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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, 2005.
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _____ to _____
Commission file number: 000-30997
ASTRALIS LTD.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1508866
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
75 Passaic Avenue
Fairfield, New Jersey 07004
(Address of principal executive offices)
(973) 227-7168
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 91,454,873 shares of Common
Stock outstanding as of August 19, 2005.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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ASTRALIS LTD.
INDEX
FOR THE QUARTERLY PERIOD ENDED June 30, 2005
Part I Financial Information...........................................3
Item 1 Condensed Balance Sheets........................................3
Condensed Statements of Operations (unaudited)..................4
Condensed Statements of Cash Flows (unaudited)..................5
Notes to Condensed Financial Statements (unaudited).............6
Item 2 Management's Discussion and Analysis or Plan of Operation......10
Item 3 Controls and Procedures........................................14
Risk Factors...................................................14
Part II Others Information.............................................19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds....19
Item 6 Exhibits.......................................................22
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASTRALIS LTD.
(A Development Stage Entity)
Condensed Balance Sheets
ASSETS
June 30, December 31,
2005 2004
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 483,809 $ 2,312,401
Accrued interest receivable 580 --
Prepaid expenses 80,516 70,895
Supplies 36,121 55,851
------------ ------------
Total Current Assets 601,026 2,439,147
Other Intangible Assets, Net 118,593 117,923
Property and Equipment, Net 147,031 214,140
Deposits 26,763 26,763
------------ ------------
$ 893,413 $ 2,797,973
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 983,147 $ 397,762
------------ ------------
Total Current Liabilities 983,147 397,762
------------ ------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Common stock; $.0001 par value; 150,000,000 shares authorized
at 2005 and 2004; 73,173,055 issued and outstanding at 2005
and 2004, 100,000 and 0 issuable at 2005 and 2004, respectively 7,327 7,317
Additional paid-in capital 52,160,241 52,095,251
Deficit accumulated in the development stage (52,257,302) (49,702,357)
------------ ------------
Total Stockholders' Equity (Deficit) (89,734) 2,400,211
------------ ------------
$ 893,413 $ 2,797,973
============ ============
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 Ended June 30, Six Months Ended June 30, March 12, 2001
----------------------------- ----------------------------- (Inception) to
2005 2004 2005 2004 June 30, 2005
------------ ------------ ------------ ------------ --------------
Revenues $ - $ - $ - $ - $ -
------------ ------------ ------------ ------------ --------------
Operating Expenses
Research and development - related party -- 430,447 -- 860,894 16,278,822
Research and development 507,708 689,800 1,594,372 1,590,494 8,043,600
Depreciation and amortization 6,724 7,530 14,646 15,040 87,670
General and administrative 365,288 762,317 961,797 1,184,215 6,339,251
------------ ------------ ------------ ------------ ------------
Total Operating Expenses 879,720 1,890,094 2,570,815 3,650,643 30,749,343
------------ ------------ ------------ ------------ ------------
Loss From Operations (879,720) (1,890,094) (2,570,815) (3,650,643) (30,749,343)
Investment Income 4,972 15,349 15,870 27,925 195,694
------------ ------------ ------------ ------------ ------------
Loss Before Income Tax Benefit (874,748) (1,874,745) (2,554,945) (3,622,718) (30,553,649)
Income Tax Benefit -- -- -- -- 515,097
------------ ------------ ------------ ------------ ------------
Net Loss (874,748) (1,874,745) (2,554,945) (3,622,718) (30,038,552)
Preferred Stock Dividends -- -- -- (10,750,000) (22,218,750)
------------ ------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (874,748) $ (1,874,745) $ (2,554,945) $(14,372,718) $(52,257,302)
============ ============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.01) $ (0.03) $ (0.03) $ (0.21) $ (1.09)
============ ============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 73,273,055 73,042,560 73,248,746 68,951,986 47,782,812
============ ============ ============ ============ ============
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 Ended March 12, 2001
------------------------------ (Inception) to
June 30, 2005 June 30, 2004 June 30, 2005
------------- ------------- --------------
Cash Flows from Operating Activities
Net loss $ (2,554,945) $ (3,622,718) $(30,038,552)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization 73,005 430,716 2,635,756
Impairment of intangible asset -- -- 2,797,612
Amortization of net premium paid on investments -- -- 54,551
Dividends reinvested -- (75,970) (199,323)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against
proceeds received from preferred stock issuance -- -- 5,015,000
Operating expenses paid by related parties on
behalf of Company -- -- 17,587
Amortization of deferred compensation -- 2,576 197,489
Investor relations fee netted against subscription
receivable -- 24,000 60,000
Compensatory common stock 65,000 75,000 275,000
Assignment of call options as compensation -- 376,508 376,508
(Gain) loss on sale of available-for-sale securities -- 50,317 160,736
Changes in assets and liabilities
Prepaid expenses (9,621) 518,071 (42,185)
Interest receivable (580) -- (580)
Supplies 19,730 18,487 (36,121)
Deposits -- -- (26,763)
Accounts payable and accrued expenses 585,385 (68,303) 924,689
------------ ------------ ------------
Net Cash Used in Operating Activities (1,822,026) (2,271,316) (17,815,610)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of available-for-sale securities -- (4,300,010) (13,858,181)
Proceeds from sale of available-for-sale securities -- 1,902,407 13,843,916
Expenditures related to patent (4,113) (19,135) (98,496)
Insurance proceeds from fixed asset retirement -- -- 4,113
Purchases of property and equipment (2,453) (35,425) (570,584)
------------ ------------ ------------
Net Cash Used in Investing Activities (6,566) (2,452,163) (679,232)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- -- (80,000)
Proceeds from stock subscription receivable -- -- 1,290,000
Proceeds from exercise of stock options -- -- 11,250
Issuance of common stock, net of offering and transaction
costs -- 4,954,191 7,842,508
Issuance of preferred stock -- -- 9,932,496
Private placement offering costs -- -- (17,603)
------------ ------------ ------------
Net Cash Provided by Financing Activities -- 4,954,191 18,978,651
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents (1,828,592) 230,712 483,809
Cash and Cash Equivalents, Beginning of Period 2,312,401 10,660 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 483,809 $ 241,372 $ 483,809
============ ============ ============
The accompanying notes are an integral part of these condensed financial
statements.
5
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 2004 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, 2005.
Stock Based Compensation
On April 4, 2003, the Company granted stock-based director compensation options
to one member of the Board of Directors. The Company accounts for those options
under the recognition and measurement principles of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. No stock-based director compensation cost is included in net
loss, as all the options granted had an exercise price equal to the market value
of the stock on the date of grant. The following table illustrates the effect on
net loss and earnings per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss to common stockholders, as reported $ (874,748) $ (1,874,745) $ (2,554,945) $(14,372,718)
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 (154,826) (1,014) (323,756) (3,197)
------------ ------------ ------------ ------------
Pro forma net loss (1,029,574) $ (1,875,759) (2,878,701) $(14,375,915)
============ ============ ============ ============
Loss per share basic and diluted - as reported $ (0.01) $ (0.03) $ (0.03) $ (0.21)
Loss per share basic and diluted - pro forma $ (0.01) $ (0.03) $ (0.04) $ (0.21)
Shares used in basic and diluted loss per share amounts 73,273,055 73,042,560 73,248,746 68,951,986
============ ============ ============ ============
6
NOTE 2 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. (the "Company") is an emerging stage biotechnology company, based
in New Jersey and incorporated under the laws of the State of Delaware, which
primarily engages in research and development of treatments for immune system
disorders and skin diseases. The Company is currently developing two products.
Its primary product, Psoraxine(R), administered by intramuscular injection, is
an innovative immunotherapuetic product under development for the treatment of
psoriasis. The Company's second product is for the treatment of arthritis. The
Company is engaged in 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.
NOTE 3 - GOING CONCERN
The Company incurred net losses to common stockholders of $2,554,945 and
$52,257,302 for the six-month period ended June 30, 2005 and for the period
March 12, 2001(date of inception) to June 30, 2005, respectively. Included in
the cumulative net losses was non-cash preferred stock dividend generated from
beneficial conversion features of preferred stock in the amount of $22,218,750.
The Company estimates it has sufficient funds to meet operating expenses and
capital requirements through the end of February 2006.
Pharmaceutical products must undergo an extensive process, including testing in
compliance with U.S. Food and Drug Administration ("FDA") regulations, before
they can be commercially sold and distributed in the United States. FDA testing
occurs in various phases over a multiple number of years. The Company expects to
continue clinical testing of Psoraxine in 2005 and beyond. 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.
On March 14, 2005, the Company issued a press release to disclose the results of
its Phase II study for Psoraxine. The Phase II study of its novel
immuno-stimulatory product for the treatment of Psoriasis indicated no
statistical difference between the Company's product and a placebo. In the
study, Psoraxine was found to be safe and well tolerated.
The Company is currently analyzing the data from its Phase II study to
understand why the results differ from the long-term improvement of the more
than 2,700 patients who were treated with Psoraxine in pre-clinical studies and
whether a different approach, including evaluating a longer course of therapy
and/or modifications to the formulation, may yield an outcome that is more
consistent with results from pre-clinical studies.
Consequently, the aforementioned items raise substantial doubt about the
Company's ability to continue as a going concern.
The Company raised $2,000,000 additional capital in August 2005 through a
private placement equity offering. These funds, in addition to its cash held at
June 30, 2005, are sufficient to finance the Company's needs for operating and
capital expenditures through February 2006, including the cost to evaluate the
results of the Phase II study, recommence clinical trials of Psoraxine(R) and
initiate development of pipeline products to treat arthritis and leishmaniasis.
The Company 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.
The Company's ability to continue as a going concern is dependent upon raising
capital through debt and equity financing. There can be no assurance that the
Company will successfully raise the required future financing on terms desirable
to the Company or that the FDA will approve Psoraxine for use in the United
States. If the Company does not obtain the needed funds, it will likely be
required to delay development of its products, alter its business plan, or in
the extreme situation, cease operations.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. 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.
7
NOTE 4 - CAPITAL STOCK ACTIVITY
In the first quarter of 2005 SkyePharma purchased the outstanding stock,
11,160,000 shares, and related rights from Mike Ajnsztajn and Gaston Liebhaber.
Consequently, as of March 3, 2005 SkyePharma owns approximately 49.7% of the
Company's outstanding common stock.
In January 2005, the Company issued 100,000 shares of the Company's common stock
along with 728,000 options to a newly hired officer of the Company. The options
were issued with an exercise price of $0.70 per share and vest equally over
three years, with a term of ten years.
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 vest over three years, with the first twenty-five percent vesting on
the date of grant.
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 vest over three years, with the first twenty-five
percent vesting on the date of grant.
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 vest over three years, with the first twenty-five percent vesting on the
date of grant.
NOTE 5 - 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 number of such shares excluded from diluted net loss per
common share were 17,007,891 and 18,576,891 at June 30, 2005 and 2004,
respectively.
NOTE 6 - SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION
In April 2005, the Company financed $24,184 of its business liability insurance
premiums by entering into a short-term note payable. The note matures on
February 16, 2006 and bears interest at a rate of 6.75% per annum. As of June
30, 2005, this note had an outstanding balance of $19,455.
In January 2005, the Company financed $33,516 of its directors and officers
liability insurance premiums by entering into a short-term note payable. The
note matures on November 10, 2005 and bears interest at a rate of 5.75% per
annum. As of June 30, 2005, this note had an outstanding balance of $13,599.
In December 2004, the Company financed $28,280 of its directors and officers
liability insurance premiums by entering into a short-term note payable. The
note matures on October 10, 2005 and bears interest at a rate of 6.65% per
annum. As of June 30, 2005 and December 31, 2004, this note had an outstanding
balance of $9,583 and $28,280, respectively.
NOTE 7 - RECLASSIFICATION
For comparability purposes, certain figures for the prior periods have been
reclassified where appropriate to conform with the financial statement
presentation used in 2004. These reclassifications had no effect on the reported
net loss.
8
NOTE 8 - SUBSEQUENT EVENTS
On August 19, 2005, we closed 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 Limited ("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 of
1933, as amended (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 will be duly and timely
filed with the Securities and Exchange Commission. 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 requires the Company 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. If the registration statement is not filed or effective by the dates
specified in the agreement, the Company is subject to a penalty of 0.5% per
month of the aggregate purchase price.
In August 2005 the Board of Directors approved a resolution, subject to
shareholder approval, to increase the authorized number of common stock by
200,000,000 shares.
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 section 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 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 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
General
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases, such as psoriasis and psoriatic and rheumatoid arthritis. Our initial
product candidate, Psoraxine(R), 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(R);
o Recommencing clinical trials to obtain the approval of the United
States Food and Drug Administration for the marketing of
Psoraxine(R); and
o Developing technology underlying Psoraxine(R) for the
treatment of indications other than psoriasis, such as arthritis
eczema, seborrheic dermatitis and leishmaniasis.
Recent Developments
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 Limited ("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
10
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 requires the Company to
file a registration statement no later than December 31, 2005 covering the
shares issued in connection with this private placement transaction and the
shares underlying the warrants which were also issued in the transaction. If the
registration statement is not filed or effective by the dates specified in the
agreement, the Company is subject to a penalty of 0.5% per month of the
aggregate purchase price.
Concurrently with the closing of the private placement, the Company and
Blue Cedar entered into a stockholder's agreement, dated as of August 17, 2005
(the "Stockholder's Agreement"). Pursuant to the Stockholder's Agreement, Blue
Cedar may designate one director to the Board of Directors of the Company.
Further, we agreed not to enter into any service agreement, distribution
arrangement or transfer of personnel with any shareholder of the Company 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 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.
Based on our current plans we believe that we have sufficient funds to
meet our operating needs through approximately February 2006. Our ability to
continue operations beyond February 2006 is contingent upon the success of
efforts to raise additional capital.
The Board of Directors has approved an amendment to the Certificate of
Incorporation of the Company, pursuant to which the Company will be authorized
to issue an additional 200,000,000 shares of Common Stock. The Amendment will be
subject to the approval of the stockholders of the Company to be sought at a
Special Meeting to be held in the fall of 2005.
Plan of Operation
Three months ended June 30, 2005 compared to three months ended June 30, 2004
For three months ended June 30, 2005:
For the three months ended June 30, 2005, we had no revenue from
operations and incurred operating expenses of $879,720 which consisted primarily
of:
o Research and development costs of $507,708, including evaluation of
clinical trial results, reformulation of Psoraxine(R) and activity
testing in animals. Research and development costs did not include
any allocation of costs related to the formulation and development
of Psoraxine(R) under our Services Agreement with SkyePharma PLC,
dated December 10, 2001, due to the expiration of the Services
Agreement in December 2004.
o General and administrative costs of approximately $365,288,
including professional fees, rent, salaries for management and our
general corporate expenditures.
As a result, during the three months ended June 30, 2005, we incurred a
net loss of $874,748.
For the three months ended June 30, 2004:
For the three months ended June 30, 2004, we had no revenue from
operations and incurred operating expenses of $1,890,094 which consisted
primarily of:
o Research and development costs of $1,120,247, including $430,447
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $178,572 in technology access option fees pursuant to
our Technology Access Option Agreement with SkyePharma, dated
December 10, 2001.
11
o General and administrative costs of approximately $762,317,
including professional fees and our general corporate expenditures.
In addition, in connection with the conversion by SkyePharma of its
shares of our Series A Convertible Preferred Stock, we assigned to
FPP Capital Advisors, as compensation, 10% of the call option
granted to us under our Call Option Agreement with SkyePharma, dated
January 20, 2004. Accordingly, a non-cash charge of $376,508 was
recorded as a general and administrative expense in June 2004.
As a result, during the three months ended June 30, 2004, we incurred a
net loss of $1,874,745.
Comparison
Our research and development expenses declined from $1,120,247 during the
three months ended June 30, 2004 to $507,708 during the three months ended June
30, 2005, primarily due to the completion of the clinical trial of Psoraxine(R)
during the first quarter of 2005, the expiration of our Services Agreement with
SkyePharma and the impairment of the technology access option granted to us by
SkyePharma under the Technology Access Option Agreement.
By comparison to the three months ended June 30, 2004, our general and
administrative costs for the three months ended June 30, 2005 decreased by
$397,029 primarily due to a one-time non-cash charge of $376,508 in June 2004
that resulted from our assignment to FPP Capital Advisors of 10% of the call
option granted to us by SkyePharma under the Call Option Agreement and
management's actions to control costs.
Losses of $874,748 for the three months ended June 30, 2005 were $999,997
less than losses for the three months ended June 30, 2004, reflecting the
completion of the Psoraxine(R) clinical trial, the expiration of our Services
Agreement with SkyePharma and management's cost control initiatives.
Six months ended June 30, 2005 compared to six months ended June 30, 2004
For six months ended June 30, 2005:
For the six months ended June 30, 2005, we had no revenue from operations
and incurred operating expenses of $2,570,815 which consisted primarily of:
o Research and development costs of $1,594,372, including evaluation
of clinical trial results, reformulation of Psoraxine(R) and
activity testing in animals. Research and development costs did not
include any allocation of costs related to the formulation and
development of Psoraxine(R) under our Services Agreement with
SkyePharma PLC, dated December 10, 2001, due to the expiration of
the Services Agreement in December 2004.
o General and administrative costs of approximately $961,797,
including professional fees, rent, salaries for management and our
general corporate expenditures.
As a result, during the six months ended June 30, 2005, we incurred a net
loss of $2,554,945.
For the six months ended June 30, 2004:
For the six months ended June 30, 2004, we had no revenue from operations
and incurred operating expenses of $3,650,643 which consisted primarily of:
o Research and development costs of $2,451,388, including $503,750
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $357,144 in technology access option fees pursuant to
our Technology Access Option Agreement with SkyePharma, dated
December 10, 2001.
12
o General and administrative costs of approximately $1,184,215,
including professional fees and our general corporate expenditures.
In addition, in connection with the conversion by SkyePharma of its
shares of our Series A Convertible Preferred Stock, we assigned to
FPP Capital Advisors, as compensation, 10% of the call option
granted to us under our Call Option Agreement with SkyePharma, dated
January 20, 2004. Accordingly, a non-cash charge of $376,508 was
recorded as a general and administrative expense in June 2004.
As a result, during the six months ended June 30, 2004, we incurred a net
loss of $3,622,718.
Comparison
Our research and development expenses declined from $2,451,388during the
six months ended June 30, 2004 to $1,594,372 during the six months ended June
30, 2005, primarily due to the completion of the clinical trial of Psoraxine(R)
during the first quarter of 2005, the expiration of our Services Agreement with
SkyePharma and the impairment of the technology access option granted to us by
SkyePharma under the Technology Access Option Agreement.
By comparison to the six months ended June 30, 2004, our general and
administrative costs for the six months ended June 30, 2005 decreased by
$222,418 primarily due to a one-time non-cash charge of $376,508 in June 2004
that resulted from our assignment to FPP Capital Advisors of 10% of the call
option granted to us by SkyePharma under the Call Option Agreement and
management's actions to control costs.
Losses of $2,554,945 for the six months ended June 30, 2005 were
$1,067,773 less than losses for the six months ended June 30, 2004, reflecting
the completion of the Psoraxine(R) clinical trial, the expiration of our
Services Agreement with SkyePharma and management's cost control initiatives.
The Next Twelve Months
At June 30, 2005 we had cash balances of $483,809, which we estimate will
last us through approximately August 2005, and no marketable securities. On
August 19, 2005, we received gross proceeds in cash of $2,000,000 from a private
placement of our securities, which we believe will last us through approximately
February 2006. 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.
Based on our current operating plan and subject to raising more capital as
discussed below, 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 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.
In this regard, we have implemented cost containment measures and
realigned development activities to focus on product formulation,
manufacturing, analytical protocols and potency. We remain committed
to Psoraxine(R) and its future development, and expect to redesign
and recommence clinical trials in 2006. We also remain committed to
exploring applications of our technology platform in other
dermatological diseases, as well as in other therapeutic areas
including arthritis. We expect that we would be required to incur
expenses of no less than $1,930,000 to third parties in connection
with continuing development of Psoraxine(R) and exploration of other
applications of the technology.
o We intend to implement our business plan and facilitate the
continuing operations of our company. We will spend approximately
$1,690,000 to pay management salaries and salaries of employees, a
portion of which is treated as research and development expense.
13
o We also expect to expend approximately $1,280,000 for our general
administrative and working capital requirements.
We will need to raise additional funds to continue our operations for the
period following February 2006 and to fund the activities described above. If we
are able to identify additional capital to fund operating and capital
expenditures for 2006, such funds will be used to cover the costs associated
with our evaluation of the results from our Phase II clinical studies for
Psoraxine(R), to continue clinical trials for Psoraxine(R) and to develop
products for the treatment of arthritis and leishmaniasis. Substantial
additional funds will be needed in future years in order to fund our efforts to
obtain FDA approval to market these products. 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. If we do not obtain additional funds, we
will likely be required to eliminate programs, delay development of our
products, or in the extreme situation, cease operations.
ITEM 3. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-QSB, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) are 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.
(b) Changes in internal controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
RISK FACTORS
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 have sufficient funds to
meet our operating expenses and capital requirements through approximately
February 2006. We will need to raise 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(R),
especially given the failure of our Phase II study to meet its primary endpoint.
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.
14
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 of $52,257,302
as of June 30, 2005 which has increased to date. The cumulative net loss through
June 30, 2005 includes non-cash preferred stock dividends of $22,218,750. We
expect that substantial losses will continue for the foreseeable future. In
order to obtain revenue from the sales of our product candidate, Psoraxine(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 our expenses to
increase and to continue to incur operating losses for the next several years as
we continue our research and development efforts for Psoraxine(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. We recently 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
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. Our initial analysis of the preliminary 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 analyze the data from the Phase II study to identify why the Phase II study
failed to meet its primary endpoint. 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.
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.
15
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.
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.
16
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. 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. We also have rights to other patents filed by Dr. O'Daly
under the terms of our employment agreement with him. Our success will depend in
part on our ability to obtain patents and maintain adequate protection of other
intellectual property for our technologies and products in the United States and
other countries. If we do not adequately protect our intellectual property,
competitors may be able to use our technologies and erode or negate our
competitive advantage. The laws of some foreign countries do not protect our
proprietary rights to the same extent as the laws of the United States, and we
may encounter significant problems in protecting our proprietary rights in these
foreign countries.
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and enforceable
patents or we effectively maintain such proprietary technologies as trade
secrets. We will apply for patents covering both our technologies and product
candidates as we deem appropriate. However, we may fail to apply for patents on
important technologies or products in a timely fashion, or at all, and in any
event, the applications we do file may be challenged and may not result in
issued patents. Any future patents we obtain may not be sufficiently broad to
prevent others from practicing our technologies or from developing competing
products. Furthermore, others may independently develop similar or alternative
technologies or design around our patented technologies. In addition, others may
challenge or invalidate our patents, or our patents may fail to provide us with
any competitive advantages. If we encounter challenges to the use or validity of
any of our patents, resulting in litigation or administrative proceedings, we
would incur substantial costs and the diversion of management in defending the
patent. In addition, we do not control the patent prosecution of technology that
we license from others. Accordingly, we cannot exercise the same degree of
control over this intellectual property as we would over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
17
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, the Chairman of our
Board of Directors and our Chief Scientific Officer, the loss of whose services
would adversely impact the achievement of our objectives. We recently hired a
Chief Executive Officer and Chief Financial Officer. To execute our business
plan fully it is essential that we retain these executives. In addition,
recruiting and retaining qualified scientific personnel to perform future
research and development work will be critical to our success. Although we
believe we can successfully attract and retain qualified personnel, we face
intense competition for experienced scientists. Failure to attract and retain
skilled personnel would prevent us from pursuing collaborations and developing
our products and core technologies to the extent otherwise possible.
Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.
If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of 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 84% 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.
18
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 19, 2005, the range of our stock price has been between $.16 and $7.15.
On August 19, 2005 we completed a private placement of common stock at a price
$.11 per share. 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 140,220,340 shares of common stock outstanding. Of
the outstanding shares, up to 73,248,055 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. In addition we will
be obligated 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. Certain
existing stockholders have the right to include their securities in such
registration statement.
Our common stock qualifies as a "penny stock" under SEC rules which may
make it more difficult for our stockholders to resell their shares of our common
stock.
Our common stock trades on the OTC Bulletin Board. As a result, the
holders of our common stock may find it more difficult to obtain accurate
quotations concerning the market value of the stock. Stockholders also may
experience greater difficulties in attempting to sell the stock than if it were
listed on a stock exchange or quoted on the Nasdaq National Market or the Nasdaq
Small-Cap Market. Because our common stock does not trade on a stock exchange or
on the Nasdaq National Market or the Nasdaq Small-Cap Market, and the market
price of the common stock is less than $5.00 per share, the common stock
qualifies as a "penny stock." SEC Rule 15g-9 under the Securities Exchange Act
of 1934 imposes additional sales practice requirements on broker-dealers that
recommend the purchase or sale of penny stocks to persons other than those who
qualify as an "established customer" or one "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 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
On April 11, 2005, we issued to a newly-elected director options to
purchase 50,000 shares of our common stock, with an exercise price of $0.26 per
share of common stock and a term of 10 years. The options shall vest over three
years, with the first twenty-five percent vesting on the date of grant. The
options were granted to this non-executive director pursuant to our 2001 Stock
Option Plan as a one-time grant upon election to our Board of Directors.
19
On February 2, 2005 and June 4, 2005, we issued to two of our directors
options to purchase 20,000 shares of our common stock, with an exercise price of
$0.69 and $0.28 respectively per share of common stock and a term of 10 years.
The options shall vest over three years, with the first twenty-five percent
vesting on the date of grant. The options were granted pursuant to our 2001
Stock Option Plan as compensation for serving on our Board of Directors.
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 an accredited investor, Blue Cedar Limited ("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 and the required number of manually executed originals
and true copies of Form D will be duly and timely filed with the Securities and
Exchange Commission. 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 requires the Company 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. If the registration statement is not
filed or effective by the dates specified in the agreement, the Company is
subject to a penalty of 0.5% per month of the aggregate purchase price.
20
Item 5. Other Information.
On August 16, 2005, Manuel Tarabay was elected to serve as a Member of the Board
of Directors of the Company. Mr. Tarabay is an investment banker and has held
positions at Merrill Lynch, J.P. Morgan and Credit Suisse First Boston. Mr.
Tarabay is Blue Cedar's designated director to the Board of Directors of the
Company. Mr. Tarabay has not been appointed to serve on any committees of the
Board of Directors. Mr. Tarabay currently acts as an advisor to Blue Cedar.
21
Item 6. Exhibits
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
10.1 Securities Purchase Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.2 Registration Rights Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.3 Stockholder's Agreement, dated August 17, 2005, by and between
Astralis Ltd. and Blue Cedar Limited.
10.4 Long-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.5 Short-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.6 Long-term Common Stock Purchase Warrant, issued to Lipworth Capital
Limited by Astralis Ltd.
31.1 Certification by the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by the 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
22
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 22, 2005 By: /s/ JAMES SHARPE
--------------------------------------------
James Sharpe
President and Chief Executive Officer
(Principal Executive Officer; Authorized
Signatory on behalf of Registrant)
Dated: August 22, 2005 By: /s/ MICHAEL GARONE
--------------------------------------------
Michael Garone
Chief Financial Officer
(Principal Financial and Accounting Officer)
23