UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
ISOLAGEN, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-12666 87-0458888
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
2500 Wilcrest, 5th Floor
Houston, Texas 77042
(Address of principal executive offices, including zip code)
(713) 780-4754
(Registrant's telephone number, including area code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for any shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Check whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act.) [ ] Yes [X] No
As of May 14, 2003, issuer had 15,310,181 shares of issued and outstanding
common stock, par value $0.001.
EXPLANATORY NOTE
THIS QUARTERLY REPORT ON FORM 10-Q/A IS BEING FILED FOR THE PURPOSE OF
AMENDING AND RESTATING ITEMS 1 AND 2 OF PART 1 SOLELY TO THE EXTENT NECESSARY
(I) TO REFLECT THE RESTATEMENT OF OUR CONSOLIDATED FINANCIAL STATEMENTS AS OF
AND FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND MARCH 31 2002 AS
DESCRIBED IN NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS, (II) TO MAKE
REVISIONS TO "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", AS WARRANTED BY THE RESTATEMENT, (III) TO INCLUDE THE
CERTIFICATIONS REQUIRED BY THE SARBANES-OXLEY ACT OF 2002 AND (IV) TO UPDATE THE
EXHIBITS AND REPORTS ON FORM 8-K IN ACCORDANCE WITH THE AMENDMENT. WE HAVE MADE
NO FURTHER CHANGES TO THE PREVIOUSLY FILED FORM 10-Q. ALL INFORMATION IN THIS
QUARTERLY REPORT ON FORM 10-Q/A IS AS OF MARCH 31, 2003 AND DOES NOT REFLECT ANY
SUBSEQUENT INFORMATION OR EVENTS OTHER THAN THOSE REFLECTED IN THE RESTATEMENT.
Isolagen, Inc. has not amended its Annual Report on Form 10-KSB for the
period ended December 31, 2001 or Quarterly Reports on Form 10-QSB for the
periods affected by the restatement during the year ended December 31, 2001,
therefore, the consolidated financial statements and related financial
information contained therein should no longer be relied upon. The consolidated
balance sheet for the year ended December 31, 2002 and the consolidated
statement of operations and cash flows for the period ended March 31, 2002 are
included as part of the consolidated financial statements included in this
Quarterly Report on Form 10-Q/A. See Isolagen's Annual Report on Form 10-KSB/A
for the period ended December 31, 2002 for more information on the effects of
the restatement on prior periods.
TABLE OF CONTENTS
PAGE
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2003 (unaudited) and December 31, 2002............1
Consolidated Statements of Operations
Three months ended March 31, 2003 (unaudited)
and March 31, 2002 (unaudited)..............................2
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 (unaudited) and
March 31, 2002 (unaudited)..................................3
Notes to Unaudited Consolidated Financial Statements.................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........16
Item 4. Controls and Procedures.............................................16
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds...........................17
Item 5. Other Information...................................................17
Item 6. Exhibits and Reports................................................17
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
March 31, December 31,
2003 2002
------------ ------------
(unaudited)
------------ ------------
(as restated) (as restated)
ASSETS
Current assets
Cash and cash equivalents $ 1,352,584 $ 4,244,640
Accounts receivable, net of allowance for doubtful accounts 77,381 40,204
Inventory 250,807 138,910
Other receivables 108,972 153,583
Prepaid expenses 277,399 284,557
------------ ------------
Total current assets 2,067,143 4,861,894
------------ ------------
Property and equipment, net 2,788,648 2,159,913
Intangible assets 540,000 --
Other assets 99,085 235,857
------------ ------------
Total assets $ 5,494,876 $ 7,257,664
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,489,249 $ 1,881,236
Accrued expenses 398,245 112,224
Deferred revenue 164,589 57,274
------------ ------------
Total current liabilities 2,052,083 2,050,734
Total liabilities 2,052,083 2,050,734
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $.001 par value; 5,000,000
shares authorized 3,039 3,039
Common stock, $.001 par value; 50,000,000
shares authorized 15,311 15,228
Additional paid-in capital 26,186,857 25,573,999
Other comprehensive income 35,680 13,875
Accumulated deficit during development stage (22,798,094) (20,399,211)
------------ ------------
Total shareholders' equity (deficit) 3,442,793 5,206,930
------------ ------------
Total liabilities and shareholder's equity $ 5,494,876 $ 7,257,664
------------ ------------
The accompanying notes are an integral part of these statements. 1
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(unaudited)
Cumulative Period
from December 28,
Three Months Ended 1995 (date of
March 31, inception) to
------------------------------- March 31,
2003 2002 2003
------------ ------------ ------------
(as restated) (as restated) (as restated)
Revenues
Sales $ 371 $ 2,518 $ 1,441,476
License fees -- 20,000 260,000
------------ ------------ ------------
Total revenues 371 22,518 1,701,476
Cost of sales 994 -- 438,586
------------ ------------ ------------
Gross profit (623) 22,518 1,262,890
Selling, general and administrative expenses 1,660,490 548,512 8,821,149
Research and development 591,081 225,082 4,361,201
------------ ------------ ------------
Operating loss (2,252,194) (751,076) (11,919,460)
Other income (expense)
Interest income 7,430 4,538 244,519
Other income 55,663 -- 88,084
Loss on disposal of asset -- -- (8,222)
Interest expense -- -- (311,628)
------------ ------------ ------------
Net loss $ (2,189,101) $ (746,538) $(11,906,707)
------------ ------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock $ -- $ -- $(10,178,944)
Preferred stock dividends (209,782) -- (712,443)
Net loss attributable to common stockholders $ (2,398,883) $ (746,538) $(22,798,094)
Per shares information
Net loss - basic and diluted $ (0.14) $ (0.05) $ (1.06)
Deemed dividend associated with beneficial
conversion of preferred stock
-- -- (0.90)
Preferred stock dividends (0.01) -- (0.06)
Net loss common share - basic and diluted $ (0.15) $ (0.05) $ (2.02)
Weighted average number of basic and diluted
common shares outstanding 15,355,855 15,189,563 11,263,055
------------ ------------ ------------
The accompanying notes are an integral part of these statements. 2
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
Three Months Ended 1995 (date of
March 31, inception) to
----------------------------- March 31,
2003 2002 2003
----------- ----------- ------------
(as restated) (as restated) (as restated)
Cash flows from operating activities
Net loss $(2,189,101) $ (746,538) $(11,906,707)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services -- 18,031 1,209,783
Uncompensated contribution of services 100,000 100,000 655,556
Depreciation 143,388 4,069 310,917
Loss on sale of property and equipment -- -- 8,222
Change in operating assets and liabilities:
Increase in accounts receivable (37,177) (161) (77,381)
Increase (decrease) in other receivables 44,611 -- (108,972)
Increase in inventory (111,897) -- (250,807)
Increase (decrease) in prepaid expenses 7,158 -- (277,399)
Increase (decrease) in other assets 17,313 -- (98,194)
Increase (decrease) in accounts payable (391,987) 49,540 1,489,249
Increase in accrued expenses 76,239 46,207 188,463
Increase (decrease) in deferred revenue 107,315 (20,000) 164,589
----------- ----------- ------------
Net cash used in operating activities (2,234,138) (548,852) (8,692,681)
----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment (772,123) (4,201) (3,108,787)
Proceeds from the sale of property and equipment -- -- 1,000
----------- ----------- ------------
Net cash used in investing activities (772,123) (4,201) (3,107,787)
----------- ----------- ------------
Cash flows from financing activities
Proceeds from the issuance of preferred stock -- -- 9,012,722
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 92,400 -- 13,117,372
----------- ----------- ------------
Effect of exchange rate changes on cash balance 21,805 -- 35,680
Net increase (decrease) in cash and cash equivalents (2,892,056) (553,053) 1,352,584
Cash and cash equivalents, beginning of period 4,244,640 1,380,824 --
----------- ----------- ------------
Cash and cash equivalents, end of period $ 1,352,584 $ 827,771 $ 1,352,584
----------- ----------- ------------
Supplemental cash flow information:
Cash paid for interest $ -- $ -- $ 150,283
----------- ----------- ------------
Deemed dividend associated with beneficial
conversion of preferred stock -- -- 10,178,944
----------- ----------- ------------
Preferred stock dividend 209,782 -- 712,443
----------- ----------- ------------
Common stock issued for services -- 18,031 1,209,783
----------- ----------- ------------
Uncompensated contribution of services 100,000 100,000 655,556
----------- ----------- ------------
The accompanying notes are an integral part of these statements. 3
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 ("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 specialty pharmaceutical bioscience
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 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.
Through March 31 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 at least the balance of 2003. The Company will finance its operations
primarily through its existing cash, future financing and revenues.
4
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 March 31, 2003, the Company had a cash balance of $1,352,584. As of
May 5, 2003, the Company had a cash balance of approximately $0.6 million. The
Company does not have any credit facilities with which to fund ongoing working
capital needs. On May 9, 2003, the Company sold 110,250 shares of Series B
Convertible Preferred Stock for a gross amount of approximately $3.1 million.
After deducting the costs and expenses associated with the sale, the Company
received approximately $2.8 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 and basis of presentation
On August 10, 2001, Isolagen Technologies consummated a merger with
American Financial Holdings, Inc. ("AFH") and Gemini IX, Inc. ("Gemini").
Pursuant to an Agreement and Plan of Merger, dated August 1, 2001, by and among
AFH, ISO Acquisition Corp, a Delaware corporation and wholly-owned subsidiary of
AFH ("Merger Sub"), Isolagen Technologies, Gemini, a Delaware corporation, and
William J Boss, Jr., Olga Marko and Dennis McGill, stockholders of Isolagen
Technologies (the "Merger Agreement"), AFH (i) issued 5,453,977 shares of its
common stock, par value $0.001 to acquire, in a privately negotiated
transaction, 100% of the issued and outstanding common stock (195,707 shares,
par value $0.01, including the shares issued immediately prior to the Merger for
the conversion of certain liabilities, as discussed below) of Isolagen
Technologies, and (ii) issued 3,942,000 shares of its common stock to acquire
100% of the issued and outstanding common stock of Gemini. Pursuant to the terms
of the Merger Agreement, Merger Sub, together with Gemini, merged with and into
Isolagen Technologies (the "Merger"), and AFH was the surviving corporation. AFH
subsequently changed its name to Isolagen, Inc. on November 13, 2001.
Prior to the Merger, Isolagen Technologies had no active business and was
seeking funding to begin U.S. Food and Drug Administration ("FDA") trials of the
Isolagen Process. AFH was a non-operating, public shell company with limited
assets. Gemini was a non-operating private company with limited assets and was
unaffiliated with AFH.
Since AFH and Gemini had no operations and limited assets at the time of
the Merger, the merger has been accounted for as a recapitalization of Isolagen
Technologies and an issuance of common stock by Isolagen Technologies for the
net assets of AFH and Gemini. In the recapitalization, Isolagen Technologies is
treated as having affected (i) a 27.8694 for 1 stock split, whereby the 195,707
shares of its common stock outstanding immediately prior the merger are
converted into the 5,453,977 shares of common stock received and held by the
Isolagen Technologies stockholders immediately after the merger, and (ii) a
change in the par value of its common stock, from $0.01 per share to $0.001 per
share. The stock split has been reflected in the accompanying consolidated
financial statements by retroactively restating all shares and per share
amounts. The change in par value is reflected by a transfer between the common
stock and additional paid-in capital accounts at the date of the Merger. The
stock issuances are accounted for as the issuance of (i) 3,942,400 shares for
the net assets of Gemini, recorded at their book value, and (ii) the issuance of
3,899,547 shares (the number of shares AFH had outstanding immediately prior to
the Merger) for the net assets of AFH, recorded at their book value.
5
Immediately prior to and as a condition of the Merger, Isolagen
Technologies issued an aggregate of 2,328,972 shares (post split) of its common
stock to convert to equity an aggregate of $2,075,246 of liabilities, comprised
of (i) accrued salaries of $328,125, (ii) convertible debt and related accrued
interest of $1,611,346, (iii) convertible shareholder notes and related accrued
interest of $135,667 and (iv) bridge financing costs of $108. Simultaneous with
the Merger, the Company sold 1,346,669 shares of restricted common stock to
certain accredited investors in a private placement transaction. The
consideration paid by such investors for the shares of common stock aggregated
$2,020,000 in transactions exempt from the registration requirements of the
Securities Act. The net cash proceeds of this private placement were used to
fund Isolagen's research and development projects and the initial FDA trials of
the Isolagen Process, to explore the viability of entering foreign markets, to
provide working capital and for general corporate purposes.
The financial statements presented include Isolagen, Inc. and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Isolagen Technologies was, for accounting
purposes, the continuing entity of the Merger, and accordingly for the periods
prior to the Merger, the financial statements reflect the financial position,
results of operations and cash flows of Isolagen Technologies. The assets,
liabilities, operations and cash flows of AFH and Gemini are included in the
consolidated financial statements from August 10, 2001 onward.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Restatement of financial statements
Subsequent to the issuance of the Company's financial statements as of
March 31, 2003 and for the three month periods ended March 31, 2003 and 2002,
the Company identified several errors that were required to be corrected in the
previously reported financial statements. The principal reasons and effects of
the adjustments are summarized below:
Beneficial Conversion Feature: During 2002, the Company completed private
placements of Series A Convertible Preferred Stock. Imbedded within the
instruments was a beneficial conversion feature that was not recorded.
Accordingly, the Company revised its financial statements as of March 31, 2003
and for the three month periods ended March 31, 2003 and 2002 to record deemed
dividends to the holders of the preferred stock totaling $0 and $0 for the three
month periods ended March 31, 2003 and 2002, respectively. The Company's
financial statements reflect an increase in the retained deficit and a
corresponding increase in paid-in capital for this amount. The deemed dividend
associated with the beneficial conversion is calculated as the difference
between the fair value of the underlying common stock less the proceeds that
have been received for the Series A Preferred Stock limited to the value of the
proceeds received. Also, the Company has included preferred dividends accrued
for the three months ended March 31, 2003 and 2002 of $209,782 and $0,
respectively, in the computation of net loss attributable to common
shareholders.
Contributed Services: During 2003, 2002 and 2001, certain officers and
directors of the Company were not compensated for a portion of their services
provided to Company. The financial statements are to reflect the total
6
cost of conducting its business which includes the value of contributed
services. Accordingly, the Company has recorded contribution services from
officers totaling $100,000 for each of the three month periods ended March 31,
2003 and 2002, respectively. We estimated the value of the contributed services
based upon our estimate of their fair market value. This contribution of
services was recorded as an increase in compensation expense and an increase in
additional paid in capital.
Weighted Average Shares Utilized in the Calculation Percentage Loss Per
Share: Similar to a reverse merger, the weighted average shares outstanding
utilized in the computation of earnings per share are to be adjusted to give
effect as if the Merger transaction had occurred as of the beginning of the
earliest year presented, similar to a stock split. For all years presented prior
to the Merger, the weighted average shares outstanding were not adjusted to
reflect the recapitalization as of the earliest period presented. Accordingly,
the Company has retroactively restated its financial statements to the earliest
period presented for the purposes of computing weighted average shares
outstanding and loss per share data.
Together these restatements changed the net loss per share attributable to
common shareholders from $0.14 to $0.15 for the three months ended March 31,
2003, from $0.04 to $0.05 for the three months ended March 31, 2002, and the
cumulative from inception net loss per share has decreased from $2.08 to $2.02.
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.
7
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
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,
8
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable, and (4) collectibility is
reasonably assured. We believe that all of these conditions are met at the time
of shipment. Currently, three injections are recommended, although the decision
to utilize one, two or three injections is between the attending physician and
his/her patient. The amount invoiced is fixed and determinable and only varies
among customers depending upon the number of injections requested. There is no
performance provision under any arrangement with any doctor and there is no
right to refund, or returns for unused injections.
Currently the Isolagen Process is delivered through an attending physician
to each patient in the Company's recommended regimen of up to three injections.
Each injection has stand alone value to the patient. The Company invoices the
attending physician upon that physician submitting his/her patient's tissue
sample to the Company; thus the contractual arrangement is between the Company
and the medical professional. The amount invoiced varies directly with the
number of injections requested. All orders are paid in advance by the physician
and are not refundable. Revenue is deferred until shipment, provided no
significant obligations remain, and is recognized in installments corresponding
to the number of injections shipped to the attending physician. Due to the short
shelf life, each injection is cultured on an as needed basis and shipped prior
to the individual injection being administered by the physician. The amount of
the revenue deferral represents the fair value of the remaining undelivered
injections defined in accordance with EITF 00-21, which addresses the issue of
accounting for arrangements that involve the delivery of multiple products or
services. Should the physician discontinue the regimen prematurely all remaining
deferred revenue is recognized.
Promotional incentives
The Company periodically offers promotional incentives to physicians on a
case-by-case basis. Promotional incentives are provided to physicians in the
form of 'at no charge' Isolagen Treatments and Isolagen Treatments offered at a
discount to the suggested price list. The Company does not receive any
identifiable benefit from the physicians in exchange for any promotional
incentives granted.
The Company does not record any revenue related to 'at no charge' Isolagen
Treatments and the cost to provide such treatments is expensed as incurred. The
Company records any discounts granted as a reduction in revenue (i.e.net revenue
after discount) from that specific transaction. The Company believes this
accounting treatment complies with Emerging Issues Task Force ("EITF")-01-09:
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products).
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.
9
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 Emerging Issues Task Force, ("EITF"), issued EITF
Issue 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
EITF 00-21 provides guidance on determining whether a revenue arrangement
contains multiple deliverable items and if so, requires that revenue be
allocated amongst the different items based on fair value. EITF 00-21 also
requires that revenue or any item in a revenue arrangement with multiple
deliverables not delivered completely must be deferred until delivery of the
item is completed. The guidance in EITF 00-21 is effective for revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. The
Company does not expect that implementation of EITF 00-21 will have a material
impact on its results of operations or financial position.
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.
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
From the date of the Merger through March 31, 2003, the Company has not
paid compensation to certain officers and directors. Accordingly, the Company
has capitalized the estimated fair value of these services. The uncompensated
contributed services totaled $100,000 for each of the three month periods ended
March 31, 2002 and 2003. We estimated the value of the contributed services
based upon our estimate of their fair market value. This contribution of
services was recorded as an increase to compensation expense and increase in
additional paid in capital.
During the three months ended March 31, 2003, the Company issued 61,600
shares of common stock for cash totaling $92,400 in connection with the exercise
of stock options.
During the three months ended March 31, 2003, the Company issued
1,565,000 options to purchase its common stock with exercise prices ranging from
$4.50 to $6.00 per share under the 2001 and 2003 Stock Options
10
Plans ("Stock Option Plans"). The options vest over a three year period from the
date of grant. The weighted average fair value of the options grant, based on
the Black-Sholes valuation model, is estimated to be $3.58 per option. Had
compensation costs for all options issued under the Stock Option Plans 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:
Three Months Ended March 31,
-----------------------------
2003 2002
----------- -----------
Net loss - as reported $(2,189,101) $ (746,538)
Less: total stock-based employee compensation
expense determined under fair value based
method for all awards granted to employees,
net of related tax effect (373,817) (191,134)
----------- -----------
Net loss - pro forma $(2,562,918) $ (937,673)
=========== ===========
Net loss per share - as reported
Basic and diluted $ (0.14) $ (0.05)
Net loss per share - pro forma
Basic and diluted $ (0.17) $ (0.06)
NOTE 5 - SUBSEQUENT EVENTS
Additional financing
On May 9, 2003, the Company sold 110,250 shares of Series B Convertible
Preferred Stock for a gross amount of approximately $3.1 million. After
deducting the costs and expenses associated with the sale, the Company received
approximately $2.8 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussions of Isolagen`s results of operations and
financial position should be read in conjunction with the financial statements
and notes pertaining to them that appear elsewhere in this Form 10-Q.
Certain statements contained herein are not based on historical facts,
but are forward-looking statements that are based upon numerous assumptions
about future conditions that could prove not to be accurate. Actual events,
transactions and results may materially differ from the anticipated events,
transactions or results described in such statements. The Company's ability to
consummate such transactions and achieve such events or results is subject to
numerous risks and uncertainties. Such risks and uncertainties include, but are
not limited to, the existence of demand for and acceptance of the Company's
products and services, regulatory approvals and developments, economic
conditions, the impact of competition and pricing, results of financing efforts
and other factors affecting the Company's business that are beyond the Company's
control. The Company undertakes no obligation and does not intend to update,
revise, or otherwise publicly release the results of any revisions to these
forward-looking statements that may be made to reflect future events or
circumstances.
Although we believe that our expectations are based on reasonable
assumptions, we can give no assurance that our expectations will materialize.
Many factors could cause actual results to differ materially from our forward
looking statements. Several of these factors include, 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
11
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 our ability to retain the licenses that
we have obtained and may obtain; and the absence of adverse
regulatory developments in the United States, European
Community, Australia, South Korea, Hong Kong, Mexico or any
other country we plan to do conduct commercial operations;
- 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;
and/or legal proceedings;
- our ability to maintain compliance with the AMEX 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 efficiently integrate future acquisitions, if
any;
- other new lines of business that the Company may enter in the
future; and
- other risks referenced from time to time elsewhere in this
report and in our filings with the SEC.
These factors are not necessarily all of the important factors that
could cause actual results of operations to differ materially from those
expressed in these forward-looking statements. Other unknown or unpredictable
factors also could have material adverse effects on our future results. We
undertake no obligation and do not intend to update, revise or otherwise
publicly release any revisions to these forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of
any unanticipated events. We cannot assure you that projected results will be
achieved.
GENERAL
Isolagen is a Houston, Texas based specialty pharmaceutical bioscience
company which has developed a patented process for the propagation of autologous
cells to be used to stimulate a patient's own collagen and elastin production.
Autologous cells are a patient's own cells taken from a small skin sample. From
such sample millions of cells can be grown and then injected into the patient to
correct and reduce the normal effects of aging like wrinkles, laugh lines,
smokers lines, fine lines and all types of depressed scars. The procedure is
minimally invasive and non-surgical. Currently, there are multiple competitive
alternatives to reduce the signs of aging, but they offer short term and often
painful solutions. Their solutions often involve substitute products or fillers,
such as human cadaver or animal collagen or synthetic chemicals. A well known
example is Botox, which uses diluted, liquid toxin to attain a correction
through muscle paralysis.
In contrast, the Isolagen Process (as described in more detail below)
is a self healing protein repair system that uses only the patient's own
(autologous) cells. Since these cells belong only to the patient and house his
or her own DNA, there is a reduced chance for rejection or allergic reaction. It
is important to note that the cells are grown individually. There is no batch
manufacturing and the Company's Laboratory Information Management System keeps
the cells self contained and separate.
12
The Isolagen Process is designed to replenish deficiencies caused
through the loss of fibroblast cells as the body ages. The body losses
approximately 1% of the body's fibroblast cells per year. The fibroblast cell is
the cell responsible for producing collagen, "the structural matrix", that
supports the skin and also produces elastin. By the time a person is 40 years
old, their body has depleted approximately 40% of its fibroblast cells, thus
causing dermal depressions and wrinkles. The Isolagen Process reduces dermal
depressions and wrinkles by replenishing the area of deficiency with millions of
the patient's own new living fibroblast cells. Within weeks after the injection,
the millions of new fibroblast cells will produce new collagen and elastin and
will help diminish wrinkles.
While there can be no assurance, the Company forecasts that it will
begin serving a total of approximately 6,400 patients in 2003, 44,800 patients
in 2004, and 157,500 patients in 2005. The Company's forecasts are based upon
assumptions that the Company will have adequate capital to fund the expanded
operations, and the Company will be authorized to market its products in United
Kingdom, Australia, and South Korea in 2003 and the United States, Italy,
Mexico, Brazil, France and Germany in 2004.
CRITICAL ACCOUNTING POLICIES
The following discussion and analysis of financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues, expenses and related
disclosures. On an on-going basis, the Company evaluates its estimates and
assumptions, including but not limited to those related to the impairment of
long-lived assets, reserves for doubtful accounts, revenue recognition and
certain accrued liabilities. The Company bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Revenue Recognition: The Company recognizes revenue from product sales
when goods are shipped and the risk of loss transfers to the customer. Revenue
from licenses and other upfront fees are recognized on a ratable basis over the
term of the respective agreement. Milestone payments are recognized upon
successful completion of a performance milestone event. Any amounts received in
advance of performance are recorded as deferred revenue. The Company recognizes
revenue over the period the service is performed in accordance with SEC Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 requires that four basic criteria must be met before revenue can
be recognized: (1) persuasive evidence of an arrangement exists, (2) delivery
has occurred or services rendered, (3) the fee is fixed and determinable, and
(4) collectibility is reasonably assured. We believe that all of these
conditions are met at the time of shipment. Currently, three injections are
recommended, although the decision to utilize one, two or three injections is
between the attending physician and his/her patient. The amount invoiced is
fixed and determinable and only varies among customers depending upon the number
of injections requested. There is no performance provision under any arrangement
with any doctor and there is no right to refund, or returns for unused
injections.
Currently the Isolagen Process is delivered through an attending
physician to each patient in the Company's recommended regimen of up to three
injections. Each injection has stand alone value to the patient. The Company
invoices the attending physician upon that physician submitting his/her
patient's tissue sample to the Company; thus the contractual arrangement is
between the Company and the medical professional. The amount invoiced varies
directly with the number of injections requested. All orders are paid in advance
by the physician and are not refundable. Revenue is deferred until shipment,
provided no significant obligations remain, and is recognized in installments
corresponding to the number of injections shipped to the attending physician.
Due to the short shelf life, each injection is cultured on an as needed basis
and shipped prior to the individual injection being administered by the
physician. The amount of the revenue deferral represents the fair value of the
remaining undelivered injections defined in accordance with Emerging Issues Task
Force ("EITF") 00-21, which addresses the issue of accounting for arrangements
that involve the delivery of multiple products or services. Should the physician
discontinue the regimen prematurely all remaining deferred revenue is
recognized.
13
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.
Stock-based compensation: The Company accounts for its stock-based
compensation under the provisions of SFAS No. 123 - "Accounting for Stock Based
Compensation." Under SFAS No. 123, the Company is permitted to either record
expenses for stock options and other employee compensation plans based on their
fair value at the date of grant or to continue to apply its current accounting
policy under Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees," ("APB NO. 25"), and recognize compensation expense, if
any, based on the intrinsic value of the equity instrument at the measurement
date. The Company elected to continue following the provisions of APB No. 25.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." This statement provides
guidance for those companies wishing to voluntarily change to the fair value
based method of accounting for stock-based compensation. The statement also
amends the disclosure requirements of 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.
RESULTS OF OPERATIONS, AS RESTATED
Comparison of the three months ending March 31, 2003 and 2002
REVENUES. Revenues decreased $22,147, to $371 for the three months
ended March 31, 2003 compared to $22,518 for the three months ended March 31,
2002. The decrease in revenues is primarily attributable to $20,000 in license
fees recognized in the three months ended March 31, 2002 which did not recur in
the three months ended March 31, 2003.
While the Company commenced partial operations in the United Kingdom
during the first three months of 2003, the Company does not expect to begin to
recognize revenues from such operations until the second quarter of 2003 because
of the method in which the Company recognizes its revenues. In particular, the
Isolagen Process involves a patient's doctor obtaining a 3 mm punch skin sample
from the patient. The skin sample is packed in a container provided by the
Company and shipped overnight to the Company's laboratory. The specimen is then
cultured utilizing the Company's patented Isolagen Process. This process
separates the cell, called a fibroblast, from the rest of the tissue then
multiplies these fibroblasts. Approximately six (6) weeks later, 1 ml is
returned to the patient's doctor for an intradermal test in the patient. Two (2)
weeks later, 1 to 1.5 ml of the patient's cells are also sent to the doctor for
treatment. Additional amounts of 1 to 1.5 ml are available for re-injection
every two (2) to three (3) weeks. The Company recognizes 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 the Company did recognize during the
first three months of 2003 from its United Kingdom operations were in part
reduced by promotional incentives provided by the Company to doctors utilizing
the Isolagen Process. The Company expects 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 $994 for the three months
ended March 31, 2003 compared to $0 for the three months ended March 31, 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 203%, or $1,111,978, to $1,660,490 for the
three months ended March 31, 2003 compared to $548,512 for the three months
ended March 31, 2002. The major components of the approximately $1.1 million
increase in selling, general and administrative expense are as follows: a)
consulting expense increased by
14
approximately $0.2 million to $0.3 million for the three months ended March 31,
2003 compared to $0.1 million for the three months ended March 31, 2002; b)
salaries increased by approximately $0.1 million to $0.2 million for the three
months ended March 31, 2003 compared to $0.1 million for the three months ended
March 31, 2002 (these amounts include an imputed expense of $100,000 in each
period relating to the fair market value of services provided by certain
officers for which they will not be compensated); c) travel expense increased by
approximately $0.2 million to $0.3 million for the three months ended March 31,
2003 compared to $0.1 million for the three months ended March 31, 2002; d)
legal expense increased by approximately $0.1 million to $0.2 million for the
three months ended March 31, 2003 compared to $0.1 million for the three months
ended March 31, 2002; e) promotional expense increased by approximately $0.1
million to $0.1 million for the three months ended March 31, 2003 compared to
$0.0 million for the three months ended March 31, 2002; and f) depreciation and
amortization increased by approximately $0.1 million to $0.1 million for the
three months ended March 31, 2003 compared to $0.0 million for the three months
ended March 31, 2002. The increase in selling, general and administrative
expenses is attributed primarily to: a) higher salaries expense 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 marketing and promotion
efforts related to the commencement of operations in the United Kingdom; and e)
depreciation and amortization of assets placed into service during 2003 with the
commencement of operations in the United Kingdom and the completion of the U.S
laboratory.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
by approximately $0.4 million during the three months ended March 31 2003 to
$0.6 million as compared to $0.2 million for the same period of 2002. Research
and development costs are composed primarily of costs related to the Company's
efforts to gain FDA approval for the Isolagen Process in the United States.
These costs include those personnel and laboratory costs related to the current
FDA trials and certain consulting costs. This project is still under
development. The total cost of research and development as of March 31, 2003 is
$4.4 million. As of March 31, 2003, we believe at a minimum it will cost $3.6
million to complete this project. That estimate assumes that no further testing
requirements are imposed by the FDA, that FDA approval is forthcoming and that
FDA approval is received during 2005. The FDA approval process is extremely
complicated and is dependent upon our study protocols and the results of our
studies. In the event that the FDA requires additional studies or requires
changes in our study protocols or in the event that the results of the studies
are not consistent with our expectations the process will be more expensive and
time consuming. Due to the vagaries of the FDA approval process we are unable to
predict what the cost of obtaining approval will be if FDA approval is not
forthcoming in 2005. The Company has other research projects currently underway,
including those related to repairing damaged nerves and therapies to regrow hair
and to heal burned skin. However, research and development costs related to
these projects were not material during the 2003 or 2002 periods. The major
components of the approximately $0.4 million increase in research and
development expense are as follows: a) salaries increased by approximately $0.2
million to $0.3 million for the three months ended March 31, 2003 compared to
$0.1 million for the three months ended March, 2002; and b) laboratory expense
increased by approximately $0.1 million to $0.1 million for the three months
ended March 31, 2003 compared to $0.0 million for the three months ended March
31, 2002.
INTEREST INCOME. Interest income increased 64%, or $2,892, to $7,430
for the three months ended March 31, 2003 compared to $4,538 for the three
months ended March 31, 2002. The increase in interest income may be attributed
to, among other things, an increase in the amount of cash on hand by the
Company, and an increase in interest rates paid on the Company's deposits.
OTHER INCOME. Other income of $55,663 for the three months ended March
31, 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 the Company's
international activity. As of March 31, 2003, the Company holds no such
securities.
NET LOSS. Net loss for the three months ended March 31, 2003 was
$2,189,101, as compared to a net loss of $746,538 for the three months ended
March 31, 2002. This increase in net loss is attributed primarily to salaries,
travel, consulting, legal, and promotional expenses. Net loss attributable to
common stockholders for the three months ended March 31, 2003 was $2,398,883, as
compared to a net loss of $746,538 for the three months ended March 31, 2002.
These amounts include $0.2 million and $0.0 million of preferred stock dividends
for the three months ended March 31, 2003 and March 31, 2002, respectively.
15
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities during the three months ended March
31, 2003, amounted to $2,234,138, as compared to the $548,852 of cash used in
operating activities during the three months ended March 31, 2002. The increase
is attributed primarily to salaries, travel, consulting, legal, and promotional
expenses.
Investing Activities
Cash used by investing activities during the three months ended March
31, 2003, amounted to $772,123 as compared to cash used by investing activities
of $4,201 during the three months ended March 31, 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 three months ended
March 31, 2003, amounted to $92,400 raised from the issuance of common stock as
compared to cash provided by financing activities of $0 during the three months
ended March 31, 2002.
Working Capital
As of March 31, 2003, the Company had a cash balance of $1,352,584. As
of May 5, 2003, the Company had a cash balance of approximately $0.6 million.
The Company does not have any credit facilities with which to fund ongoing
working capital needs. On May 9, 2003, the Company sold 110,250 shares of Series
B Convertible Preferred Stock for a gross amount of approximately $3.1 million.
After deducting the costs and expenses associated with the sale, the Company
received approximately $2.8 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.
Inflation did not have a significant impact on the Company's results
during the three months ended March 31, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk as it relates to foreign currency transactions is
described in Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Item 307 of Regulation S-K promulgated under the
Securities Act of 1933, as amended, and within 90 days of the date of this
Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial
Officer of the Company (the "Certifying Officers") have conducted evaluations of
the Company's disclosure controls and procedures. As defined under Sections
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), the term "disclosure controls and procedures" means controls
and other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Commission's rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by an issuer in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. The Certifying Officers have reviewed the Company's
disclosure controls and procedures and have concluded that those disclosure
controls and procedures are effective as of the date of this Quarterly Report on
Form 10-Q. In compliance
16
with Section 302 of the Sarbanes-Oxley Act of 2002, (18 U.S.C. 1350), each of
the Certifying Officers executed an Officer's Certification included in this
Quarterly Report on Form 10-Q.
As of the date of this Quarterly Report on Form 10-Q, there have not
been any significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the first quarter of 2003, the Company issued 100,000 shares of its
Common Stock to Pacgen Partners, a California general partnership. No broker or
underwriter was involved in the issuance of the shares of Common Stock to
Pacgen. These shares were issued to Pacgen in connection with the Company's
purchase of two patent-pending in accordance with that certain Intellectual
Property Purchase Agreement dated as of January 31, 2003 among the Company,
Gregory M. Keller, M.D. and Pacgen Partners. The two patent-pending purchased by
the Company are unrelated to the Isolagen Process currently being exploited by
the Company, but rather, in the Company's belief, are related to future
potential applications for the Isolagen Process. The Company estimated that the
two patent-pending which it purchased had, at the time of the purchase and sale
was consummated, an aggregate value of approximately $540,000. Pacgen
represented to the Company that it was, at the time the shares were issued, an
"accredited investor" within the meaning of the rules issued under the
Securities Act of 1933, as amended, and therefore the Company issued the shares
of Common Stock in reliance on Regulation D promulgated under the Securities Act
of 1933, as amended.
ITEM 5. OTHER INFORMATION
On May 9, 2003, the Company sold 110,250 shares of Series B Convertible
Preferred Stock at $28.00 per share for a gross amount of approximately $3.1
million. Each share of Series B Convertible Preferred Stock is convertible into
eight shares of the Company's common stock, at any time at the option of the
holder of such shares. The Series B Convertible Preferred Stock accrues
dividends at 6% per annum payable in cash or additional shares of Series B
Convertible Preferred Stock. Fordham Financial Management, Inc. acted as the
Company's placement agent in connection with the offer and sale of the Series B
Convertible Preferred Stock. After deducting the aggregate costs and expenses
associated with the offer and sale of the shares of the Series B Convertible
Preferred Stock, the Company actually received approximately $2.8 million. The
Company also issued to Fordham Financial Management, Inc. a warrant to purchase
88,200 shares of the Company's common stock for a purchase price of $3.50 per
share (subject to adjustment from time to time in accordance with the terms of
the warrant).
ITEM 6. EXHIBITS AND REPORTS
(A) EXHIBITS
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
4.3 Certificate of Designation of Series B Convertible
Preferred Stock filed with the Delaware Secretary of
State on May 8, 2003 (incorporated by reference to
Exhibit 4.3 of the Registrant's Form 10-Q for the
quarter ended March 31, 2003)
4.4 Form of Warrant issued to Fordham Financial Management,
Inc. (incorporated by reference to Exhibit 4.4 of the
Registrant's Form 10-Q for the quarter ended March 31,
2003)
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
17
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ISOLAGEN, INC.
Date: November 10, 2003 By: /s/ Jeffrey W. Tomz
--------------------------------------
Jeffrey W. Tomz, CFO and Secretary
(Principal Executive and
Financial Officer)
19
Exhibit Index
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
4.3 Certificate of Designation of Series B Convertible
Preferred Stock filed with the Delaware Secretary of
State on May 8, 2003 (incorporated by reference to
Exhibit 4.3 of the Registrant's Form 10-Q for the
quarter ended March 31, 2003)
4.4 Form of Warrant issued to Fordham Financial Management,
Inc. (incorporated by reference to Exhibit 4.4 of the
Registrant's Form 10-Q for the quarter ended March 31,
2003)
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.