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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission file number: 000-30997
Astralis Ltd.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1508866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 Passaic Avenue
Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 227-7168
(Issuer's telephone number)
37,538,189 shares of Common Stock outstanding as of August 5, 2003.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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ASTRALIS LTD.
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
Part I. Financial Information 3
Item 1. Condensed Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002 3
Condensed Statements of Operations (unaudited) 4
Condensed Statements of Cash Flows (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operations 10
Item 3. Controls and Procedures 12
Risk Factors 12
Part II. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
June 30, December 31,
2003 2002
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 400,283 $ 227,193
Marketable securities 2,109,223 1,207,179
Interest receivable, net 1,048 5,891
Prepaid expense - related party 1,511,250 1,995,000
Prepaid expenses and supplies 103,854 103,488
------------ ------------
Total Current Assets 4,125,658 3,538,751
Intangible Assets, Net - Related Party 3,869,044 4,226,188
Other Intangible Assets, Net 47,040 43,833
Property and Equipment, Net 332,771 362,713
Deposits 29,953 29,953
------------ ------------
$ 8,404,466 $ 8,201,438
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 141,901 $ 263,245
------------ ------------
Total Current Liabilities 141,901 263,245
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A, $.001 par value;
2,000,000 shares authorized at 2003 and 2002; 2,000,000 and
1,750,000 issued and outstanding at 2003 and 2002, respectively
(liquidation preference - $21,517,671 at 2003) 2,000 1,750
Common stock; $.0001 par value; 75,000,000 shares authorized at
2003; 37,538,189 issued and outstanding at
2003 and 2002 3,754 3,754
Additional paid-in capital 35,938,327 33,429,396
Deferred compensation (14,457) (12,164)
Common stock subscriptions receivable (298,000) (885,000)
Accumulated other comprehensive loss (18,038) (15,181)
Deficit accumulated in the development stage (27,351,021) (24,584,362)
------------ ------------
Total Stockholders' Equity 8,262,565 7,938,193
------------ ------------
$ 8,404,466 $ 8,201,438
============ ============
The accompanying notes are an integral part of these condensed financial
statements.
3
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Operations
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30, March 12, 2001
----------------------------- ----------------------------- (Inception) to
2003 2002 2003 2002 June 30, 2003
------------ ------------ ------------ ------------ -------------
Revenues $ -- $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------ ------------
Operating Expenses
Research and development - related party 430,447 2,184,247 860,894 4,479,781 10,898,528
Research and development 552,042 129,619 1,283,100 129,619 2,238,782
Depreciation and amortization 32,994 14,390 64,543 15,625 81,102
General and administrative 324,381 339,460 643,150 869,045 2,869,414
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 1,339,864 2,667,716 2,851,687 5,494,070 16,087,826
------------ ------------ ------------ ------------ ------------
Loss From Operations (1,339,864) (2,667,716) (2,851,687) (5,494,070) (16,087,826)
Investment Income 47,918 33,958 85,027 64,383 205,555
------------ ------------ ------------ ------------ ------------
Net Loss (1,291,946) (2,633,758) (2,766,660) (5,429,687) (15,882,271)
Preferred Stock Dividends -- (270,000) -- (270,000) (11,468,750)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (1,291,946) $ (2,903,758) $ (2,766,660) $ (5,699,687) $(27,351,021)
============ ============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.03) $ (0.08) $ (0.07) $ (0.15)
============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 37,538,189 37,538,189 37,538,189 37,544,781
============ ============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
4
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Statements of Cash Flows
(Unaudited)
Six Months Six Months March 12, 2001
Ended Ended (Inception) to
June 30, 2003 June 30, 2002 June 30, 2003
------------- ------------- --------------
Cash Flows from Operating Activities
Net loss $ (2,766,660) $ (5,429,687) $(15,882,272)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 421,691 372,769 1,268,786
Amortization of net premium paid on investments 4,962 33,907 53,776
Dividends reinvested (30,061) -- (39,857)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- 1,330,000 4,995,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation 6,888 66,376 173,892
Investor relations fee netted against subscription receivable 12,000 -- 12,000
Compensatory common stock -- -- 135,000
(Gain) loss on sale of marketable securities (10,280) 4,446 (3,135)
Changes in assets and liabilities
Prepaid expenses - related party 503,750 -- (1,491,250)
Prepaid expenses 9,112 12,521 (64,137)
Interest receivable 4,843 (57,869) (1,048)
Supplies (9,478) -- (39,717)
Deposits -- (29,953) (29,953)
Accounts payable - related party -- 522,554 --
Accounts payable and accrued expenses (121,344) (84,781) 141,901
------------ ------------ ------------
Net Cash Used in Operating Activities (1,974,577) (3,259,717) (10,740,441)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of marketable securities (1,915,369) (6,013,261) (9,553,806)
Proceeds from sale of marketable securities 1,045,847 2,267,511 7,415,761
Expenditures related to patent (4,416) (16,886) (35,585)
Purchases of property and equipment (33,395) (298,416) (466,459)
------------ ------------ ------------
Net Cash Used in Investing Activities (907,333) (4,061,052) (2,640,089)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- (80,000) (80,000)
Proceeds from stock subscription receivable 575,000 -- 1,040,000
Issuance of common stock, net of offering and transaction costs -- -- 2,888,317
Issuance of preferred stock, net of research and development
service fee, technology option and costs of offering 2,480,000 3,670,000 9,932,496
------------ ------------ ------------
Net Cash Provided by Financing Activities 3,055,000 3,590,000 13,780,813
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 173,090 (3,730,769) 400,283
Cash and Cash Equivalents, Beginning of Period 227,193 4,451,874 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 400,283 $ 721,105 $ 400,283
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
5
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been prepared
by Astralis Ltd. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial statements
reflect all adjustments that are, in the opinion of management, necessary to
fairly present such information. All such adjustments are of a normal recurring
nature. Although the Company believes that the disclosures are adequate to make
the information presented not misleading, certain information and footnote
disclosures, including a description of significant accounting policies normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America, have been
condensed or omitted pursuant to such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2002 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2003.
Stock Based Compensation
On April 4, 2003, the Company granted stock-based director compensation options
to one member of the Board of Directors. The Company accounts for those options
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based director compensation cost is included in net
loss, as all the options granted had an exercise price equal to the market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (1,291,946) $ (2,903,758) $ (2,766,660) $ (5,699,687)
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 (6,063) -- (6,063) --
Pro forma net loss $ (1,298,009) $ (2,903,758) $ (2,772,723) $ (5,699,687)
Basic and diluted net loss per
share - as reported (.03) (.08) (.07) (.15)
Basic and diluted net loss per
share - pro forma (.03) (.08) (.07) (.15)
Shares used in basic and diluted
loss per share amounts 37,538,189 37,538,189 37,538,189 37,544,781
6
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis Ltd. is an emerging biotechnology company based in New Jersey and
engaged primarily in the research and development of novel treatments for immune
system disorders and skin diseases. The Company is currently developing two
products. Its primary product, Psoraxine, is an innovative immunotherapeutic
agent under development for the treatment of psoriasis. The Company's second
product is for the treatment of leishmaniasis.
NOTE 3 - GOING CONCERN
Pharmaceutical products must undergo an extensive process, including testing in
compliance with U.S. Food and Drug Administration ("FDA") regulations, before
they can be commercially sold and distributed in the United States. FDA testing
occurs in various phases over several years. The Company expects to commence
clinical testing of Psoraxine in the third quarter of 2003. The Company will
need significant additional funds to complete all of the testing required by the
FDA. Currently, the Company has no products approved for commercial sale and
therefore no means to generate revenue. These conditions raise substantial doubt
about the Company's ability to continue as a going concern.
Management plans to pursue opportunities to sell equity securities privately to
limited investors in 2003. These funds, in addition to its cash and marketable
securities held at June 30, 2003, will be needed in order to finance the
Company's currently anticipated needs for operating and capital expenditures for
2003, including the cost to complete Phase II of the FDA testing process for
Psoraxine. The Company will also need to raise significant additional funds from
outside sources in future years in order to complete future phases of FDA
required testing.
The Company's ability to adhere to its current business plan is dependent upon
raising capital through debt and equity financing. There can be no assurance
that the Company will successfully raise the required future financing on terms
desirable to the Company or that the FDA will approve Psoraxine for use in the
United States. If the Company does not obtain the needed funds, it will likely
be required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. Continuing as a going concern is dependent
upon successfully obtaining additional working capital as described above. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets and amounts
and classifications of liabilities that might result from the outcome of this
uncertainty.
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposits
and mutual funds that have a readily determinable fair market value. Management
determines the appropriate classification of its investments using Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholders' Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
7
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 4 - MARKETABLE SECURITIES (Continued)
As of June 30, 2003, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
------------ ----------- ---------- ---------- -----------
Certificate of 7/2003 to
Deposits * 6/2004 $ 137,353 $ -- $ 42 137,395
Fixed Income Funds Current 1,989,908 (18,080) -- 1,971,828
----------- --------- -------- -----------
$ 2,127,261 $ (18,080) $ 42 $ 2,109,223
=========== ========= ======== ===========
*It will be necessary for the Company to utilize the proceeds from these
certificates of deposits to fund its operations in 2003 and therefore they have
been classified as short-term investments.
NOTE 5 - STOCK SUBSCRIPTION RECEVIABLE
Certain stockholders owed $1,022,000 to the Company, under stock subscription
agreements, which was due February 13, and May 13, 2002. This money was not paid
to the Company causing the notes to become in default. As of June 30, 2003, the
stockholders were late on the scheduled payments in the amount of $298,000.
Originally the board of directors of the Company voted to cancel, effective June
1, 2003, the proportionate shares of common stock for which the related
subscription receivables were not paid in full on May 31, 2003. On June 6, 2003,
the Company entered into an agreement with the delinquent subscription holders,
whereas, the subscription holders representing $250,000, will be able to assign
their interests to third-parties who would satisfy the remaining unpaid
subscription receivables. The remaining $48,000 will be satisfied via services
provided to the Company.
NOTE 6 - CAPITAL STOCK ACTIVITY
Under the terms of a purchase agreement dated December 10, 2001, SkyePharma PLC
("SkyePharma") agreed to purchase 2,000,000 shares of Series A Convertible
Preferred Stock of the Company at a price of $10 per share. On January 31, 2003,
the Company sold 250,000 shares of "the Series A Convertible Preferred Stock" to
SkyePharma for a purchase price of $2,500,000, which represented the final
installment under the purchase agreement. The Company owed SkyePharma $20,000
related to the final payment of a service agreement. That amount was deducted
from the proceeds of the January 2003 issuance of the preferred stock.
Options
On March 24, 2003, the Board of Directors approved, effective on April 4, 2003,
the grant of options to a director to purchase 50,000 shares of common stock at
an exercise price of $0.45 per share. Options to purchase 12,500 shares of
common stock vested on April 4, 2003, and options to purchase an additional
12,500 shares will vest each year thereafter for the following three years.
8
ASTRALIS LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
NOTE 7 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss $(1,291,946) $(2,633,758) $(2,766,660) $(5,429,687)
Unrealized gain (loss), net (1,181) 59,476 (2,857) 3,318
----------- ----------- ----------- -----------
Comprehensive loss $(1,293,127) $(2,574,282) $(2,769,517) $(5,426,369)
=========== =========== =========== ===========
NOTE 8 - NET LOSS PER SHARE
Basic and diluted net loss per common share are presented in accordance with
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS
128"), for all periods presented. In accordance with FAS 128, basic and diluted
net loss per common share have been computed using the weighted-average number
of shares of common stock outstanding during the period. Shares associated with
stock options, stock warrants, and convertible preferred stock are not included
because the inclusion would be anti-dilutive (i.e., reduce the net loss per
share). The total numbers of such shares excluded from diluted net loss per
common share 19,645,237 and 13,080,237 at June 30, 2003 and 2002, respectively.
9
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This filing contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate" and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe that it is important to communicate our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned Risk Factors, as
well as any other cautionary language in this filing, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of certain
of the events described in the Risk Factors section could seriously harm our
business.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this quarterly report on Form 10-QSB. This quarterly
report contains certain statements of a forward-looking nature relating to
future events or our future financial performance. We caution prospective
investors that such statements involve risks and uncertainties, and that actual
events or results may differ materially. In evaluating such statements,
prospective investors should specifically consider the various factors
identified in this quarterly report, including the matters set forth under the
caption "Risk Factors" which could cause actual results to differ materially
from those indicated by such forward-looking statements. We disclaim any
obligation to update information contained in any forward-looking statement.
Overview
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine, is a protein extract used
for the treatment of the skin disease psoriasis.
Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine;
o Production of drug supply for use in clinical trials in the United States;
o Finalizing preclinical and additional testing to prepare for Phase II
clinical trials in the United States; and
o Doctor and site enrollment for Phase II clinical trials in the United
States.
Dr. William Abramovits of the Texas Dermatology Research Institute has
agreed to be out principal investigator for our Phase I clinical trials in the
United States. We are currently in negotiations with other possible sites to
conduct Phase II clinical trials.
Results of Operations
Comparison of the six months and three months ended June 30, 2003 and June 30,
2002.
10
Revenues. We did not record any revenues during the six months or three
months ended June 30, 2003 and June 30, 2002.
Operating Expenses. Operating expenses primarily consist of research and
development costs and general and administrative expenses. Operating expenses
decreased $2,642,000 and $1,328,000, or 48.1% and 49.8%, to $2,852,000 and
$1,340,000 for the six and three months ended June 30, 2003 from $5,494,000 and
$2,668,000 for the six and three months ended June 30, 2002. Research and
development costs decreased $2,465,000 and $1,332,000, or 53.5% and 57.6%, to
$2,144,000 and $982,000 for the six and three months ended June 30, 2003 from
$130,000 for both the six and three months ended June 30, 2002. General and
administrative expenses decreased $226,000 and $15,000, or 26.0% and 4.4%, to
$643,000 and $324,000 for the six and three months ended June 30, 2003 from
$869,000 and $339,000 for the six and three months ended June 30, 2002.
The Next Twelve Months
On January 31, 2002, April 30, 2002 and January 31, 2003, SkyePharma PLC
("SkyePharma") completed its purchase under the terms of a Purchase Agreement
dated December 10, 2001 of an aggregate of 750,000 shares of our Series A
Convertible Preferred Stock, par value $.001 per share at a purchase price of
$10.00 per share, or an aggregate purchase price of $7,500,000. We received net
proceeds of approximately $6,150,000 from this placement after we netted out
from the proceeds payments totaling $1,350,000 due to SkyePharma for services
they provided under our Service Agreement with them which were treated as an
expense at the time of payment. This was the primary source of our current
funds.
At June 30, 2003 we had cash balances of $400,283 and marketable
securities of $2,109,223.
We anticipate collecting a portion of the outstanding amounts on our
subscription notes receivable. These subscription notes receivable were
originally due in two installments during 2002. As of June 30, 2003, an
aggregate of $298,000 remains outstanding and is past due. On June 6, 2003, we
entered into an agreement with the note holders whose notes have become past
due. Under the terms of the agreement, the note holders will transfer their
subscription notes to third-parties who would satisfy an aggregate of $250,000
of the unpaid amounts under the subscription notes. The remaining $48,000 would
be satisfied by provision of services to the company.
Based on our current operating plan, we anticipate conducting the
following activities and using our cash over the course of the next twelve
months as follows:
o Our primary focus is to further our development efforts of our
initial product candidate, Psoraxine. The FDA has allowed us to
proceed with Phase I clinical trials of Psoraxine and we intend to
commence such Phase I clinical trials shortly. We intend to conduct
additional clinical trials in the process of obtaining FDA approval
of Psoraxine and will also maintain ongoing research and
development. We will expend approximately $2,700,000 in connection
with these activities.
o We intend to implement our business plan and facilitate the
operations of our company. We will spend approximately $750,000 to
pay management salaries and salaries of employees.
o We also expect to expend approximately $1,250,000 for our public
relations, general administrative and working capital requirements.
We will need to raise additional funds to continue our operations for the
period following the fourth quarter of 2003. Furthermore, substantial additional
funds will be needed in order to fund our continued efforts to obtain FDA
approval of Psoraxine. No assurance can be given that we will be able to obtain
financing, or successfully sell assets or stock, or, even if such transactions
are possible, that they will be on terms reasonable to us or that they will
enable us to satisfy our cash requirements. In addition, raising additional
funds by selling additional shares of our capital stock will dilute the
ownership interest of our stockholders. If we do not obtain additional funds, we
will likely be required to eliminate programs, delay development of our
products, or in the extreme situation, cease operations.
11
ITEM 3. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures as of June 30, 2003. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective for recording, processing, summarizing and
reporting the information the company is required to disclose in the reports it
files under the Securities Exchange Act of 1934, within the time periods
specified in the SEC's rules and forms. Such evaluation did not identify any
change in our internal control over financial reporting that occurred during the
quarter ended June 30, 2003 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
RISK FACTORS
We Have No Sales, We Will Not Have Sales In The Foreseeable Future, We Are
In An Early Stage of Development And We May Never Sell Products Or Become
Profitable.
We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, had no revenues and had incurred a net loss of approximately
$27,351,021 as of June 30, 2003. We expect that substantial losses will continue
for the foreseeable future. In order to obtain revenue from the sales of our
product candidate, Psoraxine, we must successfully develop, test, obtain
regulatory approval for, manufacture, market and eventually sell such product
candidate. Our expenses have consisted principally of costs incurred in research
and development and from general and administrative costs associated with our
operations. We expect our expenses to increase and to continue to incur
operating losses for at least the next several years as we continue our research
and development efforts for Psoraxine and any subsequent product candidates.
Commercialization of any of our products will take a significant amount of time
and successful commercialization may not occur at all. As a result, we may never
become profitable.
We Will Need To Obtain Additional Funds To Support Our Future Operation
Expenses. Our Auditors Have Expressed Uncertainty Regarding Our Ability To
Continue As A Going Concern.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through
approximately the fourth quarter of 2003. We will need additional funds to
continue our operations following that period. Furthermore, substantial
additional funds will be needed in order to fund our continued efforts to obtain
FDA approval of Psoraxine. No assurance can be given that we will be able to
obtain financing, or successfully sell assets or stock, or, even if such
transactions are possible, that they will be on terms reasonable to us or that
they will enable us to satisfy our cash requirements. In addition, raising
additional funds by selling additional shares of our capital stock will dilute
the ownership interest of our stockholders. If we do not obtain additional
funds, we will likely be required to eliminate programs, delay development of
our products, alter our business plans, or in the extreme situation, cease
operations.
As a result of our losses and the matters described in the preceding
paragraph, the Independent Auditors' Report on our financial statements includes
a paragraph indicating doubt about our ability to continue as a going concern.
The financial statements that accompany this report do not include any
adjustments that might be necessary if we are unable to continue as a going
concern.
We May Not Be Successful In The Development And Commercialization Of
Products.
We may not develop products that prove to be safe and effective, that meet
applicable regulatory standards or that we can manufacture at reasonable costs
or market successfully. Successful products will require significant development
and investment, including testing, to demonstrate their safety and efficacy
prior to their commercialization. We have not proven our ability to develop and
commercialize products. We must conduct a substantial amount of additional
research and development before any regulatory authority will approve our
initial product candidate, Psoraxine. Our research and development and clinical
trials may not confirm the safety and efficacy of our products, in which case
regulatory authorities may not approve them. In addition, even if we
successfully complete our research and development efforts, our initial product
candidate, Psoraxine, may not perform in the manner we anticipate, and may not
be accepted for use by the public.
12
The Development Of Our Initial Product Remains In An Early Stage Of
Development And Substantial Additional Funds And Effort Will Be Necessary For
Further Development And Commercialization.
Our initial product candidate, Psoraxine, remains in an early stage of
development and will require the commitment of substantial resources to move it
towards commercialization. Before obtaining regulatory approvals for the
commercial sale of Psoraxine, we must demonstrate the safety and efficacy of our
product candidate through preclinical testing and clinical trials. Conducting
clinical trials involves a lengthy, expensive and uncertain process. Completion
of clinical trials may take several years or more. The length of time generally
varies substantially according to the type, complexity, novelty and intended use
of the product. If we or the U.S. Food and Drug Administration believe that our
clinical trials, when commenced, expose participating patients to unacceptable
health risks, we may suspend such trials. We may encounter problems in our
studies which will cause us or the FDA to delay or suspend the studies. Some of
the factors that may delay our commencement and rate of completion of clinical
trials include:
o ineffectiveness of the study compound, or perceptions by physicians that
the compound will not successfully treat a particular indication;
o inability to manufacture sufficient quantities of compounds for use in
clinical trials;
o failure of the FDA to approve our clinical trial protocols;
o slower than expected rate of patient recruitment;
o unforeseen safety issues; or
o government or regulatory delays.
The failure of future clinical trials may harm our business, financial
condition and results of operations.
Our Potential Therapeutic Products Face A Lengthy And Uncertain Regulatory
Process. If We Do Not Obtain Regulatory Approval Of Our Potential Products, We
Will Not Be Able To Commercialize These Products.
The FDA must approve any therapeutic product before it can be marketed in
the United States. Before we obtain FDA approval of a new drug application or
biologics license application, the product must undergo extensive testing,
including animal and human clinical trials, which can take many years and
requires substantial expenditure. Data obtained from such testing may be
susceptible to varying interpretations, which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval during the period of product development and regulatory agency review
of each submitted new drug application may cause delays or rejections. We must
devote a substantial amount of time and resources in the regulatory process in
order to obtain regulatory approval of our initial product candidate, Psoraxine.
Because our initial product candidate, Psoraxine, involves the application
of new technologies and may be used upon new therapeutic approaches, government
regulatory authorities may subject this product to more rigorous review and may
grant regulatory approvals more slowly for this product than for products using
more conventional technologies. We have not conducted any clinical trials for
Psoraxine in the United States, nor have we received approval from the FDA or
any other regulatory authority to market any product candidate. We may never
obtain the necessary approvals from the FDA or other regulatory authorities to
commercialize and market our product. The regulatory agencies of foreign
governments must also approve any therapeutic product we may develop before the
product can be sold in those countries. To date, although we have obtained
regulatory approval for clinical testing of Psoraxine in Venezuela, we have not
sought, nor have we obtained regulatory approval for the commercialization of
Psoraxine in Venezuela, because, among other things, we do not have
manufacturing facilities in that country and such facilities are required by
regulatory authorities in Venezuela before granting commercial approval for a
proposed drug.
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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.
We Are Exposed To International Risks As A Result Of Our Conduct Of
Clinical Studies In Venezuela.
We are continuing clinical trials of Psoraxine in Venezuela, a country
that has suffered from political instability and popular unrest. As a result, at
times, participants in our clinical trials were unable to reach the facilities
where our studies are conducted. This may have impaired the results of our
studies. Since the FDA requires that we report all studies conducted on human
subjects, in the event our Investigational New Drug application is approved, we
must include our Venezuela studies as previous human experience in our annual
reporting to the FDA. This data will be used only as supporting information and
will not likely increase the chance of faster FDA approval of Psoraxine.
Even If Product Candidates Emerge Successfully From Clinical Trials, We
May Not Be Able To Successfully Manufacture, Market And Sell Them.
We have not completed development of our initial product candidate,
Psoraxine, and we have not received final regulatory approval for its use in
clinical trials in the United States. If Psoraxine emerges successfully from
clinical trials, we will either commercialize products resulting from our
proprietary programs directly or through licensing arrangements with other
companies. We have no experience in manufacturing and marketing, and we
currently do not have the resources or capability to manufacture, market or sell
our products on a commercial scale. In order to commercialize Psoraxine
directly, we would need to develop or obtain through outsourcing arrangements
the capability to manufacture, market and sell products. We have an agreement
with SkyePharma under which SkyePharma will provide development, manufacturing,
pre-clinical and clinical development services for Psoraxine until December 31,
2004. However, we do not currently have a written agreement covering any period
after December 31, 2004 and we may not be able to enter into such an agreement
on commercially reasonable terms, or at all. In addition, we currently do not
have any agreements for the marketing or sale of any of our products and we may
not be able to enter into such agreements on commercially reasonable terms, or
at all.
We License And Do Not Own Our Intellectual Property. Any Inability To
Protect Our Proprietary Technologies Adequately Could Harm Our Competitive
Position.
Dr. Jose Antonio O'Daly has filed a patent application for Psoraxine, and
under the terms of a license agreement and assignment of license agreement, we
have the right to use any patent issued pursuant to that application. We
license, and do not own, the intellectual property rights to Psoraxine. In
addition, we do not have any protection from issued patents covering any of our
technology. Our success will depend in part on our ability to obtain patents and
maintain adequate protection of other intellectual property for our technologies
and products in the United States and other countries. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode or negate our competitive advantage. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that 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
14
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many Potential Competitors Which Have Greater Resources And Experience
Than We Do May Develop Products And Technologies That Make Ours Obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Amgen, Genentech, SmithKline Beecham, Protein Design Labs, Ligand
Pharmaceuticals, Schering-Plough, Pfizer and Novartis. These organizations may
develop technologies that provide superior alternatives to our technologies.
Further, our competitors may be more effective at implementing their
technologies to develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
If We Lose Our Key Personnel Or Fail To Attract And Retain Additional
Personnel, We May Be Unable To Discover And Develop Our Products.
We depend on the services of Dr. Jose Antonio O'Daly, the loss of whose
services would adversely impact the achievement of our objectives. Our key
personnel have no prior experience managing a start-up biotechnology company. We
do not currently have sufficient executive management personnel to execute our
business plan fully. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. Although we believe we can successfully attract and retain
qualified personnel, we face intense competition for experienced scientists.
Failure to attract and retain skilled personnel would prevent us from pursuing
collaborations and developing our products and core technologies to the extent
otherwise possible.
15
Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.
If We Face Claims In Clinical Trials Of A Drug Candidate, These Claims
Will Divert Our Management's Time And We Will Incur Litigation Costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of our initial product candidate, Psoraxine,
results in personal injury or death. We may experience clinical trial liability
claims if our drug candidates are misused or cause harm before regulatory
authorities approve them for marketing. We currently maintain clinical liability
insurance coverage; however, it may not sufficiently cover any claims made
against us. Clinical trial liability insurance may be expensive, difficult to
obtain and may not be available in the future on acceptable terms, if at all.
Any claims against us, regardless of their merit, could strain our financial
resources in addition to consuming the time and attention of our management. Law
suits for any injuries caused by our products may result in liabilities that
exceed our total assets.
Some Of Our Existing Stockholders Can Exert Control Over Us And May Not
Make Decisions That Further The Best Interests Of All Stockholders.
Our officers, directors and principal stockholders (greater that 5%
stockholders) together control approximately 75.75% of our outstanding common
stock. In addition, as a result of the application of certain preferred stock
adjustment rights, SkyePharma's percentage ownership may increase substantially
from its current 25.41% and may result in it having control of the company. 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. In the event of a merger or acquisition resulting
in a change in control, SkyePharma also has a right to a premium equal to its
purchase price for the preferred stock plus 30% of such purchase price per annum
commencing on the date of issuance of the preferred stock.
The Market Price Of Our Common Stock May Be Highly Volatile.
The market price of our common stock has been and will likely continue to
be highly volatile. From the date trading of our common stock commenced until
August 5, 2003, the range of our stock price has been between $0.22 and $7.15.
Factors including announcements of technological innovations by us or other
companies, regulatory matters, new or existing products or procedures, concerns
about our financial position, operating results, government regulation,
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by
stockholders and by us 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
37,538,189 shares of our common stock outstanding. If all options and warrants
currently outstanding to purchase shares of our common stock are exercised and
all of the 2,000,000 shares of preferred stock are converted into common stock
at the current conversion price of $1.60, there will be approximately 57,233,416
shares of common stock outstanding. The conversion price of preferred stock may
be further adjusted through 2004, increasing substantially the number of shares
of common stock that may be outstanding. Of the outstanding shares, up to
13,163,114 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.
16
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 Over-The-Counter Bulletin Board. As a
result, the holders of our common stock may find it more difficult to obtain
accurate quotations concerning the market value of the stock. Stockholders also
may experience greater difficulties in attempting to sell the stock than if it
were listed on a stock exchange or quoted on the Nasdaq National Market or the
Nasdaq Small-Cap Market. Because our common stock does not trade on a stock
exchange or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and
the market price of the common stock is less than $5.00 per share, the common
stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange
Act of 1934 imposes additional sales practice requirements on broker-dealers
that recommend the purchase or sale of penny stocks to persons other than those
who qualify as an "established customer" or an "accredited investor." This
includes the requirement that a broker-dealer must make a determination on the
appropriateness of investments in penny stocks for the customer and must make
special disclosures to the customer concerning the risks of penny stocks.
Application of the penny stock rules to our common stock could adversely affect
the market liquidity of the shares, which in turn may affect the ability of
holders of our common stock to resell the stock.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
ASTRALIS LTD.
(Registrant)
Dated: August 12, 2003 By: /s/ Mike Ajnsztajn
--------------------------------------------
Mike Ajnsztajn
Chief Executive Officer
(Principal Executive Officer; Authorized
Signatory on behalf of Registrant)
Dated: August 12, 2003 By: /s/ Gina Tedesco
--------------------------------------------
Gina Tedesco
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
99.1 Exhibit 31.1 -- Certification of Mike Ajnsztajn required by Rule
13a-14(a) or Rule 15d-14(a)
99.2 Exhibit 31.2 -- Certification of Gina Tedesco required by Rule
13a-14(a) or Rule 15d-14(a)
99.3 Exhibit 32.1 -- Certification of Mike Ajnsztajn and Gina Tedesco
required by Rule 13a-14(b) or Rule 15d-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350