AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 2003
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ISOLAGEN, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2834 87-0458888
(State or other (Primary Standard Industrial (I.R.S. Employer of incorporation
jurisdiction) Code Number) or organization Identification
Number)
2500 WILCREST, 5TH FLOOR
HOUSTON, TEXAS 77042
(713) 780-4754
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive
offices)
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JEFFREY W. TOMZ
CHIEF FINANCIAL OFFICER AND SECRETARY
ISOLAGEN, INC.
2500 WILCREST, 5TH FLOOR
HOUSTON, TEXAS 77042
(713) 780-4754
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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COPIES TO:
SUSAN STRANAHAN CIALLELLA, ESQ.
DILWORTH PAXSON LLP
3200 MELLON BANK CENTER
1735 MARKET STREET
PHILADELPHIA, PENNSYLVANIA 19103-7595
(215) 575-7075
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act, check the following box. [X]
If this form is being filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number in the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number in the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number in the earlier effective registration
statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE OFFERING PRICE FEE(3) (4)
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Common Stock 23,890,872 $ 9.10 $ 217,406,935 $17,587
-------------------------------------------------------------------------------------------------------
Shares of Common Stock Underlying
Common Stock Purchase Options 1,085,669 $ 5.94(2) $ 6,448,873 $ 517
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TOTAL $18,104*
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* Paid with this filing.
(1) This registration statement includes 23,890,872 shares of issued and
outstanding Common Stock. The registration fee for those shares and the
Shares of Common Stock underlying Common Stock Purchase Options is based on
the closing market price for the Registrant's shares on September 11, 2003,
pursuant to Rule 457(c) under the Securities Act of 1933, as amended (the
"Securities Act").
(2) Based on the exercise price per Share of the Common Stock Purchase
Options, respectively, pursuant to Rule 457(g)(1) under the Securities Act
of 1933, as amended.
(3) Calculated at the rate of $80.90 per $1,000,000 pursuant to fee rate
advisory #8 for fiscal year 2003. The registration fee is based on the
closing market price for the Registrant's common stock on September 11,
2003, pursuant to Rule 457(c).
(4) The registration fee is based on the Registrant's estimate of the sales
price of the Common Stock Purchase Options. Although the Common Stock
Purchase Options are currently outstanding, there is no market for them and
therefore no basis to calculate the value of them pursuant to Rule 457(c).
Pursuant to Rule 416 of the Securities Act of 1933, there are also
being registered hereunder such additional shares as may be issued to the
Selling Stockholders because of future dividends, stock distributions, stock
splits, similar capital adjustments, or Penalty Shares. See "Shares Available
for Future Sale, in Part I."
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and is subject to
compliance or amendment. Neither Isolagen nor the Selling Holders nor the
holders of Common Stock Purchase Options may sell these securities until the
Registration Statement filed with the Securities and Exchange Commission (the
"SEC") is effective. This Prospectus is not an offer to sell these securities
and is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted. The information contained in this Prospectus is
correct only as of the date of this Prospectus, regardless of the time of the
delivery of this Prospectus or any sale of these securities.
SUBJECT TO COMPLETION DATED SEPTEMBER 12, 2003
PROSPECTUS DATED , 2003
ISOLAGEN, INC.
SECURITIES OFFERED FOR RESALE BY SELLING HOLDERS
23,890,872 Shares of Common Stock
and
1,085,669 Shares of Common Stock
Issuable Upon Exercise of Common Stock Purchase Options
SECURITIES OFFERED BY ISOLAGEN, INC.
1,085669 Shares of Common Stock Issuable
Upon Exercise of Common Stock Purchase Options
This Prospectus relates to the Selling Holders' offer to sell
24,976,541 shares of our Common Stock that they hold and shares which were
purchased in private transactions with us, and to our prospective issuance of
shares of Common Stock upon exercise of outstanding Common Stock Purchase
Options and the Selling Holders' offer to resell the shares of Common Stock
issuable upon any exercise.
Our Common Stock is traded on the American Stock Exchange, L.L.C.
("AMEX") under the symbol "ILE." On September 9, 2003, the reported closing
transaction price of our Common Stock was $8.79 per share. The address of our
principal executive offices is 2500 Wilcrest, 5th Floor, Houston, Texas 77042,
and our telephone number is (713) 780-4754.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. You
should consider carefully the "Risk Factors" of this Prospectus before
purchasing any Common Stock offered. In deciding whether to purchase shares of
common stock offered or, if you are the holder of Common Stock Purchase Options
that are subject to this Prospectus, in deciding whether to exercise those
options, you should rely only on the information contained in this Prospectus.
We have not authorized anyone to provide you with any different information.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ONLY RESIDENTS OF STATES IN WHICH WE HAVE QUALIFIED THE COMMON STOCK PURCHASE
OPTIONS AND THE UNDERLYING SHARES OF COMMON STOCK MAY EXERCISE THEIR COMMON
STOCK PURCHASE OPTIONS. WHEN YOU EXERCISE THE COMMON STOCK PURCHASE OPTIONS, YOU
WILL HAVE TO PROVIDE US INFORMATION AS TO YOUR STATE OF RESIDENCE. WE MAY SEEK
QUALIFICATION FROM TIME-TO-TIME IN OTHER STATES. YOU MAY CALL ISOLAGEN, INC. AT
(713) 780-4754, TO DETERMINE WHETHER YOUR STATE OF RESIDENCE HAS BEEN INCLUDED.
(inside front cover)
TABLE OF CONTENTS
Prospectus Summary....................................................................................... 1
Risk Factors............................................................................................. 4
Selected Consolidated Financial Data..................................................................... 11
Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 12
Securities Offered, The Selling Holders and the Plan of Distribution..................................... 19
Use of Proceeds.......................................................................................... 30
Business................................................................................................. 31
Management............................................................................................... 41
Certain Beneficial Holders and Management................................................................ 46
Compensation of Directors and Executive Officers......................................................... 47
Certain Relationships and Related Transactions........................................................... 51
Capital Stock............................................................................................ 52
Market For Common Equity and Related Stockholder Matters................................................. 53
Shares Available for Future Sale......................................................................... 54
Securities and Exchange Commission Position on Indemnification for Securities Act Liabilities............ 55
Experts.................................................................................................. 55
Legal Matters............................................................................................ 55
How to Obtain Additional Information..................................................................... 55
Financial Statements..................................................................................... F-1
Isolagen has not authorized anyone to give any information or make any
representation about the offering that differs from, or adds to, the information
in this Prospectus or the documents that are publicly filed with the SEC.
Therefore, if anyone does give you different or additional information, you
should not rely on it. The delivery of this Prospectus does not mean that there
have not been any changes in Isolagen's condition since the date of this
Prospectus. If you are in a jurisdiction where it is unlawful to offer to
purchase or exercise the securities offered by this Prospectus, or if you are a
person to whom it is unlawful to direct such activities, then the offer
presented by this Prospectus does not extend to you. This Prospectus speaks only
as of its date except where it indicates that another date applies. Documents
that are incorporated by reference in this Prospectus speak only as of their
date, except where they specify that other dates apply. The information in this
Prospectus may not be complete and may be changed. Neither Isolagen nor the
Selling Holders may sell until the registration statement filed with the SEC is
effective. This Prospectus is not an offer to purchase or exercise these
securities and it is not soliciting an offer to purchase or exercise these
securities in any state where the purchase or exercise is not permitted.
PROSPECTUS SUMMARY
This summary presents selected information from this Prospectus and is
qualified in its entirety by the more detailed information and financial
statements appearing elsewhere in this Prospectus, including the information
under "Risk Factors". You should carefully read this entire Prospectus and the
documents to which the Prospectus refers in order to understand this offering.
See "How to Obtain Additional Information."
ISOLAGEN, INC.
We are an emerging pharmaceutical bioscience company located in
Houston, Texas that specializes in the development and commercialization of
autologous cellular therapy for hard and soft tissue regeneration that has
specific applications in cosmetic dermatology. We are also exploring
applications for periodontal disease, reconstructive dentistry and other
health-related markets. Autologous cellular therapy is a process whereby a
patient's own cells are extracted, reproduced and then reintroduced to the
patient for specific cosmetic and medical applications. Unlike other
applications for the treatment of dermal defects, we utilize only the patient's
unique, living cells to produce the patient's own collagen. There is no foreign
substance utilized in this treatment protocol. We sometimes refer to our
autologous cellular therapy as the Isolagen Process. We currently hold five
patents relating to the Isolagen Process.
Our goal is to become the industry leader in the research, development
and commercialization of autologous cellular therapy which stimulate a patient's
own collagen production. We have commenced Phase III trials for dermal defects
pursuant to an effective Investigational New Drug Application for the treatment
of wrinkles and scars. We have also commenced a Phase II dose ranging study
relating to the treatment of wrinkles and scars and a Phase I clinical trial for
dental applications addressing gingival recession. See "Business."
We have commenced commercial operations in the United Kingdom and
Australia, and are pursuing commercial operations through additional
subsidiaries, joint ventures or license arrangements in South Korea, Hong Kong,
Brazil and Mexico. We are investigating regulatory and other requirements in
these countries and evaluating markets and potential joint venture partners and
licensees. In July 2003, we received a license from the Therapeutic Goods
Administration ("TGA"), in Australia, to begin the manufacture of autologous
fibroblasts including the initiation of primary cultures of fibroblasts, the
propagation of fibroblasts, the harvesting of cultured fibroblasts, the storage
of cultured fibroblasts and release for supply of cultured fibroblasts. We are
not in a position to predict, when or if licenses will be granted in any other
jurisdiction. To date, we have been primarily engaged in developing our initial
product technology, recruiting personnel, commencing our United Kingdom
operations and raising capital. In the course of our development activities, we
have sustained losses and we expect such losses to continue through 2004. We
plan to finance our operations primarily through existing cash, future financing
and revenues. Our ability to operate profitably is largely contingent upon our
success in obtaining further sources of debt and equity capital, prompt
regulatory approval to sell our products in various jurisdictions and upon
continued expansion. We will require additional capital in the future to expand
our operations. No assurance can be given that we 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 our capital needs and to
support our growth. If adequate capital cannot be obtained on satisfactory
terms, our operations could be negatively impacted.
Our common stock, par value $0.001 per share ("Common Stock") is traded
on AMEX under the symbol "ILE." The market for our stock has historically been
characterized by low volume, and broad price and volume volatility.
Our website address is www.isolagen.com. The address and telephone
number of our principal executive offices are:
Isolagen, Inc.
2500 Wilcrest, 5th Floor
Houston, Texas 77042
Telephone Number: (713) 780-4754
1
We currently conduct some of our operations through wholly
owned-subsidiaries. Isolagen Technologies, Inc., a Delaware corporation, is our
wholly-owned subsidiary ("Isolagen Technologies"). 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 also the parent company of
Isolagen Technologies Pty Limited ("Isolagen Australia"), a company organized
under the laws of the Australia and a wholly-owned subsidiary of Isolagen
Technologies.
We were formed as a Delaware corporation in 1995. On August 10, 2001,
our predecessor company, known as American Financial Holding, Inc. ("AFH"),
acquired Isolagen Technologies through the merger of its wholly-owned
subsidiary, Isolagen Acquisition Corp., and an affiliated entity, Gemini IX,
Inc. ("Gemini"), with and into Isolagen Technologies (the "Merger"). As a result
of the Merger, Isolagen Technologies became a wholly-owned subsidiary of the
surviving entity which on November 13, 2001 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 its debt and approximately $625,000 of accrued liabilities
to equity. The transaction was equivalent to the issuance of stock by AFH for
the net assets of the Isolagen Technologies and Gemini, accompanied by a
recapitalization and private placement of common stock of AFH.
SHARES OFFERED BY ISOLAGEN UPON EXERCISE OF COMMON STOCK PURCHASE OPTIONS
We are offering up to a maximum of 1,085,669 shares of Common Stock to:
- holders of Common Stock Options issued to Fordham
Financial Management, Inc. or designees in connection
with the Company's Series A Convertible Preferred
Stock Offering;
- holders of Common Stock Options issued to Fordham
Financial Management, Inc. or designees in connection
with the Company's Series B Convertible Preferred
Stock Offering;
- holders of Common Stock Option issued to Equipmed
Pty. Ltd. in connection with the Company's Australian
distribution agreement; and
- holders of Common Stock Options issued to RCG Capital
Markets Group, Inc. in connection with the Company's
investor relations program.
THE OFFERING BY THE SELLING HOLDERS
This Prospectus also relates to the sale to the public of up to:
- 23,890,872 shares of our Common Stock issued to and
held by the Selling Holders; and
- 1,085,669 shares issuable upon exercise of Common
Stock Purchase Options held by certain Selling
Holders.
These securities were issued between August 2001 and August 2003, and
are "restricted securities" as that term is defined in Rule 144 adopted by the
SEC under the Securities Act. ("Rule 144")
RISK FACTORS
THE PURCHASE OF OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD PURCHASE OUR SECURITIES OR EXERCISE YOUR COMMON STOCK PURCHASE OPTIONS
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS."
WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS.
USE OF PROCEEDS
We expect to use any proceeds from the exercise of the Common Stock
Purchase Options primarily for working capital and general corporate purposes.
We will not receive any of the proceeds from the shares sold by the Selling
Holders.
2
A NOTE ABOUT FORWARD-LOOKING STATEMENTS
In our effort to make the information in this Prospectus more
meaningful, this Prospectus contains both historical and forward-looking
statements within the meaning of Section 27A of the Securities Act, Section 21E
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
information relating to Isolagen that is based on management's exercise of
business judgment as well as assumptions made by and information currently
available to management. All statements other than statements of historical fact
may be deemed to be forward-looking statements. Forward-looking statements
frequently, but not always, use the words "anticipate," "believe," "estimate,"
"expect," and "intend" and words of similar import, to identify any
forward-looking statements and may include statements concerning our strategies,
goals and plans. You should not place undue reliance on these forward-looking
statements. These statements reflect our current view of future events and are
subject to certain risks and uncertainties as noted below. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, our actual results could differ materially from those anticipated in
these forward-looking statements. Actual events, transactions and results may
materially differ from the anticipated events, transactions or results described
in such statements. The discovery and development of applications for autologous
cellular therapy are subject to substantial risks and uncertainties. There can
be no assurance that our 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, that such trials will yield
positive results, or that additional applications for the commercialization of
autologous cellular therapy can be identified and advanced into human clinical
trials. These and other factors, some of which are described below, could cause
future results to differ materially from the expectations expressed in this
report. 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, 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;
3
- continued availability of supplies at the current prices;
- no new entrance of competitive products in our markets;
- no adverse publicity related to our products or Isolagen
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 integrate efficiently 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 the forward-looking statements in this Prospectus. Other unknown or
unpredictable factors also could have material adverse effects on our future
results. The forward-looking statements in this Prospectus are made only as of
the date of this Prospectus and we do not have any obligation to publicly update
any forward-looking statements to reflect subsequent events or circumstances. We
cannot assure you that projected results will be achieved.
RISK FACTORS
The exercise of the Common Stock Purchase Options and an investment in
the shares offered by this Prospectus involve a high degree of risk. In addition
to the other information contained in this Prospectus, the following risk
factors should be considered carefully in evaluating our business, making a
decision to exercise the Common Stock Purchase Options or purchasing the shares.
You should carefully consider the risks described below before deciding whether
to exercise your Common Stock Purchase Options or invest in or continue to hold
our common stock. If any of the contingencies discussed in the following
paragraphs or other materially adverse events actually occurs, the business,
financial condition and results of operations could be materially and adversely
affected. In such case, the trading price of our common stock could decline, and
you could lose all or part of your investment. We have not authorized anyone to
give you information or to make any representation other than those contained in
this Prospectus.
NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL; DILUTION.
We will require substantial additional capital to continue our
operations. 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. The need to raise additional capital which
will expose existing shareholders to the risk of substantial dilution. We are
actively assessing various financing opportunities, including the acquisition of
entities that have substantial cash resources. 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.
4
DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY; UNCERTAINTY OF FUTURE
PROFITABILITY; POTENTIAL FLUCTUATION IN QUARTERLY RESULTS.
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.
ANTICIPATION OF FUTURE LOSSES AND NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY
ABILITY TO BECOME PROFITABLE.
We expect to expend significant resources on consultants, technology,
advertising, hiring of personnel and startup costs. As a result, we have
incurred losses since our inception and expect to experience operating losses
and negative cash flow for the foreseeable future. We anticipate that losses
will continue to increase from current levels because we expect 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 our website, our computer network, and development of
relationships with strategic business partners, including but not limited to
doctors who might use the Isolagen's therapy.
INABILITY TO REDUCE COSTS MAY LIMIT OR DELAY ABILITY TO BECOME PROFITABLE.
We anticipate that improved manufacturing practices will allow our
laboratories to have significantly greater capacity and to reduce many of our
variable costs. We also expect 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 our website, our computer
network, and development of relationships with strategic business partners,
including but not limited to doctors who might use the Isolagen's therapy. If we
cannot improve our manufacturing processes and reduce our costs and expenses, we
may continue to experience operating losses and negative cash flow. Moreover,
the costs of obtaining regulatory approvals could be considerable and the
failure to obtain or delays in obtaining such approvals could materially
adversely affect our business performance and financial results. Failure to
substantially reduce the cost per patient will have a material adverse effect on
the results of Isolagen's operations and financial condition.
LIMITED PUBLIC TRADING MARKET FOR THE COMMON STOCK; VOLATILITY OF STOCK PRICE.
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. 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.
THE DEVELOPMENT OF THE ISOLAGEN PROCESS AND ISOLAGEN'S OTHER PRODUCTS INVOLVES A
LENGTHY AND COMPLEX PROCESS, AND WE MAY BE UNABLE TO COMMERCIALIZE THE ISOLAGEN
PROCESS OR ANY OF OUR OTHER PROCESSES OR PRODUCTS CURRENTLY UNDER DEVELOPMENT.
Before we can commercialize the Isolagen Process or any other of our
development-stage products or processes in the U.S., we will need to conduct
substantial research and development; to undertake preclinical and clinical
testing; and to pursue regulatory approvals, including but not limited to
approval of our Investigational New Drug Application ("IND") for the Isolagen
Process filed with the United States Food and Drug Administration ("FDA"). This
process involves a high degree of risk and takes several years. Our 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 and other reasons, we may not successfully commercialize the
Isolagen Process or any of our other processes or products currently under
development.
5
OBTAINING FDA AND OTHER REGULATORY APPROVALS IS TIME CONSUMING AND EXPENSIVE.
The process of obtaining FDA and other regulatory approvals is time
consuming and expensive. Clinical trials are required and the marketing and
manufacturing of our products and services are subject to rigorous testing
procedures. We 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 we develop, acquire or license. Moreover, the costs of obtaining
approvals could be considerable and the failure to obtain or delays in obtaining
an approval could significantly harm our 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 any of 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.
Human healthcare products and services companies are subject to
significant regulation by a number of national, state and local agencies in the
U.S. The FDA has jurisdiction covering testing, manufacturing, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of our 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. Our products receive FDA review regarding their safety and
effectiveness. However, the FDA is permitted to revisit and change its prior
determinations. We cannot be sure that the FDA will not change its position with
regard to the safety or effectiveness of our products. If the FDA's position
changes, we may be required to change our labeling or cease to manufacture and
market the challenged products. Even prior to any formal regulatory action, we
could voluntarily decide to cease distribution and sale or recall any of our
products if concerns about the safety or effectiveness develop.
REGULATIONS IN FOREIGN MARKETS.
We are also subject to a variety of other regulations in various
foreign markets. We have commenced the sale and distribution of our therapy for
the treatment of wrinkles and scars in the United Kingdom and will commence such
operations in Australia shortly. Our failure to comply, or assertions that we
fail to comply, with these regulations could have a material adverse effect on
our business in a particular market or in general. To the extent we decide to
commence, expand operations or introduce additional products in additional
countries, government regulations in those countries may prevent or delay entry
into or expansion of operations in those markets. However, government
regulations in both our domestic and international markets can delay or prevent
the introduction, or require the reformulation or withdrawal, of some of our
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
6
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 OUR BUSINESS.
Terrorist attacks or acts of war may cause damage or disruption to our
operations, our employees, our facilities and our customers, which could
significantly impact our 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 our 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 our business,
results of operations, and financial condition in ways that management currently
cannot predict.
ANY MARKETABLE PROCESSES OR PRODUCTS THAT WE DEVELOP MAY NOT BE COMMERCIALLY
SUCCESSFUL.
Even if we obtain regulatory approval for the Isolagen Process or any
of our 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 our sales force; the effectiveness of our
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 processes or products developed by us fail to
achieve market acceptance, our 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. Our 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 we do. Our future success will depend on our ability to develop
and market effectively our processes and products against those of our
competitors. If our processes and products receive marketing approval but cannot
compete effectively in the marketplace, our profitability and financial position
will suffer.
DIFFICULTIES MANAGING GROWTH COULD ADVERSELY AFFECT OUR BUSINESS.
If we achieve growth in our operations in the next few years, such
growth could place a strain on our management, administrative, operational and
financial infrastructure. Our ability to manage our operations and growth
requires the continued improvement of operational, financial and management
controls, reporting systems and procedures. In addition, we may find it
necessary to hire additional management, financial and sales and marketing
personnel to manage our operations. If we are unable to manage this growth
effectively and successfully, our business, operating results and financial
condition may be materially adversely affected.
UNPREDICTABILITY OF OPERATING EXPENSES.
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,
7
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.
DEPENDENCE ON KEY OFFICERS AND EMPLOYEES; NEED FOR ADDITIONAL PERSONNEL.
While no assurances can be given that our current management resources
will enable us to succeed as planned, a loss of one or more of our current
officers or key employees could severely and negatively impact our operations.
No assurances can be given that we will not suffer the loss of key human
resources for one reason or another. We have employment agreements with most of
our officers, but some of our key management personnel are employed "at-will"
and may elect to pursue other opportunities at any time. We have no present
intention of obtaining key man life insurance on any of the executive officers
or management. Given our early stage of development, we depend on our ability to
attract, train and retain qualified personnel, specifically those with
management, research & development, technical and product development skills.
Competition for such personnel is intense. 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.
FLUCTUATION OF OPERATING RESULTS.
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; 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.
VOTING CONTROL BY THE OFFICERS AND DIRECTORS OF THE COMMON STOCK.
Our present executive officers, directors and controlling stockholders
directly and beneficially hold 49.5% 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.
ABSENCE OF CASH DIVIDENDS AND NO CASH DIVIDENDS ANTICIPATED.
The future payment of cash dividends on the Common Stock rests within
the discretion of our Board of Directors and will depend, among other things,
upon our earnings, our unencumbered cash, our capital requirements and our
financial condition, as well as other relevant factors. We do not anticipate
making any cash distributions on the Common Stock in the foreseeable future.
NO ASSURANCE OF BRAND NAME AWARENESS.
Our brand name is new and unproven. 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. Our
management believes that the importance of brand recognition will increase over
time. In order to gain brand recognition, we may increase our marketing and
advertising budgets to create and maintain brand loyalty.
8
WE MAY FAIL TO PROTECT ADEQUATELY OUR PROPRIETARY TECHNOLOGY, WHICH WOULD ALLOW
COMPETITORS TO TAKE ADVANTAGE OF OUR RESEARCH AND DEVELOPMENT EFFORTS.
Our long-term success largely depends on our ability to market
technologically competitive processes and products. If we fail to obtain or
maintain these protections we may not be able to prevent third parties from
using our proprietary rights. Our currently 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 our being aware of those applications, our patent
applications may not have priority over any patent applications of others. In
addition, our issued patents may not contain claims sufficiently broad to
protect us against third parties with similar technologies or products or
provide us with any competitive advantage. If a third party initiates litigation
regarding our patents, and is successful, a court could revoke our patents or
limit the scope of coverage for those patents.
The U.S. Patent and Trademark Office ("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 our proprietary rights may be limited. Any changes
in, or unexpected interpretations of, the patent laws may adversely affect our
ability to enforce our patent position.
We also rely upon trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. We protect this information with
reasonable security measures, including the use of confidentiality agreements
with our 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 us to recover our costs. Furthermore, our
trade secrets, know-how and other technology may otherwise become known or be
independently discovered by our 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 our 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 our favor, could be
substantial, and the litigation would divert management's efforts. Some of 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 our 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 our commercial activities.
WE MAY BE LIABLE FOR PRODUCT LIABILITY CLAIMS NOT COVERED BY INSURANCE.
Doctors who use our 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 may bring product liability claims
against us or our subsidiaries. While we have taken, and continue to take, what
we believe are appropriate precautions, we may be unable to avoid significant
liability exposure. We intend to obtain and keep in force product liability
insurance sufficient to protect us from claims; however, we may be unable to
obtain insurance in the future, or we may be unable to do so on acceptable
terms. Any additional insurance we obtain 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 our products and services; and injury
to our reputation.
9
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PROCESSES,
PRODUCTS OR SERVICES MAY BECOME OBSOLETE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand our 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.
ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS IN BUSINESS
AND DIVERSION OF MANAGEMENT ATTENTION.
In the near future, we 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 if we fail in this integration. Acquisitions may cause
disruptions in operations and divert management's attention from day-to-day
operations, which could impair our relationships with current employees,
customers and strategic partners. We 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 our
stockholders' holdings. In addition, our profitability 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, we may
not receive the intended benefits of such acquisitions.
OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE BEYOND
OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING OUR SHARES OR WARRANTS MAY BE
UNABLE TO RESELL THEIR SHARES OR WARRANTS 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 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.
Our stock price may decline by future sales of our shares or the
perception that such sales may occur. As of September 12, 2003, approximately
23,890,872 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. In addition, in
connection with our August 2003 private placement, we are obligated to issue
(and register the offer and sale of) additional shares of common stock. See
"Shares Available for Future Sale".
PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR DELAY A CHANGE IN CONTROL,
WHICH COULD DELAY OR PREVENT A TAKEOVER.
Our Certificate of Incorporation, as amended, provides for staggered
terms for the members of the Board of Directors. In addition, our Certificate of
Incorporation authorizes the issuance of "blank check" preferred stock with such
designations, rights, and preferences, as may be determined by our Board of
Directors. Accordingly, the Board of Directors may, without shareholder
approval, issue shares of preferred stock with dividend, liquidation,
conversion, voting, or other rights that could adversely affect the voting power
or other rights of the holders of our
10
Common Stock. "Blank check" preferred stock could also be issued to discourage,
delay, or prevent a change in our control, although we do not currently intend
to issue any additional series of our preferred stock.
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.
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected historical consolidated financial information presented as of
December 31, 1998, 1999, 2000, 2001 and 2002 and for each of the five years
ended was derived from our audited consolidated financial statements. Our
selected historical consolidated financial information presented as of June 30,
2002 and 2003 and for the six month periods ended June 30, 2002 and 2003 are
unaudited. Operating results for the six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for fair presentation have
been included.
This information should be read in conjunction with the historical financial
statements and related notes included herein, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Six Months Ended June 30, For the Year Ended December 31,
------------------------- ------------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
---------- ----------- --------- -------- --------- --------- ---------
(unaudited) (unaudited)
Consolidated Statement of
Operations Data:
Revenues $ 79,796 $ 2,518 $ 50,991 $ 25,482 $ 6,584 $ 121,931 $ 687,965
License fees - 40,000 40,000 80,000 40,000 - -
----------- ----------- ----------- ----------- --------- ----------- ---------
Total revenues 79,796 42,518 90,991 105,482 46,584 121,931 687,965
Cost of sales 48,861 - 35,133 17,891 10,846 84,862 140,695
----------- ----------- ----------- ----------- --------- ----------- ---------
Gross profit 30,935 42,518 55,858 87,591 35,738 37,069 547,270
Selling, general and
administrative expenses 4,527,594 1,921,463 5,330,026 1,493,819 728,379 1,265,534 722,491
----------- ----------- ----------- ----------- --------- ----------- ---------
Operating loss (4,496,659) (1,878,945) (5,274,168) (1,406,228) (692,641) (1,228,465) (175,221)
Other income (expense)
Interest income 10,620 19,063 208,692 17 4,891 5,902 9,936
Other income 55,663 32,421 32,421 - - - 1,237
Loss on disposal of asset - - - (8,222) - - -
Interest expense - - - (82,015) (119,326) (84,215) (19,628)
----------- ----------- ----------- ----------- --------- ----------- ---------
Net loss $(4,430,376) $(1,827,461) $(5,033,055) $(1,496,448) $(807,076) $(1,306,778) $(183,676)
----------- ----------- ----------- ----------- --------- ----------- ---------
Per share information
Net loss per common share
- basic and diluted $ (.29) $ (.12) $ (.33) $ (.20) $ (.29) $ (.53) $ (.07)
11
Weighted average number of
basic and diluted common
Shares outstanding 15,348,709 15,189,563 15,205,554 7,618,947 2,822,104 2,460,487 2,456,598
Six Months Ended June 30, December 31,
------------------------- ------------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
----------- ---------- ----------- ---------- ----------- ---------- --------
(unaudited) (unaudited)
Consolidated Balance
Sheet Data
Cash and cash equivalents $3,292,242 $8,437,492 $4,244,640 $1,380,824 $ 2,574 $ 60,994 $ 461,544
Working capital (deficit) 1,481,110 7,675,370 2,811,160 870,377 (1,435,834) (651,340) 546,704
Total assets 7,502,690 8,705,253 7,257,664 1,563,914 62,296 166,703 693,580
Total liabilities 2,553,510 795,581 2,050,734 511,514 2,290,763 1,590,052 948,151
Total stockholders
equity (deficit) 4,949,180 7,909,672 5,206,930 1,052,400 (2,228,467) (1,423,349) (254,570)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION OR PLAN OF OPERATION
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. "Forward looking
statements" include statements regarding our expectations, hopes, intentions, or
strategies regarding the future. Forward looking statements include: statements
regarding future products or products or product development; statements
regarding future selling, general and administrative costs and research and
development spending, and our product development strategy; statements regarding
future capital expenditures and financing requirements; and similar forward
looking statements. Actual events, transactions and results may materially
differ from the anticipated events, transactions or results described in such
statements. Our 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 our products and services, regulatory approvals and developments,
economic conditions, the impact of competition and pricing, results of financing
efforts and other factors affecting our business that are beyond our control.
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;
12
- 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;
- no adverse regulatory developments in the United States,
European Community, Australia, South Korea, Hong Kong, Mexico
or any other country we plan to do business in;
- continued availability of supplies at the current prices;
- no new entrance of competitive products in our markets;
- 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;
legal proceedings;
- our ability to maintain compliance with the American Stock
Exchange requirements for continued listing of our common
stock;
- the costs inherent with complying with new statutes and
regulations applicable to public reporting companies, such as
the Sarbanes-Oxley Act of 2002;
- our ability to integrate efficiently future acquisitions, if
any;
- and other new lines of business that we may enter in the
future;
- other risks referenced from time to time elsewhere in this
report and in our filings with the SEC.
CRITICAL ACCOUNTING POLICIES.
The following discussion and analysis of financial condition and
results of operations are based upon our 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, we evaluate our 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. We base
our 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.
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, relative to sales of the Isolagen Process,
that all of these conditions are met at the time of shipment.
13
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: We account for our stock-based compensation
under the provisions of SFAS No. 123 - "Accounting for Stock Based
Compensation." Under SFAS No. 123, we are 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 our 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. We 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, we have modified our disclosures to
comply with the new statement.
RESULTS OF OPERATIONS - COMPARISON OF THE SIX MONTHS ENDING JUNE 30, 2003 AND
2002.
REVENUES. Revenues increased $37,278, to $79,796 for the six months
ended June 30, 2003 compared to $42,518 for the six months ended June 30, 2002.
The increase in revenues is primarily attributable to the commencement of
operations in the United Kingdom. Included in the six months ended June 30, 2002
was $40,000 in license fees recognized which did not recur in the six months
ended June 30, 2003.
The Isolagen Process involves a patient's doctor obtaining an
approximately 3 mm punch skin sample from the patient. The skin sample is packed
in a container provided by us and shipped overnight to our laboratory. The
specimen is then cultured utilizing our 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, approximately 1
ml of the patient's cells is also sent to the doctor for treatment. Additional
amounts of approximately 1 ml are available for re-injection every two (2) to
three (3) weeks. We recognize one-third of the revenue associated with each
treatment upon the shipment of the first injection to the patient's doctor, an
additional one-third of revenue associated with each treatment is recognized
upon shipment of the second injection to the patient's doctor, and the remaining
one-third is recognized upon the shipment of the last injection to the patient's
doctor.
In addition, those revenues which we did recognize during the first six
months of 2003 from our United Kingdom operations were in part reduced by
promotional incentives provided to doctors utilizing the Isolagen Process. We
expect to continue providing such promotional incentives to doctor's during the
introduction phase of the Isolagen Process in the United Kingdom.
COST OF SALES. Costs of sales increased to $48,861 for the six months
ended June 30, 2003 compared to $0 for the six months ended June 30, 2002. The
increase in cost of sales is primarily related to the commencement of operations
in the United Kingdom.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 136%, or $2,606,131, to $4,527,594 for the six
months ended June 30, 2003 compared to $1,921,463 for the six months ended June
30, 2002. The major components of the $4.5 million selling, general and
administrative expense were as follows: a) various consultants of approximately
$0.9 million; b) salaries of approximately $1.0 million; c) travel expense of
approximately $0.4 million; d) legal expense of approximately $0.3 million; e)
promotional expense of approximately $0.3 million; and f) laboratory expense of
approximately $0.5 million which includes general consumables used in the
Isolagen Process and various supplies used in our clinical trials. 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 United Kingdom and Australia;
c) higher legal fees related to patent and business development issues; d)
increased consulting fees resulting from our expansion into new geographic
locations; e) increased activity related to the FDA
14
process; and f) increased marketing and promotion efforts related to the
commencement of operations in the United Kingdom.
INTEREST INCOME. Interest income decreased 44%, or $8,443, to $10,620
for the six months ended June 30, 2003 compared to $19,063 for the six months
ended June 30, 2002. The decrease in interest income resulted from, among other
things, a decrease in the amount of cash on hand, and a decrease in interest
rates paid on our deposits.
OTHER INCOME. Other income of $55,663 for the six months ended June 30,
2003 represents gains realized on the sale of certain interest bearing
securities denominated in Australian dollars and British pounds held to mitigate
a portion of the foreign currency exposure related to our international
activity. As of June 30, 2003, we hold no such securities.
NET LOSS. Net loss for the six months ended June 30, 2003 was
$4,430,376, as compared to a net loss of $1,827,461 for the six months ended
June 30, 2002. This increase in net loss is attributed primarily to salaries,
travel, consulting, legal, and promotional expenses.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDING JUNE 30, 2003 AND
2002.
REVENUES. Revenues increased $59,425, to $79,425 for the three months
ended June 30, 2003 compared to $20,000 for the three months ended June 30,
2002. The increase in revenues is primarily attributable to the commencement of
operations in the United Kingdom. Included in the three months ended June 30,
2002 was $20,000 in license fees recognized which did not recur in the three
months ended June 30, 2003.
Those revenues which we did recognize during the three months ended
June 30, 2003 from our United Kingdom operations were in part reduced by
promotional incentives provided to doctors utilizing the Isolagen Process. We
expect to continue providing such promotional incentives to doctor's during the
introduction phase of the Isolagen Process in the United Kingdom.
COST OF SALES. Costs of sales increased to $47,867 for the three months
ended June 30, 2003 compared to $0 for the three months ended June 30, 2002. The
increase in cost of sales is primarily related to the commencement of operations
in the United Kingdom.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 90%, or $1,128,154, to $2,376,023 for the
three months ended June 30, 2003 compared to $1,247,869 for the three months
ended June 30, 2002. The major components of the $2.4 million selling, general
and administrative expense were as follows: a) various consultants of
approximately $0.4 million; b) salaries of approximately $0.5 million; c) travel
expense of approximately $0.2 million; d) legal expense of approximately $0.1
million; e) promotional expense of approximately $0.1 million; and f) laboratory
expense of approximately $0.2 million which includes general consumables used in
the Isolagen Process and various supplies used in our clinical trials. 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 United Kingdom and
Australia; c) the payment of certain soft costs associated with the construction
of laboratory facilities in Houston, TX, London, England and Sydney, Australia;
d) higher legal fees related to patent and business development issues; e)
increased consulting fees resulting from our expansion into new geographic
locations; f) increased activity related to the FDA process; and g) increased
marketing and promotion efforts related to the commencement of operations in the
United Kingdom.
INTEREST INCOME. Interest income decreased 78%, or $11,335, to $3,190
for the three months ended June 30, 2003 compared to $14,525 for the three
months ended June 30, 2002. The decrease in interest income may be attributed
to, among other things, a decrease in the amount of cash on hand, and a decrease
in interest rates paid on our deposits.
OTHER INCOME. Other income of $32,421 for the three months ended June
30, 2002 represents gains realized on the sale of certain interest bearing
securities denominated in Australian dollars and British pounds held to mitigate
a portion of the foreign currency exposure related to our international
activity. As of June 30, 2003, we hold no such securities.
15
NET LOSS. Net loss for the three months ended June 30, 2003 was
$2,341,275, as compared to a net loss of $1,180,923 for the three months ended
June 30, 2002. This increase in net loss is attributed primarily to salaries,
travel, consulting, legal, and promotional expenses.
LIQUIDITY AND CAPITAL RESOURCES - COMPARISON OF JUNE 30, 2003 WITH JUNE 30,
2002.
OPERATING ACTIVITIES. Cash used in operating activities during the six
months ended June 30, 2003, amounted to $3,951,085, as compared to the
$1,636,244 of cash used in operating activities during the six months ended June
30, 2002. The increase is attributed primarily to salaries, travel, consulting,
legal, and promotional expenses.
INVESTING ACTIVITIES. Cash used by investing activities during the six
months ended June 30, 2003, amounted to $1,045,170 as compared to cash used by
investing activities of $86,327 during the six months ended June 30, 2002. This
increase in cash used is due to the purchase of property and equipment for the
Houston, Texas, London, England, and Sydney, Australia laboratories.
FINANCING ACTIVITIES. Cash provided by financing activities during the
six months ended June 30, 2003, amounted to $4,011,478 consisting of $3,919,078
raised from the issuance of preferred stock and $92,400 raised from the issuance
of common stock as compared to cash provided by financing activities of
$8,778,762 during the six months ended June 30, 2002 which consisted entirely of
proceeds from the issuance of preferred stock. In May 2003, the Company sold in
a private offering 155,750 shares of Series B Convertible Preferred Stock, par
value $0.001 per share, at an offering price of $28 per share. Each share of
Series B preferred stock was convertible into 8 shares of common stock at any
time after issuance and accrues dividends at 6% per annum payable in cash or
additional shares of Series B Preferred Stock. After deducting the costs and
expenses associated with the sale, the Company received cash totaling
$3,919,078. In conjunction with the private offering, the Company issued to the
placement agent warrants to purchase 124,600 shares of common stock with an
exercise price of $3.50 per share. The warrants are exercisable immediately
after grant and expire five years thereafter.
WORKING CAPITAL. As of June 30, 2003, we had a cash balance of
$3,292,242. We do not have any credit facilities with which to fund ongoing
working capital needs. Our long-term viability is dependent upon successful
operation of our business and the ability to raise additional debt and equity
within the near future. Subsequent to the completion of our August 2003 private
placement, as of September 12, 2003, we had a cash balance of $19.9 million. See
"Subsequent Equity Transactions" below. Our capital resources are adequate to
finance our operations for the next twelve months. We will require substantial
additional capital to continue our operations and to attain profitability,
neither of which can be assessed. We are actively assessing various financing
opportunities.
Inflation did not have a significant impact on our results during the
six months ended June 30, 2003.
SUBSEQUENT EQUITY TRANSACTIONS.
In August 2003, we completed a private placement of 3,359,331 shares of
our Common Stock to a group of predominately institutional investors at an
offering price of $6.00 per share. We received net proceeds from that offering
of $18,553,062. The offer and resale of the shares of Common Stock have been
registered in the registration statement of which the Prospectus forms a part.
In connection with this transaction, all of the Holders of the Series A and
Series B Preferred Stock converted their preferred shares into common stock. We
have a dividend obligation of $1,083,280 to the holders of Series A and Series B
Preferred Stock who converted their preferred shares into common stock.
As of September 12, 2003, our cash balance is $19.9 million.
RESULTS OF OPERATIONS - 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.
16
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 257%, or $3,836,207, to $5,330,026 in Fiscal
2002, compared to $1,493,819 in Fiscal 2001. The major components of the $5.3
million selling, general and administrative expense were as follows: a) various
consultants of approximately $1.6 million; b) salaries of approximately $1.2
million; c) travel expense of approximately $0.4 million ; d) legal expense of
approximately $0.3 million; and e) promotional expense of approximately $0.2
million. The increase in selling, general and administrative expenses is
attributed primarily to: a) higher salaries; b) increased travel expenses
related to our expansion into the UK and Australia; c) the construction of
laboratory facilities in Houston, TX, London, England and Sydney, Australia; d)
higher legal fees related to patent and business development issues; e)
increased consulting fees resulting from our expansion into new geographic
locations; f) increased activity related to the FDA process; and g) increased
marketing and promotion efforts related to the commencement of operations in the
UK. We had significant expense in Fiscal 2002 relating to consultants relating
to our FDA process, setting up our Laboratory Information Management System, and
the rolling out of various labs in London, Houston and Sydney. We plan to reduce
these expenses in 2003.
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 $5,033,055, as compared to a net
loss of $1,496,448 in Fiscal 2001. This increase in net loss is attributed
primarily to salaries, travel, consulting, legal, promotional expenses, and
bonuses paid to key personnel.
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.
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,
we 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, we received
$2,060,000 from sales of Common Stock.
EQUITY TRANSACTIONS. In July 2002, we 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 was 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, we 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.
17
During the year ended December 31, 2002, we 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. As of the date of
this Prospectus, all shares of the Series A Convertible Preferred Stock issued
in the private placement, together with the shares issued as a dividend thereon,
have been converted into an aggregate of 6,089,855 shares of Common Stock.
WORKING CAPITAL.
As of December 31, 2002, we had a cash balance of $4,244,640.
Inflation did not have a significant impact on the Company's results
during the year ended December 31, 2002.
RESULTS OF OPERATIONS - COMPARISON OF FISCAL YEARS ENDING DECEMBER 31, 2001 AND
2000.
REVENUES. Revenues increased 126% or $58,858, to $105,482 for the year
ended December 31, 2001, compared to $46,584 in fiscal 2000. The increase in
revenues is primarily attributable to license fees earned for the entire year in
2001 and an increase in sales of Isolagen cream.
COST OF SALES. Costs of sales increased 65%, or $7,045, to $17,891 for
the year ended December 31, 2001, compared to $10,846 in fiscal 2000. The
increase in cost of sales is primarily related to the increase in sales of
Isolagen cream.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 105%, or $765,440, to $1,493,819 for the year
ending December 31, 2001, compared to $728,379 in fiscal 2000. The increase is
attributed primarily to consulting expenses and travel expenses. The Company
incurred a non-cash consulting expense in September 2001 for $450,000.
INTEREST EXPENSE. Interest expense decreased 31%, or $37,311, to
$82,015 for the year ended December 31, 2001, compared to $119,326 in fiscal
2000. The decrease is primarily attributable to convertible debt converting to
equity in 2001.
NET LOSS. Net loss for the year ended December 31, 2001, was
$1,496,448, as compared to a net loss of $807,076 for the year ended December
31, 2000. This increase in net loss is attributed primarily to increased
consulting expenses.
LIQUIDITY AND CAPITAL RESOURCES.
OPERATING ACTIVITIES. Cash used in operating activities during the year
ended December 31, 2001, amounted to $664,203, an increase of 155%, or $403,860
over the $260,343 of cash used in operating activities during fiscal 2000. The
increase is primarily due to decreases in deferred revenue and an increase in
accrued expenses.
INVESTING ACTIVITIES. Cash provided by investing activities during the
year ended December 31, 2001, amounted to $1,000, as compared to $0 of cash
provided by investing activities during fiscal 2000.
FINANCING ACTIVITIES. Isolagen has financed its operating and investing
activities primarily from the proceeds of private placements of its common
stock. During the year December 31, 2001, the Company received $2,060,000 from
cash sales of its common stock, an increase of $2,058,077, as compared to the
$1,923 received from cash sales of common stock during fiscal 2000.
18
WORKING CAPITAL.
As of December 31, 2001, Isolagen, Inc. had a cash balance of
$1,380,824.
SECURITIES OFFERED, THE SELLING HOLDERS
AND THE PLAN OF DISTRIBUTION
This Prospectus includes the Selling Holders' securities and the
securities that are underlying outstanding Common Stock Purchase Options. The
securities being offered by Isolagen and by the Selling Holders are described in
the next two sections:
ISOLAGEN. We are not offering any securities except securities that are
underlying outstanding Common Stock Purchase Options that are outstanding. An
aggregate of 1,085,669 shares of Common Stock are issuable upon exercise of the
Common Stock Purchase Options.
THE SELLING HOLDERS. This Prospectus also includes the securities that
are being offered by the Selling Holders that were issued to them upon
conversion of their Series A and Series B Convertible Preferred Stock,
respectively. The Series A Convertible Preferred Stock was acquired in private
placements made to accredited investors only between April and July 2002. The
Series B Convertible Preferred Stock was acquired in private placements made to
accredited investors only in May 2003. The securities that are being offered by
the Selling Holders that were issued upon conversion of the Series A and Series
B Convertible Preferred Stock were issued in August, 2003. All of those shares
of Series A and Series B Convertible Preferred Stock (as well as all in-kind
dividends distributed with respect to the Series A Convertible Preferred Stock)
have been converted into Common Stock. In addition, this Prospectus includes
securities that are being offered by other Selling Holders that purchased common
stock in the August 2003 private placement or who were issued securities in
August 2001 as a result of negotiations between Isolagen and the Selling Holders
completed in August 2001 relating to the Agreement and Plan of Merger by and
among Isolagen Technologies and AFH:
- 16,972,442 shares of Common Stock which are already
outstanding; and
- 8,004,099 shares of Common Stock issuable upon exercise of the
Common Stock Purchase Options and the conversion of the Series
A and B Convertible Preferred Stock issuable thereunder.
We have set forth in the following table information relative to the
Selling Holders as of September 12, 2003. We calculated beneficial ownership
based on SEC requirements, and the information we included regarding beneficial
ownership is not necessarily indicative of beneficial ownership for any other
purpose. Unless otherwise indicated below, each person identified in the table
has sole voting and investment power with respect to all shares he, she, or it
beneficially owns, subject to applicable community property laws. We have based
the percentage calculated for each Selling Holder upon the sum of the "common
stock" and "common stock issuable upon exercise of options" columns. We do not
know when or in what amounts the Selling Holders may offer the shares described
in this Prospectus for sale. The Selling Holders may decide not to sell all or
any of the shares that this Prospectus covers. Selling Holders of 11,600,484
shares have entered into a lock-up agreement whereby such holders have agreed
not to sell or otherwise transfer any shares of commons stock until 180 days
from the date that the resale registration statement is declared effective by
the SEC without the consent of Legg Mason Wood Walker Incorporated; provided,
however, that shares of common stock may be sold as follows: (a) 25% of the
common stock may be transferred commencing on the effective date of the resale
registration statement; and (b) 25% of the common stock may be sold 90 days
following the effective date of the resale registration statement. Selling
Holders of additional 8,931,057 shares have entered into a lock-up agreement
whereby such holders have agreed not to sell or otherwise transfer any shares of
common stock until April 26, 2003 without the consent of Fordham Financial
Management, Inc. Because the Selling Holders may offer all or some of the shares
pursuant to this offering, and because, except for the lock-up agreement
referenced in this paragraph, there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares that the Selling
Holders will hold after completion of the offering, we cannot estimate the
number of the shares that the Selling Holders will hold after
19
completion of the offering. However, for purposes of this table, we have assumed
that, after completion of the offering, the Selling Holders will hold none of
the securities that this Prospectus covers.
(a) COMMON STOCK TO BE
(a) COMMON STOCK AND (b) COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
COMMON STOCK PURCHASE SHARES UNDERLYING COMMON OFFERING AND (b)
OPTIONS BENEFICIALLY OWNED STOCK PURCHASE OPTIONS PERCENTAGE BENEFICIALLY
PRIOR TO THIS OFFERING BEING OFFERED BY THE OWNED AFTER OFFERING
NAME OF SELLING HOLDER -------------------------- SELLING HOLDERS(1) ------------------------
(a) (b) (a) (b)
-------------------------------------------------------------------------------------------------------------------
Symmetry Capital Partners, 20,630 20,630 0 0%
L.P.(2)
Symmetry Capital Qualified 13,990 13,990 0 0%
Partners, L.P.(2)
Symmetry Capital Offshore 9,660 9,660 0 0%
Fund, LTD(2)
Symmetry Parallax Partners, 5,720 5,720 0 0%
L.P.(2)
SF Capital Partners Ltd.(2) 333,334 333,334 0 0%
Clarion Partners, L.P.(2) 16,667 16,667 0 0%
Clarion Offshore Fund, Ltd.(2) 16,667 16,667 0 0%
Dynamic Equity Hedge Fund(2) 16,666 16,666 0 0%
John D. Nardone(2) 16,666 16,666 0 0%
Birchwood Resources(2) 83,333 83,333 0 0%
Vertical Ventures Investments 83,333 83,333 0 0%
LLC(2)
Paul E. Orrson(2) 16,666 16,666 0 0%
Rawleigh H. Ralls(2) 50,000 50,000 0 0%
United Capital Management, 58,333 58,333 0 0%
Inc.(2)
Hayman Partners, LP(2) 30,000 30,000 0 0%
Agger Fund, LP(2) 3,665 3,665 0 0%
Agger Institutional Fund, 21,335 21,335 0 0%
LP(2)
Perceptive Life Sciences Master 500,000 500,000 0 0%
Fund, Ltd.(2)
John S. Lemak(2) 17,000 17,000 0 0%
Sandor Capital Master Fund, 34,000 34,000 0 0%
L.P.(2)
Gryphon Master Fund, LP(2) 50,000 50,000 0 0%
Little Wing, L.P.(2) 65,650 65,650 0 0%
Tradewinds Fund Ltd.(2) 17,683 17,683 0 0%
20
Endeavor LP(2) 6,500 6,500 0 0%
First American Insurance 4,630 4,630 0 0%
Small Cap Growth Fund(2)
John J. Frautschi Life 35,780 35,780 0 0%
Trust(2)
First American Small Cap 695,983 695,983 0 0%
Growth Opportunities(2)
Lyndhurst Associates(2) 11,290 11,290 0 0%
Greater Milwaukee Foundation 11,210 11,210 0 0%
MC(2)
Oregon Retail Employees 18,010 18,010 0 0%
Pension Trust(2)
Henry Posner III Agency(2) 2,950 2,950 0 0%
Posner Partners Microcap(2) 12,610 12,610 0 0%
Paul M. Posner Agency(2) 3,330 3,330 0 0%
St. Paul Electrical Construction 5,950 5,950 0 0%
Pension SC(2)
St. Paul Electrical Construction 6,800 6,800 0 0%
Supply SC(2)
E.S. Tallmadge Residuary 2,370 2,370 0 0%
Trust 2(2)
Richard D. Waterfield SC(2) 4,080 4,080 0 0%
W.M. Chester - Chester 1,430 1,430 0 0%
Children SC(2)
Milwaukee Jewish Federation(2) 10,410 10,410 0 0%
U.S. Bank, N.A., FBO 1,045,000 1,045,000 0 0%
Heartland Value Fund(2)
T.E. Staahl(3) 252,291 252,291 0 0%
John J. Machado(3) 63,274 63,274 0 0%
Geoffrey Adams(3) 31,637 31,637 0 0%
Ian Michael White(3) 31,637 31,637 0 0%
Ronald E. Furrow(3) 31,637 31,637 0 0%
Robert F. Sagarino(3) 363,630 363,630 0 0%
David P.A. Dundas(3) 15,818 15,818 0 0%
Frank Discipio(3) 31,637 31,637 0 0%
Jean Melki(3) 31,637 31,637 0 0%
George Bingham(3) 15,818 15,818 0 0%
Bruce P. Inglis(3) 31,637 31,637 0 0%
21
Stanley Keith Klein IV(3) 31,637 31,637 0 0%
Matthew John Milburn 31,637 31,637 0 0%
Thompson(3)
Ron Shelton, MD(3) 31,637 31,637 0 0%
James Malcolm Sylph(3) 31,637 31,637 0 0%
Jonathan Meyers(3) 31,637 31,637 0 0%
Fred Meyers(3) 31,637 31,637 0 0%
Fred Meyers, Money Purchase 31,637 31,637 0 0%
IRA(3)
Lindsey Meyers(3) 31,637 31,637 0 0%
Mervyn Peter Childs(3) 15,818 15,818 0 0%
Rees V. Bartlett(3) 15,818 15,818 0 0%
Robert Soloway TTEE(3) 15,818 15,818 0 0%
M.J. Derrick(3) 31,637 31,637 0 0%
Andrew Fox(3) 31,637 31,637 0 0%
Keith Stanley Parkins(3) 15,818 15,818 0 0%
Richard Weatherly(3) 31,637 31,637 0 0%
Gordon M. Burns(3) 63,044 63,044 0 0%
R.S. Bushell(3) 15,818 15,818 0 0%
Super-Tek, Inc.(3) 47,340 47,340 0 0%
Nader Akhavan-Zanjani(3) 31,637 31,637 0 0%
Susan Baquet(3) 15,818 15,818 0 0%
Samuel D. Gaby, MD(3) 15,818 15,818 0 0%
MRM Life Ltd.(3) 126,549 126,549 0 0%
Dr. Ravi Kant Agarwal and 31,637 31,637 0 0%
Mrs. Vinita Agarwal(3)
CPCL Associates(3) 15,818 15,818 0 0%
Anthony Mitra(3) 15,818 15,818 0 0%
Neil Robert Harris(3) 157,772 157,772 0 0%
Rees V. Bartlett(3) 15,818 15,818 0 0%
David Forbes(3) 15,818 15,818 0 0%
Bess Rhea Popp(3) 31,505 31,505 0 0%
Agil Hypothek Ltd.(3) 31,505 31,505 0 0%
T.A. Morgan(3) 31,455 31,455 0 0%
John and Barbara Curcio(3) 15,752 15,752 0 0%
22
Buechel Family Ltd. 1,575,287 1,575,287 0 0%
Partnership(3)
BASR Partnership(3) 89,791 89,791 0 0%
Michael Lusk(3) 15,752 15,752 0 0%
Nicholas Frank Scholes(3) 31,505 31,505 0 0%
Loannis Alexandridis(3) 31,407 31,407 0 0%
Stephen A. Kepniss(3) 31,407 31,407 0 0%
Ronald E. Furrow or Anna C. 15,703 15,703 0 0%
Furrow(3)
Samuel D. Gaby, M.D.(3) 15,703 15,703 0 0%
Brian Cunningham & Cathy M. 15,703 15,703 0 0%
Cunningham(3)
Sung Soo Kim(3) 62,814 62,814 0 0%
James M. Fenton(3) 31,407 31,407 0 0%
Noboru Muto & Sumiko Muto(3) 62,814 62,814 0 0%
Clive Maurice Beetlestone(3) 31,407 31,407 0 0%
George Bingham(3) 15,703 15,703 0 0%
John B. Ellor, Jr.(3) 15,703 15,703 0 0%
Frank DiScipio(3) 31,407 31,407 0 0%
Raymond Cincotti(3) 31,407 31,407 0 0%
Buechel Patient Care, 942,213 942,213 0 0%
Research & Education Fund,
Inc.(3)
William Bongiorno(3) 31,407 31,407 0 0%
Mark Freeman(3) 31,407 31,407 0 0%
Kevin E. Brehmer Living 15,703 15,703 0 0%
Trust(3)
Walter Macor(3) 15,703 15,703 0 0%
Joseph P. Santiamo MD(3) 15,611 15,611 0 0%
The Silverburg Trust(3) 15,611 15,611 0 0%
Reginald Patrick Joseph 15,611 15,611 0 0%
O'Neill(3)
Vincent Polito Jr.(3) 15,611 15,611 0 0%
Munirali Haji(3) 31,223 31,223 0 0%
Diderica M.A. Wiersema(3) 15,611 15,611 0 0%
Hiroshi Kondo(3) 15,611 15,611 0 0%
Michael James Lane(3) 62,446 62,446 0 0%
Jeffrey C. Friedman(3) 62,446 62,446 0 0%
23
Carol J. Kahn(3) 15,611 15,611 0 0%
Takashi Sugiyama(3) 31,223 31,223 0 0%
Haruhisa Tsuchitani(3) 31,223 31,223 0 0%
Daniel M. Rochester(3) 31,223 31,223 0 0%
Tim Zeller(3) 9,662 9,662 0 0%
Robert Sagarino(3) 15,611 15,611 0 0%
Robert Mazurek Money Purchase 15,611 15,611 0 0%
Plan(3)
Kevin E. Brehmer Living 15,611 15,611 0 0%
Trust(3)
Walid Younis Al-Ali(3) 93,557 93,557 0 0%
Anthony R.M. Rowland(3) 15,555 15,555 0 0%
David Cherry(3) 15,555 15,555 0 0%
Victor Alvarez(4) 49,000 49,000 0 0%
Dennis Cardino(4) 7,000 7,000 0 0%
Lalji Premji Vekaria(4) 42,000 42,000 0 0%
Alexis Family Limited 42,000 42,000 0 0%
Partnership(4)
Gordon M. Burns(4) 98,000 98,000 0 0%
Alan Roger Zebedee(4) 14,000 14,000 0 0%
Humphrey Johnson(4) 42,000 42,000 0 0%
Kyoko Mori(4) 14,000 14,000 0 0%
Bruce Gibbard(4) 14,000 14,000 0 0%
Michael Botting(4) 7,000 7,000 0 0%
Richard Shiring(4) 7,000 7,000 0 0%
William Pratt(4) 14,000 14,000 0 0%
Junko Morikawa(4) 7,000 7,000 0 0%
Stephen M. Karlya(4) 14,000 14,000 0 0%
Kyoko Kubota(4) 7,000 7,000 0 0%
Daniel E. Bush(4) 7,000 7,000 0 0%
David Cherry(4) 42,000 42,000 0 0%
Alphonso Russ/Shirley Russ(4) 14,000 14,000 0 0%
Richard J. Binnie(4) 7,000 7,000 0 0%
Michael T. Munch(4) 7,000 7,000 0 0%
Geoffrey Adams(4) 14,000 14,000 0 0%
24
Kenneth James Logue(4) 7,000 7,000 0 0%
Yoshiaki Sugiyama(4) 28,000 28,000 0 0%
Morgan J. Wilbur III(4) 14,000 14,000 0 0%
Stanley Keith Klein IV(4) 14,000 14,000 0 0%
Makoto Akahane(4) 14,000 14,000 0 0%
Steve Carothers(4) 14,000 14,000 0 0%
Leybrand Investments Ltd.(4) 7,000 7,000 0 0%
Donald W. Anderson(4) 7,000 7,000 0 0%
Cell Share Consortium(4) 14,000 14,000 0 0%
John Boulton(4) 7,000 7,000 0 0%
Joe Murphy(4) 14,000 14,000 0 0%
Paul Regent(4) 14,000 14,000 0 0%
Alpha-Rowen Treatments, Ltd(4) 7,000 7,000 0 0%
Anthony & Margaret Rowland(4) 7,000 7,000 0 0%
Clive Howard Kennedy(4) 7,000 7,000 0 0%
David Turner(4) 7,000 7,000 0 0%
Peter John Edmonds(4) 14,000 14,000 0 0%
Dennis George Bunning(4) 14,000 14,000 0 0%
Kevin O'Brien(4) 7,000 7,000 0 0%
Isamu Dekiya(4) 7,000 7,000 0 0%
Christopher A. James(4) 7,000 7,000 0 0%
Richard Barbiera(4) 14,000 14,000 0 0%
Bernard Pallut(4) 21,000 21,000 0 0%
Stuart Fitton(4) 7,000 7,000 0 0%
James H. Atwell(4) 7,000 7,000 0 0%
Peter Andrew Hilton(4) 7,000 7,000 0 0%
Jonathan & Lisa Weatherly(4) 7,000 7,000 0 0%
James W. Hulme(4) 7,000 7,000 0 0%
Leonard Longo(4) 7,000 7,000 0 0%
Robert Peter Simpson(4) 7,000 7,000 0 0%
The Silverberg Trust(4) 7,000 7,000 0 0%
Akira Edward Shimada(4) 14,000 14,000 0 0%
Kevin & Elaine Reid(4) 7,000 7,000 0 0%
25
Jes Johansen(4) 7,000 7,000 0 0%
Robert M. Galley(4) 7,000 7,000 0 0%
Perviz Aran(4) 42,000 42,000 0 0%
David Forbes(4) 7,000 7,000 0 0%
Simon Mordzynski(4) 7,000 7,000 0 0%
Agil Hypothek, Ltd.(4) 14,000 14,000 0 0%
John Durham(4) 14,000 14,000 0 0%
Jiu Ping Zhang(4) 14,000 14,000 0 0%
Christopher John Vickery(4) 7,000 7,000 0 0%
John Gramegna(4) 7,000 7,000 0 0%
David Olson(4) 7,000 7,000 0 0%
Philip Marino(4) 14,000 14,000 0 0%
Jack Edward Busselle(4) 14,000 14,000 0 0%
Homewave Ltd.(4) 7,000 7,000 0 0%
Patrick Frostad(4) 14,000 14,000 0 0%
Neil Harris(4) 28,000 28,000 0 0%
Peter Cook(4) 7,000 7,000 0 0%
John L. Hardwick(4) 7,000 7,000 0 0%
David R. Gust(4) 14,000 14,000 0 0%
Arnold O. Boyle(4) 7,000 7,000 0 0%
Michael J. Derrick(4) 7,000 7,000 0 0%
Graham Ball(4) 14,000 14,000 0 0%
M.J. Thomas(4) 7,000 7,000 0 0%
Yasuo Hayashi(4) 7,000 7,000 0 0%
Thomas Howard Martin(4) 7,000 7,000 0 0%
Munirali Haji(4) 140,000 140,000 0 0%
Peter Bourrelly(4) 7,000 7,000 0 0%
Benchmark Equity Group, 1,355,000 1,355,000 0 0%
Inc.(5)
William K. Boss, Jr.(5) 1,614,055 1,614,055 0 0%
Michael Avignon(5) 775,734 775,734 0 0%
Laura Lee Avignon(5) 1,000,000 1,000,000 0 0%
Michael Macaluso(5) 775,734 775,734 0 0%
Alyda Berryman Macaluso(5) 1,000,000 1,000,000 0 0%
26
Olga Marko(5) 1,050,000 1,050,000 0 0%
Jeffrey W. Tomz(5) 227,200 227,200 0 0%
Timothy J. Till(5) 1,133,334 1,133,334 0 0%
Lighthouse Capital Insurance
Co.(6) 600,000 600,000 0 0%
Steve Schilling(6) 672,147 672,147 0 0%
BASR Partnership(6) 346,667 346,667 0 0%
Nicolas Elian(6) 214,999 214,999 0 0%
Clifton Family Limited
Partnership(6) 78,334 78,334 0 0%
Henry A. Mentz III(6) 16,667 16,667 0 0%
Wendell M. Wilson(6) 10,000 10,000 0 0%
Stephen Hodson(6) 30,000 30,000 0 0%
Helen Pal(6) 10,000 10,000 0 0%
Trident III, LLC(6) 261,800 261,800 0 0%
Pound Capital Corporation(6) 252,800 252,800 0 0%
Founders Equity Group Inc.(6) 200,000 200,000 0 0%
Dennis H McGill(6) 249,749 249,749 0 0%
William R Peeples(6) 235,379 235,379 0 0%
Frederick F. Buechel(6) 200,000 200,000 0 0%
Theodore Staahl(6) 155,690 155,690 0 0%
Seacrest Partners I Limited 112,090 112,090 0 0%
Part(6)
Pacgen Partners(6) 100,000 100,000 0 0%
Robert E Tompkins(6) 100,000 100,000 0 0%
William Adams(6) 90,331 90,331 0 0%
YKA Partners Ltd(6) 88,631 88,631 0 0%
Scott S Monroe(6) 80,000 80,000 0 0%
Paula Fenton(6) 78,038 78,038 0 0%
Gregory S Keller(6) 77,258 77,258 0 0%
Foresight Capital 56,017 56,017 0 0%
Corporation(6)
Robert Mazurek(6) 53,593 53,593 0 0%
Schalk Van Rensburg(6) 48,670 48,670 0 0%
Foresight Bridge Strategies
LP(6) 40,000 40,000 0 0%
Sharyl Bancroft(6) 35,000 35,000 0 0%
27
Henry A Mentz III(6) 33,334 33,334 0 0%
S. Keith Klein IV(6) 26,667 26,667 0 0%
Alan A. Robb(6) 23,300 23,300 0 0%
Michael K Wilhelm(6) 21,681 21,681 0 0%
Ion Pal(6) 20,000 20,000 0 0%
Theodore M Staahl(6) 18,500 18,500 0 0%
David Marko(6) 16,000 16,000 0 0%
Richard M. Everhart, Jr.(6) 14,862 14,862 0 0%
Rena D'Souza(6) 10,000 10,000 0 0%
James Newman(6) 3,000 3,000 0 0%
Adrienne Tande Riner(6) 850 850 0 0%
Karen Farrell(7) 3,790 3,790 0 0%
Joseph Ingarra(7) 69,480 69,480 0 0%
Mio Lum(7) 5,790 5,790 0 0%
Mac Lutz(7) 11,580 11,580 0 0%
Fred Meyers(7) 17,000 17,000 0 0%
Robert Sagarino(7) 69,480 69,480 0 0%
Vace Partners(7) 72,640 72,640 0 0%
Eustace Conway(7) 11,580 11,580 0 0%
Janzig Demirkan(7) 11,580 11,580 0 0%
Fordham Holding Group(7) (11) 79,524 79,524 0 0%
Robert Sagarino(7) 11,580 11,580 0 0%
Carmine DeSantis, Jr.(7) 10,102 10,102 0 0%
Charles Giordano, Sr.(7) 50,000 50,000 0 0%
Dean Kajouras(7) 25,000 25,000 0 0%
William Baquet(7)(11) 286,943 286,943 0 0%
Fordham Financial Management,
Inc.(8) (11) 124,600 124,600 0 0%
Equipmed Pty. Ltd.(9) 150,000 150,000 0 0%
RCG Capital Markets Group,
Inc.(10) 75,000 75,000 0 0%
---------------------------
1. The Selling Holders are offering all of their shares of Common Stock and all
of the shares of Common Stock underlying their Common Stock Purchase
Options.
2. Issued in connection with the August 2003 Common Stock private placement.
28
3. Issued in connection with the July 2002 Series A Convertible Preferred
Stock private placement.
4. Issued in connection with the May 2003 Series B Convertible Preferred
Stock private placement.
5. Issued in connection with the August 2001 acquisition of Isolagen
Technologies, Inc.
6. Primarily issued in connection with the August 2001 acquisition of
Isolagen Technologies, Inc.
7. Common stock underlying warrants issued in connection with the July
2002 Series A Convertible Preferred Stock private placement.
8. Common stock underlying warrants issued in connection with the May 2003
Series B Convertible Preferred Stock private placement.
9. Common stock underlying warrants issued in connection with the April
2003 Equipmed Distribution Agreement.
10. Common stock underlying warrants issued in connection with the February
2003 RCG Capital Markets Group, Inc. Agreement.
11. These entities are under the common control of William Baquet.
12. For additional disclosure relating to relationships by and between
certain of the Selling Holders, refer to the beneficial ownership table
and notes thereto set forth in this Prospectus.
PLAN OF DISTRIBUTION. The Selling Holders have advised us that they
may, from time to time, offer and sell the shares included in this Prospectus;
and that they may exercise their Common Stock Purchase Options, and offer and
sell the underlying shares of Common Stock under this Prospectus. The term
"Selling Holders" includes pledgees, donees, transferees or other successors in
interest selling shares that they acquired after the date of this Prospectus
from the Selling Holders as a pledge, gift or other non-sale related transfer.
To the extent required, we may amend and supplement this Prospectus from time to
time to describe a specific plan of distribution.
Each Selling Holder has advised us that he, she or it will act
independently in making decisions with respect to the timing, manner, and size
of each sale. Each Selling Holder has advised us that they may make these sales
at prices and under terms then prevailing or at prices related to the then
current market price. The Selling Holders have advised us that they may also
make sales in negotiated transactions, including pursuant to one or more of the
following methods:
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this Prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- block trades in which the broker-dealer will attempt to sell
the shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; and
- in privately negotiated transactions.
In connection with distributions of the shares or otherwise, the
Selling Holders have advised us that each may:
- enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short
sales of the shares in the course of hedging the positions
they assume;
- sell the shares short and redeliver the shares to close out
such short positions;
- enter into option or other transactions with broker-dealers or
other financial institutions which require the delivery to
them of shares that this Prospectus offers, which they may in
turn resell; and
29
- pledge shares to a broker-dealer or other financial
institution, which, upon a default, they may in turn resell.
In addition, the Selling Holders may sell any shares that qualify for
sale pursuant to Rule 144, rather than pursuant to this Prospectus.
In effecting sales, broker-dealers or agents that the Selling Holders
engage may arrange for other broker-dealers to participate. Broker-dealers or
agents may receive commissions, discounts or concessions from the Selling
Holders, in amounts that the parties may negotiate immediately prior to the
sale.
In offering shares that this Prospectus covers, the Selling Holders,
and any broker-dealers and any other participating broker-dealers who execute
sales for the Selling Holders, may qualify as "underwriters" within the meaning
of the Securities Act in connection with these sales. Any profits that the
Selling Holders realize, and the compensation that they pay to any
broker-dealer, may qualify as underwriting discounts and commissions.
In order to comply with the securities laws of some states, the Selling
Holders must sell the shares in those states only through registered or licensed
brokers or dealers. In addition, in some states the Selling Holders must sell
the shares only if we have registered or qualified those shares for sale in the
applicable state or an exemption from the registration or qualification
requirement is available and the Selling Holder complies with the exemption.
We have advised the Selling Holders that the anti-manipulation rules of
Regulation M under the Exchange Act may apply to sales of shares in the market
and to the activities of the Selling Holders and their affiliates. In addition,
we will make copies of this Prospectus available to the Selling Holders for the
purpose of satisfying the Prospectus delivery requirements of the Securities
Act. The Selling Holders may indemnify any broker-dealer that participates in
transactions involving the sale of the shares against liabilities, including
liabilities arising under the Securities Act.
At the time a Selling Holder makes a particular offer of shares we
will, if required, distribute a Prospectus supplement that will set forth:
- the number of shares that the Selling Holder is offering;
- the terms of the offering, including the name of any
underwriter, dealer or agent;
- the purchase price paid by any underwriter;
- any discount, commission and other underwriter compensation;
- any discount, commission or concession allowed or reallowed or
paid to any dealer; and
- the proposed selling price to the public.
We have agreed to indemnify certain of the Selling Holders against
claims and losses due to material misstatements or omissions made by the Company
(and not by the Selling Holders) in this Prospectus. Certain Selling Holders
have agreed to indemnify us against claims and losses due to material
misstatements or omissions made by them.
USE OF PROCEEDS
Isolagen will receive no proceeds from the sale by the Selling Holders
of the 23,890,872 shares of common stock. Isolagen will receive from $0.00 to a
maximum of $2,827,213 from the exercise of the Common Stock Purchase Option that
are included in this Prospectus. We expect to use any proceeds received for
working capital and general corporate purposes.
30
BUSINESS
IN ORDER TO PROVIDE YOU WITH MEANINGFUL AND USEFUL INFORMATION, THIS
PROSPECTUS CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" (AS SUCH TERM IS
DEFINED IN SECTION 21E OF THE EXCHANGE ACT). THESE STATEMENTS REFLECT OUR
CURRENT EXPECTATIONS REGARDING OUR POSSIBLE FUTURE RESULTS OF OPERATIONS,
PERFORMANCE, AND ACHIEVEMENTS. THESE FORWARD-LOOKING STATEMENTS ARE MADE
PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
WHEREVER POSSIBLE, WE HAVE TRIED TO IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY USING WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT,"
"PLAN," "INTEND," AND SIMILAR EXPRESSIONS. THESE STATEMENTS REFLECT OUR CURRENT
BELIEFS AND ARE BASED ON INFORMATION CURRENTLY AVAILABLE TO US. ACCORDINGLY,
THESE STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES, AND CONTINGENCIES,
WHICH COULD CAUSE OUR ACTUAL RESULTS, PERFORMANCE, OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, SUCH STATEMENTS. WE HAVE
DESCRIBED THESE RISKS, UNCERTAINTIES AND CONTINGENCIES UNDER "RISK FACTORS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION." WE HAVE NO OBLIGATION TO UPDATE OR REVISE ANY SUCH FORWARD-LOOKING
STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF
THIS REPORT.
OVERVIEW
We are an emerging pharmaceutical bioscience company located in
Houston, Texas that specializes in the development and commercialization of
autologous cellular therapy for hard and soft tissue regeneration that has
specific applications in cosmetic dermatology. We are also exploring
applications for periodontal disease, reconstructive dentistry and other
health-related markets. We currently holds five patents. Autologous cellular
therapy is a process whereby a patient's own cells are extracted, reproduced and
then reintroduced to the patient for specific cosmetic and medical applications.
Unlike other applications for the treatment of dermal defects, we utilizes only
the patient's unique, living cells to produce the patient's own collagen. There
is no foreign substance utilized in this treatment protocol. We have commenced
Phase III trials for dermal defects pursuant to an effective Investigational New
Drug Application for the treatment of wrinkles and scars. We have also commenced
a Phase II dose ranging study and a Phase I clinical trial for dental
applications addressing gingival recession.
Our goal is to become the industry leader in the research, development
and commercialization of autologous cellular therapy which stimulate a patient's
own collagen production. We sometimes refer to our autologous cellular therapy
as the Isolagen Process.
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 we believe 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 our Laboratory Information
Management System ("LIMS") keeps the cells 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, the average person's 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
31
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, 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 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 a director 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. We
believe 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 FDA began regulating the science of biologic products.
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. 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.
Earlier this year, we commenced a Phase III trail for dermal defects
pursuant to an IND for the treatment of wrinkles and scars. The Phase III trial,
being conducted in ten sites, involves physicians who are either plastic
surgeons or dermatologists with practices that emphasize aesthetic procedures.
The patients' enrollment has been completed and totals one hundred fifty-two
patients. To date, over 90% of patients have had their first consultation. The
first patients are scheduled to begin their injections in August 2003 with the
final patient injection scheduled for the end of September 2003. This Phase III
trial is a double-blind study with 75% of the patients receiving the therapeutic
dosage and the remaining 25% receiving a placebo. In addition, in January of
2003, we commenced a double-blind Phase II trial under the IND, which is a
two-site dose ranging study of forty patients. We expect to complete our
analysis of the data from the Phase II trial during the fourth quarter of 2003.
We have also commenced a Phase I clinical trial of twenty-one patients in
progress for dental applications addressing gingival recession. We expect to
complete this study in the first quarter of 2004.
While we are hopeful that we will receive FDA approval of our IND for
the treatment of wrinkles and scars by the end of 2004, there can be no
assurance that FDA approval will be forthcoming or when any such approval might
be granted.
32
In August 2001, we formed Isolagen Europe Limited, our subsidiary
organized under the law of the United Kingdom for the purpose of exploring the
utilization of the Isolagen Process on patients located in the United Kingdom.
Our management has made inquiry to the Medicines Control Agency with respect to
our 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 August 2003, we received a license from the Therapeutic Goods
Administration ("TGA") in Australia to begin the manufacture of autologous
fibroblast cells including the initiation of primary cultures of fibroblasts,
the propagation of fibroblasts, the harvesting of cultured fibroblasts, the
storage of cultured fibroblasts and release for supply of cultured fibroblasts.
Consequently, we are commencing commercialization in Australia as of the date of
this Prospectus. We are also investigating commercialization in the following
countries: South Korea, Hong Kong, Italy and Mexico. However, due to the
unpredictability of regulatory approval in these countries, we can give no
assurance that any of these countries will approve such use or the time period
for any such approval.
In September 2002, we opened our London cellular laboratory to serve
the U. K. market, and the balance of the European market 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.
In August 2003, we opened our Australia cellular laboratory in the city
of Sydney to serve the Australian market, and various markets in the Pacific Rim
if required regulatory approvals are received. The new cellular facility,
located at 2 Lincoln Street, Lane Cove, New South Wales, Australia, 2066, began
operations in August 2003.
STRATEGY AND VISION
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.
Our goal is to become the industry leader in the research, development
and commercialization of autologous cellular, although there can be no assurance
that we will be successful. We are pursuing, through Isolagen Europe, commercial
operations in the United Kingdom and, we are pursuing commercial operations
through our subsidiaries, joint ventures or license arrangements in Australia.
We are also assessing the commencement of operations in South Korea, Hong Kong,
Brazil, and Mexico. We are investigating regulatory and other requirements in
these countries and evaluating markets and potential joint venture partners and
licensees. In the future, we will endeavor to increase and strengthen our market
position in the following ways:
- Expanding and solidifying our relationship with the
approximately 200 physicians who have used the Isolagen
Process with their patients, as well as marketing our
processes and products to other doctors (i.e., plastic
surgeons, facial plastic surgeons, dermatologists and
aestheticians).
- Continuing our current research into the science of autologous
cellular therapy.
- Working with regulatory agencies, country by country, to
attempt to obtain the approval of the Isolagen Process and our
future products.
- 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.
33
Our business plan is focused on the following major steps:
- ESTABLISHING AND FORMALIZING STRATEGIC PARTNERING
RELATIONSHIPS. We are conducting discussions with potential
strategic partners in the pharmaceutical and medical device
industries for application-specific sales and distribution of
our techniques and products. Our aim is to establish
relationships with industry leaders, both domestic and
international, which represent the broadest market appeal for
our products and techniques.
- ACCELERATING CURRENT RESEARCH EFFORTS. The research capability
that has produced the Isolagen Process could be applicable to
other processes stimulated by our technology such as gum
rejuvenation and other dental applications, urology, bone
marrow and other pigment-related maladies.
- EXPANDING SALES, PRODUCTION AND ADMINISTRATIVE RESOURCES.
Increased sales, research, and foreign affiliations will
require more resources. We will seek to obtain these resources
through third party relationships and increases to staff as
necessary.
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"):
- Surgical and non-surgical cosmetic surgery procedures in 2001
totaled over $6.9 billion;
- Approximately 855,846 Botox injections were performed in 2001;
- More than 13.2 million patients had cosmetic or reconstructive
procedures performed in 2001;
- More than 7.4 million patients had cosmetic surgery in 2001;
- Breast augmentation increased 533% between 1992 and 2001;
- Liposuction procedures increased 313% between 1992 and 2001;
- The number of people having cosmetic plastic surgery
procedures performed by ASPS members increased 7% from 2000 to
2001.
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 we intend to market as a "Natural Collagen Supplementation
System." ("NCSS") The primary benefits of the NCSS are three-fold:
- Since this is an autologous system (exclusively using a
patient's own cells), we believe there is a reduced
possibility of allergic reaction as compared to bovine
collagen and non-natural fillers.
- The therapeutic correction received is lasting longer 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.
34
These three benefits represent substantial advances in facial
rejuvenation since the standard until now has been bovine collagen, a foreign
protein derived from cows which, 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.
We believe that the benefits of the proposed NCSS 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 us and shipped overnight to our laboratory. The specimen
is then cultured utilizing the 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 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.
REGULATORY PROCESS AND CLINICAL TRIALS
Our 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 our 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
35
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 our manufacturing processes and procedures were changed to meet these
new standards, and FDA approval is obtained.
Prior to the Merger, Isolagen Technologies did not have the financial
resources to complete the FDA process. Following the Merger, we 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. We have commenced
a Phase III trail for dermal defects pursuant to an IND for the treatment of
wrinkles and scars. The Phase III trial, being conducted in ten sites, involves
physicians who are either plastic surgeons or dermatologists with practices that
emphasize aesthetic procedures. The patients' enrollment has been completed and
totals one hundred fifty-two patients. To date, over 90% of patients have had
their first consultation. The first patients are scheduled to begin their
injections in August 2003 with the final patient injection scheduled for the end
of September 2003. This Phase III trial is a double-blind study with 75% of the
patients receiving the therapeutic dosage and the remaining 25% receiving a
placebo. In addition, in January of 2003, we commenced a double-blind Phase II
trial under the IND, which is a two-site dose ranging study of forty patients.
We expect to complete our analysis of the data from the Phase II trial during
the fourth quarter of 2003. We have also commenced a Phase I clinical trial of
twenty-one patients in progress for dental applications addressing gingival
recession. We expect to complete this study in the first quarter of 2004.
While we are hopeful that we will receive FDA approval of our IND for
the treatment of wrinkles and scars by the end of 2004, there can be no
assurance that FDA approval will be forthcoming or when any such approval might
be granted.
We have developed rigorous internal standards for testing and compiling
the data necessary for our FDA filings. We conduct 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 us to submit more precise
protocols to the FDA, clearly defining the clinical objectives that we wish to
support in the pivotal trial phase.
INTERNATIONAL REGULATION
The regulation of our 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 us to make extensive
filings and obtain regulatory approvals before selling our products. Certain
countries classify our products, including the Isolagen Process, as human tissue
for transplantation but may restrict our import or sale. Other countries have no
application regulations regarding the import or sale of products similar to our
products, creating uncertainty as to what standards we may be required to meet.
Management has made inquiry to the Medicines Control Agency with respect to our
proposed use of the
36
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 August 2003, we
received a license from TGA in Australia, to begin the manufacture of autologous
fibroblasts including the initiation of primary cultures of fibroblasts, the
propagation of fibroblasts, the harvesting of cultured fibroblasts, the storage
of cultured fibroblasts and release for supply of cultured fibroblasts. We
expect to commence commercialization in Australia by the end of 2003. In
addition, we are assessing commercialization in the following countries: South
Korea, Hong Kong, Italy and Mexico. We believe that our products are not
regulated as pharmaceutical products in South Korea, Hong Kong, Italy and
Mexico, although there is substantial uncertainty regarding the regulation of
our products under the laws of those foreign countries. However, due to the
unpredictability of regulatory approval in these and other countries, we can
give no assurance that we will receive any necessary regulatory approval for the
sale of our products. Failure to comply with any country's regulatory
requirements could result in material adverse consequences on the results of our
operations. See "Risk Factors."
ISOLAGEN DENTAL PRODUCT
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. We believe that
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. 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. 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 a cellular material to prevent these defects. The
Isolagen Dental Product provides potential as a solution for this problem as
well.
We have commenced a Phase I clinical trail of twenty-one patients for
dental applications addressing gingival recession. We expect to complete this
study in the first quarter of 2004. We are unable to determine what the outcome
of this trial will be, whether or when the Isolagen Dental Process will prove to
be medically effective or commercially viable, and whether or when FDA approval
will be forthcoming.
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 our management):
--------------------------------------------------------------------------------------------------------------------------
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.
Immediate esthetic effect.
$400-$500 per treatment.
--------------------------------------------------------------------------------------------------------------------------
Hylaform Crosslinked derivative Hyaluronan implant Reabsorbs in approx. 1 year.
of hyaluronan
--------------------------------------------------------------------------------------------------------------------------
37
--------------------------------------------------------------------------------------------------------------------------
(Biomatrix) $550 per injection, approx.
--------------------------------------------------------------------------------------------------------------------------
Fibrel Collagen from pigs Collagen implant Difficult for physician to use; requires mixing with
patients blood and special equipment.
(Mentor)
Reabsorbs in 4 to 6 months.
$400 per treatment.
--------------------------------------------------------------------------------------------------------------------------
Autologen Skin from patient Collagen Implant Requires large piece of skin 3"x3" to make 3cc for
each treatment.
(Collagenesis Corp)
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.
Subcutaneous atrophy requires
microlipoinjection overlaid 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.
--------------------------------------------------------------------------------------------------------------------------
Artecoll Polymethylmethacrylate Artificial implant Treats only deep depressions (subcutaneous tissue).
suspension with
collagen
(Rofil Medical) Non reversible; implant technique errors are long
lasting.
Potential for complications higher: infection,
beading.
--------------------------------------------------------------------------------------------------------------------------
Softform Expanded polytetra- Artificial implant Requires surgery to implant.
flouroetheylene
(Collagen Corp) 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.
--------------------------------------------------------------------------------------------------------------------------
Botox Botulinum A exotoxin Muscle paralysis Effect reverses in 3 to 6 months.
--------------------------------------------------------------------------------------------------------------------------
38
--------------------------------------------------------------------------------------------------------------------------
(Allergan) Physician technique very important.
2% to 3% of patients experience drooping eyelid.
$450 to $750 per injection.
--------------------------------------------------------------------------------------------------------------------------
Ablative Lasers Mechanical device Tissue vaporization Long healing period; open sores for 5 to 14 days;
causing new tissue
e.g. CO(2) & Erbium to form redness up to six months.
Requires surgery and anesthesia.
Potential for complications: hypopigmentation, scars,
non-healing wounds.
--------------------------------------------------------------------------------------------------------------------------
Non-Ablative Lasers Mechanical device Stimulated dermis Multiple treatments 4 to 6.
to form collagen
e.g. Nd 1032, Q Takes up to six months to realize improvements.
switched 1064 YAG
--------------------------------------------------------------------------------------------------------------------------
Microdermabrasion Mechanical device Tissue abridement Minimal efficacy on scars and wrinkles.
causing new tissue
to form
Good epidermal effect.
Requires 6 to 10 treatments.
--------------------------------------------------------------------------------------------------------------------------
Chemical peels Carbolic acid, TCA, Chemical tissue Long healing period; open sores for 5 to 14 days;
alpha hydroxy acids removal causing
new tissue to form Redness up to six months.
Laser applications are replacing this technology.
--------------------------------------------------------------------------------------------------------------------------
We believe that many of our competitors have greater financial and
other resources than do we. Although we are 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 we do that are
developing or may develop similar products in the future.
INTELLECTUAL PROPERTY
Protecting our proprietary technology is vitally important to our
competitive position. We currently hold 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
repair of skin and soft tissue defects
United States
---------------------------------------------------------------------------------------------------------------------
5,660,850 Cosmetic Use of autologous dermal fibroblasts June 6, 1996 Aug. 26, 1997 20 Years
for the repair of skin and soft
tissue defects
United States
---------------------------------------------------------------------------------------------------------------------
5,858,390 Cosmetic Use of autologous undifferentiated Sept. 8, 1997 Jan. 12, 1999 20 Years
mesenchylmal cells for the repair of
skin and soft tissue defects
United States
---------------------------------------------------------------------------------------------------------------------
5,591,444 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Jan. 7, 1997 20 Years
for the repair of skin and soft tissue
defects
United States
---------------------------------------------------------------------------------------------------------------------
312548 Cosmetic Use of autologous dermal fibroblasts July 3, 1996 March 9, 2000 20 Years
for the repair of skin and soft tissue
defects
--------------------------------------------------------------------------------------------------------------------------
39
---------------------------------------------------------------------------------------------------------------------
NEW ZEALAND
---------------------------------------------------------------------------------------------------------------------
698440 Cosmetic Use of autologous dermal fibroblasts July 28, 1995 Feb. 11, 1999 20 Years
for the repair of skin and soft tissue
defects
Australia
---------------------------------------------------------------------------------------------------------------------
9,083,618 Dental Compositions for regenerating tissue May 2, 1998 Aug. 13, 2002 20 Years
that has deteriorated and methods for
using such compositions
United States
---------------------------------------------------------------------------------------------------------------------
In the 1st quarter of 2003, we entered into an Intellectual Property
Purchase Agreement to acquire two patent applications: a) to repair vocal cord
tissue defects and b) to promote healing of wounds and fistulas. As
consideration, we issued the seller 100,000 shares of Common Stock and agreed to
pay a royalty equal to (a) 5% of all revenues recognized by us or our affiliates
from commercial application of the Intellectual Property made, provided,
distributed, sold or manufactured directly by us or our affiliates, or (b) 25%
of all revenues recognized by us or our 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.
We are working on several other patent applications. We continue to
seek ways to protect our proprietary technology and trade secrets, including
entering into confidentiality or license agreements with our employees,
consultants and corporate partners, and controlling access to and distribution
of our technologies and other proprietary information.
RESEARCH AND DEVELOPMENT
Our research and development focus is not principally on new product
development, but on improved process science, manufacturing and cost reduction.
Though our research and development focuses on improved process and
manufacturing, we continue to explore applications for the Isolagen Process like
therapies to regrow hair, to repair damaged nerves, and to heal burned skin. We
expense research and development costs as they are incurred.
EMPLOYEES
We presently employ forty-nine (49) people on a full-time basis
including, twenty-eight (28) in Houston, Texas, fifteen (15) in London, England,
and six (6) in Sydney, Australia. We anticipate 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 the
company's employees to be good. We may also employ consultants on an as needed
basis to supplement existing staff.
DESCRIPTION OF PROPERTY
We currently lease 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.
Our laboratories are designed as cGMP laboratories to process
autologous cultured fibroblasts for the therapeutic injections during our
procedures and clinical and pivotal trials. We believe that our 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 us at each location:
40
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 granted us the use of this office space at no
charge until August 2003. Beginning in September 2003, the
lease rate is approximately $105,840 annually. We have a month
to month lease that may be terminated at our option. The lease
is with Axces, Inc., a Delaware corporation, which is owned by
Michael Avignon, Michael Macaluso and Timothy Till. Management
believes that the leased premises have been made available to
us on terms that are superior to those available from
arms-length providers of lease space. "See Certain
Relationships and Related Transactions."
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 we have 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 we have an
option to renew for an additional one year.
LEGAL PROCEEDINGS
We are not currently subject to any legal proceedings, threatened or
pending. We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business.
MANAGEMENT
The following table sets forth the names and ages of all of the
directors and executive officers of Isolagen and the positions held by each such
person as of September 12, 2003. Each of the directors serves until the next
annual meeting of shareholders and until his successor is elected and qualified,
or until his earlier death, resignation or removal. Officers are appointed by,
and serve at the pleasure of, the Board of Directors.
Name Age Title
---- --- -----
Frank DeLape 49 Chairman of the Board of Directors
William K. Boss, Jr. 53 Vice Chairman of the Board of Directors
Michael Macaluso 51 Chief Executive Officer, President, and Director
Jeffrey W. Tomz 32 Chief Financial Officer and Secretary
Michael Avignon 49 Director
Steven Morrell 47 Director (1)
E. Ashley Smith 57 Director(1)
Ralph V. De Martino 48 Director(1)
41
Name Age Title
---- --- -----
Olga Marko 60 Senior Vice President and Director of Research
Vaughan Clift 42 Vice President of Operations
Nelson Haight 38 Controller
(1) Messrs. Morrell, Smith and De Martino are members of the Audit and
Compensation Committees.
Our Certificate of Incorporation, as amended, provides that the Board
of Directors shall be divided into three classes, each such class to be as
nearly as possible equal in number of directors to each other class. Each
director shall serve a term of three years. The first term of office of
directors of the first class shall expire at the first annual meeting after
their election, and thereafter such terms shall expire on each three (3) year
anniversary of such date; the term of office of the directors of the second
class shall expire on the one (1) year anniversary of the first annual meeting
after their election, and thereafter such terms shall expire on each three (3)
year anniversary of such one (1) year anniversary; and the term of office of the
directors of the third class shall expire on the two (2) year anniversary of the
first annual meeting after their election, and thereafter such terms shall
expire on each three (3) year anniversary of such two (2) year anniversary. At
each succeeding annual meeting, the stockholders shall elect directors for a
full term or the remainder thereof, as the case may be, to succeed those whose
terms have expired. Each director shall hold office for the term for which
elected and until his successor shall be elected and qualify. The Board of
Directors currently consists of seven members, including Michael Macaluso,
Michael Avignon, Frank DeLape, William K. Boss, Jr., Steve Morrell, E. Ashley
Smith, and Ralph De Martino. Dr. Boss' and Mr. Morrell's term expires at the
2004 Annual Meeting of Stockholders or until his or her successor is duly
elected and qualified. Mr. Smith's and Mr. De Martino's term expires at the 2005
Annual Meeting of Stockholders or until his or her successor is duly elected and
qualified. Mr. Macaluso's, Mr. Avignon's and Mr. DeLape's term expires at the
2006 Annual Meeting of Stockholders or until his or her successor is duly
elected and qualified.
Biographical information with respect to the executive officers and
directors of Isolagen is provided below. There are no family relationships
between any present executive officers and/or directors.
Frank DeLape. Mr. DeLape was appointed as a director to the Board of
Directors on June 18, 2001. He was elected Vice President on August 10, 2001. On
August 24, 2001, Mr. DeLape resigned as Vice President and was elected Chairman
of the Board. Mr. DeLape is also the Chief Executive Officer at Benchmark Equity
Group, Inc., a position he has held since 1994. Benchmark is a boutique merchant
banking firm that focuses as facilitators and financial managers for emerging
companies. Mr. DeLape is also the Managing Partner of Gemini Growth Fund, LP.
Gemini Growth Fund, LP is a Small Business Investment Company licensed by the
United States government.
William K. Boss, Jr. Mr. Boss was appointed to the Board of Directors
on August 10, 2001. He was elected Vice Chairman of the Board of Directors on
August 24, 2001. Dr. Boss has been the founder, Chief Executive Officer and
Chairman of the Board of Isolagen Technologies since its inception in 1995. Dr.
Boss is a Board Certified Plastic Surgeon and serves the Hackensack Medical
Center as Vice Chairman of Plastic Surgery. Dr. Boss also serves as an Assistant
Clinical Professor at the University of Medicine and Dentistry in New Jersey.
Michael Macaluso. Mr. Macaluso was appointed to the Board of Directors
on June 18, 2001. He was elected President of the Company on June 21, 2001. On
August 24, 2001, Mr. Macaluso resigned as President of the Company and he was
appointed Chief Executive Officer. On June 18, 2003, Mr. Macaluso was appointed
and President. Mr. Macaluso is a founder and principal of International Printing
and Publishing ("IPP"), a position Mr. Macaluso has held since 1990. Over the
past seventeen (17) years, Mr. Macaluso has bought, managed and sold numerous
companies. In 1990, he was instrumental in the financial transaction with Touche
Ross' venture fund to acquire three companies, resulting in the creation of IPP.
As a result of the merger of Touche Ross and Deloitte, Mr. Macaluso became a
partner with Deloitte Touche. Subsequent to the merger, Mr. Macaluso negotiated
the buyout of Deloitte Touche's interest and subsequently sold IPP to a large
consolidator.
Jeffrey W. Tomz. Mr. Tomz was appointed Secretary and Treasurer of the
Company on June 21, 2001. He was appointed Chief Financial Officer on August 24,
2001. Mr. Tomz is also a Principal at Benchmark Equity Group, Inc. Benchmark is
a boutique merchant banking firm that focuses as facilitators and financial
managers for emerging companies. Mr. Tomz has served and/or is currently serving
on the board of directors of investee companies, as well as Trident III, L.L.C.
and Trident II, L.L.C. which are private investment funds. Mr. Tomz was a
Director of InfoHighway Communication Corp., a private communication company
from September 1998 to
42
September 2000. Prior to joining Benchmark in the fall of 1997, Mr. Tomz began
his career as a certified public accountant with Arthur Andersen Worldwide.
Michael Avignon. Mr. Avignon was appointed to the Board of Directors on
June 18, 2001. He was elected Vice President of the Company on August 10, 2001,
and he was appointed President on August 24, 2001. Mr. Avignon resigned as
President on January 16, 2003. Mr. Avignon is the founder, Chief Executive
Officer and Chairman of the Board of Axces, Inc., a position he has held since
1994. Axces, Inc. is a telecommunications company, which includes international
marketing and a state-of-the-art call center. Mr. Avignon is also Chairman and
Chief Executive Officer of MTM Holdings Corp. and Managing Member of Capali,
L.L.C., a private investment company.
Steven Morrell. Mr. Morrell was appointed to the Board of Directors on
May 22, 2002. Mr. Morrell is a Partner at Teknoinvest Management AS, which is
the oldest and largest Norwegian venture capital firm investing in Scandinavia
and the US in the Life Science and Information Technology sectors with $150
million under management. Prior to joining Teknoinvest in January 2001, he was
the Managing Director for two years of a Teknoinvest portfolio company,
Aquasmart International AS. Mr. Morrell has held numerous positions over the
previous fourteen years including Managing Director for Merck & Co., Inc.'s
subsidiary in Russia, Central Asia and Caucasia; General Director of Veropharm
Co., Ltd (Russia) which is one of the largest Russian pharmaceutical companies;
President of Hafslund Nycomed Pharma AG (Austria) and management consultant in
McKinsey & Co., Inc. (Scandinavia). Mr. Morrell has extensive experience in
pharmaceutical company management including licensing technology and products;
marketing and sales; production and quality control management; as well as
mergers and acquisitions. Mr. Morrell also served in the U.S. Air Force as an
officer and an F-15 fighter pilot (Japan). He also currently serves as a Member
of the Board of AKVAsmart ASA (Norway), Marical, Inc. (USA), Optinel Systems,
Inc. (USA), and OAO Pharmacy Chain 36.6 (Russia) as well as an Observer to the
Board of Cidra Corporation (USA). Mr. Morrell is fluent in English, Norwegian
and German as well as conversational in Russian, and holds an MBA (with Honors)
from IMD, Switzerland and a B.Sc. degree with a major in Mathematics and a minor
in Aerospace Studies from Brigham Young University, USA.
E. Ashley Smith. Mr. Smith was appointed to the Board in November 2002.
Mr. Smith is an attorney with a JD and LLM and was of counsel to the law firm of
Hutcheson and Grundy. He has a healthcare background with the rehabilitation
center, TIRR Systems, serving as Executive Vice President and Chief
Administrative Officer. Mr. Smith was elected President of TIRR Systems in
January 1999, and in November 1999, Mr. Smith was elected President and Chief
Executive Officer of TIRR Systems. While a member of the Texas House of
Representatives (1980 to 1994), Mr. Smith served as Chairman of the Committee on
Higher Education, the Committee on Science and Technology, Committee on
Financial Institutions, Committee on Government Organizations and the Calendars
Committee. In 1991/2, Mr. Smith was named National Legislator of the Year in
Science and Technology. In July 1990, Mr. Smith served as general counsel to
President Bush's Group of Seven Economic Summit in Houston. In 1998, Mr. Smith
was appointed by Texas Governor Bush as Chairman of the Board of the Texas
Underground Facilities Notification Corporation. He subsequently served as
Senior Advisor to Texas Governor Perry and Chaired Governor Perry's statewide
Council on Science and Biotechnology Development. In Houston, Mr. Smith has
served as the Chairman of the Southeast Biotech Research Park and was the
Founding Chairman of BioHouston, Inc. in 2001/2. Mr. Smith has also served as a
member of the boards of directors of the West Houston Chamber of Commerce, the
American Red Cross of Houston, and the End Hunger Network.
Ralph V. De Martino. Mr. De Martino was appointed to the Board in
December 2002. Mr. De Martino is the managing partner of the Washington, DC
office of Dilworth Paxson, LLP. Prior to December 31, 2002, Mr. De Martino
served as the managing principal of the law firm of De Martino Finkelstein Rosen
& Virga. Mr. De Martino attended Bucknell University (Bachelor of Science in
Business Administration, cum laude, 1976, Accounting, with departmental honors)
and the George Washington University National Law Center (Juris Doctor, with
honors, 1979). Mr. De Martino practices in the areas of securities and corporate
law. From 1999 through 2001, Mr. De Martino served on the Board of Directors of
Commodore Cruise Lines.
Olga Marko. Ms. Marko was appointed Vice President of the Company on
August 10, 2001. She assumed the role of Senior Vice President and Director of
Research on August 24, 2001. Ms. Marko has served as Vice President and Director
of Research at Isolagen Technologies since its inception in 1995. Prior to
incorporating Isolagen Technologies with Dr. Boss, Ms. Marko worked for Merck
and Company in the Department of Molecular
43
Pharmacology, Memorial Sloan Kettering and Advanced Tissue Sciences. Her focus,
at Merck, involved new drug development, as well as mentoring a group of more
than 45 scientists, in the area of tissue culture. During this time, she
developed a number of new techniques which improved transfections and receptor
expression. In addition, she also developed unique stem cell lines from bone
marrow, which were related to animal and human origin. While at Advanced Tissue
Sciences, she was instrumental in developing "in vitro", full thickness skin.
She was the first to successfully cultivate melanocytes in culture while she was
at Memorial Sloan Kettering research institution in New York. Ms. Marko's basic
research in academic institutions included cancer research, onco-virology,
metastatic involvement, skin cells biology, and wound/burn treatment. The
research in wound/burn treatment was done in collaboration with the Cornell
University Burn Unit and Rockefeller University. Her industrial experience also
included validating the effect of drugs for AIDS treatment and its immuno
responses. Ms. Marko established a number of very unique cell lines and holds a
number of patents as a result of her work. Ms. Marko has been published in such
prestigious, internationally, multi-faceted journals as Science, Nature and the
Proceedings of the National Academy, as well as many "niche" publications. She
has also co-authored a number of chapters in books relating to tissue culture
and medical sciences. Ms. Marko has over thirty-six (36) years in basic research
uncovering numerous opportunities for the development of cell lines for specific
applications. Ms. Marko has a BS in Biochemistry/Microbiology with graduate work
and extensive commercial experience in cell biology. Her experience involves
diverse, yet related, fields including cell biology, transplantation,
immunology, biochemistry, molecular biology and virology.
Vaughan L Clift, M.D. Dr. Clift was appointed Vice President of
Operations on May 28, 2002. He is in charge of the science aspects, regulatory
affairs and manufacturing performance of the Company for all products.
Previously he was Chief Scientist of DBCD, Inc., a NASA spin-off medical device
company that mass-produced a range of blood diagnostic products for the human
and veterinary market. Prior to that, Dr. Clift was Chief Scientist for Lockheed
Martin's Human Spaceflight SPDEO contract. Dr. Clift has received a number of
international and federal awards, served as keynote speaker at several
international clinical biochemistry conferences, addressed the first combined
International Red Cross and WHO meeting in Geneva, was recognized as one of
NASA's top ten scientists and was the subject of a television documentary "NASA
Man". He has clinical, manufacturing and FDA experience in integrating automated
scaled manufacturing processes.
Nelson Haight. Mr. Haight was appointed Controller of the Company on
January 8, 2003. Prior to joining the Company, Mr. Haight held various finance
and accounting positions with Petroleum Geo-Services ASA, a Norwegian oilfield
services company, from November 1996 to May 2002, as well as Copano Field
Services LLC, an independent oil and gas exploration company from January 1995
to November 1996. He began his career as a certified public accountant with
Arthur Andersen Worldwide.
No director is related to any other director or executive officer of
the Company or its subsidiaries, and there are no arrangements or understandings
by and among directors. Except as set forth hereinabove, none of our directors
is also a director of another company which has a class of securities registered
under Section 12 of the Exchange Act, or which is subject to the reporting
requirements of Section 15(d) of that act.
There are no material proceedings to which any director, officer or
affiliate of Isolagen, any owner of record or beneficially of more than five
percent of any class of voting securities of Isolagen, or any associate of any
such director, officer, affiliate or security holder is a party adverse to
Isolagen or any of its subsidiaries or has a material interest adverse to
Isolagen or any of its subsidiaries.
No director, officer or affiliate of Isolagen, any owner of record or
beneficially of more than five percent of any class of voting securities of
Isolagen has, during the last five years (i) been convicted of any criminal
proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining future violations of, or prohibiting or
mandating activities subject to, United States federal or state securities laws
or finding any violations with respect to such laws.
44
COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors has established two standing committees, namely,
an Audit Committee and a Compensation Committee. There is no nominating
committee or executive committee or any committee serving a similar function.
Audit Committee
The duties and responsibilities of the Audit Committee are to recommend
the selection of the independent public accountants for the Company to the Board
of Directors, to review the scope and cost of the audit, to review the
performance and procedures of the auditors, to review the final report of the
independent auditors, to be available for consultation with the independent
auditors, to review with the Company's Chief Financial Officer and independent
auditors corporate accounting practices and policies and financial controls and
to perform all other duties as the Board of Directors may from time to time
designate. Ralph De Martino (Chairman), Steven Morrell and Ashley Smith comprise
the Audit Committee. No member of the Company's Audit Committee has received any
consulting fees, advances or compensatory fees from the Company or its
subsidiaries and no member of the Audit Committee is an affiliate of the Company
or its subsidiaries. During 2002 prior to Mr. De Martino's joining the Board of
Directors, a firm with which Mr. De Martino was associated received $25,000 in
connection with its representation of Isolagen in the listing of Isolagen's
shares on AMEX.
Compensation Committee
The duties and responsibilities of the Compensation Committee are to
review periodically the compensation of executive officers and other key
employees, to make recommendations as to stock options, bonuses and salaries and
to perform all other duties as the Board of Directors may from time to time
designate. Steven Morrell (Chairman), Ralph De Martino and Ashley Smith are the
members of the Compensation Committee.
45
CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth information regarding the ownership of
our common stock as of September 12, 2003 by: (i) each director; (ii) each of
the executive officers named in the Summary Compensation Table; (iii) all
executive officers and directors of the Company as a group; and (iv) all those
known by us to be beneficial owners of more than five percent of our common
stock.
Common Stock
Name and Address of Beneficially Percent of
Beneficial Owner Owned (1) Class (2)
---------------- ------------ ---------
Michael Macaluso (4) 2,675,734 9.8%
2500 Wilcest, 5th Floor
Houston, TX 77042
Michael Avignon (5) 2,675,734 9.8%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Frank DeLape (6) 2,005,000 7.4%
2500 Wilcest, 5th Floor
Houston, TX 77042
William K. Boss, Jr. 1,614,055 6.1%
2500 Wilcest, 5th Floor
Houston, TX 77042
Olga Marko 1,050,000 4.0%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Jeffrey W. Tomz (7) 377,200 1.4%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Steve Morrell (8) 40,000 0.2%
Grev Wedels Plass 6
0151 Oslo, Norway
E. Ashley Smith (9) 40,000 0.2%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Vaughan Clift (10) 40,000 0.2%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Ralph V. De Martino (11) 36,667 0.1%
1818 N Street, NW
Suite 400
Washington, DC 20036
Nelson Haight -- 0.0%
2500 Wilcrest, 5th Floor
Houston, TX 77042
All Officers and 10,554,390 39.2%
Directors as a Group (11
Persons)
5% SHAREHOLDERS
Buechal Family Ltd. 2,717,500 10.3%
Partnership. (3)
76 Crest Drive
So. Orange, NJ 07079
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. Unless otherwise noted, all listed shares of common stock are
owned of record by each person or entity named as beneficial owner and that
person or entity has sole voting and dispositive power with respect to the
shares of
46
common stock owned by each of them. As to each person or entity named as
beneficial owners, that person's or entity's percentage of ownership is
determined based on the assumption that any options or convertible
securities held by such person or entity which are exercisable or
convertible within 60 days have been exercised or converted, as the case
may be.
(2) Based upon 26,332,799 shares of Common Stock calculated on a fully-diluted
basis.
(3) Includes 942,213 shares of Common stock beneficially owned by Buechel
Patient Care Research & Education Fund, Inc. and 200,000 shares of Common
Stock beneficially owned by Frederick F. Buechel.
(4) Includes 1,000,000 shares of Common Stock beneficially owned by Alyda
Macaluso, Mr. Macaluso's wife, and includes 900,000 held by Mr. Macaluso.
(5) Includes 1,000,000 shares of Common Stock beneficially owned by Laura
Avignon, Mr. Avignon's wife, and includes 900,000 options held by Mr.
Avignon.
(6) Represents 1,355,000 shares of Common Stock beneficially owned by Benchmark
Equity Group, Inc., which is solely owned by Mr. DeLape, and includes
650,000 option held by Mr. DeLape. Does not include 736,666 shares of
Common Stock beneficially held by Lighthouse Capital Insurance Company, a
Cayman Island unlimited licensed insurance company, which has issued a
variable universal life insurance contract of which Mr. DeLape and his
children are remote contingent beneficiaries. Mr. DeLape disclaims
beneficial ownership of such shares held by Lighthouse and does not have
voting or dispositive power with respect to such shares.
(7) Includes 150,000 options.
(8) Includes 40,000 options.
(9) Includes 40,000 options.
(10) Includes 40,000 options.
(11) Includes 36,667 options.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
EXECUTIVE OFFICER COMPENSATION
The following table sets forth information regarding annual and
long-term compensation with respect to the fiscal years ended December 31, 2002,
2001 and 2000, paid or accrued by the Company to or on behalf of those persons
who were, during the fiscal year ended December 31, 2002, the Company's Chief
Executive Officer and the Company's most highly compensated executive officers
serving as such as of December 31, 2002 whose compensation was in excess of
$100,000.
SUMMARY COMPENSATION TABLE
Long Term
Annual Compensation Compensation
------------------- ------------
Other Annual Securities Restricted
Name and Compensation Underlying Stock All Other
Principal Position Year Salary Bonus (12) Options (1) Awards Compensation
------------------ ---- ------ ----- ------------ ----------- ---------- ------------
Kenton L. Stanger (9) 2002 $ -- $ -- -- -- -- $ --
Former Chief Executive 2001 $ -- $ -- -- -- -- $ --
Officer, President and 2000 $ -- $ -- $ 89,684 -- -- $ --
Director
Michael Macaluso 2002 $ -- $ 60,500 $ -- -- -- $ --
(2)(3)(10) 2001 $ -- $ -- $ -- 900,000 -- $ --
Chief Executive Officer, 2000 $ -- $ -- $ -- -- -- $ --
Director
47
Long Term All Other
Annual Compensation Compensation Compensation
------------------- ------------ ------------
Other Annual Securities Restricted
Name and Compensation Underlying Stock
Principal Position Year Salary Bonus (12) Options (1) Awards
------------------ ---- ------ ----- ------------ ----------- ----------
Michael Avignon (2)(4)(10) 2002 $ -- $ 60,500 $ -- -- -- $ --
President, Director 2001 $ -- $ -- $ -- 900,000 -- $ --
2000 $ -- $ -- $ -- -- -- $ --
Jeffrey W. Tomz (2)(5)(10) 2002 $ -- $ -- $ -- -- -- $ --
Chief Financial Officer 2001 $ -- $ -- $ -- 150,000 -- $ --
and Secretary 2000 $ -- $ -- $ -- -- -- $ --
Olga Marko (6)(10) 2002 $ 125,402 $ 5,000 $ -- -- -- $ --
Senior Vice President 2001 $ 130,000 $ -- $ -- -- -- $ --
and Director of Research 2000 $ -- $ -- $ -- -- -- $ --
Vaughn Clift, M.D. (7)(11) 2002 $ 93,549 $ 6,750 $ -- 250,000 -- $ --
Vice President Operations 2001 $ -- $ -- $ -- -- -- $ --
2000 $ -- $ -- $ -- -- -- $ --
Nelson Haight (8) 2002 $ -- $ -- $ -- -- -- $ --
Controller 2001 $ -- $ -- $ -- -- -- $ --
2000 $ -- $ -- $ -- -- -- $ --
(1) Indicates number of shares of Common Stock underlying options.
(2) We did not pay Messrs. Macaluso, Avignon or Tomz a salary prior to July 14,
2003 pursuant to the Company's representation contained in the Series A
Convertible Preferred Stock Private Placement Memorandum. From July 15,
2003 through September 4, 2003, Messrs. Macaluso, Avignon and Tomz each
were paid $21,923. On September 5, 2003, Mr. Macaluso entered into an
employment agreement with an annual salary of $300,000. On September 5,
2003, Mr. Avignon's salary was increased to $200,000. On September 5, 2003,
Mr. Tomz entered into an employment agreement with an annual salary of
$200,000. See "Compensation of Directors and Executive Officers --
Employment Agreements"
(3) Mr. Macaluso was granted 400,000 stock options on February 25, 2003 at
$4.50 per share of which 200,000 options vest on February 25, 2004 and
200,000 options vest on February 25, 2005. Mr. Macaluso was also granted
300,000 stock options on September 5, 2003 at $9.81 per share which vest
ratably over the last six months of his employment agreement.
(4) Mr. Avignon resigned as President on January 16, 2003. Mr. Avignon was
granted 400,000 stock options on February 25, 2003 at $4.50 per share of
which 200,000 options vest on February 25, 2004 and 200,000 options vest on
February 25, 2005.
(5) Mr. Tomz was granted 120,000 stock options on February 25, 2003 at $4.50
per share of which 60,000 options vest on February 25, 2004 and 60,000
options vest on February 25, 2005.
(6) Ms. Marko's 2003 annual salary is $132,000.
(7) Dr. Clift's 2003 annual salary is $175,500.
(8) Mr. Haight started with the Company on January 8, 2003. Mr. Haight's 2003
annual salary is $115,000. Mr. Haight received 45,000 stock options on
January 8, 2003 at $6.00 per share in which 15,000 options vest on January
7, 2004, 15,000 options vest on January 7, 2005 and 15,000 options vest on
January 7, 2006.
(9) Mr. Stanger ceased being the President and Chief Executive Officer of the
Company on June 18, 2001.
(10) Each of Mr. Macaluso, Mr. Avignon, Mr. Tomz and Ms. Marko assumed their
respective positions with the Company on August 24, 2001.
(11) Dr. Clift assumed his position as Vice President of Operations of the
Company on May 28, 2002.
48
(12) Consists of interest accrued during fiscal year 2000 on the unpaid balance
of amounts previously outstanding on personal loans to such officer. Such
amounts were treated as compensation for purposes of this table, but was
considered an obligation payable by Mr. Stanger. Effective December 31,
2000, all amounts payable by Mr. Stanger were assigned to East Bay Trust.
Except as otherwise expressly stated in this Prospectus, we do not have
written plans to pay bonuses or defined compensation to our employees. We have
adopted medical plans for our employees at our cost.
OPTION AND STOCK APPRECIATION RIGHT GRANTS IN FISCAL YEAR ENDED DECEMBER 31,
2002
The following table contains information concerning grants of stock
options and stock appreciation rights to the individuals named below during
fiscal year 2002.
OPTIONS AND STOCK APPRECIATION RIGHTS GRANTED
Number of Percent of Total Options/SAR
Securities Underlying Granted to Employees Exercise Price Expiration
Name Option/SAR Granted in Fiscal Year Base Price Date
---- --------------------- ---------------------------- -------------- ----------
Vaughn Clift, M.D. 250,000 35.80% $ 6.00 May 28, 2012
STOCK OPTION AND STOCK APPRECIATION RIGHT EXERCISES AND HOLDINGS
The following table describes the summarizes certain information
related to the exercise of options to acquire shares of Common Stock by the
individuals named below during the 2002 fiscal year. The table also sets forth
the value of options and stock appreciation rights held by each of the
individuals named below at December 31, 2002.
AGGREGATED OPTION EXERCISES IN 2002
AND OPTION VALUES AT DECEMBER 31, 2002
Number of Securities Underlying Value of Unexercised in the-
Unexercised Options at Money Options at December 31,
December 31, 2002 2002 (1)
----------------- --------
Shares Acquired Value
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------- ----------- ------------- ----------- -------------
Michael Macaluso -- $ -- -- 900,000 $ -- $ --
Michael Avignon -- $ -- -- 900,000 $ -- $ --
Robert E. Tompkins (2) 38,400 $ 57,600 61,600 -- $ 227,920 $ --
Jeffrey W. Tomz -- $ -- -- 150,000 $ -- $ --
Vaughn Clift, M.D. -- $ -- -- 250,000 $ -- $ --
------ -------- ------ --------- ---------- ------
Total: 38,400 $ 57,600 61,600 2,200,000 $ 227,920 $ --
(1) The value of unexercised "in-the-money" options equals the difference
between the option exercise price and the closing price of our stock at
year end, multiplied by the number of shares underlying the options. The
closing price of our stock on December 31, 2002, as reported on AMEX, was
$5.20. The closing price of our stock on September 9, 2003 was $8.79.
(2) Mr. Tompkins left the Company in September 2002. Upon separation, options
to acquire 100,000 shares of Common Stock immediately vested, with options
to acquire an additional 61,600 shares of Common Stock remaining
unexercised at December 31, 2002. The options to acquire the remaining
61,600 shares of Common Stock were exercised by Mr. Tompkins in January
2003.
DIRECTOR COMPENSATION
Directors who are also employees of the Company do not receive
compensation for their services as directors. In consideration for our
independent directors services, we provided, during the fiscal year ended
December 31, 2002, each independent director with a stipend of $15,000 plus
options to purchase 100,000 shares of Common Stock at $6 per share. The options
granted to the independent directors vest over a period of three years from the
date of grant.
49
Mr. Frank DeLape, Chairman of the Board, received a $236,000 bonus in
2002 in recognition of his efforts in helping the Company to remove the FDA
clinical hold on our principal product helping us set-up our European
operations. Mr. DeLape was granted options to purchase 400,000 shares of Common
Stock on February 25, 2003 for an exercise price of $4.50 per share, of which
options to acquire 200,000 shares vest on February 25, 2004 and options to
acquire the remaining 200,000 shares vest on February 25, 2005. Mr. DeLape's was
compensated at the annual rate of $175,000, plus a $1,000 monthly car allowance
from January 1, 2003, through September 4, 2003, at which time he entered into a
new employment arrangement described below.
EMPLOYMENT AGREEMENTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
AGREEMENTS.
We have entered into employment agreements with Olga Marko, William K.
Boss, Jr., Brian Whitley, Vaughan Clift, Frank DeLape, Michael Macaluso and
Jeffrey Tomz.
Mrs. Marko entered into an employment agreement, dated August 10, 2001,
for a term of sixty (60) 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 without cause, Mrs. Marko
will be entitled to a twelve (12) month severance payment.
Dr. Boss entered into an employment agreement, 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
compensation of $50,000 for 2002; and (c) an annual compensation of $60,000 for
2003. For this compensation, Dr. Boss agrees to devote 25 mutually agreeable
days of service per year as requested by us. If the employment agreement is
terminated without cause, Dr. Boss will be entitled to a three (3) month
severance payment.
Mr. Whitley entered into an employment agreement, 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 without cause, Mr. Whitley will be
entitled to a three (3) month severance payment. Mr. Whitley left the employment
of the Company in March 2003.
Mr. Clift entered into an employment agreement, 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 without cause,
Mr. Clift will be entitled to a two (2) month severance payment.
Mr. DeLape entered into an employment agreement dated September 5,
2003, with an initial term ending July 31, 2006 and providing for a base salary
of $325,000, subject to the right of the Board of Directors to increase his
salary from time to time. Mr. DeLape is entitled to receive an annual bonus in
an amount to be determined by the Compensation Committee. If Mr. DeLape's
performance satisfies criteria to be established by the Compensation Committee
his target bonus will be 38.5% of his annual salary. The agreement also provides
that Mr. DeLape will receive employee stock options to purchase 300,000 shares
of Common Stock at an exercise price equal to the average closing transaction
price on the ten trading days preceding the grant. The option will have a term
of ten years and will vest and become exercisable ratably over the last six
calendar quarters of his employment agreement. The vesting of the option will
accelerate in the event of a change in control of the Company, the sale of
substantially all of the assets of the Company or the merger out of existence of
the Company. The agreement also provides Mr. DeLape with disability and life
insurance benefits, a car allowance and wireless communications benefits. Mr.
DeLape's employment may be terminated at any time, provided that if his
employment is terminated without "Cause" or if he terminates his employment for
"Good Reason" as those terms are defined in the agreement, he will be entitled
to receive a severance payment equal to the greater of (i) the salary payable
over the remaining term of his agreement or (ii) eighteen months salary, as well
as a bonus computed on the basis of the greater of (a) the amount determined
under the agreement by the Compensation Committee or (b) $70,000.
50
Mr. Macaluso entered into an employment agreement dated September 5,
2003, with an initial term ending July 31, 2006 and providing for a base salary
of $300,000, subject to the right of the Board of Directors to increase his
salary from time to time. Mr. Macaluso is entitled to receive an annual bonus in
an amount to be determined by the Compensation Committee. If Mr. Macaluso's
performance satisfies criteria to be established by the Compensation Committee
his target bonus will be 40% of his annual salary. The agreement also provides
that Mr. Macaluso will receive employee stock options to purchase 300,000 shares
of Common Stock at an exercise price equal to the average closing transaction
price on the ten trading days preceding the grant. The option will have a term
of ten years and will vest and become exercisable ratably over the last six
calendar quarters of his employment agreement. The vesting of the option will
accelerate in the event of a change in control of the Company, the sale of
substantially all of the assets of the Company or the merger out of existence of
the Company. The agreement also provides Mr. Macaluso with disability and life
insurance benefits, a car allowance and wireless communications benefits. Mr.
Macaluso's employment may be terminated at any time, provided that if his
employment is terminated without "Cause" or if he terminates his employment for
"Good Reason" as those terms are defined in the agreement, he will be entitled
to receive a severance payment equal to the greater of (i) the salary payable
over the remaining term of his agreement or (ii) eighteen months salary, as well
as a bonus computed on the basis of the greater of (a) the amount determined
under the agreement by the Compensation Committee or (b) $70,000.
Mr. Tomz entered into an employment agreement dated September 5, 2003
with an initial term ending July 15, 2005 and providing for a base salary of
$200,000, subject to the right of the Board of Directors to increase his salary
from time to time. Mr. Tomz is entitled to receive an annual bonus in an amount
to be determined by the Compensation Committee. If Mr. Tomz's performance
satisfies criteria to be established by the Compensation Committee, his target
bonus will be 30% of his annual salary. Mr. Tomz's employment may be terminated
at any time, provided that if his employment is terminated without "Cause" or if
he terminates his employment for "Good Reason" as those terms are defined in the
agreement, he will be entitled to a six month severance payment. In the event of
a change in control of the Company, the sale of substantially all of the assets
of the Company, a merger of the Company in which the Company is not the
surviving entity, or the termination of his employment (other than for Cause)
the vesting of any options owned by him shall accelerate.
Mr. Avignon resigned as President on January 16, 2003
BENEFIT PLANS.
The Board of Directors adopted and stockholders have approved the 2001
Stock Option and Appreciation Rights Plan (the "2001 PLAN") reserving 5,000,000
shares of Common Stock for the issuance of options to employees, directors and
consultants. The Board of Directors adopted and stockholders have approved the
2003 Stock Option and Appreciation Rights Plan (the "2003 PLAN") reserving
2,250,000 shares of Common Stock for the issuance of options to employees,
directors and consultants. The purposes of the 2001 Plan and 2003 Plan our to
promote the interests of the Company and to motivate, attract and retain the
services of persons upon whose judgment, efforts and contributions the success
of our business depends and to align the personal interests of such persons with
the interests of stockholders through equity participation in our growth and
success. The 2001 Plan and 2003 Plan provide for grants of non-qualified
options, incentive stock options and restricted stock awards, or any combination
of the foregoing.
As of September 12, 2003, options to acquire 4,296,350 shares of the
Common Stock have been granted under the 2001 Plan, and options to acquire
1,920,000 shares of Common Stock have been granted under the 2003 Plan. Also as
that same date, options to acquire 100,000 shares of Common Stock granted under
the 2001 Plan have been exercised by recipients, and no options to acquire
shares of Common Stock granted under the 2003 Plan have been exercised by
recipients. Finally, options to acquire 3,321,917 shares of Common Stock which
were granted under the 2001 Plan have vested. The options to acquire the shares
of Common Stock granted under the 2001 Plan and 2003 Plan have an exercise price
ranging from $1.50 per share to $9.81 per share.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following paragraph sets forth the reportable transactions in the
last fiscal year between Isolagen and its executive officers, directors or
affiliates. See "Compensation of Directors and Executive Officers -- Employment
Agreements" and "Compensation of Directors and Executive Officers Consulting and
Other Arrangements" for
51
descriptions of the terms of employment and consulting agreements between
Isolagen and certain officers, directors and other related parties.
TRANSACTIONS WITH THE MANAGEMENT
Beginning in September 2003, we began leasing approximately 4,900
square feet of the Houston, TX office space from Axces, Inc., a Delaware
corporation. The lease rate is approximately $105,840 annually. We have a month
to month lease that may be terminated at our option. Axces, Inc. is owned by
Michael Avignon, Michael Macaluso and Timothy Till. Management believes that the
leased premises have been made available to us on terms that are superior to
those available from arms-length providers of lease space.
CAPITAL STOCK
The following description of our capital stock and certain provisions
of the Certificate of Incorporation, as amended, and the Bylaws is a summary and
is qualified in its entirety by reference to the provisions of the Certificate
of Incorporation and the Bylaws, copies of which are filed with the SEC as
exhibits to this Registration Statement, of which this Prospectus forms a part.
Our authorized capital stock consists of 50,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock. As of September 12, 2003, there
were outstanding:
- 26,332,799 shares of Common Stock;
- 6,216,350 shares issuable upon exercise of options issued
pursuant to our employee benefit plans; and
- 1,085,669 shares issuable upon exercise of outstanding Common
Stock Purchase Option.
COMMON STOCK
We are authorized to issue 50,000,000 shares of Common Stock, $.001 par
value per share. Subject to preferences that may be applicable to any Preferred
Stock outstanding at the time, the holders of outstanding shares of Common Stock
are entitled to receive dividends out of assets legally available therefore at
such times and in such amounts as the Board of Directors may from time to time
determine. Each shareholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of shareholders. Cumulative voting
for the election of directors is not authorized.
The Common Stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or winding up
of Isolagen, the remaining assets legally available for distribution to
shareholders, after payment of claims or creditors and payment of liquidation
preferences, if any, on outstanding Preferred Stock, are distributable ratably
among the holders of the Common Stock and any participating Preferred Stock
outstanding at that time. Each outstanding share of Common Stock is fully paid
and nonassessable.
PREFERRED STOCK
The Certificate of Incorporation, as amended, authorizes us to issue
5,000,000 shares of "blank check" preferred stock, $.001 par value per share.
"blank check" preferred stock allows the Board of Directors to create one or
more series of preferred stock, and to designate the rights, privileges,
restrictions, preferences and limitations of any given series of preferred
stock. Accordingly, the Board of Directors may, without stockholder approval
issue shares of preferred stock with dividend, liquidation, conversion, voting
or other rights that could adversely affect the voting power or other rights of
the holders of our Common Stock. "Blank check" preferred stock could also be
issued to discourage, control, although we have no present intent to issue any
additional series of our preferred stock. As of September 12, 2003, two series
of preferred stock have been created, Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock. A total of 3,500,000 shares of Series A
Convertible Preferred Stock are authorized, and 200,000 shares of Series B
Convertible Preferred Stock are authorized. Thus, 1,300,000 shares of "blank
check" preferred stock remain available for the creation of additional series.
There are no shares of preferred stock issued and outstanding. All
previously issued and outstanding shares of Series A Convertible Preferred Stock
and Series B Convertible Preferred Stock have been converted into
52
Common Stock and may not be reissued. As a result, 461,493 shares of Series A
Convertible Preferred Stock and 44,250 shares of Series B Convertible Preferred
Stock remain available for issuance.
TRANSFER AGENT
The transfer agent for our Common Stock is American Stock Transfer &
Trust Company located at 59 Maiden Lane, NY, NY 11038.
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 our common stock is limited, volatile, and sporadic. The following
table sets forth the range of high and low bid quotations or high and low sales
prices for our common stock for each of the periods indicated as reported by the
OTC Bulletin Board or the AMEX. These prices for the OTC Bulletin Board reflect
inter-dealer prices, without retail mark-up, mark-down or commissions. The OTC
Bulletin Board and AMEX prices listed below may not represent actual transaction
prices.
December 31, 2003 December 31, 2002 December 31, 2001
----------------- ----------------- -----------------
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter $ 5.55 $ 4.20 $ 7.25 $ 5.00 $ 0.11 $ 0.05
Second Quarter $ 7.25 $ 4.10 $ 6.95 $ 2.90 $ 1.50 $ 0.43
Third Quarter (1) $ 10.85 $ 6.50 $ 3.75 $ 2.20 $ 2.75 $ 0.92
Fourth Quarter $ 5.75 $ 3.00 $ 7.00 $ 1.05
1. The third quarter market information for 2003 is from July 1, 2003
through September 9, 2003.
HOLDERS
As of September 12, 2003, we had 737 shareholders of record and
approximately 1,500 beneficial owners.
DIVIDENDS
We have never paid dividends on Common Stock. Currently, we anticipate
that we will retain earnings, if any, to support operations and to finance the
growth and development of our business and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future. We are obligated to pay
$1,083,280 to the former holders of the Series A Convertible Preferred Stock and
Series B Convertible Preferred Stock, respectively, who converted their
respective holdings into Common Stock shares in August 2003.
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, and the 2003 Stock Option Plan and Stock
Appreciation Rights, which are our only equity compensation plans, other than an
employee benefit plan meeting the qualification requirements of Section 401(a)
of the Internal Revenue Code, as amended.
53
------------------------------------------------------------------------------------------------------------
Number of Securities to Weighted-Average Number of Securities
be Issued Upon Exercise Exercise Price of Remaining Available for
Plan Category of Outstanding Options Outstanding Options Future Issuance
------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by 4,252,100 - 12/31/02 $ 5.08 509,500
security holders
------------------------------------------------------------------------------------------------------------
SHARES AVAILABLE FOR FUTURE SALE
There can be no assurance that a significant public market for the
Common Stock will be sustained after this offering. Sales of substantial amounts
of Common Stock in the public market after this offering, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
Common Stock or our future ability to raise capital through an offering of
equity securities. Ninety and seven-tenths percent of the issued and outstanding
shares of Common Stock are registered in the registration statement of which
this Prospectus forms a part. All of the investors that purchased shares of
Common Stock in our September 2003 private placement have included the offer and
resale in this Prospectus. Those shares total 3,359,331. Those shares are not
subject to lock-up. In addition, holders of an additional 20,531,541 shares of
Common Stock have included the offer and resale of a total of 23,890,872 shares
of Common Stock in this Prospectus. Selling Holders of 11,600,484 shares have
entered into a lock-up agreement whereby such holders have agreed not to sell or
otherwise transfer any shares of commons stock until 180 days from the date that
the resale registration statement is declared effective by the SEC without the
consent of Legg Mason Wood Walker Incorporated; provided, however, that shares
of common stock may be sold as follows: (a) 25% of the common stock may be
transferred commencing on the effective date of the resale registration
statement; and (b) 25% of the commons stock may be sold ninety days following
the effective date of the resale registration statement. Selling Holders of an
additional 8,931,057 shares have entered into a lock-up agreement whereby such
holders have agreed not to sell or otherwise transfer any shares of commons
stock until April 26, 2003 without the consent of Fordham Financial Management,
Inc. The sale of shares pursuant to this Prospectus, and more awareness of the
existence of this Prospectus could materially and adversely affect our stock
price or impair our ability to obtain capital through the issuance of equity
securities.
In addition, under the terms of the August 2003 private placement of
our common stock, we agreed to issue or to pay for all or part of each 30-day
period ("Penalty Period"), if the Registration Statement covering the privately
placed shares has not been filed with the SEC within 15 days after the placement
closing date or been declared effective by the SEC within 90 days after the
placement closing date ("Registration Default") and such Registration Default
remains uncured, to each investor 1% for each Penalty Period of the aggregate
purchase price paid by the investor for its respective shares, payable in common
stock shares (valued at the average of the closing price of the common stock for
3 trading days ending on the last trading day of such Penalty Period) (the
"Penalty Shares") or cash, or a combination of both, at our option.
One entity purchased $6,250,000 of shares. There is no limitation of
the amount of penalty with respect to those shares. In addition, the "Penalty
Shares" for this investor are valued at the average of the closing price of the
common stock for 10 trading days ending on the last trading day of a penalty
period. The maximum aggregate cash payment or issuance of Penalty Shares to all
other investors may not exceed 5% of the aggregate purchase price paid by the
investor for its respective shares and provided further, that if the issuance of
Penalty Shares by us would result in our being required under AMEX rules to
obtain the approval of our stockholders, then we will pay cash rather than issue
such Penalty Shares. We must deliver the Penalty Shares or cash payment to the
investor by the 5th business day after the end of each Penalty Period.
As of September 12, 2003, we had outstanding options and warrants for
the purchase of up to approximately 7,677,019 shares of Common Stock with an
exercise price ranging from $1.50 per share to $9.81 per share, representing
approximately 22.6% of our outstanding shares of Common Stock on a fully-diluted
basis.
The perception that these instruments may be exercised for, or
converted into, Common Stock that then could be sold into the public market
could adversely affect the market price of our Common Stock. In addition, we
54
have entered into registration rights agreements with certain of our
stockholders entitling them to include their shares of Common Stock in
registration statements for securities filed by Isolagen under the Securities
Act of 1933, as amended. Awareness of the existence of these registration rights
could lead to a perception that sales of the shares subject to the registration
rights could occur, which could materially and adversely affect our stock price
or could impair our ability to obtain capital through sales of equity
securities. In addition, shares we have issued in private transactions over the
past two years will become eligible for sale in the public market under Rule
144.
These shares are restricted securities as defined in Rule 144. Under
that rule, a stockholder who owns restricted shares that have been outstanding
for at least one year is entitled to sell, within any three-month period, a
number of restricted shares that does not exceed the greater of: (i) 1% of the
then outstanding shares of Common Stock, or approximately 263,328 shares as of
September 12, 2003; and (ii) an amount equal to the average weekly trading
volume in the Common Stock during the four calendar weeks preceding the sale.
SECURITIES AND EXCHANGE COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES
The Certificate of Incorporation of Isolagen require us to indemnify
our officers, directors, employees and agents against certain liabilities
incurred by them in those capacities if they acted in good faith and reasonably
believed their conduct was in the best interests of Isolagen or not opposed to
it. Isolagen is also required to indemnify a person who is or was a director,
officer, employee or agent of Isolagen and who was successful, on the merits or
otherwise, in defense of any proceeding to which he was a party, against
reasonable expenses, which include attorney's fees, incurred by him or her in
connection with the proceeding.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of Isolagen
under the provisions discussed in the previous paragraph, or otherwise, Isolagen
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in that Act and is, therefore, unenforceable.
EXPERTS
The consolidated balance sheets as of December 31, 2002 and 2001, and
the consolidated statements of operations, stockholders' equity, and cash flows
for each of the years in the three year period ended December 31, 2002 have been
audited by Pannell Kerr Forster of Texas, P.C., independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
Dilworth Paxson LLP, Philadelphia, Pennsylvania, has passed on the
validity of the shares of Common Stock offered hereby.
HOW TO OBTAIN ADDITIONAL INFORMATION
We file annual and quarterly reports, proxy statements, and other
information with the SEC. You may read and copy any document we have filed with
the SEC in its public reference room at 450 Fifth Street N.W., Washington, D.C.
20549. You may obtain information on the operation of the public reference room
by calling the SEC at 1-800-432-0330. The SEC maintains a World Wide Web site on
the Internet at http://www.sec.gov that contains reports, proxy and information
statements, and other information regarding companies, including those that
Isolagen files electronically with the SEC.
We also furnish Annual Reports to our shareholders that contain audited
financial information.
This Prospectus is part of a registration statement we have filed with
the SEC relating to an offer of our Common Stock described in this Prospectus.
As permitted by the SEC rules, this Prospectus does not contain all of the
information contained in the registration, accompanying exhibits and schedules
we file with the SEC. You may refer to the registration, the exhibits and
schedules for more information about our company and our Common
55
Stock. The registration statement, exhibits, and schedules are also available at
the SEC's public reference rooms or through its EDGAR database on the Internet.
You should rely only on the information contained or incorporated by
reference in this Prospectus. Isolagen has not authorized anyone to provide you
with information that is different from what is contained in this Prospectus.
You should not assume that the information contained in this Prospectus is
accurate as of any date other than the date set forth on the front cover of this
Prospectus.
If you have questions or require additional information concerning the
Common Stock described herein, please contact the following person at the
address and telephone number stated below:
Jeffrey W. Tomz
Chief Financial Officer and Secretary
Isolagen, Inc.
2500 Wilcrest, 5th Floor
Houston, Texas 77042
(713) 780-4754
jtomz@isolagen.com
56
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, 2001 and 2000................................................ 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, 2001 and 2000................................................ F-9-10
Notes to Consolidated Financial Statements...................................... F-11-21
Consolidated Balance Sheets as of
June 30, 2003 (unaudited) and December 31, 2002.............................. F-22
Consolidated Statements of Operations for the:
Six months ended June 30, 2003 (unaudited)
and June 30, 2002 (unaudited)................................................ F-23
Three months ended June 30, 2003 (unaudited)
and June 30, 2002 (unaudited)................................................ F-24
Consolidated Statements of Cash Flows for the:
Six months ended June 30, 2003 (unaudited) and
June 30, 2002 (unaudited).................................................... F-25
Notes to Unaudited Consolidated Financial Statements............................ F-26-32
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 and 2001, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002 and the
cumulative amounts during the development stage (Inception December 28, 1995).
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 each of the three years in the period ended
December 31, 2002 and the cumulative amounts for the period from Inception to
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
March 12, 2003
Pannell Kerr Forster of Texas, P.C.
Houston, Texas
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 14,839,499 5,166,205
Other comprehensive income 13,875 --
Accumulated deficit during development stage (9,664,711) (4,128,995)
------------ ------------
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 2000 2002
------------ ------------ ------------ ------------
Revenues
Sales $ 50,991 $ 25,482 $ 6,584 $ 1,441,105
License fees 40,000 80,000 40,000 260,000
------------ ------------ ------------ ------------
Total revenues 90,991 105,482 46,584 1,701,105
Cost of sales 35,133 17,891 10,846 437,592
------------ ------------ ------------ ------------
Gross profit 55,858 87,591 35,738 1,263,513
Selling, general and administrative
expenses 5,330,026 1,493,819 728,379 10,375,223
------------ ------------ ------------ ------------
Operating loss (5,274,168) (1,406,228) (692,641) (9,111,710)
Other income (expense)
Interest income 208,692 17 4,891 237,089
Other income 32,421 -- -- 32,421
Loss on disposal of asset -- (8,222) -- (8,222)
Interest expense -- (82,015) (119,326) (311,628)
------------ ------------ ------------ ------------
Net loss $ (5,033,055) $ (1,496,448) $ (807,076) $ (9,162,050)
------------ ------------ ------------ ------------
Per share information
Net loss per common share
- basic and diluted $ (.33) $ (.20) $ (.29) $ (1.81)
------------ ------------ ------------ ------------
Weighted average number of
basic and diluted common
shares outstanding 15,205,554 7,618,947 2,822,104 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 Accumulated
------------------------- ------------------------ Deficit
Number Number Additional During Other
of of Paid-In Development Comprehensive
Shares Amount Shares Amount Capital Stage Income
----------- ---------- ------------ -------- ----------- ----------- --------------
Issuance of common stock
for cash on 12/28/95 - $ - 82,000 $ 820 $ - $ - $ -
Issuance of common stock
for cash on 11/7/96 - - 400 4 49,996 - -
Issuance of common stock
for cash on 11/29/96 - - 80 1 9,999 - -
Issuance of common stock
for cash on 12/19/96 - - 240 2 29,998 - -
Issuance of common stock
for cash on 12/26/96 - - 400 4 49,996 - -
Net loss - - - - - (270,468) -
---------- ------- ---------- ------- --------- ---------- ---------
Balance, 12/31/96 - $ - 83,120 $ 831 $ 139,989 $(270,468) $ -
Issuance of common stock
for cash on 12/27/97 - - 760 8 94,992 - -
Issuance of common stock
for Services on 9/1/97 - - 400 4 36,256 - -
Issuance of common stock
for Services on 12/28/97 - - 10,305 103 10,152 - -
Net loss - - - - - (52,550) -
---------- ------- ---------- ------- --------- ---------- ---------
Balance, 12/31/97 - $ - 94,585 $ 946 $ 281,389 $(323,018) $ -
Treasury Stock
---------------------- Total
Number Shareholders'
of Equity
Shares Amount (Deficit)
--------- --------- ------------
Issuance of common stock
for cash on 12/28/95 - $ - $ 820
Issuance of common stock
for cash on 11/7/96 - - 50,000
Issuance of common stock
for cash on 11/29/96 - - 10,000
Issuance of common stock
for cash on 12/19/96 - - 30,000
Issuance of common stock
for cash on 12/26/96 - - 50,000
Net loss - - (270,468)
-------- -------- -----------
Balance, 12/31/96 - $ - $ (129,648)
Issuance of common stock
for cash on 12/27/97 - - 95,000
Issuance of common stock
for Services on 9/1/97 - - 36,260
Issuance of common stock
for Services on 12/28/97 - - 10,255
Net loss - - (52,550)
-------- -------- -----------
Balance, 12/31/97 - $ - $ (40,683)
The accompanying notes are an integral part of these statements.
F-5
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
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 8/23/98 - $ - 160 $ 2 $ 20,065
Repurchase of common
stock on 9/29/98 - - - - -
Net loss - - - - -
---------- ------- ---------- ------- ---------
Balance, 12/31/98 - $ - 94,745 $ 948 $ 301,454
Issuance of common stock
for cash on 9/10/99 - - 1,884 19 149,981
Net loss - - - - -
---------- ------- ---------- ------- ---------
Balance, 12/31/99 - $ - 96,629 $ 967 $ 451,435
Issuance of common stock
for cash on 1/18/00 - - 1,923 19 1,904
Issuance of common stock
for Services on 3/1/00 - - 2,465 25 -
Issuance of common stock
for Services on 4/4/00 - - 996 10 -
Net loss - - - - -
---------- ------- ---------- ------- ---------
Balance, 12/31/00 - $ - 102,013 $1,021 $ 453,339
Accumulated Treasury Stock
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 - $ - 5,632 $ 56 $ -
Issuance of common stock
for services on 7/1/01 - - 4,485 45 -
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 - - 2,512 25 328,100
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 - - 62,791 628 1,610,718
Issuance of common stock
for conversion of
convertible shareholder
notes payable on 8/10/01 - - 7,498 75 135,592
Issuance of common stock
for bridge financing
on 8/10/01 - - 10,776 108 -
Reverse acquisition and
recapitalization effective
8/10/01 - - 13,100,217 11,339 (110,166)
Issuance of common stock
for cash on 8/10/01 - - 1,346,669 1,347 2,018,653
Issuance of common stock
for services on 8/10/01 - - 60,000 60 -
Issuance of common stock
for cash on 8/28/01 - - 26,667 26 39,974
Issuance of common stock
for services on 9/30/01 - - 314,370 314 471,241
Accumulated Treasury Stock
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
Reverse acquisition and
recapitalization effective
8/10/01 - - (2,400) 50,280 (48,547)
Issuance of common stock
for cash on 8/10/01 - - - - 2,020,000
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
----------- ---------- ---------- --------- ------------
Issuance of common stock
for services on 11/1/01 - $ - 145,933 $ 146 $ 218,754
Net loss - - - - -
----------- ---------- ---------- --------- ------------
Balance, 12/31/01 - $ - 15,189,563 $ 15,190 $5,166,205
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
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
Issuance of preferred stock
for dividends 143,507 144 - - 502,517
Comprehensive income:
Net loss - - - - -
Other comprehensive income, 7
foreign currency
translation adjustment - - - - -
Comprehensive loss - - - - -
---------- ------- ---------- -------- -----------
Balance, 12/31/02 3,038,507 $ 3,039 15,227,963 $ 15,228 $14,839,499
---------- ------- ---------- -------- -----------
Accumulated Treasury Stock
Deficit ---------------------- Total
During Other Number Shareholders'
Development Comprehensive of Equity
Stage Income Shares Amount (Deficit)
------------ ------------- --------- --------- -------------
Issuance of common stock
for services on 11/1/01 $ - $ - - $ - $ 218,900
Net loss (1,496,448) - - - (1,496,448)
----------- --------- -------- -------- -----------
Balance, 12/31/01 $(4,128,995) $ - - $ - $ 1,052,400
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
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
Issuance of preferred stock
for dividends (502,661) - - - -
Comprehensive income:
Net loss (5,033,055) - - - (5,033,055)
Other comprehensive income,
foreign currency
translation adjustment - 13,875 - - 13,875
-----------
Comprehensive loss - - - - (5,019,180)
----------- --------- -------- -------- -----------
Balance, 12/31/02 $(9,664,711) $ 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 2000 2002
-------------- ------------ -------------- ---------------
Cash flows from operating activities
Net loss $ (5,033,055) $ (1,496,448) $ (807,076) $ (9,162,050)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services 157,704 788,970 35 1,209,783
Depreciation 99,812 15,368 16,333 167,529
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 10,717 (40,204)
Increase in other receivables (153,583) - - (153,583)
Increase (decrease) in inventory (138,910) - 14,646 (138,910)
Increase in prepaid expenses (284,557) - - (284,557)
Decrease (increase) in
other assets (115,507) 25,420 4,291 (115,507)
Increase (decrease) in accounts
payable 1,673,040 59,932 (763) 1,881,236
Increase in accrued expenses 88,906 13,045 141,474 112,224
Increase (decrease) in deferred
revenue (222,726) (80,000) 360,000 57,274
------------- ------------- ------------ -------------
Net cash used in
operating activities (3,968,013) (664,203) (260,343) (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 - - 200,000 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 1,923 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 2,041,453 201,923 13,024,972
------------- ------------- ------------ -------------
The accompanying notes are an integral part of these statements.
F-9
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
Cumulative
Period from
December 28,
For the Year Ended 1995 (date of
December 31, inception) to
-------------------------------------------------- December 31,
2002 2001 2000 2002
-------------- --------------- -------------- ---------------
Effect of exchange rate changes on
cash balances 13,875 - - 13,875
Net increase (decrease) in cash and
cash equivalents 2,863,816 1,378,250 (58,420) 4,244,640
Cash and cash equivalents, beginning
of period 1,380,824 2,574 60,994 -
----------- ------------ ----------- ------------
Cash and cash equivalents, end of period $ 4,244,640 $ 1,380,824 $ 2,574 $ 4,244,640
----------- ------------ ----------- ------------
Supplemental cash flow information:
Cash paid for interest $ - $ 1,020 $ 68,843 $ 150,283
----------- ------------ ----------- ------------
The accompanying notes are an integral part of these statement.
F-10
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 and wholly-owned subsidiary of the
Company ("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.
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
F-11
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 12, 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 12, 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
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, a Delaware corporation, Gemini, a
Delaware corporation, and William J Boss, Jr., Olga Marko and Dennis McGill,
stockholders of Isolagen Technologies (the "Merger Agreement"), the Company
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. AFH was a non-operating, public shell
company with limited assets. Consequently, the substance of the merger
transaction was a capital transaction rather than a business combination. The
transaction was equivalent to the issuance of stock by AFH for the net assets of
Isolagen Technologies and Gemini, accompanied by a recapitalization and private
placement of common stock of AFH. The accounting is identical to that resulting
from a reverse acquisition, except that no goodwill or other intangibles are
recorded. 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 had no active business and was seeking
funding to begin U.S. Food and Drug Administration ("FDA") trials of the
Isolagen 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 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.
Additionally, $1,450,000 principal of Company debt and approximately $625,000 of
accrued liabilities were converted to equity. On November 13, 2001 the Company
changed its name to Isolagen, Inc.
Basis of Presentation
The financial statements presented include the consolidated balance
sheet of Isolagen, Inc. and its wholly-owned subsidiaries at December 31, 2002
and 2001 and the consolidated statements of operations and
F-12
cash flows for Isolagen, Inc. and its wholly-owned subsidiaries for the year
ended December 31, 2002. The consolidated statements of operations and cash
flows for the year ended December 31, 2001 include Isolagen Technologies, Inc.
for this period and Isolagen, Inc. for the period from August 10, 2001 through
December 31, 2001. The consolidated statements of operations and cash flows for
the year ended December 31, 2000 consists of the results of Isolagen
Technologies, Inc. only.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of cash flows
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Concentration of credit risk
The Company maintains its cash with a major U.S. domestic bank. The
amounts held in this bank exceed the insured limit of $100,000 from time to
time. The terms of these deposits are on demand to minimize risk. The Company
has not incurred losses related to these deposits.
The Company is subject to risks common to companies in the development
stage including, but not limited to, development of new products, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to fund its product plans. The Company
has a limited operating history and has yet to generate any significant revenues
from customers. To date, the Company has been funded by private debt and equity
financings. The Company's ultimate success is dependent upon its ability to
raise additional capital and to successfully develop and market its products.
The products developed by the Company require approvals from the United
States FDA or other international regulatory agencies prior to commercial sales.
There can be no assurance that all of the Company's products will receive the
necessary approvals. If the Company was denied such approvals or such approvals
were delayed, it may have a material adverse impact on the Company.
Inventory
Inventory primarily consists of raw materials used in the Isolagen
Process. Inventory is stated at the lower of cost or market and cost is
determined by the weighted average method.
Property and equipment
Property and equipment, consisting primarily of lab equipment, computer
equipment, leasehold improvements, and office furniture and fixtures is carried
at cost less accumulated depreciation. Depreciation for financial reporting
purposes is provided by the straight-line method over the estimated useful lives
of three to five years subject to half year convention. Leasehold improvements
are amortized using the straight-line method over the remaining life of the
lease. The cost of repairs and maintenance is charged against income as
incurred.
Earnings per share data
Basic earnings (loss) per share is calculated based on the weighted
average common shares outstanding during the period. Diluted earnings per share
also gives effect to the dilutive effect of stock options, warrants and
convertible preferred stock (calculated based on the treasury stock method). The
Company does not present diluted earnings per share for years in which it
incurred net losses as the effect of potentially dilutive shares from
convertible debt is antidilutive.
Shares of Isolagen 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.
F-13
Stock-based compensation
The Company accounts for its stock-based compensation under the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 123 -
"Accounting for Stock Based Compensation." Under SFAS No. 123, the Company is
permitted to either record expenses for stock options and other employee
compensation plans based on their fair value at the date of grant or to continue
to apply its current accounting policy under Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees," ("APB No. 25"), and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
the provisions of APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies wishing to
voluntarily change to the fair value based method of accounting for stock-based
compensation. The statement also amends the disclosure requirements of Statement
123, requiring prominent disclosure in annual and interim financial statements
regarding a company's method for accounting for stock-based employee
compensation and the effect of the method on reported results. While Isolagen
continues to utilize the disclosure-only provisions of SFAS No. 123, the Company
has modified its disclosures to comply with the new statement. See Note 6.
Income taxes
An asset and liability approach is used for financial accounting and
reporting for income taxes. Deferred income taxes arise from temporary
differences between income tax and financial reporting and principally relate to
recognition of revenue and expenses in different periods for financial and tax
accounting purposes and are measured using currently enacted tax rates and laws.
In addition, a deferred tax asset can be generated by net operating loss
carryforwards ("NOLs"). If it is more likely than not that some portion or all
of a deferred tax asset will not be realized, a valuation allowance is
recognized.
Revenue recognition
The Company recognizes revenue from product sales when goods are
shipped and the risk of loss transfers to the customer. Revenue from licenses
and other upfront fees are recognized on a ratable basis over the term of the
respective agreement. Milestone payments are recognized upon successful
completion of a performance milestone event. Any amounts received in advance of
performance are recorded as deferred revenue. The Company recognizes revenue
over the period the service is performed in accordance with SEC Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 requires that four basic criteria must be met before revenue can be
recognized: (1) persuasive evidence of an arrangement exists, (2) delivery has
occurred or services rendered, (3) the fee is fixed and determinable, and (4)
collectibility is reasonably assured. The Company believes, relative to sales of
the Isolagen Process, that all of these conditions are met at the time of
shipment.
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.
F-14
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
---------- ----------
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)
----------- -----------
$ - $ -
----------- -----------
F-15
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
During 2002, the Company entered into leases for 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 in Houston, Texas at no charge until August 2003. Beginning September
2003, the lease rate will be approximately $1.80 per month per square foot.
License agreement
Effective July 1, 2000, the Company granted exclusive rights to develop
and market its technologies and products within Japan. Should the development
efforts result in a marketable product, the Company will receive royalties based
on product sales. Upon execution of the license agreement, the Company received
an initial up-front fee of $400,000 which was deferred and will be recognized on
a ratable basis over the five year term of the agreement. For the years ended
December 31, 2002, 2001 and 2000, the Company recognized $40,000, $80,000 and
$40,000, 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.
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
F-16
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.
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
F-17
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
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.
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.
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:
OPTIONS, WARRANTS,
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ----------------------------------
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-18
The weighted average and warrant exercise price information for 2002
and 2001 is as follows:
OPTIONS, WARRANTS
YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------------------- ---------------------------------
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-19
YEAR ENDED DECEMBER 31,
----------------------------------------
2002 2001
------------------ -----------------
Net loss - as reported $ (5,033,055) $ (1,496,448)
Net loss - pro forma $ (6,041,617) $ (1,646,012)
Net loss per share - as reported
Basic and diluted $ (.33) $ (.20)
Net loss per share - pro forma
Basic and diluted $ (.40) $ (.22)
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-20
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-21
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
June 30, December 31,
2003 2002
--------------- --------------
(unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,292,242 $ 4,244,640
Accounts receivable, net of allowance for doubtful accounts 59,177 40,204
Inventory 264,288 138,910
Other receivables 99,011 153,583
Prepaid expenses 256,902 284,557
-------------- --------------
Total current assets 3,971,620 4,861,894
-------------- --------------
Property and equipment, net 2,848,007 2,159,913
Intangible assets 540,000 -
Other assets 143,063 235,857
-------------- --------------
Total assets $ 7,502,690 $ 7,257,664
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,538,004 $ 1,881,236
Accrued expenses 743,975 112,224
Deferred revenue 271,531 57,274
-------------- --------------
Total current liabilities 2,553,510 2,050,734
-------------- --------------
Total liabilities 2,553,510 2,050,734
-------------- --------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $.001 par value; 5,000,000 shares authorized:
Preferred Stock - Series A $.001 par value; 3,500,000 shares
authorized; 2,967,553 and 3,038,507 shares issued and
outstanding at June 30, 2003 and December 31, 2002, respectively 2,967 3,039
Preferred Stock - Series B $.001 par value; 200,000 shares
authorized; 155,750 shares issued and outstanding 156 -
Common stock, $.001 par value; 50,000,000 shares
authorized; 15,571,841 and 15,227,963 shares issued and outstanding
at June 30, 2003 and December 31, 2002, respectively 15,572 15,228
Additional paid-in capital 19,311,791 14,839,499
Other comprehensive income 124,970 13,875
Accumulated deficit during development stage (14,506,276) (9,664,711)
-------------- --------------
Total shareholders' equity (deficit) 4,949,180 5,206,930
-------------- --------------
Total liabilities and shareholder's equity $ 7,502,690 $ 7,257,664
-------------- --------------
The accompanying notes are an integral part of these statements.
F-22
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Cumulative
Period from
December 28,
Six Months Ended 1995 (date of
June 30, inception) to
---------------------------------- June 30,
2003 2002 2003
--------------- --------------- --------------
Revenues
Sales $ 79,796 $ 2,518 $ 1,520,901
License fees - 40,000 260,000
------------- ------------- --------------
Total revenues 79,796 42,518 1,780,901
Cost of sales 48,861 - 486,453
------------- ------------- --------------
Gross profit 30,935 42,518 1,294,448
Selling, general and administrative expenses 4,527,594 1,921,463 14,902,817
------------- ------------- --------------
Operating loss (4,496,659) (1,878,945) (13,608,369)
Other income (expense)
Interest income 10,620 19,063 247,709
Other income 55,663 32,421 88,084
Loss on disposal of asset - - (8,222)
Interest expense - - (311,628)
------------- ------------- --------------
Net loss $ (4,430,376) $ (1,827,461) $ (13,592,426)
------------ ------------- --------------
Per share information
Net loss per common share - basic and diluted $ (0.29) $ (0.12) $ (2.37)
------------- ------------- --------------
Weighted average number of basic and diluted
common shares outstanding 15,348,709 15,189,563 5,739,727
------------- ------------- --------------
The accompanying notes are an integral part of these statements.
F-23
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30,
-----------------------------------
2003 2002
-------------- --------------
Revenues
Sales $ 79,425 -
License fees - 20,000
-------------- --------------
Total revenues 79,425 20,000
Cost of sales 47,867 -
-------------- --------------
Gross profit 31,558 20,000
Selling, general and administrative expenses 2,376,023 1,247,869
-------------- --------------
Operating loss (2,344,465) (1,227,869)
Other income (expense)
Interest income 3,190 14,525
Other income - 32,421
Interest expense - -
-------------- --------------
Net loss $ (2,341,275) $ (1,180,923)
-------------- --------------
Per share information
Net loss per common share - basic and diluted $ (0.15) $ (0.08)
-------------- --------------
Weighted average number of basic and diluted 15,343,047 15,189,563
common shares outstanding -------------- --------------
The accompanying notes are an integral part of these statements.
F-24
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
Six Months Ended 1995 (date of
June 30, inception) to
-------------------------------- June 30,
2003 2002 2003
------------- ------------- ---------------
Cash flows from operating activities
Net loss $ (4,430,376) $ (1,827,461) $ (13,592,426)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services - 43,573 1,209,783
Depreciation 357,077 8,918 524,606
Loss on sale of property and equipment - - 8,222
Change in operating assets and liabilities:
(Increase) in accounts receivable (18,973) (32,392) (59,177)
(Increase) decrease in other receivables 54,572 - (99,011)
(Increase) in inventory (125,378) - (264,288)
(Increase) decrease in prepaid expenses 27,655 - (256,902)
Increase (decrease) in other assets 92,794 (18,443) (22,713)
Increase (decrease) in accounts payable (343,232) 94,681 1,538,004
Increase in accrued expenses 220,519 134,880 332,743
Increase (decrease) in deferred revenue 214,257 (40,000) 271,531
------------- ------------- ---------------
Net cash used in operating activities (3,951,085) (1,636,244) (10,409,628)
------------- ------------- ---------------
Cash flows from investing activities
Purchase of property and equipment (1,045,170) (86,327) (3,381,834)
Proceeds from the sale of property and equipment - - 1,000
------------- ------------- ---------------
Net cash used in investing activities (1,045,170) (86,327) (3,380,834)
------------- ------------- ---------------
Cash flows from financing activities
Proceeds from the issuance of preferred stock 3,919,078 8,778,762 12,931,800
Proceeds from convertible debt - - 1,450,000
Proceeds from notes payable to shareholders - - 135,667
Proceeds from the issuance of common stock 92,400 - 2,617,810
Merger and acquisition expenses - - (48,547)
Repurchase of common stock - - (50,280)
------------- ------------- ---------------
Net cash provided by financing activities 4,011,478 8,778,762 17,036,450
------------- ------------- ---------------
Effect of exchange rate changes on cash balance 32,379 477 46,254
Net increase (decrease) in cash and cash equivalents (952,398) 7,056,668 3,292,242
Cash and cash equivalents, beginning of period 4,244,640 1,380,824 -
------------- ------------- ---------------
Cash and cash equivalents, end of period $ 3,292,242 $ 8,437,492 $ 3,292,242
------------- ------------- ---------------
Supplemental cash flow information:
Cash paid for interest $ - $ - $ 150,283
------------- ------------- ---------------
The accompanying notes are an integral part of these statements.
F-25
Isolagen, Inc.
(A Development Stage Company)
Notes to Unaudited 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 and wholly-owned subsidiary of the
Company ("Isolagen Technologies"). 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 traded on the American
Stock Exchange ("AMEX") under the symbol "ILE."
Isolagen is an emerging pharmaceutical bioscience company specializing
in the development and commercialization of autologous cellular therapy for hard
and soft tissue regeneration and other therapies. Isolagen currently holds five
patents. Autologous cellular therapy is a process whereby a patient's own cells
are extracted, reproduced and then reintroduced to the patient for specific
cosmetic and medical applications. Unlike other applications for the treatment
of dermal defects, Isolagen utilizes only the patient's unique, living cells to
produce the patient's own collagen. There is no foreign substance utilized in
this treatment protocol. Isolagen's goal is to become an industry leader in the
research, development and commercialization of autologous cellular therapy which
stimulate a patient's own collagen production.
In 1995, Isolagen Technologies began treating a small percentage of
patients 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. Such
authorization must be secured prior to commercialization of any new drug or
biological product. The FDA placed the authorization 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 approved Isolagen's Investigational New Drug Application ("IND") for the
treatment of wrinkles and scars and clinical trial are underway. The Company's
Phase III trial for dermal defects has commenced, is being conducted in ten
sites, and involves physicians who are either plastic surgeons or dermatologists
with practices that emphasize aesthetic procedures. The patients' enrollment has
been completed and totals one hundred fifty-two patients. To date, over 90% of
the patients have had their first consultation. The first patients are scheduled
to begin their injections in August 2003 with the final patient injection
scheduled for the end of September 2003. This Phase III trial is a double-blind
study with 75% of the patients receiving the therapeutic dosage and the
remaining 25% receiving a placebo. In addition, in January of 2003, Isolagen
commenced a double-blind Phase II trial under the IND, which is a two-site dose
ranging study of forty patients. Isolagen expects to complete its analysis of
the data from the Phase II trial during the fourth quarter of 2003. Finally,
Isolagen also has a Phase I clinical trial of twenty-one patients in progress
for dental applications addressing gingival recession. Isolagen expects to
complete this study in the first quarter of 2004.
The Company's goal is to become an industry leader in the research,
development and commercialization of autologous cellular therapy which stimulate
a patient's own collagen production. The Company, through Isolagen Europe, has
commenced 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, Mexico and elsewhere. The Company is
investigating regulatory and other requirements in these countries and
evaluating markets and potential joint venture partners and licensees. In July
2003, the Company received License No. 174347 from the Therapeutic Goods
Administration ("TGA"), in Australia, to begin the manufacture of autologous
fibroblasts including the initiation of primary cultures of fibroblasts, the
propagation of fibroblasts, the harvesting of cultured fibroblasts, the
F-26
storage of cultured fibroblasts and release for supply of cultured fibroblasts.
The Company is not in a position to predict, when or if licenses will be granted
in any jurisdiction.
Through June 30, 2003, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel, commencing its
United Kingdom operations and raising capital. In the course of its development
activities, the Company has sustained losses and expects such losses to continue
through 2004. The Company will finance its operations primarily through its
existing cash, future financing and revenues.
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 June 30, 2003, the Company had a cash balance of $3,292,242. As
of August 7, 2003, the Company had a cash balance of approximately $2.2 million.
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
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, a Delaware corporation, Gemini, a
Delaware corporation, and William J Boss, Jr., Olga Marko and Dennis McGill,
stockholders of Isolagen Technologies (the "Merger Agreement"), the Company
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. AFH was a non-operating, public shell
company with limited assets. Consequently, the substance of the merger
transaction was a capital transaction rather than a business combination. The
transaction was equivalent to the issuance of stock by AFH for the net assets of
the Isolagen Technologies and Gemini, accompanied by a recapitalization and
private placement of common stock of AFH. The accounting is identical to that
resulting from a reverse acquisition, except that no goodwill or other
intangibles are recorded. AFH issued an aggregate of 9,756,372 shares of
restricted common stock, par value $0.001 per share, 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 had no active business and was seeking
funding to begin U.S. Food and Drug Administration ("FDA") trials of the
Isolagen Process.
Simultaneous with the Merger, AFH 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 Technologies' 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.
Additionally, $1,450,000 principal of Isolagen Technologies' debt and
approximately $625,000 of accrued liabilities were converted to equity. On
November 13, 2001, AFH changed its name to Isolagen, Inc.
F-27
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 June 30, 2003 and December 31, 2002. The consolidated statements of
operations and cash flows for six and three month periods ended June 30, 2003
and June 30, 2002 include Isolagen, Inc. and its wholly-owned subsidiaries. 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 10-KSB filed with
the Securities and Exchange Commission on March 31, 2003.
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
F-28
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.
Intangible assets
In the first quarter of 2003, 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. The pending patent applications are recorded as intangible assets at
their acquisition cost and will be amortized over their estimated useful lives
on a straight-line basis.
Earnings per share data
Basic earnings (loss) per share is calculated based on the weighted
average common shares outstanding during the period. Diluted earnings per share
also gives effect to the dilutive effect of stock options, warrants and
convertible preferred stock (calculated based on the treasury stock method). The
Company does not present diluted earnings per share for years in which it
incurred net losses as the effect is antidilutive.
Shares of Isolagen common stock outstanding prior to the Merger were
deemed converted to its equivalent shares of the Company's common stock using a
conversion factor as defined in the Merger Agreement.
Stock-based compensation
The Company accounts for its stock-based compensation under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting
for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to
either record expenses for stock options and other employee compensation plans
based on their fair value at the date of grant or to continue to apply its
current accounting policy under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," ("APB No. 25"), and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
the provisions of APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies wishing to
voluntarily change to the fair value based method of accounting for stock-based
compensation. The statement also amends the disclosure requirements of SFAS No,
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, it has
modified its disclosures to comply with the new statement.
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
F-29
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. The Company believes, relative to sales of the Isolagen
Process, that all of these conditions are met at the time of shipment.
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 expenses 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 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, it has modified its disclosures to
comply with the new statement.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities", which requires the consolidation of variable interest
entities. FIN 46 is applicable to variable interest entities created after
January 31, 2003. Variable interest entities created prior to February 1, 2003
must be consolidated effective July 1, 2003. Isolagen adopted FIN 46 in the
quarter ended June 30, 2003, and it did not have a material impact on our
financial position or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
F-30
2003. Isolagen will adopt SFAS 149 effective July 1, 2003, and does not expect
that the provisions of SFAS 149 will have a material impact on the Company's
financial position or results of operations.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
150 requires that certain financial instruments, which under previous guidance
were accounted for as equity, must now be accounted for as liabilities. The
financial instruments affected include mandatory redeemable stock, certain
financial instruments that require or may require the issuer to buy back some of
its shares in exchange for cash or other assets and certain obligations that can
be settled with shares of stock. SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. SFAS 150 was adopted in the quarter ended June 30, 2003 and it did not
have an impact of the Company's financial positions or results of operations.
NOTE 3 - CONTINGENCIES
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 4 - EQUITY
During the six months ended June 30, 2003, the Company issued 61,600
shares of common stock for cash totaling $92,400 in connection with the exercise
of stock options and issued 114,598 shares of common stock in exchange for
cashless exercise of warrants.
In May 2003, the Company sold in a private offering 155,750 shares of
Series B Convertible Preferred Stock, par value $0.001 per share, at an offering
price of $28 per share. Each share of Series B preferred stock is convertible
into 8 shares of common stock at any time after issuance and accrues dividends
at 6% per annum payable in cash or additional shares of Series B Preferred
Stock. After deducting the costs and expenses associated with the sale, the
Company received cash totaling $3,919,078. In conjunction with the private
offering, the Company issued to the placement agent warrants to purchase 124,600
shares of common stock with an exercise price of $3.50 per share. The warrants
are exercisable immediately after grant and expire five years thereafter.
In April 2003, the Company issued 150,000 warrants to purchase its
common stock with an exercise price of $3.50 per share in conjunction with a
distribution agreement. The warrants vest over a three year period, subject to
certain acceleration clauses. The Company recognized consulting expenses
totaling $22,391 during the three months ended June 30, 2002 based on the fair
value of the warrants granted on the grant date.
In May 2003, the Company issued 150,000 options to purchase its common
stock with an exercise price of $3.50 per share under the 2001 Stock Option Plan
("Stock Option Plan"). The options vest over a three year period from the date
of grant. The Company recognized compensation expense totaling $8,750 during the
three months ended June 30, 2002 based on the options intrinsic value on the
grant date. Had compensation costs for all options issued under the Stock Option
Plan been determined based on the fair value at the grant date consistent with
the provisions of SFAS No. 123, net income and net income per share would have
decreased to the pro forma amounts indicated below:
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Three Months Ended June 30, Six Months Ended June 30,
----------------------------- ----------------------------
2003 2002 2003 2002
------------ ----------- ----------- -----------
Net loss - as reported $ (2,341,275) $(1,180,923) $(4,430,376) $(1,827,461)
Less: total stock-based employee compensation
expense determined under fair value based
method for all awards granted to employees,
net of related tax effect (316,955) (191,134) (605,322) (382,268)
------------ ----------- ----------- -----------
Net loss - pro forma $ (2,658,680) $(1,372,057) $(5,035,698) $(2,209,729)
------------ ----------- ----------- -----------
Net loss per share - as reported
Basic and diluted $ (0.15) $ (0.08) $ (0.29) $ (0.12)
Net loss per share - pro forma
Basic and diluted $ (0.17) $ (0.09) $ (0.33) $ (0.15)
F-32
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses to be paid in
connection with the sale of the shares of common stock being registered hereby.
The Selling Holders will pay only those expenses directly related to the
transfer of their securities. All amounts are estimates except for the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission registration fee $ 18,104
Accounting fees and expenses 3,000
Legal fees and expenses 25,000
Printing fees and expenses 15,000
Blue-sky fees and expenses 5,000
Transfer agent and registrar fees and expenses 5,000
Miscellaneous 5,000
Fees to be paid by Selling Security Holders 0
=========
Total to be paid by Isolagen $ 76,104
=========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Isolagen's Certificate of Incorporation and Bylaws authorize it to
indemnify directors, officers, employees and agents of Isolagen against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred in connection with any action, suit or
proceeding, if the party to be indemnified acted in good faith and in a manner
that he reasonably believed to be in or not opposed to the best interests of
Isolagen, and, with respect to any criminal action or proceeding, such party had
no reasonable cause to believe his conduct was unlawful. The Certificate of
Incorporation and the Bylaws of Isolagen also authorize it to indemnify
directors, officers, employees and agents of Isolagen who is or was a party to
or is threatened to be a party to, any threatened, pending, or completed action
or suit by or in the right of Isolagen to procure a judgment in its favor by
reason of the fact the he was a director, officer, employee or agent of Isolagen
or of another entity at the request of Isolagen, against expenses (including
reasonable attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of Isolagen, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged liable to Isolagen unless and to the extent that the court in which
such suit or action was brought shall determine on application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
The Bylaws also permit Isolagen to enter into indemnity agreements with
individual directors, officers, employees, and other agents. Isolagen reserves
the right to enter into such agreements with its directors and executive
officers effective upon the closing of this offering. These agreements, together
with the Bylaws and Articles of Incorporation, may require Isolagen, among other
things, to indemnify directors or officers against certain liabilities that may
arise by reason of their status or service as directors (other than liabilities
resulting from willful misconduct of a culpable nature), to advance expenses to
them as they are incurred, provided that they
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undertake to repay the amount advanced if it is ultimately determined by a court
that they are not entitled to indemnification, and to obtain and maintain
directors' and officers' insurance if available on reasonable terms.
Isolagen currently has directors' and officers' liability insurance.
At present, there is no pending litigation or proceeding involving a
director, officer or employee of Isolagen pursuant to which indemnification is
sought, nor is Isolagen aware of any threatened litigation that may result in
claims for indemnification.
Delaware General Corporation Law, Section 145, and the Articles of
Incorporation and Bylaws of Isolagen provide for the indemnification of
officers, directors and other corporate agents in terms sufficiently broad to
indemnify such persons, under certain circumstances, for liabilities (including
reimbursement of expenses incurred) arising under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, Isolagen has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
EXHIBIT
DOCUMENT NUMBER
Registrant's Certificate of Incorporation 3(i)
Registrant's Bylaws 3(ii)
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
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 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. The
transaction was effected pursuant to the exemption from registration set forth
in Section 4(2) under the Securities Act. Each of the purchasers was
sophisticated and had access to all information regarding the company. No
placement agent or finder was involved in the transaction.
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, an entity beneficially owned by William F. Pettinati, William F.
Pettinati, Jr. 1998 Gift Trust, and the Andrew P. Pettinati 1998 Gift Trust,
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. The transaction was effected pursuant to the
exemption from registration set forth in Section 4(2) under the Securities Act.
Each of the purchasers was sophisticated and had access to all information
regarding the Company. No placement agent or finder was involved in the
transaction.
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On 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 was
convertible into two shares of common stock at any time after issuance and
accrued 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, contain cashless exercise provisions, and expire five
years thereafter. The private placement was made pursuant to reliance on Rule
506 of Regulation D and all of the investors were "accredited investors," as
that term is defined in Rule 501(a) of Regulation D. Fordham Financial
Management, Inc. ("Fordham"), a registered broker-dealer, acted as the placement
agent. Fordham received an 8% commission, a 2% non-accountable expense
allowance, a consulting fee of 1%, reimbursement of other identified costs in
the amount of $1,087,985, and certain rights of indemnification.
In September 2002, the Company issued 375,000 warrants to purchase its
common stock with an exercise price ranging from $1.50 to $2.50 per share to The
Lotus Group ("Lotus"), located in San Francisco, CA, in conjunction with
consulting services. The warrants vest over a ten year period, subject to
certain acceleration clauses, and expire ten years following grant. Lotus is
sophisticated and had access to all material information regarding the Company.
The transaction was made pursuant to the exemption from registration provided by
Section 4(2) of the Securities Act of 1933. Consideration for the issuance of
the warrants was the execution of a distribution agreement. No placement agent
or finder was involved in the transaction.
During the year ended December 31, 2002, the Company issued an
additional 143,507 shares of Series A Preferred Stock in "in-kind" dividends on
the Series A Preferred Stock. This issuance did not constitute a "sale" for
purposes of the Securities Act of 1933.
All of the Series A Convertible Preferred Stock has been converted into
Common Stock by the holders.
On January 7, 2003, the Company issued 61,600 shares of Common Stock in
connection with the exercise of employee stock options by Robert E. Tompkins, a
former executive officer of the Company who is sophisticated and had access to
all material information regarding the Company. The transaction was effected in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act of 1933. No placement agent or finder was involved in the
transaction.
In February 2003, the Company issued 75,000 warrants to purchase its
common stock with an exercise price of $5.94 per share to RCG Capital Markets
Group, Inc. ("RCG"), located in Phoenix, AZ, in conjunction with our investor
relations program. The warrants vest over certain performance criteria, and
expire six years following grant. RCG is sophisticated and had access to all
material information regarding the Company. The transaction was made pursuant to
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933. Consideration for the issuance of the warrants was the execution of a
distribution agreement. No placement agent or finder was involved in the
transaction.
In May 2003, the Company sold in a private offering 155,750 shares of
Series B Convertible Preferred Stock, par value $0.001 per share, at an offering
price of $28 per share. Each share of Series B Convertible Preferred Stock was
convertible into 8 shares of Common Stock at any time after issuance and accrued
dividends at 6% per annum payable in cash or additional shares of Series B
Convertible Preferred Stock. After deducting the costs and expenses associated
with the sale, the Company received cash totaling $3,919,078. The private
placement was made pursuant to reliance on Rule 506 of Regulation D and all of
the investors were "accredited investors," as that term is defined in Rule
501(a) of Regulation D. Fordham acted as the placement agent. Fordham received a
7% commission, a 3% non-accountable expense allowance, and reimbursement of
other identified expenses in the amount of $279,480, as well as certain rights
of indemnification. In conjunction with the private offering, the Company issued
to the placement agent warrants to purchase 124,600 shares of common stock with
an exercise price of $3.50 per share. The warrants are exercisable immediately
after grant, contain cashless exercise provisions, and expire five years
thereafter.
In April 2003, the Company issued 150,000 warrants to purchase its
common stock with an exercise price of $3.50 per share to Equipmed Pty. Ltd.
(the "Distributor"), located in Sydney, Australia, in conjunction with the
conclusion of a distribution agreement. The warrants vest over a three year
period, subject to certain acceleration clauses, and expire ten years following
grant. The Distributor is sophisticated and had access to all material
II-3
information regarding the Company. The transaction was made pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933. Consideration for the issuance of the warrants was the execution of a
distribution agreement. No placement agent or finder was involved in the
transaction.
From June 17, 2003 through September 4, 2003, the Company issued
327,432 shares of its Common Stock in connection with the cashless exercise of a
portion of the placement agent warrant previously issued to Fordham in
connection with the private placement of Series A Convertible Preferred Stock in
July 2002. The transaction was effected in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act of 1933. No party
acted as a placement agent or finder in connection with this cashless exercise.
On August 28, 2003, the Company completed a private placement of
3,359,331 shares of its Common Stock, primarily to institutional investors, for
consideration of $6.00 per share. The gross proceeds of the private placement
were $20,155,986. The net proceeds after commissions and offering expenses were
$18,553,062. Legg Mason Wood Walker, Incorporated ("Legg Mason"), a registered
broker-dealer, acted as the placement agent. Legg Mason received a 7% placement
fee and reimbursement of its expenses in the amount of $1,472,924. The
transaction was effected in reliance upon the exemption from registration
provided by Rule 506 of Regulation D. All of the investors were "accredited
investors," as that term is defined in Rule 501(a) of Regulation D.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits Pursuant to Item 601 of Regulation S-K:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
2 Agreement and Plan of Merger by and among American Financial Holding, Inc.,
ISO Acquisition Corp., Isolagen Technologies, Inc., Gemini IX, Inc., and
William K. Boss, Jr., Olga Marko and Dennis McGill dated August 1, 2001(1)
3(i) Amended Certificate of Incorporation (7)
3(ii) Bylaws (2)
4.1 Specimen of Common Stock certificate (3)
4.2 Certificate of Designations of Series A Convertible Preferred Stock (7)
4.3 Certificate of Designations of Series B Convertible Preferred Stock (6)
4.4 Letter of Transmittal for holders of promissory notes of Isolagen
Technologies, Inc. (1)
4.5 Letter of Transmittal for stockholders of Isolagen Technologies, Inc. (1)
4.6 Letter of Transmittal for stockholders of Gemini IX, Inc. (1)
5 Opinion of Dilworth Paxson LLP (8)
10.1 2003 Stock Option and Stock Appreciation Rights Plan (4)
10.2 2001 Stock Option and Appreciation Rights Plan (5)
10.3 Employment Agreement dated August 10, 2001 between Isolagen, Inc. and Olga
Marko (7)
10.4 "Intentionally Blank"
II-4
10.5 Employment Agreement dated May 28, 2002 between Isolagen, Inc. and Vaughan
Clift (7)
10.6 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Frank Delape (7)
10.7 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Michael Macaluso (7)
10.8 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Jeffrey W. Tomz (7)
10.9 Employment Agreement dated August 10, 2001 between Isolagen, Inc. and
William K. Boss, as amended on February 28, 2002 (7)
10.10 "Intentionally Blank"
10.11 Lease Agreement dated March 24, 2002 by and between the Registrant as
Lessee and Claire O Aceti Gbmh as Lessor (7)
10.12 Lease Agreement dated November 20, 2002 by and between the Registrant as
Lessee and Lego Australia Pty Limited as Lessor (7)
21 List of Subsidiaries (9)
23.1 Dilworth Paxson LLP Consent (8)
23.2 Pannell Kerr Forster of Texas, P.C. Consent (7)
24 Power of Attorney (included on signature page)
---------------------
(1) Previously filed as exhibit to the Registrant's Form 8-K as filed on
August 22, 2001 and is incorporated by reference hereto.
(2) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1991 and is incorporated
by reference hereto.
(3) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001 and is incorporated
by reference hereto.
(4) Previously filed as appendix to the Registrant's Definitive Proxy
Statement (DEF14A) filed with the SEC in connection with the 2003
Annual Stockholder Meeting and is incorporated by reference hereto.
(5) Previously filed as appendix to the Registrant's Definitive Proxy
Statement (DEF14A) filed with the SEC in connection with the 2001
Annual Stockholder Meeting and is incorporated by reference hereto.
(6) Previously filed as appendix to the Registrant's Form 10-Q as filed on
May 15, 2003 and is incorporated by reference hereto.
(7) Filed herewith.
(8) To be filed by amendment.
(9) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002 and is incorporated
by reference hereto.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
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(a) (1) To file, during any period in which it
offers or sells securities, a post-effective amendment to this
registration statement to:
(i) include any Prospectus required by
Section 10(a)(3) of the Securities Act;
(ii) reflect in the Prospectus any facts
or events which, individually or together, represent
a fundamental change in the information in the
registration statement; and
(iii) include any additional or changed
material information of the plan of distribution.
(2) For determining liability under the
Securities Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the
offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove
from registration any of the securities that remain unsold at
the end of the offering.
(b) Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the provisions
described under Item 14 above, or otherwise, the Registrant has been
advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification relative
to alleged securities act violations (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person, the Registrant will submit to a court of appropriate
jurisdiction the question of whether such indemnification is against
public policy and will be governed by the final adjudication of such
issue.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Houston,
State of Texas, September 12, 2003.
ISOLAGEN, INC.
By: /s/ JEFFREY W. TOMZ
Chief Financial Officer and Secretary
POWER OF ATTORNEY
In accordance with the requirements of the Securities Act of 1933, the
following persons in their capacities and on the dates stated signed this
registration statement.
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears constitutes and appoints Michael Macaluso and Jeffrey W. Tomz, or either
of them, as true and lawful attorneys-in-fact and agents with full power of
substitution and re-substitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement file herewith and any
or all amendments to said Registration Statement (including post-effective
amendments and registration statements filed pursuant to Rule 462 and
otherwise), and to file the same, with all exhibits thereto, and other documents
in connection therewith, the Securities and Exchange Commission granting unto
said attorney-in-fact and agents the full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about the
foregoing, as to all intents and purposes as he or she might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agents or any of them, or his substitute, may lawfully do or cause to be done by
virtue hereof.
/s/ MICHAEL MACALUSO
-----------------------
Michael Macaluso President, Chief Executive Officer and September 12, 2003
Director
/s/ FRANK DELAPE
-----------------------
Frank Delape Chairman of the Board and Director September 12, 2003
/s/ MICHAEL AVIGNON
-----------------------
Michael Avignon Director September 12, 2003
/s/ WILLIAM BOSS
-----------------------
William Boss Director September 12, 2003
/s/ JEFFREY W. TOMZ
-----------------------
Jeffrey W. Tomz Chief Financial Officer and Accounting September 12, 2003
Officer and Secretary
II-7
/s/ E. ASHLEY SMITH Director September 12, 2003
-----------------------
E. Ashley Smith
/s/ RALPH V. DE MARTINO Director September 12, 2003
-----------------------
Ralph V. De Martino
/s/ STEVEN MORRELL Director September 12, 2003
-----------------------
Steven Morrell
II-8
INDEX TO EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
2 Agreement and Plan of Merger by and among American Financial Holding, Inc.,
ISO Acquisition Corp., Isolagen Technologies, Inc., Gemini IX, Inc., and
William K. Boss, Jr., Olga Marko and Dennis McGill dated August 1, 2001(1)
3(i) Amended Certificate of Incorporation (7)
3(ii) Bylaws (2)
4.1 Specimen of Common Stock certificate (3)
4.2 Certificate of Designations of Series A Convertible Preferred Stock (7)
4.3 Certificate of Designations of Series B Convertible Preferred Stock (6)
4.4 Letter of Transmittal for holders of promissory notes of Isolagen
Technologies, Inc. (1)
4.5 Letter of Transmittal for stockholders of Isolagen Technologies, Inc. (1)
4.6 Letter of Transmittal for stockholders of Gemini IX, Inc. (1)
5 Opinion of Dilworth Paxson LLP (8)
10.1 2003 Stock Option and Stock Appreciation Rights Plan (4)
10.2 2001 Stock Option and Appreciation Rights Plan (5)
10.3 Employment Agreement dated August 10, 2001 between Isolagen, Inc. and Olga
Marko (7)
10.4 "Intentionally Blank"
10.5 Employment Agreement dated May 28, 2002 between Isolagen, Inc. and Vaughan
Clift (7)
10.6 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Frank Delape (7)
10.7 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Michael Macaluso (7)
10.8 Employment Agreement dated September 5, 2003 between Isolagen, Inc. and
Jeffrey W. Tomz (7)
10.9 Employment Agreement dated August 10, 2001 between Isolagen, Inc. and
William K. Boss, as amended on February 28, 2002 (7)
10.10 "Intentionally Blank"
10.11 Lease Agreement dated March 24, 2002 by and between the Registrant as
Lessee and Claire O Aceti Gbmh as Lessor (7)
10.12 Lease Agreement dated November 20, 2002 by and between the Registrant as
Lessee and Lego Australia Pty Limited as Lessor (7)
21 List of Subsidiaries (9)
23.1 Dilworth Paxson LLP Consent (8)
23.2 Pannell Kerr Forster of Texas, P.C. Consent (7)
24 Power of Attorney (included on signature page)
---------------------
(1) Previously filed as exhibit to the Registrant's Form 8-K as filed on
August 22, 2001 and is incorporated by reference hereto.
(2) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 1991 and is incorporated
by reference hereto.
(3) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2001 and is incorporated
by reference hereto.
(4) Previously filed as appendix to the Registrant's Definitive Proxy
Statement (DEF14A) filed with the SEC in connection with the 2003
Annual Stockholder Meeting and is incorporated by reference hereto.
(5) Previously filed as appendix to the Registrant's Definitive Proxy
Statement (DEF14A) filed with the SEC in connection with the 2001
Annual Stockholder Meeting and is incorporated by reference hereto.
(6) Previously filed as appendix to the Registrant's Form 10-Q as filed on
May 15, 2003 and is incorporated by reference hereto.
(7) Filed herewith.
(8) To be filed by amendment.
(9) Previously filed as exhibit to the Registrant's Annual Report on Form
10-KSB for the fiscal year ended December 31, 2002 and is incorporated
by reference hereto.