UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
ISOLAGEN, INC.
(Exact name of registrant as specified 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
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 the
reports), and (2) has been subject to those filing requirements for the past 90
days. [X] Yes [ ] No
As of November 12, 2002, issuer had 15,189,563 shares of issued and outstanding
common stock, par value $0.001.
Documents Incorporated by Reference: NONE
Transitional Small Business Issuer Format: Yes [X] No [ ]
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 2002 (unaudited) and December 31, 2001.................... 3
Consolidated Statements of Operations
Nine Months ended September 30, 2002 (unaudited)
and September 30, 2001 (unaudited)...................................... 4
Three Months ended September 30, 2002 (unaudited)
and September 30, 2001 (unaudited)...................................... 5
Consolidated Statements of Cash Flows
Nine Months ended September 30, 2002 (unaudited)
and September 30, 2001 (unaudited)...................................... 6
Notes to Unaudited Consolidated Financial Statements............................. 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................................. 11
Item 3. Controls and Procedures.......................................................... 13
Part II. Other Information
Item 1. Legal Proceedings................................................................ 14
Item 2. Changes in Securities............................................................ 14
Item 3. Defaults Upon Senior Securities.................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders.............................. 14
Item 5. Other Information................................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................................. 14
The Consolidated Financial Statements of the Company required to be filed with
this 10-QSB Quarterly Report were prepared by management and commence on the
following page, together with related Notes. In the opinion of management, the
Consolidated Financial Statements fairly present the financial condition of the
Company.
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
September 30, December 31,
2002 2001
------------ -----------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 7,300,603 $ 1,380,824
Accounts receivable 92,363 1,067
Inventory 69,154 --
------------ -----------
Total current assets 7,462,120 1,381,891
------------ -----------
Property and equipment, net 769,476 7,357
Other assets 140,565 174,666
------------ -----------
Total assets $ 8,372,161 $ 1,563,914
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,482,022 $ 208,196
Accrued expenses 345,083 23,318
Deferred revenue 11,711 280,000
------------ -----------
Total current liabilities 1,838,816 511,514
------------ -----------
Total liabilities 1,838,816 511,514
------------ -----------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.001 par value; 5,000,000
shares authorized; 2,895,000 issued and outstanding 2,895 --
Common stock, $.001 par value; 50,000,000
shares authorized; 15,189,563 issued and outstanding 15,190 15,190
Additional paid-in capital 14,176,033 5,166,205
Other comprehensive loss (39,651) --
Accumulated deficit during development stage (7,621,122) (4,128,995)
------------ -----------
Total shareholders' equity 6,533,345 1,052,400
------------ -----------
Total liabilities and shareholders' equity $ 8,372,161 $ 1,563,914
------------ -----------
The accompanying notes are an integral part of these statements. 3
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Cumulative
Period from
December 28,
Nine Months Ended 1995 (date of
September 30, inception) to
----------------------------- September 30,
2002 2001 2002
------------ ----------- -----------
Revenues
Sales $ 2,518 $ 9,905 $ 1,392,632
License fees 40,000 60,000 260,000
------------ ----------- -----------
Total revenues 42,518 69,905 1,652,632
Cost of sales -- 4,918 402,459
------------ ----------- -----------
Gross profit 42,518 64,987 1,250,173
Selling, general and administrative expenses 3,319,712 1,105,454 8,364,909
------------ ----------- -----------
Operating loss (3,277,194) (1,040,467) (7,114,736)
Other income (expense)
Interest income 83,025 6,102 111,422
Loss on disposal of asset -- -- (8,222)
Interest expense -- (82,015) (311,628)
------------ ----------- -----------
Net loss $ (3,194,169) $(1,116,380) $(7,323,164)
------------ ----------- -----------
Per share information
Net loss per common share - basic and diluted $ (0.21) $ (0.22) $ (1.53)
------------ ----------- -----------
Weighted average number of basic and diluted
common shares outstanding 15,189,563 5,074,369 4,785,679
------------ ----------- -----------
The accompanying notes are an integral part of these statements. 4
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30,
--------------------------------
2002 2001
------------ -----------
Revenues
Sales $ -- $ 2,162
License fees -- 20,000
------------ -----------
Total revenues -- 22,162
Cost of sales -- 588
------------ -----------
Gross profit -- 21,574
Selling, general and administrative expenses 1,398,249 831,372
------------ -----------
Operating loss (1,398,249) (809,798)
Other income (expense)
Interest income 31,541 6,094
Unrealized gain on foreign currency deposits -- --
Interest expense -- (13,106)
------------ -----------
Net loss $ (1,366,708) $ (816,810)
------------ -----------
Per share information
Net loss per common share - basic and diluted $ (0.09) $ (0.08)
------------ -----------
Weighted average number of basic and diluted
common shares outstanding 15,189,563 9,668,451
------------ -----------
The accompanying notes are an integral part of these statements. 5
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(unaudited)
Cumulative
Period from
December 28,
Nine Months Ended 1995 (date of
September 30, inception) to
---------------------------- September 30,
2002 2001 2002
----------- ----------- ------------
Cash flows from operating activities
Net loss $(3,194,169) $(1,116,380) $ (7,323,164)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services 54,316 744,736 1,106,395
Depreciation 22,403 12,206 90,120
Loss on sale of property and equipment -- 9,073 8,222
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable (91,296) 2,119 (92,363)
Increase in inventory (69,154) -- (69,154)
Increase in other assets (20,215) 25,420 (20,215)
Increase in accounts payable 1,273,826 99,297 1,482,022
Increase in accrued expenses 23,807 16,254 47,125
Increase (decrease) in deferred revenue (268,289) (60,000) 11,711
----------- ----------- ------------
Net cash used in operating activities (2,268,771) (267,275) (4,759,301)
----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment (784,522) -- (868,818)
Proceeds from the sale of property
and equipment -- 1,000 1,000
----------- ----------- ------------
Net cash used in investing activities (784,522) 1,000 (867,818)
----------- ----------- ------------
Cash flows from financing activities
Proceeds from the issuance of preferred stock 9,012,723 -- 9,012,723
Proceeds from convertible debt -- -- 1,450,000
Proceeds from notes payable to shareholders -- 30,000 135,667
Proceeds from the issuance of common stock -- 2,060,000 2,467,810
Merger and acquisition expenses -- (48,547) (48,547)
Repurchase of common stock -- -- (50,280)
----------- ----------- ------------
Net cash provided by financing activities 9,012,723 2,041,453 12,967,373
----------- ----------- ------------
Effect of exchange rate changes on cash balances (39,651) -- (39,651)
Net increase (decrease) in cash and cash equivalents 5,919,779 1,775,178 7,300,603
Cash and cash equivalents, beginning of period 1,380,824 2,574 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 7,300,603 $ 1,777,752 $ 7,300,603
----------- ----------- ------------
Supplemental cash flow information:
Cash paid for interest $ -- $ 1,020 $ 150,283
----------- ----------- ------------
The accompanying notes are an integral part of these statements. 6
Isolagen, Inc.
(A Development Stage Company)
Notes to Unaudited Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION, BUSINESS AND ORGANIZATION
Isolagen, Inc., a Delaware corporation ("Isolagen" or the "Company"), is the
parent company of Isolagen Technologies, Inc. ("Isolagen Technologies"), a
Delaware corporation and wholly-owned subsidiary of the Company. Isolagen
Technologies is the parent company of Isolagen Europe Limited ("Isolagen
Europe"), a company organized under the laws of the United Kingdom and
wholly-owned subsidiary of Isolagen Technologies. Isolagen Technologies is the
parent company of Isolagen Australia Pty Limited ("Isolagen Australia"), a
company organized under the laws of the Australia and wholly-owned subsidiary of
Isolagen Technologies. The common stock, par value $0.001 per share, of the
Company ("Common Stock") is quoted on the Over-the-Counter Bulletin Board under
the ticker symbol "ISLG.OB"
Isolagen was organized to specialize in the development and commercialization of
autologous cellular therapy ("ACT") for hard and soft tissue regeneration and
other therapies. Isolagen currently holds five patents. Representing
breakthrough technology in the overall approach to cosmetic and medical therapy,
ACT is a process whereby a patient's own cells are extracted, reproduced through
Isolagen's proprietary process, and then reintroduced back into the patient for
specific cosmetic and medical applications. Unlike collagen development
companies, Isolagen uses only the patient's unique living cells for the source
of its therapeutic effect. Isolagen's goal is to become the industry leader in
the research, development and commercialization of autologous cellular therapy.
In 1997, the U.S. Food and Drug Administration ("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 ACT and the Isolagen Process. 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
biological 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 Company's manufacturing processes and procedures were
changed to meet these new standards, and FDA approval is obtained. The use of
the Isolagen Process was discontinued after the FDA placed the IND on hold, and
Isolagen Technologies did not have sufficient funding to pursue regulatory
approvals.
In the second quarter of 2002, the FDA removed the clinical hold. The Company is
pursuing the FDA approval process in collaboration with FDA consulting firms.
Present interpretation of the published regulations places the Isolagen process
under the Center for Biological Evaluation and Research ("CBER"). The
regulations define manipulation of autologous cell therapies at various levels.
The present understanding is that the Isolagen process falls within the
legislation for minimally regulated products. Isolagen has commenced a
retrospective study of its extensive patient database to answer specific FDA
related issues prior to submission of an amended IND.
Through September 30, 2002, the Company has been primarily engaged in developing
its initial product technology, establishing manufacturing facilities,
recruiting personnel and raising capital. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through at least 2002. The Company will finance its operations primarily through
its existing cash, future financing and revenues.
7
Acquisition and Merger
----------------------
On August 10, 2001, the Company, pursuant to an Agreement and Plan of Merger,
dated August 1, 2001, by and among the Company, ISO Acquisition Corp, a Delaware
corporation and wholly-owned subsidiary of the Company ("Merger Sub"), Isolagen
Technologies, a Delaware corporation, Gemini IX, Inc., a Delaware corporation
("Gemini"), and William J. Boss, Jr., Olga Marko and Dennis McGill, stockholders
of Isolagen Technologies (the "Merger Agreement"), acquired in a privately
negotiated transaction 100% of the issued and outstanding capital stock of
Isolagen Technologies. Pursuant to the terms of the Merger Agreement, Merger
Sub, together with Gemini, merged with and into Isolagen Technologies (the
"Merger"), and Isolagen Technologies was the surviving corporation of the
Merger. The Company issued an aggregate of 9,756,372 shares of restricted common
stock, par value $0.001 per share, of the Company ("Common Stock") as
consideration for the Merger, to retire certain debts of Isolagen Technologies
and in connection with certain bridge loans of Isolagen Technologies.
Prior to the Merger, Isolagen Technologies had no active business and was
seeking funding to begin U.S. FDA trials of this process.
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 the Company'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.
Basis of Presentation
---------------------
The financial statements presented include the consolidated balance sheet of
Isolagen, Inc. and its wholly-owned subsidiaries, Isolagen Technologies, Inc.,
Isolagen Europe Limited and Isolagen Australia Pty Limited, at September 30,
2002 and December 31, 2001. The consolidated statements of operations and cash
flows for the nine-month and three-month periods ended September 30, 2002
include Isolagen, Inc. and its wholly-owned subsidiaries. The consolidated
statements of operations and cash flows for the nine-month and three-month
periods ended September 30, 2001 include Isolagen Technologies, Inc. and
Isolagen, Inc. for the period of August 10, 2001 through September 30, 2001. All
significant intercompany transactions have been eliminated.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
-----------------------------
The financial statements included herein, which have not been audited pursuant
to the rules and regulations of the Securities and Exchange Commission, reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows for the
interim periods on a basis consistent with the annual audited statements. All
such adjustments are of a normal recurring nature. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for any other interim period of a full year. Certain information,
accounting policies and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted pursuant to such rules and
regulation, although the Company believes that the disclosures are adequate to
make the information presented not misleading, These financial statements should
be read in conjunction with the Company's audited financial statements included
in the Company's current report on Form 10K-SB filed with the Securities and
Exchange Commission on March 21, 2002.
8
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 materially adverse impact on the Company.
Inventory
---------
Inventory is comprised of raw materials used in the Isolagen process and is
valued at the lower of cost (first-in, first-out) or market.
Property and equipment
----------------------
Property and equipment, consisting primarily of lab equipment, computer
equipment, 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. The cost of repairs and maintenance is charged
against income as incurred.
Earnings per share data
-----------------------
Basic earnings (loss) per share is calculated based on the weighted average
common shares outstanding during the period. Diluted earnings per share also
gives effect to the dilutive effect of stock options, warrants and convertible
preferred stock (calculated based on the treasury stock method). The Company
does not present diluted earnings per share for periods in which it incurred net
losses as the effect of potentially dilutive shares from convertible preferred
stock is antidilutive.
Shares of Isolagen Technologies common stock outstanding prior to the Merger
were deemed converted to its equivalent shares of the Company's common stock
using a conversion factor as defined in the Merger Agreement.
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
9
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.
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. 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.
Foreign currency
----------------
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year-end rate of exchange and statements of earnings items are
translated at the weighted average exchange rates for the year. The resulting
translation adjustments are made directly to a separate component of
stockholders' equity. Gains and losses from foreign currency transactions, such
as those resulting from the settlement of foreign receivables or payables, are
included in the consolidated statements of earnings.
For the nine and three months ended September 30, 2002, the Company recorded a
foreign currency translation loss of $39,651 and $40,128, respectively,
resulting in a total comprehensive loss of $3,233,820 and $1,406,836, for the
nine and three months ended September 30, 2002, respectively.
From time to time, the Company enters into forward exchange contracts in
anticipation of future movements in certain foreign exchange rates. Realized and
unrealized gains and losses on these contracts are included in net income.
NOTE 3 - SERIES A CONVERTIBLE PREFERRED STOCK
The Company entered into a placement agent agreement with an investment bank
with respect to the sale of up to 2,295,000 shares of Series A Convertible
Preferred Stock at an offering price of $3.50 per share. Each share of preferred
stock is convertible into two shares of common stock at any time after issuance
and accrues interest at 8% per annum. Subsequently, the agreement was amended to
increase the maximum offering to 2,895,000 shares.
For each 15,000 shares of preferred stock sold, the placement agent received
warrants to purchase 6,000 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.
During the nine months ended September 30, 2002, the Company issued 2,895,000
shares of Series A Convertible Preferred Stock and warrants to purchase
1,158,000 shares of common stock to the placement agent. The Company received
cash proceeds totaling $9,012,723, net of offering costs. The Company accrued
dividends payable of $297,958 during the nine months ended September 30, 2002
relating to the Series A Convertible Preferred Stock.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
The following discussions of Isolagen, Inc. results of operations and financial
position should be read in conjunction with the financial statements and notes
pertaining to them that appear elsewhere in this Form 10-QSB.
Forward-Looking Information
This report contains certain forward-looking statements and information relating
to Isolagen, Inc. that are based on the beliefs of management as well as
assumptions made by and information currently available to management. When used
in the document, the words "anticipate," "believe," "estimate," "expect,"
"intend," and similar expressions, as they relate to the Company or its
management, are intended to identify forward-looking statements. Such statements
reflect the current view of the Company respecting future events and are subject
to certain risks, uncertainties, and assumptions, including the risks and
uncertainties noted. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, or intended.
SUMMARY REVIEW AND OUTLOOK
Isolagen, Inc., a Delaware corporation ("Isolagen" or the "Company"), is the
parent company of Isolagen Technologies, Inc. ("Isolagen Technologies"), a
Delaware corporation and wholly-owned subsidiary of the Company. Isolagen
Technologies is the parent company of Isolagen Europe Limited ("Isolagen
Europe"), a company organized under the laws of the United Kingdom and
wholly-owned subsidiary of Isolagen Technologies. Isolagen Technologies is the
parent company of Isolagen Australia Pty Limited ("Isolagen Australia"), a
company organized under the laws of the Australia and wholly-owned subsidiary of
Isolagen Technologies. The common stock, par value $0.001 per share, of the
Company ("Common Stock") is quoted on the Over-the-Counter Bulletin Board under
the ticker symbol "ISLG.OB"
Isolagen was organized to specialize in the development and commercialization of
autologous cellular therapy ("ACT") for hard and soft tissue regeneration and
other therapies. Isolagen currently holds five patents. Representing
breakthrough technology in the overall approach to cosmetic and medical therapy,
ACT is a process whereby a patient's own cells are extracted, reproduced through
Isolagen's proprietary process, and then reintroduced back into the patient for
specific cosmetic and medical applications. Unlike collagen development
companies, Isolagen uses only the patient's unique living cells for the source
of its therapeutic effect. Isolagen's goal is to become the industry leader in
the research, development and commercialization of autologous cellular therapy.
In 1997, the U.S. Food and Drug Administration ("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 ACT and the Isolagen Process. 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
biological 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 Company's manufacturing processes and procedures were
changed to meet these new standards, and FDA approval is obtained. The use of
the Isolagen Process was discontinued after the FDA placed the IND on hold, and
Isolagen Technologies did not have sufficient funding to pursue regulatory
approvals.
In the second quarter of 2002, the FDA removed the clinical hold. The Company is
pursuing the FDA approval process in collaboration with FDA consulting firms.
Present interpretation of the published
11
regulations places the Isolagen process under the Center for Biological
Evaluation and Research ("CBER"). The regulations define manipulation of
autologous cell therapies at various levels. The present understanding is that
the Isolagen process falls within the legislation for minimally regulated
products. Isolagen has commenced a retrospective study of its extensive patient
database to answer specific FDA related issues prior to submission of an amended
IND.
Through September 30, 2002, the Company has been primarily engaged in developing
its initial product technology, establishing manufacturing facilities,
recruiting personnel and raising capital. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through at least 2002. The Company will finance its operations primarily through
its existing cash, future financing and revenues.
Acquisition and Merger
----------------------
On August 10, 2001, the Company, pursuant to an Agreement and Plan of Merger,
dated August 1, 2001, by and among the Company, ISO Acquisition Corp, a Delaware
corporation and wholly-owned subsidiary of the Company ("Merger Sub"), Isolagen
Technologies, a Delaware corporation, Gemini IX, Inc., a Delaware corporation
("Gemini"), and William J. Boss, Jr., Olga Marko and Dennis McGill, stockholders
of Isolagen Technologies (the "Merger Agreement"), acquired in a privately
negotiated transaction 100% of the issued and outstanding capital stock of
Isolagen Technologies. Pursuant to the terms of the Merger Agreement, Merger
Sub, together with Gemini, merged with and into Isolagen Technologies (the
"Merger"), and Isolagen Technologies was the surviving corporation of the
Merger. The Company issued an aggregate of 9,756,372 shares of restricted common
stock, par value $0.001 per share, of the Company ("Common Stock") as
consideration for the Merger, to retire certain debts of Isolagen Technologies
and in connection with certain bridge loans of Isolagen Technologies.
Prior to the Merger, Isolagen Technologies had no active business and was
seeking funding to begin U.S. FDA trials of this process.
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 will be
used to fund the Company'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.
With regards to the proposed activities described above, no assurances can be
made that the Company will implement any of these potential actions, and if so,
whether any of them will prove successful or the degree of that success.
RESULTS OF OPERATIONS
Comparison of three-month periods ending September 30, 2002 and September 30,
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $566,877 for the three-month period ending
September 30, 2002, as compared to the same period in the prior year. The
increase is attributed primarily to salaries, travel, consulting, legal,
promotional expenses and bonuses paid to key personnel.
INTEREST INCOME. Interest income increased $25,447 for the three months ended
September 30, 2002 as compared to the same period last year primarily due to
income earned on the proceeds from the issuance of preferred stock.
INTEREST EXPENSE. Interest expense decreased $13,106 for the three months ended
September 30, 2002, as compared to the same period last year due primarily to
the retirement of debt during the Merger.
12
NET LOSS. Net loss for the three months ended September 30, 2002, was
$1,366,708, as compared to a net loss of $816,810 for the three months ended
September 30, 2001. This increase in net loss is attributed primarily to an
increase in salaries, travel, consulting, legal, promotional expenses and
bonuses paid to key personnel.
Comparison of nine month periods ending September 30, 2002 and September 30,
2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2,214,258 for the nine-month period ending
September 30, 2002, as compared to the same period in the prior year. The
increase is attributed primarily to salaries, travel, consulting, legal,
promotional expenses and bonuses paid to key personnel.
INTEREST INCOME. Interest income increased $76,923 for the nine months ended
September 30, 2002 as compared to the same period last year primarily due to
income earned on the proceeds from the issuance of preferred stock.
INTEREST EXPENSE. Interest expense decreased $82,015 for the nine months ended
September 30, 2002, as compared to the same period last year due primarily to
the retirement of debt during the Merger.
NET LOSS. Net loss for the nine months ended September 30, 2002, was $3,194,169,
as compared to a net loss of $1,116,380 for the nine months ended September 30,
2001. This increase in net loss is attributed primarily to an increase in
salaries, travel, consulting, legal, promotional expenses and bonuses paid to
key personnel.
Historical Cash Flows
OPERATING ACTIVITIES. Cash used in operating activities during the nine months
ended September 30, 2002, amounted to $2,268,771 as compared to $267,275 used
for the nine month-period ending September 30, 2001 attributable primarily to an
increase in salaries, travel, consulting, legal, promotional expenses, bonuses
paid to key personnel, write-off of deferred revenue, and increase in accounts
payable.
INVESTING ACTIVITIES. Cash used by investing activities during the nine months
ended September 30, 2002, amounted to $784,522, due to the purchase of property
and equipment for the Houston and London laboratory.
FINANCING ACTIVITIES. The Company has financed its operating and investing
activities primarily from the proceeds of private placements of its common and
preferred stock. During the nine months ended September 30, 2002, the Company
received $9,012,723 from the issuance of preferred stock. During the nine months
ended September 30, 2001, the Company received $2,060,000 from the issuance of
common stock and $30,000 from the issuance of notes payable to shareholders.
Liquidity and Capital Resources
As of September 30, 2002, the Company had a cash balance of $7,300,603. The
Company believes the existing working capital will be adequate to meet
anticipated capital and liquidity requirements for the next nine months. 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.
ITEM 3. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-14(c) promulgated under the
Securities and Exchange Act of 1934, as amended) as of a date (the "Evaluation
Date") within 90 days prior to the filing date of this report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded, that our disclosure controls and
13
procedures are effective for timely gathering, analyzing and disclosing the
information we are required to disclose in our reports filed under the
Securities Exchange Act of 1934, as amended. There have been no significant
changes made in our internal controls or in other factors that could
significantly affect our internal controls subsequent to the Evaluation Date.
PART II--OTHER INFORMATION
ITEM 1. 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.
ITEM 2. CHANGES IN SECURITIES
During the three months ended September 30, 2002, the Company issued 75,108
shares of Series A Convertible Preferred Stock to investors and warrants to
purchase 30,043 shares of common stock to a placement agent. The Company
received cash proceeds totaling $233,962, net of offering costs.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit Number Document Description
-------------- --------------------
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K. None
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ISOLAGEN, INC.
Date: November 12, 2002 By: /s/ Michael Macaluso
----------------------------------
Michael Macaluso, CEO
(Principal Executive Officer)
Date: November 12, 2002 By: /s/ Jeffrey W. Tomz
----------------------------------
Jeffrey W. Tomz, CFO and Secretary
(Principal Financial Officer)
15
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Michael Macaluso, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Isolagen, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
By: /s/ Michael Macaluso
Chief Executive Officer
(Principal Executive Officer)
16
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Jeffrey W. Tomz, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Isolagen, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
November 12, 2002
By:/s/ Jeffrey W. Tomz
Chief Financial Officer
(Principal Financial Officer)
17
EXHIBIT INDEX
Exhibit Number Document Description
-------------- --------------------
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to
18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002