As filed with the Securities and Exchange Commission on July 23, 2002
Registration No. 333-84324
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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AMENDMENT NO. 1
To
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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ASTRALIS LTD.
(Name of small business issuer in its charter)
Delaware 6531 84-1508866
----------------------------- ------------------------- ------------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of incorporation Industrial Classification Identification
or organization) 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)
Mike Ajnsztajn
Chief Executive Officer
Astralis Ltd.
75 Passaic Avenue
Fairfield, New Jersey 07004
(973) 227-7168
(Name, address and telephone number of agent for service)
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Copies of Communications to:
Jeffrey A. Baumel, Esq.
McCarter & English, LLP
Four Gateway Center
100 Mulberry Street
Newark, New Jersey 07102-4096
(973) 622-4444
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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 any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. |X|
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. |_|
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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.
PROSPECTUS
ASTRALIS LTD.
2,431,415 Shares of Common Stock
The shareholders named on page 40 are selling up to 2,431,415 shares of
our common stock. 405,236 of the shares we are registering are issuable upon the
exercise of outstanding warrants. On July 22, 2002, the last reported sale price
of our common stock on the OTC Bulletin Board was $0.74 per share.
Investing in our common stock involves risks. Please read the "Risk
Factors" section beginning on page 7 to read about certain risks that you should
consider before buying 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 information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
The date of this Prospectus is July 23, 2002
================================================================================
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. 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.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
SUMMARY ................................................................... 3
RISK FACTORS .............................................................. 7
SPECIAL CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS .............. 13
USE OF PROCEEDS ........................................................... 13
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .................. 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS ................ 15
BUSINESS .................................................................. 19
MANAGEMENT ................................................................ 27
EXECUTIVE COMPENSATION .................................................... 31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............................ 33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ............ 37
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION ............................. 38
DESCRIPTION OF CAPITAL STOCK ............................................. 42
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING
AND FINANCIAL DISCLOSURE ................................................ 45
LEGAL MATTERS ............................................................. 46
EXPERTS ................................................................... 46
WHERE YOU CAN FIND ADDITIONAL INFORMATION ................................. 46
-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. All information contained in this Prospectus, except where
otherwise indicated, gives effect to a 10-for-1 stock dividend effected on March
14, 2001.
Astralis Ltd.
We are a development-stage biotechnology company, incorporated under the
laws of the State of Delaware and based in New Jersey, which primarily engages
in research and development of treatments for immune system disorders and skin
diseases. Our current activities focus on the development of a product
candidate named Psoraxine(TM) for the treatment of the skin disease
psoriasis. Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine;
o Doctor and site enrollment for clinical trials of Psoraxine in the
United States;
o Preparation of an Investigation of New Drug application to obtain
approval from the United States Food and Drug Administration for the
commencement of clinical trials of Psoraxine in the United States;
and
o Construction of leasehold improvements to our laboratory facility in
Fairfield, New Jersey.
Recent Developments
Combination with Astralis LLC. We were originally incorporated under the
laws of the State of Colorado on June 30, 1999 under the name "Hercules
Development Group, Inc" and engaged in the business of managing real estate.
Our real estate operations ceased in the second half of 2001. On November 13,
2001, we entered into a Contribution Agreement, dated as of September 10, 2001,
between us on the one side and Astralis LLC, a New Jersey limited liability
company formed on March 12, 2001 and Dr. Jose Antonio O'Daly, Gaston Liebhaber,
Mike Ajnsztajn, Richard Genovese, David Stevenson, Grizzly Consulting Ltd.,
Wolver Limited and Logarithmic Inc., being all of the members of Astralis LLC,
on the other side. At such time, we began our current business which was the
prior business of Astralis LLC.
Pursuant to the business combination set forth in the Contribution
Agreement, 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 warrants to purchase 6,300,000 shares of our common
3
stock at an exercise price of $1.60 per share. Pursuant to the Contribution
Agreement, on November 13, 2001, all of our officers and directors resigned from
their respective positions with us . The officers and managers of Astralis LLC
replaced them as our officers and directors. See "Management; Executive
Officers and Directors".
We accounted for this combination as a recapitalization. We were the
legal acquirer in the merger. Astralis LLC was the accounting acquirer since its
members acquired a majority interest in our stock. Consequently, all historical
financial information prior to November of 2001 represent the operations of
Astralis LLC.
In addition, on November 14, 2001, we filed an amendment to our Articles
of Incorporation which changed our name from "Hercules Development Group, Inc."
to "Astralis Pharmaceuticals Ltd." On November 19, 2001, we reincorporated in
the State of Delaware under our current name.
Private Placement. During November of 2001, we completed a private
placement offering 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 will continue to use the net
proceeds of the private placement to conduct clinical trials for our initial
product candidate, to continue funding the prosecution of our patent
application, for the lease of a research and development facility and corporate
headquarters, to pay salaries to our employees and for working capital and
general corporate purposes. We also used the proceeds to repay approximately
$150,000 loaned to us by Jim R. Smith and William F. Miller and to repay $50,000
loaned to us by Michael Garnick. We agreed to file a registration statement
with the Securities and Exchange Commission covering the shares of common
stock sold in the private placement no later than March 13, 2002.
Purchase Agreement. 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. As of July 22, 2002, SkyePharma has purchased 1,500,000
shares of our Series A Convertible Preferred Stock, par value $.001 per share,
at a purchase price of $10.00 per share, or an aggregate purchase price of $15
million. Pursuant to the Purchase Agreement, SkyePharma will make a total equity
investment of up to $20 million. The remaining $5 million investment will
involve the sale of an additional 500,000 shares of preferred stock to
SkyePharma in two equal installments on July 31, 2002 and January 31, 2003.
Each share of preferred stock issued pursuant to the Purchase Agreement is
convertible into four shares of our common stock at the option of SkyePharma
initially at a conversion rate of $2.50 per share of common stock. The
conversion ratio is subject to multiple adjustment provisions for three years
predicated on the price of our common stock and generally providing
anti-dilution protection. However, the conversion ratio will not adjust to a
level greater than
4
approximately 50 shares of common stock for each share of preferred stock.
Service and Technology Access Option Agreements. We also entered into
two agreements with SkyePharma relating to the formulation and development of
our product candidate, Psoraxine. Under the terms of the Technology Access
Option Agreement, dated December 10, 2001, we paid to SkyePharma a $5 million
fee for the option to acquire a license for DepoFoam and other relevant drug
delivery technologies owned by SkyePharma. The option expires on December 10,
2008. In addition, pursuant to a Service Agreement, dated December 10, 2001,
SkyePharma will provide us with development, manufacturing, pre-clinical and
clinical development services in consideration of an aggregate of $11 million
payable in 2001 and 2002.
5
The Offering
Shares of Common Stock offered 2,431,415
Use of Proceeds We will not be receiving any
proceeds from this offering,
although we will receive proceeds
upon the exercise of any
warrants. Certain selling
stockholders may wish to offer to
sell shares of our common stock
that they acquired from us in a
private placement of shares of our
common stock.
OTC Bulletin Board Symbol ASTR
Summary Financial Information
The summary financial data is derived from the historical financial
statements of Astralis Ltd. 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.
March 12 January 1, 2002
(Date of Inception) to
to December 31, 2001 March 31, 2002
---------------------- ---------------
Statement of operations data:
Revenue $ 0 $ 0
Net loss applicable to common stockholders (6,195,364) (2,795,929)
Net loss per share to common stockholders (0.23) (0.07)
Weighted average shares outstanding 27,348,000 37,551,373
Balance sheet data: December 31, 2001 March 31, 2002
------------------- ---------------
Working capital (deficit) 4,107,252 1,090,911
Total assets 9,457,451 8,825,832
Total liabilities 383,083 150,363
Stockholders' equity $ 9,074,368 $8,675,469
6
Our Offices
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.
7
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 Have No Sales, We Will Not Have Sales In The Foreseeable Future, We Are
In An Early Stage of Development And We May Never Sell Products Or Become
Profitable.
We commenced our current operations in 2001 and such operations remain in
an early stage of development. We have no products approved for sale and
therefore, no means to generate revenue. We have not commercialized any
products, had no revenues and had incurred a net loss of approximately
$9,200,000 as of June 30, 2002 which has increased to date. We expect that
substantial losses will continue for the foreseeable future. In order to obtain
revenue from the sales of our product candidate, Psoraxine, we must successfully
develop, test, obtain regulatory approval for, manufacture, market and
eventually sell such product candidate. Our expenses have consisted principally
of costs incurred in research and development and from general and
administrative costs associated with our operations. We expect our expenses to
increase and to continue to incur operating losses for at least the next several
years as we continue our research and development efforts for Psoraxine and any
subsequent product candidates. Commercialization of any of our products will
take a significant amount of time and successful commercialization may not occur
at all. As a result, we may never become profitable.
We May Not Be Successful In The Development And Commercialization Of
Products.
We may not develop products that prove to be safe and effective, that
meet applicable regulatory standards or that we can manufacture at reasonable
costs or market successfully. Successful products will require significant
development and investment, including testing, to demonstrate their safety and
efficacy prior to their commercialization. We have not proven our ability to
develop and commercialize products. We must conduct a substantial amount of
additional research and development before any regulatory authority will approve
our initial product candidate, Psoraxine. Our research and development and
clinical trials may not confirm the safety and efficacy of our products, in
which case regulatory authorities may not approve them. In addition, even if
we successfully complete our research and development efforts, our initial
product candidate, Psoraxine, may not perform in the manner we anticipate, and
may not be accepted for use by the public.
The Development Of Our Initial Product Remains In An Early Stage Of
Development And Substantial Additional Funds And Effort Will Be Necessary For
Further Development And Commercialization.
8
Our initial product candidate, Psoraxine, remains in an early stage of
development and will require the commitment of substantial resources to move it
towards commercialization. Psoraxine will require extensive preclinical and
clinical testing before we can submit any applications for regulatory approval.
Before obtaining regulatory approvals for the commercial sale of Psoraxine, we
must demonstrate the safety and efficacy of our product candidate through
preclinical testing and clinical trials. Conducting clinical trials involves
a lengthy, expensive and uncertain process. Completion of clinical trials may
take several years or more. The length of time generally varies substantially
according to the type, complexity, novelty and intended use of the product. If
we or the U.S Food and Drug Administration believe that our clinical trials,
when commenced, expose participating patients to unacceptable health risks,
we may suspend such trials. We may encounter problems in our studies which will
cause us or the FDA to delay or suspend the studies. Some of the factors that
may delay our commencement and rate of completion of clinical trials include:
o ineffectiveness of the study compound, or perceptions by physicians
that the compound will not successfully treat a particular
indication;
o inability to manufacture sufficient quantities of compounds for use
in clinical trials;
o failure of the FDA to approve our clinical trial protocols;
o slower than expected rate of patient recruitment;
o unforeseen safety issues; or
o government or regulatory delays.
The failure of future clinical trials may harm our business, financial
condition and results of operations.
Our Potential Therapeutic Products Face A Lengthy And Uncertain
Regulatory Process. If We Do Not Obtain Regulatory Approval Of Our Potential
Products, We Will Not Be Able To Commercialize These Products.
The FDA must approve any therapeutic product before it can be marketed in
the United States. Before we obtain FDA approval of a new drug application or
biologics license application, the product must undergo extensive testing,
including animal and human clinical trials, which can take many years and
require 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.
9
Because our initial product candidate, Psoraxine, involves the application
of new technologies and may be used upon new therapeutic approaches, government
regulatory authorities may subject this product to more rigorous review and may
grant regulatory approvals more slowly for this product than for products using
more conventional technologies. We have not conducted any clinical trials for
Psoraxine in the United States, nor have we submitted any applications with the
FDA or any other regulatory authority to test any potential products in humans
or to market any product candidate. We may not be able to conduct clinical
testing or obtain the necessary approvals from the FDA or other regulatory
authorities to market our product. The regulatory agencies of foreign
governments must also approve any therapeutic product we may develop before the
product can be sold in those countries. To date, although we have obtained
regulatory approval for clinical testing of Psoraxine in Venezuela, we have not
obtained final regulatory approval for the manufacture or commercial
distribution of Psoraxine in Venezuela.
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 completed development of our initial product candidate,
Psoraxine, and we have not received approval for its use in clinical trials
in the United States. If Psoraxine emerges successfully from clinical trials,
we will either commercialize products resulting from our proprietary programs
directly or through licensing arrangements with other companies. We have no
experience in manufacturing and marketing, and we currently do not have the
resources or capability to manufacture, market and sell our products on a
commercial scale. In order to commercialize Psoraxine directly, we would need
to develop or obtain through outsourcing arrangements the capability to
manufacture, market and sell products. We have an agreement with SkyePharma
under which SkyePharma will provide development, manufacturing, pre-clinical and
clinical development services for Psoraxine until December 31, 2002; however,
we do not currently have a written agreement covering any period after
December 31, 2002 and we may not be able to enter into such an agreement on
commercially reasonable terms, or at all. In addition, we currently do not have
any agreements for the marketing or sale of any of our products and we may not
be able to enter into such agreements on commercially reasonable terms, or at
all.
Any Inability To Adequately Protect Our Proprietary Technologies Could
Harm Our Competitive Position.
10
We do not have any protection from issued patents covering any of our
technology. Our success will depend in part on our ability to obtain patents and
maintain adequate protection of other intellectual property for our technologies
and products in the United States and other countries. If we do not adequately
protect our intellectual property, competitors may be able to use our
technologies and erode or negate our competitive advantage. The laws of some
foreign countries do not protect our proprietary rights to the same extent as
the laws of the United States, and we may encounter significant problems in
protecting our proprietary rights in these foreign countries.
The patent positions of biotechnology companies, including our patent
positions, involve complex legal and factual questions and, therefore, validity
and enforceability cannot be predicted with certainty. Patents may be
challenged, deemed unenforceable, invalidated or circumvented. We will be able
to protect our proprietary rights from unauthorized use by third parties only to
the extent that we cover our proprietary technologies with valid and
enforceable patents or we effectively maintain such proprietary technologies
as trade secrets. We will apply for patents covering both our technologies and
product candidates as we deem appropriate. However, we may fail to apply for
patents on important technologies or products in a timely fashion, or at all,
and in any event, the applications we do file may be challenged and may not
result in issued patents. Any future patents we obtain may not be sufficiently
broad to prevent others from practicing our technologies or from developing
competing products. Furthermore, others may independently develop similar or
alternative technologies or design around our patented technologies. In
addition, others may challenge or invalidate our patents, or our patents may
fail to provide us with any competitive advantages. If we encounter challenges
to the use or validity of any of our patents, resulting in litigation or
administrative proceedings, we would incur substantial costs and the diversion
of management in defending the patent. In addition, we do not control the patent
prosecution of technology that we license from others. Accordingly, we cannot
exercise the same degree of control over this intellectual property as we would
over technology we own.
We rely upon trade secrets protection for our confidential and proprietary
information. We have taken measures to protect our proprietary information.
These measures may not provide adequate protection for our trade secrets or
other proprietary information. We seek to protect our proprietary information by
entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose our proprietary information, and we may not be able to meaningfully
protect our trade secrets. In addition, others may independently develop
substantially equivalent proprietary information or techniques or otherwise gain
access to our trade secrets.
Many Potential Competitors Who Have Greater Resources And Experience Than
We Do May Develop Products And Technologies That Make Ours Obsolete.
Companies in the biotechnology industry face rapid technological
change in a rapidly evolving field. Our future success will depend on our
ability to maintain a competitive position with respect to technological
advances. Rapid technological development by others may result in our products
and technologies becoming obsolete.
We face, and will continue to face, intense competition from organizations
such as large biotechnology and pharmaceutical companies, as well as academic
and research institutions and
11
government agencies. Our competitors may include Biogen, Amgen, Genentech,
SmithKline Beecham, Protein Design Labs, Ligand Pharmaceuticals,
Schering-Plough, Pfizer and Novartis. These organizations may develop
technologies that provide superior alternatives to our technologies. Further,
our competitors may be more effective at implementing their technologies to
develop commercial products.
Any products that we develop through our technologies will compete in
multiple, highly competitive markets. Many of the organizations competing with
us in the markets for such products have greater capital resources, research and
development and marketing staffs, facilities and capabilities, and greater
experience in obtaining regulatory approvals, product manufacturing and
marketing. Accordingly, our competitors may be able to develop technologies and
products more easily, which would render our technologies and products obsolete
and noncompetitive.
We Will Need To Obtain Additional Funds To Support Our Future Operation
Expenses.
Based on our current plans, we believe that we currently have sufficient
funds to meet our operating expenses and capital requirements through at least
the next 12 months. However, the actual amount of funds that we will need during
or after the next 12 months will be determined by many factors, including those
discussed in this section. We will need additional funds to commence Phase III
studies, which is the final phase of clinical trials in humans. An inability
to obtain needed funds or to obtain them on terms favorable to us may cause
us to delay, scale back or eliminate some or all of our research and
development programs or to license third parties to develop or market products
or technologies that we would otherwise seek to develop or market ourselves.
Raising additional funds by selling additional shares of our capital stock
will dilute the ownership interest of our stockholders.
If We Lose Our Key Personnel Or Fail To Attract And Retain Additional
Personnel, We May Be Unable To Discover And Develop Our Products.
We depend on the services of Dr. Jose Antonio O'Daly, the loss of whose
services would adversely impact the achievement of our objectives. Our key
personnel have no prior experience managing a start-up biotechnology company. We
do not currently have sufficient executive management personnel to execute our
business plan fully. In addition, recruiting and retaining qualified scientific
personnel to perform future research and development work will be critical to
our success. Although we believe we can successfully attract and retain
qualified personnel, we face intense competition for experienced scientists.
Failure to attract and retain skilled personnel would prevent us from pursuing
collaborations and developing our products and core technologies to the extent
otherwise possible.
Our planned activities will require additional expertise. These activities
will require the addition of new personnel, including management, and the
development of additional expertise by existing management personnel. The
inability to acquire or develop this expertise could impair the growth, if any,
of our business.
If We Face Claims In Clinical Trials Of A Drug Candidate, These Claims
Will Divert Our Management's Time And We Will Incur Litigation Costs.
12
We face an inherent business risk of clinical trial liability claims in
the event that the use or misuse of our initial product candidate, Psoraxine,
results in personal injury or death. We may experience clinical trial liability
claims if our drug candidates are misused or cause harm before regulatory
authorities approve them for marketing. We currently do not maintain clinical
liability insurance coverage. Even if we obtain such an insurance policy, it may
not sufficiently cover any claims made against us. Clinical trial liability
insurance may be expensive, difficult to obtain and may not be available in
the future on acceptable terms, if at all. Any claims against us, regardless of
their merit, could strain our financial resources in addition to consuming the
time and attention of our management. Law suits for any injuries caused by our
products may result in liabilities that exceed our total assets.
Some Of Our Existing Stockholders Can Exert Control Over Us And May Not
Make Decisions That Further The Best Interests Of All Stockholders.
Our officers, directors and principal stockholders (greater that 5%
stockholders) together control approximately 84.58% 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. In addition, this
concentration of ownership may delay or prevent a change in control of us and
might affect the market price of our common stock, even when a change in
control may be in the best interest of all stockholders. 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.
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 July 22, 2002, the range of our stock price has been between $0.43 and
$7.15. Factors including announcements of technological innovations by us or
other companies, regulatory matters, new or existing products or procedures,
concerns about our financial position, operating results, government regulation,
developments or disputes relating to agreements, patents or proprietary rights
may have a significant impact on the market price of our stock. In addition,
potential dilutive effects of future sales of shares of common stock by
stockholders and by us, including the selling stockholders pursuant to this
prospectus and subsequent sale of common stock by SkyePharma and 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
13
our equity securities. We have an aggregate of 37,538,189 shares of our
common stock outstanding. If all options and warrants currently outstanding to
purchase shares of our common stock are exercised and all of the 2,000,000
shares of preferred stock are converted into common stock, there will be
approximately 52,618,416 shares of common stock outstanding. Of the
outstanding shares, up to 9,931,415 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.
Our Common Stock Qualifies As A "Penny Stock" Under SEC Rules Which May
Make It More Difficult For Our Stockholders To Resell Their Shares Of Our Common
Stock.
Our common stock trades on the Over-The-Counter Bulletin Board. As a
result, the holders of our common stock may find it more difficult to obtain
accurate quotations concerning the market value of the stock. Stockholders also
may experience greater difficulties in attempting to sell the stock than if it
were listed on a stock exchange or quoted on the Nasdaq National Market or the
Nasdaq Small-Cap Market. Because our common stock does not trade on a stock
exchange or on the Nasdaq National Market or the Nasdaq Small-Cap Market, and
the market price of the common stock is less than $5.00 per share, the common
stock qualifies as a "penny stock." SEC Rule 15g-9 under the Securities
Exchange Act of 1934 imposes additional sales practice requirements on
broker-dealers that recommend the purchase or sale of penny stocks to persons
other than those who qualify as an "established customer" or an "accredited
investor." This includes the requirement that a broker-dealer must make a
determination on the appropriateness of investments in penny stocks for the
customer and must make special disclosures to the customer concerning the risks
of penny stocks. Application of the penny stock rules to our common stock
could adversely affect the market liquidity of the shares, which in turn may
affect the ability of holders of our common stock to resell the stock.
SPECIAL 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
14
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. The principal reason for this offering is to allow for the resale of
the shares currently held by the selling stockholders that they acquired
from us in a private placement of shares of our common stock.
15
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the Over- The-Counter Bulletin Board under
the symbol ASTR. The following table sets forth, for the periods indicated, the
range of high and low bid quotations for the 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. As of July 22, 2002, there were
37,538,189 shares of common stock, par value $.0001 per share, outstanding
which were held by 187 holders of record. We began trading our common stock in
March 2001.
Market Price
High Low
2001
First Quarter * $3.93 $0.43
Second Quarter $6.85 $2.50
Third Quarter $7.15 $1.70
Fourth Quarter $3.80 $2.50
2002
First Quarter $2.75 $1.50
Second Quarter through July 22, 2002 $3.30 $0.74
The closing price for our common stock on July 22, 2002, was $0.74.
----------
* After stock split
Dividends
On March 14, 2001, we declared a stock dividend to stockholders of record
as of 8:00 a.m., eastern standard time, on March 14, 2001, on the basis of ten
shares of common stock for each one share of common stock then issued and
outstanding. The payment date and time for the stock dividend were March 15,
2001, at 8:00 a.m., eastern standard time. As a result of the stock dividend,
each of our stockholders received nine additional shares of common stock for
each one share of common stock owned of record as of the record date and time.
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.
16
All accrued and unpaid dividends on the outstanding shares of our
preferred stock must be paid before we pay any dividends on our common
stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The Following Plan Of Operations 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 Specifically Consider The Various
Factors Identified In This Prospectus, Including The Matters Set Forth Under The
Caption "Risk Factors" Contained Elsewhere In This Prospectus, 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.
Plan of Operations
Overview
We were formerly named Astralis Pharmaceuticals Ltd. and Hercules
Development Group, Inc., and were incorporated under the laws of the state of
Colorado on June 30, 1999. Subsequently we were reincorporated in the state of
Delaware on December 10, 2001 and changed our name to Astralis Ltd. In November
2001, we were a public shell company, defined as an inactive, publicly quoted
company with nominal assets and liabilities.
Our operations and financial statements prior to November 2001 are those
of Astralis LLC, a New Jersey limited liability company formed on March 12,
2001. Astralis LLC was merged into us on November 13, 2001 pursuant to the terms
of the Contribution Agreement.
The effect of our combination with Astralis LLC was a reverse merger. We
were the legal acquirer in the merger. Astralis LLC was the accounting acquirer
since its members acquired a majority ownership interest in us. Consequently,
the historical financial information included in our financial statements prior
to November 2001 are those of the accounting acquirer, Astralis LLC. The
stockholders' equity of the merged company was
17
recapitalized to reflect the capital structure of the legal entity (Astralis
Ltd.) and the retained earning of Astralis LLC. Pro forma financial information
is not presented since the combination is a recapitalization and not a business
combination.
We are a development stage biotechnology company engaged primarily in the
research and development of treatments for immune system disorders and skin
diseases. Our initial product candidate, Psoraxine, is a protein extract used
for the treatment of the skin disease psoriasis.
Currently, we are engaged in the following activities to further our
development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine;
o Doctor and site enrollment for clinical trials of Psoraxine in the
United States;
o Preparation of an Investigation of New Drug application to obtain
approval from the United States Food and Drug Administration for the
commencement of clinical trials of Psoraxine in the United States;
and
o Construction of leasehold improvements to our laboratory facility
in Fairfield, New Jersey.
For the three months ended March 31, 2002:
On January 31, 2002, we sold to SkyePharma pursuant to a Purchase
Agreement dated December 10, 2001, 250,000 shares of our Series A Convertible
Preferred Stock, par value $.001 per share at a purchase price of $10.00 per
share, or an aggregate purchase price of $2,500,000. We received net proceeds of
approximately $1,835,000 from this placement after we netted out from the
proceeds a $665,000 payment due to SkyePharma for services they provided under
our Service Agreement with them which was treated as an expense at the time of
payment.
For the three months ended March 31, 2002, we had no revenue and incurred
operating expenses of $2,826,354 which consisted primarily of:
o Research and development costs of $2,295,534, including $1,995,000
that was paid to SkyePharma for services provided under our Service
Agreement with them and amortization of approximately $60,000 of our
technology option license which is being amortized over a seven year
period.
18
o General and administrative costs of approximately $529,585,
including professional fees related to our merger with Astralis LLC
and the related investor relations and marketing expenses and our
general corporate expenditures.
For the period March 12, 2001 (date of inception) through December 31, 2001:
For the period from March 12, 2001, which was the date of our inception,
through December 31, 2001, we had no revenue and incurred a net loss of
$6,195,364.
During 2001 we raised funds from the following private placement offerings
and agreements:
o Under the Contribution Agreement dated September 10, 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 options to purchase 6,300,000 additional
membership interests in Astralis LLC for an exercise price of
$1.60 per membership interest. On November 13, 2001 at the closing
of the transaction under the Contribution Agreement, 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 our 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. These subscription notes
receivable were due in two installments with $850,000 having been
due on February 13, 2002 and the remaining $500,000 due on May 13,
2002.
o During November of 2001 we engaged in a private placement 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. We received proceeds, net of offering costs and payments of
pre-merger shell costs, in the amount of $2,752,495.
o In December of 2001, we sold to SkyePharma under the Purchase
Agreement 1,000,000 shares of our Series A Convertible Preferred
Stock, par value $.001 per share at a purchase price of $10.00 per
share, or an aggregate purchase price of $10,000,000. We received
net proceeds of approximately $1,950,000 from this placement after
the following expenditures were netted out from the proceeds:
o $5 million payment due to SkyePharma in connection with our
purchase of the technology option license from SkyePharma,
19
o $3 million payment due to SkyePharma for services they
provided under our Service Agreement with them which was
expensed at the time of payment, and
o offering costs of approximately $50,000.
During 2001 we incurred operating expenses of $4,084,619 which consisted
primarily of:
o Research and development costs of $3,231,775, including $3 million
that was paid to SkyePharma for services provided under our
Service Agreement with them and amortization of approximately
$60,000 of our technology option license which is being amortized
over a seven year period.
o General and administrative costs of approximately $850,000,
including professional fees related to our merger with Astralis LLC
and the related investor relations and marketing expenses and our
general corporate expenditures.
We also had a non-cash preferred stock dividend in 2001 in the amount of
$2.12 million. This resulted from our December 10, 2001 sale of preferred stock
to SkyePharma which had a conversion rate to our common stock which was
lower than the market price of our common stock on that date. Therefore, we
were required to record a preferred dividend calculated by multiplying the
number of preferred shares sold on that date by the difference between the
conversion price and the market price.
The Next Twelve Months
At June 30, 2002 we had cash balances of $762,748 and marketable
securities of $3,712,179.
Included in our cash and marketable securities balances are the proceeds
from our April 30, 2002 sale of 250,000 shares of our preferred stock to
SkyePharma at a purchase price of $10.00 per share, or an aggregate purchase
price of $2,500,000. We received net proceeds of approximately $1,835,000 from
this placement after we netted out from the proceeds a $665,000 payment due to
SkyePharma for services they provided under our Service Agreement with them
which was expensed at the time of payment
SkyePharma has agreed to purchase for $5,000,000 an additional 500,000
shares of preferred stock, in two equal installments on July 31, 2002 and
January 31, 2003.
We anticipate collecting our subscription notes receivable. These
subscription notes receivable were due in two installments, with $850,000
having been due on February 13, 2002 and the remaining $500,000 due on May 13,
2002.
20
We have entered into a payment plan agreement with the note holders of the
subscription notes receivable. The note holders have agreed to pay a $200,000
initial payment and will make payments of $150,000 per month from July 2002
until January 2003 and a payment of $100,000 in February 2003. Upon any default
by a note holder, such note holder will forfeit the number of shares equal to
the remaining amount of his note divided by $0.50.
Based on our current operating plan, we anticipate conducting the
following activities and using our cash and expected net proceeds of the
Purchase Agreement over the course of the next twelve months as follows:
o Our primary focus is to further our development efforts of our
initial product candidate, Psoraxine. We are preparing an
Investigation of New Drug application to obtain approval from the
United States Food and Drug Administration for the commencement of
clinical trials of Psoraxine in the United States. Upon receiving
approval, we will commence doctor and site enrollment for these
clinical trials and then conduct clinical trials in the process of
obtaining FDA approval of Psoraxine . We will transfer our
research and development to the United States and maintain ongoing
research and development or Psoraxine. We will expend approximately
$8,000,000 in connection with these activities. Included in this
amount are payments required under our Service Agreement with
SkyePharma which will amount to $4,700,000 for the last two
quarters of 2002 and are required to be paid in equal monthly
amounts;
o We intend to implement our business plan and facilitate the
operations of our company. We will spend approximately $1.5 million
to pay management salaries and salaries of two new employees
expected to be hired during this time period;
o We will construct leasehold improvements to our laboratory facility
in Fairfield, New Jersey and purchase additional capital equipment.
We will expend approximately $400,000 for these capital
expenditures;
o We also expect to expend approximately $1.1 million for our public
relations, general administrative and working capital
requirements.
Based on the current operating plan, we anticipate that our existing
capital resources, together with the net proceeds we receive from the
Purchase Agreement and the proceeds of the subscription notes receivable, will
be adequate to satisfy our capital requirements for approximately the next 12
months. However, our plans may change as we reach milestones and as our
circumstances may change.
21
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.
Description of Business
General
We are a development-stage biotechnology company, incorporated under the
laws of the State of Delaware and based in New Jersey, which primarily
engages in research and development of treatments for immune system disorders
and skin diseases. Our main office is located at 75 Passaic Avenue, Fairfield,
New Jersey 07004.
We were originally incorporated under the laws of the State of Colorado on
June 30, 1999 under the name "Hercules Development Group, Inc." and engaged in
the business of managing real estate. Our real estate operations ceased in the
second half of 2001. On November 13, 2001, we entered into a Contribution
Agreement, dated as of September 10, 2001 between us on the one side and
Astralis LLC, a New Jersey limited liability company formed on March 12, 2001
and Dr. Jose Antonio O'Daly, Gaston Liebhaber, Mike Ajnsztajn, Richard Genovese,
David Stevenson, Grizzly Consulting Ltd., Wolver Limited and Logarithmic
22
Inc., being all of the members of Astralis LLC, on the other side. At such
time, we began our current business which was the prior business of Astralis
LLC.
Pursuant to the business combination set forth in the Contribution
Agreement, 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 warrants to purchase 6,300,000 shares of our common
stock at an exercise price of $1.60 per share. Pursuant to the Contribution
Agreement, on November 13, 2001, all of our officers and directors resigned
from their respective positions with us. The officers and managers of Astralis
LLC replaced them as our officers and directors. See "Management; Executive
Officers and Directors".
We accounted for this combination as a recapitalization. We were the legal
acquirer in the merger. Astralis LLC was the accounting acquirer since its
members acquired a majority interest in our stock. Consequently, all historical
financial information prior to November of 2001 represent the operations of
Astralis LLC.
In addition, on November 14, 2001, we filed an amendment to our Articles
of Incorporation which changed our name from "Hercules Development Group, Inc."
to "Astralis Pharmaceuticals Ltd." On November 19, 2001, we reincorporated in
the State of Delaware under our current name.
23
Business of Astralis Ltd.
We are primarily engaged in research and development of treatments for
immune system disorders and skin diseases. Our current activities focus on the
development of a product candidate named Psoraxine for the treatment of the
skin disease psoriasis. Currently, we are engaged in the following activities
to further our development efforts of our initial product candidate:
o Ongoing research and development of Psoraxine;
o Doctor and site enrollment for clinical trials in the United States;
o Preparation of an Investigation of New Drug application to obtain
approval from the United States Food and Drug Administration for the
commencement of clinical trials of Psoraxine in the United States;
and
o Construction of leasehold improvements to our laboratory facility in
Fairfield, New Jersey.
Psoriasis is a genetically based inflammatory and scaly skin disease of
currently unknown origins that generally lasts a lifetime and for which there is
presently no known cure. While performing a field trial in Caracas, Venezuela in
1992 for a vaccine for leishmaniasis, a disease transmitted by parasites, Dr.
O'Daly discovered that a patient, after receiving a third dose of the
leishmaniasis vaccine, experienced complete remission of the plaque psoriasis
lesion that had been present on the patient's leg for the past 12 years. After
researching and improving the leishmaniasis vaccine, Dr. O'Daly developed
Psoraxine specifically for use in clinical trials for the remission of
psoriasis.
Psoraxine is a synthesized immuno-therapeutic agent, presented in liquid
form and is packed in 0.5 mg ampules for intra-muscular injection. After
researching and improving Psoraxine, preliminary clinical trials were
undertaken in Caracas, Venezuela during the eight year period from 1992 to 2000.
During the preliminary clinical trials, the prevalence of psoriasis was
monitored using the Psoriasis Area and Severity Index. The results of the
preliminary clinical trials yielded positive evidence of remission of psoriasis
lesions. Of the 2,770 patients involved in the preliminary clinical trials,
approximately 74% had between 70% and 100% remission of psoriasis lesions as
compared with initial PASI values. We have not sought, nor have we obtained,
regulatory approval for the commercialization of Psoraxine in Venezuela
because, among other things, we do not have the financial resources to acquire
manufacturing facilities in that country and such facilities are required by
regulatory authorities in Venezuela before granting commercial approval for a
proposed drug. We do, however, have the approval of regulatory authorities in
Venezuela to continue clinical trials of Psoraxine in the country.
24
We are now seeking approval for Psoraxine from the United States Food and Drug
Administration, which is a necessary and critical step toward the
commercialization of Psoraxine. We will use data from our clinical trials in
Venezuela to support our attempt to obtain FDA approval.
Representatives of Astralis LLC sent a briefing document to the FDA and
held a pre-Investigation of New Drug conference call with representatives of
the FDA on May 16, 2001 to review the clinical results of Dr. O'Daly's work with
Psoraxine in Venezuela. Based upon this conference call, we are presently
preparing an Investigation of New Drug application to be filed with the FDA in
the second half of 2002 to conduct Phase I.B. studies of Psoraxine. The purpose
of Phase I.B studies is to test the effectiveness of a drug and determine safe
dosage ranges in patients suffering with the disease or condition that the
product is intended to treat. Phase I.B studies would involve the administration
of dosages of Psoraxine in a controlled setting to groups of volunteers. We
anticipate that it will take at least one year to complete the Phase I.B studies
at a cost of not less than $500,000. Astralis Ltd. and Astralis LLC have spent
approximately $3,231,775 on research and development activities over the past
fiscal year. See "Government Regulation".
Patient Populations
According to the National Psoriasis Foundation, psoriasis affects about
2.6% of the U.S. population, or more than 7 million people in the United States.
Psoriasis also affects 2% to 3% of the world's population. Approximately 150,000
to 260,000 new cases of psoriasis are diagnosed each year. No special blood test
or other diagnostic tool exists for psoriasis. The diagnosis is usually
determined through examination of the skin by a physician or other health care
provider. Less commonly, a skin biopsy is examined under a microscope for
biological evidence of psoriasis. The presence of small pits in the fingernails
is also an indicator of psoriasis.
Approximately 400 people die from complications caused by psoriasis each
year in the United States. Primarily, such complications occur in relation to a
severe, extensive form of psoriasis such as generalized Pustular Psoriasis or
Erythrodermia 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 compromised to such a great extent,
secondary infections are possible. Fluid loss is a complicating factor in these
serious forms of psoriasis, and a great strain is also placed on the circulatory
system.
According to the National Psoriasis Foundation, 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 it
frequently involves the fingers and toes. Other parts of the body can be
affected as well, including the wrists, neck, lower back, knees and ankles. In
severe cases, psoriatic arthritis can be destructive to joints and disabling.
For the most part, people with psoriasis function normally, although some people
experience low self-esteem caused by the unsightly effect of the disease on the
skin.
25
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. It is estimated that 56 million hours of work are lost each
year due to psoriasis, and that between $1.6 billion and $3.2 billion is spent
annually on treating psoriasis.
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. Each of these treatments has variable
efficacy, with side effects and cosmetic problems in addition to their failure
to prevent frequent relapses.
Psoriasis Treatments in Development
We currently face competition from a number of pharmaceutical companies
who have psoriasis treatments under development that have substantially greater
financial and other resources than we have. The National Psoriasis Foundation
has identified not less than 41 treatments under development which are in
various stages of the FDA approval process, including at least five of which are
in the final phase of clinical trials in humans required by the FDA approval
process.
The available developmental psoriasis treatments include topical
ointments, systemic treatments, oral treatments and UV light therapy treatments.
We understand that several of the largest pharmaceutical companies in the world
have more than one psoriasis treatment under development.
Competition
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 diseases and conditions as
Psoraxine. Our competitors may include Biogen, Amgen, Genentech, SmithKline
Beecham, Protein Design Labs, Ligand Pharmaceuticals, Schering-Plough, Pfizer
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, some of
these companies have considerable experience in preclinical testing, clinical
trials and other regulatory approval procedures. 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 market
commercial products, either on their own or through collaborative efforts.
Our major competitors include fully integrated pharmaceutical companies
that have extensive drug discovery efforts. We face significant competition from
organizations that are pursuing the same or similar technologies as the
technologies used by us in our drug discovery 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
26
competitive advantage. We are aware that many other companies or institutions
are pursuing development of drugs and technologies directly targeted at
applications for the treatment and eventual cure of psoriasis.
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.
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.
The process required by the FDA before our product candidate, Psoraxine,
may be marketed in the United States generally involves the following:
o preclinical laboratory and animal tests;
o submission of an Investigation of 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 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, we must submit an Investigation of New Drug
application to the FDA. The Investigation of 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 Investigation of New Drug sponsor
and the FDA must resolve any outstanding concerns before the clinical trial can
begin. Our proposed submission of an Investigation of New Drug application may
not result in FDA authorization to commence a clinical trial. Further, an
independent institutional review
27
board at the medical center proposing to conduct the clinical trial must review
and approve the plan for any clinical trial before it commences.
We may not successfully complete any of the three phases of testing of
Psoraxine 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.
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
28
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 in
Venezuela, but we have not obtained final regulatory approval for the
manufacture and commercial distribution of Psoraxine in Venezuela.
Intellectual Property
On March 16, 2001, Dr. O'Daly filed a patent application entitled
"Compositions and Methods for the Treatment and Clinical Remission of Psoriasis"
with the United States Patent and Trademark Office. Preliminary searches have
been conducted to ensure that no product similar to Psoraxine has already
secured full patent protection. The patent application process may take up to
two years to complete. Pursuant to a License Agreement dated as of April 26,
2001 between Dr. O'Daly and Astralis LLC, Dr. O'Daly granted Astralis LLC the
exclusive right and license to use and exploit his patent if and when such
patent is issued. Pursuant to an Assignment of License Agreement, dated November
13, 2001, by and between Astralis LLC and us, Astralis LLC assigned to us all of
its rights under the License Agreement.
Our intellectual property consists of our license to Dr. O'Daly's
application of a patent for Psoraxine, our rights under the Assignment of
License Agreement and trade secrets and know-how. Our ability to compete
effectively depends in large part on our ability to obtain the patent for
Psoraxine, maintain trade secrets and operate without infringing the rights of
others and to prevent others from infringing on our proprietary rights. We will
be able to protect our technologies from unauthorized use by third parties only
to the extent that they are covered by valid and enforceable patents or
copyrights or are effectively maintained as trade secrets. Accordingly, patents
or other proprietary rights are an essential element of our business. There can
be no assurance that proprietary information will not be disclosed, that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets or that we can
meaningfully protect our trade secrets.
Agreements with SkyePharma
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 1,500,000 shares of our
Series A Convertible Preferred Stock, par value $.001 per share, at a purchase
price of $10.00 per share, or an aggregate purchase price of $15 million.
Pursuant to the Purchase Agreement, SkyePharma will make a total equity
investment of up to $20 million. The remaining $5 million investment will
involve the sale of up to an additional 500,000 shares of preferred stock to
SkyePharma in two equal installments on July 31, 2002 and January 31, 2003. Each
share of preferred stock issued pursuant to the Purchase Agreement is
29
convertible into four shares of common stock at the option of SkyePharma
initially at a conversion rate of $2.50 per share of common stock. The
conversion ratio is subject to multiple adjustments for three years depending on
our stock price maintaining certain levels. The ratio is also subject to
anti-dilution protection. However, the conversion ratio will not adjust to a
level greater than approximately 50 shares of common stock for each share of
preferred stock. As a result of the Purchase Agreement, SkyePharma is the
beneficial owner of 18% of our outstanding common stock. In addition to other
rights under the Purchase Agreement, SkyePharma, as the holder of shares of
preferred stock, holds the exclusive right to elect one member of our Board of
Directors. Pursuant to the Purchase Agreement, we and certain of our
stockholders holding an aggregate of 66.58% of our outstanding common stock
executed a Stockholders' Agreement, dated as of December 10, 2001, with
SkyePharma, whereby each stockholder agreed to vote its shares of common stock
to elect the independent directors nominated by our Board of Directors to our
Board of Directors and, once SkyePharma no longer owns its preferred stock, to
elect a nominee nominated by SkyePharma to our Board of Directors. We also
granted SkyePharma certain registration rights effective as of December 10, 2002
pursuant to a Registration Rights Agreement, dated as of December 10, 2001.
We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine, with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5 million fee for the option to
acquire a license for DepoFoam and other relevant drug delivery technologies
owned by SkyePharma. SkyePharma owns over twenty patents for the drug delivery
technologies in several countries, including the United States, Japan,
Australia, New Zealand and Canada. The majority of these patents will continue
in force until 2014. Under the terms of the Technology Access Option Agreement,
if we exercise our option, we must pay a running royalty of 5% of new sales of
all products manufactured and sold that use or exploit the drug delivery
technologies. 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.
In addition, pursuant to a Service Agreement, dated December 10, 2001,
SkyePharma will 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 payable through 2002 for
second generation Psoraxine. The Service Agreement terminates on December 31,
2002. The Service Agreement requires that we and SkyePharma negotiate in good
faith during the fourth quarter of 2002 for the continuation of the agreement.
Other Research and Development Efforts
We are developing a second product for the treatment of leishmaniasis.
Since leishmaniasis is not prevalent in the United States, we intend to market
this product primarily in other countries. 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. However, our
Technology Access Option Agreement
30
permits us to use the technology we may license from SkyePharma for our
leishmaniasis treatment. We are also engaged in preliminary research of
treatments for rheumatoid arthritis, severe dermatitis, papilomas,
hiperkeratosis, melanomas, prostate enlargement and Chagas disease.
Employees
As of July 22, 2002, we employed 5 full-time employees and no part-time
employees. None of these employees are covered by a collective bargaining
agreement and we believe that our employee relations are good.
Legal Proceedings
We are not currently party to any material legal proceeding. In addition,
none of our directors or executive officers are involved in or subject to any
pending legal proceedings, whether material or otherwise. None of our directors
or executive officers has an interest, material or otherwise, against us.
Property
Our executive offices and research laboratory are located at 75 Passaic
Avenue, Fairfield, New Jersey 07004. The yearly rent for such office and
laboratory space is $77,500. We previously conducted research at Centro Para La
Investigacion y Tratamiento De La Psoriasis, Avenue Las Gencias Calle Codazzi
Urb. Los Chaguaramos, Caracas, Venezuela.
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, MD, PhD 60 Chairman of the Board of
Directors; President of
Research and Development
31
Mike Ajnsztajn 37 Chief Executive Officer; Director
Gaston Liebhaber 67 Director of International
Affairs; Director
Gina Tedesco 38 Chief Financial Officer; Director
Michael Ashton 55 Director
Steven Fulda 69 Director
Fabien Pictet 43 Director
James Leyden, MD 61 Chairman, Medical Advisory Board
Bruce Epstein 38 Marketing Affairs Advisor
With the exception of Mr. Ajnsztajn and Ms. Tedesco who are husband and
wife, and Mr. Liebhaber who is Mr. Ajnsztajn's uncle, 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.
On November 13, 2001, pursuant to the Contribution Agreement, Shai Stern,
who served as our Chief Executive Officer, President and sole director since
February 28, 2001 and Steven Harrington, who served as our Vice President since
April 9, 2001, resigned from all of their respective positions with us. At the
time of their resignations, Messrs. Stern and Harrington constituted all of our
executive officers and directors.
Jose Antonio O'Daly, MD, PhD. Dr. O'Daly has served as our Chairman of the Board
of Directors and President of Research and Development since November 13, 2001.
Dr. O'Daly is the sole founder of Center for Research and Treatment for
Psoriasis in Caracas, Venezuela and has served as its president since 1998.
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. Dr. O'Daly has
dedicated the last 15 years of his life working on a cure for Psoriasis.
32
Mike Ajnsztajn. Mr. Ajnsztajn has served as our Chief Executive Officer and as a
director since November 13, 2001. From 1986 to 1992, Mr. Ajnsztajn worked for
Rhone Poulenc as both an Export Manager for the Far East based in France, and as
the Marketing Director in China. From 1992 to 2001, Mr. Ajnstajn was the
president of Blowtex, a Brazilian condom manufacturer. Mr. Ajnsztajn is also
co-founder of Opus International, a New Jersey based import/export company that
distributes hospital examination gloves and raw materials for the latex
industry. Opus International also provides business-consulting services.
Gaston Liebhaber. Mr. Liebhaber has served as our Director of International
Affairs since November 13, 2001 and as a director since January 31, 2002. Mr.
Liebhaber has 35 years of experience in the pharmaceutical industry. Mr.
Liebhaber founded Fundafarmacia in Caracas, Venezuela, a non-profit organization
that distributes medicine, at discounted prices, to the poor and homeless.
Fundafarmacia is the largest pharmacy chain in Venezuela. Since 1982, Mr.
Liebhaber has served as the Managing Director of Latin America of Sankyo
Pharmaceutical, the largest Japanese pharmaceutical company, based in Venezuela.
Since 1987, Mr. Liebhaber also has served on the Board of Directors of the
Venezuelan Association of Pharmaceutical Companies. Mr. Liebhaber has received
several honorary medals and prizes from the Venezuelan government.
Gina Tedesco. Ms. Tedesco has served as our Chief Financial Officer since
November 13, 2001 and as a director since January 31, 2002. Ms. Tedesco is a
co-founder of Opus International and has served as its President since 1997.
Ms. Tedesco has extensive experience in the pharmaceutical industry and in all
aspects of finance and business planning. From 1989 to 1996, Ms. Tedesco held
various positions with Rhone Poulenc ranging from controller for the European
pharmaceutical subsidiaries to Director of Finance and Investor Relations for a
Brazilian subsidiary. Ms. Tedesco earned an MBA from George Washington
University in International Business.
Michael Ashton. Mr. Ashton has served as one of our directors since January 31,
2002. Since 1998, Mr. Ashton has served as the Chief Executive Officer of
SkyePharma PLC, a London based drug delivery technology provider. From 1996 to
1998, Mr. Ashton served as the Chief Executive Officer of SkyePharma AG in
Switzerland. Mr. Ashton has thirty years of experience in the pharmaceutical
industry. Prior to joining SkyePharma PLC, from 1989 to 1996, Mr. Ashton was
Chairman and Chief Executive Officer of Faulding, Australia's largest
pharmaceutical company located in the United States. Mr. Ashton has a Bachelor
of Pharmacy Degree from Sydney University and a MBA Degree from Rutgers
University.
Steven Fulda. Mr. Fulda has served as one of our directors and a member of our
audit committee since February 6, 2002. Since 1989, Mr. Fulda has served as
Managing Director of Fulda Business Planners. Mr. Fulda has forty years of
management and consulting experience spanning all facets of business strategy,
planning, development and financing. Mr. Fulda has identified and managed growth
opportunities for over 250 emerging businesses. 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
33
Degree in Systems Engineering from Bell Laboratories' New York University
Graduate Program.
Fabien Pictet. Mr. Pictet has served as one of our directors and a member of our
audit committee since February 6, 2002. Since 1998, Mr. Pictet has served as
Chairman of Fabien Pictet and Partners, a London based firm which invests in the
emerging markets arena. Mr. Pictet has twenty years of experience in investing
in emerging markets. During his eleven 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 has a
Master of International Management Degree from American Graduate School of
International Management and a Bachelor's Degree in Economics from the
University of San Francisco.
James Leyden, MD. Dr. Leyden has served as the Chairman of our Medical Advisory
Board since November 31, 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 been
instrumental 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 has a Bachelor's Degree from Saint
Joseph's College and a MD for the University of Pennsylvania School of Medicine.
Bruce Epstein. Mr. Epstein has served as our Marketing Affairs Advisor since
November 13, 2001. Since 2000, Mr. Epstein has served as the General Manager
of Noesis Healthcare Interactions, a full-service healthcare communications
company managing a creative and support staff focused on the marketing and
advertising of multiple pharmaceutical brands with leading pharmaceutical
companies. Mr. Epstein is a specialist in strategic planning and tactical
implementation of pharmaceutical products. From 1996 to 2000, Mr. Epstein
worked at Klemtner Advertising, the healthcare division of Saatchi and Saatchi.
From 1986 to 1996, Mr. Epstein worked for Roche Laboratories, a Swiss
pharmaceutical company with a U.S. division based in Nutley, New Jersey. Mr.
Epstein obtained a MBA from New York University, Stern School of Business, and a
Registered Pharmacist Degree from Rutgers, College of Pharmacy.
34
Board Composition and Committees
We currently have seven directors, each serving a term until the next
annual meeting of stockholders. At each annual meeting of stockholders, six
directors will be elected by the holders of our common stock and one director
will be nominated and elected by the holders of our Series A Convertible
Preferred Stock. SkyePharma PLC is the only holder of our preferred stock. In
addition, pursuant to a Stockholders' Agreement between us, certain of our
stockholders holding an aggregate of 66.58% of the issued and outstanding
common stock and SkyePharma, each stockholder agreed to vote its shares of
common stock and to take all other actions necessary to elect the independent
directors nominated by our Board of Directors and to elect the nominee nominated
by the Board of Directors of SkyePharma when all of the preferred stock held
by SkyePharma has been converted into shares of common stock.
Messrs. Fulda and Pictet serve as the only members of the audit committee
of the Board of Directors. The audit committee makes recommendations to the
Board of Directors regarding the selection of independent auditors, reviews the
results and scope of audits and other accounting-related services and reviews
and evaluates our internal control functions.
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.
Under Delaware law, we may indemnify our officers and directors for
various expenses and damages resulting from their acting in those capacities.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have 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.
35
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 to each of our four most highly compensated
executive officers, if any such other executive officer received compensation
greater than $100,000 during any of the last three fiscal years.
Summary Compensation Table
Annual Compensation
--------------------------------------------------------------------------------
Name and Principal Position Year Salary ($)
--------------------------------------------------------------------------------
Mike Ajnsztajn 2001 $81,164
CEO
--------------------------------------------------------------------------------
Shai Stern, Sole Director,
CEO and President 2001 --
--------------------------------------------------------------------------------
Mr. Shai Stern served as our President, Chief Executive Officer and
director from February 28, 2001 through November 13, 2001. Mr. Stern received no
compensation in any form for the services provided to us. Mr. Ajnsztajn has
served as our Chief Executive Officer and as a director since November 13,
2001. Mr. Ajnsztajn shall receive a salary of $150,000 for services performed
during the year 2002.
We do not provide our officers or employees with pension, stock
appreciation rights, long-term incentive or other plans and have no present
intention of implementing any of these plans, with the exception of our 2001
Stock Option Plan. On December 31, 2001, we granted stock options to two
consultants to purchase an aggregate of 300,000 shares of our 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 the options are 4
years, 3 years, 2 years and 1 year for options vesting in 2001, 2002, 2003 and
2004, respectively. The strike price of all these options is $2.75. In the
future, we may offer additional stock options to employees, non-employee members
of the Board of Directors and/or consultants. It is possible that we may, in the
future, establish various executive incentive programs and other benefits,
including reimbursement for expenses incurred in connection with our operations,
company automobiles and life and health insurance, but none have yet been
granted. The provisions of these plans and benefits will be at the discretion of
the Board of Directors.
36
Compensation of Directors
The executive directors will not receive compensation pursuant to any
standard arrangement for their services as directors. We will reimburse all
outside directors for travel and lodging expenses related to scheduled Board
meetings. We will also pay $3,500 during 2002 and $1,000 per meeting, to the
directors serving on the audit committee.
Employment Agreements
Pursuant to an Employment Agreement dated December 10, 2001, Dr. O'Daly
receives a salary of $150,000 per year for his services as Chairman of the Board
and President of Research and Development. The Employment Agreement has a term
of three years and requires Dr. O'Daly to refrain from competing with us for a
period of one year following termination of his employment. 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 was unanimously adopted by our Board of
Directors on November 1, 2001 and approved by our stockholders at a special
meeting held on November 1, 2001. The 2001 Plan contains 5,000,000 shares of
common stock, par value $.0001 per share 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 shall be
designated at the time of grant as either an incentive stock option or as a
non-qualified stock option. As of June 30, 2002, options to purchase 300,000
shares of common stock have been granted under the 2001 Plan.
The 2001 Plan shall be administered by our Board of Directors, or by any
committee that we may in the future form and to which the Board of Directors may
delegate the authority to perform such functions.
Every person who at the date of grant of an option is an employee of ours
or of any affiliate of ours is eligible to receive non-qualified stock options
under the 2001 Plan. Every person who at the date of grant is a consultant to,
or non-employee director of, us or any affiliate of ours is eligible to receive
non-qualified stock options under the 2001 Plan.
The exercise price of a non-qualified stock option shall 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 non-qualified stock option granted to any person who owns,
directly or by attribution under the Internal Revenue 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 affiliate shall in no event be less
than 110% of the fair market value of the
37
stock covered by the option at the time the option is granted. The exercise
price of an incentive stock option shall in no event 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 incentive stock option granted to any 10%
Stockholder shall in no event be less than 110% of the fair market value of the
stock covered by the option at the time the option is granted.
The administrator of the 2001 Plan, in its sole discretion, shall fix
the term of each option, provided that the maximum term of an option shall be
ten years. Incentive stock options granted to a 10% Stockholder shall 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 shall 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, options held at
such 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); provided,
however, that if such exercise of the option would result in liability for the
optionee under Section 16(b) of the Securities Exchange Act of 1934, then such
three-month period automatically shall be extended until the tenth day following
the last date upon which optionee has any liability under Section 16(b) (but in
no event after the expiration date).
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 incentive stock options granted
under the 2001 Plan to the requirements of federal or other tax laws relating to
incentive stock options. No amendment, alteration, suspension or
discontinuance shall 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
On June 30, 1999, we issued and sold an aggregate of
23,800,000 shares of common stock to J. Peter Garthwaite and Bradley A. Scott
in consideration for services performed for us by each individual. Messrs.
Garthwaite and Scott served as our President/Chief Executive Officer/Treasurer
and Secretary, respectively, and as directors from the date of our inception
on June 30, 1999, until their resignation from their respective positions on
February 28, 2001.
38
Messrs. Garthwaite and Scott sold their shares of common stock to Mr. Shai
Stern on February 28, 2001. Mr. Stern served as our President, Chief Executive
Officer and sole director from February 28, 2001 until November 13, 2001.
On November 13, 2001, pursuant to the Contribution Agreement, the Astralis
Members 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 our 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 held 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.
During the nine months ended September 30, 2001, we advanced $207,000 to
two of our stockholders, FAC Enterprises, Inc. and 1025 Investments, Inc.,
in exchange for promissory notes. The stockholders repaid the total amount prior
to November 30, 2001.
Centro Para La Investigacion y Tratmiento De La Psoriasis, a research
entity owned by the spouse of Dr. Jose Antonio O'Daly, provided assistance in
the research and development of Psoraxine in Venezuela commencing in November of
2001. CITP no longer provides services to us. We paid approximately $275,000 to
CITP for the services it provided.
Relationship with SkyePharma
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 1,500,000 shares of
our Series A Convertible Preferred Stock, par value $.001 per share, at a
purchase price of $10.00 per share, or an aggregate purchase price of $15
million. Pursuant to the Purchase Agreement, SkyePharma will make a total equity
investment of up to $20 million. The remaining $5 million investment will
involve the sale of up to an additional 500,000 shares of preferred stock to
SkyePharma in two equal installments on July 31, 2002 and January 31, 2003.
Each share of preferred stock issued pursuant to the Purchase Agreement is
convertible into four shares of common stock at the option of SkyePharma
initially at a conversion rate of $2.50 per share of common stock. The
conversion ratio is subject to multiple adjustments for three years depending on
our stock price maintaining certain levels. The ratio is also subject to
anti-dilution protection. However, the conversion ratio will not adjust to a
level greater than approximately 50 shares of common stock for each share of
preferred stock. If on the
39
first, second or third anniversary of the original issuance date, the current
market price per share of common stock is less than the current conversion
price, then the conversion price will be reset to the average closing price of
the stock for the ten days prior to the anniversary date. However, the
conversion price will not be reset for the first or second anniversary date
lower than the lower of (a) $1.60 or (b) the price which results from
multiplying $1.60 by a fraction the numerator of which is the then applicable
conversion price (taking into account the reset provisions not contingent on
stock price and which generally provide anti-dilution protection and ignoring
any reset provision related to the first anniversary date) and the denominator
of which is $2.50. The conversion price will not be reset for the third
anniversary date lower than the lower of (a) $0.20 or (b) the price which
results from multiplying $0.20 by a fraction the numerator of which is the
conversion price (taking into account the reset provisions not contingent on
stock price and which generally provide anti-dilution protection and ignoring
any applicable conversion price related to the previous anniversary dates) and
the denominator of which is $2.50. The conversion price will not be reset on the
third anniversary date if, prior to that date, the United States Patent and
Trademark Office has issued a patent or notice of allowance with claims having
substantially the same scope as the patent application filed by Dr. O'Daly and
covering a psoriasis vaccine marketed and commercialized by us. Furthermore, the
conversion price will not be reset if the average closing price calculated is
greater than the conversion price.
As a result of the Purchase Agreement, SkyePharma is the beneficial owner
of 18% of our outstanding common stock based on our current conversion price.
In addition to other rights under the Purchase Agreement, SkyePharma, as the
sole holder of shares of preferred stock, holds the exclusive right to elect
one member of our Board of Directors. Pursuant to the Purchase Agreement, we and
certain of our stockholders holding an aggregate of 66.58% of our outstanding
common stock executed a Stockholders' Agreement, dated as of December 10,
2001, with SkyePharma, whereby each stockholder agreed to vote its shares of
common stock to elect the independent directors nominated by our Board of
Directors to our Board of Directors and, once SkyePharma no longer owns its
preferred stock, to elect a nominee nominated by SkyePharma to our Board of
Directors. We also granted SkyePharma certain registration rights effective as
of December 10, 2002 pursuant to a Registration Rights Agreement, dated as of
December 10, 2001.
We also entered into two agreements concerning the formulation and
development of our initial injectable product candidate, Psoraxine, with
SkyePharma. Under the terms of the Technology Access Option Agreement, dated
December 10, 2001, we paid to SkyePharma a $5 million fee for the option to
acquire a license for DepoFoam and other relevant drug delivery technologies
owned by SkyePharma. The option we received under the Technology Access Option
Agreement expires on December 10, 2008. In addition, pursuant to a Service
Agreement, dated December 10, 2001, SkyePharma will 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 payable through 2002 for second generation Psoraxine. The
Service Agreement terminates on December 31, 2002. The Service Agreement
requires that we and SkyePharma negotiate in good faith during the fourth
quarter of 2002 for the continuation of the agreement.
40
Private Placement
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
in Astralis LLC for an exercise price of $1.60 per membership interest. The
aggregate purchase price for such units was $1,350,000. On November 13, 2001
at the closing of the Contribution Agreement, the aforementioned units were
exchanged for an aggregate of 2,700,000 shares of our common stock and
6,300,000 warrants to purchase common stock at an exercise price of $1.60 per
share.
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 by us out of the proceeds of the private placement.
During November of 2001, we completed a private placement offering
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, for an exercise price of $4.00 per share, for an aggregate
purchase price of $3,321,887. We granted certain registration rights to the
purchasers of the shares.
Pictet Private Equity Investors purchased 180,000 shares of our common
stock and warrants to purchase another 36,000 shares of common stock. Pictet
Private Equity Investors is controlled by Fabien Pictet, a member of our Board
of Directors.
During the period from March 15 through April 26, 2000, we issued and sold
an aggregate of 750,000 shares of common stock to a total of fifty persons,
all of whom are residents of the State of Colorado, for cash consideration
totaling $75,000.
41
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth the names and beneficial ownership of our
common stock owned, directly or indirectly, by (i) each person who is a
director or executive officer of our company, (ii) all our directors and
executive officers as a group, and, to the best of our knowledge, (iii) all
holders of 5% or more of the outstanding shares of our common stock. As of
July 22, 2002, there were 37,538,189 shares of our common stock
outstanding. Unless otherwise noted, the address of all the individuals named
below is care of Astralis Ltd. at 75 Passaic Avenue, Fairfield, NJ 07004.
Number of shares of Common Percentage of
Stock Beneficially Common Stock
Name and Address Owned (1) Owned
Dr. Jose Antonio O'Daly 13,640,000 36.34%
Mike Ajnsztajn (2) 8,680,000 23.12%
Gina Tedesco (2) 0 --
Gaston Liebhaber 2,480,000 6.60%
Michael Ashton (3) 8,220,000 --
Fabien Pictet (4) 216,000 *
Steven Fulda 0 --
SkyePharma PLC (5) (6) 8,220,000 18%
All Officers and Directors 33,236,000 72.90%
as a Group
----------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the 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.
42
(2) Ms. Tedesco, our Chief Financial Officer, may be deemed to be the beneficial
owner of the 8,680,000 shares of common stock owned as of July 22, 2002 by
her husband, Mike Ajnsztajn. Ms. Tedesco disclaims beneficial ownership of such
shares.
(3) Includes 8,220,000 shares of common stock beneficially owned by SkyePharma.
Mr. Ashton is Chief Executive Officer of SkyePharma.
(4) All of the shares indicated include shares owned by Pictet Private Equity
Investors. Also includes warrants to purchase 36,000 shares of common stock.
(5) SkyePharma is the beneficial owner of 200,000 shares of our common stock,
1,500,000 shares of our preferred stock and warrants to purchase 20,000
shares of common stock, and may acquire another 500,000 shares of preferred
stock within the next sixty days pursuant to the Purchase Agreement, dated as
of December 10, 2001, between us and SkyePharma. Accordingly, SkyePharma has
beneficial ownership of 8,220,000 shares of common stock, assuming its
purchase of the 500,000 additional shares of preferred stock and the
conversion of all shares of preferred stock owned or to be purchased by
SkyePharma into common stock at the current conversion rate of four to one.
Michael Ashton, Chief Executive Officer of SkyePharma and a member of our Board
of Directors, exercises voting control over the shares held by SkyePharma.
(6) In order to facilitate the consummation of the transaction contemplated by
the Purchase Agreement, we, certain of our stockholders holding an aggregate of
66.58% of our outstanding common stock and SkyePharma executed a Stockholders'
Agreement, dated as of December 10, 2001, whereby each stockholder agreed to
vote its shares of common stock and take all other actions necessary to elect
the independent directors nominated by our Board of Directors and to elect the
nominee nominated to our Board of Directors by SkyePharma when all of the shares
of preferred stock owned by SkyePharma have been converted into common
stock. SkyePharma does not have the right to dispose (or direct the disposition
of) any of the 25,016,000 shares of common stock owned by the other parties to
the Stockholders' Agreement and accordingly SkyePharma disclaims beneficial
ownership of all such shares.
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
An aggregate of up to 2,431,415 shares of our common stock may be
offered and sold pursuant to this prospectus by the selling stockholders. The
selling stockholders acquired these shares of common stock from us in a
private placement of shares of our common stock completed in November 2001. In
this private placement, we issued and 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,
resulting in gross proceeds to our company of
43
$3,321,887. We intend to use the proceeds of the sale of the shares of common
stock to fund clinical trials, to continue funding our patent application, for
the possible lease or construction of a small scale manufacturing facility, to
repay certain indebtedness, to pay salaries to our employees and for working
capital and general corporate purposes. We will not receive any of the proceeds
resulting from the sale of the shares of common stock held by the selling
stockholders, although we will receive the proceeds from the exercise of any of
the warrants.
In connection with the private placement, we agreed to file a
registration statement with the Securities and Exchange Commission covering all
of the shares of common stock sold in the private placement.
44
The following table sets forth certain information as of July 22, 2002
regarding the sale by the selling stockholders of 2,431,415 shares of common
stock in this offering.
One of the selling stockholders, SkyePharma is the beneficial owner of
18% of our common stock. SkyePharma, as a result of its ownership of all of
the outstanding shares of our Series A Convertible Preferred Stock has the right
to elect a director to our Board of Directors. In addition, Skyepharma has
entered into (i) a Technology Access Option Agreement, dated December 10, 2001
with us pursuant to which Skyepharma will receive from us a $5 million fee,
which will be recognized as revenue over the lifetime of the contract, for the
option to acquire a license for DepoFoam and other relevant drug delivery
technologies, and (ii) a Service Agreement, dated December 10, 2001 with us
pursuant to which SkyePharma will provide us with development, manufacturing,
pre-clinical and clinical development services.
Pictet Private Equity Investors is controlled by Fabien Pictet, a member
of our Board of Directors.
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.
45
-----------------------------------------------------------------------------------------------------------------------
Selling Stockholder Beneficial
Ownership of Shares Shares to be Shares Beneficially
of Common Stock Sold in Owned After the
Prior to Sale(1) the Offering Offering(2)
-----------------------------------------------------------------------------------------------------------------------
Deutsche Bank 144,000 144,000 --
-----------------------------------------------------------------------------------------------------------------------
Pictet Private Equity Investors 216,000 216,000 --
-----------------------------------------------------------------------------------------------------------------------
FPP Emerging Hedge Fund 192,000 192,000 --
-----------------------------------------------------------------------------------------------------------------------
Unicor Inc. 60,000 60,000 --
-----------------------------------------------------------------------------------------------------------------------
Nigel William Wray 59,988 59,988 --
-----------------------------------------------------------------------------------------------------------------------
The SOG Fund 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
Brahman Capital Fund 24,000 24,000 --
-----------------------------------------------------------------------------------------------------------------------
Michael Garnick 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
Fidulex Management Inc. 24,000 24,000 --
-----------------------------------------------------------------------------------------------------------------------
Fidulex Management Inc. 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
Fidulex Management Inc. 24,000 24,000 --
-----------------------------------------------------------------------------------------------------------------------
Fidulex Management Inc. 143,981 143,981 --
-----------------------------------------------------------------------------------------------------------------------
Galba Ansalt 144,000 144,000 --
-----------------------------------------------------------------------------------------------------------------------
Ming Capital Enterprises 179,986 179,986 --
-----------------------------------------------------------------------------------------------------------------------
Maria and Greg Savettiere 96,000 96,000 --
-----------------------------------------------------------------------------------------------------------------------
Vega Investments Inc. 29,986 29,986 --
-----------------------------------------------------------------------------------------------------------------------
Sean Fitzpatrick 18,000 18,000 --
-----------------------------------------------------------------------------------------------------------------------
N. Herrick Irrevocable Securities Trust 216,000 216,000 --
-----------------------------------------------------------------------------------------------------------------------
Heritage Finance and Trust Company 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
Citco Global Custody NV Cash 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
Dr. Jacques Gonella 119,994 119,994 --
-----------------------------------------------------------------------------------------------------------------------
SkyePharma Plc 8,220,000 120,000 8,220,000
-----------------------------------------------------------------------------------------------------------------------
Banque Privee Edmond de Rothchild SA 187,481 187,481 --
-----------------------------------------------------------------------------------------------------------------------
CBG Compagnie 72,000 72,000 --
-----------------------------------------------------------------------------------------------------------------------
(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. In this
instance, the selling stockholders each own warrants with respect to which
they are deemed to be the beneficial owner of the shares of common stock
issuable upon the exercise of such warrants.
(2) Assumes all of the shares of common stock offered hereby are sold by the
selling stockholders. The percentage of the class of
46
common stock owned after the offering will be 0% for all selling
stockholders except SkyePharma, which will be the beneficial owner of 18%
after the offering.
The common stock held by the selling stockholders may be offered and
sold from time to time as market conditions permit in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. The selling
stockholders will act independently of us in making decisions with respect to
the timing, manner and size of each sale. The shares offered hereby may be sold
by one or more of the following methods, without limitation: (a) a block trade
in which a broker or dealer so engaged will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to facilitate
the transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this prospectus; (c) ordinary
brokerage transactions and transactions in which the broker solicits purchasers
and (d) face-to-face transactions between sellers and purchasers without a
broker-dealer. In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Such
brokers or dealers may receive commissions or discounts from the selling
stockholders in amounts to be negotiated. Such brokers and dealers and any
other participating brokers and dealers may be deemed to be "underwriters"
within the meaning of the Securities Act of 1933 in connection with such sales.
The selling stockholders may also pledge shares of common stock as
collateral for margin accounts and such shares could be resold pursuant to the
terms of such accounts. We have been advised by the selling stockholders that
they have not made any arrangements relating to the distribution of the shares
covered by this prospectus.
In addition, any shares covered by this prospectus which qualify for sale
pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this
prospectus.
47
DESCRIPTION OF CAPITAL STOCK
We are authorized to issue 78,000,000 shares of capital stock of which (i)
75,000,000 shares shall be designated as common stock, par value $.0001 per
share, and (ii) 3,000,000 shares shall be designated as preferred stock, par
value $.001 per share, of which 2,000,000 shares shall be designated as Series A
Convertible Preferred Stock. As of July 22, 2002 there are outstanding (a)
37,538,189 shares of common stock owned by approximately 187 holders of record
and (b) 1,500,000 shares of preferred stock owned by SkyePharma. There are
also outstanding warrants to purchase 6,780,237 shares of our common stock.
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 purchase additional shares of any class of our capital
stock.
Pursuant to a Stockholders' Agreement, dated as of December 10, 2001, by
and among us, certain of our stockholders owning 66.58% of our issued and
outstanding common stock and SkyePharma, each stockholder agreed to vote its
shares of common stock and take all other actions necessary to elect the
independent directors nominated by the Board of Directors and to elect the
nominee nominated by the Board of Directors of SkyePharma when all of the
preferred stock owned by SkyePharma has been converted into shares of common
stock.
Series A Convertible Preferred Stock
The holders of Series A Convertible Preferred Stock have the power to
elect one member to our Board of Directors. In addition, the affirmative vote of
the holders of two-thirds of the preferred stock is required for (i) us to
authorize or
48
create any class or series of capital stock ranking senior or on parity to the
preferred stock and (ii) any amendment, alteration or repeal of our
certificate of incorporation, certificate of designations or bylaws which would
serve to affect the rights, powers or preferences of the preferred stock.
Holders of the preferred stock are entitled:
o to receive noncumulative cash dividends equal to 6% of the
preferred stock price or the amount such holders would have
received had the holders converted their shares to common stock
immediately prior to the record date for payment of dividends to
holders of common stock when, as and if declared by the Board of
Directors out of funds that are legally available therefore;
o to convert each share of preferred stock into common stock. The
current conversion ratio is four shares of common stock for each
share of preferred stock. The conversion ratio is subject to
multiple adjustment provisions annually for three years
predicated on the price of our common stock and generally providing
anti-dilution protection. However, the conversion ratio will not
adjust to a level greater than approximately 50 shares of common
stock for each share of preferred stock; and
o in the event of our liquidation, dissolution, or winding up, to be
paid a preference, before any distribution or payment is made upon
any common stock or any other equity security that ranks junior to
the preferred stock.
Preferred Stock
Our Board of Directors has the authority, within the limitations set forth
in our certificate of designations and certificate of incorporation and the
rights of the holders of Series A Convertible Preferred Stock set forth above,
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.
Warrants
As of July 22, 2002, we have outstanding warrants to purchase
6,780,237 shares of our common stock. We issued warrants to purchase
415,237 shares of our common stock at an exercise price of $4.00 per share
pursuant to the private placement. We issued warrants to purchase 6,300,000
shares of our common stock at an exercise price of $1.60 per share pursuant to
the Contribution Agreement.
49
We have outstanding warrants to purchase 75,000 shares of our common stock
at an exercise price of $1.75 per share.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company, 59 Maiden Lane, Plaza Level, New York, New York
10038.
Reports to Stockholders
We have and will continue to comply with the periodic reporting, proxy
solicitation and other applicable requirements of the Securities Exchange Act of
1934.
Shares Eligible for Future Sale
We currently have 37,538,189 shares of common stock outstanding. Of
the 37,538,189 shares of common stock outstanding, up to 9,931,415 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 July 22, 2002, there were outstanding
options to purchase 7,090,237 shares of our common stock.
All of the 1,500,000 shares of preferred stock that are 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.
Lock-Up Agreements
None of the currently outstanding common stock or preferred stock are
subject to lock-up agreements.
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 person 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:
50
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.
Market for Common Stock
Shares of our common stock are listed on the Over- The-Counter
Bulletin Board under the symbol ASTR.
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 1
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 deferring hostile
takeovers or delaying changes in the control or management of Astralis Ltd. even
if doing so would be beneficial to our stockholders.
51
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF ACCOUNTING
AND FINANCIAL DISCLOSURE
Our Board of Directors appointed the independent certified accounting firm
of L J Soldinger Associates Ltd. to audit our financial statements for the year
ended December 31, 2001. Accordingly, our prior accounting firm, Cordovano and
Harvey, P.C., was dismissed as our independent auditors effective November 28,
2001, the date when written notification was delivered to that firm. The
appointment of L J Soldinger Associates Ltd. as our independent auditors was
effective as of November 2, 2001. Our Board of Directors approved the change in
independent accountants and our stockholders approved the change in independent
accountants at a special meeting held on November 1, 2001.
The audit reports of Cordovano and Harvey, P.C. on our financial
statements as of December 31, 2000 and 1999, for the fiscal year ended December
31, 2000 and for the period from June 30, 1999 (the date our inception) through
December 31, 1999, did not contain any adverse opinion or disclaimer of opinion,
nor were such audit reports qualified or modified as to uncertainty, audit scope
or accounting principals. In addition, there were no disagreements between us
and Cordovano and Harvey, P.C. on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope and procedures
which, if not resolved to the satisfaction of Cordovano and Harvey, P.C., would
have caused Cordovano and Harvey, P.C. to make reference to the matter in their
reports. A letter from Cordovano and Harvey, P.C. is incorporated by reference
to this registration statement as Exhibit 16.1.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be
passed upon by McCarter & English, LLP.
EXPERTS
L J Soldinger Associates Ltd., independent auditors, have audited our
financial statements for the year ended December 31, 2001, as set forth in
their report. We've included our financial statements in the prospectus and
elsewhere in this registration statement in reliance on the L J Soldinger
Associates Ltd. 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
52
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.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide prospective investors with any different
or additional information. This prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted. The information contained in this prospectus is
correct only as of the date hereof, regardless of the time of delivery of this
prospectus or any sale of these securities.
53
Astralis, Ltd.
(A Development Stage Entity)
INDEX TO THE FINANCIAL STATEMENTS
Page(s)
-------
Independent Auditors' Report F2
Balance Sheets F3
Statements of Operations F4
Statements of Stockholders' Equity F5
Statements of Cash Flows F9
Notes to Financial Statements F10
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Astralis, Ltd.
Florham Park, New Jersey
We have audited the accompanying balance sheet of Astralis, Ltd. (a development
stage entity) as of December 31, 2001, and the related statements of operations,
stockholders' equity, and cash flows, for the period March 12, 2001 (date of
inception) through December 31, 2001. 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 audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 statements presentation. We believe that our audit provides 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, 2001, and the results of operations, changes in stockholders' equity and its
cash flows for the period then ended in conformity with accounting principles
generally accepted in the United States of America.
L J SOLDINGER ASSOCIATES
Arlington Heights, Illinois
February 4, 2002
F-2
ASTRALIS, LTD.
(A Development Stage Entity)
Balance Sheets
December 31, 2001
ASSETS
March 31, December 31,
2002 2001
------------ ------------
(Unaudited) (Audited)
Current Assets
Cash and cash equivalents $ 157,853 $ 4,451,874
Marketable securities - current 1,000,000 --
Interest receivable 54,992 --
Prepaid expenses 28,429 38,461
------------ ------------
Total Current Assets 1,241,274 4,490,335
Marketable securities - noncurrent 2,694,424 --
Intangible Assets, Net - Related Party 4,761,904 4,940,476
Other Intangible Assets, Net 38,304 25,054
Property and Equipment, Net 61,736 1,586
Deposits 28,190 --
------------ ------------
$ 8,825,832 $ 9,457,451
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable - related party $ -- $ 142,446
Accounts payable and accrued expenses 150,363 240,637
------------ ------------
Total Current Liabilities 150,363 383,083
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Convertible preferred stock, Series A,
$.001 par value; 2,000,000 shares
authorized; 1,250,000 and 1,000,000
issued and outstanding at 2002 and
2001, respectively (liquidation
preference - $12,706,713 at 2002) 1,250 1,000
Common stock; $.0001 par value;
75,000,000 shares authorized;
37,538,189 and 37,588,179 issued
and outstanding at 2002 and
2001, respectively 3,754 3,759
Additional paid-in capital 19,432,978 17,013,223
Deferred compensation (365,062) (398,250)
Common stock subscriptions receivable (1,350,000) (1,350,000)
Accumulated other comprehensive gain (loss) (56,158) --
Deficit accumulated in the development stage (8,991,293) (6,195,364)
------------ ------------
Total Stockholders' Equity 8,675,469 9,074,368
------------ ------------
$ 8,825,832 $ 9,457,451
============ ============
The accompanying notes are an integral part of the financial statements.
F-3
ASTRALIS, LTD.
(A Development Stage Entity)
Statements of Operations
Three Months March 12, 2001 March 12, 2001 March 12, 2001
Ended (Inception) to (Inception) to (Inception) to
March 31, 2002 March 31, 2001 December 31, 2001 March 31, 2002
-------------- -------------- ----------------- --------------
(Unaudited) (Unaudited) (Audited) (Unaudited)
Revenues $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Operating Expenses
Research and development
- related party 2,295,534 -- 3,203,235 5,498,769
Research and development -- 3,000 28,540 28,540
Depreciation and amortization 1,235 -- 831 2,066
General and administrative 529,585 220 852,013 1,381,598
------------ ------------ ------------ ------------
Total Operating Expenses 2,826,354 3,220 4,084,619 6,910,973
------------ ------------ ------------ ------------
Loss From Operations (2,826,354) (3,220) (4,084,619) (6,910,973)
Interest Income 30,425 -- 9,255 39,680
------------ ------------ ------------ ------------
Net Loss (2,795,929) (3,220) (4,075,364) (6,871,293)
Preferred Stock Dividends -- -- (2,120,000) (2,120,000)
------------ ------------ ------------ ------------
Net Loss to Common Stockholders $ (2,795,929) $ (3,220) $ (6,195,364) $ (8,991,293)
============ ============ ============ ============
Pro Forma Information
Net loss $ (3,220) $ (6,195,364)
Pro forma tax provision -- --
------------ ------------
Pro forma net loss $ (3,220) $ (6,195,364)
============ ============
Basic and Diluted Loss per
Common Share $ (0.07) $ -- $ (0.23)
============ ============ ============
Basic and Diluted Weighted
Average Common Shares
Outstanding 37,551,373 21,505,000 27,348,030
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-4
ASTRALIS, LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Preferred Stock Common Stock Additional
------------------------ --------------------------- Paid-In Subscription Deferred
Shares Amount Shares Amount Capital Receivable Compensation
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balances, March 12,
2001 (Date of
Inception) -- $ -- -- $ -- $ -- $ -- $ --
Members' capital
contributions,
3/15/2001 -- -- 25,300,000 2,530 30,653 (33,183) --
Capital contributions
received, 3/1 -
8/13/2001 -- -- -- -- -- 33,183 --
Members' contributed
services, 3/15 -
6/30/2001 -- -- -- -- 12,986 -- --
Members' capital
contributions,
9/1/2001 -- -- 2,700,000 270 1,349,730 (1,350,000) --
Warrants to purchase
6,300,000 shares of
common stock at $1.60
per share issued
in private placement -- -- -- -- -- -- --
Common stock issuable
for consulting
services, 9/1/2001;
500,000 shares -- -- -- -- 135,000 -- --
Common stock issued
in private placement
net of issuance costs,
11/13/2001; 2,076,179
shares at $1.60 per
share -- -- 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 -- (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 -- (177,000)
Amortization of
deferred compensation -- -- -- -- -- -- 132,750
Net loss -- -- -- -- -- -- --
--------- ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31,
2001 (audited) 1,000,000 $ 1,000 37,588,179 $ 3,759 $ 17,013,223 $ (1,350,000) $ (398,250)
========= ============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-5
ASTRALIS, LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the Total
Comprehensive Development Comprehensive
Loss Stage Total Loss
------------- ----------- ----------- -------------
Balances, March 12, 2001
(Date of Inception) $ -- $ -- $ -- $ --
Members' capital contributions, 3/15/2001 -- -- -- --
Capital contributions received,
3/1 - 8/13/2001 -- -- 33,183 --
Members' contributed services,
3/15 - 6/30/2001 -- -- 12,986 --
Members' capital contributions, 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 -- -- -- --
Options to purchase 100,000 shares of
common stock at $1.77 (based on valuation)
issued for consulting services, 12/31/2001 -- -- -- --
Amortization of deferred compensation -- -- 132,750 --
Net loss -- (4,075,364) (4,075,364) --
--------- ----------- ----------- ---------
Balance, December 31, 2001 (audited) $ -- $(6,195,364) $ 9,074,368 $ --
========= =========== =========== =========
The accompanying notes are an integral part of the 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
Amortization of deferred
compensation -- -- -- -- --
COMPREHENSIVE LOSS
Net loss -- -- -- -- --
Other comprehensive loss:
Unrealized gain (loss)
on available-for-sale
securities -- -- -- -- --
--------- ------------ ------------ ------------ ------------
Total Comprehensive
Loss
Balance, March 31, 2002
(unaudited) 1,250,000 $ 1,250 37,538,189 $ 3,754 $ 19,432,978
========= ============ ============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-7
ASTRALIS, LTD.
(A Development Stage Entity)
Statements of Stockholders' Equity
Deficit
Accumulated Accumulated
Other During the
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;
1,000,000 shares
at $10.00 per share -- -- -- -- 2,500,000
Amortization of
deferred compensation -- 33,188 -- -- 33,188
COMPREHENSIVE LOSS
Net loss -- -- -- (2,795,929) (2,795,929) $(2,795,929)
Other comprehensive
loss:
Unrealized gain (loss)
on available-for-sale
securities -- -- (56,158) -- (56,158) (56,158)
----------- ----------- ---------- ----------- ----------- -----------
Total Comprehensive Loss $(2,852,087)
===========
Balance, March 31, 2002
(unaudited) $(1,350,000) $ (365,062) $ (56,158) $(8,991,293) $ 8,675,469
=========== =========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-8
ASTRALIS, LTD.
(A Development Stage Entity)
Statements of Cash Flows
Three Months March 12, 2001 March 12, 2001 March 12, 2001
Ended (Inception) to (Inception) to (Inception) to
March 31, 2002 March 31, 2001 December 31, 2001 March 31, 2002
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Audited) (Unaudited)
Cash Flows from Operating
Activities
Net loss $(2,795,929) $ (3,220) $(4,075,364) $(6,871,293)
Adjustments to reconcile
net loss to net cash
used in operating
activities
Depreciation and
amortization 179,807 -- 60,355 240,162
Amortization of net
premium paid on
investments 14,375 -- -- 14,375
Members' contributed
salaries -- 11,936 12,986 12,986
Research and development
service fee netted
against proceeds
received from
preferred stock
issuance 665,000 -- 3,000,000 3,665,000
Operating expenses
paid by related
parties on behalf
of Company -- (5,000) 17,587 17,587
Amortization of
deferred
compensation 33,188 (3,716) 132,750 165,938
Compensatory common
stock -- -- 135,000 135,000
Changes in assets and
liabilities
Prepaid expenses 10,032 -- (38,461) (28,429)
Interest receivable (54,992) -- (10,255) (54,992)
Deposits (28,190) -- -- (28,190)
Accounts payable -
related party (142,446) -- 142,446 --
Accounts payable and
accrued expenses (90,274) -- 240,637 150,363
----------- ----------- ----------- -----------
Net Cash Used in Operating
Activities (2,209,429) -- (382,319) (2,581,493)
----------- ----------- ----------- -----------
Cash Flows from Investing
Activities
Purchases of marketable
securities (4,520,957) -- -- (4,520,957)
Proceeds from sale of
marketable securities 756,000 -- -- 756,000
Expenditures related to
patent (13,745) -- -- (24,000)
Purchases of property
and equipment (60,890) -- (1,620) (62,510)
----------- ----------- ----------- -----------
Net Cash Used in Investing
Activities (3,839,592) -- (1,620) (3,851,467)
----------- ----------- ----------- -----------
Cash Flows from Financing
Activities
Repurchase of common stock (80,000) -- -- (80,000)
Issuance of common stock,
net of offering and
transaction costs -- -- 2,888,317 2,888,317
Issuance of preferred
stock, net of research
and development service
fee, technology option
and costs of offering 1,835,000 -- 1,947,496 3,782,496
----------- ----------- ----------- -----------
Net Cash Provided by Financing
Activities 1,755,000 -- 4,835,813 6,590,813
----------- ----------- ----------- -----------
Net Increase (Decrease) in
Cash and Cash Equivalents (4,294,021) -- 4,451,874 157,853
Cash and Cash Equivalents,
Beginning of Period 4,451,874 -- -- --
----------- ----------- ----------- -----------
Cash and Cash Equivalents,
End of Period $ 157,853 $ -- $ 4,451,874 $ 157,853
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
F-9
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Operations
Astralis, Ltd. (the "Company") is an emerging biotechnology company based in New
Jersey and engaged primarily in the research and development of novel treatments
for immune system disorders and skin diseases. The Company is currently
developing two products. Its primary product, Psoraxine, is an innovative
vaccine under development for the treatment of psoriasis. The Company's second
product is for the treatment of leishmaniasis.
History
The Company, formerly Astralis Pharmaceutical, Ltd. and Hercules Development
Group, Inc. ("Hercules"), was incorporated under the laws of the state of
Colorado on June 30, 1999 and reincorporated in the state of Delaware on
December 10, 2001. In November 2001, the Company was a public shell company,
defined as an inactive, publicly quoted company with nominal assets and
liabilities.
The operations and financial statements of the Company are those of Astralis,
LLC, ("Astralis, LLC") a New Jersey limited liability company formed on March
12, 2001. Astralis, LLC was merged into the Company on November 13, 2001 at
which time the Company changed its name to Astralis Pharmaceutical, Ltd. The
Company is the surviving legal entity.
In connection with the merger, the Company issued 28,000,000 shares of its
common stock along with warrants to purchase 6,300,000 shares of the Company's
common stock at $1.60 per share to the members of Astralis, LLC in a one-for-one
exchange for all of the 28,000,000 outstanding Astralis, LLC member units of
ownership and all of the 6,300,000 outstanding options to purchase member units.
As a result of the transaction, the former members of Astralis, LLC acquired a
majority interest in the Company.
On December 10, 2001, the Company changed its name to Astralis, Ltd. and
reincorporated to the state of Delaware.
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").
The combination of the Company and Astralis, LLC has been treated as a
recapitalization of the Company. The Company was the legal acquirer in the
merger. Astralis, LLC was the accounting acquirer since its members acquired a
majority ownership interest in the Company. Consequently, the historical
financial information included in the financial statements of the Company prior
to November 2001 is that of Astralis, LLC. Pro forma financial information is
not presented since the combination is a recapitalization and not a business
combination.
F-10
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim Information
The interim consolidated financial data as of March 31, 2002 and for the three
months ended March 31, 2002 and 2001 is unaudited. The information reflects all
adjustments, consisting only of normal recurring adjustments that, in the
opinion of management, are necessary to fairly present the financial position
and results of operations of the Company for the periods indicated. Results of
operations for the interim periods are not necessarily indicative of the results
of operations for a full fiscal year.
Pro Forma Financial Information
As discussed in Note 1, Astralis, LLC was originally organized in the form of a
Limited Liability Company. Upon the Merger, its capital structure changed to
that of a corporation. The change resulted in the Company retaining the tax
benefit for the portion of the losses generated subsequent to November 13, 2001,
whereas the previous losses were passed through to the Astralis, LLC members.
Pursuant to Staff Accounting Bulletin Number 1B.2 "Pro Forma Financial
Statements and Earnings per Share" ("SAB 1B.2"), a pro forma income statement
has been presented which reflects the impact of the Company's change in capital
structure as if it had occurred March 12, 2001 (Astralis LLC's inception). This
presentation reflects the Company generating a tax benefit, which has been
offset with a valuation allowance, which includes the net operating losses
incurred by Astralis LLC during the period from March 12, 2001 to November 13,
2001, the operating period prior to Astralis, LLC's termination.
Development Stage Enterprise
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards No. 7 "Accounting and Reporting for Development
Stage Enterprises" ("SFAS No. 7"). 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
raising capital through private placement stock offerings, effecting its
business merger, and performing research and development activities.
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 a remaining
maturity of 90 days or less at the time of purchase to be cash equivalents.
F-11
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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
equipment.
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 been offset by a
valuation reserve because management has determined that the realization of
deferred tax assets is less likely than not and, accordingly, has established a
valuation allowance.
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.
Loss Per Share
Loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("FAS 128"). 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 at December 31, 2001, are as follows:
Exercise Price Shares
-------------- ----------
Options $ 2.79 300,000
Warrants $ 1.60 - 4.00 6,790,237
Convertible preferred stock $ 2.50 4,000,000
----------
11,090,237
==========
F-12
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The total number of shares excluded from diluted net loss at March 31, 2002 was
12,080,239.
Segment Information
The Company has determined it has one reportable operating segment as defined by
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information."
Research and Development Costs
The cost of research, development and product improvement expenditures are
charged to expense as they are incurred. Research, development and product
improvement costs included in operating expenses amounted to $3,231,775 for the
period from March 12, 2001 (date of inception) to December 31, 2001.
Included in this amount were payments to related parties - see Note 8.
Long-Lived Assets
The Company accounts for its investments in long-lived assets in accordance with
SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and Long-Lived
Assets To Be Disposed Of". The Company periodically reviews the value of
long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Each impairment test is based on a comparison of the future undiscounted cash
flows arising from the assets with the carrying value of the asset. If
impairment is indicated, the asset is written down to its estimated fair value
on a discounted cash flow basis.
Stock-Based Compensation
The Company has adopted Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (FAS 123) and Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services". As permitted under FAS 123, the Company has continued to follow
Accounting for Stock Issued To Employees ("APB 25") in accounting for its
stock-based compensation. Under APB 25, no accounting recognition is given to
stock options issued to employees that are granted with exercise prices at fair
market value. Stock options issued to non-employees are recorded at fair value
at the date of grant and are subsequently remeasured as counterparty performance
is complete, which typically corresponds to the vesting period.
F-13
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board, or FASB, approved
Statements of Financial Accounting Standards ("SFAS"), No. 141, "Business
Combinations" ("SFAS No. 141") and No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142"). The statements eliminate the pooling-of-interests
method of accounting for business combinations and require that goodwill and
intangible assets with indefinite lives not be amortized. Instead, these assets
will be reviewed for impairment annually with any related losses recognized when
incurred. SFAS 141 is generally effective for business combinations after June
2001.
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"), which is effective for fiscal years beginning
after June 15, 2002. This Statement addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS No. 143 requires, among other
things, that the retirement obligations be recognized when they are incurred and
displayed as liabilities on the balance sheet. In addition, the asset's
retirement costs are to be capitalized as part of the asset's carrying amount
and subsequently allocated to expense over the asset's useful life.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"), which is effective for fiscal
years beginning after December 15, 2001 and interim periods within those fiscal
years. This Statement develops one accounting model for long-lived assets that
are to be disposed of by sale, as well as addressing the principal
implementation issues.
The adoption of SFAS 141, 142, 143 and 144 is not expected to have any impact on
the Company's financial statements.
NOTE 3 - 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 13,
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.
F-14
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 3 - INTANGIBLE ASSETS (Continued)
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 will evaluate this intangible for impairment annually under FAS 121
Accounting For The Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of.
As of December 31, 2001, the Company has amortized $797 of patent cost and
$59,524 of the cost of the technology option license. The amortization related
to the technology option license is recorded as research and development cost as
required by SFAS No. 2.
Intangible assets consisted of:
December 31, 2001
-----------------
Patent $ 25,851
Technology access fee 5,000,000
Less accumulated amortization (60,321)
----------
$4,965,530
==========
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
December 31, 2001
-----------------
Computer equipment $ 1,620
Less accumulated depreciation (34)
----------
$ 1,586
==========
Depreciation expense for the period from March 12, 2001 (date of inception) to
December 31, 2001 was $34.
F-15
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 5 - 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 31,2001
----------------
Deferred tax assets:
Accumulated depreciation
and amortization $ 13,300
Research and development
credits carryforward 204,700
Federal and state deferred
tax benefit arising from
net operating loss carryforwards 1,436,800
----------
1,654,800
Less valuation allowance (1,654,800)
----------
Total deferred tax assets $ --
==========
Income tax benefit consists of the following:
December 31, 2001
-----------------
Deferred
Federal $ 11,300
State 2,000
Federal and state tax benefit of
net operating loss carryforward 1,436,800
Tax benefit from research and
development credits carryforward 204,700
----------
Less valuation allowance (1,654,800)
----------
Total $ --
==========
As of December 31, 2001, the Company had losses which resulted in net operating
loss carryforwards for tax purposes amounting to approximately $3,500,000 that
may be offset against future taxable income. These carryforwards expire in 2021.
The Company has also generated research and development credits of $204,700 that
will also expire in 2021. 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.
F-16
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 5 - INCOME TAXES (Continued)
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 will generate 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
$1,654,800 as of December 31, 2001.
In accordance with federal income tax regulations, the net loss incurred by
Astralis, LLC from inception to the date of the merger has been excluded from
the benefits of the net operating loss carryforwards reflected in this footnote.
The pro forma presentation on the statement of operations reflects the effect on
the Company had the change in capital structure to a corporation been effective
as of March 12, 2001 (Astralis LLC inception) (see Note 2).
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 35%.
December 31, 2001
-----------------
Federal income tax benefit at
statutory rate $1,426,400
Federal income tax benefit passed
through to the members of
Astralis, LLC (65,800)
State income tax benefit (net of
effect of federal benefit) 207,700
Non-deductible expenses (118,200)
Research and development credit 204,700
Valuation allowance (1,654,800)
----------
Income Tax Benefit $ --
==========
Effective Income Tax Rate 0%
==========
NOTE 6 - CAPITAL STOCK ACTIVITY
The Company's Articles of Incorporation authorizes the issuance of 75,000,000
shares of common stock, $0.0001 par value per share, of which 37,588,179 were
outstanding as of December 31, 2001.
As discussed in Note 1, the combination of Astralis and Hercules was treated as
a recapitalization of Astralis, 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.
F-17
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 6 - CAPITAL STOCK ACTIVITY (Continued)
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.
Under a contribution agreement dated 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 at the closing of the Contribution
Agreement, the aforementioned Units were exchanged for an aggregate of 2,700,000
shares of our common stock and 6,300,000 warrants to purchase 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. These subscription notes
receivable are due in two installments with $850,000 being due on February 13,
2002 and the remaining $500,000 due on May 13, 2002. 3,150,000 of these warrants
expire December 13, 2003 and 3,150,000 expire November 13, 2006.
Common Stock
In September 2001, Astralis, LLC granted a consultant 500,000 membership units
in return for services rendered. Common shares of Company stock were transferred
to the consultant subsequent to December 31, 2001. 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.
In November 2001, the Company completed a $3,321,887 private placement offering
aggregating 103.81 units at $32,000 per unit. 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 November 13, 2006. The
holders of these common shares and warrants received registration rights. The
Company has an obligation to file a registration statement by March 13, 2002 to
commence registration of these shares and 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 and payable in 24 equal monthly installments of $6,000.
In April 2001, Hercules issued warrants to purchase 75,000 shares of the Company
stock at an exercise price of $1.75 per share in connection with a loan it
obtained which occurred prior to the recapitalization with the Company. These
warrants expire in April 2004.
F-18
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 6 - CAPITAL STOCK ACTIVITY (Continued)
Preferred Stock
The Company's Articles of Incorporation authorizes the issuance of 3,000,000
shares of Preferred Stock, with a $0.001 par value per share. On December 13,
2001, the Company authorized 2,000,000 shares to be designated as "Series A
Convertible Preferred Stock" ("Series A Preferred"). If the Company declares a
dividend, holders of each share of Series A Preferred are entitled to
non-cumulative cash dividends which shall 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 are also entitled to vote on all matters at stockholder meetings.
Holders of each share of the Series A Preferred may convert their shares to
common stock at an initial conversion price of $2.50. This conversion price may
be adjusted and reset as follows:
i.) If the Company pays a common stock dividend or pays a regular dividend
with common stock the conversion price is decreased by multiplying the
conversion price by a fraction of which the numerator is the number of
shares of common stock outstanding prior to the dividend and the
denominator will be the numerator plus the number of shares constituting
such dividend or other distribution. If such dividend or distribution is
not paid the conversion price will revert back to the previous conversion
price on the date the board of directors decide not to pay such dividend.
ii.) If the Company issues or grants rights, options, warrants,
exchangeable securities or convertible securities entitling the recipient
to subscribe for or purchase shares of common stock at a price per share
less than the conversion price, the conversion price will be decreased.
The existing conversion price will be multiplied by a fraction of which
the numerator will be the number of shares of common stock outstanding
prior to the issuance, plus the number of shares of common stock which
could have been purchased using the existing conversion price using the
aggregate proceeds of the subscription or purchase and the denominator
will be the number of shares of common stock outstanding prior to the
issuance plus the number of shares of common stock so offered for
subscription or purchase pursuant to such rights. If such rights expire or
the board determines not to issue such rights than the conversion price
will revert back to the previous conversion price.
iii.) If the Company's common stock is split or reverse split - the
conversion price will be adjusted proportionately.
iv.) If the Company issues assets, debt securities, similar debt
instruments, or other classes of securities to holders of its common stock
the conversion price will be adjusted. The conversion price will be
adjusted by multiplying it by a fraction the numerator of which shall be
equal to the current market price per share of common stock (representing
the average of the ten days closing prices prior to the day of
determination otherwise by the current market price on such date)
("Current Market Price") per share less the fair market value (as
determined by the board of directors) of the portion of the assets, shares
or debt securities so distributed, applicable to one share of common
stock; and, the denominator of which shall be equal to the Current Market
Price per share of common stock. If such distribution is not made the
conversion price will revert back to the previous conversion price.
F-19
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 6 - CAPITAL STOCK ACTIVITY (Continued)
v.) If the Company distributes cash to all holders of its common stock
(excluding certain exceptions) which when added to cumulative cash
distributions to common shareholders for the previous twelve months
exceeds 6% of the product of, the Current Market Price per share of common
stock times the number of shares of common stock outstanding on that date,
the conversion price is reduced. The conversion price will be adjusted by
multiplying it by a fraction the numerator of which will be equal to the
Current Market Price per share of the common stock less an amount equal to
the quotient of the excess of such cash amount over such aggregate current
market price divided by the number of share of common stock outstanding on
such date and the denominator of which shall be equal to the Current
Market Price per share of the common stock.
vi.) If there is a tender offer made by the Company for all or any portion
of the common stock which will expire and the tender offer will require
the payment to stockholders consideration having a fair market value per
share of common stock (as determined by the board of directors) that
exceeds the market price per share of common stock in effect on the date
the tender offer is publicly announced, the conversion price will be
reduced. The conversion price shall be adjusted to equal the rate
determined by multiplying it by a fraction the numerator of which will
equal the product of the Current Market Price per share of common stock
multiplied by the number of shares of common stock outstanding (including
tendered shares) on the expiration date less the aggregate fair market
value of the consideration to be paid to stockholders and the denominator
will be equal to the product of the Current Market Price per share of
common stock on the expiration date multiplied by the number of shares of
common stock outstanding (including tendered shares) as of the expiration
date less the number of shares validly tendered and not withdrawn as of
the expiration date.
vii.) If on the first, second or third anniversary dates of the original
issuance date of the preferred stock, the current market price per share
of common stock is less than the current conversion price, then the
conversion price will be reset to the average closing price of the ten
days prior to the anniversary date. However, under this section, the
conversion price will not be reset for the first and second anniversary
date lower than the lower of $1.60 or the price which results from
multiplying $1.60 by a fraction of which the numerator is the then
applicable conversion price ignoring any conversion price related to the
first reset date and the denominator is $2.50, or for the third
anniversary date will not be reset lower than the lower of $.20 or the
price which results from multiplying $.20 by a fraction of which the
numerator is the conversion price ignoring any applicable conversion price
related to the previous anniversary dates and the denominator is $2.50.
However, the conversion price will not be reset on the third anniversary
date if, prior to that date the United States Patent and Trademark Office
has issued a patent or a notice of allowance with claims have
substantially the same scope as the independent claims originally filed on
March 15, 2001 and covering a psoriasis vaccine marketed and
commercialized by the Company. The conversion price will not be reset if
the average closing price calculated is greater than the conversion price.
The preceding seven paragraphs represent an overview of the reset
provisions which are subject to the preferred stock agreement which
specifically defines: terms, methods of calculation, dates to use in
determining numerators and denominators, sources of information to be used
in calculations and other items too detailed and numerous to be included
here.
F-20
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 6 - CAPITAL STOCK ACTIVITY (Continued)
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 will receive 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 next two closings occurred in January and April 2002 and the
Company sold an aggregate 500,000 shares of Series A Preferred for a purchase
price of $5,000,000. The remaining 500,000 shares of Series A Preferred totaling
$5,000,000 are contracted to be sold in two equal installments which are
scheduled to close on July 31, 2002 and January 31, 2003.
The Company's stock price on December 10, 2001 was $3.03; consequently, pursuant
to the requirements of EITF 98-5 "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratios",
the issuance of the Series A Preferred, which are 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.
Since the conversion price of the Series A Preferred is subject to reset
provisions as described above - there is a contingent beneficial conversion
feature applicable to the Series A Preferred. Using the potential conversion
price of $1.60 for the first anniversary date, ignoring any other price
adjustments described above, the contingent beneficial conversions feature would
result in an additional preferred stock dividend of $6,817,500.
Automatic Conversion: Subject to the provisions of the Series A Preferred
agreement, each outstanding share of Series A Preferred will be automatically
converted into the number of shares of common stock equal to the quotient
obtained by dividing (i) the product of the Series A Preferred purchase price
(plus any declared but unpaid dividends thereon), and the number of shares of
Series A Preferred being converted by (ii) the conversion price (as adjusted or
reset), if at any time the Company consummates an underwritten public offering
of shares of its common stock registered under the Securities Act of 1933, where
the proceeds to the Company (prior to deducting any underwriters' discounts and
commissions) equals to or exceeds $30,000,000 and where the price per share of
common stock offered to investors in such offering (without subtracting any
underwriters discounts or commissions) exceeds the greater of $5.00 per share or
two times the conversion price (as adjusted or reset).
Conversion at the Corporation's Option: The Company may in any twelve month
period beginning after the second anniversary of the date convert up to 500,000
shares of Series A Preferred into such number of fully paid and nonassessable
whole shares of common stock as is obtained by multiplying the number of shares
of Series A Preferred to be converted by the Series A Preferred purchase price
(plus any declared but unpaid dividends thereon) and dividing the result by the
conversion price (as adjusted or reset), provided, however, that such conversion
may only occur if the average closing sale price per share of the Company's
common stock, calculated based on the closing sale price per share of the
Company's common stock for the thirty preceding consecutive trading days,
exceeds the greater of $10.00 or four times the conversion price (as adjusted or
reset).
F-21
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 6 - CAPITAL STOCK ACTIVITY (Continued)
Stock Warrants
At December 31, 2001, the Company had the following outstanding common stock
warrants to purchase its securities:
Number of Exercise Price
Warrants Issued Per Share
--------------- --------------
6,790,237 $1.60 - $4.00
========= =============
These warrants were primarily issued in connection with the exchange with
Astralis LLC and the private placement offering.
NOTE 7 - STOCK OPTION PLAN
On September 10, 2001 the Company adopted its 2001 Stock Option Plan which
provides for the granting of options to officers, directors, employees, and
consultants. The number of shares of common stock which can be purchased under
this plan is limited to 25,000,000 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.
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.
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 shareholders' 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.
F-22
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 7 - STOCK OPTION PLAN (Continued)
The components of deferred compensation for the options granted are as follows:
Consultants
-----------
Balance at December 31, 2001
Deferred compensation recorded $ 531,000
Amortization to stock-based compensation (132,750)
---------
Balance at December 31, 2001 (audited) 398,250
Amortization to stock-based compensation (33,188)
---------
Balance at March 31, 2002 (unaudited) $ 365,062
=========
Exercise prices for stock options outstanding as of December 31, 2001 and the
weighted average remaining contractual life are as follows:
Weighted Average Weighted
Exercise Options Remaining Number Average
Prices Outstanding Contractual Life Exercisable Exercise Price
-------- ----------- ----------------- ----------- --------------
$ 2.75 300,000 2.5 years 75,000 $ 2.75
FAS 123 were estimated as of the date of the grant using a Black-Scholes
option-pricing model. The fair value of options granted December 31, 2001 were
determined under the Black-Scholes option-pricing model using a volatility of
110%, a risk-free interest rate of approximately 4.1%, an expected life of 1-4
years and a dividend yield of zero.
NOTE 8 - 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.
F-23
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 8 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)
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.
Contributed Services
Certain members of the Company have provided services to the Company without
compensation. In accordance with the accounting treatment proscribed in the SEC
Staff Accounting Bulletin Topic 5-T, the Company has recorded as expense an
amount representing the value of these services totaling $12,986. An offsetting
entry was recorded to members' capital.
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 6).
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 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 Company entered into a services agreement whereby it agreed to pay
$11,000,000 to SkyePharma in return for SkyePharma providing all development,
manufacturing, pre-clinical and clinical development services for the Company's
primary product - 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. The payment terms
for the services agreement are fixed. $3,000,000 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. This $3,000,000 was
expensed in 2001.
The remaining $8,000,000 is required to be paid in eleven equal monthly
installments of $665,000, and a final payment of $685,000 for all months in
2002. For the three months ended March 31, 2002, the Company expensed $1,995,000
in connection with this agreement.
F-24
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 8 - RELATED PARTY - TRANSACTIONS/COMMITMENTS/INDEMNIFICATIONS (Continued)
SkyePharma has the right of first refusal 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.
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.
Other
A research entity owned by the spouse of the majority shareholder provided
research and development services to the Company totaling $143,711 and $121,962
for the period ended December 31, 2001 and March 31, 2002, respectively. The
full amount remained unpaid as of December 31, 2001.
NOTE 9 - OPERATING LEASES
During 2001 and the first four months of 2002, the Company shared office space
for its principal executive offices in Florham Park, New Jersey with a related
party at no expense. The value of the shared space is minimal.
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 will be $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.
On March 15, 2002, the Company leased an apartment for one majority shareholder
for one year. The lease will start from April 15, 2002 and end on April 14,
2003. Monthly rent will be $2,865, which will be paid by the Company.
NOTE 10 - 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.
F-25
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 10 - CONCENTRATIONS (Continued)
In 2002, the Company's sole source of funding is expected to be generated from
sales of its Series A Preferred shares under a purchase agreement with
SkyePharma. Should the remaining purchases of shares not occur as specified by
the purchase contract, the Company would need to find alternative sources of
financing, alter its business plan or curtail its operations.
NOTE 11 - LIQUIDITY AND CONTINGENCIES NOT DESCRIBED ELSEWHERE
There are many steps to the process that pharmaceutical products must undergo
before they can be commercially sold and distributed in the United States. Drugs
must undergo testing in compliance with US Food and Drug Administration ("FDA")
regulations and ultimately receive FDA approval. The Company's Psoraxine product
is expected to enter initial FDA testing in 2002. FDA testing occurs in various
phases over a multiple number of years.
The Company anticipates that their liquid resources as of March 31, 2002,
together with the $5,000,000 in proceeds to contractually be received from the
sale of their Series A Preferred (see Note 6) will be sufficient to finance its
currently anticipated needs for operating and capital expenditures for 2002 and
through the completion of Phase II of the FDA testing process in connection with
its Psoraxine vaccine. However, the Company will need to raise additional funds
from outside sources in order to complete future phases of FDA required testing.
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.
NOTE 12 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
Three Months
Period Ended Ended
December 31, 2001 March 31, 2002
----------------- --------------
Supplemental Disclosures
Cash Paid for Interest and Taxes $ 236 $ 300
======== =======
Non-Cash Transactions
Intangible expenses paid by
Members on behalf of
the Company $ 15,596 $ --
======== =======
The technology access option in the amount of $5,000,000 and services fees of
$3,000,000 were deducted from proceeds of preferred stock.
The Company received stock subscriptions during the year in the amount of
$1,350,000, which remained outstanding as of December 31, 2001.
F-26
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 12 - SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION (Continued)
The Company recorded a preferred stock dividend in the amount of $2,120,000 for
the beneficial conversion feature of the preferred stock issued.
Payment of the January 2002 service fee in the amount of $665,000 was netted
against the SkyePharma January 31, 2002 installment purchase of Company Series A
Preferred.
For the three months ended March 31, 2002 the Company recorded an unrealized
loss on its securities available-for-sale in the amount of $56,158.
NOTE 13 - MARKETABLE SECURITIES (UNAUDITED)
The Company's marketable equity securities consisted of certificates of deposits
and government securities that have a readily determinable fair market value.
Management determines the appropriate classification of its investments using
Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" at the time of purchase, and
re-evaluates such determinations at each balance sheet date.
The securities reflected in these financial statements are deemed by management
to be "available-for-sale" and, accordingly, are reported at fair value, with
unrealized gains and losses reported in other comprehensive income and reflected
as a separate component within the Stockholders' Equity section of the balance
sheets. Realized gains and losses on securities available-for-sale are included
in other income/expense and, when applicable, are reported as a reclassification
adjustment, net of tax, in other comprehensive income. Gains and losses on the
sale of available-for-sale securities are determined using the
specific-identification method.
As of March 31, 2002, available-for-sale securities consist of the following:
Gross Gross
Amortized Unrealized Unrealized
Due Cost Loss Gains Fair Value
--------- ----------- ---------- --------- -----------
Certificate of 4/2002 to
Deposits 2/2003 $ 2,390,336 $ (2,152) $ 546 $ 2,388,730
Government 4/2006 to
Securities 11/2011 1,360,246 (54,552) -- 1,305,694
----------- ---------- --------- -----------
$ 3,750,582 $ (56,704) $ 546 $ 3,694,424
----------- ---------- --------- -----------
Less Current
Portion (1,000,000) -- -- (1,000,000)
----------- ---------- --------- -----------
Non-Current
Portion $ 2,750,582 $ (56,704) $ 546 $ 2,694,424
=========== ========== ========= ===========
F-27
ASTRALIS, LTD.
(A Development Stage Entity)
Notes to Financial Statements
(Information as of March 31, 2002 and for the Three Months
Ended March 31, 2002 and 2001 is Unaudited)
NOTE 14 - COMPREHENSIVE LOSS (UNAUDITED)
Excluding net loss, the Company's source of comprehensive loss is from the net
unrealized loss on its marketable debt securities, which are classified as
available-for-sale. The following summarizes the components of comprehensive
loss:
Three Months March 12, 2001
Ended (Inception) to
March 31, 2002 March 31, 2001
-------------- --------------
Net loss $(2,795,929) $ (3,220)
Other comprehensive loss
Unrealized loss, net (56,158) --
----------- ----------
Comprehensive loss $(2,852,087) $ (3,220)
=========== ==========
NOTE 15 - SUBSEQUENT EVENTS
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.
NOTE 16 - SUBSEQUENT EVENTS - (UNAUDITED)
Certain stockholders owed $1,350,000 to the Company, under stock subscription
agreements, which was due February 13 and May 13, 2002 (see Note 6). This money
was not paid to the Company causing the notes to become in default. On June 3,
2002 the Company entered into a payment plan agreement with a representative of
the stockholders, whereby the stockholders will pay the amounts due, in
approximately equal amounts, over a nine-month period commencing in June 2002.
The stockholders will be subject to forfeiture of a percentage of their shares
if they do not make the required payments. The Company has also agreed to extend
the expiration date of warrants to purchase 3,150,000 shares of common stock
from December 13, 2003 to December 13, 2004.
F-28
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.
Under Delaware law, we may indemnify our officers and directors for
various expenses and damages resulting from their acting in those capacities.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have 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.
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
------
Registration Fee $ 483
Printing $ 7,500
Legal Fees and Expenses $25,000
Accounting Fees and Expenses $17,000
Transfer Agents and Registrars Fees $ 0
Miscellaneous $ 17
TOTAL $50,000
The above fees will be paid by us and not by the selling stockholders.
II-1
Item 26. Recent Sales of Unregistered Securities
On January 10, 2002 Messrs. Ajnsztajn, O'Daly and Liebhaber, who each
serve on our Board of Directors and who respectively serve as our Chief
Executive Officer, Chairman of the Board of Directors and President of Research
and Development, and Director of International Affairs, transferred respectively
175,000, 275,000 and 50,000 shares of our common stock owned by them to Manolo
Tarabay for consulting services rendered by Mr. Tarabay in connection with their
efforts to raise capital for our company. Messrs. Ajnsztajn, O'Daly and
Liebhaber relied on the exemption from registration afforded by Section 4(2) of
the Securities Act of 1933. They relied upon the fact that the transfer to Mr.
Tarabay did not constitute a public offering. No underwriter was used in
connection with the transfer.
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. As
of July 22, 2002, pursuant to the Purchase Agreement, SkyePharma purchased
1,500,000 shares of our Series A Convertible Preferred Stock, $.001 par value
per share, at a purchase price of $10.00 per share, or an aggregate purchase
price of $15,000,000. Pursuant to the Purchase Agreement, SkyePharma will make
a total equity investment in our company of up to $20,000,000. SkyePharma has
agreed to purchase for $5,000,000 an additional 500,000 shares of preferred
stock in two equal installments on July 31, 2002 and January 31, 2003. Each
share of preferred stock issued pursuant to the Purchase Agreement is
convertible into four shares of common stock at the option of SkyePharma
initially at a conversion rate of $2.50 per share of common stock. 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. We relied on the fact that the offering was only made available to
"Accredited Investors" as defined in Rule 501 of Regulation D, the offering of
preferred stock pursuant to the Purchase Agreement was made available to less
than 35 purchasers as required by Rule 506(a)(2) 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. No
underwriter was used in connection with the offering.
During November of 2001, we completed a private placement offering
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. We relied on
the fact that the offering was only made available to "Accredited Investors" as
defined in Rule 501 of Regulation D, the offering was made available to less
than 35 purchasers as required by Rule 506(a)(2) 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. No
underwriter was used in connection with the private placement.
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. No underwriters were used in connection with this
transaction. We relied on the exemption from registration afforded by Section
4(2) of the Securities Act of 1933. We relied on the fact that this
transaction did not constitute a public offering.
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. We relied upon the fact that our issuance of the promissory note did not
constitute a public securities offering. No underwriter was used in connection
with the issuance of the promissory note.
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. Astralis LLC relied on the fact that the aggregate
offering price for the units did not exceed $5 million, less the aggregate
offering price for all securities sold within the twelve months before the start
of and during the offering in reliance on any exemption under Section 3(b) of,
or in violation of Section 5(a) of, the Securities Act of 1933, the offer to
purchase the units was made available to under 35 purchasers 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. No underwriter was
used in connection with the sale of the units.
During April of 2001, we issued warrants to purchase 75,000 share 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. We relied upon the fact that our issuance of the
warrants did not constitute a public securities offering. No underwriter was
used in connection with the issuance of the warrants.
II-3
During the period from March 15 through April 26, 2000, we issued and sold
an aggregate of 750,000 shares (7,500,000 shares post stock dividend) of common
stock to a total of fifty persons, all of whom are residents of the State of
Colorado, for cash consideration totaling $75,000. We made the sales in reliance
upon the exemption from registration with the U.S. Securities and Exchange
Commission provided under Section 3(b) of the Securities Act of 1933 and Rule
504 of Regulation D under the Securities Act of 1933, and via registration by
qualification with the Colorado Division of Securities under Section 11-51-304
of the Colorado Uniform Securities Act. Our Application for Registration by
Qualification became effective with the Colorado Division of Securities on March
15, 2000. No underwriter was employed in connection with the offering and sale
of the shares. The facts that we relied upon to make the federal exemption
available include, among others, that: (i) the aggregate offering price for the
offering of the shares of common stock did not exceed $1,000,000, less the
aggregate offering price for all securities sold within the twelve months before
the start of and during the offering in reliance on any exemption under Section
3(b) of, or in violation of Section 5(a) of, the Securities Act of 1933; (ii)
the required number of manually executed originals and true copies of Form D
were duly and timely filed with the Securities and Exchange Commission; (iii) we
conducted no general solicitation or advertising in connection with the offering
of any of the shares and (iv) at the time of the offering, we were not subject
to the reporting requirements of Section 13 or 15(d) of the Exchange Act of
1934.
On June 30, 1999, we issued and sold 23,800,000 shares of common stock
to each of Messrs. J. Peter Garthwaite and Bradley A. Scott in consideration for
services performed by each individual in connection with our organization valued
at $119 in each case (a total of $238 at the rate of $.0001 per share). Messrs.
Garthwaite and Scott served as our President/Chief Executive Officer/Treasurer
and Secretary, respectively, and directors from the date of our inception on
June 30, 1999, until their voluntary resignations on February 28, 2001. Messrs.
Garthwaite and Scott sold their 2,380,000 shares of common stock representing
approximately 76% of our then 3,130,000 outstanding shares of common stock, to
Mr. Shai Stern, who served as our President, Chief Executive Officer and sole
director from February 28, 2001 until his resignation pursuant to the
Contribution Agreement on November 13, 2001. We relied, in connection with the
sales of the shares, upon the exemption from registration afforded by Section
4(2) of the Securities Act of 1933 and Section 11-51-308(1)(p) of the Colorado
Uniform Securities Act. We relied upon the fact that the issuance and sale of
the shares did not constitute a public securities offering together with the
fact that Messrs. Garthwaite and Scott were our executive officers, directors
and controlling stockholders at the time of the sales, to make the exemptions
available. No underwriter was used in connection with this transaction.
II-4
Item 27. Exhibits
Exhibit Number Description
-------------- -----------
3.1 * Certificate of Incorporation of Astralis Ltd.
3.2 * Bylaws of Astarlis Ltd.
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.
16.2 ++ Letter of Cordovano and Harvey, P.C.
23.1 Consent of LJ Soldinger Associates Ltd.
23.2 Consent of McCarter & English, LLP (included in Exhibit 5.1 to
this Registration Statement)
----------
* 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.
# 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 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 Current Report for Astralis Pharmaceuticals Ltd. on November 29,
2001.
II-5
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:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth 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 Securities and Exchange Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than 20 %
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities which remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act 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.
II-6
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-7
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 July 23, 2002.
ASTRALIS LTD.
By: /s/ Mike Ajnsztajn
----------------------------
Mike Ajnsztajn
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.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
* Chairman of the Board July 23, 2002
--------------------------
Dr. Jose Antonio O'Daly
/s/ Mike Ajnsztajn Chief Executive Officer and July 23, 2002
-------------------------- Director (principal executive
Mike Ajnsztajn officer)
/s/ Gina Tedesco Chief Financial Officer and July 23, 2002
-------------------------- Director (principal financial
Gina Tedesco and accounting officer)
II-8
* Director July 23, 2002
--------------------------
Steven Fulda
* Director July 23, 2002
--------------------------
Gaston Liebhaber
* Director July 23, 2002
--------------------------
Fabien Pictet
* Director July 23, 2002
--------------------------
Michael Ashton
* By: /s/ Gina Tedesco July 23, 2002
--------------------
Gina Tedesco
Attorney-in-Fact
II-9
Exhibit Number Description
-------------- -----------
3.1 * Certificate of Incorporation of Astralis Ltd.
3.2 * Bylaws of Astarlis Ltd.
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.
16.2 ++ Letter of Cordovano and Harvey, P.C.
23.1 Consent of LJ Soldinger Associates Ltd.
23.2 Consent of McCarter & English, LLP (included in Exhibit 5.1
to this Registration Statement)
-------------
* 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.
# 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 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 Current Report for Astralis Pharmaceuticals Ltd. on November 29, 2001.