UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
ISOLAGEN, INC.
(Name of small business issuer in its charter)
Delaware 0-12666 87-0458888
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 Wilcrest, 5th Floor
Houston, Texas 77042
(Address of principal executive offices, including zip code)
(713) 780-4754
(Issuer's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class Name of Each Exchange on which Registered
Common Stock, $.001 par value American Stock Exchange
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for any shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB/A or any
amendment to this Form 10-KSB/A. [X]
Issuer's revenues for its most recent fiscal year were $90,991.
As of March 24, 2003, the aggregate market value of the issuer's common stock
held by non-affiliates of the issuer based upon the price of at which such
common stock was sold on the American Stock Exchange as of such date was
$23,831,501.
As of March 24, 2003, issuer had 15,389,563 shares of issued and outstanding
common stock, par value $0.001.
Documents Incorporated by Reference: Portions of the information set forth in
the definitive proxy statement to be filed by the registrant within 120 days of
the close of the fiscal year are incorporated by reference in Part III hereof.
Transitional Small Business Issuer Format: Yes [ ] No [X]
EXPLANATORY NOTE
THIS ANNUAL REPORT ON FORM 10-KSB/A IS BEING FILED FOR THE PURPOSE OF
AMENDING AND RESTATING ITEMS 6 AND 7 OF PART 1 SOLELY TO THE EXTENT NECESSARY
(I) TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF
AND FOR THE PERIODS ENDED DECEMBER 31, 2002 AND 2001, AS DESCRIBED IN NOTE 2 TO
THE CONSOLIDATED FINANCIAL STATEMENTS, (II) TO MAKE REVISIONS TO "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS", AS
WARRANTED BY THE RESTATEMENT, (III) TO INCLUDE THE CERTIFICATIONS REQUIRED BY
THE SARBANES-OXLEY ACT OF 2002 AND (IV) TO UPDATE THE EXHIBITS AND REPORTS ON
FORM 8-K IN ACCORDANCE WITH THE AMENDMENT. WE HAVE MADE NO FURTHER CHANGES TO
THE PREVIOUSLY FILED FORM 10-KSB/A. ALL INFORMATION IN THIS ANNUAL REPORT ON
FORM 10-KSB/A IS AS OF DECEMBER 31, 2002 AND DOES NOT REFLECT ANY SUBSEQUENT
INFORMATION OR EVENTS OTHER THAN THOSE REFLECTED IN THE RESTATEMENT.
Isolagen, Inc. has not amended its Annual Report on Form 10-KSB for the
period ended December 31, 2001 or Quarterly Reports on Form 10-QSB for the
periods affected by the restatement during the year ended December 31, 2001,
therefore, the consolidated financial statements and related financial
information contained therein should no longer be relied upon. The restated
consolidated financial statements for the year ended December 31, 2001 are
included as part of the consolidated financial statements included in this
Annual Report on Form 10-KSB/A.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.............................................1
ITEM 2. DESCRIPTION OF PROPERTY............................................16
ITEM 3. LEGAL PROCEEDINGS..................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ...........................................17
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS.............................................18
ITEM 7. FINANCIAL STATEMENTS...............................................22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT............................................................23
ITEM 10. EXECUTIVE COMPENSATION.............................................23
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.....................................................23
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS...............23
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K...................................23
ITEM 14. CONTROLS AND PROCEDURES............................................24
This report contains forward-looking statements that relate to future
events or our future financial performance and involve known and unknown risks,
uncertainties and other factors that may cause Isolagen, Inc.'s or its
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," or the negative of these terms or other
comparable terminology. These statements are only predictions. Actual events or
results may differ materially.
Although Isolagen, Inc. believes that the expectations reflected in the
forward-looking statements are reasonable, it cannot guarantee future results,
levels of activity, performance, or achievements. Moreover, neither Isolagen,
Inc. nor any other person assumes responsibility for the accuracy and
completeness of these forward-looking statements. Isolagen, Inc. is under no
duty to update any of the forward-looking statements after the date of this
report to conform its prior statements to actual results. Isolagen Inc.'s actual
results could differ materially from its historical operating results and from
those anticipated in these forward-looking statements as a result of certain
factors, including, without limitation, those set forth under "Risk Factors" of
this Form 10-KSB/A and those set forth under "Management's Discussion and
Analysis or Plan of Operation."
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Isolagen, Inc. ("Isolagen" or the "Company") is the parent company of
Isolagen Technologies, Inc., a Delaware corporation ("Isolagen Technologies").
Isolagen Technologies is the parent company of Isolagen Europe Limited, a
company organized under the laws of the United Kingdom and wholly-owned
subsidiary of Isolagen Technologies ("Isolagen Europe"). Isolagen Technologies
is also the parent company of Isolagen Australia Pty Limited, a company
organized under the laws of the Australia and wholly-owned subsidiary of
Isolagen Technologies ("Isolagen Australia"). The common stock, par value $0.001
per share, of the Company ("Common Stock") is traded on the American Stock
Exchange ("AMEX") under the ticker symbol "ILE."
Isolagen is a Houston, Texas based biotechnology company which has
developed a patented process for the propagation of autologous cells to be used
to stimulate a patient's own collagen and elastin production. Autologous cells
are a patient's own cells taken from a small skin sample. From such sample,
millions of cells can be grown and then injected into the patient to correct and
reduce the normal effects of aging like wrinkles, laugh lines, smokers lines,
fine lines and all types of depressed scars. The procedure is minimally invasive
and non-surgical. Currently, there are multiple competitive alternatives to
reduce the signs of aging, but the Company believes they offer short term and
often painful solutions. Their solutions often involve substitute products or
fillers, such as human cadaver or animal collagen or synthetic chemicals. A well
known example is Botox, which uses diluted, liquid toxin to attain a correction
through muscle paralysis.
In contrast, the Isolagen Process (as described in more detail below) is a
self healing protein repair system that uses only the patient's own (autologous)
cells. Since these cells belong only to the patient and house his or her own
deoxyribonucleic acid ("DNA"), there is a reduced chance for rejection or
allergic reaction. It is important to note that the cells are grown
individually. There is no batch manufacturing and the Company's Laboratory
Information Management System ("LIMS") keeps the cells self contained and
separate.
The Isolagen Process is designed to replenish deficiencies caused through
the loss of fibroblast cells as the body ages. The body losses approximately 1%
of the body's fibroblast cells per year. The fibroblast cell is the cell
responsible for producing collagen, "the structural matrix", that supports the
skin and also produces elastin. By the time a person is 40 years old, his or her
body has depleted approximately 40% of its fibroblast cells, thus causing dermal
depressions and wrinkles. The Isolagen Process reduces dermal depressions and
wrinkles by replenishing the area of deficiency with millions of the patient's
own new living fibroblast cells. Within weeks after the injection, the millions
of new fibroblast cells will produce new collagen and elastin and will help
diminish wrinkles.
In the early 1990s, Olga Marko, currently Senior Vice President and
Director of Research of the Company, was researching a way to identify
autologous cellular systems ("ACS") which could stimulate a patient's own
collagen production. Ms. Marko developed a process of extracting a patient's own
cells (dermal fibroblasts), growing and
1
expanding those cells in a controlled environment, and then re-introducing such
cells into the skin of the patient's face, thereby stimulating the growth of the
patient's collagen resulting in the repair of dermal defects (the "Isolagen
Process"). With the support of William K. Boss, Jr., M.D., currently Vice
Chairman of the Company, a board certified plastic surgeon, Isolagen
Technologies was formed on December 28, 1995 with the purpose of researching,
marketing and commercializing the Isolagen Process for cosmetic applications.
In 1995, Dr. Boss began treating a small percentage of his patients with
the Isolagen Process to correct defects (e.g., wrinkles, depressions and
scarring) in the patient's face. Dr. Boss and Ms. Marko solicited the clinical
support of Gregory Keller, M.D., Associate Chief of Head and Neck Plastic
Surgery at the University of California at Los Angeles Medical School, and W.
Gregory Chernoff, M.D., a plastic surgeon with practices in California and
Indiana. Between 1995 and 1999 Drs. Boss, Keller and Chernoff, together with
approximately 200 other doctors, utilized the Isolagen Process on approximately
963 patients with positive results. The use of the Isolagen Process on such
patients provided evidence to Isolagen Technologies that the Isolagen Process
could effectively grow and re-introduce a patient's own cells with beneficial
results. Of the 963 patients treated with the Isolagen Process, totaling
approximately 3,000 procedures, the participating physicians documented no
significant adverse reactions. Although all these procedures were at least three
(3) years ago and some as long as seven (7) years ago; the majority of patients
still report satisfaction with results of the procedures to their physicians.
The Company believes that since the Isolagen Process involves a patient's own
cells, the possibility of allergic reaction is reduced and the therapeutic
correction appears to be long lasting with the patients experiencing gradual and
continued improvement as a result of the natural activity of the patient's own
re-introduced cell structure.
In 1997, the U.S. Food and Drug Administration ("FDA") began regulating
the science of biologics. Biologic products like ACS, in contrast to drugs that
are chemically synthesized, are derived from living sources (such as humans,
animals, and microorganisms). From 1995 to 1999, management of Isolagen
Technologies believed that FDA approvals were not required for use of the
Isolagen Process, based on advice from FDA consultants. In 1999, the FDA advised
Isolagen Technologies that use of the Isolagen Process would require FDA
approval, and Isolagen Technologies filed an investigational new drug
application ("IND") covering the Isolagen Process with the FDA. An IND is a
request for authorization from the FDA to administer an investigational drug or
biologic product to humans. Such authorization must be secured prior to
commercialization of any new drug or biological product. After its review of
Isolagen Technologies' IND on December 9, 1999, the FDA placed the IND on
clinical hold until the manufacturing processes and procedures of Isolagen
Technologies were changed to meet these new standards, and FDA approval was
obtained. The use of the Isolagen Process was discontinued after the FDA placed
the IND on hold.
On August 10, 2001, the Company, then known as American Financial Holding,
Inc., acquired Isolagen Technologies through the merger of its wholly-owned
subsidiary, Isolagen Acquisition Corp., and an affiliated entity, Gemini IX,
Inc., with and into Isolagen Technologies (the "Merger"). As a result of the
Merger, Isolagen Technologies became a wholly-owned subsidiary of the Company.
On November 13, 2001, the Company changed its name to Isolagen, Inc.
Simultaneously with the Merger, the Company raised over $2,000,000 in equity, at
$1.50 per share, in a private placement of Common Stock and converted $1,450,000
principal amount of Company debt and approximately $625,000 of accrued
liabilities of the Company to equity. For further discussion of the accounting
treatment of the transactions, please see footnote 1 of the audited consolidated
financial statements contained at Item 7.
In August 2001, the Company engaged Cato Research Limited ("Cato"), a
research and development organization which assists pharmaceutical and
biotechnology companies in navigating the regulatory approval process. With the
assistance of Cato, the Company's IND was released from clinical hold by the FDA
in April 2002 and the Company is currently planning Phase III clinical trials of
the Isolagen Process. Several studies are taking place, including dosage
management, dental application relating to gum and bone, cosmetic correction and
treatment for scarring. These studies are operational under currently active
INDs with the FDA. The Company believes that these INDs are scheduled for
License Application (approval) by the FDA in 2003, although there can be no
assurance that such approval will be obtained or obtained on a timely basis.
In August 2001, the Company formed Isolagen Europe for the purpose of
exploring the utilization of the Isolagen Process on patients located in the
United Kingdom. The Company's management has made inquiry to the Medicines
Control Agency with respect to the Company's proposed use of the Isolagen
Process in cosmetic applications in the United Kingdom. Based on the written
responses received from the Medicines Control Agency, management believes that
the proposed use of the Isolagen Process in cosmetic applications in the United
Kingdom will not require regulatory approval. In 2003, the Company anticipates
seeking commercialization in the following countries: Australia, South Korea,
Hong Kong, Italy and Mexico. However, due to the unpredictability of regulatory
approval in these
2
countries, the Company can give no assurance that any of these countries will
approve such use or the time period for any such approval.
In July 2002, the Company raised $10,132,500 in a private placement of its
Series A Convertible Preferred Stock at an offering price of $3.50 per share.
Each share of Series A Convertible Preferred Stock is convertible into two (2)
shares of Common Stock at any time after issuance and accrues dividends at 8%
per annum payable in cash or additional shares of Series A Convertible Preferred
Stock.
In September 2002, the Company opened its London cellular laboratory that
can serve the European marketplace if required regulatory approvals are
obtained. The new cellular facility, located at 59/61 Park Royal, London, NW10
7JJ, England began operations in the 4th quarter of 2002.
STRATEGY AND VISION
The Company's goal is to become the industry leader in the research,
development and commercialization of the Isolagen Process and the use of ACS,
although there can be no assurance in that regard. The Company is pursuing,
through Isolagen Europe, commercial operations in the United Kingdom and is
pursuing commercial operations through subsidiaries, joint ventures or license
arrangements in Australia, South Korea, Hong Kong, Brazil, and Mexico.. The
Company is investigating regulatory and other requirements in these countries
and evaluating markets and potential joint venture partners and licensees. In
the future, the Company believes that it can increase and strengthen its market
position in the following ways:
- Expanding and solidifying its relationship with the approximately
200 physicians who have used the Isolagen Process with their
patients, as well as marketing the Company's processes and products
to other doctors (i.e., plastic surgeons, facial plastic surgeons,
dermatologists and aestheticians).
- Continuing its current research into the science of ACS.
- Working with regulatory agencies, country by country, to obtain the
approval of the Isolagen Process and future products of the Company.
- Investigating foreign markets for the Isolagen Process and future
products.
- Developing new applications for the Isolagen Process beyond cosmetic
facial rejuvenation, such as dental applications.
- Designing and developing new laboratory facilities.
The Company's business plan is focused on the following major steps:
- ESTABLISHING AND FORMALIZING STRATEGIC PARTNERING RELATIONSHIPS. The
Company is conducting discussions with identified industry leaders
in the pharmaceutical and medical device industries for
application-specific sales and distribution of the Company's
techniques and products. The Company's aim is to establish
relationships with industry leaders, both domestic and
international, which represent the broadest market appeal for
specific Company products and techniques.
- ACCELERATING CURRENT RESEARCH EFFORTS. The Company is working on
capturing the full benefit of the Isolagen Process and ACS
technology in applications in the cosmetic field. The research
capability that has produced the Isolagen Process could be
applicable to other processes stimulated by ACS technology such as
gum rejuvenation and other dental applications, urology, bone marrow
and other pigment-related maladies.
- EXPANDING PRODUCTION FACILITY CAPACITY. Isolagen Technologies
operates a laboratory facility in Houston, Texas which is equipped
with state-of-the-art tissue culture equipment, instrumentation and
storage systems.
- EXPANDING SALES, PRODUCTION AND ADMINISTRATIVE RESOURCES. Increased
sales, research, and foreign affiliations will require more
resources of the Company. These will be supplied through third party
relationships and increases to staff as necessary.
3
- SUPPLEMENTING AND LEVERAGING EXISTING ADVISORY RELATIONSHIPS.
Physicians are a primary channel for introducing and distributing
new products. To facilitate the marketing strategies outlined above,
existing physician and corporate relationships of the Company will
be supplemented and leveraged. Their support is a key building block
in the future growth of the Company.
MARKET SIZE AND CHARACTERISTICS
The Isolagen Process of tissue regeneration is directed primarily at the
dermatological and plastic surgery markets. According to the American Society of
Plastic Surgeons ("ASPS") and the Plastic Surgery Educational Foundation
("PSEF"):
- 6.6 million people had cosmetic plastic surgery in 2002;
- Approximately 1.1 million Botox injections were performed in 2002;
- More than 4.9 million people had non-surgical cosmetic procedures in
2002;
- In 2002, 37% of all cosmetic plastic surgery patients were repeat
patients.
ASPS and PSEF statistics represent patients having procedures performed by
member surgeons certified by the American Board of Plastic Surgery as well as
other physicians certified by the American Board of Medical Specialties.
FACIAL REJUVENATION
The first application of the Isolagen Process is for facial rejuvenation,
which the Company intends to market as a "Natural Collagen Supplementation
System." The primary benefits of the Natural Collagen Supplementation System are
three-fold:
- Since this is an autologous system (exclusively using a patient's
own cells), the Company believes there is a reduced possibility of
allergic reaction as compared to bovine collagen and non-natural
fillers.
- The therapeutic correction received is lasting because the patient's
immune system recognizes the injected cells as the patient's own and
does not reabsorb or reject them as it does with foreign materials
and proteins.
- Patients experience gradual and continued improvement as a result of
the natural activity of the re-introduced cells.
These three benefits represent substantial advances in facial rejuvenation
since the standard until now has been bovine collagen. Bovine collagen, a
foreign protein derived from cows, is generally fully reabsorbed by a patient's
body within a few months after application, leaving the patient with no visible
signs of correction. As additional treatments with bovine collagen are
performed, there is a gradual build-up of the body's antibodies and the
development of enzymes that compromise the treatment's effectiveness. Combined
with the expense and the continued intrusiveness of ongoing treatments, the
value and benefit of bovine collagen injections is diminished.
The benefits of the proposed Natural Collagen Supplementation System
outlined above counter the drawbacks to bovine collagen treatments, thereby
extending the market potential for soft tissue regeneration to a broader
population of patients. This broader population includes those who have tried
and discontinued use of bovine collagen and those that never considered
treatments due to potential drawbacks.
THE ISOLAGEN PROCESS IN DETAIL
First a 3 mm punch skin sample is obtained in the scalp area behind the
patient's ear. This area is chosen because of its vascularity, lack of sun
exposure and invisibility of any scar. The skin sample specimen is packed in a
container provided by the Company and shipped overnight to the Company's
laboratory. The specimen is then cultured utilizing the Company's patented
Isolagen Process. This process separates the cell, called a fibroblast, from the
rest of the tissue then multiplies these fibroblasts. Approximately six (6)
weeks later, 1 ml is returned to the patient's doctor for an intradermal test in
the patient. Two (2) weeks later, 1 to 1.5 ml of the patient's cells are also
sent to the doctor for
4
treatment. Additional amounts of 1 to 1.5 ml are available for re-injection
every two (2) to three (3) weeks. A fibroblast culture from a patient may also
be cryogenically stored by the patient for future use.
Fibroblasts stimulate collagen production. Fibroblasts have a finite
lifespan and finite ability to repair damage. "Younger" fibroblasts are more
effective than "older" fibroblasts from older or more photodamaged patients. The
amount of correction a patient would see depends on a variety of factors,
including the type of facial line, type of scar, age of the patient and the
intrinsic ability of each patient's fibroblasts to create more collagen. Our
product is the only product on the market that utilizes a patient's own cells or
is autologous. There is no foreign substance utilized in our treatment. We are
currently charging physicians approximately $1,800 for three injections.
Alternative products include Zyderm/Zyplast, Hlyaform, Fibrel, Autologen,
Demolagen Lypocytic Dermal Augmentation, Alloderm, Artecoll, Softform, Silicon
Droplets, Botox, Ablative Lasers, Non-Ablative Lasers, Microdermabrasion and
Chemical Peels. These products will cost in the range of $400 to $1,250 per
procedure, and last in the range of three months to one year.
REGULATORY PROCESS AND CLINICAL TRIALS
The Company's technologies are subject to extensive government regulation
principally by the FDA and state and local authorities in the United States and
by comparable agencies in certain foreign countries. Products for human
treatment are subject to rigorous pre-clinical and clinical testing procedures
as a condition for approval by the FDA and by similar authorities in foreign
countries. These regulations apply to the testing, manufacturing, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. The FDA does not apply a single regulatory scheme to human tissues and
the products derived from human tissue. On a case-by-case basis, the FDA may
choose to regulate such products as transplanted human tissue, medical devices
or biologics. A fundamental difference in the treatment of products under these
classifications is that the FDA generally permits human tissue for
transplantation to be commercially distributed without premarket approval. In
contract, products regulated as medical devices or biologics usually require
such approval. The process of obtaining premarket approval for a biologic is
often expensive, lengthy and uncertain. The steps required before a biologic may
be marketed in the United States include (i) preclinical laboratory and testing,
(ii) submission to the FDA of an IND application, which must become effective
before clinical trials may commence, (iii) adequate and well-controlled clinical
trials to establish the safety and efficacy of the drug, (iv) submission to the
FDA of a New Drug Application ("NDA") and (v) FDA approval of the NDA prior to
any commercial sale or shipment of the biologic. In addition to obtaining FDA
approval for each product, each domestic drug-manufacturing establishment must
be registered with, and approved by, the FDA.
In 1997, the FDA began regulating the science of biologics. Biologics, in
contrast to drugs that are chemically synthesized, are derived from living
sources (such as humans, animals, and microorganisms) like the Isolagen Process.
For the regulation of biologics, the FDA imposes a special additional licensing
requirement known as a Biologic License. The license imposes very specific
requirements upon the facility and the manufacturing and marketing of licensed
products to assure their safety, purity, and potency. Before conducting the
required clinical testing of a biological product, an applicant must submit an
IND to the FDA, containing preclinical data demonstrating the safety of the
product for human investigational use, information about the manufacturing
processes and procedures and the proposed clinical protocol. In 1999, Isolagen
Technologies filed such an IND on the Isolagen Process with the FDA. Clinical
trials of biological products typically are conducted in three sequential
phases, but may overlap. Phase I trials test the product in a small number of
health subjects, primarily to determine its safety and tolerance at one or more
doses. In Phase II, in addition to safety, the efficacy, optimal dose and side
effects of the product are evaluated in a patient population somewhat larger
than the Phase I trials. Phase III involves further safety and efficacy testing
on an expanded patient population at geographically dispersed test sites. All
clinical studies must be conducted in accordance with FDA approved protocols and
are subject to the approval and monitoring of one or more institutional review
boards. In addition, clinical investigations must adhere to good clinical
practices. Completion of all three phases of clinical studies may take several
years and the FDA may temporarily or permanently suspend a clinical study at any
time. Upon completion and analysis of clinical trials, the applicant assembles
and submits a Biologic License Application containing, among other things, a
complete description of the manufacturing process. Before the license can be
granted, the applicant must also undergo a successful establishment inspection.
In 1995, when Isolagen Technologies began operations, the FDA had no
regulations governing the area of biologics. New regulations were promulgated by
the FDA in 1997. After reviewing the new regulations and seeking the advice of
consultants, Isolagen Technologies concluded that the use of the Isolagen
Process in cosmetic applications did not require the approval of the FDA. The
FDA disagreed. Isolagen Technologies filed an IND which was placed on clinical
hold until the Company's manufacturing processes and procedures were changed to
meet these new standards, and FDA approval is obtained.
5
Prior to the Merger, Isolagen Technologies did not have the financial
resources to complete the FDA process. Following the Merger, the Company
provided such financing and in April 2002, the FDA released Isolagen
Technologies' IND and clinical trial negotiations began. As a result, a 397
patient retrospective study has been completed. The results demonstrated both
safety and efficacy as Phase II data. Using Isolagen Technologies recently
completed cGMP laboratory facility in Houston, Texas, several studies are taking
place. These include: dosage management, dental application relating to gum and
bone, cosmetic correction and scarring. They are operational under currently
active INDs with the FDA. The Company believes that these INDs are scheduled for
Biologic License Application (approval) by the FDA in 2003, although there can
be no assurance that such approval will be obtained or obtained on a timely
basis.
The Company has developed rigorous internal standards for testing and
compiling the data necessary for its FDA filings. The Company conducts
feasibility studies for all the medical conditions it proposes to treat prior to
filing applications with the FDA for pivotal trials. This process has allowed
the Company to submit more precise protocols to the FDA, clearly defining the
clinical objectives that the Company wishes to support in the pivotal trial
phase.
INTERNATIONAL REGULATION
The regulation of the Company's products, including the Isolagen Process,
outside of the United States varies by country. Certain countries regulate human
tissue products as a pharmaceutical product, which would require the Company to
make extensive filings and obtain regulatory approvals before selling its
products. Certain countries classify the Company's products, including the
Isolagen Process, as human tissue for transplantation but may restrict its
import or sale. Other countries have no application regulations regarding the
import or sale of products similar to the Company's products, creating
uncertainty as to what standards the Company may be required to meet. The
Company's management has made inquiry to the Medicines Control Agency with
respect to the Company's proposed use of the Isolagen Process in cosmetic
applications in the United Kingdom. Based on the written responses received from
the Medicines Control Agency, management believes that the proposed use of the
Isolagen Process in cosmetic applications in the United Kingdom will not require
regulatory approval. In 2003, the Company intends to seek commercialization in
the following countries: Australia, South Korea, Hong Kong, Italy and Mexico.
The Company believes that its products are not regulated as pharmaceutical
products in Australia, South Korea, Hong Kong, Italy and Mexico, although there
is substantial uncertainty regarding the regulation of the Company's products
under the laws of those foreign countries. However, due to the unpredictability
of regulatory approval in these and other countries, the Company can give no
assurance that it will receive any necessary regulatory approval for the sale of
its products. Failure to comply with any country's regulatory requirements could
result in material adverse consequences for the Company. See "Risk Factors."
ISOLAGEN DENTAL PRODUCT
It is well known that papilla recession, also known as black triangle
disease, is the number one cause of periodontal disease and there has been no
effective treatment. In cases where the recession of the gum has progressed to
an advanced stage, the accepted approach has been to take a graft from the
palate, which creates in some cases, donor side defects and is extremely
painful. This drastic and complex surgical procedure has provided varying
results which are not fully embraced by periodontists due to the donor site
morbidity associated with the taking of such a large piece of the palate.
Papilla recession is the receding of the triangular piece of gum tissue
between two teeth. The Company believed that if the fibroblasts from the facial
area could stimulate collagen growth in the face, then the fibroblasts from the
oral cavity could stimulate collagen production in the mouth. If this premise is
correct, the Isolagen Process could enhance the oral tissue which should result
in the prevention of black triangle disease.
In 1999, Isolagen engaged Dr. Nick Elian, D.D.S., an associate professor
at New York University Dental School, to test the Isolagen Process in the oral
cavity. The treatment protocol called for three injections per site, but being
cautious, Dr. Elian's first procedure included only one injection. The results
were positive with no adverse reaction. In Dr. Elian's next procedure, he
followed protocol and the results were magnified. Several more procedures were
performed with equally positive results.
The Isolagen Dental Product has been used in research and development in
treating varying degrees of papilla recession; by injecting cells created
through the Isolagen Process treats small areas of recession. In cases where the
disease creates greater recession, Isolagen has developed a graft which entails
applying the Isolagen Process technology to a matrix or carrier.
6
In cases where teeth are removed, problems may develop such as dry socket
or contracted sockets. These problems frequently require follow-up surgical
procedures for correction and to prevent additional soft tissue problems. The
traditional approach by oral surgeons has been to implant acellular material to
prevent these defects. The Isolagen Dental Product provides potential as a
solution for this problem as well.
Rena N. D'Souza, DDS, MS PHD, Professor and Research Director, Department
of Orthodontics at the University of Texas Health Science Center at Houston -
Dental Branch ("UTHSC"), stated: "The regeneration of the supporting tissues of
a tooth that are damaged in the course of periodontal disease remains a major
challenge for dental clinicians today. Isolagen's autologous cell therapy when
combined with well proven techniques of guided tissue regeneration is
state-of-the-art technology that opens up a new and exciting paradigm for the
treatment of soft tissue defects in the oral cavity."
THE DENTAL MARKET
While the cosmetic and dermatological market place is extremely large, its
size pales in comparison to the size of the dental market. The Company's
research shows that, in the United States, there are approximately 33,000
practitioners performing cosmetic procedures. This includes Plastic Surgeons
(7,000), Facial Plastic Surgeons (10,000), Dermatologists (12,000) and
Aestheticians (4,000). That same research shows approximately 150,000 dentists.
The comparative demand for dental procedures far exceeds that of cosmetic
procedures which has resulted in a far greater number of practitioners.
In addition, according to Millennium Research Group, the 2002 global
market for dental implants and accessories is valued at $1.1 billion, with an
expected five-year forward annual growth rate of 16%. Over 90% of oral surgeons,
periodontists and prosthodontists currently provide at least some aspect of
dental implant treatment in their practices, and more than 65% of general
dentists have used implants for supporting fixed and removable replacement
teeth.
The Company believes this market will grow over the next five years. This
increase is attributed to an increase in the average age of the population and
patients' preference of dental implants over conventional means of replacing
damaged or missing teeth such as bridges and dental plates due to the recent
improvements in dental implant placement procedures, the longer-term success
rates of implants and the many advantages that implants have over traditional
bridge plates and dentures. These advantages include increased support, security
and comfort; the ability to replace a single tooth without altering adjacent
teeth; and the prevention of noticeable spaces caused by missing teeth.
Almost every person that lives to a normal age will experience gingival
(gum recession, including papilla recession). Others will have a need for an
extraction or have a dry or contracted socket. Further contrast demonstrates
that gingival and these other related maladies pose major health concerns where
the vast majority of cosmetic procedures are simply preferential, elective and
left untouched will have no health consequence. In comparison, not every person
or even a high percentage will experience any deficiency that will require them
to engage a cosmetic practitioner. Therefore, we feel the ACS dental application
offers a greater potential than our cosmetic application.
UNITED KINGDOM OPERATIONS
In September 2002, the Company opened its London cellular laboratory and
began operation there in the fourth quarter of 2002.
COMPETITION
Tissue regeneration companies compete in the dermatology and plastic
surgery markets with substantially different treatments. These include silicone
injections, laser procedures, facial surgical procedures (e.g., facelifts and
eyelid surgeries), fat injections, dermabrasion, collagen injections, and
botulism toxin injections. Indirect competition comes from facial care
treatment products. Items catering to the growing demand for therapeutic skin
care products are facial scrubs, anti-aging treatments, tonics, astringents and
skin-restoration formulas. Patients who might consider using the Isolagen
Process could also consider the following products (information included under
Key Points is provided by Company management):
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
------- ----------- ------------ ----------
Zyderm/Zyplast Collagen from Collagen implant Reabsorbs in 3 to 6 months in 95+ % of patients.
cowhides of a closed Allergic reaction in approx. 3% of patients.
(Inamed Aesthetics) herd Immediate esthetic effect.
7
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
------- ----------- ------------ ----------
$400-$500 per treatment.
FDA approved.
Hylaform Crosslinked Hyaluronan implant Reabsorbs in approx. 1 year.
(Biomatrix) derivative of $550 per injection, approx.
hyaluronan Not FDA approved; clinical trials planned.
Fibrel Collagen from pigs Collagen implant Difficult for physician to use; requires mixing with
(Mentor) patients blood and special equipment.
Reabsorbs in 4 to 6 months. $400 per treatment. No significant
market demand for product FDA approved
Autologen Skin from patient Collagen Implant Requires large piece of skin 3"x3" to make 3cc for each
(Collagenesis Corp) treatment.
Reabsorbs in 6 to 12 months.
$650-$850 treatment.
Dermolagen Skin from cadavers Collagen Implant Source of product limits market appeal significantly.
(Collagenesis Corp) Requires large piece of skin 3"x3" to make 3cc for each
treatment.
Reabsorbs in 6 to 12 months.
$1,000 for three treatments.
Lypocytic Dermal Fat from patient Fat implant Reabsorbs in 6 to 12 months; not a viable correction.
Augmentation Requires harvesting of fat, preparation, and
reintroduction into treatment areas.
(manufactured by Subcutaneous atrophy requires microlipoinjection overlaid
physician) with lypocytic dermal augmentation.
Autologous nature avoids allergic reaction.
$550 to $1,250 per treatment.
Alloderm Acellular human Allograft Treats only deep depressions (subcutaneous tissue).
(Lifecell Corp) dermal graft Dissolves in 1 to 3 years.
Requires surgery to implant.
Potential for complications higher: infection, migration,
scarring.
$2,500 per treatment.
Artecoll Polymethylmethacrylate Artificial implant Treats only deep depressions (subcutaneous tissue).
(Rofil Medical) suspension with Non reversible; implant technique errors are long lasting.
collagen Potential for complications higher: infection, beading.
Not FDA approved.
Softform Expanded Artificial implant Requires surgery to implant.
(Collagen Corp) polytetra- Potential for complications: infection, rejection, and
flouroetheylene malpositioning.
Used only for subcutaneous tissue augmentation.
Silicone Droplets Synthetic oil Artificial implant Controversy over safety of human use of silicone.
(Dow Corning) Potential for adulterated product is high due to
availability of non-medical grades of silicone.
Not FDA approved.
Botox Botulinum A exotoxin Muscle paralysis Effect reverses in 3 to 6 months.
(Allergan) Physician technique very important.
2% to 3% of patients experience drooping eyelid.
$450 to $750 per injection.
Not FDA approved.
Ablative Lasers Mechanical device Tissue Long healing period; open sores for 5 to 14 days;
e.g. CO2 & Erbium vaporization redness up to six months.
causing new tissue Requires surgery and anesthesia.
(Coherent or to form Potential for complications: hypopigmentation, scars,
Luminesse) non-healing wounds.
$1,500 to $7,500
Non-Ablative Lasers Mechanical device Stimulated dermis Multiple treatments 4 to 6.
e.g. Nd 1032, Q to form collagen Takes up to six months to realize improvements.
switched 1064 YAG Up to $5,000.
(Coherent or
Luminesse)
Microdermabrasion Mechanical device Tissue abridement Minimal efficacy on scars and wrinkles.
(Microdermex, causing new tissue Good epidermal effect.
Parisian Peel or to form Requires 6 to 10 treatments.
Dermaglow) Up to $2,000.
Chemical peels Carbolic acid, TCA, Chemical tissue Long healing period; open sores for 5 to 14 days;
(TCA, Phenol alpha hydroxy acids removal causing redness up to six months.
chemicals new tissue to form Laser applications are replacing this technology.
are formulated by a $500 to $5,000.
pharmacist)
The Company believes that many of its competitors have greater financial
and other resources than those of the Company. Although the Company is not aware
of any similar products to the Isolagen Process that have received pre-market
approval from the FDA, there may be other companies having greater financial
resources than the Company that are developing or may develop similar products
in the future.
8
INTELLECTUAL PROPERTY
Protecting the proprietary technology of the Company is vitally important
to the Company's competitive position. Isolagen Technologies currently holds the
following patents:
Number Business Line Title Filing Date Patent Date Term
------ ------------- ----- ----------- ----------- ----
5,665,372 Cosmetic Autologous dermal fibroblasts for the June 6, 1996 Sept. 9, 1997 20 Years
United States repair of skin and soft tissue defects
5,660,850 Cosmetic Use of autologous dermal fibroblasts June 6, 1996 Aug. 26, 1997 20 Years
United States for the repair of skin and soft
tissue defects
5,858,390 Cosmetic Use of autologous undifferentiated Sept. 8, 1997 Jan. 12, 1999 20 Years
United States mesenchylmal cells for the repair of
skin and soft tissue defects
5,591,444 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Jan. 7, 1997 20 Years
United States for the repair of skin and soft
tissue defects
312548 Cosmetic Use of autologous dermal fibroblasts July 3, 1996 March 9, 2000 20 Years
New Zealand for the repair of skin and soft
tissue defects
698440 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Feb. 11, 1999 20 Years
Australia for the repair of skin and soft
tissue defects
9,083,618 Dental Compositions for regenerating tissue May 2, 1998 Aug. 13, 2002 20 Years
United States that has deteriorated and methods for
using such compositions
In the 1st quarter of 2003, Isolagen Technologies entered into an
Intellectual Property Purchase Agreement with Gregory M. Keller, M.D. and Pacgen
Partners to acquire two patent applications: a) to repair vocal cord tissue
defects and b) to promote healing of wounds and fistulas. As consideration, the
Company issued the seller 100,000 shares of the Company's Common Stock and a
royalty equal to (a) 5% of all revenues recognized by Purchaser or its
Affiliates from commercial application of the Intellectual Property made,
provided, distributed, sold or manufactured directly by Purchaser or its
Affiliates, or (b) 25% of all revenues recognized by Purchaser or its Affiliates
from licensing, sublicensing, transferring or selling the Intellectual Property
to a third party, without offset or deduction for general and administrative or
operating costs, subject to a total maximum royalty of $2 million.
The Company is working on several other patent applications. The Company
continues to seek ways to protect its proprietary technology and trade secrets,
including entering into confidentiality or license agreements with its
employees, consultants and corporate partners, and controlling access to and
distribution of its technologies and other proprietary information.
RESEARCH AND DEVELOPMENT
The Company's research and development focus is not principally on new
product development, but on improved process science, manufacturing and cost
reduction. Though the Company's research and development focuses on improved
process and manufacturing, the Company continues to explore applications for the
Isolagen Process like therapies to regrow hair, repair damaged nerves, and heal
burned skin. For the years ending December 31, 2002, 2001 and 2000, we incurred
research and development expenses of $1.7 million, $0.9 million, and $0.5
million, respectively.
PUBLISHED ARTICLES
The following are published articles regarding the Isolagen Process:
1. Deborah Watson, MD; Gregory S. Keller, MD; Victor Lacombe, MD; Peter
B. Fodor, MD; Jeffrey Rawnsley, MD; Gary P. Lask, MD. Autologous
Fibroblasts for Treatment of Facial Rhytids and Dermal Depression.
ARCH Facial Plast Surg/Vol 1, July-Sep 1999.
2. William K. Boss, Jr., MD, FACS; Hakan Usal, MD; Peter B. Fodor, MD;
Gregory Chernoff, MD; Autologous Cultured Fibroblasts: A Protein
Repair System. Annals of Plastic Surgery, Volume 44/Number 5/May
2000.
3. William K. Boss, Jr., MD; Hakan Usal, MD; Gregory Chernoff, MD;
Gregory S. Keller, MD; Gary P. Lask, MD; Peter B. Fodor, MD.
Autologous Cultured Fibroblasts as Cellular Therapy in Plastic
Surgery. Clinics in Plastic Surgery, Volume 27, Number 4, October
2000.
9
EMPLOYEES
The Company presently employs thirty-two (32) people on a full-time basis,
twenty (20) in Houston, Texas, nine (9) in London, England, and three (3) in
Sydney, Australia. The Company anticipates hiring additional employees in the
areas of quality assurance, manufacturing, marketing and research and
development as the need arises. None of these individuals are covered by a
collective bargaining agreement and management considers its relations with its
employees to be good. The Company may also employ consultants on an as needed
basis to supplement existing staff.
RISK FACTORS
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR
OPERATIONS OVER THE COURSE OF THE NEXT TWO YEARS. NO ASSURANCE CAN BE GIVEN THAT
ANY SUCH FINANCING, IF OBTAINED, WILL BE ADEQUATE TO MEET OUR ULTIMATE CAPITAL
NEEDS AND TO SUPPORT OUR GROWTH. Although we believe our current cash resources
will be sufficient to fund our planned operations for the next 12 months, we
will require substantial additional capital to meet our long-term needs.
Subsequent to 12 months, we will require approximately $20 million of additional
capital to bring our product to market in the United States and expand
operations in the United Kingdom and Australia. This estimate assumes that no
further testing requirements are imposed by the FDA, that FDA approval is
forthcoming and that FDA approval is received during 2005. The FDA approval
process is extremely complicated and is dependent upon our study protocols and
the results of our studies. In the event that the FDA requires additional
studies or requires changes in our study protocols or in the event that the
results of the studies are not consistent with our expectations, the process
will be more expensive and time consuming. Due to the vagaries of the FDA
approval process we are unable to predict what the cost of obtaining approval
will be if FDA approval is not forthcoming in 2005. We recently commenced
operations, are suffering losses from operations, have limited capital
resources, do not have access to a line of credit or other debt facility, and
will be unable to sustain operations absent substantial infusions of capital. We
are actively assessing various financing opportunities. There can be no
assurance that we will be successful in raising the necessary capital; or that
we will be able to raise capital on acceptable terms. Additionally, no assurance
can be given that any such financing, if obtained, will be adequate to meet our
ultimate capital needs and to support our growth. If adequate capital cannot be
obtained on satisfactory terms, our operations could be materially and adversely
impacted.
THE NEED TO RAISE ADDITIONAL CAPITAL WILL EXPOSE EXISTING SHAREHOLDERS TO
THE RISK OF SUBSTANTIAL DILUTION. The need to raise additional capital will
expose existing shareholders to the risk of substantial dilution.
ISOLAGEN HAS NOT DEMONSTRATED AN ABILITY TO GENERATE SIGNIFICANT REVENUE,
AND THERE IS NO ASSURANCE THAT WE WILL PRODUCE ANY MATERIAL REVENUES. Isolagen
is a development stage company with a limited operating history and no
significant revenues to date. Isolagen has not yet demonstrated its ability to
generate significant revenue, and there is no assurance that we will produce any
material revenues, or that we will ever operate on a profitable basis.
AS A RESULT OF OUR LIMITED OPERATING HISTORY AND BECAUSE OF THE EMERGING
NATURE OF THE MARKETS IN WHICH WE WILL COMPETE, OUR FINANCIAL DATA IS OF LIMITED
VALUE IN PLANNING FUTURE OPERATING EXPENSES. OUR OPERATING EXPENSES ARE
DIFFICULT TO FORECAST ACCURATELY. TO THE EXTENT THAT SUCH EXPENSES PRECEDE OR
ARE NOT RAPIDLY FOLLOWED BY INCREASED REVENUE, OUR BUSINESS, RESULTS OF
OPERATIONS AND FINANCIAL CONDITION MAY BE MATERIALLY ADVERSELY AFFECTED. As a
result of our limited operating history and because of the emerging nature of
the markets in which we will compete, our financial data is of limited value in
planning future operating expenses. Our expense levels will be based in part on
our expectations concerning future revenues. A significant portion of our
revenue is anticipated to be derived from the Isolagen Process; however, the
size and extent of such revenues are wholly dependent upon the choices and
demand of individuals, which are difficult to forecast accurately. We may be
unable to adjust our operations in a timely manner to compensate for any
unexpected shortfall in revenues. Accordingly, a significant shortfall in demand
for the Isolagen Process could have an immediate and material adverse effect on
our business, results of operations and financial condition. Further, business
development and marketing expenses may increase significantly as we expand our
operations. To the extent that such expenses precede or are not rapidly followed
by increased revenue, our business, results of operations and financial
condition may be materially adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE AS A
RESULT OF A VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OF OUR CONTROL. OUR
OPERATING RESULTS MAY FALL BELOW THE EXPECTATIONS OF SECURITIES ANALYSTS,
STOCKHOLDERS AND INVESTORS IN ANY FUTURE PERIOD. Our operating results may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside of our control. These factors include: the level of demand
for the Isolagen Process and other services and products that we may develop;
our ability to attract and retain personnel with the necessary strategic,
technical and creative skills required for effective operations;
10
the amount and timing of expenditures by customers; the amount and timing of
capital expenditures and other costs relating to the expansion of our
operations; government regulation and legal developments regarding the use of
the Isolagen Process; and general economic conditions. As a strategic response
to changes in the competitive environment, we may from time to time make certain
pricing, service, technology or marketing decisions or business or technology
acquisitions that could have a material adverse effect on our quarterly results.
Due to all of these factors, our operating results may fall below the
expectations of securities analysts, stockholders and investors in any future
period.
WE ANTICIPATE THAT LOSSES WILL CONTINUE TO INCREASE FROM CURRENT LEVELS
AND THAT WE WILL EXPERIENCE NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY ABILITY
TO BECOME PROFITABLE. The Company expects to expend significant resources on
consultants, technology, advertising, hiring of personnel and startup costs. As
a result, the Company has incurred losses since its inception and expects to
experience operating losses and negative cash flow for the foreseeable future.
The Company anticipates its losses will continue to increase from current levels
because it expects to incur additional costs and expenses related to brand
development, consulting costs, laboratory development costs, FDA clinical
trials, marketing and other promotional activities, the addition of customer
service personnel, the continued development of its website, its computer
network, and development of relationships with strategic business partners,
including but not limited to doctors who might use the Isolagen Process. For the
years ending December 31, 2002, 2001 and 2000, we incurred losses of $5.4
million, $1.7 million and $0.8 million, respectively.
OUR INABILITY TO REDUCE COSTS MAY LIMIT OR OUR DELAY ABILITY TO BECOME
PROFITABLE. The Company anticipates that improved manufacturing practices will
allow the Company's laboratories to have significantly greater through-put and
reduce many of the Company's variable costs. The Company also expects to incur
additional costs and expenses related to brand development, consulting costs,
laboratory development costs, FDA clinical trials, marketing and other
promotional activities, the addition of customer service personnel, the
continued development of its website, its computer network, and development of
relationships with strategic business partners, including but not limited to
doctors who might use the Isolagen Process. If the Company cannot reduce its
costs and expenses, then the Company may continue to experience operating losses
and negative cash flow. Moreover, the costs to obtain regulatory approvals could
be considerable and the failure to obtain or delays in obtaining such approvals
could materially adversely affect the Company's business performance and
financial results. We have spent approximately $200,000 for regulatory approvals
in the United Kingdom and Australia. Research and development costs are composed
primarily of costs related to the Company's efforts to gain FDA approval for the
Isolagen Process in the United States. These costs include those personnel and
laboratory costs related to the current FDA trials and certain consulting costs.
This project is still under development. The total cost of research and
development as of December 31, 2002 is $3.8 million. As of December 31, 2002, we
believe at a minimum it will cost $4.2 million to complete this project. That
estimate assumes that no further testing requirements are imposed by the FDA,
that FDA approval is forthcoming and that FDA approval is received during 2005.
The FDA approval process is extremely complicated and is dependent upon our
study protocols and the results of our studies. In the event that the FDA
requires additional studies or requires changes in our study protocols or in the
event that the results of the studies are not consistent with our expectations
the process will be more expensive and time consuming. Due to the vagaries of
the FDA approval process we are unable to predict what the cost of obtaining
approval will be if FDA approval is not forthcoming in 2005. Failure to
substantially reduce the cost per patient will have a material adverse effect on
the results of Isolagen's operations and financial condition.
THERE IS A LIMITED PUBLIC TRADING MARKET FOR THE COMMON STOCK THAT MAY
LIMIT OR PRECLUDE YOUR ABILITY TO SELL SHARES OF COMMON STOCK. There is a
limited public trading market for the Common Stock, and there is no assurance
that any established public trading market will develop for any of the Company's
securities. Without such an active or public trading market, there can be no
assurance of any liquidity or resale value of the Common Stock. The Common Stock
may be illiquid for indefinite periods of time.
OUR STOCK PRICE IS HIGHLY VOLATILE, AND REPRESENTS SIGNIFICANT MARKET RISK
TO AN INVESTMENT IN OUR COMMON STOCK. The market price of the Common Stock is
likely to be highly volatile due to risks and uncertainties described in this
Prospectus, as well as other factors, including sales of substantial amounts of
our stock by existing stockholders and price and volume fluctuations in the
stock market which do not relate to our operating performance. During 2001, our
common stock traded from $0.05 to $7.00. During 2002, our common stock traded
from $2.20 to $7.25.
OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE
BEYOND OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING OUR SHARES MAY BE UNABLE TO
RESELL THEIR SHARES AT A PROFIT AS A RESULT OF THIS VOLATILITY. The securities
markets have from time to time experienced significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies. Announcements of delays in our testing, development or regulatory
approval schedules, technological innovations or new products developed by us or
our competitors and
11
developments or disputes concerning patents or proprietary rights could have a
significant and adverse impact on such market prices. Regulatory developments in
the United States and foreign countries, economic and other external factors,
all affect the market price of our securities. In addition, the realization of
any of the risks described in these "Risk Factors" could have a significant and
adverse impact on such market prices.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
THEREFORE, PRESENT STOCK PRICES MAY NOT BE INDICATIVE OF THE PRICES AT WHICH YOU
WILL BE ABLE TO SELL SHARES OF COMMON STOCK. Our stock price may decline by
future sales of our shares or the perception that such sales may occur. As of
December 31, 2002, approximately 14.2 million shares of Common Stock held by
existing stockholders constitute "restricted shares" as defined in Rule 144
under the Securities Act. The restricted shares may only be sold if they are
registered under the Securities Act, or sold under Rule 144 promulgated under
the Securities Act, or another exemption from registration under the Securities
Act. Substantially all of the restricted shares of our common stock are either
eligible for sale pursuant to Rule 144 or have been registered under the
Securities Act for resale by the holders. We are unable to estimate the amount,
timing, or nature of future sales of outstanding common stock. Sales of
substantial amounts of our common stock in the public market may cause the
stock's market price to decline.
THE DEVELOPMENT OF THE ISOLAGEN PROCESS AND THE COMPANY'S OTHER PRODUCTS
INVOLVES A LENGTHY AND COMPLEX PROCESS, AND THE COMPANY MAY BE UNABLE TO
COMMERCIALIZE THE ISOLAGEN PROCESS OR ANY OF ITS OTHER PROCESSES OR PRODUCTS
CURRENTLY UNDER DEVELOPMENT. Before the Company can commercialize the Isolagen
Process or any other of its development-stage products or processes in the U.S.,
the Company will need to conduct substantial research and development; undertake
preclinical and clinical testing; and pursue regulatory approvals, including but
not limited to FDA approval of its IND for the Isolagen Process. This process
involves a high degree of risk and takes several years. The Company's process
and product development efforts may fail for many reasons, including: failure of
the process or product in preclinical studies; clinical trial data that is
insufficient to support the safety or effectiveness of the process or product;
or the failure to obtain the required regulatory approvals. Specifically, the
FDA may withhold approval of the IND for several years or reject the IND
outright. For these reasons, and others, the Company may not successfully
commercialize the Isolagen Process or any of its other processes or products
currently under development.
OBTAINING FDA AND OTHER REGULATORY APPROVALS IS TIME CONSUMING AND
EXPENSIVE, AND THE RESPECTIVE OUTCOMES ARE UNCERTAIN. The process of obtaining
FDA and other regulatory approvals is time consuming and expensive. Clinical
trials are required and the marketing and manufacturing of Company's products
and services are subject to rigorous testing procedures. The Company may not be
able to obtain FDA approval or other regulatory approval to conduct clinical
trials or to manufacture and market any of the products it develops, acquires or
licenses. Moreover, the costs to obtain approvals could be considerable and the
failure to obtain or delays in obtaining an approval could significantly harm
the Company's business performance and financial results. Even if pre-marketing
approval from the FDA is received, the FDA is authorized to impose
post-marketing requirements such as: (i) testing and surveillance to monitor a
product and its continued compliance with regulatory requirements; (ii)
submitting products for inspection and, if any inspection reveals that the
product is not in compliance, prohibiting the sale of all products; (iii)
suspending manufacturing; and (iv) withdrawing marketing clearance. In their
regulation of advertising, the FDA and Federal Trade Commission (the "FTC") from
time to time issue correspondence alleging that some advertising or promotional
practices are false, misleading or deceptive. The FDA has the power to impose a
wide array of sanctions on companies for such advertising practices, and the
receipt of correspondence from the FDA alleging these practices could result in
the following: (i) incurring substantial expenses, including fines, penalties,
legal fees and costs to comply with the FDA's requirements; (ii) changes in the
methods of marketing and selling products; (iii) taking FDA-mandated corrective
action, which may include placing advertisements or sending letters to
physicians, rescinding previous advertisements or promotions; and (iv)
disruption in the distribution of products and loss of sales until compliance
with the FDA's position is obtained.
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION THAT MAY SIGNIFICANTLY
AFFECT OUR OPERATING RESULTS. Human healthcare products and services companies
are subject to significant regulation by a number of national, foreign, state
and local agencies. The FDA has jurisdiction covering testing, manufacturing,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the Company's products. Failure to comply with applicable
regulatory requirements could, among other things, result in: (i) fines; (ii)
changes to advertising; (iii) suspensions of regulatory approvals of products;
(iv) delays in product distribution, marketing and sale; and (iv) civil or
criminal sanctions. The Company's products receive FDA review regarding their
safety and effectiveness. However, the FDA is permitted to revisit and change
its prior determinations. The Company cannot be sure that the FDA will not
change its position with regard to the safety or effectiveness of its products.
If the FDA's position changes, the Company may be required to change its
labeling or cease to manufacture and market the
12
challenged products. Even prior to any formal regulatory action, the Company
could voluntarily decide to cease distribution and sale or recall any of its
products if concerns about the safety or effectiveness develop.
WE ARE ALSO SUBJECT TO A VARIETY OF OTHER REGULATIONS IN VARIOUS FOREIGN
MARKETS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS IN A
PARTICULAR MARKET OR IN GENERAL. The Company is also subject to a variety of
other regulations in various foreign markets. The Company's failure to comply,
or assertions that the Company fails to comply, with these regulations could
have a material adverse effect on the Company's business in a particular market
or in general. To the extent the Company decides to commence or expand
operations in additional countries, government regulations in those countries
may prevent or delay entry into or expansion of operations in those markets. In
addition, the Company may introduce additional products into the foreign
markets. However, government regulations in both the Company's domestic and
international markets can delay or prevent the introduction, or require the
reformulation or withdrawal, of some of the Company's products.
OUR FOREIGN OPERATIONS ARE EXPOSED TO RISKS ASSOCIATED WITH FOREIGN
REGULATIONS, EXCHANGE RATE FLUCTUATIONS, TRADE RESTRICTIONS AND POLITICAL,
ECONOMIC AND SOCIAL INSTABILITY. A foreign government may impose trade or
foreign exchange restrictions or increased tariffs, which could adversely affect
our operations. We are also exposed to risks associated with foreign currency
fluctuations. Our operations in some markets also may be adversely affected by
political, economic and social instability in foreign countries. As we continue
to focus on expanding our existing international operations, these and other
risks associated with international operations may increase. We are also subject
to the risks of doing business abroad, including unexpected changes in
regulatory requirements, export and import restrictions, tariffs and other trade
barriers, difficulties in staffing and managing foreign operations, longer
payment cycles, problems in collecting accounts receivable, potential adverse
tax consequences, exchange rate fluctuations, increased risks of piracy, limits
on our ability to enforce our intellectual property rights, , limits on
repatriation of funds and political risks that may limit or disrupt
international sales. Such limitations and interruptions could have a material
adverse effect on our business, financial condition and results of operations.
In addition, operations of our foreign subsidiaries are translated from local
currency into U.S. dollars based on average monthly exchange rates. We currently
do not hedge our foreign currency transactions and is therefore subject to the
risk of changes in exchange rates.
TERRORIST ATTACKS OR ACTS OF WAR MAY SERIOUSLY HARM THE COMPANY'S
BUSINESS. Terrorist attacks or acts of war may cause damage or disruption to the
Company, its employees, its facilities and its customers, which could impact the
Company's revenues, costs and expenses, and financial condition. The terrorist
attacks that took place in the United States on September 11, 2001 were
unprecedented events that have created many economic and political
uncertainties, some of which may materially adversely affect the Company's
business, results of operations, and financial condition. The potential for
future terrorist attacks, the national and international responses to terrorist
attacks, and other acts of war or hostility have created many economic and
political uncertainties, which could materially adversely affect the Company's
business, results of operations, and financial condition in ways that management
currently cannot predict.
ANY MARKETABLE PROCESSES OR PRODUCTS THAT THE COMPANY DEVELOPS MAY NOT BE
COMMERCIALLY SUCCESSFUL. Even if the Company obtains regulatory approval for the
Isolagen Process or any of its other development-stage processes or products in
the U.S. and other countries, those processes or products may not be accepted by
the market. A number of factors may affect the rate and level of market
acceptance of the Isolagen Process or these processes or products, including:
regulation by the FDA and other government authorities; market acceptance by
doctors and hospital administrators; the effectiveness of the Company's sales
force; the effectiveness of the Company's production and marketing capabilities;
the success of competitive products; and the availability and extent of
reimbursement from third-party payers. If the Isolagen Process or any other
Company processes or products fail to achieve market acceptance, the Company's
profitability and financial condition will suffer.
OUR COMPETITORS IN THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES MAY
HAVE SUPERIOR PRODUCTS, MANUFACTURING CAPABILITIES OR MARKETING POSITION. The
human healthcare products and services industry is extremely competitive. The
Company's competitors include major pharmaceutical companies and other
biotechnology companies. Most of these competitors have more extensive research
and development, marketing and production capabilities and greater financial
resources than the Company. The Company's future success will depend on its
ability to develop and market effectively its processes and products against
those of its competitors. If the Company's processes and products receive
marketing approval but cannot compete effectively in the marketplace, the
Company's profitability and financial position will suffer.
13
DIFFICULTIES MANAGING GROWTH COULD ADVERSELY AFFECT OUR BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION. If the Company achieves growth in its
operations in the next few years, such growth could place a strain on its
management, administrative, operational and financial infrastructure. The
Company's ability to manage its operations and growth requires the continued
improvement of operational, financial and management controls, reporting systems
and procedures. In addition, the Company may find it necessary to hire
additional management, financial and sales and marketing personnel to manage the
Company's operations. If the Company is unable to manage this growth effectively
and successfully, the Company's business, operating results and financial
condition may be materially adversely affected.
WE ARE DEPENDENT ON OUR KEY OFFICERS AND EMPLOYEES. The Company is
dependent on the efforts of Frank DeLape (Chairman of the Board of Directors),
William K. Boss, Jr. (Vice Chairman of the Board of Directors), Michael
Macaluso, (Chief Executive Officer, President and Director), Jeffrey Tomz,
(Chief Financial Officer and Secretary), Olga Marko (Senior Vice President and
Director of Research), and Vaughan Clift, (Vice President of Operations). The
loss of any of these officers or employees or our inability to recruit and train
additional key service personnel in a timely manner, could materially and
adversely affect our business and our future prospects. While no assurances can
be given that the Company's current management resources will enable it to
succeed as planned, a loss of one or more of its current officers or key
employees could severely and negatively impact its operations. No assurances can
be given that the Company will not suffer the loss of key human resources for
one reason or another. The Company has employment agreements with certain of its
officers, but some of its key management personnel are employed "at-will" and
may elect to pursue other opportunities at any time. Specifically, the loss of
Michael Macaluso, the Chief Executive Officer of the Company, or Frank DeLape,
Chairman of the Board, neither of which has an employment agreement with the
Company, could significantly harm the Company's business. The Company has no
present intention of obtaining key man life insurance on any of the executive
officers or management. We have had no difficulty hiring and retaining the
necessary management and personnel in the recent past. To the best of our
knowledge, none of our key officers or employees plan to leave or retire in the
near future.
WE WILL NEED TO ATTRACT, TRAIN OR RETAIN ADDITIONAL HIGHLY QUALIFIED
TECHNICAL AND MANAGERIAL PERSONNEL IN THE FUTURE. OUR INABILITY TO DO SO COULD
HAVE A MATERIAL ADVERSE AFFECT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION. There can be no assurance that we will be able to attract, train or
retain additional highly qualified technical and managerial personnel in the
future, which could have a material adverse effect on the our business,
financial condition and results of operations.
OUR OFFICERS AND DIRECTORS HAVE EFFECTIVE VOTING CONTROL OF THE COMMON
STOCK. THEREFORE, OUR OTHER STOCKHOLDERS WILL HAVE LIMITED PARTICIPATION IN OUR
AFFAIRS. As of December 31, 2002, our present executive officers, directors and
controlling stockholders directly and beneficially hold 57.9% of the outstanding
shares of Common Stock. Our officers, directors and controlling stockholders
currently are, and in the foreseeable future will continue to be, in a position
to control Isolagen by being able to nominate and elect a majority of our Board
of Directors. The Board of Directors establishes corporate policies and has the
sole authority to nominate and elect our officers to carry out those policies.
Other stockholders therefore will have limited participation in our affairs.
WE HAVE NOT DECLARED ANY DIVIDENDS ON OUR COMMON STOCK TO DATE AND WE HAVE
NO INTENTION OF DECLARING DIVIDENDS IN THE FORESEEABLE FUTURE. INVESTORS IN OUR
COMMON STOCK CANNOT RELY ON DIVIDEND INCOME. The future payment by the Company
of cash dividends on the Common Stock rests within the discretion of its Board
of Directors and will depend, among other things, upon the Company's earnings,
its "unencumbered cash," its capital requirements and its financial condition,
as well as other relevant factors. The Company does not anticipate making any
cash distributions on the Common Stock in the foreseeable future. Investors in
our common stock cannot rely on dividend income.
IF WE ARE UNABLE TO EFFECTIVELY PROMOTE OUR BRAND AND ESTABLISH A LEADING
POSITION IN THE BIOTECHNOLOGY MARKETPLACE, RESULTS OF OPERATION AND FINANCIAL
CONDITION WILL SUFFER. The Company's brand name is new and unproven. If the
Company is unable to effectively promote its brand and establish a leading
position in the biotechnology marketplace, results of operation and financial
condition will suffer. Company management believes that the importance of brand
recognition will increase over time. In order to gain brand recognition, the
Company may increase its marketing and advertising budgets to create and
maintain brand loyalty.
WE MAY FAIL TO PROTECT ADEQUATELY ITS PROPRIETARY TECHNOLOGY, WHICH WOULD
ALLOW COMPETITORS TO TAKE ADVANTAGE OF ITS RESEARCH AND DEVELOPMENT EFFORTS. The
Company's long-term success largely depends on its ability to market
technologically competitive processes and products. If the Company fails to
obtain or maintain these protections it may not be able to prevent third parties
from using its proprietary rights. The Company's currently
14
pending or future patent applications may not result in issued patents. In the
United States, patent applications are confidential until patents issue, and
because third parties may have filed patent applications for technology covered
by its pending patent applications without the Company being aware of those
applications, the Company's patent applications may not have priority over any
patent applications of others. In addition, the Company's issued patents may not
contain claims sufficiently broad to protect the Company against third parties
with similar technologies or products or provide the Company with any
competitive advantage. If a third party initiates litigation regarding the
Company's patents, and is successful, a court could revoke the Company's patents
or limit the scope of coverage for those patents.
The U.S. Patent and Trademark Office, commonly referred to as the USPTO,
and the courts have not consistently treated the breadth of claims allowed in
biotechnology patents. If the USPTO or the courts begin to allow broader claims,
the incidence and cost of patent interference proceedings and the risk of
infringement litigation will likely increase. On the other hand, if the USPTO or
the courts begin to allow narrower claims, the value of the Company's
proprietary rights may be limited. Any changes in, or unexpected interpretations
of, the patent laws may adversely affect the Company's ability to enforce its
patent position.
The Company also relies upon trade secrets, proprietary know-how and
continuing technological innovation to remain competitive. The Company protects
this information with reasonable security measures, including the use of
confidentiality agreements with its employees, consultants and corporate
collaborators. It is possible that these individuals will breach these
agreements and that any remedies for a breach will be insufficient to allow the
Company to recover its costs. Furthermore, the Company's trade secrets, know-how
and other technology may otherwise become known or be independently discovered
by its competitors.
WE MAY INCUR SUBSTANTIAL COSTS AS A RESULT OF LITIGATION OR OTHER
PROCEEDINGS RELATING TO PATENT AND OTHER INTELLECTUAL PROPERTY RIGHTS. A third
party may sue us, one of its subsidiaries or one of our strategic collaborators
for infringing a third-party's patent rights. Likewise, we may need to resort to
litigation to enforce our patent rights or to determine the scope and validity
of third-party proprietary rights.
The cost to us of any litigation or other proceeding relating to
intellectual property rights, even if resolved in the our favor, could be
substantial, and the litigation would divert management's efforts. Some of the
our competitors may be able to sustain the costs of complex patent litigation
more effectively than we can because they have substantially greater resources.
If we do not prevail in this type of litigation, we or its strategic
collaborators may be required to: pay monetary damages; stop commercial
activities relating to the affected products or services; obtain a license in
order to continue manufacturing or marketing the affected products or services;
or compete in the market with a substantially similar product.
Uncertainties resulting from the initiation and continuation of any
litigation could limit our ability to continue some of our operations. In
addition, a court may require that we pay expenses or damages and litigation
could disrupt the Company's commercial activities.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Doctors who use the Company's processes and products, including but not limited
to the Isolagen Process, and patients who have been treated by the Isolagen
Process or any other process or products of the Company may bring product
liability claims against the Company or its subsidiaries. While the Company has
taken, and continue to take, what the Company believes are appropriate
precautions, the Company may be unable to avoid significant liability exposure.
The Company intends to obtain and keep in force product liability insurance
sufficient to protect it from claims; however, the Company may be unable to
obtain insurance in the future, or the Company may be unable to do so on
acceptable terms. Any additional insurance the Company obtains may not provide
adequate coverage against any asserted claims. In addition, regardless of merit
or eventual outcome, product liability claims may result in: diversion of
management's time and attention; expenditure of large amounts of cash on legal
fees, expenses and payment of damages; decreased demand for the Company's
products and services; and injury to the Company's reputation. At present, we
believe we carry reasonably adequate insurance coverage against product
liability claims.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR
PROCESSES, PRODUCTS OR SERVICES MAY BECOME OBSOLETE AND UNMARKETABLE. The field
of biotechnology is characterized by significant and rapid technological change.
Although we attempt to expand its technological capabilities in order to remain
competitive, research and discoveries by others may make our processes, products
or services obsolete. If we cannot compete effectively in the marketplace, our
potential for profitability and financial position will suffer.
15
OUR ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS IN
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION, ADVERSELY IMPACTING OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION. In the near future, the
Company may make acquisitions of complementary companies, products or
technologies. Any acquisitions will require the assimilation of the operations,
products and personnel of the acquired businesses and the training and
motivation of these individuals. Management may be unable to maintain and
improve upon the uniform standards, controls, procedures and policies of the
Company if it fails in this integration. Acquisitions may cause disruptions in
operations and divert management's attention from day-to-day operations, which
could impair the Company's relationships with current employees, customers and
strategic partners. The Company may also have to, or choose to, incur debt or
issue equity securities to pay for any future acquisitions. The issuance of
equity securities for an acquisition could be substantially dilutive to the
Company's stockholders' holdings. In addition, profitability of the Company may
suffer because of such acquisition-related costs or amortization costs for
acquired goodwill and other intangible assets. If management is unable to fully
integrate acquired businesses, products, technologies or personnel with existing
operations, the Company may not receive the intended benefits of such
acquisitions. We are not party to any agreements, written or oral, for the
acquisition of any company, product or technology.
PROVISIONS IN OUR BYLAWS PROVIDE FOR INDEMNIFICATION OF OFFICERS AND
DIRECTORS, WHICH COULD REQUIRE US TO DIRECT FUNDS AWAY FROM OUR BUSINESS AND
PRODUCTS. Our Bylaws provide for indemnification of officers and directors. We
may be required to pay judgments, fines, and expenses incurred by an officer or
director, including reasonable attorneys' fees, as a result of actions or
proceedings in which such officers and directors are involved by reason of being
or having been an officer or director. Funds paid in satisfaction of judgments,
fines and expenses may be funds we need for the operation of our business and
the development of our products, thereby affecting our ability to attain
profitability. This could cause our stock price to drop.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently leases facilities in three (3) locations: (a)
Houston, Texas, (b) London, England, and (c) Sydney, Australia. The Houston,
Texas facility is located at 2500 Wilcrest, 5th Floor, Houston, TX 77042 and
houses the corporate headquarters as well as laboratory space used for research
and development and as the U.S. processing laboratory for cosmetic and dental
trials. The London, England facility is located at 59/61 Park Royal, London,
NW10 7JJ and houses our European production facility. The Sydney Australia
facility is located at 2 Lincoln Street, Lane Cove, New South Wales, Australia,
2066 and houses our Australian production facility.
The Company laboratories are designed as cGMP laboratories to process
autologous cultured fibroblasts for the therapeutic injections during our
procedures and clinical and pivotal trials. The Company believes its
laboratories meet FDA facilities' requirements under Center for Biologics
Evaluation and Research ("CBER"). The following table summarizes the approximate
amount of space in square feet utilized by the Company at each location:
ADMINISTRATIVE WAREHOUSE LABORATORY TOTAL
-------------- --------- ---------- -----
Houston 4,900 (1) -- 3,900 (2) 8,797
London 1,300 2,900 5,200 9,400 (3)
Sydney 1,100 1,100 4,900 7,100 (4)
----- ----- ----- -----
7,300 4,000 14,000 25,297
1. Certain officers of the Company have granted the Company the use of
this office space at no charge until August 2003. Beginning in
September 2003, the lease rate is approximately $105,840 annually.
There is currently no lease term as the space is being provided at
no charge.
2. The lease rate is approximately $60,840 annually and the term of the
lease expires on March 31, 2005.
3. The lease rate is approximately $146,640 annually and the term of
the lease expires on March 24, 2010 and the Company has the option
to cancel after March 24, 2005.
4. The lease rate is approximately $102,240 annually and the term of
the lease expires on November 19, 2004 and the Company has an option
to renew for an additional one year.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any legal proceedings. The Company
may from time to time become a party to various legal proceedings arising in the
ordinary course of its business.
16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal year 2002.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Since December 11, 2002, our common stock has been traded on the American
Stock Exchange under the symbol "ILE." Prior to December 11, 2002, our common
stock was quoted on the OTC Bulletin Board under the symbol "ISLG". The market
for the Company's common stock on the OTC Bulletin Board was limited, volatile,
and sporadic. The following table sets forth the range of high and low bid
quotations or high and low sales prices for the Company's common stock for each
of the periods indicated as reported by the OTC Bulletin Board or the American
Stock Exchange. These prices for the OTC Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions.
Fiscal Years Ended
--------------------------------------------------
December 31, 2002 December 31, 2001
-------------------- --------------------
High Low High Low
---- --- ---- ---
First Quarter $7.25 $5.00 $0.11 $0.05
Second Quarter $6.95 $2.90 $1.50 $0.43
Third Quarter $3.75 $2.20 $2.75 $0.92
Fourth Quarter $5.75 $3.00 $7.00 $1.05
Holders
As of March 24, 2003, the Company had 406 shareholders of record and
approximately 1,000 beneficial owners.
Dividends
The Company has never paid dividends on Common Stock. Currently, the
Company anticipates that it will retain earnings, if any, to support operations
and to finance the growth and development of its business and does not
anticipate paying cash dividends on the Common Stock in the foreseeable future.
The holders of Series A Preferred Stock will receive cumulative annual
dividends, payable in shares of Series A Preferred Stock or cash, at the option
of the Board of Directors, at an annual rate of 8% ($0.28 per share), payable on
December 31 of each year commencing December 31, 2002. Unpaid dividends will
accumulate and be payable prior to the payment of dividends on shares of Common
Stock. Cash dividends will only be payable from funds legally available
therefore, when and as declared by the Board of Directors of the Company, and
unpaid dividends will accumulate until the Company can legally pay the
dividends. In 2002, the Company paid dividends to the holders of Series A
Preferred Stock in the amount of 143,506.6113 shares of Series A Preferred
Stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2002, with
respect to options outstanding and available under our 2001 Stock Option Plan
and Stock Appreciation Rights, which is our only equity compensation plan, other
than an employee benefit plan meeting the qualification requirements of Section
401(a) of the Internal Revenue Code. On January 29, 2003, the Board of Directors
of the Company approved the 2003 Stock Option Plan and Stock Appreciation Rights
Plan which is subject to approval of the stockholders of the Company at their
next annual meeting.
17
Number of Securities to be Issued Weighted-Average Number of Securities
Upon Exercise of Outstanding Exercise Price Remaining Available for
Plan Category Options of Outstanding Options Future Issuance
Equity compensation plans
approved by security holders 4,252,100 $5.08 509,500
Recent Sales of Unregistered Securities
The following information relates to securities of the Company issued or
sold during the three months ended December 31, 2002 which were not registered
under the Securities Act of 1933, as amended (the "Securities Act"):
None.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussions of the Company's results of operations and
financial condition should be read in conjunction with the financial statements
and notes pertaining to them that appear elsewhere in this Form 10-KSB/A.
Certain statements contained herein are not based on historical facts, but
are forward-looking statements that are based upon numerous assumptions about
future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or results is subject to
numerous risks and uncertainties. Such risks and uncertainties include, but are
not limited to, the existence of demand for and acceptance of the Company's
products and services, regulatory approvals and developments, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the Company's
control. The Company undertakes no obligation and does not intend to update,
revise, or otherwise publicly release the results of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
Although we believe that our expectations are based on reasonable
assumptions, we can give no assurance that our expectations will materialize.
Many factors could cause actual results to differ materially from our forward
looking statements. Several of these factors include, in addition to those
contained in "Risk Factors," without limitation:
- our ability to develop autologous cellular therapies that have
specific applications in cosmetic dermatology, and our ability to
explore (and possibly develop) applications for periodontal disease,
reconstructive dentistry and other health-related markets;
- whether our clinical human trials relating to autologous cellular
therapy applications for the treatment of dermal defects or gingival
recession can be conducted within the timeframe that we expect,
whether such trials will yield positive results, or whether
additional applications for the commercialization of autologous
cellular therapy can be identified by us and advanced into human
clinical trials;
- our ability to provide and deliver any autologous cellular therapies
that we may develop, on a basis is that is cost competitive with
other therapies, drugs and treatments that may be provided by our
competitors;
- our ability to finance our business;
- our ability to maintain our current pricing model;
- our ability to decrease our cost of goods sold;
- a stable interest rate market in the world, and specifically the
countries we are doing business in or plan to do business in;
- management's best estimate on the patient data including patients
started and patients completed;
- a stable currency rate environment in the world, and specifically
the countries we are doing business in or plan to do business in;
- our ability to receive requisite regulatory approvals in the United
States, European Community, Australia, South Korea, Hong Kong,
Mexico and other countries, and our ability to retain the licenses
that we may obtain in such jurisdictions; and the absence of adverse
regulatory developments in the United States, European Community,
Australia, South Korea, Hong Kong, Mexico or any other country, in
which we plan to conduct commercial operations;
- continued availability of supplies at the current prices;
- no new entrance of competitive products in our markets;
18
- no adverse publicity related to our products or the Company itself;
- no adverse claims relating to our Intellectual Property;
- the adoption of new, or changes in, accounting principles; and/or
legal proceedings;
- our ability to maintain compliance with the AMEX requirements for
continued listing of our common stock;
- the costs inherent in complying with new laws and regulations
applicable to public reporting companies, such as the Sarbanes-Oxley
Act of 2002;
- our ability to efficiently integrate future acquisitions, if any;
- other new lines of business that the company may enter in the
future; and
- other risks referenced from time to time elsewhere in this report
and in our filings with the SEC.
These factors are not necessarily all of the important factors that could
cause actual results of operations to differ materially from those expressed in
these forward-looking statements. Other unknown or unpredictable factors also
could have material adverse effects on our future results. We undertake no
obligation and do not intend to update, revise or otherwise publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of any unanticipated events.
We cannot assure you that projected results will be achieved.
GENERAL
Isolagen is a Houston, Texas based biotechnology company which has
developed a patented process for the propagation of autologous cells to be used
to stimulate a patient's own collagen and elastin production. Autologous cells
are a patient's own cells taken from a small skin sample. From such sample
millions of cells can be grown and then injected into the patient to correct and
reduce the normal effects of aging like wrinkles, laugh lines, smokers lines,
fine lines and all types of depressed scars. The procedure is minimally invasive
and non-surgical. Currently, there are multiple competitive alternatives to
reduce the signs of aging, but they offer short term and often painful
solutions. Their solutions often involve substitute products or fillers, such as
human cadaver or animal collagen or synthetic chemicals. A well known example is
Botox, which uses diluted, liquid toxin to attain a correction through muscle
paralysis.
In contrast, the Isolagen Process (as described in more detail below) is a
self healing protein repair system that uses only the patient's own (autologous)
cells. Since these cells belong only to the patient and house his or her own
DNA, there is a reduced chance for rejection or allergic reaction. It is
important to note that the cells are grown individually. There is no batch
manufacturing and the Company's LIMS keeps the cells self contained and
separate.
The Isolagen Process is designed to replenish deficiencies caused through
the loss of fibroblast cells as the body ages. The body losses approximately 1%
of the body's fibroblast cells per year. The fibroblast cell is the cell
responsible for producing collagen, "the structural matrix", that supports the
skin and also produces elastin. By the time a person is 40 years old, their body
has depleted approximately 40% of its fibroblast cells, thus causing dermal
depressions and wrinkles. The Isolagen Process reduces dermal depressions and
wrinkles by replenishing the area of deficiency with millions of the patient's
own new living fibroblast cells. Within weeks after the injection, the millions
of new fibroblast cells will produce new collagen and elastin and will help
diminish wrinkles.
Isolagen reported a net loss of $5,433,055 for the year ended December 31,
2002 compared to a net loss of $1,652,004 for the year ended December 31, 2001.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of financial condition and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in conformity with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures. On
an on-going basis, the Company evaluates its estimates and assumptions,
including but not limited to those related to the impairment of long-lived
assets, reserves for doubtful accounts, revenue recognition and certain accrued
liabilities. The Company bases its estimates on historical experience and
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
19
Revenue Recognition: We recognize revenue from product sales when goods
are shipped and the risk of loss transfers to the customer. Revenue from
licenses and other up-front fees are recognized on a ratable basis over the term
of the respective agreement. Milestone payments are recognized upon successful
completion of a performance milestone event. Any amounts received in advance of
performance are recorded as deferred revenue. We recognize revenue over the
period the service is performed in accordance with SEC Staff Accounting Bulletin
No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101
requires that four basic criteria must be met before revenue can be recognized:
(1) persuasive evidence of an arrangement exists, (2) delivery has occurred or
services rendered, (3) the fee is fixed and determinable, and (4) collectibility
is reasonably assured. We believe that all of these conditions are met at the
time of shipment. Currently, three injections are recommended, although the
decision to utilize one, two or three injections is between the attending
physician and his/her patient. The amount invoiced is fixed and determinable and
only varies among customers depending upon the number of injections requested.
There is no performance provision under any arrangement with any doctor and
there is no right to refund, or returns for unused injections.
Currently the Isologen Process is delivered through an attending physician
to each patient in the Company's recommended regimen of up to three injections.
Each injection has stand alone value to the patient. The Company invoices the
attending physician upon that physician submitting his/her patient's tissue
sample to the Company; thus the contractual arrangement is between the Company
and the medical professional. The amount invoiced varies directly with the
number of injections requested. All orders are paid in advance by the physician
and are not refundable. Revenue is deferred until shipment, provided no
significant obligations remain, and is recognized in installments corresponding
to the number of injections shipped to the attending physician. Due to the short
shelf life, each injection is cultured on an as needed basis and shipped prior
to the individual injection being administered by the physician. The amount of
the revenue deferral represents the fair value of the remaining undelivered
injections defined in accordance with EITF 00-21, which addresses the issue of
accounting for arrangements that involve the delivery of multiple products or
services. Should the physician discontinue the regimen prematurely all remaining
deferred revenue is recognized.
Research and development expenses: Research and development include direct
costs, research-related overhead, and costs associated with improved process
science, manufacturing and cost reduction are charged to operations as incurred.
Stock-based compensation: The Company accounts for its stock-based
compensation under the provisions of SFAS No. 123 - "Accounting for Stock Based
Compensation." Under SFAS No. 123, the Company is permitted to either record
expenses for stock options and other employee compensation plans based on their
fair value at the date of grant or to continue to apply its current accounting
policy under Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," ("APB NO. 25"), and recognize compensation expense, if
any, based on the intrinsic value of the equity instrument at the measurement
date. The Company elected to continue following the provisions of APB No. 25.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. This statement provides guidance for
those companies wishing to voluntarily change to the fair value based method of
accounting for stock-based compensation. The statement also amends the
disclosure requirements of Statement 123, requiring prominent disclosure in
annual and interim financial statements regarding a company's method for
accounting for stock-based employee compensation and the effect of the method on
reported results. While Isolagen continues to utilize the disclosure-only
provisions of Statement 123, the Company has modified its disclosures to comply
with the new statement.
RESULTS OF OPERATIONS, AS RESTATED
Comparison of fiscal years ending December 31, 2002 and 2001
REVENUES. Revenues decreased 14% or $14,491, to $90,991 for the year ended
December 31, 2002 ("Fiscal 2002") compared to $105,482 for the year ended
December 31, 2001 ("Fiscal 2001"). The decrease in revenues is primarily
attributable a decrease of $40,000 in license fees recognized in Fiscal 2002,
partially offset by an increase of $48,473 relating to Isolagen Process revenue
in the UK.
COST OF SALES. Costs of sales increased 96%, or $17,242, to $35,133 in
Fiscal 2002, compared to $17,891 in Fiscal 2001. The increase in cost of sales
is primarily related to the increase in revenues generated from the commencement
of operations in the UK.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 458%, or $3,279,314 to $3,994,782 in Fiscal
2002, compared to $715,468 in Fiscal 2001. The major components of the
approximately $3.3 million increase in selling, general and administrative
expense are as follows: a)
20
salaries increased by approximately $0.6 million to $0.7 million in Fiscal 2002
compared to $0.1 million in Fiscal 2001 (these amounts include an imputed
expense of $400,000 in Fiscal 2002 and $155,556 in Fiscal 2001 relating to the
fair market value of services provided by certain officers by which they were
not compensated); b) consulting expense increased by approximately $0.6 million
to $0.7 million in Fiscal 2002 compared to $0.1 million in Fiscal 2001; c)
travel expense increased by approximately $0.3 million to $0.4 million in Fiscal
2002 compared to $0.1 million in Fiscal 2001; d) legal expense increased by
approximately $0.2 million to $0.3 million in Fiscal 2002 compared to $0.1
million in Fiscal 2001; e) promotional expense increased by approximately $0.2
million to $0.2 million in Fiscal 2002 compared to $0.0 million in Fiscal 2001;
and f) various other expenses, including rent, insurance and other office
expense increased by approximately $1.0 million to $1.3 million in Fiscal 2002
compared to $0.3 million in Fiscal 2001. The increase in selling, general and
administrative expenses is attributed primarily to: a) higher salaries due to an
increase in the number of employees; b) increased travel expenses related to our
expansion into the UK and Australia; c) higher legal fees related to patent and
business development issues; d) increased marketing and promotion efforts
related to the commencement of operations in the UK; and e) increase in office
locations due to expansion into the United Kingdom and Australia.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$0.8 million during the twelve months ended December 31, 2002 to $1.7 million as
compared to $0.9 million for the same period of 2001. Research and development
costs are composed primarily of costs related to the Company's efforts to gain
FDA approval for the Isolagen Process in the United States. These costs include
those personnel and laboratory costs related to the current FDA trials and
certain consulting costs. This project is still under development. The total
cost of research and development as of December 31, 2002 is $3.8 million. As of
December 31, 2002, we believe at a minimum it will cost $4.2 million to complete
this project. That estimate assumes that no further testing requirements are
imposed by the FDA, that FDA approval is forthcoming and that FDA approval is
received during 2005. The FDA approval process is extremely complicated and is
dependent upon our study protocols and the results of our studies. In the event
that the FDA requires additional studies or requires changes in our study
protocols or in the event that the results of the studies are not consistent
with our expectations the process will be more expensive and time consuming. Due
to the vagaries of the FDA approval process we are unable to predict what the
cost of obtaining approval will be if FDA approval is not forthcoming in 2005.
The Company has other research projects currently underway, including those
related to repairing damaged nerves and therapies to regrow hair and to heal
burned skin. However, research and development costs related to these projects
were not material during the 2002 or 2001 periods. The major components of the
approximately $0.8 million increase in research and development expense are as
follows: a) consulting expense increased by approximately $0.1 million to $0.7
million in Fiscal 2002 compared to $0.6 million in Fiscal 2001. In Fiscal 2001,
the Company incurred a non-cash consulting expense of $450,000 which represents
the issuance of 300,000 common shares as payment for consulting services
relating to a potential development of a dental product; b) salaries increased
by approximately $0.5 million to $0.9 million in Fiscal 2002 compared to $0.4
million in Fiscal 2001; and c) laboratory expense increased by approximately
$0.2 million to $0.2 million in Fiscal 2002 compared to $0.0 million in Fiscal
2001.
INTEREST EXPENSE. Interest expense decreased $82,015, to $0 in Fiscal
2002, compared to $82,015 in Fiscal 2001. The decrease results from conversion
of all of our convertible debt to equity in Fiscal 2001.
INTEREST INCOME. Interest income increased $208,675 to $208,692 in Fiscal
2002, compared to $17 in Fiscal 2001. The increase is primarily due to an
increase in the amount of investable assets representing the net proceeds from
the issuance of Series A Preferred Stock.
NET LOSS. Net loss in Fiscal 2002, was $5,433,055, as compared to a net
loss of $1,652,004 in Fiscal 2001. This increase in net loss is attributed
primarily to salaries, travel, consulting, legal, promotional expenses, and
bonuses paid to key personnel. Net loss attributable to common stockholders in
Fiscal 2002 was $16,114,660, as compared to a net loss of $1,652,004 in Fiscal
2001. These amounts include $10.2 million and $0.0 million of deemed dividend
associated with beneficial conversion of preferred stock in Fiscal 2002 and
Fiscal 2001, respectively. These amounts include $0.5 million and $0.0 million
of preferred stock dividends in Fiscal 2002 and Fiscal 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities during the year ended December 31, 2002,
amounted to $3,968,013, as compared to the $664,203 of cash used in operating
activities during fiscal 2001. The increase is attributed primarily to salaries,
travel, consulting, legal, promotional expenses, bonuses paid to key personnel,
write-off of deferred revenue, and increase in accounts payable.
21
Investing Activities
Cash used by investing activities during Fiscal 2002, amounted to
$2,252,368, as compared to cash provided by investing activities of $1,000 in
Fiscal 2001. This increase in cash used is due to the purchase in Fiscal 2002 of
property and equipment for the Houston, Texas, London, England, and Sydney,
Australia laboratories.
Financing Activities
Cash provided by financing activities increased to $9,070,322 in Fiscal
2002 from $2,041,453 in Fiscal 2001. During Fiscal 2002, the Company received
net proceeds of $9,012,722 from the issuance of Series A Preferred Stock and
$57,600 from sales of common stock. During Fiscal 2001, the Company received
$2,060,000 from sales of common stock.
Equity Transactions, as restated
In July 2002, the Company completed a private offering of 2,895,000 shares
of Series A Convertible Preferred Stock, par value $0.001 per share, at an
offering price of $3.50 per share. Each share of Series A Preferred Stock is
convertible into two shares of common stock at any time after issuance and
accrues dividends at 8% per annum payable in cash or additional shares of Series
A Preferred Stock. In conjunction with the private offering, the Company issued
to the placement agent warrants to purchase 1,158,000 shares of common stock
with an exercise price of $1.93 per share. The warrants are exercisable
immediately after grant and expire five years thereafter. The fair market of the
warrants granted to the placement agent, based on the Black-Scholes valuation
model, is estimated to be $1.57 per warrant, assuming the following: no dividend
yield, a risk-free interest rate of 4%, an expanded term of the warrants of 2
years, and an expected volatility of 129%. The value of the warrants granted has
been offset against the proceeds received from the sale of the Series A
Preferred Stock.
During the year ended December 31, 2002, the Company issued an additional
143,507 shares of Series A Preferred Stock in lieu of cash for payment of
dividends on the Series A Preferred Stock totaling $502,661.
The price of the preferred stock sold was $3.50 per share. The market
value of the Company's common stock sold on the dates that the preferred stock
sold or was issued as a dividend had a range of $2.30 - $5.40 per common share.
In accordance with EITF 00-27 this created a beneficial conversion to the
holders of the preferred stock and a deemed dividend to the preferred
stockholders totaling $10,178,944 was recorded by the Company with a
corresponding amount recorded as additional paid-in capital. The deemed dividend
associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that
have been received for the Series A Preferred Stock limited to the value of the
proceeds received.
Working Capital
As of December 31, 2002, the Company had a cash balance of $4,244,640. As
of March 25, 2003, the Company had a cash balance of approximately $1.4 million.
The Company does not have any credit facilities with which to fund ongoing
working capital needs. As of March 25, 2003, the Company believes its existing
cash and cash equivalents will be adequate to meet its anticipated capital and
liquidity requirements until June 30, 2003. The Company needs to raise
additional capital within the next three months in order to have sufficient
working capital to continue as a going concern. The short-term and long-term
viability of the Company are dependent upon successful operation of its business
and its ability to raise substantial additional debt and equity within the near
future.
The Company has adopted a plan of financing in order to raise additional
capital.
Inflation did not have a significant impact on the Company's results
during the year ended December 31, 2002.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company, including the notes thereto and
report of the independent auditors thereon, are included in this report as set
forth in the "Index to Financial Statements." See F-1 for Index to Consolidated
Financial Statements.
22
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Company incorporates herein by reference information regarding
directors and executive officers from the Company's definitive proxy statement
to be filed by the registrant within 120 days of the close of the fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The Company incorporates herein by reference information regarding
executive compensation from the Company's definitive proxy statement to be filed
by the registrant within 120 days of the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company incorporates herein by reference information regarding
security ownership of certain beneficial owners and management from the
Company's definitive proxy statement to be filed by the registrant within 120
days of the close of the fiscal year
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company incorporates herein by reference information regarding certain
relationships and related transactions from the Company's definitive proxy
statement to be filed by the registrant within 120 days of the close of the
fiscal year
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
3.1 Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 of the Registrant's Form 10-K for the
fiscal year ended December 31, 1991)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 10-K for the fiscal year ended
December 31, 1991)
4.1 Specimen of Common Stock certificate (incorporated by
reference to Exhibit 4.4 of the Registrant's Form 10-KSB
for the fiscal year ended December 31, 2001)
10.1* 2001 Stock Option and Stock Appreciation Rights Plan
10.2* Employment Agreement dated August 10, 2001 between
Isolagen, Inc. and Olga Marko
10.3* Employment Agreement dated August 10, 2001 between
Isolagen, Inc. and William K. Boss, as amended on
February 28, 2002
10.4* 2003 Stock Option and Stock Appreciation Rights Plan
21.1 List of Subsidiaries (incorporated by reference to
Exhibit 21.1 of the Registrant's Form 10-KSB for the
fiscal year ended December 31, 2002)
23
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
*Indicated management compensatory plan, contract or arrangement.
(B) REPORTS ON FORM 8-K. During the quarter ended December 31, 2002, the
Company filed no reports on Form 8-K:
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and its Chief Financial Officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15-d-14(c)) as of a
date within 90 days of the filing date of this annual report (the "Evaluation
Date") have concluded that as of the Evaluation Date, the Company's disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities, particularly during the
period in which this annual report was being prepared.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in
the reports that we file under the Exchange Act is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the Company's internal controls
subsequent to the Evaluation Date, nor any significant deficiencies or material
weaknesses in such controls requiring corrective actions. As a result, no
corrective actions were taken.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Isolagen, Inc.
--------------
By: /s/ Jeffrey W. Tomz
--------------------------------
Jeffrey W. Tomz, Chief Financial Officer and
Principal Accounting Officer
Date: November 10, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ Frank DeLape Chairman of the Board November 10, 2003
------------------------
Frank DeLape
/s/ William K. Boss, Jr. Vice Chairman of the Board November 10, 2003
------------------------
William K. Boss, Jr.
/s/ Michael Macaluso Chief Executive Officer and Director November 10, 2003
-----------------------
Michael Macaluso
/s/ Michael Avignon Director November 10, 2003
------------------------
Michael Avignon
/s/ Jeffrey W. Tomz Chief Financial Officer November 10, 2003
------------------------
Jeffrey W. Tomz
/s/ Steven Morrell Director November 10, 2003
------------------------
Steven Morrell
/s/ Ashley Smith Director November 10, 2003
------------------------
Ashley Smith
/s/ Ralph De Martino Director November 10, 2003
------------------------
Ralph De Martino
25
Isolagen, Inc.
(A Development Stage Company)
Index to Consolidated Financial Statements
PAGE
Report of Independent Public Accountants..............................F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001..........F-3
Consolidated Statements of Operations for the years ended
December 31, 2002 and 2001............................................F-4
Consolidated Statements of Shareholders' Equity
From inception to December 31, 2002.................................F-5-8
Consolidated Statements of Cash Flows for the years ended
December 31, 2002 and 2001............................................F-9
Notes to Consolidated Financial Statements........................F-10-22
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Isolagen, Inc.
We have audited the accompanying consolidated balance sheets of Isolagen, Inc.
and Subsidiaries (a Delaware corporation) as of December 31, 2002 (as restated)
and 2001 (as restated), and the related consolidated statements of operations
(as restated), shareholders' equity (as restated) and cash flows (as restated)
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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 statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Isolagen, Inc. and
Subsidiaries as of December 31, 2002 and 2001 and the results of their
operations and their cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of America.
As described in Note 2, the Company restated its financial statements for the
years ended December 31, 2002 and 2001.
/s/ PANNELL KERR FORSTER OF TEXAS, P.C.
Houston, TX
March 12, 2003
(except for Restatement of Financial Statements described in Note 2 for which
the date is October 17, 2003)
F-2
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
December 31,
2002 2001
------------ ------------
(as restated) (as restated)
ASSETS
Current assets
Cash and cash equivalents $ 4,244,640 $ 1,380,824
Inventory 138,910 --
Accounts receivable, net of allowance for doubtful accounts 40,204 1,067
Other receivables 153,583 --
Prepaid expenses 284,557 --
------------ ------------
Total current assets 4,861,894 1,381,891
------------ ------------
Property and equipment, net 2,159,913 7,357
Other assets 235,857 174,666
------------ ------------
Total assets $ 7,257,664 $ 1,563,914
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,881,236 $ 208,196
Accrued expenses 112,224 23,318
Deferred revenue 57,274 280,000
------------ ------------
Total current liabilities 2,050,734 511,514
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $.001 par value; 5,000,000
shares authorized 3,039 --
Common stock, $.001 par value; 50,000,000
shares authorized 15,228 15,190
Additional paid-in capital 25,573,999 5,321,761
Other comprehensive income 13,875 --
Accumulated deficit during development stage (20,399,211) (4,284,551)
------------ ------------
Total shareholders' equity (deficit) 5,206,930 1,052,400
------------ ------------
Total liabilities and shareholder's equity $ 7,257,664 $ 1,563,914
------------ ------------
The accompanying notes are an integral part of these statements
F-3
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
Period from
December 28,
For the Year Ended 1995 (date of
December 31, inception) to
------------------------------- December 31,
2002 2001 2002
------------ ------------ ------------
(as restated) (as restated) (as restated)
Revenues
Sales $ 50,991 $ 25,482 $ 1,441,105
License fees 40,000 80,000 260,000
------------ ------------ ------------
Total revenues 90,991 105,482 1,701,105
Cost of sales 35,133 17,891 437,592
------------ ------------ ------------
Gross profit 55,858 87,591 1,263,513
Selling, general and administrative expenses 3,994,782 715,468 7,160,659
Research and development 1,735,244 933,907 3,770,120
------------ ------------ ------------
Operating loss (5,674,168) (1,561,784) (9,667,266)
Other income (expense)
Interest income 208,692 17 237,089
Other income 32,421 -- 32,421
Loss on disposal of asset -- (8,222) (8,222)
Interest expense -- (82,015) (311,628)
------------ ------------ ------------
Net loss $ (5,433,055) $ (1,652,004) $ (9,717,606)
------------ ------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock (10,178,944) -- (10,178,944)
Preferred stock dividends (502,661) -- (502,661)
------------ ------------ ------------
Net loss attributable to common shareholders $(16,114,660) $ (1,652,004) $(20,399,211)
------------ ------------ ------------
Per share information
Net loss - basic and diluted $ (.36) $ (.14) $ (.87)
Deemed dividend associated with beneficial
conversion of preferred stock (.67) -- (.92)
Preferred stock dividends (.03) -- (.04)
------------ ------------ ------------
Net loss per common share - basic and diluted $ (1.06) $ (.14) $ (1.83)
Weighted average number of basic and diluted
common shares outstanding 15,205,554 12,206,106 11,116,938
------------ ------------ ------------
The accompanying notes are an integral part of these statements
F-4
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
(as restated)
Series A Preferred Stock Common Stock
------------------------ ------------------------ Accumulated
Deficit
Number Number Additional During
of of Paid-In Development
Shares Amount Shares Amount Capital Stage
--------- --------- --------- --------- --------- -----------
Issuance of common stock
for cash on 12/28/95 -- $ -- 2,285,291 $ 22,853 $ (22,033) $ --
Issuance of common stock
for cash on 11/7/96 -- -- 11,149 111 49,889 --
Issuance of common stock
for cash on 11/29/96 -- -- 2,230 22 9,978 --
Issuance of common stock
for cash on 12/19/96 -- -- 6,690 67 29,933 --
Issuance of common stock
for cash on 12/26/96 -- -- 11,148 111 49,889 --
Net loss -- -- -- -- -- (270,468)
--------- --------- --------- --------- --------- ---------
Balance, 12/31/96 -- $ -- 2,316,508 $ 23,164 $ 117,656 $(270,468)
Issuance of common stock
for cash on 12/27/97 -- -- 21,182 212 94,788 --
Issuance of common stock
for Services on 9/1/97 -- -- 11,148 111 36,149 --
Issuance of common stock
for Services on 12/28/97 -- -- 287,193 2,872 7,383 --
Net loss -- -- -- -- -- (52,550)
--------- --------- --------- --------- --------- ---------
Balance, 12/31/97 -- $ -- 2,636,031 $ 26,359 $ 255,976 $(323,018)
Treasury Stock
------------------------
Total
Other Number Shareholders'
Comprehensive of Equity
Income Shares Amount (Deficit)
------------- --------- --------- -------------
Issuance of common stock
for cash on 12/28/95 $ -- -- $ -- $ 820
Issuance of common stock
for cash on 11/7/96 -- -- -- 50,000
Issuance of common stock
for cash on 11/29/96 -- -- -- 10,000
Issuance of common stock
for cash on 12/19/96 -- -- -- 30,000
Issuance of common stock
for cash on 12/26/96 -- -- -- 50,000
Net loss -- -- -- (270,468)
--------- --------- --------- ---------
Balance, 12/31/96 $ -- -- $ -- $(129,648)
Issuance of common stock
for cash on 12/27/97 -- -- -- 95,000
Issuance of common stock
for Services on 9/1/97 -- -- -- 36,260
Issuance of common stock
for Services on 12/28/97 -- -- -- 10,255
Net loss -- -- -- (52,550)
--------- --------- --------- ---------
Balance, 12/31/97 $ -- -- $ -- $ (40,683)
The accompanying notes are an integral part of these statements.
F-5
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Common Stock
---------------------------- ---------------------------- Accumulated
Deficit
Number Number Additional During
of of Paid-In Development
Shares Amount Share Amount Capital Stage
----------- ----------- ----------- ----------- ----------- -----------
Issuance of common stock
for cash on 8/23/98 -- $ -- 4,459 $ 45 $ 20,022 $ --
Repurchase of common
stock on 9/29/98 -- -- -- -- -- --
Net loss -- -- -- -- -- (195,675)
----------- ----------- ----------- ----------- ----------- -----------
Balance, 12/31/98 -- $ -- 2,640,490 $ 26,404 $ 275,998 $ (518,693)
Issuance of common stock
for cash on 9/10/99 -- -- 52,506 525 149,475 --
Net loss -- -- -- -- -- (1,306,778)
----------- ----------- ----------- ----------- ----------- -----------
Balance, 12/31/99 -- $ -- 2,692,996 $ 26,929 $ 425,473 $(1,825,471)
Issuance of common stock
for cash on 1/18/00 -- -- 53,593 536 1,387 --
Issuance of common stock
for Services on 3/1/00 -- -- 68,698 687 (662) --
Issuance of common stock
for Services on 4/4/00 -- -- 27,758 278 (268) --
Net loss -- -- -- -- -- (807,076)
----------- ----------- ----------- ----------- ----------- -----------
Balance, 12/31/00 -- $ -- 2,843,045 $ 28,430 $ 425,930 $(2,632,547)
Treasury Stock
----------------------------
Total
Other Number Shareholders'
Comprehensive of Equity
Income Shares Amount (Deficit)
------------- ----------- ----------- -----------
Issuance of common stock
for cash on 8/23/98 $ -- -- $ -- $ 20,067
Repurchase of common
stock on 9/29/98 -- 2,400 (50,280) (50,280)
Net loss -- -- -- (195,675)
----------- ----------- ----------- -----------
Balance, 12/31/98 $ -- 2,400 $ (50,280) $ (266,571)
Issuance of common stock
for cash on 9/10/99 -- -- -- 150,000
Net loss -- -- -- (1,306,778)
----------- ----------- ----------- -----------
Balance, 12/31/99 $ -- 2,400 $ (50,280) $(1,423,349)
Issuance of common stock
for cash on 1/18/00 -- -- -- 1,923
Issuance of common stock
for Services on 3/1/00 -- -- -- 25
Issuance of common stock
for Services on 4/4/00 -- -- -- 10
Net loss -- -- -- (807,076)
----------- ----------- ----------- -----------
Balance, 12/31/00 $ -- 2,400 $ (50,280) $(2,228,467)
The accompanying notes are an integral part of these statements.
F-6
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Common Stock
---------------------------- ----------------------------
Number Number Additional
of of Paid-In
Shares Amount Share Amount Capital
----------- ----------- ----------- ----------- -------------
Issuance of common stock
for services on 7/1/01 -- $ -- 156,960 $ 1,570 $ (1,514)
Issuance of common stock
for services on 7/1/01 -- -- 125,000 1,250 (1,205)
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 -- -- 70,000 700 327,425
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 -- -- 1,750,000 17,500 1,593,846
Issuance of common stock
for conversion of
convertible shareholder
notes payable -- -- 208,972 2,090 133,577
on 8/10/01
Issuance of common stock
for bridge financing
on 8/10/01 -- -- 300,000 3,000 (2,892)
Change in par value in
Recapitalization of
Isolagen Technologies
effective 8/10/01 -- -- -- (49,085) (1,195)
Issuance of common stock
for net assets of Gemini
on 8/10/01 -- -- 3,942,400 3,942 (3,942)
Issuance of common stock
for net assets of AFH
on 8/10/01 -- -- 3,899,547 3,900 (3,900)
Issuance of common stock
for cash on 8/10/01 -- -- 1,346,669 1,347 2,018,653
Transaction and fund
raising expenses
on 8/10/01 -- -- -- -- (48,547)
Issuance of common stock
for services on 8/10/01 -- -- 60,000 60 --
Issuance of common stock
for cash on 8/28/01 -- -- 26,667 26 39,974
Issuance of common stock
for services on 9/30/01 -- -- 314,370 314 471,241
Treasury Stock
Accumulated ----------------------------
Deficit Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage Income Shares Amount (Deficit)
----------- ------------- ----------- ----------- -------------
Issuance of common stock
for services on 7/1/01 $ -- $ -- -- $ -- $ 56
Issuance of common stock
for services on 7/1/01 -- -- -- -- 45
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 -- -- -- -- 328,125
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 -- -- -- -- 1,611,346
Issuance of common stock
for conversion of
convertible shareholder
notes payable -- -- -- -- 135,667
on 8/10/01
Issuance of common stock
for bridge financing
on 8/10/01 -- -- -- -- 108
Change in par value in
Recapitalization of
Isolagen Technologies
effective 8/10/01 -- -- (2,400) 50,280 --
Issuance of common stock
for net assets of Gemini
on 8/10/01 -- -- -- -- --
Issuance of common stock
for net assets of AFH
on 8/10/01 -- -- -- -- --
Issuance of common stock
for cash on 8/10/01 -- -- -- -- 2,020,000
Transaction and fund
raising expenses
on 8/10/01 -- -- -- -- (48,547)
Issuance of common stock
for services on 8/10/01 -- -- -- -- 60
Issuance of common stock
for cash on 8/28/01 -- -- -- -- 40,000
Issuance of common stock
for services on 9/30/01 -- -- -- -- 471,555
The accompanying notes are an integral part of these statements.
F-7
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Common Stock
----------------------------- -------------------------------
Number Number Additional
of of Paid-In
Shares Amount Share Amount Capital
------------ ------------ ------------ ------------ ------------
Uncompensated contribution of
services - 3rd Qtr. (as restated) -- $ -- -- $ -- $ 55,556
Issuance of common stock
for services on 11/1/01 -- -- 145,933 146 $ 218,754
Uncompensated contribution of
services - 4th Qtr. (as restated) -- -- -- -- 100,000
Net loss (as restated) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, 12/31/01 (as restated) -- $ -- 15,189,563 $ 15,190 $ 5,321,761
Uncompensated contribution of
services - 1st Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for cash on 4/26/02 905,000 905 -- -- 2,817,331
Issuance of preferred stock
for cash on 5/16/02 890,250 890 -- -- 2,772,239
Issuance of preferred stock
for cash on 5/31/02 795,000 795 -- -- 2,473,380
Issuance of preferred stock
for cash on 6/28/02 229,642 230 -- -- 712,991
Uncompensated contribution of
services - 2nd Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for cash on 7/15/02 75,108 75 -- -- 233,886
Issuance of common stock
for cash on 8/1/02 -- -- 38,400 38 57,562
Issuance of warrants
for services on 9/06/02 -- -- -- -- 103,388
Uncompensated contribution of
services - 3rd Qtr. (as restated) -- -- -- -- 100,000
Uncompensated contribution of
services - 4th Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for dividends 143,507 144 -- -- 502,517
Deemed dividend associated with
beneficial conversion
of preferred stock (as restated) -- -- -- -- 10,178,944
Comprehensive income:
Net loss (as restated) -- -- -- -- --
Other comprehensive income,
foreign currency
translation adjustment -- -- -- -- --
Comprehensive loss (as restated) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, 12/31/02 (as restated) 3,038,507 $ 3,039 15,227,963 $ 15,228 $ 25,573,999
------------ ------------ ------------ ------------ ------------
Treasury Stock
Accumulated ------------------------------
Deficit Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage Income Shares Amount (Deficit)
------------ ------------- ------------ ------------ -------------
Uncompensated contribution of
services - 3rd Qtr. (as restated) $ -- $ -- -- $ -- $ 55,556
Issuance of common stock
for services on 11/1/01 -- -- -- -- 218,900
Uncompensated contribution of
services - 4th Qtr. (as restated) -- -- -- -- 100,000
Net loss (as restated) (1,652,004) -- -- -- (1,652,004)
------------ ------------ ------------ ------------ ------------
Balance, 12/31/01 (as restated) $ (4,284,551) $ -- -- $ -- $ 1,052,400
Uncompensated contribution of
services - 1st Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for cash on 4/26/02 -- -- -- -- 2,818,236
Issuance of preferred stock
for cash on 5/16/02 -- -- -- -- 2,773,129
Issuance of preferred stock
for cash on 5/31/02 -- -- -- -- 2,474,175
Issuance of preferred stock
for cash on 6/28/02 -- -- -- -- 713,221
Uncompensated contribution of
services - 2nd Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for cash on 7/15/02 -- -- -- -- 233,961
Issuance of common stock
for cash on 8/1/02 -- -- -- -- 57,600
Issuance of warrants
for services on 9/06/02 -- -- -- -- 103,388
Uncompensated contribution of
services - 3rd Qtr. (as restated) -- -- -- -- 100,000
Uncompensated contribution of
services - 4th Qtr. (as restated) -- -- -- -- 100,000
Issuance of preferred stock
for dividends (502,661) -- -- -- --
Deemed dividend associated with
beneficial conversion
of preferred stock (as restated) (10,178,944) -- -- -- --
Comprehensive income:
Net loss (as restated) (5,433,055) -- -- -- (5,433,055)
Other comprehensive income,
foreign currency
translation adjustment -- 13,875 -- -- 13,875
------------
Comprehensive loss (as restated) -- -- -- -- (5,419,180)
------------ ------------ ------------ ------------ ------------
Balance, 12/31/02 (as restated) $(20,399,211) $ 13,875 -- $ -- $ 5,206,930
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-8
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
For the Year Ended 1995 (date of
December 31, inception) to
------------------------------- December 31,
2002 2001 2002
------------ ------------ ------------
(as restated) (as restated) (as restated)
Cash flows from operating activities
Net loss $ (5,433,055) $ (1,652,004) $ (9,717,606)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services 157,704 788,970 1,209,783
Uncompensated contribution of services 400,000 155,556 555,556
Depreciation 99,812 15,368 167,529
Loss on sale of property and equipment -- 8,222 8,222
Change in operating assets and liabilities:
Decrease (increase) in accounts receivable (39,137) 1,288 (40,204)
Increase in other receivables (153,583) (153,583)
Increase in inventory (138,910) -- (138,910)
Increase in prepaid expenses (284,557) -- (284,557)
Decrease (increase) in other assets (115,507) 25,420 (115,507)
Increase in accounts payable 1,673,040 59,932 1,881,236
Increase in accrued expenses 88,906 13,045 112,224
Increase (decrease) in deferred revenue (222,726) (80,000) 57,274
------------ ------------ ------------
Net cash used in operating activities (3,968,013) (664,203) (6,458,543)
------------ ------------ ------------
Cash flows from investing activities
Purchase of property and equipment (2,252,368) -- (2,336,664)
Proceeds from the sale of property
and equipment -- 1,000 1,000
------------ ------------ ------------
Net cash provided by (used in) (2,252,368) 1,000 (2,335,664)
operating activities ------------ ------------ ------------
Cash flows from financing activities
Proceeds from convertible debt -- -- 1,450,000
Proceeds from notes payable to shareholders -- 30,000 135,667
Proceeds from the issuance of preferred stock 9,012,722 -- 9,012,722
Proceeds from the issuance of common stock 57,600 2,060,000 2,525,410
Merger and acquisition expenses -- (48,547) (48,547)
Repurchase of common stock -- -- (50,280)
------------ ------------ ------------
Net cash provided by financing activities 9,070,322 2,041,453 13,024,972
------------ ------------ ------------
Effect of exchange rate changes on cash balances 13,875 -- 13,875
Net increase in cash and cash equivalents 2,863,816 1,378,250 4,244,640
Cash and cash equivalents, beginning of period 1,380,824 2,574 --
------------ ------------ ------------
Cash and cash equivalents, end of period $ 4,244,640 $ 1,380,824 $ 4,244,640
------------ ------------ ------------
Supplemental cash flow information:
Cash paid for interest $ -- $ 1,020 $ 150,283
------------ ------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock 10,178,944 -- 10,178,944
------------ ------------ ------------
Preferred stock dividend 502,661 -- 502,661
------------ ------------ ------------
Common stock issued for services 157,704 788,970 1,209,783
------------ ------------ ------------
Uncompensated contribution of services 400,000 155,556 555,556
------------ ------------ ------------
The accompanying notes are an integral part of these statements.
F-9
Isolagen, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION
Isolagen, Inc. f/k/a American Financial Holding, Inc., a Delaware
corporation ("Isolagen" or the "Company") is the parent company of Isolagen
Technologies, Inc., a Delaware corporation ("Isolagen Technologies"). Isolagen
Technologies is the parent company of Isolagen Europe Limited, a company
organized under the laws of the United Kingdom and wholly-owned subsidiary of
Isolagen Technologies ("Isolagen Europe"). Isolagen Technologies is the parent
company of Isolagen Australia Pty Limited, a company organized under the laws of
the Australia and wholly-owned subsidiary of Isolagen Technologies ("Isolagen
Australia"). The common stock, par value $0.001 per share, of the Company
("Common Stock") is traded on the American Stock Exchange ("AMEX") under the
symbol "ILE."
Isolagen is a Houston, Texas based biotechnology company which has
developed a patented process for the propagation of autologous cells to be used
to stimulate a patient's own collagen and elastin production (the "Isolagen
Process"). Autologous cells are a patient's own cells taken from a small skin
sample. From such sample millions of cells are grown and then injected into the
patient to correct and reduce the normal effects of aging like wrinkles, laugh
lines, smokers lines, fine lines and all types of depressed scars. The procedure
is minimally invasive and non-surgical.
In 1995, Isolagen Technologies began treating a small percentage of
patients with the Isolagen Process to correct defects (e.g., wrinkles,
depressions and scarring) in the patient's face. Between 1995 and 1999,
approximately 200 doctors utilized the Isolagen Process on approximately 963
patients with positive results. In 1997, the FDA began regulating the science of
biologics. Biologics, in contrast to drugs that are chemically synthesized, are
derived from living sources (such as humans, animals, and microorganisms) like
the Isolagen Process. In 1995, when Isolagen Technologies began operations, the
FDA had no regulations governing this area of biologics. After reviewing the new
regulations and seeking the advice of consultants, Isolagen concluded that the
use of the Isolagen Process in cosmetic applications did not require the
approval of the FDA. In 1999, Isolagen Technologies filed a request for
authorization from the FDA to administer an investigational drug or biological
product to humans (referred to herein as an "IND"). Such authorization must be
secured prior to commercialization of any new drug or biological product. The
FDA placed the IND on clinical hold until Isolagen Technologies' manufacturing
processes and procedures were changed to meet these new biologics standards, and
FDA approval is obtained. In April 2002, the FDA released Isolagen's IND and
clinical trial negotiations are underway.
As a result, a 397 patient retrospective study has been completed. The
results demonstrated both safety and efficacy as Phase II data. Using Isolagen
Technologies recently completed cGMP laboratory facility in Houston, Texas,
several studies are taking place. These include: dosage management, dental
application relating to gum and bone, cosmetic correction and scarring. They are
operational under currently active INDs with the FDA. The Company anticipates
that these INDs are scheduled for License Application (approval) by the FDA in
2003, although there can be no assurance that such approval will be obtained or
obtained on a timely basis.
The Company's goal is to become the industry leader in the research,
development and commercialization of the Isolagen Process and the use of
autologous cellular systems ("ACS") which stimulate a patient's own collagen
production. The Company is also pursuing, through Isolagen Europe, commercial
operations in the UK and is pursuing commercial operations through subsidiaries,
joint ventures or license arrangements in Australia, South Korea, Hong Kong,
Brazil, Mexico and elsewhere. The Company is investigating regulatory and other
requirements in these countries and evaluating markets and potential joint
venture partners and licensees.
Through December 31, 2002, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel, commencing its
UK operations and raising capital. In the course of its development activities,
the Company has sustained losses and expects such losses to continue through at
least 2003. The Company will finance its operations primarily through its
existing cash, future financing and revenues.
F-10
The Company's ability to operate profitably under its current business
plan is largely contingent upon its success in obtaining further sources of debt
and equity capital, prompt regulatory approval to sell its products and upon its
continued expansion. The Company will require additional capital in the future
to expand its operations. No assurance can be given that the Company will be
able to obtain any such additional capital, either through equity or debt
financing, on satisfactory terms or at all. Additionally, no assurance can be
given that any such financing, if obtained, will be adequate to meet the
Company's ultimate capital needs and to support the Company's growth. If
adequate capital cannot be obtained on satisfactory terms, the Company's
operations could be negatively impacted.
If the Company achieves growth in its operations in the next few years,
such growth could place a strain on its management, administrative, operational
and financial infrastructure. The Company's ability to manage its operations and
growth requires the continued improvement of operational, financial and
management controls, reporting systems and procedures. In addition, the Company
may find it necessary to hire additional management, financial and sales and
marketing personnel to manage the Company's expanding operations. If the Company
is unable to manage this growth effectively and successfully, the Company's
business, operating results and financial condition may be materially adversely
affected.
As of December 31, 2002, the Company had a cash balance of $4,244,640. As
of March 25, 2003, the Company had a cash balance of approximately $1.4 million.
The Company does not have any credit facilities with which to fund ongoing
working capital needs. As of March 25, 2003, the Company believes its existing
cash and cash equivalents will be adequate to meet its anticipated capital and
liquidity requirements until June 30, 2003 The Company needs to close a
financing transaction within the next three months to have sufficient working
capital until December 31, 2003. In the event such a financing transaction is
not successful, the Company may need to pursue alternative funding sources such
as temporary bridge financing to meet its cash flow needs or curtail its plan of
operations to preserve its available cash for fiscal 2003. The long-term
viability of the Company is dependent upon successful operation of its business
and the ability to raise additional debt and equity within the near future.
Acquisition and merger and basis of presentation
On August 10, 2001, Isolagen Technologies consummated a merger with
American Financial Holdings, Inc. ("AFH") and Gemini IX, Inc. ("Gemini").
Pursuant to an Agreement and Plan of Merger, dated August 1, 2001, by and among
AFH, ISO Acquisition Corp, a Delaware corporation and wholly-owned subsidiary of
AFH ("Merger Sub"), Isolagen Technologies, Gemini, a Delaware corporation, and
William J Boss, Jr., Olga Marko and Dennis McGill, stockholders of Isolagen
Technologies (the "Merger Agreement"), AFH (i) issued 5,453,977 shares of its
common stock, par value $0.001 to acquire, in a privately negotiated
transaction, 100% of the issued and outstanding common stock (195,707 shares,
par value $0.01, including the shares issued immediately prior to the Merger for
the conversion of certain liabilities, as discussed below) of Isolagen
Technologies, and (ii) issued 3,942,000 shares of its common stock to acquire
100% of the issued and outstanding common stock of Gemini. Pursuant to the terms
of the Merger Agreement, Merger Sub, together with Gemini, merged with and into
Isolagen Technologies (the "Merger"), and AFH was the surviving corporation. AFH
subsequently changed its name to Isolagen, Inc. on November 13, 2001.
Prior to the Merger, Isolagen Technologies had no active business and was
seeking funding to begin U.S. Food and Drug Administration ("FDA") trials of the
Isolagen Process. AFH was a non-operating, public shell company with limited
assets. Gemini was a non-operating private company with limited assets and was
unaffiliated with AFH.
Since AFH and Gemini had no operations and limited assets at the time of
the Merger, the merger has been accounted for as a recapitalization of Isolagen
Technologies and an issuance of common stock by Isolagen Technologies for the
net assets of AFH and Gemini. In the recapitalization, Isolagen Technologies is
treated as having affected (i) a 27.8694 for 1 stock split, whereby the 195,707
shares of its common stock outstanding immediately prior the merger are
converted into the 5,453,977 shares of common stock received and held by the
Isolagen Technologies stockholders immediately after the merger, and (ii) a
change in the par value of its common stock, from $0.01 per share to $0.001 per
share. The stock split has been reflected in the accompanying consolidated
financial statements by retroactively restating all shares and per share
amounts. The change in par value is reflected by a transfer between the common
stock and additional paid-in capital accounts at the date of the Merger. The
stock issuances are accounted for as the issuance of (i) 3,942,400 shares for
the net assets of Gemini,
F-11
recorded at their book value, and (ii) the issuance of 3,899,547 shares (the
number of shares AFH had outstanding immediately prior to the Merger) for the
net assets of AFH, recorded at their book value.
Immediately prior to and as a condition of the Merger, Isolagen
Technologies issued an aggregate of 2,328,972 shares (post split) of its common
stock to convert to equity an aggregate of $2,075,246 of liabilities, comprised
of (i) accrued salaries of $328,125, (ii) convertible debt and related accrued
interest of $1,611,346, (iii) convertible shareholder notes and related accrued
interest of $135,667 and (iv) bridge financing costs of $108. Simultaneous with
the Merger, the Company sold 1,346,669 shares of restricted common stock to
certain accredited investors in a private placement transaction. The
consideration paid by such investors for the shares of common stock aggregated
$2,020,000 in transactions exempt from the registration requirements of the
Securities Act. The net cash proceeds of this private placement were used to
fund Isolagen's research and development projects and the initial FDA trials of
the Isolagen Process, to explore the viability of entering foreign markets, to
provide working capital and for general corporate purposes.
The financial statements presented include Isolagen, Inc. and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Isolagen Technologies was, for accounting
purposes, the continuing entity of the Merger, and accordingly for the periods
prior to the Merger, the financial statements reflect the financial position,
results of operations and cash flows of Isolagen Technologies. The assets,
liabilities, operations and cash flows of AFH and Gemini are included in the
consolidated financial statements from August 10, 2001 onward.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement of financial statements
Subsequent to the issuance of the Company's financial statements as of
December 31, 2002 and for the year then ended, the Company identified several
errors that were required to be corrected in the previously reported financial
statements. The principal reasons and effects of the adjustments are summarized
below:
Beneficial Conversion Feature: During 2002, the Company completed a
private placement of Series A Convertible Preferred Stock. Imbedded within the
instruments was a beneficial conversion feature that was not recorded.
Accordingly, the Company revised its financial statements as of December 31,
2002 and for the year then ended to record a deemed dividend to the holders of
the preferred stock totaling $10,178,944. The Company's financial statements
reflect an increase in the retained deficit and a corresponding increase in
paid-in capital for this amount. The deemed dividend associated with the
beneficial conversion is calculated as the difference between the fair value of
the underlying common stock less the proceeds that have been received for the
Series A Preferred Stock limited to the value of the proceeds received. Also,
the Company has included preferred dividends accrued in 2002 totaling $502,661
in the computation of net loss attributable to common shareholders. (see Note 6)
Contributed Services: During 2002 and 2001, the certain officers and
directors of the Company were not compensated for a portion of their services
provided to Company. The financial statements are to reflect the total cost of
conducting its business which includes the value of contributed services.
Accordingly, the Company has recorded contribution services from officers
totaling $400,000 and $155,556 for the years ended December 31, 2002 and 2001,
respectively. We estimated the value of the contributed services based upon our
estimate of their fair market value. This contribution of services was recorded
as an increase in compensation expense and an increase in additional paid in
capital. (see Note 6)
Weighted Average Shares Utilized in the Calculation Percentage Loss Per
Share: Similar to a reverse merger, the weighted average shares outstanding
utilized in the computation of earnings per share are to be adjusted to give
effect as if the Merger transaction had occurred as of the beginning of the
earliest year presented, similar to a stock split. For all years presented prior
to the Merger, the weighted average shares outstanding were not adjusted to
reflect the recapitalization as of the earliest period presented. Accordingly,
the Company has retroactively restated its financial statements to the earliest
period presented for the purposes of computing weighted average shares
outstanding and loss per share data.
F-12
Together these restatements changed the net loss per share from $0.33 to
$1.06 for the year ended December 31, 2002, $0.20 to $0.14 for the year ended
December 31, 2001, and the cumulative from inception net loss per share has
increased from $1.19 to $1.83.
Statement of cash flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Concentration of credit risk
The Company maintains its cash with a major U.S. domestic bank. The
amounts held in this bank exceed the insured limit of $100,000 from time to
time. The terms of these deposits are on demand to minimize risk. The Company
has not incurred losses related to these deposits.
The Company is subject to risks common to companies in the development
stage including, but not limited to, development of new products, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to fund its product plans. The Company
has a limited operating history and has yet to generate any significant revenues
from customers. To date, the Company has been funded by private debt and equity
financings. The Company's ultimate success is dependent upon its ability to
raise additional capital and to successfully develop and market its products.
The products developed by the Company require approvals from the United
States FDA or other international regulatory agencies prior to commercial sales.
There can be no assurance that all of the Company's products will receive the
necessary approvals. If the Company was denied such approvals or such approvals
were delayed, it may have a material adverse impact on the Company.
Inventory
Inventory primarily consists of raw materials used in the Isolagen
Process. Inventory is stated at the lower of cost or market and cost is
determined by the weighted average method.
Property and equipment
Property and equipment, consisting primarily of lab equipment, computer
equipment, leasehold improvements, and office furniture and fixtures is carried
at cost less accumulated depreciation. Depreciation for financial reporting
purposes is provided by the straight-line method over the estimated useful lives
of three to five years subject to half year convention. Leasehold improvements
are amortized using the straight-line method over the remaining life of the
lease. The cost of repairs and maintenance is charged against income as
incurred.
Earnings per share data
Basic earnings (loss) per share is calculated based on the weighted
average common shares outstanding during the period. Diluted earnings per share
also gives effect to the dilutive effect of stock options, warrants and
convertible preferred stock (calculated based on the treasury stock method). The
Company does not present diluted earnings per share for years in which it
incurred net losses as the effect of potentially dilutive shares from
convertible debt is antidilutive.
Shares of Isolagen common stock outstanding prior to the Merger were
deemed converted to its equivalent shares of the Company's common stock using a
conversion factor as defined in the Merger Agreement. Shares issued in
conjunction with the Merger have been retroactively restated to the earliest
period presented for the purpose of computing weighted average shares
outstanding.
F-13
Stock-based compensation
The Company accounts for its stock-based compensation under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting
for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to
either record expenses for stock options and other employee compensation plans
based on their fair value at the date of grant or to continue to apply its
current accounting policy under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," ("APB No. 25"), and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
the provisions of APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies wishing to
voluntarily change to the fair value based method of accounting for stock-based
compensation. The statement also amends the disclosure requirements of Statement
123, requiring prominent disclosure in annual and interim financial statements
regarding a company's method for accounting for stock-based employee
compensation and the effect of the method on reported results. While Isolagen
continues to utilize the disclosure-only provisions of SFAS No. 123, the Company
has modified its disclosures to comply with the new statement. See Note 6.
Income taxes
An asset and liability approach is used for financial accounting and
reporting for income taxes. Deferred income taxes arise from temporary
differences between income tax and financial reporting and principally relate to
recognition of revenue and expenses in different periods for financial and tax
accounting purposes and are measured using currently enacted tax rates and laws.
In addition, a deferred tax asset can be generated by net operating loss
carryforwards ("NOLs"). If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Revenue recognition
The Company recognizes revenue from product sales when goods are shipped
and the risk of loss transfers to the customer. Revenue from licenses and other
upfront fees are recognized on a ratable basis over the term of the respective
agreement. Milestone payments are recognized upon successful completion of a
performance milestone event. Any amounts received in advance of performance are
recorded as deferred revenue. The Company recognizes revenue over the period the
service is performed in accordance with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable, and (4) collectibility is
reasonably assured. We believe that all of these conditions are met at the time
of shipment. Currently, three injections are recommended, although the decision
to utilize one, two or three injections is between the attending physician and
his/her patient. The amount invoiced is fixed and determinable and only varies
among customers depending upon the number of injections requested. There is no
performance provision under any arrangement with any doctor and there is no
right to refund, or returns for unused injections.
Currently the Isologen Process is delivered through an attending physician
to each patient in the Company's recommended regimen of up to three injections.
Each injection has stand alone value to the patient. The Company invoices the
attending physician upon that physician submitting his/her patient's tissue
sample to the Company; thus the contractual arrangement is between the Company
and the medical professional. The amount invoiced varies directly with the
number of injections requested. All orders are paid in advance by the physician
and are not refundable. Revenue is deferred until shipment, provided no
significant obligations remain, and is recognized in installments corresponding
to the number of injections shipped to the attending physician. Due to the short
shelf life, each injection is cultured on an as needed basis and shipped prior
to the individual injection being administered by the physician. The amount of
the revenue deferral represents the fair value of the remaining undelivered
injections defined in accordance with EITF 00-21, which addresses the issue of
accounting for arrangements that involve the delivery of multiple products or
services. Should the physician discontinue the regimen prematurely all remaining
deferred revenue is recognized.
F-14
Promotional incentives
The Company periodically offers promotional incentives to physicians on a
case-by-case basis. Promotional incentives are provided to physicians in the
form of 'at no charge' Isolagen Treatments and Isolagen Treatments offered at a
discount to the suggested price list. The Company does not receive any
identifiable benefit from the physicians in exchange for any promotional
incentives granted.
The Company does not record any revenue related to 'at no charge' Isolagen
Treatments and the cost to provide such treatments is expensed as incurred. The
Company records any discounts granted as a reduction in revenue (i.e.net revenue
after discount) from that specific transaction. The Company believes this
accounting treatment complies with Emerging Issues Task Force ("EITF")-01-09:
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)."
Foreign currency translation
The financial position and results of operations of the Company's foreign
subsidiaries are generally determined using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Adjustments arising from the use of differing exchange rates from period to
period are included in other comprehensive income in stockholders' equity. Gains
and losses resulting from foreign currency transactions are included in earnings
and have not been material in any one year.
Comprehensive income
Comprehensive income encompasses all changes in equity other than those
with stockholders and consists of net earnings and foreign currency translation
adjustments. The Company does not provide for U.S. income taxes on foreign
currency translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Research and development expenses
Research and development include direct costs, research-related overhead,
and costs associated with improved process science, manufacturing and cost
reduction are charged to operations as incurred.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
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.
Recent accounting pronouncements
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies wishing to
voluntarily change to the fair value based method of accounting for stock-based
compensation. The statement also amends the disclosure requirements of Statement
123, requiring prominent disclosure in annual and interim financial statements
regarding a company's method for accounting for stock-based employee
compensation and the effect of the method on reported results. While Isolagen
continues to utilize the disclosure-only provisions of SFAS No. 123, the Company
has modified its disclosures to comply with the new statement. See Note 6.
F-15
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment is comprised of:
December 31,
------------
2002 2001
----------- -----------
Lab Equipment $ 682,640 $ 52,454
Computer Equipment 333,826 6,326
Office furniture and fixtures 20,536
Leasehold Improvements 1,274,146 --
----------- -----------
2,311,148 58,780
Less: Accumulated depreciation (151,235) (51,423)
----------- -----------
Property and equipment, net $ 2,159,913 $ 7,357
----------- -----------
NOTE 4 - FEDERAL INCOME TAXES
The components of the Company's deferred tax assets at December 31, 2002
and 2001 are as follows:
December 31,
------------
2002 2001
----------- -----------
Deferred tax assets:
Loss carryforwards $ 4,467,456 $ 3,007,506
Deferred tax liabilities:
Deferred revenue (19,473) (95,200)
----------- -----------
4,447,983 2,912,306
Less: Valuation allowance (4,447,983) (2,912,306)
----------- -----------
$ -- $ --
----------- -----------
As of December 31, 2002, the Company had generated NOLs of approximately
$13,100,000 available to reduce future income taxes. These carryforwards begin
to expire in 2003. A change in ownership, as defined by federal income tax
regulations, could significantly limit the Company's ability to utilize its
carryforwards. Additionally, because federal tax laws limit the time during
which the NOLs may be applied against future taxes, the Company may not be able
to take full advantage of the NOLs to reduce future income taxes if it fails to
generate taxable income prior to expiration of the NOLs. As the Company has had
cumulative losses and there is no assurance of future taxable income, valuation
allowances have been recorded to fully offset the deferred tax asset at December
31, 2002 and 2001. The valuation allowance increased $1,535,677 during 2002 due
to the Company's current period net loss.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, warehouse and laboratory facilities in London,
England and Sydney, Australia under third party non-cancelable operating leases
through 2010. Future minimum lease commitments at December 31, 2002 are as
follows:
YEAR ENDED
DECEMBER 31
-----------
2003 $ 226,150
F-16
2004 219,778
2005 149,684
2006 149,684
2007 149,684
Thereafter 636,154
------------
Total $ 1,531,134
------------
For the year ended December 31, 2002, rental expense totaled $105,206.
Certain officers of the Company provide office space and laboratory
facilities at no charge until August 2003. Beginning September 2003, the lease
rate will be approximately $1.80 per month per square foot.
License agreement
Effective July 1, 2000, the Company granted exclusive rights to develop
and market its technologies and products within Japan. Should the development
efforts result in a marketable product, the Company will receive royalties based
on product sales. Upon execution of the license agreement, the Company received
an initial up-front fee of $400,000 which was deferred and will be recognized on
a ratable basis over the five year term of the agreement in accordance with the
terms of the agreement. For the years ended December 31, 2002 and 2001, the
Company recognized $40,000 and $80,000, respectively, of contract revenues
pursuant to this agreement.
During 2002, the Company began negotiations to revoke the license
agreement. As a result, the Company reclassified to a payable the remaining
deferred revenue totaling $240,000 and accrued an additional $160,000 in
anticipation of a settlement totaling approximately $400,000. Thus, the entire
amount of the initial up-front fee of $400,000 has been accrued as management's
estimate of the amount necessary to satisfy the Company's obligation under the
Agreement.
Employment agreements
The Company has entered into employment agreements with Olga Marko,
William K. Boss, Jr., Brian Whitley, Robert E. Tompkins and Vaughan Clift.
Ms. Marko entered into an employment agreement with the Company, dated
August 10, 2001, for a term of sixty months at an annual base salary of
$130,000. The base salary shall increase on an annual basis by the same
percentage that the Consumer Price Index has increased during the same time
frame or at the direction of the Board of Directors, whichever is higher. Mrs.
Marko is eligible for an annual bonus to be determined by the Board of Directors
in its sole discretion. If the employment agreement is terminated by the Company
without cause, Mrs. Marko will be entitled to a twelve month severance payment.
Dr. Boss entered into an employment agreement with the Company, dated
August 10, 2001, and later amended on February 28, 2002 as follows: (a) during
the first year of the term, Dr. Boss will receive 60,000 shares of Common Stock;
(b) an annual salary of $50,000 for 2002; and (c) an annual salary of $60,000
for 2003. For this compensation, Dr. Boss agrees to devote 25 mutually agreeable
days per year as requested by the Company (i.e., out-of-town meetings, etc.). If
the employment agreement is terminated by the Company without cause, Dr. Boss
will be entitled to a three-month severance payment.
Mr. Whitley entered into an employment agreement with the Company, dated
September 1, 2001, for a term of sixty (60) months at an annual base salary as
follows: (a) $4,000 per month for September 2001 through December 2001; and (b)
$10,000 per month for months subsequent to December 31, 2001. Mr. Whitley is
eligible for an annual bonus to be determined by the Board of Directors in its
sole discretion. If the employment agreement is terminated by the Company
without cause, Mr. Whitley will be entitled to a three month severance payment.
Mr. Whitley left the employment of the Company in March 2003.
Mr. Tompkins entered into an employment agreement with the Company, dated
September 17, 2001, for a term of thirty-six (36) months at an annual base
salary of $90,000. Mr. Tompkins is eligible for an annual bonus to
F-17
be determined by the Board of Directors in its sole discretion. If the
employment agreement is terminated by the Company without cause, Mr. Tompkins
will be entitled to a two month severance payment. Mr. Tompkins left the
employment of the Company in September 2002. All amounts related to his
separation of employment are reflected in the 2002 statement of operations.
Mr. Clift entered into an employment agreement with the Company, dated May
28, 2002, for a term of thirty-six (36) months at an annual base salary of
$175,500. Mr. Clift is eligible for an annual bonus to be determined by the
Board of Directors in its sole discretion. If the employment agreement is
terminated by the Company without cause, Mr. Clift will be entitled to a two (2)
month severance payment.
Consulting agreement
Effective August 20, 2001, the Company entered into an agreement with Cato
Research Ltd. to provide drug development, regulatory advisory and other
services. Pursuant to the terms of the agreement, the Company issued 133,333
shares of restricted common stock with an assigned value of $200,000 as a
retainer fee, which was capitalized as a prepaid expense. As services are
rendered, 80% of the invoiced amount is payable in cash with the remaining 20%
payable through a reduction in the retainer fee. At December 31, 2002 and 2001,
$120,350 and $174,666, respectively, was capitalized as other assets related to
this agreement.
In addition, the agreement includes a special incentive performance
arrangement. In the event the Company receives FDA approval on or before August
20, 2003 as a result of the consulting services, the Company will issue 250,000
restricted common shares as an incentive bonus. If the regulatory approval is
received after August 20, 2003, but before February 20, 2004, the Company will
issue 100,000 restricted shares as an incentive bonus. On August 19, 2002, the
agreement was amended to revoke the special incentive performance arrangement.
SEC enforcement
On October 9, 1996, the Company was advised by the Enforcement Division of
the Securities and Exchange Commission (the "Commission") that it is considering
recommending that the Commission bring an enforcement action, which could
include a civil penalty, against the Company in U.S. District Court for failing
to file timely periodic reports in violation of Section 13(a) of the Securities
and Exchange Act of 1934 and the rules thereunder.
In October 1996, the Company also received a request for the voluntary
production of information to the Enforcement Division of the Commission related
to the resignation of Coopers & Lybrand LLP and the termination of Arthur
Andersen LLP and the appointment of Jones, Jensen & Company as the Company's
independent public accountants and the reasons therefore. In addition, the
Company was requested to provide certain information respecting its previous
sales of securities. The Company cooperated in providing information in response
to these inquiries in early 1997. The Company has not been advised of the
outcome of the foregoing, and has had no further contact by the Enforcement
Division of the Commission.
NOTE 6 - EQUITY, STOCK PLAN AND WARRANTS
Uncompensated contributed services
From the date of the Merger through December 31, 2002, the Company has not
paid compensation to certain officers and directors. Accordingly, the Company
has capitalized the estimated fair value of these services. The uncompensated
contributed services totaled $400,000 and $155,556 for the years ended December
31, 2002 and 2001, respectively. We estimated the value of the contributed
services based upon our estimate of their fair market value. This contribution
of services was recorded as an increase to compensation expense and increase in
additional paid in capital.
Equity instruments issued to non-employees
From time to time, in order to preserve cash and to fund operating
activities of the Company, common stock or other equity instruments may be
issued for cash or in exchange for goods or services. Equity instruments
F-18
issued for goods or services are recorded at the fair value of the goods or
services received or the fair value of the equity instruments issued, whichever
is more reliably measurable.
As referred to in Note 1, the Company became a publicly traded enterprise
as a result of the Merger. Noncash transactions involving the issuance of equity
instruments prior to the Merger were recorded at the fair value of the goods or
services received, while transactions occurring after the Merger were recorded
at the fair value of the equity instruments issued, which were determined based
on quoted market prices.
Series A Convertible Preferred Stock
In July 2002, the Company completed a private offering of 2,895,000 shares
of Series A Convertible Preferred Stock, par value $0.001 per share, at an
offering price of $3.50 per share. Each share of Series A Preferred Stock is
convertible into two shares of common stock at any time after issuance and
accrues dividends at 8% per annum payable in cash or additional shares of Series
A Preferred Stock. In conjunction with the private offering, the Company issued
to the placement agent warrants to purchase 1,158,000 shares of common stock
with an exercise price of $1.93 per share. The warrants are exercisable
immediately after grant and expire five years thereafter.
The fair market of the warrants granted to the placement agent, based on
the Black-Scholes valuation model, is estimated to be $1.57 per warrant,
assuming the following: no dividend yield, a risk-free interest rate of 4%, an
expanded term of the warrants of 2 years, and an expected volatility of 129%.
The value of the warrants granted has been offset against the proceeds received
from the sale of the Series A Preferred Stock.
During the year ended December 31, 2002, the Company issued an additional
143,507 shares of Series A Preferred Stock in lieu of cash for payment of
dividends on the Series A Preferred Stock totaling $502,661.
The price of the preferred stock sold was $3.50 per share. The market
value of the Company's common stock sold on the dates that the preferred stock
sold or was issued as a dividend had a range of $2.30 - $5.40 per common share.
In accordance with EITF 00-27 this created a beneficial conversion to the
holders of the preferred stock and a deemed dividend to the preferred
stockholders totaling $10,178,944 was recorded by the Company with a
corresponding amount recorded as additional paid-in capital. The deemed dividend
associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that
have been received for the Series A Preferred Stock limited to the value of the
proceeds received.
2001 Stock Option and Stock Appreciation Rights Plan
Effective August 10, 2001, the Company adopted the Isolagen, Inc. 2001
Stock Option and Stock Appreciation Rights Plan (the "Stock Plan"). The Stock
Plan is discretionary and allows for an aggregate of up to 5,000,000 shares of
the Company's common stock to be awarded through incentive and non-qualified
stock options and stock appreciation rights. The Stock Plan is administered by
the Company's Board of Directors, who has exclusive discretion to select
participants who will receive the awards and to determine the type, size and
terms of each award granted.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for
its Stock Plan. Under APB No. 25, the Company does not recognize compensation
expense on the issuance of its stock options because the terms are fixed and the
exercise price equals or exceeds the fair market value of the underlying stock
on the grant date.
Information regarding the options and warrants granted in 2002 and 2001 is
as follows:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
OPTIONS WARRANTS
------- --------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Outstanding, beginning of year 3,792,500 -- 450,000 --
Granted 698,000 3,792,500 1,533,000 450,000
F-19
Exercised (38,400) -- -- --
Expired or cancelled (200,000) -- (450,000) --
---------- ---------- ---------- ----------
Outstanding, end of year 4,252,100 3,792,500 1,533,000 450,000
---------- ---------- ---------- ----------
Exercisable, end of year 458,017 4,167 1,243,000 --
---------- ---------- ---------- ----------
Available for grant, end of year 509,500 1,207,500
---------- ----------
The weighted average and warrant exercise price information for 2002 and
2001 is as follows:
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
OPTIONS WARRANTS
------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Outstanding, beginning of year $ 2.70 $ -- $ 1.50 $ --
Granted during the year $ 6.07 $ 2.70 $ 1.93 $ 1.50
Exercised during the year $ 1.50 $ -- $ -- $ --
Expired or cancelled during the year $ 1.50 $ -- $ 1.50 $ --
Outstanding at end of year $ 5.08 $ 2.70 $ 2.05 $ 1.50
Exercisable at end of year $ 2.08 $ -- $ 1.94 $ 1.50
Significant option and warrant groups outstanding at December 31, 2002,
and related weighted average exercise price and life information is as follows:
WEIGHTED
OPTIONS WARRANTS EXERCISE REMAINING
GRANT DATE OUTSTANDING OUTSTANDING EXERCISABLE PRICE LIFE (YEARS)
---------- ----------- ----------- ----------- ----- ------------
September 2001 2,975,000 -- 124,750 $ 5.47 8.67
September 2001 61,600 -- 61,600 $ 1.50 8.71
October 2001 340,000 -- 140,000 $ 1.50 8.75
November 2001 117,500 -- 71,667 $ 2.40 8.83
December 2001 60,000 -- 60,000 $ 3.57 8.92
May 2002 100,000 -- -- $ 6.00 9.42
May 2002 112,000 -- -- $ 6.00 9.42
May 2002 150,000 -- -- $ 6.00 9.42
June 2002 20,000 -- -- $ 6.00 9.50
June 2002 96,000 -- -- $ 6.50 9.50
July 2002 -- 1,158,000 1,158,000 $ 1.93 4.50
September 2002 -- 375,000 75,000 $ 2.43 10.75
November 2002 100,000 -- -- $ 6.00 9.83
December 2002 100,000 -- -- $ 6.00 9.92
December 2002 20,000 -- -- $ 6.00 9.92
The weighted average fair value at date of grant for options and warrants
granted during 2002 and 2001 was $3.96 and $1.12, respectively, per option. The
fair value of options at date of grant was estimated using the Black-Scholes
model with the following weighted average assumptions:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
-------- --------
Expected life (years) 6 years 6 years
Interest rate 4% 4%
Dividend yield -- --
F-20
Forfeiture rate 5% 5%
Volatility 129% 98%
Had compensation costs for the Company's stock option plan been determined
based on the fair value at the grant date in 2002 and 2001 consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per share would
have increased to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
------------- -------------
Net loss - as reported $ (5,433,055) $ (1,652,004)
Net loss - pro forma $ (6,441,617) $ (1,801,568)
Net loss per share - as reported
Basic and diluted $ (.36) $ (.14)
Net loss per share - pro forma
Basic and diluted $ (.42) $ (.15)
NOTE 7 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 22, 2001, the Company, then known as American Financial
Holding, Inc. entered into a purchase agreement (the "Purchase Agreement") with
Alyda Macaluso, Laura Avignon, and Lighthouse Capital Insurance Co. whereby the
Company issued 15,000,000 shares of common stock (pre-split) and issued $150,000
of promissory notes to the purchasers for $300,000 in cash. Under the terms of
the Purchase Agreement, the Company obtained shareholder approval for a 21:4
reverse stock split, which resulted in the 4,279,449 shares of common stock
outstanding at December 31, 2000 being consolidated into 199,974 post-split
shares. In addition, the 15,000,000 pre-split shares of common stock issued to
the purchasers were consolidated into 700,935 post split shares and the $150,000
promissory notes were automatically converted into 2,299,065 post-split shares
of common stock; thus bringing the total interest in the Company held by the
purchasers to 3,000,000 post-split shares of common stock. Accordingly, the
Purchase Agreement resulted in a change in control of the Company.
On August 10, 2001, the Company acquired Isolagen Technologies through the
merger of its wholly-owned subsidiary, Isolagen Acquisition Corp., a Delaware
corporation ("Merger Sub"), and an affiliated entity, Gemini IX, Inc., a
Delaware corporation ("Gemini"), with and into Isolagen Technologies (the
"Merger"). As a result of the Merger, Isolagen Technologies became a
wholly-owned subsidiary of the Company. Simultaneously with the Merger, the
Company issued 1,346,669 shares, at $1.50 per share, of the Company's restricted
common stock to Timothy J. Till, Michael Avignon, Michael Macaluso, and BASR
Partnership for consideration totaling $2,020,000 in a private placement and
converted $1,450,000 principal amount of Company debt and approximately $625,000
of accrued liabilities of the Company to equity. On November 13, 2001, the
Company changed its name to Isolagen, Inc.
NOTE 8 - SUBSEQUENT EVENTS
Additional financing
The Company has adopted a plan of financing in order to raise additional
capital.
2003 Stock Option and Appreciation Rights Plan
On January 29, 2003, the Company's Board of Directors approved the 2003
Stock Option and Appreciation Rights Plan (the "2003 Stock Plan"). The 2003
Stock Plan is discretionary and allows for an aggregate of up to 2,500,000
shares of the Company's common stock to be awarded through incentive and
non-qualified stock options and stock appreciation rights. The 2003 Stock Plan
is administered by the Company's Board of Directors which has exclusion
discretion to select participants who will receive the awards and to determine
the type, size and terms of each award granted. The 2003 Stock Plan is subject
to approval by a vote of the Company's stockholders at their next annual
meeting.
F-21
Stock options
On February 25, 2003, the Company issued to certain officers options to
purchase 920,000 shares of the of the Company's common stock at an exercise
price of $4.50 per share. The options vest equally over a two year period from
the grant date.
Intellectual property purchase agreement
Subsequent to December 31, 2002, the Company entered into an Intellectual
Property Purchase Agreement to acquire two pending patent applications. As
consideration, the Company issued the seller 100,000 shares of its Common Stock
and royalty equal to (a) 5% of all revenues recognized by the Company or its
Affiliates from commercial application of the Intellectual Property made,
provided, distributed, sold or manufactured directly by the Company or its
Affiliates, or (b) 25% of all revenues recognized by the Company or its
Affiliates from licensing, sublicensing, transferring or selling the
Intellectual Property to a third party, without offset or deduction for general
and administrative or operating costs, subject to a total maximum royalty of $2
million.
F-22
EXHIBIT INDEX
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
3.1 Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 of the Registrant's Form 10-K for the
fiscal year ended December 31, 1991)
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Registrant's Form 10-K for the fiscal year ended
December 31, 1991)
4.1 Specimen of Common Stock certificate (incorporated by
reference to Exhibit 4.4 of the Registrant's Form 10-KSB
for the fiscal year ended December 31, 2001)
10.1* 2001 Stock Option and Stock Appreciation Rights Plan
10.2* Employment Agreement dated August 10, 2001 between
Isolagen, Inc. and Olga Marko
10.3* Employment Agreement dated August 10, 2001 between
Isolagen, Inc. and William K. Boss, as amended on
February 28, 2002
10.4* 2003 Stock Option and Stock Appreciation Rights Plan
21.1 List of Subsidiaries (incorporated by reference to
Exhibit 21.1 of the Registrant's Form 10-KSB for the
fiscal year ended December 31, 2002)
31.1 Certification of Chief Executive Officer pursuant
to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Indicated management compensatory plan, contract or arrangement.