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 REVISING THE (i) NUMBER OF SHARES ISSUED AND OUTSTANDING
PRIOR TO THE AUGUST 10, 2001 TRANSACTION (DESCRIBED IN NOTE 1 TO THE FINANCIAL
STATEMENTS) TO RETROACTIVELY REFLECT THE PAR VALUE AND ADDITIONAL PAID IN
CAPITAL FOR THE NUMBER OF SHARES RECEIVED BY THE ISOLAGEN TECHNOLOGIES
STOCKHOLDERS IN THE TRANSACTION, AFTER GIVING EFFECT TO THE DIFFERENCE IN PAR
VALUE AND (ii) THE WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON SHARES
OUTSTANDING USED IN PRESENTING NET LOSS PER COMMON SHARE AFTER GIVING EFFECT TO
THE REVISION IN ITEM (i) ABOVE. WE HAVE MADE NO FURTHER CHANGES TO THE
PREVIOUSLY FILED FORM 10-KSB/A FILED WITH THE SEC ON NOVEMBER 12, 2003. THE
ABOVE DESCRIBED CHANGES HAD NO AFFECT ON OUR FINANCIAL POSITION OR RESULTS OF
OPERATIONS, EXCEPT FOR THE EFFECTS ON THE NET LOSS PER SHARE FROM THE CHANGE IN
THE NUMBER OF WEIGHTED AVERAGE SHARES OUTSTANDING. 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
AMENDMENT.
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 revision during the year ended December 31, 2001.
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
botulisum 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):
7
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
---------------------------------------------------------------------------------------------------------------------------------
Zyderm/Zyplast Collagen from cowhides Collagen implant Reabsorbs in 3 to 6 months in 95+ % of patients.
of a closed herd Allergic reaction in approx. 3% of patients.
(Inamed Aesthetics) Immediate esthetic effect.
$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 implat 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-flouroetheylene Potential for complications: infection, rejection, and
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. CO(2) & 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 Laser applications are replacing this technology.
are formulated by a to form $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 Upon Weighted-Average Number of Securities
Exercise of Exercise Price of Remaining Available
Plan Category Outstanding Options Outstanding Options for Future Issuance
------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 4,252,100 $ 5.08 509,500
security holders
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 17, 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 17, 2003
-------------------------
Frank DeLape
/s/ William K. Boss, Jr. Vice Chairman of the Board November 17, 2003
-------------------------
William K. Boss, Jr.
/s/ Michael Macaluso Chief Executive Officer and Director November 17, 2003
-------------------------
Michael Macaluso
/s/ Michael Avignon Director November 17, 2003
-------------------------
Michael Avignon
/s/ Jeffrey W. Tomz Chief Financial Officer November 17, 2003
-------------------------
Jeffrey W. Tomz
/s/ Steven Morrell Director November 17, 2003
-------------------------
Steven Morrell
/s/ Ashley Smith Director November 17, 2003
-------------------------
Ashley Smith
/s/ Ralph De Martino Director November 17, 2003
-------------------------
Ralph De Martino
25
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.
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
------------ ------------
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
------------- ------------- ------------
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) $ (.22) $ (1.91)
Deemed dividend associated with beneficial
conversion of preferred stock (.67) - (2.01)
Preferred stock dividends (.03) - (.10)
------------ ------------ ------------
Net loss per common share - basic and diluted $ (1.06) $ (.22) $ (4.02)
Weighted average number of basic and diluted
common shares outstanding 15,205,554 7,618,947 5,071,594
------------ ------------ ------------
The accompanying notes are an integral part of these statements
F-4
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
Series A Preferred Stock Common Stock
------------------------ -----------------
Number Number Additional
of of Paid-In
Shares Amount Shares Amount Capital
------ ------ --------- ------ ----------
Issuance of common stock
for cash on 12/28/95 -- $ -- 2,285,291 $2,285 $ (1,465)
Issuance of common stock
for cash on 11/7/96 -- -- 11,149 11 49,989
Issuance of common stock
for cash on 11/29/96 -- -- 2,230 2 9,998
Issuance of common stock
for cash on 12/19/96 -- -- 6,690 7 29,993
Issuance of common stock
for cash on 12/26/96 -- -- 11,148 11 49,989
Net loss -- -- -- -- --
------ ------ --------- ------ ----------
Balance, 12/31/96 -- $ -- 2,316,508 $2,316 $ 138,504
Issuance of common stock
for cash on 12/27/97 -- -- 21,182 21 94,979
Issuance of common stock
for Services on 9/1/97 -- -- 11,148 11 36,249
Issuance of common stock
for Services on 12/28/97 -- -- 287,193 287 9,968
Net loss -- -- -- -- --
------ ------ --------- ------ ----------
Balance, 12/31/97 -- $ -- 2,636,031 $2,635 $ 279,700
Treasury Stock
--------------
Accumulated
Deficit Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage 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) -- -- -- (270,468)
----------- ------------- ------ ------ -------------
Balance, 12/31/96 $ (270,468) $-- -- $-- $ (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) -- -- -- (52,550)
----------- ------------- ------ ------ -------------
Balance, 12/31/97 $ (323,018) $-- -- $-- $ (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)
Series A Preferred Stock Common Stock
------------------------ -----------------
Number Number Additional
of of Paid-In
Shares Amount Share Amount Capital
------ ------ --------- ------ ----------
Issuance of common stock
for cash on 8/23/98 -- $ -- 4,459 $ 4 $ 20,063
Repurchase of common
stock on 9/29/98 -- -- -- -- --
Net loss -- -- -- -- --
---- ------ --------- ------ ----------
Balance, 12/31/98 -- $ -- 2,640,490 $2,639 $ 299,763
Issuance of common stock
for cash on 9/10/99 -- -- 52,506 53 149,947
Net loss -- -- -- -- --
---- ------ --------- ------ ----------
Balance, 12/31/99 -- $ -- 2,692,996 $2,692 $ 449,710
Issuance of common stock
for cash on 1/18/00 -- -- 53,593 54 1,869
Issuance of common stock
for Services on 3/1/00 -- -- 68,698 69 (44)
Issuance of common stock
for Services on 4/4/00 -- -- 27,758 28 (18)
Net loss -- -- -- -- --
---- ------ --------- ------ ----------
Balance, 12/31/00 -- $ -- 2,843,045 $2,843 $ 451,517
Treasury Stock
-----------------------
Accumulated
Deficit Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage 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) -- -- -- (195,675)
------------- ------ ------ ------------- -------------
Balance, 12/31/98 $ (518,693) $ -- 2,400 $ (50,280) $ (266,571)
Issuance of common stock
for cash on 9/10/99 -- -- -- -- 150,000
Net loss (1,306,778) -- -- -- (1,306,778)
------------- ------ ------ ------------- -------------
Balance, 12/31/99 $ (1,825,471) $ -- 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) -- -- -- (807,076)
------------- ------ ------ ------------- -------------
Balance, 12/31/00 $ (2,632,547) $ -- 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)
Series A Preferred Stock Common Stock
------------------------ -----------------
Number Number Additional
of of Paid-In
Shares Amount Shares Amount Capital
-------- ----------------- ------ -----------
Issuance of common stock
for services on 7/1/01 -- $-- 156,960 $ 157 $ (101)
Issuance of common stock
for services on 7/1/01 -- -- 125,000 125 (80)
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 -- -- 70,000 70 328,055
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 -- -- 1,750,000 1,750 1,609,596
Issuance of common stock
for conversion of
convertible shareholder
notes payable on 8/10/01 -- -- 208,972 209 135,458
Issuance of common stock
for bridge financing
on 8/10/01 -- -- 300,000 300 (192)
Retirement of treasury
stock on 8/10/01 -- -- -- -- (50,280)
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 27 39,973
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 on 8/10/01 -- -- -- -- 135,667
Issuance of common stock
for bridge financing
on 8/10/01 -- -- -- -- 108
Retirement of treasury
stock on 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)
Series A Preferred Stock Common Stock
------------------------ ---------------------------
Number Number Additional
of of Paid-In
Shares Amount Shares Amount Capital
--------- ------- ---------- ------- ------------
Uncompensated contribution of
services - 3rd Qtr. -- $ -- -- $ -- $ 55,556
Issuance of common stock for
services on 11/1/01 -- -- 145,933 146 $ 218,754
Uncompensated contribution of
services - 4th Qtr. -- -- -- -- 100,000
Net loss -- -- -- -- --
--------- ------- ---------- ------- ------------
Balance, 12/31/01 -- $ -- 15,189,563 $15,190 $ 5,321,761
Uncompensated contribution of
services - 1st Qtr. -- -- -- -- 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. -- -- -- -- 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. -- -- -- -- 100,000
Uncompensated contribution of
services - 4th Qtr. -- -- -- -- 100,000
Issuance of preferred
stock for dividends 143,507 144 -- -- 502,517
Deemed dividend associated with
beneficial conversion of
preferred stock -- -- -- -- 10,178,944
Comprehensive income:
Net loss -- -- -- -- --
Other comprehensive income,
foreign currency translation
adjustment -- -- -- -- --
Comprehensive loss -- -- -- -- --
--------- ------- ---------- ------- ------------
Balance, 12/31/02 3,038,507 $ 3,039 15,227,963 $15,228 $ 25,573,999
--------- ------- ---------- ------- ------------
Accumulated Treasury Stock
Deficit -------------- Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage Income Shares Amount (Deficit)
------------ ------------- ------ ------- -------------
Uncompensated contribution of
services - 3rd Qtr. $ -- $ -- -- $ -- $ 55,556
Issuance of common stock for
services on 11/1/01 -- -- -- -- 218,900
Uncompensated contribution of
services - 4th Qtr. -- -- -- -- 100,000
Net loss (1,652,004) -- -- -- (1,652,004)
------------ ------- ---- ------- ------------
Balance, 12/31/01 $ (4,284,551) $ -- -- $ -- $ 1,052,400
Uncompensated contribution of
services - 1st Qtr. -- -- -- -- 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. -- -- -- -- 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. -- -- -- -- 100,000
Uncompensated contribution of
services - 4th Qtr. -- -- -- -- 100,000
Issuance of preferred
stock for dividends (502,661) -- -- -- --
Deemed dividend associated with
beneficial conversion of
preferred stock (10,178,944) -- -- -- --
Comprehensive income:
Net loss (5,433,055) -- -- -- (5,433,055)
Other comprehensive income,
foreign currency translation
adjustment -- 13,875 -- -- 13,875
------------
Comprehensive loss -- -- -- -- (5,419,180)
------------ ------- ---- ------- ------------
Balance, 12/31/02 $(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
------------ ------------ ------------
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) operating
activities (2,252,368) 1,000 (2,335,664)
------------ ------------ ------------
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 and change in par value have been reflected in the
accompanying consolidated financial statements by retroactively restating all
share and per share amounts. The stock issuances are accounted for as the
issuance of (i) 3,942,400 shares for the net assets of Gemini, recorded at their
book value, and (ii) the issuance of 3,899,547 shares (the number of shares AFH
had outstanding immediately
F-11
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: As described in Note 1, the Merger was accounted for as a
recapitalization of Isolagen Technologies and the issuance of shares of common
stock for the net assets of AFH and Gemini. The number of weighted average
shares outstanding computed for the purposed of computing basic and diluted loss
per share were revised to correctly reflect this accounting treatment.
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 $0.22 for the year ended
December 31, 2001, and the cumulative from inception net loss per share has
increased from $1.19 to $4.02.
F-12
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, after giving effect to the
manner in which the merger was accounted for as described in Note 1. 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.
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
F-13
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.
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)."
F-14
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.
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
---------- ----------
F-15
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
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.
F-16
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 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.
F-17
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 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.
F-18
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
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
---------- ----------
F-19
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 - -
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:
F-20
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.
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.
F-21
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