As filed with the Securities and Exchange Commission on October 12, 2005
Registration No. 333-115974
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------------------------
POST-EFFECTIVE AMENDMENT NO. 1
To
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------------------
ASTRALIS LTD.
(Name of small business issuer in its charter)
Delaware 6531 4-1508866
--------------------------------- ------------------------- ----------------
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Classification Identification
Code Number) Number)
75 Passaic Avenue
Fairfield, New Jersey 07004
(973) 227-7168
(Address and telephone number of principal executive offices and
principal place of business)
James Sharpe
Chief Executive Officer
Astralis Ltd.
75 Passaic Avenue
Fairfield, New Jersey 07004
(973) 227-7168
(Name, address and telephone number of agent for service)
------------------------------
Copies of Communications to:
Jeffrey A. Baumel, Esq.
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102
(973) 622-4444
------------------------------
Approximate date of commencement of proposed sale of the
securities to the public:
As soon as practicable after the effective date of this Registration Statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
------------------------------
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to Completion, dated October 12, 2005
PRELIMINARY PROSPECTUS
ASTRALIS LTD.
47,056,520 Shares of Common Stock
The stockholders named in this prospectus are selling up to 47,056,520
shares of our common stock. 11,446,654 of the shares we are registering are
issuable upon the exercise of outstanding warrants. The selling stockholders may
offer and sell their shares on a continuous or delayed basis in the future.
These sales may be conducted in the open market or in privately negotiated
transactions and at market prices, fixed prices or negotiated prices. We will
not receive any of the proceeds from the sale of shares by the selling
stockholders, but we will receive funds from the exercise of their warrants.
Our common stock is currently listed on the OTC Bulletin Board under the
symbol "ASTR." On October 6, 2005, the last reported sale price of our common
stock on the OTC Bulletin Board was $0.14 per share.
Investing in our common stock involves risks. Please read the "Risk
Factors" section beginning on page 4 to read about certain risks that you should
consider before purchasing shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
The date of this Prospectus is October 12, 2005
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No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus, and if given or made, such information or representations must not
be relied upon as having been authorized by us, the selling stockholders or any
underwriter. You should rely only on the information contained in this
prospectus. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any security other than the common stock offered
by this prospectus, or an offer to sell or a solicitation of an offer to buy any
security by any person in any jurisdiction in which such offer or solicitation
would be unlawful. Neither the delivery of this prospectus nor any sale made
hereunder shall, under any circumstances, imply that the information in this
prospectus is correct as of any time subsequent to the date of this prospectus.
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TABLE OF CONTENTS
SUMMARY................................................................... 2
RISK FACTORS.............................................................. 4
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... 10
USE OF PROCEEDS........................................................... 10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS................ 11
BUSINESS.................................................................. 18
MANAGEMENT................................................................ 27
EXECUTIVE COMPENSATION.................................................... 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 37
SELLING STOCKHOLDERS...................................................... 39
PLAN OF DISTRIBUTION...................................................... 42
DESCRIPTION OF CAPITAL STOCK.............................................. 43
LEGAL MATTERS............................................................. 46
EXPERTS................................................................... 47
WHERE YOU CAN FIND ADDITIONAL INFORMATION................................. 47
INDEX TO THE FINANCIAL STATEMENTS......................................... F-1
-i-
SUMMARY
You should read this summary together with the more detailed information,
including our financial statements and related notes, appearing elsewhere in
this prospectus.
Our Company
We are a development stage biotechnology company 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.
In March 2005, we announced that the Phase II study of Psoraxine(R) 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. We expect to redesign and recommence
clinical trials in 2006.
We are incorporated under the laws of the State of Delaware. Our principal
executive offices are located at 75 Passaic Avenue, Fairfield, New Jersey 07004
and our telephone number is (973) 227-7168. Our Internet address is
www.astralisltd.com. The information on our web site is not incorporated by
reference into, and does not constitute part of, this prospectus.
The Offering
Shares of common stock offered 47,056,520
Use of Proceeds We will not receive any proceeds from the
sale of the common stock offered by the
selling stockholders. However, we may
receive an aggregate of approximately
$8,259,827 upon the exercise of all the
warrants held by selling stockholders, if
such warrants are exercised for cash. We
will use such funds, if any, to fund
clinical trials and for working capital
and general corporate purposes.
OTC Bulletin Board Symbol ASTR
2
Summary Financial Information
The summary financial data is derived from the historical financial
statements of Astralis Ltd. (the "Company"). This summary financial data should
be read in conjunction with "Management's Discussion and Analysis or Plan of
Operations" as well as our historical financial statements and the related notes
thereto, included elsewhere in this prospectus.
Statement of operations data:
Three Months Ended June 30, Year Ended December 31,
----------------------------- -----------------------------
2005 2004 2004 2003
------------ ------------ ------------ ------------
Revenues $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Operating Expenses
Research and development - related party -- 430,447 4,519,400 1,721,788
Research and development 507,708 689,800 3,169,660 2,323,885
Depreciation and amortization 6,724 7,530 30,403 26,062
General and administrative 365,288 762,317 1,860,844 1,290,346
------------ ------------ ------------ ------------
Total Operating Expenses (879,720) 1,890,094 9,580,307 5,362,081
------------ ------------ ------------ ------------
Loss From Operations (879,720) (1,890,094) (9,580,307) (5,362,081)
Investment Income 4,972 15,349 (722) 60,018
------------ ------------ ------------ ------------
Loss before income tax benefit (874,748) (1,874,745) (9,581,029) (5,302,063)
Income tax benefit -- -- 293,461 221,636
Net Loss (874,748) (1,874,745) (9,287,568) (5,080,427)
Preferred Stock Dividends -- -- (10,750,000) --
------------ ------------ ------------ ------------
Net Loss to Common Stockholders (874,748) (1,874,745) (20,037,568) $ (5,080,427)
============ ============ ============ ============
Basic and Diluted Loss per Common Share $ (0.01) $ (0.03) $ (0.28) $ (0.14)
============ ============ ============ ============
Basic and Diluted Weighted Average
Common Shares Outstanding 73,273,055 73,042,560 71,073,507 37,538,189
============ ============ ============ ============
Balance sheet data:
Three Months Ended
June 30, 2005 Year Ended
December 31, December 31, 2004
------------------ -----------------
Total current assets 601,026 2,439,147
Total assets 893,413 2,797,973
Total current liabilities 983,147 397,762
Deficit accumulated in the development stage (52,257,302) (49,702,357)
Total stockholders' equity 893,413 2,797,973
3
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this prospectus, in connection
with an investment in our common stock. This prospectus contains certain
forward-looking statements, which involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this prospectus. An investment in our common stock involves a high
degree of risk and is suitable only for investors who can afford to lose their
entire investment.
We 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
January 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.
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.
4
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.
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
5
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.
6
Even after investing significant time and resources, we may not obtain
regulatory approval for our product. If we do not receive regulatory approval,
we cannot sell the product. Even if we receive regulatory approval, this
approval may place limitations on the indicated uses for which we can market the
product. Further, after granting regulatory approval, regulatory authorities
subject a marketed product and its manufacturer to continual review, and
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on the product, manufacturer and manufacturing facility,
including withdrawal of the product from the market. In certain countries,
regulatory agencies also set or approve prices.
Even if product candidates emerge successfully from clinical trials, we
may not be able to successfully manufacture, market and sell them.
We have not 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.
7
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many potential competitors which have greater resources and experience
than we do may develop products and technologies that could make ours obsolete.
Companies in the biotechnology industry face rapid technological change in
a rapidly evolving field. Our future success will depend on our ability to
maintain a competitive position with respect to technological advances. Rapid
technological development by others may result in our products and technologies
becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and government agencies. Our competitors may include
Biogen, Genentech/Xoma, Amgen, Wyeth, Abbott Laboratories and Novartis. These
organizations may develop technologies that provide superior alternatives to our
technologies. Further, our competitors may be more effective at implementing
their technologies to develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
If we lose our key personnel or fail to attract and retain additional
personnel, we may be unable to discover and develop our products.
We depend on the services of Dr. Jose Antonio O'Daly, 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.
8
If we face claims in clinical trials of a drug candidate, these claims
will divert our management's time and we will incur litigation costs.
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of Psoraxine(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.
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
October 1, 2005, the range of our stock price has been between $0.16 and $7.15.
On August 19, 2005 we completed a private placement of common stock at a price
$0.11 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
91,354,873 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 140,120,340 shares of common stock outstanding. Of
the outstanding shares, up to 11,605,224 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
9
be obligated to file a registration statement within approximately 30 days of
the final closing of our most recent 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.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains many forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "anticipate," "believe,"
"estimate," and "continue" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future operating results or of our financial
condition or state other "forward-looking" information.
We believe in the importance of communicating our future expectations to
our investors. However, we may be unable to accurately predict or control events
in the future. The factors listed in the sections captioned "Risk Factors" and
"Management's Discussion and Analysis or Plan of Operations," as well as any
other cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock by the
selling stockholders. We will receive proceeds upon the exercise of any
warrants. If all of the selling stockholders exercise all of their warrants for
cash, we will receive an aggregate of approximately $8,259,827. We will use such
funds, if any, to fund clinical trials and for working capital and general
corporate purposes.
10
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board under the symbol
ASTR. The closing price for our common stock on October 6, 2005 was $0.14.
The following table sets forth, for the periods indicated, the range of
high and low bid quotations for shares of our common stock as quoted on the OTC
Bulletin Board. The reported bid quotations reflect inter-dealer prices, without
retail markup, markdown or commissions, and may not necessarily represent actual
transactions.
High Low
2003
First Quarter $0.72 $0.34
Second Quarter $1.01 $0.40
Third Quarter $1.41 $0.36
Fourth Quarter $0.87 $0.42
2004
First Quarter $1.66 $0.80
Second Quarter $1.46 $1.04
Third Quarter $1.05 $0.51
Fourth Quarter $0.85 $0.42
2005
First Quarter $0.84 $0.16
Second Quarter $0.40 $0.20
Holders of common stock
As of October 1, 2005, there were approximately 2,833 holders of record of
our common stock.
Dividends
We have never paid or declared a cash dividend on our common stock. We
intend, for the foreseeable future, to retain all future earnings for use in our
business. The amount of dividends we pay in the future, if any, will be at the
discretion of our Board of Directors and will depend upon our earnings, capital
requirements, financial condition and other relevant factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion of our financial condition and plan of operation
should be read in conjunction with our financial statements and the related
notes included elsewhere in this prospectus. This prospectus contains certain
statements of a forward-looking nature relating to future events or our future
financial performance. We caution prospective investors that such statements
involve risks and uncertainties, and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
11
specifically consider the various factors identified in this prospectus,
including the matters set forth under the caption "Risk Factors" which could
cause actual results to differ materially from those indicated by such
forward-looking statements. We disclaim any obligation to update information
contained in any forward-looking statement.
Overview
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases, 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
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 us to file a
registration statement within approximately 30 days of the final closing of our
private placement covering the resale of all shares included therein, as well as
the shares underlying the warrants. If the registration statement is not filed
or effective by the dates specified in the agreement, we are subject to a
penalty of 0.5% per month of the aggregate purchase price .
Concurrently with the closing of the private placement, we entered into a
stockholder's agreement with Blue Cedar, dated as of August 17, 2005 (the "Blue
Cedar Stockholder's Agreement"). Pursuant to the Blue Cedar Stockholder's
Agreement, Blue Cedar may designate one director to our Board of Directors.
Further, we agreed not to enter into any service agreement, distribution
arrangement or transfer of personnel with any of our stockholders owning more
than 10% of the outstanding shares of common stock until we complete Phase II
clinical trials of Psoraxine(R), without the prior written consent of Blue
Cedar, which shall not be unreasonably withheld. Additionally, for a period of
two years following the closing date of the private placement, we granted Blue
Cedar certain pre-emptive rights, allowing Blue Cedar to participate in
substantially all sales of securities. The Blue Cedar Stockholder's Agreement
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of our common stock.
12
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 January 2006 is contingent upon the success of
efforts to raise additional capital.
The Board of Directors has approved an amendment to our Certificate of
Incorporation, pursuant to which we will be authorized to issue an additional
200,000,000 shares of Common Stock. The Amendment will be subject to the
approval of our stockholders 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
("SkyePharma"), dated December 10, 2001 (the "Services Agreement"),
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 ("Technology Access Option Agreement").
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, par value $.001
per share ("Series A 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 ("Call Option Agreement"). Accordingly, a non-cash charge of
$376,508 was recorded as a general and administrative expense in
June 2004.
13
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.
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 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.
14
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 $2,451,388 during 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.
Fiscal year ended December 31, 2004 compared to fiscal year ended December 31,
2003
For fiscal year ended December 31, 2004:
On January 20, 2004, we closed a private placement from which we received
gross proceeds of approximately $4.08 million. The transaction consisted of the
sale to accredited investors of units consisting of 8,159,964 shares of common
stock and warrants to purchase 8,159,964 shares of common stock. Concurrently
with this transaction, SkyePharma converted all of its outstanding shares of
Series A Preferred Stock into 25,000,000 shares of common stock at a reduced
conversion price of $0.80 per share. In accordance with Statement of Financial
Auditing Standard 84, "Induced Conversions of Convertible Debt, an Amendment of
APB Opinion No. 26," we recorded this conversion transaction as a non-cash
preferred stock dividend in January 2004 in the amount of $10,750,000.
On February 19, 2004, we held a second closing for our private placement
from which we received gross proceeds of approximately $1.15 million. The
transaction consisted of the sale to accredited investors of units consisting of
2,299,902 shares of common stock and warrants to purchase 2,299,902 shares of
common stock. In connection with our private placements and the conversion of
SkyePharma's Series A Preferred Stock, SkyePharma agreed that 12,500,000 shares
of the common stock issued upon conversion will be subject to a right of
repurchase by us under certain circumstances at a premium to the conversion
price. We assigned the right to purchase 1,250,000 of these shares to FPP
Capital Advisors as consideration for services it provided to us in negotiating
the Series A Preferred Stock conversion by SkyePharma. Accordingly, we recorded
a non-cash charge of $376,508 in June 2004 in connection with this assignment.
In February 2004, in connection with the private placement, FPP Capital
Advisors received a consulting fee of $261,496, warrants to purchase 418,394
shares of our common stock at $0.50 per share and warrants to purchase 418,394
shares of our common stock. In June 2004, we issued units consisting of 150,000
shares of common stock and warrants to purchase 150,000 shares of common stock
to FPP Capital Advisors in consideration for services rendered to us in
negotiating our right to repurchase 12,500,000 shares of common stock from
SkyePharma.
15
For the fiscal year ended December 31, 2004, we had no revenue from
operations and incurred operating expenses of $9,580,307 which consisted
primarily of:
o Research and development costs of $7,689,060, including $2,360,000
that we incurred to conduct our Phase I and Phase II clinical
studies, $1,007,500 for services provided by SkyePharma under our
Service Agreement with them, amortization of approximately $714,288
of the technology option license under our Technology Access Option
Agreement with SkyePharma as an intangible asset over its seven-year
life, and a charge of $2,797,612 to record an impairment of the
technology option license.
o General and administrative costs of approximately $1,860,844,
including professional fees and our general corporate expenditures.
As a result, during the fiscal year ended December 31, 2004, we incurred a net
loss of $20,037,568, which also included a non-cash preferred stock dividend of
$10,750,000.
In December 2004, we received $293,461 in cash from the sale of a portion
of our tax related net operating losses ("NOLS") under the State of New Jersey's
Technology Business Tax Certificate Transfer Program. The program is an
initiative adopted by the New Jersey State legislature that allows qualified
technology and biotechnology businesses in New Jersey to sell unused amounts of
NOLS and defined research and development tax credits for cash.
For fiscal year ended December 31, 2003:
In January 2003, pursuant to a Purchase Agreement, dated as of December
10, 2001, we sold 250,000 shares of our Series A Preferred Stock to SkyePharma
for an aggregate purchase price of $2,500,000. We received proceeds of
$2,480,000 after we netted out from the proceeds $20,000 due to SkyePharma in
connection with the Service Agreement.
During the fiscal year ended December 31, 2003, we received $825,000
outstanding under subscription notes. In April 2003, we entered into an Amended
Investor Relation Agreement with a stockholder who had outstanding subscription
notes. In exchange for services rendered, we reduced the outstanding amount by
$36,000. In 2004, the stockholder will provide services valued at $24,000 in
lieu of payment of the outstanding subscription receivable balance.
For the fiscal year ended December 31, 2003, we had no revenue from
operations and incurred operating expenses of $5,362,081 which consisted
primarily of:
o Research and development costs of $4,045,673, including $1,007,500
that we incurred in connection with services provided by SkyePharma
under our Service Agreement with them and amortization of
approximately $714,288 under our technology option license which is
being amortized over a seven year period.
o General and administrative costs of approximately $1,290,346,
including professional fees and our general corporate expenditures.
As a result, during the fiscal year ended December 31, 2003, we incurred a net
loss of $5,080,427.
16
In December 2003, we received $221,636 in cash from the sale of a portion
of our tax related NOLS under the State of New Jersey's Technology Business Tax
Certificate Transfer Program. The program is an initiative adopted by the New
Jersey State legislature that allows qualified technology and biotechnology
businesses in New Jersey to sell unused amounts of NOLS and defined research and
development tax credits for cash.
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
January 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, we announced that
the Phase II study of our 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.
We will need to raise additional funds to continue our operations for the
period following January 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.
17
BUSINESS
You should read the following description of our business in conjunction
with the information included elsewhere in this prospectus. This description
contains certain forward-looking statements that involve risk and uncertainties.
Our actual results could differ significantly from the results discussed in the
forward-looking statements as a result of certain of the factors set forth in
the "Risk Factors" section and elsewhere in this prospectus.
General
We are a development stage biotechnology company 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.
We were originally incorporated under the laws of the State of Colorado in
1999 under the name Hercules Development Group, Inc. We subsequently changed our
name to Astralis Pharmaceuticals Ltd. and, in November 2001, reincorporated
under the laws of the State of Delaware under our present name.
Psoriasis
Psoriasis is a chronic inflammatory skin disorder of currently unknown
origins that generally lasts a lifetime and for which there is presently no
known cure. Researchers believe that psoriasis may be caused by the immune
system sending faulty signals that affect the growth cycle of skin cells. As a
result, skin cells accumulate on the surface of the body faster than normal. In
people without psoriasis, skin cells mature and are shed approximately every 28
days. In psoriatic skin, the skin cells mature over a period of approximately
three to six days.
The symptoms of psoriasis include scaly skin and inflammation occurring on
a cyclical basis, with periods of remission and relapse. There are five types of
psoriasis. The most common form, appearing in approximately 80% of individuals
suffering from the disease, is plaque psoriasis. The other forms are guttate,
inverse, erythrodermic and pustular psoriasis. Psoriasis typically does not
prevent individuals with the condition from functioning normally. However, the
pain, discomfort and emotional effects may be extensive.
Market Opportunity
According to the National Psoriasis Foundation, psoriasis affects
approximately 2.1% of the United States population, or more than 4.5 million
people in the United States. Psoriasis also affects approximately 1% to 3% of
the world's population. Approximately 150,000 to 260,000 new cases of psoriasis
are diagnosed each year. In addition, each year approximately 350 people in the
United States die due to complications caused by psoriasis. Primarily, such
complications occur in relation to severe, extensive forms of psoriasis such as
18
erythrodermic or pustular psoriasis, where large areas of skin are shed. Because
the skin plays an important role in regulating body temperature and serving as a
barrier to infection, when a person's skin is severely compromised, secondary
infections may occur. These serious forms of psoriasis may also cause
complicating factors, such as fluid loss and strain on the circulatory system.
The National Psoriasis Foundation also indicates that between 10% and 30%
of people who have psoriasis will also develop psoriatic arthritis, which is
similar to rheumatoid arthritis, but generally milder. Psoriatic arthritis
causes inflammation and stiffness in the soft tissue around joints, and
frequently affects the fingers and toes. Psoriatic arthritis may also affect
other areas of the body such as the wrists, neck, lower back, knees and ankles.
Psoriasis is a chronic illness that, in many cases, requires continuous
treatment. Patients with psoriasis often pay for costly medications and face
ongoing visits with physicians. Severe cases may require periods of
hospitalization. The National Psoriasis Foundation estimates that the costs of
treating psoriasis may exceed $3.0 billion annually.
Psoraxine(R)
Psoraxine(R) was developed by Dr. Jose Antonio O'Daly, our Chairman of the
Board and Chief Scientific Officer. In 1991, Dr. O'Daly was conducting trials
for a vaccine for leishmaniasis in Caracas, Venezuela. One patient involved in
the leishmaniasis vaccine trials, who also suffered from psoriasis for 12 years,
experienced complete remission of psoriasis after receiving the vaccine. As a
result of this discovery, Dr. O'Daly focused his efforts on developing a product
for the treatment of psoriasis. From 1992 through 2001, Dr. O'Daly developed
Psoraxine(R), a purified version of the original product that is an
immunotherapeutic agent presented in liquid form and packed in 0.5 milligram
ampules for intra-muscular injection. Dr. O'Daly tested the original product
that was a precursor of Psoraxine(R) in approximately 2,900 patients in several
clinical trials in Venezuela. The results from the studies provided evidence of
remission of psoriasis lesions as a result of treatment with the product. In
addition, individuals in the studies did not present severe side effects as a
result of treatment. In one clinical study, of the 2,770 patients, 648, or 28%,
experienced complete remission of psoriasis. In addition, almost half of the
patients experienced psoriasis reduction of between 70% to 99% as measured by
the Psoriasis Area and Severity Index ("PASI"). Additional studies yielded
average PASI reductions of between 73% and 92%.
Dr. O'Daly licensed Psoraxine(R) to us in 2001 and moved to the United
States in 2002. We made capital investments to our research and development
facility of approximately $500,000 in 2002 and we filed an Investigational New
Drug application with the FDA for Psoraxine(R) in March 2003. On August 4, 2003
the FDA allowed us to commence our Phase I clinical trials for Psoraxine(R).
The purpose of Phase I studies is to test the safety of a drug. We have
completed our Phase I studies, which involved the administration by
intramuscular injection of a single dose of 50, 150 or 300 micrograms of
Psoraxine(R) or a placebo in a controlled setting to groups of psoriatic
patients. Our Phase I results indicate that Psoraxine(R) is safe and
well-tolerated. We spent approximately $130,000 on our Phase I studies in 2003
and approximately $210,000 on our Phase I studies in 2004.
We commenced Phase II studies in April 2004. The purpose of Phase II
studies is to test the safety and efficacy of a drug. The Phase II studies have
been completed. We spent approximately $2,150,000 on our Phase II studies in
2004. The initial analysis of the preliminary data from the Phase II studies
indicates that treatment with Psoraxine(R) did not provide any statistically
significant clinical improvement of psoriasis in participants of the studies. We
are currently analyzing the data from the Phase II studies to understand why
19
statistical significance at its primary endpoint was not achieved and to
evaluate our clinical development options for Psoraxine(R). We expect that we
will be required to spend a total of approximately $4,500,000 during fiscal year
2005 to complete Phase II studies, analyze results, and redesign and implement
our clinical development strategy. For the year ended December 31, 2004, we
reflected $7,689,060 in research and development expenses, including $4,519,400
related to SkyePharma. For the year ended December 31, 2003, we reflected
$4,045,673 in research and development expenses, including $1,721,788 related to
SkyePharma.
Current Psoriasis Therapies
The topical treatment for psoriasis has been based on the use of
emollients, keratolytic agents, coal tar, anthralin, corticosteroids of medium
to strong potency and calcipotriene. UVB phototherapy has been used in the
treatment of moderate cases of psoriasis. For severe cases, systemic treatments
include methotextrate, cyclosporine and oral retinoids. Each of these treatments
has variable efficacy, with side effects and cosmetic problems in addition to
the failure to prevent frequent relapses.
Competition and Psoriasis Treatments in Development
The pharmaceutical and biotechnology industries are intensely competitive.
Many companies, including biotechnology, chemical and pharmaceutical companies,
are actively engaged in activities similar to ours, including research and
development of drugs for the treatment of the same disease as Psoraxine(R). The
FDA has approved Amevive, manufactured by Biogen, Raptiva, manufactured by
Genentech/Xoma, and Enbrel, manufactured by Amgen and Wyeth, for the treatment
of moderate-to-severe chronic plaque psoriasis in adult patients. If we succeed
in obtaining FDA approval of Psoraxine(R), Amevive, Raptiva and Enbrel may
compete directly with our product. In addition to Biogen, Genentech/Xoma, Amgen
and Wyeth, our competitors may include Centocor, Abbott Laboratories and
Novartis. Many of these companies have substantially greater financial and other
resources, larger research and development staffs, and more extensive marketing
and manufacturing organizations than we have. In addition, these companies have
more experience in preclinical testing, clinical trials and other regulatory
approval procedures than we have. There are also academic institutions,
governmental agencies and other research organizations that are conducting
research in areas in which we are working. They may also come to develop and
market commercial products, either on their own or through collaborative
efforts.
We expect to encounter significant competition for any of the
pharmaceutical products we develop. Companies that complete clinical trials
obtain required regulatory approvals and commence commercial sales of their
products before their competitors may achieve a significant competitive
advantage.
Developments by others may render our product obsolete or noncompetitive.
We will face intense competition from other companies for collaborative
arrangements with pharmaceutical and biotechnology companies, for establishing
relationships with academic and research institutions and for licenses to
additional technologies. These competitors may succeed in developing
technologies or products that are more effective than Psoraxine(R).
Government Regulation
The FDA and comparable regulatory agencies in state and local
jurisdictions and in foreign countries impose substantial requirements upon the
clinical development, manufacture and marketing of pharmaceutical products.
These agencies and other federal, state and local entities regulate research and
development activities and testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our potential products.
20
The process required by the FDA before our product candidate,
Psoraxine(R), may be marketed in the United States generally involves the
following:
o preclinical laboratory and animal tests;
o submission of an Investigational New Drug application, which must
become effective before clinical trials may begin;
o adequate and well controlled human clinical trials to establish the
safety and efficacy of the proposed drug for its intended use; and
o FDA approval of a new drug application or biologics license
application.
The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approvals for
Psoraxine(R) or any other potential products will be granted on a timely basis,
if at all.
Prior to commencing clinical trials, which are typically conducted in
three sequential phases, a company must submit an Investigational New Drug
application to the FDA. In March 2003, we filed our Investigational New Drug
application for Psoraxine(R) with the FDA. The Investigational New Drug
application automatically becomes effective 30 days after receipt by the FDA,
unless the FDA, within the 30-day time period, raises concerns or questions
about the conduct of the trial. In such a case, the Investigational New Drug
sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. In August 2003, the FDA informed us that we could commence our
clinical trials of Psoraxine(R). We have completed Phase I clinical trials in
which Psoraxine(R) was found to be generally safe and well-tolerated in Phase I
test patients. We have also recently completed a Phase II clinical trial, which
did not achieve its primary endpoint for PASI (Psoriasis Area and Severity
Index) reduction. We are currently analyzing the data collected during the Phase
II study, including biopsy data indicating cellular level changes that has not
been previously available, to gain a better understanding of the results, and to
direct our future efforts.
Although we remain committed to the future clinical development of
Psoraxine(R), we may not successfully complete the three phases of clinical
trials of Psoraxine(R) within any specific time period, if at all. Furthermore,
the FDA or an institutional review board or the sponsor may suspend a clinical
trial at any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk.
The results of product development, pre-clinical studies and clinical
studies are submitted to the FDA as part of a new drug application or biologics
license application. The FDA may deny a new drug application or biologics
license application if the applicable regulatory criteria are not satisfied or
may require additional clinical data. Even if such data is submitted, the FDA
may ultimately decide that the new drug application or biologics license
application does not satisfy the criteria for approval. Once issued, the FDA may
withdraw product approval if compliance with regulatory standards is not
maintained or if problems occur after the product reaches market. In addition,
the FDA may require testing and surveillance programs to monitor the effect of
approved products which have been commercialized, and the FDA has the power to
prevent or limit further marketing of a product based on the results of these
post-marketing programs.
21
Satisfaction of FDA requirements or similar requirements of state, local
and foreign regulatory agencies typically takes several years and the actual
time required may vary substantially based upon the type, complexity and novelty
of the product or indication. Government regulation may delay or prevent
marketing of potential products or new indications for a considerable period of
time and impose costly procedures upon our activities. Success in early stage
clinical trials does not assure success in later stage clinical trials.
Data obtained from clinical activities is not always conclusive and may be
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Even if a product receives regulatory approval, the
approval may be significantly limited to specific indications and dosages.
Further, even after regulatory approval is obtained, later discovery of
previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market. Delays in
obtaining, or failures to obtain, additional regulatory approvals for any of our
product candidates would have a material adverse effect on our business.
Any products manufactured or distributed by us pursuant to FDA approvals
are subject to continuing regulation by the FDA, including record-keeping
requirements and reporting of adverse experiences with the drug. Drug
manufacturers and their subcontractors are required to register their
establishments with the FDA and certain state agencies, and are subject to
periodic unannounced inspections by the FDA and certain state agencies for
compliance with good manufacturing practices, which impose certain procedural
and documentation requirements upon us and any third party manufacturers we may
utilize. We cannot be certain that our present or future suppliers will be able
to comply with the good manufacturing practices, regulations and other FDA
regulatory requirements.
Outside the United States, our ability to market a product is contingent
upon receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Union, registration procedures are
available to companies wishing to market a product in more than one EU Member
State. If the regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. This foreign regulatory approval process involves all of the risks
associated with FDA clearance. To date, we have obtained regulatory approval for
clinical testing of Psoraxine(R) in Venezuela, but we have not obtained final
regulatory approval for commercial distribution of Psoraxine(R) in Venezuela
because we do not have manufacturing facilities in that country and such
facilities are required by regulatory authorities in Venezuela before granting
commercial approval for a proposed drug.
Intellectual Property
In January 2004, the United States Patent and Trademark Office ("PTO")
issued a patent to Dr. Jose O'Daly for the "Compositions and Methods for the
Treatment and Clinical Remission of Psoriasis." Under the terms of a license
agreement and assignment of license agreement, we have the exclusive right and
license to use and exploit this patent. Dr. O'Daly will continue to maintain
ownership rights with respect to the patent and patent application. However, Dr.
O'Daly has granted us a perpetual, royalty free license to his patent under the
agreements, which will terminate only upon the expiration of the patent, or upon
the commencement of a bankruptcy or insolvency proceeding involving our company
or upon our dissolution or liquidation.
22
In March 2002, Akiva LLC, an entity controlled by Dr. O'Daly, also filed
an application to obtain patent protection internationally under the Patent
Cooperation Treaty. In addition, in August 2003, Akiva LLC filed patent
applications in the European Union, Australia, Brazil, Canada, Mexico and Japan.
We have rights to these applications, which are currently pending, pursuant to
the license and assignment of license agreements described above.
In January 2004, Dr. O'Daly filed a patent application with the PTO
focusing on the mechanism of action of Psoraxine(R), expanding the claims to
include medical indications other than psoriasis, such as Atopic Dermatitis,
Psoriatic Arthritis and Rheumatoid Arthritis. In addition, the patent elaborates
further on the mechanism of action of Leishmania extracts, which are believed to
induce T-cell activation. In January 2004, Dr. O'Daly also filed a second patent
relating to a culture medium for parasitic organisms, which is part of our
technology platform. Dr. O'Daly has assigned to us the rights in the patent
applications. Also, in January 2004, the PTO granted us a federal trademark
registration for the mark Psoraxine(R).
Agreements with SkyePharma
We entered into a Purchase Agreement, dated as of December 10, 2001 with
SkyePharma pursuant to which SkyePharma purchased an aggregate of 2,000,000
shares of our Series A Preferred Stock, for an aggregate purchase price of $20.0
million. On January 20, 2004, pursuant to our Omnibus Conversion Agreement with
SkyePharma, dated January 12, 2004, SkyePharma converted all of its 2,000,000
shares of our Series A Preferred Stock into 25,000,000 shares of our common
stock at a conversion price of $0.80 per share. Further, pursuant to a Stock
Purchase Agreement, dated December 29, 2004, between SkyePharma, Mike Ajnsztajn,
our former Chief Executive Officer and former member of our Board of Directors,
and Gaston Liebhaber, a former member of our Board of Directors, effective March
3, 2005, SkyePharma purchased 11,160,000 shares, collectively, of our common
stock from Mr. Ajnsztajn and Mr. Liebhaber. As a result of this purchase,
SkyePharma, as of April 29, 2005, owned 36,360,000 shares, or 49.8%, of our
issued and outstanding common stock. See Risk Factor entitled "One of our
existing stockholders can exert control over us and may not make decisions that
further the best interests of all stockholders" for a discussion of the possible
consequences of SkyePharma's ownership of our common stock.
On January 20, 2004, in connection with SkyePharma's conversion of the
Series A Preferred Stock, we entered into the Call Option Agreement with
SkyePharma, pursuant to which we received the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma at a premium to the $0.80
conversion price. In the event we exercise the call option, the exercise price
will be between $1.28 and $1.52 per share, depending on the date of exercise.
The call option will be exercisable by us for a period commencing upon our
achievement of a certain milestone event and ending on January 20, 2007. In June
2004, we assigned the right to purchase 1,250,000 shares under the Call Option
Agreement to FPP Capital Advisors as consideration for services it provided in
negotiating the Omnibus Conversion Agreement. FPP Capital Advisors is controlled
by Fabien Pictet, a member of our Board of Directors.
On January 20, 2004, the closing date of the conversion of SkyePharma's
2,000,000 shares of our Series A Preferred Stock, we, SkyePharma and our other
original stockholders amended the stockholders agreement, dated as of December
10, 2001 (the "Amended Stockholders' Agreement"). Pursuant to the Amended
Stockholders' Agreement, our board of directors must include at least two
independent directors and SkyePharma has the right to nominate one director.
Michael Ashton is SkyePharma's initial and current nominated director. Until
January 20, 2007, Jose Antonio O'Daly has the right to nominate one director.
The Amended Stockholders' Agreement will terminate upon the later of (i) the
date on which SkyePharma no longer beneficially owns, in the aggregate, at least
20% of our outstanding common stock or (ii) January 20, 2007. Further, the
Amended Stockholders' Agreement may be terminated by the mutual written consent
23
of the parties. Pursuant to the Amended Stockholders' Agreement, SkyePharma is
required to vote its shares of our common stock in favor of certain enumerated
transactions that have been approved by our Board of Directors and all of our
independent directors. These transactions include (i) the amendment of our
certificate of incorporation solely to increase our authorized capital stock,
(ii) the adoption or amendment of an employee benefit plan applicable to all
employees, (iii) the issuance of additional securities for cash and (iv) the
sale of all of our outstanding capital stock or all or substantially all of our
assets, or our merger with another entity, provided that SkyePharma will receive
the same consideration for its shares as other holders of common stock and will
be able to participate in the sale or merger on the same terms as the most
favorable terms available to any of our other stockholders and the total
consideration for the transaction is greater than $135 million.
We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine(R), with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5.0 million technology access fee
for the option to acquire a license for DepoFoam and other relevant drug
delivery technologies owned by SkyePharma. Under the terms of the Technology
Access Option Agreement, if we exercise our option, we must pay a royalty of 5%
of net sales of all products manufactured or sold that use or exploit the drug
delivery technologies that we license from SkyePharma. In addition, if we
exercise our option, SkyePharma retains the right during the term of the
Technology Access Option Agreement to undertake the manufacture of all of our
products that incorporate or utilize the drug delivery technologies. The option
we received under the Technology Access Option Agreement expires on December 10,
2008. The Technology Access Option Agreement may be terminated by either party
if (i) the other party commits any irremediable breach of the agreement, (ii)
the other party commits any remediable breach and fails to remedy such breach
within sixty days of service of notice of the breach, (iii) a court makes an
administration order with respect to the other party or any composition in
satisfaction of the debts of, or scheme of arrangement of the affairs of, the
other party, or (iv) the other party becomes insolvent, has a receiver appointed
over any of its assets, enters into any composition with creditors generally or
has an order made or resolution passed for it to be wound up. SkyePharma has the
right of first negotiation to acquire the worldwide marketing rights to
Psoraxine(R). We have evaluated the technology access option fee we paid under
the Technology Access Option Agreement, which we have been capitalizing as a
research and development intangible asset and amortizing over a seven-year
period, and have determined that as of December 31, 2004, the technology access
option fee exceeded its fair market value. Consequently, we recorded as
additional research and development costs in 2004 a charge of $2,797,612 to
reflect an impairment of this intangible asset.
In addition, we entered into the Service Agreement, dated December 10,
2001, pursuant to which SkyePharma was to provide us with development,
manufacturing, pre-clinical and clinical development services in consideration
of $11 million, of which $3 million was paid in 2001, with the remaining $8
million paid primarily during 2002 for second generation Psoraxine(R). The
Service Agreement terminated on December 31, 2002. We entered into an Amendment
to the Service Agreement with SkyePharma, effective as of January 1, 2003, to
extend the term of the Service Agreement and modify the services to be provided
by SkyePharma such that SkyePharma continued to provide certain services to us
through December 31, 2004, in consideration for payments made during 2002. The
agreement expired on December 31, 2004.
Blue Cedar Private Placement
On August 19, 2005, we completed a private placement of securities from
which we received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar, of units
consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
24
$0.165 and (iii) warrants to purchase over a 12-month period 12,121,212 shares
of common stock with an exercise price of $0.165. We relied upon the exemption
from registration provided under Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. The private placement was only made
available to one "accredited investor" as defined in Rule 501 of Regulation D.
Lipworth Capital Limited acted as our placement agent in connection with the
private placement. We paid an 8% fee to our placement agent and issued warrants
to purchase 1,454,545 shares of common stock with an exercise price of $0.165,
in connection with the financing in addition to other costs. Additionally, we
granted Blue Cedar certain registration rights pursuant to a registration rights
agreement, dated as of August 17, 2005, in connection with this transaction. The
registration rights agreement requires us to file a registration statement
within approximately 30 days of the final closing of our private placement
covering the resale of all shares included therein, as well as the shares
underlying the warrants. If the registration statement is not filed or effective
by the dates specified in the agreement, we are subject to a penalty of 0.5% per
month of the aggregate purchase price.
Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is now required to be comprised
of at least eight directors and Blue Cedar may designate one director our Board
of Directors. Manuel Tarabay is Blue Cedar's initial and current designated
director. Further, pursuant to the Blue Cedar Stockholder's Agreement, we agreed
not to enter into any service agreement, distribution arrangement or transfer of
personnel with any of our stockholders owning more than 10% of the outstanding
shares of common stock until we complete Phase II clinical trials of
Psoraxine(R), without the prior written consent of Blue Cedar, which shall not
be unreasonably withheld. Additionally, for a period of two years following the
closing date of the private placement, we granted Blue Cedar certain pre-emptive
rights, allowing Blue Cedar to participate in substantially all sales of
securities. The Blue Cedar Stockholder's Agreement will terminate upon the later
of the Blue Cedar Termination Date or August 15, 2008. The "Blue Cedar
Termination Date" is the date on which Blue Cedar no longer beneficially owns,
in the aggregate, at least 20% of our outstanding common stock.
Other Research and Development Efforts
In addition to our development of Psoraxine(R) for the treatment of
psoriasis, we are researching its possible application for the treatment of
other conditions, such as eczema, seborrheic dermatitis and leishmaniasis. We
are also developing a second product for the treatment of arthritis. We intend
to market this product primarily in the United States, although we have not
named this product yet and we do not have any approvals from, nor has any
application been filed with, the FDA or any foreign governmental regulatory
authority for this product. Currently, we do not have any collaborators for this
product. We are also engaged in preliminary research of a treatment for
transplant rejection.
Employees and Consultants
As of October 1, 2005, we employed seven full-time employees, including
four scientists and one laboratory technician. We also have 14 consultants. We
have no part-time employees. None of our employees are covered by a collective
bargaining agreement and we believe that our employee relations are good.
Legal Proceedings
We are not currently a party to any material legal proceedings.
25
Property
We lease our executive offices and research laboratory located at 75
Passaic Avenue, Fairfield, New Jersey 07004. The yearly rent for such office and
laboratory space is $77,500.
26
MANAGEMENT
Executive Officers and Directors
The names, ages and positions of our current directors and executive
officers are as follows:
Name Age Position
-------------------------------- --- -----------------------------------
Jose Antonio O'Daly, M.D., Ph.D. 63 Chairman of the Board of Directors
and Chief Scientific Officer
James Sharpe 53 President, Chief Executive Officer
and Director
Michael Garone 46 Chief Financial Officer
Michael Ashton 59 Director
Samuel Barnett, Ed.D. 57 Director
Steven Fulda 72 Director
Fabien Pictet 46 Director
Gordon Schooley, Ph.D. 59 Director
Manuel Tarabay 53 Director
There are no familial relationships among our directors and/or officers.
Directors hold office until the next annual meeting of our stockholders or until
their respective successors have been elected and qualified. Officers serve at
the pleasure of the Board of Directors.
Jose Antonio O'Daly, M.D., Ph.D. Dr. O'Daly has served as our Chairman of the
Board of Directors since November 2001, and was appointed our Chief Scientific
Officer on December 22, 2004. From November 2001 to December 22, 2004, Dr.
O'Daly served as our President of Research and Development. Dr. O'Daly is the
sole founder of the Center for Research and Treatment for Psoriasis in Caracas,
Venezuela and has served as its President since 1998. From 1972 to 1998, Dr.
O'Daly served as Director and Head of Research of the Microbiology Center of the
Venezuelan Institute of Scientific Investigations. Dr. O'Daly attended the
Central University of Venezuela, Caracas, receiving his Doctorate of Medical
Sciences in 1968. In 1971, Dr. O'Daly earned a Doctorate of Philosophy from the
Johns Hopkins University in Baltimore, Maryland. Dr. O'Daly is an honorary
member of the Venezuelan Medical Academy.
James Sharpe. Mr Sharpe has served as our President and Chief Executive Officer
and as one of our directors since January 27, 2005. From 1999 to 2005, Mr.
Sharpe served as President and founder of Ankyr Consulting, L.L.C, an
independent consulting company for healthcare and biotechnology companies. In
early 1999, he served as President of Small Molecule Therapeutics, a
privately-owned drug discovery company. From 1997 to 1998, Mr. Sharpe served as
Chief Operating Officer of FEI Technologies, Inc., a privately-owned drug
delivery company. From 1991 to 1996, Mr. Sharpe served as President and
co-founder of GX BioSystems A/S, a privately-owned biotechnology company focused
27
on vaccines and biopesticides. Mr. Sharpe recently founded Metacine, Inc., a
cancer vaccine company, and co-founded Optigenix, Inc., a directed evolution
company. He was a founding member of the Pennsylvania Biotechnology Association,
where he served as President from 1990 to 1992 and was a member of the Board of
Directors from 1989 to 1997. From 1993 to 1996 he served as a member of the
Board of Governors of the Emerging Company Section of the Biotechnology Industry
Association. Mr. Sharpe holds a B.S. in Chemistry from Union College and an
M.B.A. in Marketing and Finance from the University of Rochester.
Michael Garone. Mr. Garone has served as our Chief Financial Officer since
February 21, 2005. From October 13, 2004 to February 21, 2005, Mr. Garone served
as our Interim Chief Financial Officer. During 2004, Mr. Garone founded Gar-1
Business Advisory Services, L.L.C., an independent consulting company for
information movement and management companies. From 1983 to 2003, Mr. Garone was
employed by AT&T, Inc. where he held various positions of increasing
responsibilities, including Chief Financial Officer of AT&T Alascom and
Financial Planning Vice President, Broadband and Internet Services. Mr. Garone
began his career in finance as an Over-the-Counter stock trader specializing in
high technology start-up companies. Mr. Garone holds a B.A. in Mathematics from
Colgate University and an M.B.A. from Columbia University.
Michael Ashton. Mr. Ashton has served as one of our directors since January
2002. Mr. Ashton has 30 years of experience in the pharmaceutical industry, and
since 1997 he has held the position of Chief Executive Officer of SkyePharma
PLC, a London-based drug delivery technology provider. Prior to joining
SkyePharma, Mr. Ashton served as Chairman and Chief Executive Officer of the
U.S. subsidiary of Faulding, Australia's largest pharmaceutical companies. Mr.
Ashton is a member of the Board of Directors of Transition Inc. Mr. Ashton holds
a Bachelor of Pharmacy Degree from Sydney University and an M.B.A. from Rutgers
University.
Samuel Barnett, Ed.D. Mr. Barnett has served as one of our directors and a
member of our audit committee since June 2004. In 1979, Mr. Barnett founded
Barnett International, a consulting firm, and served as Chief Consultant from
1979 to 1999. From 1999 to 2000, Mr. Barnett served as Lead Partner of the
Americas Pharmaceutical Practice of PricewaterhouseCoopers Consulting. From 2000
to 2005, he served as Lead Partner of the Americas Life Sciences Consulting
Practice for IBM Business Consulting Services. Mr. Barnett holds a Bachelor's
Degree from Wesleyan University and received both his Master's and Doctorate
Degrees from Temple University.
Steven Fulda. Mr. Fulda has served as one of our directors and a member of our
audit committee since February 2002. Since 1989, Mr. Fulda has served as
Managing Director of Fulda Business Planners. Mr. Fulda has 40 years of
management and consulting experience including business strategy, planning,
development and financing. Since 1992, Mr. Fulda has been an Adjunct Professor
of Entrepreneurship and Director of the Small Business Institute at Fairleigh
Dickinson University. Mr. Fulda holds a Master's Degree in Quantitative Business
Analysis from New York University and a Master's Degree in Systems Engineering
from Bell Laboratories' New York University Graduate Program.
Fabien Pictet. Mr. Pictet has served as one of our directors since February
2002. Since 1998, Mr. Pictet has served as Chairman of Fabien Pictet and
Partners, a London-based investment firm. Mr. Pictet has 20 years of experience
in investing in emerging markets. During his 11 year tenure with Pictet and Cie,
from 1986 to 1997, Mr. Pictet held various positions ranging from Manager
responsible for U.S. equity investments to Partner responsible for all of the
firm's institutional activities in Geneva, Zurich and London. Mr. Pictet holds a
Bachelor's Degree in Economics from the University of San Francisco and a
Master's Degree in International Management from American Graduate School of
International Management.
28
Gordon Schooley, Ph.D. Dr. Schooley has served as one of our directors and a
member of our Medical Advisory Board since April 11, 2005. Dr. Schooley has over
33 years of experience in the pharmaceutical field, including extensive
experience in clinical and product development. Since 1999, Dr. Schooley has
served as Chief Scientific Officer of SkyePharma PLC. From 1989 to 1998, Dr.
Schooley served as Vice President of Clinical and Regulatory Affairs for
Alliance Pharmaceutical Corp. From 1987 to 1989, Dr. Schooley served as Vice
President of Clinical and Regulatory Affairs for Newport Pharmaceuticals
International, Inc. From 1979 to 1987, Dr. Schooley served as Director of
Clinical Research, Biostatistics and Computing Services for Allergan
Pharmaceuticals. Dr. Schooley currently serves as a member of the Scientific
Advisory Boards of Topigen Pharmaceuticals, Inc., Progen Ltd., and Seacology
Foundation. Dr. Schooley holds a B.S. and an M.S. in Business and Statistics
from Brigham Young University and received his Doctorate of Philosophy in
Biostatistics from the University of Michigan School of Public Health.
Manuel Tarabay. Mr. Tarabay has served as a director of Astralis since August
2005. Mr. Tarabay has worked with Merrill Lynch in Beirut, New York, and Kuwait.
In his career, Mr. Tarabay has been employed in the Treasury departments of
Paris and Geneva as a private banker and portfolio manager. He has worked with
JP Morgan as Head of Investment Management and on the International Asset
Allocation Committee. He has spent time at Bankers Trust serving on the Global
Advisory Team, as well as at Credit Suisse First Boston, where he worked in
international business. Mr. Tarabay now works as a private banker and financial
advisor based in Beirut. Mr. Tarabay has his Bachelors in Mathematics & Computer
Science from Dartmouth College as well as his M.B.A. from the European Institute
of Business Administration.
Advisors
Medical Advisory Board
James Leyden, M.D. Dr. Leyden has served as the Chairman of our Medical Advisory
Board since November 2001. Dr. Leyden has been a Professor of Dermatology at the
Hospital of the University of Pennsylvania in Philadelphia since 1983. He has
served on the boards of many of the nation's key dermatological committees,
including those of the American Academy of Dermatology and the Dermatology
Foundation. Dr. Leyden has also served as a consultant to the U.S. Food and Drug
Administration and the Federal Trade Commission, and to drug regulation agencies
in England, Germany and Austria. Dr. Leyden has also assisted in the
development, testing and commercialization of Accutane, Bactroban, Nizoral,
Cleocin, Benzamycin, Benzaclin, Minocin and the use of bicarbonate to control
body odor. Dr. Leyden holds a Bachelor's Degree from Saint Joseph's College and
an M.D. from the University of Pennsylvania School of Medicine.
Gerald Krueger, M.D. Dr. Krueger has served on our Medical Advisory Board since
December 2003. Dr. Krueger is a Professor of Dermatology at the University of
Utah School of Medicine. Dr. Krueger consults for the U.S. Food and Drug
Administration on psoriasis and serves on the executive committee of the
Dermatology Foundation. In addition, he recently completed a ten-year term as
Chairman of the Medical Advisory Board of the National Psoriasis Foundation. Dr.
Krueger has been elected into the Alpha Omega Honor Society of Medicine. He has
received the Taub International Award for psoriasis research, the American Skin
Association Award for psoriasis research and the National Psoriasis Foundation's
Lifetime Achievement Award and Founders Award.
Our Medical Advisory Board does not hold any formal meetings. However,
management consults with the Medical Advisory Board from time to time. On April
11, 2005, we also appointed Dr. Schooley to serve on our Medical Advisory Board.
29
Board Composition
We currently have eight directors, each serving a term until the next
annual meeting of stockholders. Pursuant to the Blue Cedar Stockholder's
Agreement, Blue Cedar may designate one director to our Board of Directors.
Manuel Tarabay is Blue Cedar's initial and current designated director. The Blue
Cedar Stockholder's Amendment 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. Further, pursuant to the
Amended Stockholders' Agreement, our Board of Directors must include at least
two independent directors and SkyePharma has the right to nominate one director.
Michael Ashton is SkyePharma's initial and current nominated director. Until
January 20, 2007, Dr. O'Daly has the right to nominate one director. The Amended
Stockholders' Agreement will terminate upon the later of (i) the date on which
SkyePharma no longer beneficially owns, in the aggregate, at least 20% of our
outstanding common stock or (ii) January 20, 2007. Further, the Amended
Stockholders' Agreement may be terminated by the mutual written consent of the
parties.
Compensation of Directors
We reimburse all outside directors for travel and lodging expenses related
to scheduled board meetings. Our Board of Directors authorized the following
payments for non-executive directors during the fiscal year-ended December 31,
2004: $1,000 for each board meeting attended in person and $400 for each meeting
attended by teleconference; an annual retainer of $4,000 paid to the Chairman of
the Audit Committee; $1,000 paid to each Audit Committee member per financial
filing; an annual retainer of $2,500 paid to the Chairman of the Compensation
Committee; an annual retainer of $1,500 paid to each Compensation Committee
member, other than the Chairman; an annual retainer of $3,000 paid to the
Chairman of the Strategic Planning Committee; an annual retainer of $1,000 paid
to each Strategic Planning Committee member, other than the Chairman; and $1,000
paid to each Strategic Planning Committee member for each half-day strategic
planning meeting attended in person. In addition, each non-executive Director
will receive a one-time grant upon election to the Board of stock options to
purchase 50,000 shares of our common stock, vesting over a four-year period with
the first 25% vesting on the date of grant, and an annual grant upon the
anniversary of election to the Board of stock options to purchase 20,000 shares
of our common stock, vesting over a four-year period with the first 25% vesting
on the date of grant. Other than the foregoing, our directors do not receive
compensation pursuant to any standard arrangement for their services as
directors.
30
Indemnification Matters
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by us and our predecessors during each of the last three fiscal years to
our Chief Executive Officer and any other executive officer who received
compensation greater than $100,000 during any of the last three fiscal years.
Summary Compensation Table
Annual Compensation
-------------------
Other Annual
Name and Principal Position Year Salary ($) Compensation ($)
--------------------------- ---- ---------- ----------------
James Sharpe, 2004 -- --
President and Chief Executive 2003 -- --
Officer (1) 2002 -- --
Mike Ajnsztajn 2004 109,875 2,437(4)
Prior Chief Executive Officer (2) 2003 154,375 4,613
2002 150,000 4,613
Jose Antonio O'Daly, 2004 188,487 41,004(5)
Chairman of the Board of Directors and 2003 158,750 73,740
Chief Scientific Officer (3) 2002 150,000 56,671
----------
(1) Mr. Sharpe became our President and Chief Executive Officer on January 27,
2005.
31
(2) On July 28, 2004, we accepted the resignation of Mr. Ajnsztajn, effective
immediately with respect to his position as a member of our Board of
Directors and effective August 26, 2004 with respect to his position as
our Chief Executive Officer.
(3) Dr. O'Daly became one of our employees on July 1, 2002. Prior to July 1,
2002, Dr. O'Daly provided services as a consultant to the company.
(4) For the fiscal year ended December 31, 2004, this amount includes $2,437
in health insurance premiums paid by us for Mr. Ajnsztajn's benefit.
(5) For the fiscal year ended December 31, 2004, this amount includes $8,707
in health insurance premiums paid by us for Dr. O'Daly's benefit, an
automobile allowance of $5,729 and $26,568 for a furnished apartment.
Employment Agreements
On December 22, 2004, we entered into an employment agreement with Jose
Antonio O'Daly, the Chairman of our Board of Directors and our Chief Scientific
Officer. Under the terms of his employment agreement, Dr. O'Daly is entitled to
an annual base salary of $231,000 payable in arrears in bi-monthly installments,
less statutory deductions and an annual bonus of up to 25% of his base salary
and based upon achievement of such goals and subject to such additional terms as
may be determined by the Board of Directors. As a member of our senior
management team, Dr. O'Daly has been granted the option to purchase 728,000
shares of our common stock with an initial exercise price of $0.70 per share.
The options are fully vested and have a term of ten years. In the event of a
voluntary termination for "good reason" or if Dr. O'Daly is terminated following
a change in control or without "cause," he generally will receive, among other
things, the following severance benefits: (a) an amount equal to two times his
annual base salary established for the fiscal year in which the date of
termination occurs and (b) an amount equal to two times his annual bonus award
established for the fiscal year in which his date of termination occurs. In the
event of a voluntary termination by Dr. O'Daly without good reason, or if Dr.
O'Daly is terminated by us for cause, he will receive the following severance
benefits: (a) an amount equal to his base salary for one year and (b) an amount
equal to one times his annual bonus award established for the fiscal year in
which his date of termination occurs. The employment agreement includes certain
non-competition and confidentiality provisions.
On January 27, 2005, we entered into an employment agreement which expires
January 15, 2007 with James Sharpe, our President and Chief Executive Officer
and a member of Board of Directors. Under the terms of his employment agreement,
Mr. Sharpe is entitled to an annual base salary of $231,000 payable in arrears
in bi-monthly installments, less statutory deductions and an annual bonus of up
to 25% of his base salary based upon the achievement of certain goals and
subject to such additional terms as may be determined by the Board of Directors.
As a member of our senior management team, Mr. Sharpe has been granted the
option to purchase 728,000 shares of our common stock, which will vest
immediately to the extent of 182,000 shares and then an additional 182,000
shares per year on a cumulative basis until all options have vested. The options
have an initial exercise price of $0.70 per share and have a term of ten years.
In addition, on the first date of his employment, Mr. Sharpe was issued 100,000
shares of common stock and on the date that is one year following the first date
of employment, an additional 100,000 shares, which will be fully vested and
fully paid as of the date of issuance. Also, pursuant to the agreement, we will
make the following payments to Mr. Sharpe: (a) $35,000, no later than January
15, 2006 and (b) an additional amount of not less than $35,000 and not more than
$65,000 no later than January 15, 2007, provided however, that if prior to
January 15, 2007, our cash balance falls below $350,000, we will immediately pay
the minimum remaining amount to Mr. Sharpe. In the event that Mr. Sharpe is
terminated after a change of control, he generally will receive, among other
things, the following severance benefits: (a) an amount equal to two times his
32
annual base salary established for the fiscal year in which his date of
termination occurs and (b) an amount equal to two times his annual bonus award
established for the fiscal year in which his date of termination occurs. In the
event Mr. Sharpe is terminated for good reason, without cause, or non-renewal,
he will generally receive the following severance benefits: (a) an amount equal
to one times his annual base salary established for the fiscal year in which the
date of termination occurs and (b) an amount equal to one times his annual bonus
award established for the fiscal year in which the date of termination occurs.
The employment agreement includes certain non-competition and confidentiality
provisions.
On February 21, 2005, we entered into a consultant agreement with Michael
Garone, whereby Mr. Garone was retained on a full-time, exclusive basis to serve
as our Chief Financial Officer. As Chief Financial Officer, Mr. Garone reports
to our Chief Executive Officer and is responsible for, among other things, our
financial planning and funding and assists our Chief Executive Officer lead and
implement our long-term strategy and vision to provide successful growth in
value for our investors and stockholders. Under the terms of the consultant
agreement, Mr. Garone is entitled to a monthly fee of at least $15,600. We have
agreed to indemnify Mr. Garone against any claims that may arise as a result of
the performance of his duties as our Chief Financial Officer under the
consultant agreement and to include him, at our cost, as an insured party under
our current directors' and officer' liability insurance policy. The term of the
consultant agreement will continue until terminated by either party without
cause upon 30 days written notice or with cause upon 10 days written notice.
None of our other executive officers receive compensation pursuant to any
standard arrangement for their services as executive officers.
2001 Stock Option Plan
Our 2001 Stock Option Plan ("2001 Plan") was unanimously adopted by the
Board of Directors on November 1, 2001 and approved by our stockholders at a
special meeting held on November 1, 2001. The 2001 Plan provides for the
issuance of 5,000,000 shares of common stock underlying stock options available
for grant thereunder. The purpose of the 2001 Plan is to provide additional
incentive to our directors, officers, employees and consultants who are
primarily responsible for our management and growth. Each option will be
designated at the time of grant as either an incentive stock option (an "ISO")
or as a non-qualified stock option (a "NQSO"). As of December 31, 2004, options
to purchase 1,143,000 shares of common stock have been granted under the 2001
Plan.
The 2001 Plan is administered by our Board of Directors, or by any
committee that we may in the future form and to which the Board of Directors may
delegate the authority to perform such functions (in either case, the
"Administrator").
Every person who at the date of grant of an option is an employee of ours
or any affiliate of ours is eligible to receive NQSOs or ISOs under the 2001
Plan. Every person who at the date of grant is a consultant to, or non-employee
director of, ours or any affiliate of ours is eligible to receive NQSOs under
the 2001 Plan.
The exercise price of a NQSO will be not less than 85% of the fair market
value of the stock subject to the option on the date of grant. To the extent
required by applicable laws, rules and regulations, the exercise price of a NQSO
granted to any person who owns, directly or by attribution under the Code
(currently Section 424(d)), stock possessing more than 10% of the total combined
voting power of all classes of our stock or stock of any of our affiliates (a
"10% Stockholder") will not be less than 110% of the fair market value of the
stock covered by the option at the time the option is granted. The exercise
price of an ISO will be determined in accordance with the applicable provisions
of the Code and will not be less than the fair market value of the stock covered
by the option at the time the option is granted. The exercise price of an ISO
granted to any 10% Stockholder will not be less than 110% of the fair market
value of the stock covered by the option at the time the option is granted.
33
The Administrator, in its sole discretion, will fix the term of each
option, provided that the maximum term of an option will be ten years. ISOs
granted to a 10% Stockholder will expire not more than five years after the date
of grant. The 2001 Plan provides for the earlier expiration of options in the
event of certain terminations of employment of the holder.
Options may be granted and exercised under the 2001 Plan only after there
has been compliance with all applicable federal and state securities laws. The
2001 Plan will terminate within ten years from the date of its adoption by the
board of directors.
If for any reason other than death or permanent and total disability, an
optionee ceases to be employed by us or any of our affiliates (such event being
called a "Termination"), options held at the date of Termination (to the extent
then exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than
thirty days after the date of such Termination as is specified in the Option
Agreement or by amendment thereof (but in no event after the expiration date of
the option (the "Expiration Date")); provided, however, that if such exercise of
the option would result in liability for the optionee under Section 16(b) of the
Exchange Act, then such three-month period automatically will be extended until
the tenth day following the last date upon which the optionee has any liability
under Section 16(b) (but in no event after the Expiration Date).
The board of directors may at any time amend, alter, suspend or
discontinue the 2001 Plan. Without the consent of an optionee, no amendment,
alteration, suspension or discontinuance may adversely affect outstanding
options except to conform the 2001 Plan and ISOs granted under the 2001 Plan to
the requirements of federal or other tax laws relating to ISOs. No amendment,
alteration, suspension or discontinuance will require stockholder approval
unless (i) stockholder approval is required to preserve incentive stock option
treatment for federal income tax purposes or (ii) the board of directors
otherwise concludes that stockholder approval is advisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
General
Centro Para La Investigacion y Tratmiento De La Psoriasis ("CITP"), a
research entity owned by Helen O'Daly, the spouse of Dr. Jose Antonio O'Daly,
provided assistance in the research and development of Psoraxine in Venezuela
commencing in November 2001 and terminating in May 2002. We paid approximately
$275,000 to CITP for the services it provided.
Relationship with Blue Cedar and Lipworth Capital
On August 19, 2005, we completed a private placement of securities from
which we received gross proceeds of approximately $2,000,000. The transaction
consisted of the sale to one accredited investor, Blue Cedar, of units
consisting of: (i) 18,181,818 shares of common stock, (ii) warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
$0.165 and (iii) warrants to purchase over a 12-month period 12,121,212 shares
of common stock with an exercise price of $0.165. We relied upon the exemption
from registration provided under Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder. The private placement was only made
available to one "accredited investor" as defined in Rule 501 of Regulation D.
Lipworth Capital Limited acted as our placement agent in connection with the
private placement. We paid an 8% fee to our placement agent and issued warrants
to purchase 1,454,545 shares of common stock with an exercise price of $0.165,
in connection with the financing in addition to other costs. Additionally, we
34
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 us to file a registration statement
within approximately 30 days of the final closing of our private placement
covering the resale of all shares included therein, as well as the shares
underlying the warrants. If the registration statement is not filed or effective
by the dates specified in the agreement, we are subject to a penalty of 0.5% per
month of the aggregate purchase price .
Concurrently with the closing of the private placement, we and Blue Cedar
entered into the Blue Cedar Stockholder's Agreement. Pursuant to the Blue Cedar
Stockholder's Agreement, our Board of Directors is now required to be comprised
of at least eight directors and Blue Cedar may designate one director to the
Board of Directors of the Company. Manuel Tarabay is Blue Cedar's initial and
current designated director. Further, pursuant to the Blue Cedar Stockholder's
Agreement, we agreed not to enter into any service agreement, distribution
arrangement or transfer of personnel with any of our stockholders owning more
than 10% of the outstanding shares of common stock until we complete Phase II
clinical trials of Psoraxine(R), without the prior written consent of Blue
Cedar, which shall not be unreasonably withheld. Additionally, for a period of
two years following the closing date of the private placement, we granted Blue
Cedar certain pre-emptive rights, allowing Blue Cedar to participate in
substantially all sales of securities. The Blue Cedar Stockholder's Agreement
will terminate upon the later of the Blue Cedar Termination Date or August 15,
2008. The "Blue Cedar Termination Date" is the date on which Blue Cedar no
longer beneficially owns, in the aggregate, at least 20% of our outstanding
common stock.
Relationship with SkyePharma
We entered into a Purchase Agreement, dated as of December 10, 2001 with
SkyePharma pursuant to which SkyePharma purchased an aggregate of 2,000,000
shares of our Series A Preferred Stock, for an aggregate purchase price of $20.0
million. On January 20, 2004, pursuant to the Omnibus Conversion Agreement dated
January 12, 2004 between us and SkyePharma ("Omnibus Conversion Agreement"),
SkyePharma converted all of its 2,000,000 shares of Series A Preferred Stock
into 25,000,000 shares of our common stock at a conversion price of $0.80 per
share. On March 3, 2005, SkyePharma acquired 11,160,000 additional shares of our
common stock in a privately negotiated transaction. As a result, as of April 29,
2005 SkyePharma beneficially owns 49.8% of our common stock on a fully diluted
basis.
On January 20, 2004, in connection with SkyePharma's conversion of our
Series A Preferred Stock, we entered into the Call Option Agreement with
SkyePharma, pursuant to which we received the right to repurchase some or all of
12,500,000 shares of our common stock from SkyePharma at a premium to the $0.80
conversion price. In the event we exercise the call option, the exercise price
will be between $1.28 and $1.52 per share, depending on the date of exercise.
The call option will be exercisable by us upon our achievement of a certain
milestone event and ending on January 20, 2007.
Pursuant to the Amended Stockholders' Agreement, our Board of Directors
must include at least two independent directors and SkyePharma has the right to
nominate one director to the Board. Michael Ashton is SkyePharma's initial and
current nominated director. Until January 20, 2007, Dr. O'Daly has the right to
nominate one director. The Amended Stockholders' Agreement will terminate upon
the later of (i) the date on which SkyePharma no longer beneficially owns, in
the aggregate, at least 20% of our outstanding common stock or (ii) January 20,
2007. Further, the Amended Stockholders' Agreement may be terminated by the
mutual written consent of the parties. Pursuant to the Amended Stockholders'
Agreement, SkyePharma is required to vote its shares of our common stock in
favor of certain enumerated transactions, where those transactions have been
approved by our Board of Directors and all of the independent directors. These
35
transactions include (i) the amendment of our certificate of incorporation
solely to increase our authorized capital stock, (ii) the adoption or amendment
of an employee benefit plan applicable to all employees, (iii) the issuance of
additional securities for cash and (iv) the sale of all of our outstanding
capital stock or all or substantially all of our assets, or our merger with
another entity, provided that SkyePharma will receive the same consideration for
its shares as other holders of common stock and will be able to participate in
the sale or merger on the same terms as the most favorable terms available to
any of our other stockholders and the total consideration for the transaction is
greater than $135 million.
We also entered into two agreements concerning the formulation and
development of Psoraxine(R) with SkyePharma. Under the terms of the Technology
Access Option Agreement, we paid to SkyePharma a $5.0 million technology access
fee for the option to acquire a license for certain drug delivery technologies
owned by SkyePharma. Under the terms of the Technology Access Option Agreement,
if we exercise our option, we must pay a royalty of 5% of net sales of all
products manufactured or sold that use or exploit the drug delivery technologies
that we license from SkyePharma. In addition, if we exercise our option,
SkyePharma retains the right during the term of the Technology Access Option
Agreement to undertake the manufacture of all of our products that incorporate
or utilize the drug delivery technologies. The option we received under the
Technology Access Option Agreement expires on December 10, 2008, unless
terminated sooner pursuant to the terms of the Technology Access Option
Agreement. Pursuant to the Technology Access Option Agreement, SkyePharma also
has the right of first negotiation to acquire the worldwide marketing rights to
Psoraxine(R). Based on an evaluation of the technology access option fee we paid
under the Technology Access Option Agreement, which we have been capitalizing as
a research and development intangible asset over a seven-year period, we have
determined that as of December 31, 2004, the technology access option fee
exceeded its fair market value. Consequently, we recorded as additional research
and development costs in 2004 a charge of $2,797,612 to reflect an impairment of
this intangible asset.
On December 10, 2001, we entered into the Service Agreement with
SkyePharma pursuant to which SkyePharma was to provide us with development,
manufacturing, pre-clinical and clinical development services in consideration
of $11 million. The Service Agreement terminated on December 31, 2002. We
entered into an Amendment to the Service Agreement with SkyePharma, effective as
of January 1, 2003, to extend the term of the Service Agreement and modify the
services to be provided by SkyePharma such that SkyePharma continued to provide
certain services to us through December 31, 2004, in consideration for payments
made during 2002. The agreement expired on December 31, 2004.
Relationship with FPP Capital Advisors
In connection with private placements of units consisting of common stock
and warrants that occurred in 2004, FPP Capital Advisors, an entity controlled
by our board member, Fabien Pictet, received a consulting fee of $261,496. In
addition, for consulting services provided in connection with the private
placement, FPP Capital Advisors and certain other selling stockholders received
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of our common
stock at $0.73 per share. One of these other selling stockholders, Manuel
Tarabay, received warrants to purchase 72,000 shares of common stock, and became
a member of the Board of Directors in August 2005. Upon exercise of the warrants
issued in the private placement, we will pay a cash commission equal to 5% of
the amounts raised through the exercise of the warrants.
In addition, in consideration for services provided in negotiating our
Omnibus Conversion Agreement with SkyePharma, we issued to FPP Capital Advisors
units consisting of 150,000 shares of common stock and warrant stock and
warrants to purchase 150,000 shares of common stock at an exercise price of
$0.73 per share. We also assigned the right to purchase 1,250,000 shares under
our Call Option Agreement with SkyePharma to FPP Capital Advisors.
36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and beneficial ownership of our
common stock owned as of September 21, 2005, by (i) each of our directors, (ii)
each person named in the Summary Compensation Table, (iii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iv) all
holders of 5% or more of the outstanding shares of our common stock. Unless
otherwise noted, the address of all the individuals and entities named below is
care of Astralis Ltd. at 75 Passaic Avenue, Fairfield, NJ 07004.
Number of Shares of Common Stock Percentage of Common
Name and Address Beneficially Stock Owned
---------------- Owned (1)
Dr. Jose Antonio O'Daly, MD, 14,368,000 15.6%
Ph.D. (2) (3)
James Sharpe (4) 282,000 *
Michael Ashton (5) 36,413,900 39.9%
Samuel Barnett, Ed.D (6) 130,000 *
Steven Fulda (7) 42,500 *
Fabien Pictet (8) 3,677,794 4.0%
Gordon Schooley, Ph.D. (9) 12,500 *
SkyePharma PLC (3) (5) 36,413,900 39.9%
105 Piccadilly
London W1J 7NJ
England
Blue Cedar Limited (10) 48,484,848 39.9%
P.O. Box 546
28-30 The Parade
St. Heiler, Jersey JE4 8X9
Manuel Tarabay (11) 734,500 *
All Officers and Directors 55,681,194 59.2%
as a Group (2) (4) (5) (6) (7) (8) (9)
----------
* Less than 1%
37
(1) Beneficial ownership is determined in accordance with Rule 13d-3(a) of the
Securities Exchange Act of 1934 and generally includes voting or investment
power with respect to securities. Except as indicated by footnotes and subject
to community property laws, where applicable, the person named above has sole
voting and investment power with respect to all shares of the common stock shown
as beneficially owned by him. The beneficial ownership percentage is based on
91,354,873 shares of our common stock outstanding as of September 21, 2005.
(2) Includes 13,640,000 shares of common stock and vested options to purchase
728,000 shares of common stock.
(3) Under the terms of Amendment Stockholders' Agreement, dated as of January
20, 2004 by and among us, SkyePharma, Dr. O'Daly and our other original
stockholders, the parties agreed to vote all shares held by such parties for (i)
one director designated by SkyePharma, (ii) one director designated by Dr.
O'Daly, (iii) one director designated by each of the other three original
stockholders and (iv) two independent directors. No party to the agreement has
the right to dispose (or direct the disposition of) any shares of common stock
held by any of the other parties to the agreement. Accordingly, each party
disclaims beneficial ownership of the shares held by the other parties. Since
the date of such agreement, the other three original stockholders resigned their
positions with us and transferred all of their shares of common stock to
SkyePharma. As a result, none of them have any rights to designate a director
under the Agreement
(4) Includes 100,000 shares of common stock and options to purchase 182,000
shares of common stock that are exercisable within 60 days of September 21,
2005.
(5) Includes 36,393,900 shares of common stock beneficially owned by SkyePharma
and warrants to purchase 20,000 shares of common stock beneficially owned by
SkyePharma that are exercisable within 60 days of September 21, 2005. Mr. Ashton
is Chief Executive Officer of SkyePharma. Under the terms of a Call Option
Agreement, dated January 20, 2004, we have the right to repurchase some or all
of 12,500,000 shares of our common stock from SkyePharma. In June 2004, we
assigned the right to purchase 1,250,000 shares under the Call Option Agreement
to FPP Capital Advisors, an entity controlled by Fabien Pictet. The call option
will be exercisable by us for a period commencing upon our achievement of a
certain milestone event and ending on January 20, 2007.
(6) Includes 100,000 shares of common stock and options to purchase 12,500
shares of common stock that are exercisable within 60 days of September 21,
2005.
(7) Includes 25,000 shares of common stock and options to purchase 12,500 shares
of common stock that are exercisable within 60 days of September 21, 2005.
(8) Includes 1,260,000 shares of common stock owned by FPP Emerging Hedge Fund
1, Ltd. and warrants to purchase an aggregate of 632,000 shares of common stock
owned by FPP Emerging Hedge Fund 1, Ltd. that are exercisable within 60 days of
September 21, 2005. Includes 400,000 shares of common stock and warrants to
purchase 500,000 shares of common stock owned by Perly International Ltd. that
are exercisable within 60 days of September 21, 2005. Includes 180,000 shares of
common stock owned by Pictet Private Equity Investors, S.A. and warrants to
purchase 36,000 shares held by Pictet Private Equity Investors S.A. that are
exercisable within 60 days of September 21, 2005. Includes 150,000
38
shares of common stock owned by FPP Capital Advisors and warrants to purchase
519,794 shares held by FPP Capital Advisors that are exercisable within 60 days
of September 21, 2005. Mr. Pictet controls Perly International, Ltd and is Group
Chairman of Fabien Pictet and Partners Ltd. that controls FPP Emerging Hedge
Fund 1, Ltd., Pictet Private Equity Investors, S.A., FPP Capital Advisors. In
June 2004, we assigned the right to purchase 1,250,000 shares of our common
stock under the Call Option Agreement between us and SkyePharma to FPP Capital
Advisors, an entity controlled by Fabien Pictet. The shares beneficially owned
by Mr. Pictet, as reflected in this table do not include these 1,250,000 shares.
(9) Includes options to purchase 12,500 shares of common stock that are
exercisable within 60 days of September 21, 2005.
(10) Includes 18,181,818 shares of common stock owned by Blue Cedar and (i)
warrants to purchase 18,181,818 shares of common stock for a period of five
years and (ii) warrants to purchase 12,121,212 shares of common stock for a
period of twelve months. The warrants may be exercised as of August 17, 2005.
(11) Includes 650,000 shares of common stock, warrants to purchase 72,000 shares
of common stock within 60 days of September 21, 2005 and options to purchases
12,500 shares of common stock within 60 days of September 21, 2005.
SELLING STOCKHOLDERS
An aggregate of up to 47,056,520 shares of our common stock may be offered
and sold pursuant to this prospectus by the selling stockholders. SkyePharma
acquired its shares of common stock through the conversion of our outstanding
Series A Preferred Stock. The other selling stockholders acquired common stock
and warrants to purchase common stock by (i) purchasing units consisting of
common stock and warrants in a private placement consummated in January and
February 2004, (ii) receiving warrants as consideration for consulting services
provided in connection with such private placement or (iii) receiving units as
consideration for negotiating the Omnibus Conversion Agreement dated January 12,
2004 between us and SkyePharma.
In the private placement consummated in January and February 2004, we
issued an aggregate of 10,459,866 shares of our common stock and warrants to
purchase an aggregate of 10,459,866 shares of our common stock at an exercise
price of $0.73 per share. We received gross proceeds of $5,229,933 from the
January and February 2004 private placement.
In the event all selling stockholders exercise their warrants to purchase
shares of our common stock, we will receive additional gross proceeds of
$8,259,827.
Relationship with Certain Selling Stockholders
In connection with the January and February 2004 private placement, FPP
Capital Advisors received a consulting fee of $261,496. In addition, FPP Capital
Advisors and certain other selling stockholders who assisted FPP Capital
Advisors in providing consulting services to us, received warrants to purchase
an aggregate of 418,394 shares of our common stock at $0.50 per share and
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.73
per share. One of these other selling stockholders, Manuel Tarabay, received
warrants to purchase 72,000 shares of common stock, and became a member of the
Board of Directors in August 2005. Further, in consideration for services
rendered in negotiating the Omnibus Conversion Agreement, dated January 12, 2004
between us and SkyePharma, we issued units consisting of 150,000 shares of
common stock and warrants to purchase 150,000 shares of common stock at an
exercise price of $0.73 per share to FPP Capital Advisors. We also assigned to
FPP Capital Advisors the right to purchase 1,250,000 shares of our common stock
from SkyePharma under the Call Option Agreement discussed below. FPP Capital
Advisors is controlled by Fabien Pictet, a member of our Board of Directors.
39
Under the terms of the Omnibus Conversion Agreement, between us and
SkyePharma, on January 20, 2004 SkyePharma converted all of its outstanding
shares of our Series A Preferred Stock into 25,000,000 shares of common stock at
a conversion price of $0.80 per share. As a result of its conversion, SkyePharma
beneficially owns 26% of our common stock. On January 20, 2004, we and
SkyePharma entered into a Call Option Agreement pursuant to which we received
the right to repurchase some or all of 12,500,000 shares of our common stock
from SkyePharma at a premium to the conversion price. We assigned to FPP Capital
Advisors the right to purchase 1,250,000 of these shares. The call option will
be exercisable by us for a period commencing upon our achievement of a certain
milestone event and ending on January 20, 2007.
On January 20, 2004, we, SkyePharma and our other original stockholders
entered into the Amended Stockholders' Agreement to amend the stockholders
agreement, dated as of December 10, 2001 to provide for, among other things, the
termination of the agreement on the later of (1) January 20, 2007 or (2) the
date on which SkyePharma no longer beneficially owns 20% of our outstanding
common stock. Under the terms of Amended Stockholders' Agreement, the parties
agreed to vote all shares held by such parties for (i) one director designated
by SkyePharma, (ii) one director designated by Dr. O'Daly, (iii) one director
designated by each of the other three original stockholders and (iv) two
independent director. No party to the agreement has the right to dispose (or
direct the disposition of) any shares of common stock held by any of the other
parties to the agreement. Accordingly, each party disclaims beneficial ownership
of the shares held by the other parties. Since the date of the Amended
Stockholders' Agreement, the other three original stockholders resigned their
positions with us and transferred all of their shares of common stock to
SkyePharma. As a result, none of them have any rights to designate a director
under the Amended Stockholders' Agreement. In addition, pursuant to the Amended
Stockholders' Agreement, SkyePharma is required to vote its shares of our common
stock in favor of certain enumerated transactions, where those transactions have
been approved by our Board of Directors and all of the independent directors.
Further, on December 10, 2001, we entered into a Technology Access Option
Agreement and a Service Agreement with SkyePharma. Also, effective as of January
1, 2003, we entered into an Amendment to the Service Agreement with SkyePharma.
These agreements are described under "Business -- Agreements with SkyePharma."
No other selling stockholders has held any position or office or had a
material relationship with us within the past three years other than as a result
of the ownership of our common stock and other securities.
The following table sets forth certain information as of June 28, 2004
regarding the sale by the selling stockholders of 47,056,520 shares of common
stock in this offering.
40
Shares
Currently Shares
Shares Outstanding at Warrant Total Beneficially Ownership
Beneficially June 28, 2004 Shares Shares Owned Percent
Owned Before the Registered in Registered in Registered in After the After the
Selling Stockholder Offering (1) the Offering (1) the Offering the Offering Offering Offering
----------------------- ----------------- ---------------- ------------- ------------- ------------ ----------
Vieri Bracco 305,200 (2) 140,000 165,200 (2) 305,200 (2) -- --
ACE Fund Sicav 1,600,000 800,000 800,000 1,600,000 -- --
Pictet & Cie 1,700,000 850,000 850,000 1,700,000 -- --
Fidulex Management, 3,600,000 1,800,000 1,800,000 3,600,000 -- --
Inc.
Gesico International 800,000 400,000 400,000 800,000 -- --
S.A.
Epalinges Limited 599,928 299,964 299,964 599,928 -- --
Bank Morgan Stanley AG 3,600,000 1,800,000 1,800,000 3,600,000 -- --
S.A.M. Master Fund 1,200,000 600,000 600,000 1,200,000 -- --
L.P.
Mirabaud & Cie 200,000 100,000 100,000 200,000 -- --
Bank Julius Baer & 200,000 100,000 100,000 200,000 -- --
Co., Ltd.
UBS Private Banking 1,000,000 500,000 500,000 1,000,000 -- --
Nominees Ltd.
B.I. Lipworth & Co. 200,000 100,000 100,000 200,000 -- --
Limited
Deborah Jones 300,000 150,000 150,000 300,000 -- --
FPP Emerging Hedge 1,200,000 600,000 600,000 1,200,000 -- --
Fund I
Vistal International 200,000 100,000 100,000 200,000
Ltd.
Marcelo M. Fleury 200,000 100,000 100,000 200,000
Maran Limited 300,000 150,000 150,000 300,000 -- --
Newbridge Advisors 80,000 40,000 40,000 80,000 -- --
Donvale Investments 400,000 200,000 200,000 400,000 -- --
Ltd.
Greenwood Nominees 200,000 100,000 100,000 200,000 -- --
Ltd.
Serica Bank 100,000 50,000 50,000 100,000 -- --
Bernard Rapoport 100,000 50,000 50,000 100,000 -- --
Larry Jaynes 100,000 50,000 50,000 100,000 -- --
Maurice Sydney 200,000 100,000 100,000 200,000 -- --
Lipworth
Graeme Gordon 400,000 200,000 200,000 400,000
Nick Wentworth Stanley 199,920 99,960 99,960 199,920 -- --
Carla Maria Orsi 160,000 80,000 80,000 160,000 -- --
Carbone
Alexandre Stakhovitch 769,794 (3) 200,000 569,794 (3) 769,794 (3) -- --
Raffaele Ricci 199,884 99,942 99,942 199,884 -- --
Marcos M. Carvalhal 200,000 100,000 100,000 200,000 -- --
and Scott Starkey
Joint Tenants
B.I. Lipworth & Co. 200,000 100,000 100,000 200,000 -- --
Limited as Nominee
for BrandNew Group
Limited
I.S. Twersky 400,000 200,000 200,000 400,000 -- --
Rhonda Limited 400,000 200,000 200,000 400,000 -- --
SkyePharma PLC 25,220,000 (4)(5) 25,000,000 (2) -- 25,000,000 (4)(5) 220,000 *
FPP Capital Advisors 669,794 (6) 150,000 519,794 519,794 -- --
Manuel Tarabay 722,000 (7)(8) -- 72,000(8) 72,000 650,000 1.9%
----------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person, shares of common stock subject to
options or warrants held by that person that are currently exercisable or
exercisable within 60 days of the date of this prospectus are deemed
outstanding. Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares beneficially owned by
him. Selling stockholders are deemed to beneficially own the shares of common
stock issuable upon the exercise of their warrants.
41
(2) Includes warrants to purchase 12,600 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 12,600 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement.
(3) Includes warrants to purchase 184,897 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 184,897 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement and
in connection with the conversion of our Series A Preferred Stock by SkyePharma.
(4) Includes 25,200,000 shares of common stock and warrants to purchase 20,000
shares of common stock. Michael Ashton, Chief Executive Officer of SkyePharma
and a member of our Board of Directors, exercises voting control over the shares
held by SkyePharma.
(5) Under the terms of a Call Option Agreement, dated January 20, 2004, we have
the right to repurchase some or all of 12,500,000 shares of our common stock
from SkyePharma. In June 2004, we assigned the right to purchase 1,250,000
shares under the Call Option Agreement to FPP Capital Advisors, an entity
controlled by Fabien Pictet. The call option will be exercisable for a period
commencing upon our achievement of a certain milestone event and ending on
January 20, 2007.
(6) Includes warrants to purchase 184,897 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 184,897 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement and
in connection with negotiating the Omnibus Conversion Agreement dated January
12, 2004 between us and SkyePharma.
(7) Includes 650,000 shares of common stock beneficially owned by Mr. Tarabay
which he acquired prior to our 2004 private placement.
(8) Includes warrants to purchase 36,000 shares of common stock at an exercise
price of $0.50 per share and warrants to purchase 36,000 shares of common stock
at an exercise price of $0.73 per share. Such warrants were issued for
consulting services provided in connection with our 2004 private placement.
PLAN OF DISTRIBUTION
The selling stockholders and any of their pledgees, donees, transferees,
assignees or other successors-in-interest may, from time to time, sell any or
all of the shares of common stock offered hereby on any stock exchange, market
or trading facility on which the shares are traded or in private transactions.
Our common stock currently trades on the OTC Bulletin Board. Any sales by the
selling stockholders may be at fixed or negotiated prices. The selling
stockholders may use any one or more of the following methods when selling
shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction;
42
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in any of their warrants or common stock issuable upon conversion of
their warrants and, if they default in the performance of their secured
obligations, the pledgees or secured parties may offer and sell the shares
underlying the warrants from time to time under this prospectus.
The selling stockholders also may transfer their warrants or shares of
common stock issuable upon conversion of their warrants in other circumstances,
in which case the pledgees, donees, transferees, assignees or other
successors-in-interest will be "selling stockholders" for purposes of this
prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
informed us that they do not have any agreement or understanding, directly or
indirectly, with any person to distribute the common stock.
We will not receive any proceeds from sales of any shares by the selling
stockholders. However, we may receive an aggregate of $8,259,827 upon the
exercise of all the warrants held by selling stockholders, if such warrants are
exercised for cash. We will use such funds, if any, to fund clinical trials and
for working capital and general corporate purposes.
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 153,000,000 shares of capital stock divided
into (i) 150,000,000 shares of common stock, par value $0.0001 per share and
(ii) 3,000,000 shares of preferred stock par value $0.001 per share. As of
September 21, 2005, there are 91,354,873 shares of our common stock outstanding,
held of record by approximately 2,833 stockholders. We do not have any shares of
preferred stock outstanding.
43
Common Stock
The holders of our common stock are entitled to one vote for each share
held of record in the election of directors and in all other matters to be voted
on by the stockholders. There is no cumulative voting with respect to the
election of directors. As a result, the holders of more than 50% of the shares
voting for the election of directors can elect all of the directors. Holders of
common stock are entitled:
o to receive any dividends as may be declared by the Board of
Directors out of funds legally available for such purpose after
payment of accrued dividends on the outstanding shares of preferred
stock; and
o in the event of our liquidation, dissolution, or winding up, to
share ratably in all assets remaining after payment of liabilities
and after provision has been made for each class of stock having
preference over the common stock.
All of the outstanding shares of common stock are validly issued, fully
paid and nonassessable. Holders of our common stock have no preemptive right to
subscribe for or to purchase additional shares of any class of our capital
stock.
Under the terms of Amended Stockholders' Agreement, dated as of January
20, 2004 by and among us, SkyePharma, Dr. O'Daly and our other original
stockholders, the parties agreed to vote all shares held by such parties for (i)
one director designated by SkyePharma, (ii) one director designated by Dr.
O'Daly, (iii) one director designated by each of the other three original
stockholders and (iv) two independent director. No party to the Amended
Stockholders' Agreement has the right to dispose (or direct the disposition of)
any shares of common stock held by any of the other parties to the agreement.
Accordingly, each party disclaims beneficial ownership of the shares held by the
other parties. Since the date of the Amended Stockholders' Agreement, the other
three original stockholders resigned their positions with us and transferred all
of their shares of common stock to SkyePharma. As a result, none of them have
any rights to designate a director under the Agreement. Further, the Amended
Stockholders' Agreement provides, among other things, the termination of the
agreement or the later of (1) January 20, 2007 or (2) the date on which
SkyePharma no longer beneficially owns 20% of our outstanding common stock. In
addition, SkyePharma is required to vote its shares of our common stock in favor
of certain enumerated transactions, where those transactions have been approved
by our Board of Directors and all of the independent directors. Additionally,
pursuant to the Blue Cedar Stockholder's Agreement, dated as of August 17, 2005,
Blue Cedar may designate one director to our Board of Directors. The Blue Cedar
Stockholder's Amendment will terminate upon the later of the Blue Cedar
Termination Date or August 15, 2008. The "Blue Cedar Termination Date" is the
date on which Blue Cedar no longer beneficially owns, in the aggregate, at least
20% of our outstanding common stock.
Preferred Stock
Our Board of Directors has the authority, within the limitations set forth
in our certificate of designations and certificate of incorporation to provide
by resolution for the issuance of preferred stock, in one or more classes or
series, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series.
44
Warrants
As of September 21, 2005, we have outstanding warrants to purchase
140,120,340 shares of our common stock. We issued warrants to purchase 6,300,000
shares of our common stock at an exercise price of $1.60 per share pursuant to a
private placement that occurred in September 2001. We issued warrants to
purchase 415,237 shares of our common stock at an exercise price of $4.00 per
share pursuant to a private placement that occurred in November 2001. We issued
warrants to purchase 10,459,866 shares of our common stock at an exercise price
of $0.73 per share pursuant to a private placement that occurred in January and
February 2004. In connection with a private placement that was completed June
2004, we issued to FPP Capital Advisors and certain other selling stockholders
who assisted FPP Capital Advisors in providing consulting services to us
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of our common
stock at $0.73 per share. One of these other selling stockholders, Manuel
Tarabay, received warrants to purchase 72,000 shares of common stock, and became
a member of the Board of Directors in August 2005. In consideration for services
rendered in negotiating the Omnibus Conversion Agreement, dated January 12, 2004
between us and SkyePharma, we issued units consisting of 150,000 shares of
common stock and warrants to purchase 150,000 shares of common stock to FPP
Capital Advisors. FPP Capital Advisors is controlled by Fabien Pictet, a member
of our Board of Directors. In connection with our most recent private placement
which consummated August 19, 2005, we issued to Blue Cedar warrants to purchase
over a 5-year period 18,181,818 shares of common stock with an exercise price of
$0.165 and warrants to purchase over a 12-month period 12,121,212 shares of
common stock with an exercise price of $0.165. In addition, in connection with
the August 19, 2005 private placement, as consideration for services rendered,
we issued warrants to purchase 1,454,545 shares of common stock with an exercise
price of $0.165, to our placement agent, Lipworth Capital Limited.
Market for Common Stock
Shares of our common stock are listed on the OTC Bulletin Board under the
symbol ASTR.
Transfer Agent and Registrar
Our transfer agent and registrar is American Stock Transfer and Trust
Company, 59 Maiden Lane, Plaza Level, New York, New York 10038.
Shares Eligible for Future Sale
We currently have 91,354,873 shares of common stock outstanding. Of the
91,354,873 shares of common stock outstanding, up to 11,605,224 shares are
freely tradable without restriction or further registration under the Securities
Act, except for any shares purchased by an "affiliate", which will be subject to
the resale limitations of Rule 144 promulgated under the Securities Act.
All of the remaining shares of common stock currently outstanding are
"restricted securities" or owned by "affiliates", as those terms are defined in
Rule 144, and may not be sold publicly unless they are registered under the
Securities Act or are sold pursuant to Rule 144 or another exemption from
registration. The restricted securities are not eligible for sale without
registration under Rule 144. As of September 21, 2005, there were outstanding
options and warrants to purchase 140,120,340 shares of our common stock.
Lock-Up Agreements
None of the currently outstanding shares of common stock are subject to
lock-up agreements.
45
Rule 144
Generally, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including any of our
affiliates or persons whose shares are aggregated with an affiliate, who has
owned restricted shares of common stock beneficially for at least one year, is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of:
o 1% of our then outstanding shares of common stock; or
o the average weekly trading volume of shares of our common stock
during the four calendar weeks preceding such sale.
A person who is not an affiliate, has not been an affiliate within three
months prior to sale, and has beneficially owned the restricted shares for at
least two years is entitled to sell such shares under Rule 144(k) without regard
to any of the limitations described above.
Charter and Bylaws Provisions and Delaware Anti-Takeover Statute
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. This section prevents Delaware corporations from
engaging under certain circumstances, in a "business combination", which
includes a merger or sale of more than 10% of the corporation's assets, with any
"interested stockholder", or a stockholder who owns 15% or more of the
corporation's outstanding voting stock, as well as affiliates and associates of
any such persons, for three years following the date such stockholder became an
"interested stockholder", unless (i) the business combination or the transaction
in which such stockholder became an "interested stockholder" is approved by the
Board of Directors prior to the date the "interested stockholder" attained such
status; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an "interested stockholder", the "interested stockholder"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (x) persons who are directors and
also officers and (y) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after the
date the "interested stockholder" attained such status the business combination
is approved by the Board of Directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested stockholder."
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors. Our bylaws eliminate the right of
stockholders to call special meetings of stockholders. The authorization of one
million shares of undesignated preferred stock makes it possible for the Board
of Directors to issue a class of preferred stock with voting or other rights or
preferences that could impede the success of any attempt to effect a change in
our control. These and other provisions may have the effect of delaying,
deferring or preventing hostile takeovers or changes in the control or
management of the Company even if doing so would be beneficial to our
stockholders.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon by McCarter & English, LLP.
46
EXPERTS
L J Soldinger Associates, LLC, independent registered public accountants,
have audited our financial statements as of December 31, 2004 and 2003, and for
the years then ended and the period March 12, 2001 (date of inception) through
December 31, 2004, as set forth in their report. We have included our financial
statements in the prospectus and elsewhere in this registration statement in
reliance on the L J Soldinger Associates, LLC reports, given on their respective
authority as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement on Form SB-2 under the Securities Act of 1933 with respect to the
common stock offered by this prospectus. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules to the registration statement. For further information with respect to
us and the common stock offered by this prospectus, reference is made to the
registration statement and the exhibits and schedules filed as a part of the
registration statement. Additionally, we file annual, quarterly and current
reports, proxy statements and other documents with the Securities and Exchange
Commission. You may read and copy any materials we file with the Securities and
Exchange Commission at the Securities and Exchange Commission's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a World Wide Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
address of the Securities and Exchange Commission's Web site is
http://www.sec.gov.
47
ASTRALIS LTD.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
Financial Statements as of and for the Years Ended
December 31, 2004 and 2003 Page
------------------------------------------------------- -------------
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-13
Notes to Financial Statements F-14
Interim Financial Statements as of June 30, 2005 and
June 30, 2004 and for the Quarters Ended
June 30, 2005 and 2004
-------------------------------------------------------
Condensed Balance Sheets (Unaudited) F-32
Condensed Statements of Operations (Unaudited) F-33
Condensed Statements of Cash Flows (Unaudited) F-34
Notes to Condensed Financial Statements (Unaudited) F-35
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Astralis Ltd.
We have audited the accompanying balance sheets of Astralis Ltd. (a development
stage entity) as of December 31, 2004 and 2003, and the related statements of
operations, stockholders' equity and cash flows for the years then ended and the
period March 12, 2001 (date of inception) through December 31, 2004. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Astralis Ltd. as of December
31, 2004 and 2003, and the results of its operations, changes in stockholders'
equity and its cash flows for the years then ended and the period March 12, 2001
(date of inception) through December 31, 2004 in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has incurred net losses since inception, does
not have sufficient funds to execute its business plan, estimates its current
cash will last through the end of the second quarter of 2005, and reported in
2005 the results from its Phase II testing indicated no statistical difference
between the Company's product and a placebo. These conditions raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ L J SOLDINGER ASSOCIATES, LLC
Deer Park, Illinois
February 16, 2005
F-2
ASTRALIS LTD.
(A Development Stage Entity)
Balance Sheets
ASSETS
December 31,
-----------------------------
2004 2003
------------ ------------
Current Assets
Cash and cash equivalents $ 2,312,401 $ 10,660
Marketable securities -- 1,374,174
Prepaid expense - related party -- 1,007,500
Prepaid expenses 70,895 84,902
Supplies 55,851 87,037
------------ ------------
Total Current Assets 2,439,147 2,564,273
Intangible Assets, Net - Related Party -- 3,511,900
Other Intangible Assets, Net 117,923 94,640
Property and Equipment, Net 214,140 293,049
Deposits 26,763 29,953
------------ ------------
$ 2,797,973 $ 6,493,815
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 397,762 $ 279,506
------------ ------------
Total Current Liabilities 397,762 279,506
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock; Series A, $.001 par value;
3,000,000 shares authorized at 2004 and 2003; 0 and
2,000,000 issued and outstanding at 2004 and 2003, respectively
(liquidation preference - $0 and $22,122,600 at 2004 and 2003, -- 2,000
respectively)
Common stock; $.0001 par value; 150,000,000 shares authorized at
2004 and 2003; 73,173,055 and 37,538,189 issued and
outstanding at 2004 and 2003, respectively 7,317 3,754
Additional paid-in capital 52,095,251 35,929,864
Deferred compensation -- (4,822)
Common stock subscriptions receivable -- (24,000)
Accumulated other comprehensive loss -- (27,698)
Deficit accumulated in the development stage (49,702,357) (29,664,789)
------------ ------------
Total Stockholders' Equity 2,400,211 6,214,309
------------ ------------
$ 2,797,973 $ 6,493,815
============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-3
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Operations
March 12, 2001
Year Ended December 31, (Inception) to
----------------------------- December 31,
2004 2003 2004
------------ ------------ --------------
Revenues $ -- $ -- $ --
------------ ------------ -------------
Operating Expenses
Research and development - related party 4,519,400 1,721,788 16,278,822
Research and development 3,169,660 2,323,885 6,449,228
Depreciation and amortization 30,403 26,062 73,024
General and administrative 1,860,844 1,290,346 5,377,454
------------ ------------ -------------
Total Operating Expenses 9,580,307 5,362,081 28,178,528
------------ ------------ -------------
Loss From Operations (9,580,307) (5,362,081) (28,178,528)
Investment income (loss) (722) 60,018 179,824
------------ ------------ -------------
Loss before income tax benefit (9,581,029) (5,302,063) (27,998,704)
Income tax benefit 293,461 221,636 515,097
------------ ------------ -------------
Net Loss (9,287,568) (5,080,427) (27,483,607)
Preferred Stock Dividends (10,750,000) -- (22,218,750)
------------ ------------ -------------
Net Loss to Common Stockholders $(20,037,568) $ (5,080,427) $ (49,702,357)
============ ============ =============
Basic and Diluted Loss per Common Share $ (0.28) $ (0.14) $ (1.12)
============ ============ =============
Basic and Diluted Weighted Average
Common Shares Outstanding 71,073,507 37,538,189 44,472,789
============ ============ =============
See independent auditors' report and the accompanying notes to financial
statements.
F-4
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
---------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances, March 12, 2001
(Date of Inception) -- $ -- -- $ -- $ --
Members' capital contributions, -- -- 25,300,000 2,530 30,653
3/15/2001
Capital contributions received,
3/1 - 8/13/2001 -- -- -- -- --
Members' contributed services,
3/15 - 6/30/2001 -- -- -- -- 12,986
Members' capital contributions, -- -- 2,700,000 270 1,349,730
9/1/2001
Warrants to purchase 6,300,000 shares
of common stock at $1.60 per share
issued in private placement -- -- -- -- --
Common stock issuable for consulting
services, 9/1/2001; 500,000 shares -- -- -- -- 135,000
Common stock issued in private
placement net of issuance costs,
11/13/2001; 2,076,179 shares at
$1.60 per share -- -- 2,076,179 208 3,190,429
Warrants to purchase 415,237 shares
of common stock at $4.00 per share
issued in private placement,
11/13/2001 -- -- -- -- --
Net assets and liabilities acquired
in merger with Hercules -- -- 7,512,000 751 (303,071)
Preferred stock issued, net of
issuance costs, 12/10/2001;
1,000,000 shares at $10.00 per share 1,000,000 1,000 -- -- 9,946,496
Preferred stock dividend, 12/10/2001 -- -- -- -- 2,120,000
Options to purchase 200,000 shares of
common stock at $1.77 (based on
valuation) issued for legal
services, 12/31/2001 -- -- -- -- 354,000
Options to purchase 100,000 shares of
common stock at $1.77 (based on
valuation) issued for consulting
services, 12/31/2001 -- -- -- -- 177,000
Amortization of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2001 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-5
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
----------- ----------- ----------- ----------- ----------- -------------
Balances, March 12, 2001
(Date of Inception) $ -- $ -- $ -- $ -- $ --
Members' capital contributions, (33,183) -- -- -- --
3/15/2001
Capital contributions received,
3/1 - 8/13/2001 33,183 -- -- -- 33,183
Members' contributed services,
3/15 - 6/30/2001 -- -- -- -- 12,986
Members' capital contributions, (1,350,000) -- -- -- --
9/1/2001
Warrants to purchase 6,300,000 shares of
common stock at $1.60 per share issued
in private placement -- -- -- -- --
Common stock issuable for consulting
services, 9/1/2001; 500,000 shares -- -- -- -- 135,000
Common stock issued in private placement
net of issuance costs, 11/13/2001;
2,076,179 shares at $1.60 per share -- -- -- -- 3,190,637
Warrants to purchase 415,237 shares of
common stock at $4.00 per share issued
in private placement, 11/13/2001 -- -- -- -- --
Net assets and liabilities acquired in
merger with Hercules -- -- -- -- (302,320)
Preferred stock issued, net of issuance
costs, 12/10/2001; 1,000,000 shares
at $10.00 per share -- -- -- -- 9,947,496
Preferred stock dividend, 12/10/2001 -- -- -- (2,120,000) --
Options to purchase 200,000 shares of
common stock at $1.77 (based on valuation)
issued for legal services, 12/31/2001 -- (354,000) -- -- --
Options to purchase 100,000 shares of
common stock at $1.77 (based on valuation)
issued for consulting services, -- (177,000) -- -- --
12/31/2001
Amortization of deferred compensation -- 132,750 -- -- 132,750
Net loss -- -- -- (4,075,364) (4,075,364) $(4,075,364)
----------- ----------- ----------- ----------- ----------- -----------
Total Comprehensive loss $(4,075,364)
===========
Balance, December 31, 2001 $(1,350,000) $ (398,250) $ -- $ (6,195,364) $ 9,074,368
----------- ----------- ----------- ----------- -----------
See independent auditors' report and the accompanying notes to financial
statements.
F-6
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
---------------------------- ----------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances Brought Forward 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223
Oversubscription of common stock issued
in private placement, 11/13/2001; 49,990
shares cancelled at $1.60 per share, 1/24/2002 -- -- (49,990) (5) (79,995)
Preferred stock issue, net of issuance costs,
1/31/2002; 250,000 shares at $10.00 per share 250,000 250 -- -- 2,499,750
Preferred stock issue, net of issuance costs,
4/30/2002; 250,000 shares at $10.00 per share 250,000 250 -- -- 2,499,750
Preferred stock dividend, April 30, 2002 -- -- -- -- 270,000
Preferred stock issue, net ofissuance costs,
7/31/2002; 250,000 shares at $10.00 per share 250,000 250 -- -- 2,499,750
Collection of subscription receivable -- -- -- -- --
Options issued for consultingservices,
9/10/2002; 15,000 options at $0.38
per option, based on valuation -- -- -- -- 5,700
Preferred stock dividend, 12/10/2002 -- -- -- -- 9,078,750
Amortization of deferred compensation -- -- -- -- --
Fair value adjustment on deferred
compensation -- -- -- -- (357,532)
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) onavailable-for-sale
securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2002 1,750,000 $ 1,750 37,538,189 $ 3,754 $ 33,429,396
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-7
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------ ------------ -------------
Balances Brought Forward $ (1,350,000) $ (398,250) $ -- $ (6,195,364) $ 9,074,368
Oversubscription of common stock issued
in private placement, 11/13/2001; 49,990
shares cancelled at $1.60 per share,
1/24/2002 -- -- -- -- (80,000)
Preferred stock issue, net of issuance
costs, 1/31/2002; 250,000 shares at
$10.00 per share -- -- -- -- 2,500,000
Preferred stock issue, net of issuance
costs, 4/30/2002; 250,000 shares at
$10.00 per share -- -- -- -- 2,500,000
Preferred stock dividend, April 30, 2002 -- -- -- (270,000) -- (270,000)
Preferred stock issue, net ofissuance
costs, 7/31/2002; 250,000 shares at
$10.00 per share -- -- -- -- 2,500,000
Collection of subscription receivable 465,000 -- -- -- 465,000
Options issued for consultingservices,
9/10/2002; 15,000 options at $0.38
per option, based on valuation -- (5,700) -- -- --
Preferred stock dividend, 12/10/2002 -- -- -- (9,078,750) -- (9,078,750)
Amortization of deferred compensation -- 34,254 -- -- 34,254
Fair value adjustment on deferred
compensation -- 357,532 -- -- --
COMPREHENSIVE LOSS
Net loss -- -- -- (9,040,248) (9,040,248) $ (9,040,248)
Other comprehensive loss:
Unrealized loss on available-for-sale
securities -- -- (15,181) -- (15,181) (15,181)
------------ ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $(18,404,179)
============
Balance, December 31, 2002 $ (885,000) $ (12,164) $ (15,181) $(24,584,362) $ 7,938,193
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-8
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
---------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances Brought Forward 1,750,000 $ 1,750 37,538,189 $ 3,754 $ 33,429,396
Preferred stock issue, net of issuance costs,
1/31/2003; 250,000 shares at $10.00 250,000 250 -- -- 2,499,750
Collection of subscription receivable -- -- -- -- --
Reduction of subscription receivable,
in lieu of payment for services -- -- -- -- --
Amortization of deferred compensation -- -- -- -- --
Fair value adjustment on deferred
compensation -- -- -- -- 18,321
Offering cost for January 2004
private placement -- -- -- -- (17,603)
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on available-for-sale
securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2003 2,000,000 $ 2,000 37,538,189 $ 3,754 $ 35,929,864
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-9
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------ ------------ -------------
Balances Brought Forward $ (885,000) $ (12,164) $ (15,181) $(24,584,362) $ 7,938,193
Preferred stock issue, net of issuance
costs, 1/31/2003; 250,000 shares at
$10.00 per share -- -- -- -- 2,500,000
Collection of subscription receivable, 825,000 -- -- -- 825,000
Reduction of subscription receivable,
in lieu of payment for services 36,000 -- -- -- 36,000
Amortization of deferred compensation -- 25,663 -- -- 25,663
Fair value adjustment on deferred
compensation -- (18,321) -- -- --
Offering cost for January 2004,
private placement -- -- -- -- (17,603)
COMPREHENSIVE LOSS
Net loss -- -- -- (5,080,427) (5,080,427) $ (5,080,427)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale Securities, net -- -- (12,517) -- (12,517) (12,517)
------------ ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $ (5,092,944)
============
Balance, December 31, 2003 $ (24,000) $ (4,822) $ (27,698) $(29,664,789) $ 6,214,309
------------ ------------ ------------ ------------ ------------
See independent auditors' report and the accompanying notes to financial
statements.
F-10
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
----------------------------- ---------------------------- Paid-In
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balances Brought Forward 2,000,000 $ 2,000 37,538,189 $ 3,754 $ 35,929,864
Common stock issue, net of issuance costs,
Jan -Feb 2004 at $0.50 per unit -- -- 10,459,866 1,046 4,953,147
Collection of subscription receivable -- -- -- -- --
Conversion of Preferred Stock, Series A (2,000,000) (2,000) 25,000,000 2,500 (500)
Preferred stock dividend -- -- -- -- 10,750,000
Common stock issued,
in lieu of payment for services -- -- 150,000 15 74,985
Call option assigned, -- -- -- -- 376,507
in lieu of payment for services
Amortization of deferred compensation -- -- -- -- --
Stock options exercised -- -- 25,000 2 11,248
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale
securities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss
Balance, December 31, 2004 -- $ -- 73,173,055 $ 7,317 $ 52,095,251
============ ============ ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-11
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Subscription Deferred Comprehensive Development Comprehensive
Receivable Compensation Loss Stage Total Loss
------------ ------------ ------------- ------------ ------------ ------------
Balances Brought Forward $ (24,000) $ (4,822) $ (27,698) $(29,664,789) $ 6,214,309
Common stock issue, net of issuance
costs, Jan -Feb 2004 at $2.00 per
share -- -- -- -- 4,954,193
Collection of subscription receivable, 24,000 -- -- -- 24,000
Conversion of Preferred Stock,
Series A -- -- -- -- --
Preferred stock dividend -- -- -- (10,750,000) -- (10,750,000)
Common stock issued,
in lieu of payment for services -- -- -- -- 75,000
Call option assigned, -- -- -- -- 376,507
in lieu of payment for services
Amortization of deferred compensation -- 4,822 -- -- 4,822
Stock options exercised -- -- -- -- 11,250
COMPREHENSIVE LOSS
Net loss -- -- -- (9,287,568) (9,287,568) $ (9,287,568)
Other comprehensive loss:
Unrealized gain (loss) on
available-for-sale
securities, net -- -- 27,698 -- 27,698 27,698
------------ ------------ ------------ ------------ ------------ ------------
Total Comprehensive Loss $(20,009,870)
============
Balance, December 31, 2004 $ -- $ -- $ -- $(49,702,357) $ 2,400,211
============ ============ ============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements.
F-12
ASTRALIS LTD.
(A Development Stage Entity)
Statements of Cash Flows
Year Ended December 31, March 12, 2001
----------------------------- (Inception) to
2004 2003 December 31, 2004
------------ ------------ -----------------
Cash Flows from Operating Activities
Net loss $ (9,287,568) $ (5,080,427) $(27,483,607)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization 867,902 847,754 2,562,751
Impairment of intangible asset 2,797,612 -- 2,797,612
Amortization of net premium paid on investments -- 5,737 54,551
Dividend income reinvested (117,219) (72,308) (199,323)
Members' contributed salaries -- -- 12,986
Research and development service fee netted against proceeds
received from preferred stock issuance -- 20,000 5,015,000
Operating expenses paid by related parties on behalf of company -- -- 17,587
Amortization of deferred compensation 4,822 25,663 197,489
Investor relation fees netted against subscription receivable 24,000 36,000 60,000
Compensatory common stock 75,000 -- 210,000
Assignment of call option 376,508 -- 376,508
Loss on sale of available-for-sale securities and fixed asset 129,832 23,759 160,736
retirement
Changes in assets and liabilities
Prepaid expenses 1,059,838 975,847 (32,564)
Interest receivable -- 5,891 --
Supplies 31,186 (56,798) (55,851)
Deposits 3,190 -- (26,763)
Accounts payable and accrued expenses 77,228 (1,169) 339,304
------------ ------------ ------------
Net Cash Used in Operating Activities (3,957,669) (3,270,051) (15,993,584)
------------ ------------ ------------
Cash Flows from Investing Activities
Purchases of available-for-sale securities (4,300,010) (1,919,734) (13,858,181)
Proceeds from sale of available-for-sale securities 5,690,970 1,783,032 13,843,916
Expenditures related to patent (26,947) (36,267) (94,383)
Insurance proceeds from claim 4,113 -- 4,113
Purchases of property and equipment (74,157) (60,910) (568,131)
------------ ------------ ------------
Net Cash Used in Investing Activities 1,293,969 (233,879) (672,666)
------------ ------------ ------------
Cash Flows from Financing Activities
Repurchase of common stock -- -- (80,000)
Collection of subscription receivable -- 825,000 1,290,000
Proceeds from exercise of stock options 11,250 -- 11,250
Issuance of common stock, net of offering and transaction costs 4,954,191 -- 7,842,508
Issuance of preferred stock -- 2,480,000 9,932,496
Private placement offering costs -- (17,603) (17,603)
------------ ------------ ------------
Net Cash Provided by Financing Activities 4,965,441 3,287,397 18,978,651
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,301,741 (216,533) 2,312,401
Cash and Cash Equivalents, Beginning of Period 10,660 227,193 --
------------ ------------ ------------
Cash and Cash Equivalents, End of Period $ 2,312,401 $ 10,660 $ 2,312,401
============ ============ ============
See independent auditors' report and the accompanying notes to financial
statements
F-13
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. (the "Company") is an emerging stage biotechnology company, based
in New Jersey and incorporated under the laws of the State of Delaware, which
primarily engages in research and development of treatments for immune system
disorders and skin diseases. The Company is currently developing two products.
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 also engaged in research on the possible development of the
technology underlying Psoraxine(R) for the treatment of other indications, such
as eczema, and leishmaniasis.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Company's financial statements are prepared on the accrual basis of
accounting in accordance with United States generally accepted accounting
principles ("US GAAP").
Development Stage Enterprise
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting for
Development Stage Enterprises." Under SFAS No. 7, certain additional financial
information is required to be included in the financial statements for the
period from inception of the Company to the current balance sheet date.
Since the inception of the Company, management has been in the process of
performing research and development activities, fulfilling FDA requirements in
order to get approval on Psoraxine(R), and the raising of capital through
private placement stock offerings.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in money market
funds. The Company considers all highly liquid instruments with an original
maturity of 90 days or less at the time of purchase to be cash equivalents.
Credit Risk
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits at financial institutions. To
mitigate this risk, the Company places its cash deposits only with high credit
quality institutions.
F-14
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment
Furniture and equipment are recorded at cost, less accumulated depreciation
computed on a straight-line basis over the estimated useful lives of the
respective assets. Depreciation is computed using a four-year life for computer
and office equipment, three to four years for lab equipment, five-year for
automobile, seven-year for furniture and fixtures and three-year for leasehold
improvements.
Income Taxes
Income taxes are recorded in the period in which the related transactions are
recognized in the financial statements, net of the valuation allowances, which
have been recorded against deferred tax assets. Deferred tax assets and
liabilities are recorded for the expected future tax consequences of temporary
differences between the tax basis and the financial reporting of assets and
liabilities. Net deferred tax assets and liabilities, relating primarily to
federal and state net operating loss carryforwards and research and development
credits that have been deferred for tax purposes have also been recorded. A
valuation reserve has been recorded to offset a portion of the deferred tax
benefit (except for amount realized through the sale of a portion of the
Company's New Jersey net operating loss) because management has determined it is
more likely than not that the deferred tax assets will not be realized. See Note
7.
Fair Value of Financial Instruments
The Company's financial instruments, including cash and cash equivalents,
accounts payable and accrued expenses, are carried at cost, which approximates
fair value.
Stock-Based Compensation Arrangements
The Company applies the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting For Stock Issued To
Employees," and related interpretations, in accounting for its stock-based
grants to employees and directors. Under the intrinsic value method of
accounting, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price. The
Company applies the disclosure provisions specified in SFAS No. 148, "Accounting
For Stock Based Compensation - Transition and Disclosure - an Amendment of SFAS
123." The Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation," in accounting for stock-based grants to non-employees.
The following table illustrates the effect on net loss and earnings per share if
the Company had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based compensation.
F-15
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Year Ended December 31,
-----------------------------
2004 2003
------------ ------------
Net loss, as reported $(20,037,568) $ (5,080,427)
Add:
Stock-based compensation expense included in reported net
loss determined under APB No. 25, net of related tax effects -- --
Deduct:
Total stock-based director compensation expense determined
under fair-value-based method for all awards, net of related
tax effects 29,495 11,589
------------ ------------
Pro forma net loss $(20,067,063) $ (5,092,016)
============ ============
Loss per share:
Basic - as reported $ (0.28) $ (0.14)
Basic - pro forma $ (0.28) $ (0.14)
These pro forma amounts may not be representative of future disclosures since
the estimated fair value of stock options is amortized to expense over the
vesting period and additional options may be issued in future years. The
estimated fair value of each option granted was calculated using the
Black-Scholes option-pricing model. The following summarizes the weighted
average of the assumptions used in the model.
2004 2003
----- -----
Risk free rate 4.13% 2.1%
Expected years until exercise 9.614 3.0
Expected stock volatility 100.0% 100.0%
Dividend yield -- --
===== =====
Loss Per Share
Loss per common share is calculated in accordance with SFAS No. 128, Earnings
Per Share. Basic loss per common share is computed based upon the weighted
average number of shares of common stock outstanding for the period and excludes
any potential dilution. Shares associated with stock options, warrants and
convertible preferred stock are not included because their inclusion would be
antidilutive (i.e., reduce the net loss per share).
The common shares potentially issuable arising from these instruments, which
were outstanding during the periods presented in the financial statements,
consisted of:
2004 2003
---------- ----------
Options 1,118,000 365,000
Warrants 18,151,891 6,780,237
Convertible preferred stock -- 12,500,000
---------- ----------
19,269,891 19,645,237
========== ==========
F-16
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Information
The Company has determined it has one reportable operating segment as defined by
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
Research and Development Costs
The cost of research, development and product improvement expenditures, which
includes depreciation of the Company's laboratory, amortization and impairment
of the technology access option, are charged to expense as they are incurred.
Research, development and product improvement costs included in operating
expenses amounted to $7,689,060 and $4,045,673 for the years ending December 31,
2004 and 2003, respectively; and $22,728,050 for the period from March 12, 2001
(date of inception) to December 31, 2004.
Included in this amount were payments to related parties (see Note 11). Also
included in the December 31, 2004 and for the period from March 12, 2001 (date
of inception) to December 31, 2004 amount, is an impairment of intangible assets
of $2,797,612. (see Note 5).
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(revised 2004), Share-Based Payment, which is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation. SFAS 123(R) supersedes Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. Generally, the approach in SFAS 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. Statement 123(R) must be adopted no
later than January 1, 2006 and early adoption is permitted in periods in which
financial statements have not yet been issued.
As required, the Company will adopt SFAS No. 123(R) no later than January 1,
2006. Under SFAS No. 123(R), the Company may either recognize compensation cost
for share-based payments to employees based on the grant-date fair value from
the beginning of the period in which the provisions are first applied, without
restating periods prior to adoption, or may elect to restate prior periods by
recognizing compensation costs in the amounts previously reported in the
pro-forma footnote disclosures under the provisions of SFAS 123. The Company is
evaluating the impact of the two adoption methods and as yet has not determined
which method we will utilize.
The Company cannot estimate the impact of adopting Statement No. 123(R) because
it will depend on levels of share-based payments granted in the future but,
based solely upon the pro-forma disclosures for prior periods, we believe that
the impact will not be material to our results of operations.
NOTE 3 - GOING CONCERN
The Company incurred net losses to common stockholders of $20,037,568 and
$49,702,357 for the year ended December 31, 2004 and for the period March 12,
2001 (date of inception) to December 31, 2004, respectively. Included in these
net losses were non-cash preferred stock dividends generated from beneficial
conversion features of preferred stock in the amounts of $10,750,000 for the
year ended December 31, 2004 and $22,218,750 in the cumulative net loss (see
Note 8).
The Company estimates it has sufficient funds to meet operating expenses and
capital requirements through the end of the second quarter of 2005.
F-17
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 3 - GOING CONCERN (Continued)
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 our 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
thereby providing inconclusive results. In the study, Psoraxine was found to be
safe and well tolerated.
The Company is currently analyzing the data from our 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.
Management plans to raise additional capital through private placement equity
offerings in 2005. These funds, in addition to its cash held at December 31,
2004, will be needed in order to finance the Company's currently anticipated
needs for operating and capital expenditures for 2005, including the cost to
evaluate the results of the Phase II study, continue 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 financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
NOTE 4 - MARKETABLE SECURITIES
The Company's marketable equity securities consisted of certificates of deposit,
fixed income funds that have a readily determinable fair market value.
Management determines the appropriate classifications of its investments using
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
at the time of purchase, and re-evaluates such determinations at each balance
sheet date.
The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholder's Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the specification
method.
The Company had no available for sale securities as of December 31, 2004.
F-18
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 4 - MARKETABLE SECURITIES (Continued)
As of December 31, 2003, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
----------- ----------- ----------- ----------- -----------
Fixed Income Fund Current $ 1,401,872 $ (27,740) $ 42 $ 1,374,174
----------- ----------- ----------- -----------
$ 1,401,872 $ (27,740) $ 42 $ 1,374,174
=========== =========== =========== ===========
The Company's investment income (loss) consists of:
Years Ended December 31,
------------------------
2004 2003
--------- ---------
Interest income $ 127,409 $ 120,668
Realized loss from disposal of securities (128,131) (23,760)
Bad debt expense -- (36,890)
--------- ---------
$ (722) $ 60,018
========= =========
NOTE 5 - INTANGIBLE ASSETS
The Company's policy is to capitalize the costs of purchased and internally
developed patents and those expenses in connection with patent rights licensed
to the Company. The life of the patent is 20 years from the date the patent is
applied for or 17 years from when it is granted, whichever is longer. The
Company's policy is to capitalize direct costs related to the rights it has
licensed, and amortize them on a straight-line basis over the remaining portion
of the 20-year period, which commenced on March 16, 2001, the date the
application was filed for the patent the Company has licensed
The Company paid $5,000,000 for a technology access option from SkyePharma PLC
("SkyePharma"). This option gives the Company the right, until December 10,
2008, to enter into a non-exclusive license agreement to utilize any of three
drug delivery systems of SkyePharma in connection with any drugs it develops to
treat two specific immunotherapies. Upon exercise of the option, the Company
will be required to pay a license fee of 5% of net sales of any product
utilizing the drug delivery systems. All other terms of the license agreement
will be determined upon exercise of the option. In addition, any use of the
delivery systems after December 10, 2008 will need to be negotiated under a new
licensing agreement at that time.
Management has taken the position that the technology access option fee is a
license fee which allows the Company, prior to commercialization of its drugs,
to utilize the established delivery system technologies of SkyePharma to test
for viability and enhancement of the Company's Psoraxine vaccine. In accordance
with Financial Accounting Standard No. 2 - Research and Development Costs ("SFAS
No. 2"), the Company has capitalized the technology access option as a research
and development intangible asset and is amortizing it over its seven-year life.
The Company evaluates this intangible annually for impairment under SFAS 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." The Company
has determined that as of December 31, 2004, the technology access option fee
exceeded its fair market value and consequently the Company recorded impairment
charges in the amount of $2,797,612 in 2004.
F-19
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 5 - INTANGIBLE ASSETS - (Continued)
The Company has amortized $6,362 and $2,892 of patent costs and $714,288 and
$714,288 of the cost of the technology option license in 2004 and 2003,
respectively. The amortization and impairment related to the technology option
license is recorded as research and development cost as required by SFAS No. 2.
Intangible assets consisted of the following at December 31,
2004 2003
----------- -----------
Patent $ 130,109 $ 100,464
Technology access fee 5,000,000 5,000,000
Less impairment (2,797,612) --
Less accumulated amortization (2,214,574) (1,493,924)
----------- -----------
$ 117,923 $ 3,606,540
=========== ===========
Amortization expense related to the patents is expected to be approximately
$6,400 per year for each of the succeeding five years.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31,
2004 2003
--------- ---------
Furniture and Fixtures $ 28,281 $ 28,281
Computer Equipment 30,477 21,803
Leasehold Improvements 199,741 196,544
Lab Equipment 299,066 236,781
Automobiles -- 8,945
--------- ---------
$ 557,565 $ 492,354
Accumulated depreciation and amortization (343,425) (199,305)
--------- ---------
$ 214,140 $ 293,049
========= =========
Depreciation expense amounted to $147,252 and $130,574 for the years ended
December 31, 2004 and 2003, respectively. The depreciation related to the
Company's laboratory and related equipment is recorded as research and
development as required by SFAS No. 2.
F-20
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary timing
differences between the carrying amounts of assets and liabilities reflected on
the financial statements and the amounts used for income tax purposes. The tax
effects of temporary differences and net operating loss carryforwards and tax
credits that give rise to significant portions of the deferred tax assets
recognized are presented below:
December 31,
2004 2003
------------ ------------
Deferred tax assets :
Prepaid research and development $ -- $ 798,800
Deferred compensation 77,000 76,500
Accumulated depreciation and amortization 332,000 1,613,200
Research and development credits carryforward 1,974,300 1,125,400
Federal and state deferred tax benefit arising from
net operating loss carryforwards 8,370,600 5,612,500
------------ ------------
12,034,600 7,945,700
Less valuation allowance (12,034,600) (7,945,700)
------------ ------------
Total deferred tax assets $ -- $ --
============ ============
As of December 31, 2004, the Company had losses, which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $22,000,000 that
may be offset against future taxable income. These carryforwards start to expire
in 2021. The Company generated federal research and development credits of
$1,350,300 that will start to expire in 2021 and state credits of $624,000 that
will start to expire in 2008. However, these carryforwards and credits may be
significantly limited due to changes in the ownership of the Company as a result
of future equity offerings.
Recognition of the benefits of the deferred tax assets and liabilities will
require that the Company generate future taxable income. There can be no
assurance that the Company generates any earnings or any specific level of
earnings in future years. Therefore, the Company has established a valuation
allowance for deferred tax assets (net of liabilities) of approximately
$12,034,600 and $7,945,700 as of December 31, 2004 and 2003.
In 2004 and 2003, the Company sold $3,791,489 and $2,863,511, respectively, of
its gross New Jersey net operating loss carryforwards under the State of New
Jersey's Technology Business Tax Certificate Transfer Program (the "Program").
The Program allows qualified technology and biotechnology businesses in New
Jersey to sell unused amounts of net operating loss carryforwards and defined
research and development tax credits for cash. The proceeds from the sale of the
Company's carryforwards were $293,461 and $221,600, respectively (net of fees)
and the amount was recorded as a tax benefit in the statements of operations.
The State of New Jersey renews the Program annually and limits the aggregate
proceeds of the program to $10,000,000. Due to the uncertainty at any time as to
the Company's ability to effectuate the sale of available New Jersey net
operating losses, and since the Company has no control or influence over the
Program, the benefits are recorded once the agreement with the counterpart is
signed and the sale is approved by the State.
In accordance with federal income tax regulations, the net loss incurred by
Astralis, LLC from inception to the date of its merger with the Company has been
excluded from the benefits of the net operating loss carryforwards reflected in
this footnote.
F-21
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 7 - INCOME TAXES (Continued)
The following table presents the principal reasons for the difference between
the Company's effective tax rates and the United States federal statutory income
tax rate of 34%.
December 31,
2004 2003
----------- -----------
Federal income tax benefit at statutory rate $ 3,257,550 $ 1,802,700
State income tax benefit (net of effect of federal benefit) 446,600 296,300
Non-deductible expenses (170,650) (130,300)
Research and development credit 848,900 688,200
Valuation allowance before realization of state benefit (4,382,400) (2,656,900)
Benefit from sale of state net operating loss 293,500 221,600
----------- -----------
Income Tax Benefit $ 293,500 $ 221,600
=========== ===========
Effective Income Tax Rate (9%) (13%)
=========== ===========
NOTE 8 - CAPITAL STOCK ACTIVITY
Common Stock
In 2001 Astralis LLC and the Company merged and this transaction was treated as
a recapitalization of the Company, whereby the Company issued to the members of
Astralis, LLC, 28,000,000 shares of common stock and warrants to purchase
6,300,000 shares of Company common stock for $1.60 per share in a one-for-one
exchange for all of the outstanding 28,000,000 Astralis, LLC member units of
ownership and 6,300,000 options to purchase member units.
Prior to the Merger
Astralis LLC issued 25,300,000 units on April 25, 2001 to various members for an
aggregate subscription receivable amount of $33,183. During the year, the
members paid $33,183 on behalf of the Company to satisfy their subscription
receivable.
In April 2001, the Company issued warrants to purchase 75,000 shares of common
stock at an exercise price of $1.75 per share. These warrants expired in April
2004.
On September 1, 2001, five new members were admitted as members of the LLC
through the execution of a subscription agreement. These new members subscribed
to units ("Units") from Astralis LLC consisting of an aggregate of 2,700,000
membership interests (the "Membership Interests") in Astralis LLC and 6,300,000
options to purchase additional Membership Interests in Astralis LLC for an
exercise price of $1.60 per Membership Interest.
On November 13, 2001, the aforementioned Units were exchanged for an aggregate
of 2,700,000 shares of our common stock and warrants to purchase 6,300,000
shares of common stock at an exercise price of $1.60 per share. The aggregate
purchase price for such Units was $1,350,000 and was paid with subscription
notes. Warrants to purchase 3,150,000 shares of common stock, as amended, were
to expire on December 13, 2004 and 3,150,000 expire November 13, 2006. The
3,150,000 warrants that were set to expire on December 13, 2004 were extended to
February 18, 2005 and subsequently extended to March 11, 2005 when they expired.
F-22
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)
In September 2001, Astralis, LLC granted 500,000 membership units to a
consultant in return for services rendered. The membership units were
subsequently exchanged for shares of common stock of the Company. The cost of
the services, based on an independent valuation of the units granted, which
amounted to $135,000, were recorded at the time the services were rendered in
2001.
Subsequent to Merger
In November 2001, the Company completed a $3,321,887 private placement offering
pursuant to which it sold 103.81 units at $32,000 per unit for an aggregate
amount of $3,321,887. Each unit consisted of 20,000 shares of common stock and
warrants to purchase 4,000 shares of the Company's common stock at $4.00 per
share. The warrants expire on November 13, 2006. The holders of these shares of
common stock and warrants received registration rights. The Company was required
to file a registration statement by March 13, 2002 to register the sale of these
shares and the shares underlying the warrants. Upon consummation of the private
placement, the Company paid a $100,000 investment banking fee and entered into
an agreement for future investment banking services amounting to $144,000,
payable in 24 equal monthly installments of $6,000.
In January 2002, the Company agreed to amend a subscription agreement with one
of the investors who participated in the November 2001 private placement
offering. The Company consented to reduce the number of shares in the
subscription agreement by 49,990 shares of common stock. The Company cancelled
the respective shares and returned the corresponding amount of funds to the
investor amounting to $80,000.
In 2002 and 2003, the Company collected $465,000 and $825,000 in cash of the
subscription receivables, respectively. In April 2003, the Company entered into
the Amended Investor Relation Agreement with one of the stockholders who has
outstanding subscription receivable with the Company. The Company agreed to
receive services in lieu of payment of the outstanding subscription receivable
in the amount of $60,000. In 2004 and 2003, the Company received services valued
at $24,000 and $36,000, respectively.
On December 15, 2003, the Company amended its Articles of Incorporation to
authorize the issuance of 150,000,000 shares of common stock, $0.0001 par value
per share, and 3,000,000 shares of Series A preferred stock, $0.001 par value of
which 73,173,055 shares of common and 0 share of Series A preferred were
outstanding as of December 31, 2004.
On January 20, 2004, the Company closed a private placement from which it
received gross proceeds of approximately $4,080,000. The transaction consisted
of the sale to accredited investors of units consisting of 8,159,964 shares of
common stock and warrants to purchase 8,159,964 shares of common stock. The
warrants have an exercise price of $0.73 and expire in four years.
On February 19, 2004, the Company closed the second round of its private
placement from which it received $1,150,000. The transaction consisted of sales
to accredited investors of units consisting of 2,299,902 shares of common stock
and warrants to purchase 2,299,902 shares of common stock. The warrants have an
exercise price of $0.73 and expire in four years.
FPP Capital Advisors whose sole stockholder is a director of the Company was
paid a consulting fee in the amount of $261,496 in February 2004 for the
consulting services related to the private placement completed in 2004. In
addition, the related party and his assignees received warrants to purchase an
aggregate of 418,394 shares of the Company's common stock at $0.50 per share and
warrants to purchase an aggregate of 418,394 shares of the Company's common
stock at $0.73 per share. An additional consulting fee equal to 5% of proceeds
received will be paid upon exercise of the warrants issued in the private
placements. The warrants expire in four years.
F-23
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)
The Company issued to FPP Capital Advisors (a related party) 150,000 shares of
common stock and warrants to purchase 150,000 shares of common stock for
consulting services valued at $75,000. The warrants have an exercise price of
$0.73 and expire in five years. In addition, in connection with the conversion
by SkyePharma of its shares of the Company's Series A Preferred Stock, the
Company assigned to FPP Capital Advisors, as compensation, 10% of the call
option provided to the Company under the call option agreement dated January 20,
2004 between the Company and SkyePharma. Accordingly, the Company recorded a
non-cash charge of $376,508 in June 2004.
On July 9, 2004 a director of the Company exercised options to purchase 25,000
shares of common stock at $0.45 a share. The shares issued remain restricted.
Preferred Stock
On December 13, 2001, the Company authorized 2,000,000 shares of preferred stock
to be designated as "Series A Convertible Preferred Stock" ("Series A Preferred
Stock") with a $0.001 par value per share. If the Company declares a dividend,
holders of each share of Series A Preferred are entitled to non-cumulative cash
dividends which will be the greater of i) 6% of the preferred share purchase
price; or ii) the amount such holders would have received had the holders
converted to common stock immediately prior to record date for payment of a
dividend to holders of common stock. No dividend can be declared or paid on
common stock without an equal or greater dividend being paid or declared on the
Series A Preferred. Holders of each share of Series A Preferred were entitled to
vote on all matters at stockholder meetings. Holders of each share of the Series
A Preferred could convert their shares to common stock at an initial conversion
price of $2.50. The conversion price could be adjusted and reset as set forth in
the purchase agreement for the Series A Preferred.
On December 10, 2001, the Company and SkyePharma entered into a purchase
agreement whereby SkyePharma agreed to purchase 2,000,000 shares of Series A
Preferred at a price of $10 per share over a 13-month period with five separate
closings. On December 10, 2002, the one-year anniversary of the agreement,
SkyePharma received registration rights on the common stock underlying its
Series A Preferred shares. The first closing occurred in December 2001 and the
Company sold 1,000,000 shares of Series A Preferred for a purchase price of
$10,000,000.
The second, third and fourth closing occurred in January 2002, April 2002, and
July 2002. On each closing, the Company sold 250,000 shares of Series A
Preferred for a purchase price of $2,500,000. The final 250,000 shares of Series
A Preferred totaling $2,500,000 closed on January 31, 2003.
The Company's stock price on December 10, 2001 was $3.03; consequently, pursuant
to the requirements of the Emerging Issues Task Force ("EITF") 98-5 "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," as amended by EITF 00-27, the issuance of the
Series A Preferred, which was convertible initially at $2.50 per share at any
time, resulted in a beneficial conversion feature recorded as a preferred stock
dividend in the amount of $2,120,000.
The Company's stock price on April 30, 2002 was $2.77; consequently, the
issuance of the Series A Preferred, which was convertible initially at $2.50 per
share at any time, resulted in a beneficial conversion feature recorded as a
preferred stock dividend in the amount of $270,000.
Since the conversion price of the Series A Preferred was subject to reset
provisions as described above, there was a beneficial conversion feature
applicable to the Series A Preferred. Using the potential conversion price of
$1.60 for the first anniversary date as specified in the purchase agreement, the
beneficial conversion feature resulted in an additional preferred stock dividend
of $9,078,750 in December 2002.
F-24
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 8 - CAPITAL STOCK ACTIVITY (Continued)
On January 20, 2004, Skyepharma converted all of its outstanding shares of
Series A Preferred Stock of the Company into 25,000,000 shares of common stock
at a reduced conversion price of $0.80 per share. Skyepharma agreed that up to
12,500,000 shares of its common stock issued upon conversion of the Series A
Preferred Stock will be subject to a call option at the discretion of the
Company upon completion of an agreed upon milestone at a premium in excess of
the conversion price. The call option can be exercised on or after July 21,
2004. In connection with this transaction and in accordance with SFAS 84,
"Induced Conversions of Convertible Debt, an Amendment of APB Opinion No. 26"
the Company recorded a non-cash preferred stock dividend in January 2004
amounting to $10,750,000.
On the closing date of conversion, January 20, 2004, the Company and other
original stockholders amended the stockholders agreement dated as of December
10, 2001. After the date of that Amendment, the Board of Directors is required
to be comprised of at least seven directors and include at least two independent
directors. Per the Amendment, SkyePharma shall have the right to nominate one
director, who shall initially be Michael Ashton. From the date of the Amendment
until the third anniversary, Jose Antonio O'Daly, Mike Ajnsztajn and Gaston
Liebhaber (the "Founders"), each has the right to nominate one director. The
Founders will initially be directors. The Agreement will terminate upon the
later of (i) the SkyePharma Termination Date or (ii) the third anniversary of
this Amendment, which is January 20, 2007. Further, this agreement may be
terminated by the mutual written consent. "The SkyePharma Termination Date" is
the date on which SkyePharma no longer beneficially owns, in the aggregate, at
least 20% of the outstanding common stock of the Company.
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 49.8% of the
Company's outstanding common stock.
Stock Warrants
At December 31, 2004, the Company had the following outstanding common stock
warrants to purchase its securities:
Number of Warrants Exercise Price
Issued Per Share
------------------ --------------
18,151,891 $0.50 - $4.00
================== ==============
These warrants were primarily issued in connection with the exchange with
Astralis, LLC and the private placement offering.
NOTE 9 - STOCK OPTION PLAN
On September 10, 2001, the Company adopted its 2001 Stock Option Plan that
provides for the granting of options to officers, directors, employees, and
consultants. The number of shares of common stock that can be purchased under
this plan is limited to 5,000,000 shares, adjustable for changes in the capital
structure of the Company. No options can be granted under this plan after
September 10, 2011. Options granted under this plan may be either incentive
stock options or non-qualified stock options. Options terms are not to exceed 10
years. The options have limited transferability, and will be subject to various
vesting provisions as determined at the date of grant. The Board of Directors or
a committee thereof will determine the exercise price of options granted in
accordance with the provisions of this plan. The Board has the ability to amend,
suspend or terminate this plan at any time, subject to restrictions imposed by
applicable law.
F-25
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 9 - STOCK OPTION PLAN - (Continued)
On December 31, 2001, the Company granted two consultants options to purchase an
aggregate 300,000 shares of the Company's common stock in exchange for their
services. These options vest ratably, at 75,000 per year, over a four-year
period commencing in 2001. The expiration terms of these options are 4 years, 3
years, 2 years and 1 year, for options vesting in 2001, 2002, 2003 and 2004,
respectively. The strike price for all of these options is $2.75.
During July 2002, the Company granted 15,000 stock options with a strike price
of $2.50, as compensation to a consultant.
The Company records deferred compensation when it makes compensatory stock
option grants to employees, members of the Board of Directors, consultants or
advisory board members. For the options granted to consultants, the amount of
deferred compensation recorded is the fair value of the stock options on the
grant date as determined using a Black-Scholes option-pricing model. The Company
records deferred compensation as a reduction to stockholders' equity with an
offsetting increase to additional paid-in capital. The Company then amortizes
deferred compensation into stock-based compensation expense over the performance
period, which typically coincides with the vesting period of the stock-based
award.
During April 2003, the Company granted options to purchase 50,000 shares of
common stock at an exercise price of $0.45 per share to one of its directors.
Options to purchase 12,500 shares of common stock vested on April 4, 2003, and
options to purchase an additional 12,500 shares will vest each year thereafter
for the following three years. In July 2004, 25,000 vested options were
exercised.
On July 2, 2004, the Company granted options to purchase 50,000 shares of common
stock at an exercise price of $1.00 per share to one of its directors. Options
to purchase 12,500 shares of common stock vested on grant date and options to
purchase an additional 12,500 shares will vest each year thereafter for the
following three years. The term of the options is four years.
During December 2004, the Company granted options to purchase 728,000 shares of
common stock at an exercise price of $0.70 per share to one of its officers. The
options are vested immediately and expire in ten years.
NOTE 10 - DEFERRED COMPENSATION
The components of deferred compensation for the options granted are as follows
at December 31,
2004 2003
-------- --------
Balance at January 1 $ 4,822 $ 12,164
Deferred compensation recorded -- --
Fair value adjustments -- 18,321
Amortization to stock-based compensation (4,822) (25,663)
-------- --------
Balance at December 31 $ -- $ 4,822
======== ========
F-26
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 10 - DEFERRED COMPENSATION - (Continued)
Exercise prices for stock options outstanding as of December 31, 2004 and the
weighted average remaining contractual life are as follows:
Weighted Average Weighted
Remaining Number Average
Exercise Prices Options Outstanding Contractual Life Exercisable Exercise Price
---------------- ------------------- ---------------- ----------- --------------
$ 0.45 25,000 3.25 years -- $ 0.45
$ 0.70 728,000 10 years 728,000 $ 0.70
$ 1.00 50,000 3.5 years 12,500 $ 1.00
$ 2.50 - 2.75 315,000 1.08 year 315,000 $ 2.74
In accordance with FAS 123 the fair value of the options were estimated as of
the date of the grant or subsequent vesting date, or December 31, 2004 if not
vested, using a Black-Scholes option-pricing model. The assumptions used in
estimating the fair value of the options ranged as follows:
Volatility 100% - 130%
Risk-free interest rate 2.1% - 4.19%
Expected life 1 - 10 years
Dividend yield --
NOTE 11 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS
Patent
A founding member of the Company is the owner of a patent application, filed
March 16, 2001 with the United States Patent and Trademark Office, entitled
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
(the "Invention"). On April 26, 2001, the Company, in exchange for $10, entered
into an exclusive license agreement to use and exploit the Invention, the
technology related thereto, and the related patent rights, including the ability
to license foreign patent rights. The term of the license agreement expires on
the last date of expiration of the patent or earlier date as specified in the
license agreement.
During the term of the license agreement, the Company is required to pay all
fees and costs relating to the filing, prosecution, and maintenance of the
patent and associated rights. In addition, the Company is required to pay all
reasonable attorneys' fees of the Company, or patent owner, in the pursuit of
any patent infringement litigation.
SkyePharma PLC Agreements
On December 10, 2001, the Company executed three agreements with SkyePharma, a
pharmaceutical company located in England.
The Company entered into a stock purchase agreement whereby SkyePharma agreed to
purchase 2,000,000 shares of Series A Preferred at a price of $10 per share in
five separate closings over a 13-month period commencing in December 2001 (see
Note 8).
The Company entered into a technology option agreement whereby it agreed to pay
SkyePharma $5,000,000 in return for the right, for 7 years, to enter into a
non-exclusive license agreement with SkyePharma to utilize three drug delivery
systems ($2,000,000, $2,000,000, and $1,000,000, respectively per delivery
system). The royalty fee in this license
F-27
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 11 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)
agreement is specified to be 5% of the net sales of any product the Company
sells utilizing a SkyePharma drug delivery system. All other terms of this
license agreement would need to be determined upon exercise of the option. The
Company can transfer this option to another party, subject to approval by
SkyePharma. This license would only allow the Company to use these delivery
systems for drugs that treat two particular immunotherapies - psoriasis and
leishmaniasis. The $5,000,000 fee was required to be paid on December 10, 2001
and was netted (for convenience purposes) out of the first $10,000,000
installment purchase of preferred stock by SkyePharma.
The technology option cost basis exceeded its fair value under the FAS No. 144
test as of December 31, 2004 and consequently the Company recorded an impairment
charge of $2,797,612 in relation to the option (see Note 5).
The Company entered into a services agreement whereby it paid $11,000,000 to
SkyePharma in return for SkyePharma providing all development, manufacturing,
pre-clinical and clinical development services for the Company's primary -
second generation Psoraxine, up to the completion of Phase II clinical studies.
The contract recognized that SkyePharma performed $3,000,000 of these services
in the fourth quarter of 2001 and that SkyePharma will perform and be paid for
the remaining $8,000,000 of services in 2002 and 2003. The payment terms for the
services agreement are fixed. The Company paid $3,000,000 in 2001, $7,980,000 in
2002 and $20,000 in 2003.
The service agreement terminated on December 31, 2002. In March 2003, the
Company and SkyePharma amended the original service agreement, effective January
1, 2003, to extend the term of the agreement and modify the services to be
provided by SkyePharma. SkyePharma will continue to provide certain services to
the Company through December 31, 2004 in consideration for payments it received
from the Company during 2002 in connection with this agreement, as a prepaid
expense. This prepaid amount was expensed during the remaining period of the
amended service agreement, In 2004 and 2003, the Company expensed $1,007,500 and
$1,007,500, respectively, in connection with the services agreement.
SkyePharma has the right of first negotiation to acquire the worldwide licensing
and distribution rights to Psoraxine up to the completion of the Phase II
studies. On completion of Phase II studies, Astralis will offer SkyePharma the
option to acquire the worldwide licensing and distribution rights to Psoraxine.
If SkyePharma does not take the option, Astralis will seek a marketing partner
to fund Phase III clinical studies and to provide a sales and marketing
infrastructure.
As of March 7, 2005, SkyePharma owns approximately 49.8% of the Company's
outstanding common stock.
Indemnification
The Company has agreed, subject to specific provisions in the Technology Access
Agreement, to indemnify SkyePharma, its directors and employees against any and
all losses, claims, demands, proceedings, actions, etc. which may be brought or
established against them as a result of, among other items, i) negligence of
Company personnel or contractors or ii) death, personal injury or property
damage or loss caused by the Company selling a product containing a SkyePharma
delivery system which is defective or not merchantable. However, this
indemnification does not apply to any death or personal injury arising from
defects inherent in the delivery systems or technical know-how of SkyePharma
licenses with the delivery system technology.
NOTE 12 - OPERATING LEASES
On March 13, 2002, the Company entered into a lease agreement for laboratory and
office space. The lease period is for three years and rent is $77,500 annually.
The Company also entered into a concurrent service agreement with the lessor of
the laboratory space on a time and material basis.
During 2003 and 2004, the Company leased two apartments and an automobile for
two different key employees, one of whom is an officer. One of the leases
terminated in August 2004. As of December 31, 2004, the Company had one lease
outstanding for an apartment of a key employee and one auto lease outstanding.
F-28
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 12 - OPERATING LEASES (Continued)
The Company incurred rent expense in the amount of $128,443 and $137,070 for
2004 and 2003, respectively.
The following is a schedule by year of future minimum rental payments required
under operating leases, as of December 31, 2004:
Year Ending December 31:
2005 $ 58,835
2006 1,908
2007 1,113
NOTE 13 - COMPREHENSIVE LOSS
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Year Ended December 31,
-----------------------------
2004 2003
------------ ------------
Net loss to common stockholders $(20,037,568) $ (5,080,427)
------------ ------------
Unrealized gain (loss) on securities:
Unrealized gain (loss) arising during period -- (26,245)
Reclassification adjustment for loss realized
in net loss 27,698 13,728
------------ ------------
Unrealized gain (loss), net 27,698 (12,517)
------------ ------------
Comprehensive loss $(20,009,870) $ (5,092,944)
============ ============
NOTE 14 - CONCENTRATIONS
The Company currently has two products that are under development. Lack of
product development or customer interest could have a materially adverse effect
on the Company. Further, significant changes in technology could lead to new
products or services that compete with the product to be offered by the Company.
These changes could materially affect the price of the Company's products or
render them obsolete.
NOTE 15 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
The Company did not pay any interest or taxes in 2004 or 2003.
NOTE 16 - SUBSEQUENT EVENTS
In January 2005, the Company entered into an Employment Agreement with the newly
hired Chief Executive Officer of the Company. The agreement is for a term of two
years and will be automatically renewed for an unlimited number of additional
terms of one year each unless either party provides written notice of
termination at least ninety days prior to the end of such term.
F-29
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
NOTE 16 - SUBSEQUENT EVENTS (Continued)
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 four
years, with a term of ten years.
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 our 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
thereby providing inconclusive results. In the study, Psoraxine was found to be
safe and well tolerated.
The Company is currently analyzing the data from the 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.
F-30
INTERIM FINANCIAL STATEMENTS
F-31
FINANCIAL INFORMATION
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.
F-32
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.
F-33
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 -- 24,000 60,000
receivable
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 -- 4,954,191 7,842,508
costs
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.
F-34
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 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
============ ============ ============ ============
F-35
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
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 January 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 January 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
F-36
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
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.
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.
F-37
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Condensed Financial Statements
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.
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 were 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
stockholder approval, to increase the authorized number of common stock by
200,000,000 shares.
F-38
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Our Certificate of Incorporation eliminates the personal liability of
directors to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of Section 102 of the General Corporation Law of Delaware. In
addition, our Certificate of Incorporation includes provisions to indemnify our
officers and directors and other persons against expenses, judgments, fines and
amounts paid in settlement in connection with threatened, pending or completed
suits or proceedings against those persons by reason of serving or having served
as officers, directors or in other capacities to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware.
Our bylaws provide the power to indemnify our officers, directors,
employees and agents or any person serving at our request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the fullest extent permitted by Delaware law.
Item 25. Other Expenses of Issuance and Distribution
Expenses payable in connection with the issuance and distribution of the
securities being registered (estimated except in the case of the registration
fee) are as follows:
Amount
------
Printing N/A
Legal Fees and Expenses $ 60,000
Accounting Fees and Expenses $ 20,000
Miscellaneous $160,000
TOTAL $240,000
The above fees will be paid by us and not by the selling stockholders.
II-1
Item 26. Recent Sales of Unregistered Securities
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 were duly and timely filed with the Securities and
Exchange Commission.
In June 2004, we issued units consisting of 150,000 shares of common stock
and warrants to purchase 150,000 shares of common stock to FPP Capital Advisors
in consideration for services rendered in negotiating the Call Option Agreement
dated January 12, 2004 between us and SkyePharma. In addition, we assigned to
FPP Capital Advisors the right to purchase 1,250,000 shares of our common stock
pursuant to the Call Option Agreement dated January 12, 2004 between us and
SkyePharma. We relied on the exemption from registration with the Securities and
Exchange Commission provided under Section 4(2) and Rule 506 of Regulation D
under the Securities Act of 1933.
On January 20, 2004 and February 19, 2004, we sold to accredited investors
units consisting of an aggregate of 10,459,866 shares of common stock and
warrants to purchase 10,459,866 shares of common stock for an aggregate purchase
price of approximately $5.23 million. In connection with this transaction, FPP
Capital Advisors and certain other persons who assisted FPP Capital Advisors in
providing consulting services to us received a consulting fee of $261,496,
warrants to purchase an aggregate of 418,394 shares of our common stock at $0.50
per share and warrants to purchase an aggregate of 418,394 shares of our common
stock at $0.73 per share. One of these other selling stockholders, Manuel
Tarabay, received warrants to purchase 72,000 shares of common stock, and became
a member of the Board of Directors in August 2005. We relied on the exemption
from registration with the Securities and Exchange Commission provided under
Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D under
the Securities Act of 1933.
We entered into a Purchase Agreement dated as of December 10, 2001 with
SkyePharma PLC, a company incorporated under the laws of England and Wales.
Pursuant to the Purchase Agreement, SkyePharma purchased, during a thirteen
month period ending January 31, 2003, 2,000,000 shares of our Series A Preferred
Stock, par value $.001 per share, at a purchase price of $10.00 per share, or an
aggregate purchase price of $20.0 million. We relied on the exemption from
registration with the Securities and Exchange Commission provided under Section
4(2) and Rule 506 of Regulation D under the Securities Act of 1933. On January
20, 2004, pursuant to an Omnibus Conversion Agreement dated January 12, 2004
between us and SkyePharma, SkyePharma converted all of its shares of our Series
A Preferred Stock into 25,000,000 shares of common stock at a conversion price
of $0.80 per share. We relied on the exemption from registration with the
Securities and Exchange Commission provided under Section 4(2) and Rule 506 of
Regulation D under the Securities Act of 1933.
During November of 2001, we completed a private placement offering to
accredited investors pursuant to which we sold an aggregate of 2,076,179 shares
of our common stock and issued warrants to purchase an aggregate of 415,237
shares of our common stock, at an exercise price of $4.00 per share, for an
aggregate purchase price of $3,321,887. We relied on the exemption from
registration with the Securities and Exchange Commission provided under Section
4(2) of the Securities Act of 1933 and Rule 506 of Regulation D under the
Securities Act of 1933.
II-2
On November 13, 2001, pursuant to the Contribution Agreement, dated as of
September 10, 2001, by and among us and the members of Astralis, LLC, a New
Jersey limited liability company, the members of Astralis, LLC transferred all
of their respective membership interests in Astralis, LLC to us in exchange for
28,000,000 shares of our common stock and 6,300,000 warrants to purchase common
stock at an exercise price of $1.60 per share. Pursuant to the Contribution
Agreement, we cancelled 23,800,000 of the 23,820,000 shares of common stock
owned by Mr. Shai Stern who served as our Chief Executive Officer and sole
director until his resignation, pursuant to the Contribution Agreement, on
November 13, 2001. We relied on the exemption from registration afforded by
Section 4(2) of the Securities Act of 1933.
During October of 2001, we issued a promissory note of $50,000 to Michael
Garnick. The promissory note had a maturity date of November 13, 2001. We also
issued to the lender 12,000 shares of common stock. The promissory note was
repaid out of the proceeds of the private placement. We relied on the exemption
from registration afforded by Section 4(2) of the Securities Act of 1933.
On September 1, 2001, Richard Genovese, David Stevenson, Grizzly
Consulting Ltd., Wolver Limited and Logarithmic, Inc. purchased units from
Astralis, LLC consisting of an aggregate of 2,700,000 membership interests in
Astralis, LLC and 6,300,000 options to purchase additional membership interests
for a purchase price of $1.60 per membership interest. The aggregate purchase
price for such units was $1,350,000. Pursuant to the Contribution Agreement, on
November 13, 2001 the units were exchanged for an aggregate of 2,700,000 shares
of common stock and 6,300,000 warrants to purchase common stock at an exercise
price of $1.60 per share. Astralis, LLC relied on the exemption from
registration with the Securities and Exchange Commission provided under Section
3(b) of the Securities Act of 1933 and Rule 505 of Regulation D under the
Securities Act of 1933.
During May of 2001, we issued warrants to purchase 75,000 shares of our
common stock at an exercise price of $1.75 per share in connection with a loan.
We relied on the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933.
Item 27. Exhibits
Exhibit Number Description
-------------- -----------
3.1 * Certificate of Incorporation of Astralis Ltd.
3.2 ** Bylaws of Astralis Ltd.
4.1 +++ Specimen Stock Certificate
5.1 @ Opinion of McCarter & English, LLP
10.1 ** Agreement and Plan of Merger
10.2 # Contribution Agreement dated September 10, 2001
10.3 ## Purchase Agreement dated December 10, 2001
10.4 ## Stockholder Agreement dated December 10, 2001
10.5 + 2001 Stock Option Plan
10.6 *** Sub-Lease Agreement
10.7 *** License Agreement dated April 26, 2001 between Jose Antonio
O'Daly and Astralis LLC
10.8 *** Assignment of License
10.9 *** Form of Warrant
10.10 ++ Agreement for Services dated December 10, 2001 between
SkyePharma Inc. and Astralis Ltd.
10.11 ++ Technology Access Option Agreement dated December 10, 2001 by
and among SkyePharma Inc., SkyePharma Holding AG and Astralis
Ltd.
II-3
10.12 ### Employment Agreement dated December 10, 2001, between Dr. Jose
Antonio O'Daly and Astralis Ltd.
10.13 ### Amendment #1 to Agreement for Services dated March 18, 2003
between SkyePharma Inc. and Astralis Ltd.
10.14 + Omnibus Conversion Agreement dated January 12, 2004 between
Astralis Ltd. and SkyePharma PLC
10.15 + Call Option Agreement dated January 20, 2004 between Astralis
Ltd. and SkyePharma PLC
10.16 + Amendment No. 1 to Stockholders Agreement dated January 20,
2004 by and among Astralis Ltd., SkyePharma PLC, Jose Antonio
O'Daly, Mike Ajnsztajn, Gaston Liebhaber and Gina Tedesco
10.17 @@ Securities Purchase Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.18 @@ Registration Rights Agreement, dated August 17, 2005, by and
between Astralis Ltd. and Blue Cedar Limited.
10.19 @@ Stockholder's Agreement, dated August 17, 2005, by and between
Astralis Ltd. and Blue Cedar Limited.
10.20 @@ Long-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.21 @@ Short-term Common Stock Purchase Warrant, issued to Blue Cedar
Limited by Astralis Ltd.
10.22 @@ Long-term Common Stock Purchase Warrant, issued to Lipworth
Capital Limited by Astralis Ltd.
23.1 Consent of McCarter & English, LLP (included in Exhibit 5.1)
23.2 Consent of L J Soldinger & Associates, LLC
24.1 Powers of Attorney (included on the signature page)
----------
* Previously filed with the Securities and Exchange Commission as an Exhibit to
the Annual Report on Form 10-KSB on March 30, 2004.
** Previously filed with the Securities and Exchange Commission as an Exhibit to
the Preliminary Proxy Statement for Astralis Pharmaceuticals Ltd. on November
16, 2001.
*** Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form SB-2 for Astralis Ltd. on March 14, 2002.
# Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Pharmaceuticals Ltd. on November 14,
2001.
## Previously filed with the Securities and Exchange Commission as an Exhibit to
the Current Report on Form 8-K for Astralis Ltd. on December 14, 2001.
### Previously filed with the Securities and Exchange Commission as an Exhibit
to the Annual Report on Form 10-KSB on March 31, 2003.
+ Previously filed with the Securities and Exchange Commission as an Exhibit to
the Preliminary Proxy Statement for Hercules Development Group Inc. on October
4, 2001.
++ Previously filed with the Securities and Exchange Commission as an Exhibit to
the Amendment to the Registration Statement on Form SB-2 for Astralis Ltd. on
July 23, 2002.
+++ Previously filed with the Securities and Exchange Commission as an Exhibit
to the Registration Statement on Form SB-2 for Astralis Ltd. on May 28, 2004.
@ Previously filed with the Securities and Exchange Commission as an Exhibit to
the Registration Statement on Form SB-2 for Astralis Ltd. on June 28, 2004.
@@ Previously filed with the Securities and Exchange Commission as an Exhibit on
Form 10-QSB on August 19, 2005.
II-4
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities which remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-5
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of
Fairfield, State of New Jersey, on October 12, 2005.
ASTRALIS LTD.
By: /s/ James Sharpe
-----------------------
James Sharpe
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Jose Antonio O'Daly Chairman of the Board October 12, 2005
---------------------------
Dr. Jose Antonio O'Daly
/s/ James Sharpe Chief Executive Officer and October 12, 2005
--------------------------- Director
James Sharpe (principal executive officer)
/s/ Michael Garone Chief Financial Officer October 12, 2005
--------------------------- (principal financial and
Michael Garone accounting officer)
Director October 12, 2005
---------------------------
Michael Ashton
/s/ Samuel Barnett Director October 12, 2005
---------------------------
Samuel Barnett
Director October 12, 2005
---------------------------
Steven Fulda
/s/ Fabien Pictet Director October 12, 2005
---------------------------
Fabien Pictet
/s/ Gordon Schooley Director October 12, 2005
---------------------------
Gordon Schooley
Director October 12, 2005
---------------------------
Manuel Tarabay