AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 2003
REGISTRATION NO. 333-108769
================================================================================
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 (I.R.S. Employer of
jurisdiction) Industrial Code Number) incorporation 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, 5 TH 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. [ ]
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CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE OFFERING PRICE FEE(2)
--------------------------- ---------------- ---------------- ---------------- ------------
Common Stock 25,010,322 $ 7.52 $ 188,077,621 $ 15,215
TOTAL $ 15,215*
* $18,104 has been previously paid.
(1) This registration statement includes 23,924,653 shares of issued and
outstanding Common Stock. The registration fee for those shares and the
Shares of Common Stock underlying Common Stock Warrants 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) 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 November 14, 2003,
pursuant to Rule 457(c).
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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.
Neither Isolagen nor the Selling Holders nor the holders of Common
Stock Warrants 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.
PROSPECTUS DATED NOVEMBER 19, 2003
ISOLAGEN, INC.
SECURITIES OFFERED FOR RESALE BY SELLING HOLDERS
23,924,653 Shares of Common Stock
and
1,085,669 Shares of Common Stock
Issuable Upon Exercise of Common Stock Warrants
This Prospectus relates to the Selling Holders' offer to sell 25,010,322
shares of our Common Stock that they hold and shares which were purchased in
private transactions with us, and to 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 November 14, 2003, the reported closing transaction
price of our Common Stock was $7.52 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. 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.
TABLE OF CONTENTS
Prospectus Summary............................................................................... 1
Risk Factors..................................................................................... 2
Selected Consolidated Financial Data............................................................. 12
Management's Discussion and Analysis of Financial Condition and Results of Operations............ 14
Securities Offered, The Selling Holders and the Plan of Distribution............................. 22
Use of Proceeds.................................................................................. 31
Business......................................................................................... 31
Management....................................................................................... 41
Certain Beneficial Holders and Management........................................................ 45
Compensation of Directors and Executive Officers................................................. 46
Certain Relationships and Related Transactions................................................... 50
Capital Stock.................................................................................... 51
Market For Common Equity and Related Stockholder Matters......................................... 52
Shares Available for Future Sale................................................................. 53
Securities and Exchange Commission Position on Indemnification for Securities Act Liabilities.... 54
Experts.......................................................................................... 54
Legal Matters.................................................................................... 54
How to Obtain Additional Information............................................................. 54
Financial Statements............................................................................. F-1
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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. 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. Fibroblast cells are cells that make
the structural fibers and ground substance of connective tissues; these cells
produce collagen, reticular and elastic fibers found in the extracellular matrix
or ground substance. 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 Isolagen Technologies issuing stock
for the net assets of AFH and Gemini accompanied by a recapitalization. .
THE OFFERING BY THE SELLING HOLDERS
This Prospectus relates to the sale to the public of up to:
o 23,924,653 shares of our Common Stock issued to and held by the
Selling Holders; and 1,085,669 shares issuable upon exercise of
Common Stock Warrants held by certain Selling Holders including:
o Warrants issued to Fordham Financial Management, Inc. or
designees in connection with the Company's Series A Convertible
Preferred Stock Offering;
o Warrants issued to Fordham Financial Management, Inc. or
designees in connection with the Company's Series B Convertible
Preferred Stock Offering;
o Warrants issued to Equipmed Pty. Ltd. in connection with the
Company's Australian distribution agreement; and
o Warrants issued to RCG Capital Markets Group, Inc. in connection
with the Company's investor relations program.
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
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 purchase the shares. You should carefully
consider the risks described below before deciding to 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.
2
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL TO FUND OUR OPERATIONS OVER
THE COURSE OF THE NEXT TWO YEARS. NO ASSURANCE CAN BE GIVEN THAT ANY SUCH
FINANCING, IF OBTAINED, WILL BE ADEQUATE TO MEET OUR ULTIMATE CAPITAL NEEDS AND
TO SUPPORT OUR GROWTH.
Although we believe our current cash resources will be sufficient to fund
our planned operations for the next 12 months, we will require substantial
additional capital to meet our long-term needs. Subsequent to 12 months, we will
require approximately $20 million of additional capital to bring our product to
market in the United States and expand operations in the United Kingdom and
Australia. This estimate assumes that no further testing requirements are
imposed by the FDA, that FDA approval is forthcoming and that FDA approval is
received during 2005. The FDA approval process is extremely complicated and is
dependent upon our study protocols and the results of our studies. In the event
that the FDA requires additional studies or requires changes in our study
protocols or in the event that the results of the studies are not consistent
with our expectations, the process will be more expensive and time consuming.
Due to the vagaries of the FDA approval process we are unable to predict what
the cost of obtaining approval will be if FDA approval is not forthcoming in
2005. We recently commenced operations, are suffering losses from operations,
have limited capital resources, do not have access to a line of credit or other
debt facility, and will be unable to sustain operations absent substantial
infusions of capital. We are actively assessing various financing opportunities.
There can be no assurance that we will be successful in raising the necessary
capital; or that we will be able to raise capital on acceptable terms.
Additionally, no assurance can be given that any such financing, if obtained,
will be adequate to meet our ultimate capital needs and to support our growth.
If adequate capital cannot be obtained on satisfactory terms, our operations
could be materially and adversely impacted.
THE NEED TO RAISE ADDITIONAL CAPITAL WILL EXPOSE EXISTING SHAREHOLDERS TO THE
RISK OF SUBSTANTIAL DILUTION.
The need to raise additional capital will expose existing shareholders to
the risk of substantial dilution.
ISOLAGEN HAS NOT DEMONSTRATED AN ABILITY TO GENERATE SIGNIFICANT REVENUE, AND
THERE IS NO ASSURANCE THAT WE WILL PRODUCE ANY MATERIAL REVENUES.
Isolagen is a development stage company with a limited operating history and
no significant revenues to date. Isolagen has not yet demonstrated its ability
to generate significant revenue, and there is no assurance that we will produce
any material revenues, or that we will ever operate on a profitable basis.
AS A RESULT OF OUR LIMITED OPERATING HISTORY AND BECAUSE OF THE EMERGING NATURE
OF THE MARKETS IN WHICH WE WILL COMPETE, OUR FINANCIAL DATA IS OF LIMITED VALUE
IN PLANNING FUTURE OPERATING EXPENSES. OUR OPERATING EXPENSES ARE DIFFICULT TO
FORECAST ACCURATELY. TO THE EXTENT THAT SUCH EXPENSES PRECEDE OR ARE NOT RAPIDLY
FOLLOWED BY INCREASED REVENUE, OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
CONDITION MAY BE MATERIALLY ADVERSELY AFFECTED.
As a result of our limited operating history and because of the emerging
nature of the markets in which we will compete, our financial data is of limited
value in planning future operating expenses. Our expense levels will be based in
part on our expectations concerning future revenues. A significant portion of
our revenue is anticipated to be derived from the Isolagen Process; however, the
size and extent of such revenues are wholly dependent upon the choices and
demand of individuals, which are difficult to forecast accurately. We may be
unable to adjust our operations in a timely manner to compensate for any
unexpected shortfall in revenues. Accordingly, a significant shortfall in demand
for the Isolagen Process could have an immediate and material adverse effect on
our business, results of operations and financial condition. Further, business
development and marketing expenses may increase significantly as we expand our
operations. To the extent that such expenses precede or are not rapidly followed
by increased revenue, our business, results of operations and financial
condition may be materially adversely affected.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE AS A RESULT OF A
VARIETY OF FACTORS, MANY OF WHICH ARE OUTSIDE OF OUR CONTROL. OUR OPERATING
RESULTS MAY FALL BELOW THE EXPECTATIONS OF SECURITIES ANALYSTS, STOCKHOLDERS AND
INVESTORS IN ANY FUTURE PERIOD.
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside of our control. These factors
include: the level of demand for the Isolagen Process and other services and
products that we may develop; our ability to attract and retain personnel with
the necessary strategic, technical and creative skills required for effective
operations; 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
3
our quarterly results. Due to all of these factors, our operating results may
fall below the expectations of securities analysts, stockholders and investors
in any future period.
WE ANTICIPATE THAT LOSSES WILL CONTINUE TO INCREASE FROM CURRENT LEVELS AND THAT
WE WILL EXPERIENCE NEGATIVE CASH FLOW, WHICH MAY LIMIT OR DELAY ABILITY TO
BECOME PROFITABLE.
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. For the years ending December 31,
2002, 2001 and 2000, we incurred losses of $5.4 million, $1.7 million and $0.8
million, respectively. For the nine months ended September 30, 2003, we incurred
losses of $7.1 million. Since inception, we incurred losses of $17.1 million.
OUR INABILITY TO REDUCE COSTS MAY LIMIT OR OUR 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. We have spent
approximately $200,000 for regulatory approvals in the United Kingdom and
Australia. Research and development costs are composed primarily of costs
related to the Company's efforts to gain FDA approval for the Isolagen Process
in the United States. These costs include those personnel and laboratory costs
related to the current FDA trials and certain consulting costs. This project is
still under development. The total cost of research and development as of
September 30, 2003 is $6.1 million. As of September 30, 2003, we believe at a
minimum it will cost $1.9 million to complete this project. That estimate
assumes that no further testing requirements are imposed by the FDA, that FDA
approval is forthcoming and that FDA approval is received during 2005. The FDA
approval process is extremely complicated and is dependent upon our study
protocols and the results of our studies. In the event that the FDA requires
additional studies or requires changes in our study protocols or in the event
that the results of the studies are not consistent with our expectations the
process will be more expensive and time consuming. Due to the vagaries of the
FDA approval process we are unable to predict what the cost of obtaining
approval will be if FDA approval is not forthcoming in 2005. Failure to
substantially reduce the cost per patient will have a material adverse effect on
the results of Isolagen's operations and financial condition.
THERE IS A LIMITED PUBLIC TRADING MARKET FOR THE COMMON STOCK THAT MAY LIMIT OR
PRECLUDE YOUR ABILITY TO SELL SHARES OF COMMON STOCK.
There is a limited public trading market for the Common Stock, and there is
no assurance that any established public trading market will develop for any of
the Company's securities. Without such an active or public trading market, there
can be no assurance of any liquidity or resale value of the Common Stock. The
Common Stock may be illiquid for indefinite periods of time.
OUR STOCK PRICE IS HIGHLY VOLATILE, AND REPRESENTS SIGNIFICANT MARKET RISK TO AN
INVESTMENT IN OUR COMMON STOCK.
The market price of the Common Stock is likely to be highly volatile due to
risks and uncertainties described in this Prospectus, as well as other factors,
including sales of substantial amounts of our stock by existing stockholders and
price and volume fluctuations in the stock market which do not relate to our
operating performance. During 2001, our common stock traded from $0.05 to $7.00.
During 2002, our common stock traded from $2.20 to $7.25. During the period from
January 1, 2003 through November 14, 2003, our common stock traded from $4.10 to
$10.85.
4
OUR COMMON STOCK IS VULNERABLE TO PRICING AND PURCHASING ACTIONS THAT ARE BEYOND
OUR CONTROL AND, THEREFORE, PERSONS ACQUIRING OUR SHARES MAY BE UNABLE TO RESELL
THEIR SHARES AT A PROFIT AS A RESULT OF THIS VOLATILITY.
The securities markets have from time to time experienced significant price
and volume fluctuations that may be unrelated to the operating performance of
particular companies. Announcements of delays in our testing, development or
regulatory approval schedules, technological innovations or new products
developed by us or our competitors and developments or disputes concerning
patents or proprietary rights could have a significant and adverse impact on
such market prices. Regulatory developments in the United States and foreign
countries, economic and other external factors, all affect the market price of
our securities. In addition, the realization of any of the risks described in
these "Risk Factors" could have a significant and adverse impact on such market
prices.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
THEREFORE, PRESENT STOCK PRICES MAY NOT BE INDICATIVE OF THE PRICES AT WHICH YOU
WILL BE ABLE TO SELL SHARES OF COMMON STOCK.
Our stock price may decline by future sales of our shares or the perception
that such sales may occur. As of November 17, 2003, approximately 23,924,653
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".
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.
OBTAINING FDA AND OTHER REGULATORY APPROVALS IS TIME CONSUMING AND EXPENSIVE,
AND THE RESPECTIVE OUTCOMES ARE UNCERTAIN.
The process of obtaining FDA and other regulatory approvals is time
consuming and expensive. Clinical trials are required and the marketing and
manufacturing of 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.
5
WE ARE SUBJECT TO EXTENSIVE GOVERNMENTAL REGULATION THAT MAY SIGNIFICANTLY
AFFECT OUR OPERATING RESULTS.
Human healthcare products and services companies are subject to significant
regulation by a number of national, 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.
WE ARE ALSO SUBJECT TO A VARIETY OF OTHER REGULATIONS IN VARIOUS FOREIGN MARKETS
THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS IN A PARTICULAR MARKET
OR IN GENERAL.
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 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
6
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, OPERATING
RESULTS AND FINANCIAL CONDITION.
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.
WE ARE DEPENDENT ON OUR KEY OFFICERS AND EMPLOYEES.
The Company is dependent on the efforts of Frank DeLape (Chairman of the
Board of Directors), William K. Boss, Jr. (Vice Chairman of the Board of
Directors), Michael Macaluso, (Chief Executive Officer, President and Director),
Jeffrey Tomz, (Chief Financial Officer and Secretary), Olga Marko (Senior Vice
President and Director of Research), and Vaughan Clift, (Vice President of
Operations). The loss of any of these officers or employees or our inability to
recruit and train additional key service personnel in a timely manner, could
materially and adversely affect our business and our future prospects. While no
assurances can be given that 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. We have had no difficulty hiring and retaining the
necessary management and personnel in the recent past. To the best of our
knowledge, none of our key officers or employees plan to leave or retire in the
near future.
WE WILL NEED TO ATTRACT, TRAIN OR RETAIN ADDITIONAL HIGHLY QUALIFIED TECHNICAL
AND MANAGERIAL PERSONNEL IN THE FUTURE. OUR INABILITY TO DO SO COULD HAVE A
MATERIAL ADVERSE AFFECT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION.
There can be no assurance that we will be able to attract, train or retain
additional highly qualified technical and managerial personnel in the future,
which could have a material adverse effect on the our business, financial
condition and results of operations.
OUR OFFICERS AND DIRECTORS HAVE EFFECTIVE VOTING CONTROL OF THE COMMON STOCK.
THEREFORE, OUR OTHER STOCKHOLDERS WILL HAVE LIMITED PARTICIPATION IN OUR
AFFAIRS.
Our present executive officers, directors and controlling stockholders
directly and beneficially hold 49.0% of the outstanding shares of Common Stock.
Our officers, directors and controlling stockholders currently are, and in the
foreseeable future will continue to be, in a position to control Isolagen by
being able to nominate and elect a majority of our Board of Directors. The Board
of Directors establishes corporate policies and has the sole authority to
nominate and elect our officers to carry out those policies. Other stockholders
therefore will have limited participation in our affairs.
WE HAVE NOT DECLARED ANY DIVIDENDS ON OUR COMMON STOCK TO DATE AND WE HAVE NO
INTENTION OF DECLARING DIVIDENDS IN THE FORESEEABLE FUTURE. INVESTORS IN OUR
COMMON STOCK CANNOT RELY ON DIVIDEND INCOME.
The future payment of cash dividends on the Common Stock rests within the
discretion of our Board of Directors and will depend,
7
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. Investors in our common stock cannot rely on dividend
income.
IF WE ARE UNABLE TO EFFECTIVELY PROMOTE OUR BRAND AND ESTABLISH A LEADING
POSITION IN THE BIOTECHNOLOGY MARKETPLACE, RESULTS OF OPERATION AND FINANCIAL
CONDITION WILL SUFFER.
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.
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
8
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. At present, we believe we carry
reasonably adequate insurance coverage against product liability claims.
IF WE ARE UNABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGES, OUR PROCESSES,
PRODUCTS OR SERVICES MAY BECOME OBSOLETE AND UNMARKETABLE.
The field of biotechnology is characterized by significant and rapid
technological change. Although we attempt to expand 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.
OUR ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS IN
BUSINESS AND DIVERSION OF MANAGEMENT ATTENTION, ADVERSELY IMPACTING OUR
BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In the near future, 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. We are not party to any agreements,
written or oral, for the acquisition of any company, product or technology.
PROVISIONS IN OUR CHARTER DOCUMENTS COULD PREVENT OR FRUSTRATE SHAREHOLDERS'
ATTEMPTS TO REPLACE OR REMOVE CURRENT MANAGEMENT.
Our Certificate of Incorporation, as amended, provides for staggered terms
for the members of the Board of Directors. The Certificate provides that the
Board of Directors shall be divided into three staggered 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. At shareholders'
meetings only those directors comprising one of the three classes shall have
completed their term and be subject to re-election or replacement.
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 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.
Classifying the Board of Directors and the issuance of "blank check"
preferred stock are traditional anti-takeover measures installed to present
obstacles to takeovers. These provisions of our Certificate of Incorporation
make it difficult for a majority shareholder to gain control of the Board of
Directors and of the Company because, for instance, classification of the Board
would delay the time within which a majority shareholder could obtain effective
control of the Board. Such provisions may be beneficial to the Company's
management and its Board in a hostile tender offer and may have an adverse
impact on shareholders who may want to participate in such a tender offer, or
who may want to replace the Board of Directors.
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
9
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.
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:
o 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;
o 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;
o 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;
o our ability to finance our business;
o our ability to maintain our current pricing model;
o our ability to decrease our cost of goods sold;
o a stable interest rate market in the world, and specifically the
countries we are doing business in or plan to do business in;
o management's best estimate on the patient data including patients
started and patients completed;
o a stable currency rate environment in the world, and specifically
the countries we are doing business in or plan to do business in;
o 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,
10
Hong Kong, Mexico or any other country, in which we plan to
conduct commercial operations;
o continued availability of supplies at the current prices;
o no new entrance of competitive products in our markets;
o no adverse publicity related to our products or Isolagen itself;
o no adverse claims relating to our intellectual property;
o the adoption of new, or changes in, accounting principles; and/or
legal proceedings;
o our ability to maintain compliance with the AMEX requirements for
continued listing of our common stock;
o the costs inherent in complying with new laws and regulations
applicable to public reporting companies, such as the
Sarbanes-Oxley Act of 2002;
o our ability to integrate efficiently future acquisitions, if any;
o other new lines of business that the company may enter in the
future; and
o 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.
11
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 September
30, 2002 and 2003 and for the nine month periods ended September 30, 2002 and
2003 are unaudited. Operating results for the nine months ended September 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."
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2003 2002
------------ ------------
(UNAUDITED) (UNAUDITED)
(AS RESTATED)
Consolidated Statement of Operations Data $ 158,371 $ 2,518
Revenues
License fees -- 40,000
------------ ------------
Total revenues 158,371 42,518
Cost of sales 79,161 --
------------ ------------
Gross profit 79,210 42,518
Selling, general and administrative expenses 5,201,411 2,470,703
Research and development 2,291,675 1,149,009
------------ ------------
Operating loss (7,414,876) (3,577,194)
Other income (expense)
Interest income 19,404 83,025
Other income 55,663 --
Loss on disposal of asset -- --
Interest expense -- --
------------ ------------
Net loss $ (7,339,809) $ (3,494,169)
------------ ------------
Deemed dividend associated with beneficial conversion of preferred stock (1,244,880) (9,676,671)
Preferred stock dividends (1,087,200) (297,958)
------------ ------------
Net loss attributable to common stockholders $ (9,671,889) $(13,468,798)
Per share information Net
loss - basic and diluted $ (.44) $ (.23)
Deemed dividend associated with beneficial conversion of preferred stock (.07) (.64)
Preferred stock dividends (.06) (.02)
------------ ------------
Net loss attributable to common stockholders $ (.57) $ (.89)
Shares outstanding 16,824,001 15,189,563
12
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED) (AS RESTATED)
Consolidated Statement of Operations Data $ 50,991 $ 25,482 $ 6,584 $ 121,931 $ 687,965
Revenues
License fees 40,000 80,000 40,000 -- --
------------ ------------ ------------ ------------ ------------
Total revenues 90,991 105,482 46,584 121,931 687,965
Cost of sales 35,133 17,891 10,846 84,862 140,695
------------ ------------ ------------ ------------ ------------
Gross profit 55,858 87,591 35,738 37,069 547,270
Selling, general and administrative expenses 3,994,782 715,468 265,075 1,079,356 688,491
Research and development 1,735,244 933,907 463,304 186,178 34,000
------------ ------------ ------------ ------------ ------------
Operating loss (5,674,168) (1,561,784) (692,641) (1,228,465) (175,221)
Other income (expense)
Interest income 208,692 17 4,891 5,902 9,936
Other income 32,421 -- -- -- 1,237
Loss on disposal of asset -- (8,222) -- -- --
Interest expense -- (82,015) (119,326) (84,215) (19,628)
------------ ------------ ------------ ------------ ------------
Net loss $ (5,433,055) $ (1,652,004) $ (807,076) $ (1,306,778) $ (183,676)
------------ ------------ ------------ ------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock (10,178,944) -- -- -- --
Preferred stock dividends (502,661) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss attributable to common stockholders $(16,114,660) $ (1,652,004) $ (807,076) $ (1,306,778) $ (183,676)
Per share information
Net loss - basic and diluted $ (.36) $ (.22) $ (.29) $ (.49) $ (.07)
Deemed dividend associated with beneficial
conversion of preferred stock (.67) -- -- -- --
Preferred stock dividends (.03) -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (1.06) $ (.22) $ (.29) $ (.49) (.07)
Shares outstanding 15,205,554 7,618,947 2,822,104 2,656,598 2,637,982
NINE MONTHS
ENDED SEPT. 30, DECEMBER 31,
------------------------- ---------------------------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(AS RESTATED) (AS RESTATED) (AS RESTATED)
Consolidated Balance
Sheet Data
Cash and cash equivalents $18,546,927 $ 7,300,603 $ 4,244,640 $ 1,380,824 $ 2,574 $ 60,994 $ 461,544
Working capital (deficit) 16,981,988 5,623,304 2,811,160 870,377 (1,435,834) (651,340) 546,704
Total assets 22,734,365 8,372,161 7,257,664 1,563,914 62,296 166,703 693,580
Total liabilities 2,422,303 1,838,816 2,050,734 511,514 2,290,763 1,590,052 948,151
Total stockholders
Equity (deficit) 20,312,062 6,533,345 5,206,930 1,052,400 (2,228,467) (1,423,349) (254,570)
13
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 including those contained in "Risk Factors" could cause actual
results to differ materially from our forward looking statements.
GENERAL.
Isolagen is a Houston, Texas based emerging pharmaceutical bioscience
company which has focused its efforts in the development and commercialization
of autologous cellular technology that has specific applications in cosmetic
dermatology and is 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, 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 the industry leader in the research, development and
commercialization of autologous cellular therapy which stimulate a patient's own
collagen production.
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 September 30, 2003, the Company had a cash balance of $18.5
million. As of November 17, 2003, the Company had a cash balance of
approximately $17.6 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.
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
14
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 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.
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 NINE MONTHS ENDING SEPTEMBER 30, 2003
AND 2002.
REVENUES. Revenues increased $115,853, to $158,371 for the nine months ended
September 30, 2003 compared to $42,518 for the nine months ended September 30,
2002. The increase in revenues is primarily attributable to the commencement of
operations in the United Kingdom. Included in the nine months ended September
30, 2002 was $40,000 in license fees recognized which did not recur in the nine
months ended September 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
15
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 nine
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 $79,161 for the nine months ended
September 30, 2003 compared to $0 for the nine months ended September 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 111%, or $2,730,708, to $5,201,411 for the
nine months ended September 30, 2003 compared to $2,470,703 for the nine months
ended September 30, 2002. The major components of the approximately $2.7 million
increase in selling, general and administrative expense are as follows: a)
consulting expense increased by approximately $0.2 million to $0.9 million for
the nine months ended September 30, 2003 compared to $0.7 million for the nine
months ended September 30, 2002; b) salaries increased by approximately $0.3
million to $0.8 million for the nine months ended September 30, 2003 compared to
$0.5 million for the nine months ended September 30, 2002 (these amounts include
an imputed expense of $200,000 in the nine months ended September 30, 2003 and
an imputed expense of $300,000 in the nine months ended September 30, 2002
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 $0.3 million to $0.6 million for the nine months ended September
30, 2003 compared to $0.3 million for the nine months ended September 30, 2002;
d) legal expense increased by approximately $0.1 million to $0.3 million for the
nine months ended September 30, 2003 compared to $0.2 million for the nine
months ended September 30, 2002; e) promotional expense increased by
approximately $0.3 million to $0.4 million for the nine months ended September
30, 2003 compared to $0.1 million for the nine months ended September 30, 2002;
and f) depreciation and amortization increased by approximately $0.7 million to
$0.7 million for the nine months ended September 30, 2003 compared to $0.0
million for the nine months ended September 30, 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 $1.1 million during the nine months ended September 30, 2003 to
$2.3 million as compared to $1.2 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 September 30, 2003
is $6.1 million. As of September 30, 2003, we believe at a minimum it will cost
$2 million to complete this project. That estimate assumes that no further
testing requirements are imposed by the FDA, that FDA approval is forthcoming
and that FDA approval is received during 2005. The FDA approval process is
extremely complicated and is dependent upon our study protocols and the results
of our studies. In the event that the FDA requires additional studies or
requires changes in our study protocols or in the event that the results of the
studies are not consistent with our expectations the process will be more
expensive and time consuming. Due to the vagaries of the FDA approval process we
are unable to predict what the cost of obtaining approval will be if FDA
approval is not forthcoming in 2005. The Company has other research projects
currently underway, including those related to repairing damaged nerves and
therapies to regrow hair and to heal burned skin. However, research and
development costs related to these projects were not material during the 2003 or
2002 periods. The major components of the approximately $1.1 million increase in
research and development expense are as follows: a) salaries increased by
approximately $0.7 million to $1.3 million for the nine months ended September
30, 2003 compared to $0.6 million for the nine months ended September 30, 2002;
and b) laboratory expense increased by approximately $0.3 million to $0.5
million for the nine months ended September 30, 2003 compared to $0.2 million
for the nine months ended September 30, 2002.
INTEREST INCOME. Interest income decreased 77%, or $63,621, to $19,404 for
the nine months ended September 30, 2003 compared to $83,025 for the nine months
ended September 30, 2002. The decrease in interest income resulted from, among
other things, a decrease in the amount of cash on hand by the Company, and a
decrease in interest rates paid on the Company's deposits.
16
OTHER INCOME. Other income of $55,663 for the nine months ended September
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 the Company's
international activity. As of September 30, 2003, the Company holds no such
securities.
NET LOSS. Net loss for the nine months ended September 30, 2003 was
$7,339,809, as compared to a net loss of $3,494,169 for the nine months ended
September 30, 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 nine months ended September 30, 2003
was $9,671,889, as compared to a net loss of $13,468,798 for the nine months
ended September 30, 2002. These amounts include $1.2 million and $9.7 million of
deemed dividend associated with beneficial conversion of preferred stock for the
nine months ended September 30, 2003 and September 30, 2002, respectively. These
amounts include $1.1 million and $0.3 million of preferred stock dividends for
the nine months ended September 30, 2003 and September 30, 2002, respectively.
RESULTS OF OPERATIONS - COMPARISON OF THE THREE MONTHS ENDING SEPTEMBER 30, 2003
AND 2002.
REVENUES. Revenues increased $78,575, to $78,575 for the three months ended
September 30, 2003 compared to $0 for the three months ended September 30, 2002.
The increase in revenues is primarily attributable to the commencement of
operations in the United Kingdom.
Those revenues which we did recognize during the three months ended
September 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 $30,300 for the three months
ended September 30, 2003 compared to $0 for the three months ended September 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 68%, or $681,761, to $1,678,355 for the three
months ended September 30, 2003 compared to $996,594 for the three months ended
September 30, 2002. The major components of the approximately $0.7 million
increase in selling, general and administrative expense are as follows: a)
salaries decreased by approximately $0.1 million to $0.2 million for the three
months ended September 30, 2003 compared to $0.3 million for the three months
ended September 30, 2002 (these amounts include an imputed expense of $100,000
in the three months ended September 30, 2002 relating to the fair market value
of services provided by certain officers for which they will not be
compensated); b) promotional expense increased by approximately $0.2 million to
$0.2 million for the three months ended September 30, 2003 compared to $0.0
million for the three months ended September 30, 2002; c) depreciation and
amortization increased by approximately $0.3 million to $0.3 million for the
three months ended September 30, 2003 compared to $0.0 million for the three
months ended September 30, 2002; and d) office costs increased by approximately
$0.4 million to $0.5 million for the three months ended September 30, 2003
compared to $0.1 million for the three months ended September 30, 2002. The
increase in selling, general and administrative expenses is attributed primarily
to: a) increased marketing and promotion efforts related to the commencement of
operations in the United Kingdom; and b) 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 $0.6 million during the three months ended September 30, 2003 to
$1.1 million as compared to $0.5 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 September 30, 2003
is $6.1 million. As of September 30, 2003, we believe at a minimum it will cost
$2 million to complete this project. That estimate assumes that no further
testing requirements are imposed by the FDA, that FDA approval is forthcoming
and that FDA approval is received during 2005. The FDA approval process is
extremely complicated and is dependent upon our study protocols and the results
of our studies. In the event that the FDA requires additional studies or
requires changes in our study protocols or in the event that the results of the
studies are not consistent with our expectations the process will be more
expensive and time consuming. Due to the vagaries of the FDA approval process we
are unable to predict what the cost of obtaining approval will be if FDA
approval is not forthcoming in 2005. The Company has other research projects
currently underway, including those related to repairing damaged nerves and
therapies to regrow hair and to heal burned skin. However, research and
development costs related to these projects were not material during the 2003 or
2002 periods. The major components of the approximately $0.6 million increase in
research and development expense are as follows: a) salaries increased by
approximately $0.3 million to $0.6 million for the three months ended September
30,
17
2003 compared to $0.3 million for the three months ended September 30, 2002; b)
consultant expense increased by approximately $0.2 to $0.3 million for the three
months ended September 30, 2003 compared to $0.1 million for the three months
ended September 30, 2002; and c) laboratory expense increased by approximately
$0.1 million to $0.3 million for the three months ended September 30, 2003
compared to $0.2 million for the three months ended September 30, 2002.
INTEREST INCOME. Interest income decreased 72%, or $22,757, to $8,784 for
the three months ended September 30, 2003 compared to $31,541 for the three
months ended September 30, 2002. The decrease in interest income may be
attributed to, among other things, a decrease in the amount of cash on hand by
the Company, and a decrease in interest rates paid on the Company's deposits.
NET LOSS. Net loss for the three months ended September 30, 2003 was
$2,709,433, as compared to a net loss of $1,466,708 for the three months ended
September 30, 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 September 30,
2003 was $3,385,444, as compared to a net loss of $1,752,779 for the three
months ended September 30, 2002. These amounts include $0.0 million and $0.1
million of deemed dividend associated with beneficial conversion of preferred
stock for the three months ended September 30, 2003 and September 30, 2002,
respectively. These amounts include $0.7 million and $0.2 million of preferred
stock dividends for the three months ended September 30, 2003 and September 30,
2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES - COMPARISON OF SEPTEMBER 30, 2003 WITH
SEPTEMBER 30, 2002.
OPERATING ACTIVITIES. Cash used in operating activities during the nine
months ended September 30, 2003, amounted to $6,270,821, as compared to the
$2,268,771 of cash used in operating activities during the nine months ended
September 30, 2002. The increase is attributed primarily to salaries, travel,
consulting, legal, and promotional expenses.
INVESTING ACTIVITIES. Cash used by investing activities during the nine
months ended September 30, 2003, amounted to $1,110,248 as compared to cash used
by investing activities of $748,522 during the nine months ended September 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 nine
months ended September 30, 2003, amounted to $21,689,839 consisting of a)
$3,919,078 raised from the issuance of preferred stock; b) $18,857,961 raised
from the issuance of common stock; and c) $1,087,200 cash dividends paid on
preferred stock, as compared to cash provided by financing activities of
$9,012,723 during the nine months ended September 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. The
fair value of the warrants granted to the placement agent, based on the
Black-Scholes valuation model is estimated to be $2.77 per warrant. The value of
the warrants granted has been offset from the proceeds received from the sale of
the Series B Preferred Stock and recorded as additional paid in capital.
The price of the Series B Preferred Stock sold was $28 per share. The
market value of the Company's common stock sold on the dates that the preferred
stock was sold had a range of $4.40 - $4.54 per common share. In accordance with
EITF 00-27 this created a beneficial conversion to the holders of the preferred
stock and a deemed dividend to the preferred stockholders totaling $1,244,880
was recorded by the Company with a corresponding amount recorded as additional
paid-in capital. The deemed dividend associated with the beneficial conversion
is calculated as the difference between the fair value of the underlying common
stock less the proceeds that have been received for the Series B Preferred Stock
limited to the value of the proceeds received.
In August 2003, the Company sold in a private offering 3,359,331 shares of
Common Stock, par value $0.001 per share, at an offering price of $6 per share.
After deducting the costs and expenses associated with the sale, the Company
received cash totaling
18
$18,455,561. 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
had a dividend obligation of $1.1 million, which was paid in the 3rd quarter of
2003, to the holders of Series A and Series B Preferred Stock who converted
their preferred shares into common stock.
WORKING CAPITAL. As of September 30, 2003, the Company had a cash balance of
$18.5 million. As of November 17, 2003, the Company had a cash balance of
approximately $17.6 million. The Company does not have any credit facilities
with which to fund ongoing working capital needs. 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. 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 nine
months ended September 30, 2003.
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.
COST OF SALES. Costs of sales increased 96%, or $17,242, to $35,133 in
Fiscal 2002, compared to $17,891 in Fiscal 2001. The increase in cost of sales
is primarily related to the increase in revenues generated from the commencement
of operations in the UK.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 458%, or $3,279,314 to $3,994,782 in Fiscal
2002, compared to $715,468 in Fiscal 2001. The major components of the
approximately $3.3 million increase in selling, general and administrative
expense are as follows: a) salaries increased by approximately $0.6 million to
$0.7 million in Fiscal 2002 compared to $0.1 million in Fiscal 2001 (these
amounts include an imputed expense of $400,000 in Fiscal 2002 and $155,556 in
Fiscal 2001 relating to the fair market value of services provided by certain
officers by which they were not compensated); b) consulting expense increased by
approximately $0.6 million to $0.7 million in Fiscal 2002 compared to $0.1
million in Fiscal 2001; c) travel expense increased by approximately $0.3
million to $0.4 million in Fiscal 2002 compared to $0.1 million in Fiscal 2001;
d) legal expense increased by approximately $0.2 million to $0.3 million in
Fiscal 2002 compared to $0.1 million in Fiscal 2001; e) promotional expense
increased by approximately $0.2 million to $0.2 million in Fiscal 2002 compared
to $0.0 million in Fiscal 2001; and f) various other expenses, including rent,
insurance and other office expense increased by approximately $1.0 million to
$1.3 million in Fiscal 2002 compared to $0.3 million in Fiscal 2001. The
increase in selling, general and administrative expenses is attributed primarily
to: a) higher salaries due to an increase in the number of employees; b)
increased travel expenses related to our expansion into the UK and Australia; c)
higher legal fees related to patent and business development issues; d)
increased marketing and promotion efforts related to the commencement of
operations in the UK; and e) increase in office locations due to expansion into
the United Kingdom and Australia.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$0.8 million during the twelve months ended December 31, 2002 to $1.7 million as
compared to $0.9 million for the same period of 2001. Research and development
costs are composed primarily of costs related to the Company's efforts to gain
FDA approval for the Isolagen Process in the United States. These costs include
those personnel and laboratory costs related to the current FDA trials and
certain consulting costs. This project is still under development. The total
cost of research and development as of December 31, 2002 is $3.8 million. As of
December 31, 2002, we believe at a minimum it will cost $4.2 million to complete
this project. That estimate assumes that no further testing requirements are
imposed by the FDA, that FDA approval is forthcoming and that FDA approval is
received during 2005. The FDA approval process is extremely complicated and is
dependent upon our study protocols and the results of our studies. In the event
that the FDA requires additional studies or requires changes in our study
protocols or in the event that the results of the studies are not consistent
with our expectations the process will be more expensive and time consuming. Due
to the vagaries of the FDA approval process we are unable to predict what the
cost of obtaining approval will be if FDA approval is not forthcoming in 2005.
The Company has other research projects currently underway, including those
related to repairing damaged nerves and therapies to regrow hair and to heal
burned skin. However, research and development costs related to these projects
were not material during the 2002 or 2001 periods. The major components of the
approximately $0.8 million increase in research and development expense are as
follows: a) consulting expense increased by approximately $0.1 million to $0.7
million in Fiscal 2002 compared to $0.6 million in Fiscal 2001. In Fiscal 2001,
the Company incurred a non-cash consulting expense of $450,000 which represents
the issuance of 300,000 common
19
shares as payment for consulting services relating to a potential development of
a dental product; b) salaries increased by approximately $0.5 million to $0.9
million in Fiscal 2002 compared to $0.4 million in Fiscal 2001; and c)
laboratory expense increased by approximately $0.2 million to $0.2 million in
Fiscal 2002 compared to $0.0 million in Fiscal 2001.
INTEREST EXPENSE. Interest expense decreased $82,015, to $0 in Fiscal 2002,
compared to $82,015 in Fiscal 2001. The decrease results from conversion of all
of our convertible debt to equity in Fiscal 2001.
INTEREST INCOME. Interest income increased $208,675 to $208,692 in Fiscal
2002, compared to $17 in Fiscal 2001. The increase is primarily due to an
increase in the amount of investable assets representing the net proceeds from
the issuance of Series A Preferred Stock.
NET LOSS. Net loss in Fiscal 2002, was $5,433,055, as compared to a net loss
of $1,652,004 in Fiscal 2001. This increase in net loss is attributed primarily
to salaries, travel, consulting, legal, promotional expenses, and bonuses paid
to key personnel. Net loss attributable to common stockholders in Fiscal 2002
was $16,114,660, as compared to a net loss of $1,652,004 in Fiscal 2001. These
amounts include $10.2 million and $0.0 million of deemed dividend associated
with beneficial conversion of preferred stock in Fiscal 2002 and Fiscal 2001,
respectively. These amounts include $0.5 million and $0.0 million of preferred
stock dividends in Fiscal 2002 and Fiscal 2001, respectively.
LIQUIDITY AND CAPITAL RESOURCES.
OPERATING ACTIVITIES. Cash used in operating activities during the year
ended December 31, 2002, amounted to $3,968,013, as compared to the $664,203 of
cash used in operating activities during fiscal 2001. The increase is attributed
primarily to salaries, travel, consulting, legal, promotional expenses, bonuses
paid to key personnel, write-off of deferred revenue, and increase in accounts
payable.
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. The fair market of the warrants
granted to the placement agent, based on the Black-Scholes valuation model, is
estimated to be $1.57 per warrant, assuming the following: no dividend yield, a
risk-free interest rate of 4%, an expanded term of the warrants of 2 years, and
an expected volatility of 129%. The value of the warrants granted has been
offset against the proceeds received from the sale of the Series A Preferred
Stock.
During the year ended December 31, 2002, 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.
The price of the preferred stock sold was $3.50 per share. The market value
of the Company's common stock sold on the dates that the preferred stock sold or
was issued as a dividend had a range of $2.30 - $5.40 per common share. In
accordance with EITF 00-27 this created a beneficial conversion to the holders
of the preferred stock and a deemed dividend to the preferred stockholders
totaling $10,178,944 was recorded by the Company with a corresponding amount
recorded as additional paid-in capital. The deemed dividend associated with the
beneficial conversion is calculated as the difference between the fair value of
the underlying common stock less the proceeds that have been received for the
Series A Preferred Stock limited to the value of the proceeds received.
20
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 170%, or $450,393, to $715,468 in Fiscal 2001
compared to $265,075 in Fiscal 2000. The major components of the approximately
$0.5 million increase in selling, general and administrative expense are as
follows: a) salaries increased by approximately $0.2 million to $0.2 million in
Fiscal 2001 compared to $0.0 million in Fiscal 2000 (this amount consists of
$155,556 in Fiscal 2001 relating to the fair market value of services provided
by certain officers by which they were not compensated); b) consulting expense
increased by approximately $0.1 million to $0.1 million in Fiscal 2001 compared
to $0.0 million in Fiscal 2000; and c) travel expense increased by approximately
$0.1 million to $0.1 million in Fiscal 2001 compared to $0.0 million in Fiscal
2000 in connection with the Company beginning the process of relocating the
Company's corporate headquarter from Paramus, NJ to Houston, TX.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
$0.5 million during the twelve months ended December 31, 2001 to $1.0 million as
compared to $0.5 million for the same period of 2001. Research and development
costs are composed primarily of costs related to the Company's efforts to gain
FDA approval for the Isolagen Process in the United States. These costs include
those personnel and laboratory costs related to the current FDA trials and
certain consulting costs. This project is still under development. The total
cost of research and development as of December 31, 2001 is $2.0 million. As of
December 31, 2001, we believe at a minimum it will cost $5.1 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 2001 or 2000 periods. The major components of the
approximately $0.5 million increase in research and development expense are as
follows: a) consulting expense increased by approximately $0.5 million to $0.5
million in Fiscal 2001 compared to $0.0 million in Fiscal 2000. In Fiscal 2001,
the Company incurred a non-cash consulting expense of $450,000 which represents
the issuance of 300,000 common shares as payment for consulting services
relating to a potential development of a dental product; and b) salaries
decreased by approximately $0.1 million to $0.3 million in Fiscal 2001 compared
to $0.4 million in Fiscal 2000.
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 and Net loss attributable to common stockholders for the
year ended December 31, 2001, was $1,652,004, 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.
21
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.
WORKING CAPITAL.
As of December 31, 2001, Isolagen, Inc. had a cash balance of $1,380,824.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to foreign currency exchange rates market risk. Market risk
is the potential loss arising from adverse changes in market rates and prices,
such as foreign currency exchange rates. We do not enter into derivatives or
other financial instruments for trading or speculative purposes.
Substantially all of our revenues for the year ended December 31, 2002 were
derived from operations in the UK. In addition, during 2003 we expect to
commence operations in Australia. The results of operations and financial
position of our foreign operations were principally measured in their respective
currencies and translated into U.S. dollars. The effect of U.S. dollar/U.K pound
foreign currency fluctuations in these countries is somewhat mitigated by the
fact that expenses are generally incurred in the same currencies in which the
revenue is generated. The reported income of these subsidiaries will be higher
or lower depending on the weakening or strengthening of the U.S. dollar against
the respective foreign currency. Additionally 32% of our assets at December 31,
2002 were based in our foreign operations and translated into U.S. dollars at
the foreign currency exchange rate in effect as of the end of each accounting
period, with the effect of such translation reflected as a separate component of
consolidated shareholders' equity. Accordingly, our consolidated shareholders'
equity will fluctuate depending on the weakening or strengthening of the U.S.
dollar against the respective foreign currency.
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 Warrants. The securities being
offered by the Selling Holders are described below:
THE SELLING HOLDERS. This Prospectus 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:
- 23,924,653 shares of Common Stock which are already outstanding; and
- 1,085,669 shares of Common Stock issuable upon exercise of the Common
Stock Warrants.
We have set forth in the following table information relative to the Selling
Holders as of November 17, 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 warrants" 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
22
of 11,634,265 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. In addition, shares of common stock issued or issuable upon
conversion of placement agent warrants received by Fordham Financial Management,
Inc. as compensation for acting as placement agent in our May 2003 offering of
Series B Preferred Stock are restricted from sale, transfer, assignment or
hypothecation for a period of one year from the effective date of this
Registration Statement except to officers or partners (not directors) of Fordham
Financial Management, Inc. and members of the selling group and/or their
officers or partners. In the event selling stockholders of Isolagen, Inc. sell
their common shares through Fordham Financial Management, Inc., it may deemed to
be a "statutory underwriter." In this respect, all transactions shall be
executed by Fordham on an agency basis and commissions charged to its customers
in connection with each transaction shall not exceed a maximum of 4-1/2% of the
gross proceeds. Fordham Holdings Group. Inc. is the parent corporation of
Fordham Financial Management and the holder of warrants to purchase 124,600
shares of Isolagen's common stock. 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 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.
23
(a) COMMON STOCK TO BE
BENEFICIALLY OWNED AFTER
(a) COMMON STOCK AND (b) OFFERING AND (b) PERCENTAGE
COMMON STOCK WARRANTS COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
OWNED SHARES UNDERLYING OFFERING
PRIOR TO THIS OFFERING COMMON STOCK WARRANTS ---------------------------------------------
------------------------ BEING OFFERED BY
NAME OF SELLING HOLDER (a) (b) THE SELLING HOLDERS(1) (a) (b)
---------------------------------- ------------ ---------- ---------------------- --------------------- ---------------------
Symmetry Capital Partners,
L.P.(2) 20,630 20,630 0 0%
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,
L.P.(2) 5,720 5,720 0 0%
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 LLC(2) 83,333 83,333 0 0%
Paul E. Orrson(2) (22) 16,666 16,666 0 0%
Rawleigh H. Ralls(2) 50,000 50,000 0 0%
United Capital Management,
Inc.(2) 58,333 58,333 0 0%
Hayman Partners, LP(2) (22) 30,000 30,000 0 0%
Agger Fund, LP(2) 3,665 3,665 0 0%
Agger Institutional Fund, LP(2) 21,335 21,335 0 0%
Perceptive Life Sciences Master
Fund, Ltd.(2) 500,000 500,000 0 0%
John S. Lemak(2) 17,000 17,000 0 0%
Sandor Capital Master Fund,
L.P.(2) 34,000 34,000 0 0%
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%
Endeavor LP(2) 6,500 6,500 0 0%
First American Insurance
Small Cap Growth Fund(2) 4,630 4,630 0 0%
John J. Frautschi Life
Trust(2) 35,780 35,780 0 0%
First American Small Cap
Growth Opportunities(2) 695,983 695,983 0 0%
Lyndhurst Associates(2) 11,290 11,290 0 0%
Greater Milwaukee
Foundation MC(2) 11,210 11,210 0 0%
Oregon Retail Employees
Pension Trust(2) 18,010 18,010 0 0%
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 Pension SC(2) 5,950 5,950 0 0%
St. Paul Electrical
Construction Supply SC(2) 6,800 6,800 0 0%
E.S. Tallmadge Residuary
Trust 2(2) 2,370 2,370 0 0%
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
Heartland Value Fund(2) 1,045,000 1,045,000 0 0%
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%
Stanley Keith Klein IV(3) 31,637 31,637 0 0%
24
(a) COMMON STOCK TO BE
BENEFICIALLY OWNED AFTER
(a) COMMON STOCK AND (b) OFFERING AND (b) PERCENTAGE
COMMON STOCK WARRANTS COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
OWNED SHARES UNDERLYING OFFERING
PRIOR TO THIS OFFERING COMMON STOCK WARRANTS ---------------------------------------------
------------------------ BEING OFFERED BY
NAME OF SELLING HOLDER (a) (b) THE SELLING HOLDERS(1) (a) (b)
---------------------------------- ------------ ---------- ---------------------- --------------------- ---------------------
Matthew John Milburn
Thompson(3) 31,637 31,637 0 0%
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 IRA(3) 31,637 31,637 0 0%
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
Mrs. Vinita Agarwal(3) 31,637 31,637 0 0%
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%
Buechel Family Ltd.
Partnership(3)(13) 1,575,287 1,575,287 0 0%
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
Furrow(3) 15,703 15,703 0 0%
Samuel D. Gaby, M.D.(3) 15,703 15,703 0 0%
Brian Cunningham & Cathy M
Cunningham(3) 15,703 15,703 0 0%
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) (13)
William Bongiorno(3) 31,407 31,407 0 0%
Mark Freeman(3) 31,407 31,407 0 0%
Kevin E. Brehmer Living
Trust(3) 15,703 15,703 0 0%
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
O'Neill(3) 15,611 15,611 0 0%
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%
25
(a) COMMON STOCK TO BE
BENEFICIALLY OWNED AFTER
(a) COMMON STOCK AND (b) OFFERING AND (b) PERCENTAGE
COMMON STOCK WARRANTS COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
OWNED SHARES UNDERLYING OFFERING
PRIOR TO THIS OFFERING COMMON STOCK WARRANTS ---------------------------------------------
------------------------ BEING OFFERED BY
NAME OF SELLING HOLDER (a) (b) THE SELLING HOLDERS(1) (a) (b)
---------------------------------- ------------ ---------- ---------------------- --------------------- ---------------------
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%
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 Plan(3) 15,611 15,611 0 0%
Kevin E. Brehmer Living
Trust(3) 15,611 15,611 0 0%
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
Partnership(4) 42,000 42,000 0 0%
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%
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%
26
(a) COMMON STOCK TO BE
BENEFICIALLY OWNED AFTER
(a) COMMON STOCK AND (b) OFFERING AND (b) PERCENTAGE
COMMON STOCK WARRANTS COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
OWNED SHARES UNDERLYING OFFERING
PRIOR TO THIS OFFERING COMMON STOCK WARRANTS ---------------------------------------------
------------------------ BEING OFFERED BY
NAME OF SELLING HOLDER (a) (b) THE SELLING HOLDERS(1) (a) (b)
---------------------------------- ------------ ---------- ---------------------- --------------------- ---------------------
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%
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,
Inc.(5)(14) 1,355,000 1,355,000 0 0%
William K. Boss, Jr.(5) (15) 1,614,055 1,614,055 0 0%
Michael Avignon(5) (16) 775,734 775,734 0 0%
Laura Lee Avignon(5) (17) 1,000,000 1,000,000 0 0%
Michael Macaluso(5) (18) 775,734 775,734 0 0%
Alyda Berryman
Macaluso(5)(19) 1,000,000 1,000,000 0 0%
Olga Marko(5) (20) 1,050,000 1,050,000 0 0%
Jeffrey W. Tomz(5) (21) 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
Part(6) 112,090 112,090 0 0%
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%
27
(a) COMMON STOCK TO BE
BENEFICIALLY OWNED AFTER
(a) COMMON STOCK AND (b) OFFERING AND (b) PERCENTAGE
COMMON STOCK WARRANTS COMMON STOCK INCLUDING BENEFICIALLY OWNED AFTER
OWNED SHARES UNDERLYING OFFERING
PRIOR TO THIS OFFERING COMMON STOCK WARRANTS ---------------------------------------------
------------------------ BEING OFFERED BY
NAME OF SELLING HOLDER (a) (b) THE SELLING HOLDERS(1) (a) (b)
---------------------------------- ------------ ---------- ---------------------- --------------------- ---------------------
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
Corporation(6) 56,017 56,017 0 0%
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%
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%
Rich Adams (3)(23) 10,532 10,532 0 0%
William Barbour (3)(23) 1,986 1,986 0 0%
George Carris (3)(23) 4,030 4,030 0 0%
Josh Conroy (3)(23) 397 397 0 0%
Allan Gordon (3)(23) 11,439 11,439 0 0%
Michele Harley (3)(23) 397 397 0 0%
Maria Luppino (3)(23) 397 397 0 0%
Nadine Mattis (3)(23) 794 794 0 0%
Kevin Melamed (3)(23) 397 397 0 0%
Joseph Principe (3)(23) 206 206 0 0%
Jesus Ramos (3)(23) 397 397 0 0%
Dario Rodriguez (3)(23) 1,589 1,589 0 0%
Chiaki Yamamoto (3)(23) 1,220 1,220 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) (23) 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)(23) 79,524 79,524 0 0%
Robert Sagarino(7) (23) 11,580 11,580 0 0%
Carmine DeSantis, Jr.(7) 10,102 10,102 0 0%
Charles Giordano, Sr.(7) (23) 50,000 50,000 0 0%
Dean Kajouras(7) (23) 25,000 25,000 0 0%
William Baquet(7)(11) (23) 286,943 286,943 0 0%
Fordham Financial Management,
Inc.(8) (11) (23) 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%
TOTAL 23,924,653 1,085,669 25,010,322 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
Warrants.
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.
13. Dr. Frederick F. Buechel is a 5% beneficial shareholder.
14. Controlled by Frank DeLape who is Chairman of the Company.
15. Vice Chairman of the Company.
16. Director of the Company.
17. Wife of Michael Avignon.
18. Chief Executive Officer and President of the Company.
19. Wife of Michael Macaluso.
20. Senior Vice President and Director of Research of the Company.
21. Chief Financial Officer and Secretary of the Company.
22. Affiliated with Legg Mason Wood Walker, Inc., a broker dealer. This
selling shareholder purchased securities in the ordinary course of
business, and at the time of purchase of the securities to be resold,
the selling shareholder had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
23. Affiliated with Fordham Financial Management, Inc., a broker dealer.
This selling shareholder purchased securities in the ordinary course of
business, and at the time of purchase of the securities to be resold,
the selling shareholder had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
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 Warrants, 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.
29
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:
o purchases by a broker-dealer as principal and resale by such
broker-dealer for its own account pursuant to this Prospectus;
o ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
o 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
o in privately negotiated transactions.
In connection with distributions of the shares or otherwise, the Selling
Holders have advised us that each may:
o 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;
o sell the shares short and redeliver the shares to close out such short
positions;
o 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
o 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:
o the number of shares that the Selling Holder is offering;
o the terms of the offering, including the name of any underwriter, dealer
or agent;
30
o the purchase price paid by any underwriter;
o any discount, commission and other underwriter compensation;
o any discount, commission or concession allowed or reallowed or paid to
any dealer; and
o 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
shares of common stock.
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
31
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
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/Exploratory trial for dermal
defects pursuant to an IND for the treatment of wrinkles and scars. The Phase
III/Exploratory 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 100% of patients have had their first
consultation. The final patient injection are scheduled for November 2003. This
Phase III/Exploratory 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 are
completing our analysis of the data from the Phase II trial. We have also
commenced a Phase I clinical trial of twenty-one patients for dental
applications addressing gingival recession. We expect to complete this study in
the first quarter of 2004.
We received a letter from the FDA dated October 28, 2003, from the Office of
Cellular, Tissue, and Gene Therapies. The letter is in response to our request
for clarification of study design comments that the FDA alluded to previously.
We believe that we will be able to respond to all comments in the letter and
will be doing so in a face to face meeting with the FDA at the end of 2003. The
majority of issues relate to comments that have already been addressed and are
the subject of submissions which we will make in preparation for our upcoming
meeting with the FDA. At that time, we will attempt to resolve any remaining
study design issues.
32
Successful resolution of these issues with the FDA may permit us to use the
study data from the Phase III/Exploratory study for license application or to
supplement this data with well controlled additional studies. However, there can
be no assurance that we will be able to satisfy the study design issues
presented by the FDA.
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.
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:
o 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).
o Continuing our current research into the science of autologous cellular
therapy.
o Working with regulatory agencies, country by country, to attempt to
obtain the approval of the Isolagen Process and our future products.
o Investigating foreign markets for the Isolagen Process and future
products.
o Developing new applications for the Isolagen Process beyond cosmetic
facial rejuvenation, such as dental applications.
33
o Designing and developing new laboratory facilities.
Our business plan is focused on the following major steps:
o 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.
o 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.
o 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"):
o 6.6 million people had cosmetic plastic surgery in 2002;
o Approximately 1.1 million Botox injections were performed in 2002;
o More than 4.9 million people had non-surgical cosmetic procedures in
2002;
o In 2002, 37% of all cosmetic plastic surgery patients were repeat
patients.
ASPS and PSEF statistics represent patients having procedures performed by
member surgeons certified by the American Board of Plastic Surgery as well as
other physicians certified by the American Board of Medical Specialties.
FACIAL REJUVENATION
The first application of the Isolagen Process is for facial rejuvenation,
which we intend to market as a "Natural Collagen Supplementation System."
("NCSS") The primary benefits of the NCSS are three-fold:
o 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.
o 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.
o Patients experience gradual and continued improvement as a result of the
natural activity of the re-introduced cells.
These three benefits represent substantial advances in facial rejuvenation
since the standard until now has been bovine collagen, 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
34
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. Our
product is the only product on the market that utilizes a patient's own cells or
is autologous. There is no foreign substance utilized in our treatment. We are
currently charging physicians approximately $1,800 for three injections.
Alternative products include Zyderm/Zyplast, Hlyaform, Fibrel, Autologen,
Demolagen Lypocytic Dermal Augmentation, Alloderm, Artecoll, Softform, Silicon
Droplets, Botox, Ablative Lasers, Non-Ablative Lasers, Microdermabrasion and
Chemical Peels. These products will cost in the range of $400 to $1,250 per
procedure, and last in the range of three months to one year.
REGULATORY PROCESS AND CLINICAL TRIALS
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 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.
35
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/Exploratory trail for dermal defects pursuant to an IND for the
treatment of wrinkles and scars. The Phase III/Exploratory 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 100% of patients have had their first consultation. The final patient
injection are scheduled for November 2003. This Phase III/Exploratory 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 are completing our analysis of the data from
the Phase II trial. We have also commenced a Phase I clinical trial of
twenty-one patients for dental applications addressing gingival recession. We
expect to complete this study in the first quarter of 2004.
We received a letter from the FDA dated October 28, 2003, from the Office of
Cellular, Tissue, and Gene Therapies. The letter is in response to our request
for clarification of study design comments that the FDA alluded to previously.
We believe that we will be able to respond to all comments in the letter and
will be doing so in a face to face meeting with the FDA at the end of 2003. The
majority of issues relate to comments that have already been addressed and are
the subject of submissions which we will make in preparation for our upcoming
meeting with the FDA. At that time, we will attempt to resolve any remaining
study design issues. Successful resolution of these issues with the FDA may
permit us to use the study data from the Phase III/Exploratory study for license
application or to supplement this data with well controlled additional studies.
However, there can be no assurance that we will be able to satisfy the study
design issues presented by the FDA.
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 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, the agency that regulates medical drugs and devices 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
36
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.
(Inamed Aesthetics) 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
(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.
37
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
------------------- ---------------------- ------------------- --------------------------------------------------------
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
(manufactured by reintroduction into treatment areas.
physician)
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).
Dissolves in 1 to 3 years.
(Lifecell Corp) dermal graft
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.
(Allergan) Physician technique very important.
2% to 3% of patients experience drooping eyelid.
$450 to $750 per injection.
38
PRODUCT DESCRIPTION PRODUCT TYPE KEY POINTS
------------------- ---------------------- ------------------- --------------------------------------------------------
Ablative Lasers Mechanical device Tissue vaporization Long healing period; open sores for 5 to 14 days;
causing new tissue redness up to six months.
e.g. CO(2) & Erbium to form
Requires surgery and anesthesia.
(Coherent or
Luminesse) 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
(Coherent or Luminesse)
Microdermabrasion Mechanical device Tissue abridement Minimal efficacy on scars and wrinkles.
causing new tissue
(Microdermex, to form Good epidermal effect.
Parisian Peel or
Dermaglow) Requires 6 to 10 treatments.
Chemical peels Carbolic acid, TCA, alpha Chemical tissue Long healing period; open sores for 5 to 14 days;
hydroxy acids removal causing new
(TCA, Phenol tissue to form Redness up to six months.
chemicals are
formulated by a Laser applications are replacing this technology.
pharmacist)
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 repair June 6, 1996 Sept. 9, 1997 20 Years
of skin and soft tissue defects
United States
5,660,850 Cosmetic Use of autologous dermal fibroblasts for the June 6, 1996 Aug. 26, 1997 20 Years
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
United States soft tissue defects
5,591,444 Cosmetic Use of autologous dermal fibroblasts for the July 28, 1995 Jan. 7, 1997 20 Years
repair of skin and soft tissue Defects
United States
312548 Cosmetic Use of autologous dermal fibroblasts for the July 3, 1996 March 9, 2000 20 Years
repair of skin and soft tissue defects
New Zealand
698440 Cosmetic Use of autologous dermal fibroblasts for the July 28, 1995 Feb. 11, 1999 20 Years
repair of skin and soft tissue defects
Australia
9,083,618 Dental Compositions for regenerating tissue that has May 2, 1998 Aug. 13, 2002 20 Years
deteriorated and methods for using such
compositions
United States
In the 1st quarter of 2003, we entered into an Intellectual Property
Purchase Agreement with Gregory M. Keller, M.D. and Pacgen Partners to acquire
two patent applications: a) to repair vocal cord tissue defects and b) to
promote healing of wounds and fistulas. As consideration, 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
39
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. For the years
ending December 31, 2002, 2001 and 2000, we incurred research and development
expenses of $1.7 million, $0.9 million, and $0.5 million, respectively. For the
nine months ended September 30, 2003, we incurred research and development
expenses of $2.3 million.
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:
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.
40
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 November 17, 2003. 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)
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
41
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 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. Since January 2001, 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. From February 1999 to January 2001, he was
the Managing Director of a Teknoinvest portfolio company, Aquasmart
International AS. From January 1998 to February 1999, he was the General
Director of Veropharm Co., Ltd. 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.
42
Ralph V. De Martino. Mr. De Martino was appointed to the Board in December
2002. Since January 2003, Mr. De Martino is the managing partner of the
Washington, DC office of the law firm Dilworth Paxson, LLP. From 1983 to
December 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 and Audit Committee 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 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. From January 2001 to
May 2002, Dr. Clift did various research on Home Oxygen Therapy Systems while
developing an oxygen system for NASA. From July 1997 to January 2001, 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. From May 1992 to June 1997, 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
43
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.
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.
44
CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth information regarding the ownership of our
common stock as of November 17, 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 9.7%
2500 Wilcest, 5th Floor
Houston, TX 77042
Michael Avignon (5) 2,675,734 9.7%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Frank DeLape (6) 2,005,000 7.3%
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 3.9%
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 0.1%
Grev Wedels Plass 6
0151 Oslo, Norway
E. Ashley Smith (9) 40,000 0.1%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Vaughan Clift (10) 40,000 0.1%
2500 Wilcrest, 5th Floor
Houston, TX 77042
Ralph V. De Martino (11) 40,000 0.1%
1818 N Street, NW
Suite 400
Washington, DC 20036
Nelson Haight (12) 15,000 0.1%
2500 Wilcrest, 5th Floor
Houston, TX 77042
All Officers and Directors 10,572,723 38.8%
as a Group (11 Persons)
5% SHAREHOLDERS
Buechel Family Ltd. 2,717,500 10.2%
Partnership. (3)
76 Crest Drive
So. Orange, NJ 07079
45
(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 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 26,672,192 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 40,000 options.
(12) Includes 15,000 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.
46
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
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.
47
(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.
(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 $ -- $ -2-
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 November 14, 2003 was $7.52.
(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.
48
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.
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.
49
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 November 17, 2003, options to acquire 3,949,100 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 439,000 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 3,014,100 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 descriptions of the terms of employment and consulting
agreements between Isolagen and certain officers, directors and other related
parties.
50
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 November 17, 2003, there were
outstanding:
o 26,672,192 shares of Common Stock;
o 5,869,100 shares issuable upon exercise of options issued pursuant to
our employee benefit plans; and
o 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. The Board of Directors' ability to
issue "blank check" preferred stock serves as a traditional anti-takeover
measure installed to present obstacles to takeovers. This provision of our
Certificate of Incorporation makes it difficult for a majority shareholder to
gain control of the Company and, therefore, may be beneficial to the Company's
management and its Board in a hostile tender offer and may have an adverse
impact on shareholders who may want to participate in such a tender offer. Also,
the issuance of preferred stock with voting and conversion rights could
materially and adversely affect the voting power of the holders of the Common
Stock and may have the effect of delaying, deferring or preventing a change in
control of the Company.
As of November 17, 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.
51
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 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 $ 10.85 $ 6.50 $ 3.75 $ 2.20 $ 2.75 $ 0.92
Fourth Quarter (1) $ 9.03 $ 7.00 $ 5.75 $ 3.00 $ 7.00 $ 1.05
1. The fourth quarter market information for 2003 is from October 1, 2003
through November 14, 2003.
HOLDERS
As of November 14, 2003, we had 742 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 $1.1
million, which was paid in the 3rd quarter of 2003, 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.
NUMBER OF SECURITIES TO
BE ISSUED UPON WEIGHTED-AVERAGE NUMBER OF SECURITIES
EXERCISE OF EXERCISE PRICE OF REMAINING AVAILABLE FOR
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE
------------- ----------------------- ------------------- -----------------------
Equity compensation plans approved by 4,252,100 - 12/31/02 $ 5.08 509,500
security holders
52
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 August 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. Those investors who purchased shares of our common stock in
the August 2003 private placement are identified in footnote (2) in the Selling
Holders table in "Securities Offered, the Selling Holders and the Plan of
Distribution."
In addition, holders of an additional 20,531,541 shares of Common Stock
have included the offer and resale of a total of 23,924,653 shares of Common
Stock in this Prospectus. Selling Holders of 11,634,265 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, the placement agent for the
August 2003 private placement; 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, the Heartland Value Fund, purchased $6,270,000 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 November 17, 2003, we had outstanding options and warrants for the
purchase of up to approximately 7,329,269 shares of Common Stock with an
exercise price ranging from $1.50 per share to $9.81 per share, representing
approximately 21.6% 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 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 266,722 shares as of
November 17, 2003; and (ii) an amount equal to the average weekly trading volume
in the Common Stock during the four calendar weeks preceding the sale.
53
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
Jeffrey W. Tomz
Chief Financial Officer and Secretary
Isolagen, Inc.
2500 Wilcrest, 5th Floor
Houston, Texas 77042
(713) 780-4754
jtomz@isolagen.com
54
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 September 30, 2003 (unaudited) and December 31, 2002.................................... F-22
Consolidated Statements of Operations for the Nine months ended September 30, 2003 (unaudited) and September 30, 2002
(unaudited)............................................................................................................... F-23
Consolidated Statement of Operations for the Three months ended September 30, 2003 (unaudited) and September 30, 2002
(unaudited)............................................................................................................... F-24
Consolidated Statements of Shareholders' Equity from inception to September 30, 2003 (unaudited).......................... F-25-29
Consolidated Statements of Cash Flows for the Nine months ended September 30, 2003 (unaudited) and September 30, 2002
(unaudited)............................................................................................................... F-30
Notes to Unaudited Consolidated Financial Statements...................................................................... F-31-38
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Isolagen, Inc.
We have audited the accompanying consolidated balance sheets of Isolagen, Inc.
and Subsidiaries (a Delaware corporation) as of December 31, 2002 (as restated)
and 2001 (as restated), and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2002 (as restated) and the cumulative amounts during the
development stage (as restated) (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.
As described in Note 2, the Company restated its financial statements for the
years ended December 31, 2002 and 2001.
/s/ PANNELL KERR FORSTER OF TEXAS, P.C.
Houston, TX
March 12, 2003
(except for Restatement of Financial Statements described in Note 2 for which
the date is October 17, 2003)
F-2
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
December 31
2002 2001
------------ ------------
(as restated) (as restated)
ASSETS
Current assets
Cash and cash equivalents $ 4,244,640 $ 1,380,824
Inventory 138,910 --
Accounts receivable, net of allowance for doubtful accounts 40,204 1,067
Other receivables 153,583 --
Prepaid expenses 284,557 --
------------ ------------
Total current assets 4,861,894 1,381,891
------------ ------------
Property and equipment, net 2,159,913 7,357
Other assets 235,857 174,666
------------ ------------
Total assets $ 7,257,664 $ 1,563,914
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,881,236 $ 208,196
Accrued expenses 112,224 23,318
Deferred revenue 57,274 280,000
------------ ------------
Total current liabilities 2,050,734 511,514
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Preferred stock, $.001 par value; 5,000,000
shares authorized 3,039 --
Common stock, $.001 par value; 50,000,000
shares authorized 15,228 15,190
Additional paid-in capital 25,573,999 5,321,761
Other comprehensive income 13,875 --
Accumulated deficit during development stage (20,399,211) (4,284,551)
------------ ------------
Total shareholders' equity (deficit) 5,206,930 1,052,400
------------ ------------
Total liabilities and shareholder's equity $ 7,257,664 $ 1,563,914
------------ ------------
The accompanying notes are an integral part of these statements.
F-3
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
Cumulative
Period from
December 28,
1995 (date of
For the Year Ended inception) to
December 31, December 31,
------------------------------------------------ -------------
2002 2001 2000 2002
------------ ------------ ------------ ------------
(as restated) (as restated) (as restated) (as restated)
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 3,994,782 715,468 265,075 7,160,659
Research and development 1,735,244 933,907 463,304 3,770,120
------------ ------------ ------------ ------------
Operating loss (5,674,168) (1,561,784) (692,641) (9,667,266)
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 $ (5,433,055) $ (1,652,004) $ (807,076) $ (9,717,606)
------------ ------------ ------------ ------------
Deemed dividend associated with
beneficial conversion of preferred
stock (10,178,944) -- -- (10,178,944)
Preferred stock dividends (502,661) -- -- (502,661)
------------ ------------ ------------ ------------
Net loss attributable to common
shareholders $(16,114,660) $ (1,652,004) $ (807,076) $(20,399,211)
------------ ------------ ------------ ------------
Per share information
Net loss - basic and diluted $ (0.36) $ (0.22) $ (0.29) $ (1.91)
Deemed dividend associated with
beneficial conversion of preferred
stock (0.67) -- -- (2.01)
Preferred stock dividends (0.03) -- -- (0.10)
------------ ------------ ------------ ------------
Net loss per common share - basic
and diluted $ (1.06) $ (0.22) $ (0.29) $ (4.02)
------------ ------------ ------------ ------------
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
(as restated)
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 -- $ -- 2,285,291 $ 2,285 $ (1,465) $ -- $ --
Issuance of common stock
for cash on 11/7/96 -- -- 11,149 11 49,989 -- --
Issuance of common stock
for cash on 11/29/96 -- -- 2,230 2 9,998 -- --
Issuance of common stock
for cash on 12/19/96 -- -- 6,690 7 29,993 -- --
Issuance of common stock
for cash on 12/26/96 -- -- 11,148 11 49,989 -- --
Net loss -- -- -- -- -- (270,468) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, 12/31/96 -- $ -- 2,316,508 $ 2,316 $ 138,504 $ (270,468) $ --
Issuance of common stock
for cash on 12/27/97 -- -- 21,182 21 94,979 -- --
Issuance of common stock
for Services on 9/1/97 -- -- 11,148 11 36,249 -- --
Issuance of common stock
for Services on 12/28/97 -- -- 287,193 287 9,968 -- --
Net loss -- -- -- -- -- (52,550) --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, 12/31/97 -- $ -- 2,636,031 $ 2,635 $ 279,700 $ (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)
(as restated)
Series A Preferred Stock Common Stock Accumulated
--------------------------- --------------------------- Deficit
Number Number Additional During
of of Paid-In Development
Shares Amount Shares Amount Capital Stage
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common stock
for cash on 8/23/98 -- $ -- 4,459 $ 4 $ 20,063 $ --
Repurchase of common
stock on 9/29/98 -- -- -- -- -- --
Net loss -- -- -- -- -- (195,675)
------------ ------------ ------------ ------------ ------------ ------------
Balance, 12/31/98 -- $ -- 2,640,490 $ 2,639 $ 299,763 $ (518,693)
Issuance of common stock
for cash on 9/10/99 -- -- 52,506 53 149,947 --
Net loss -- -- -- -- -- (1,306,778)
------------ ------------ ------------ ------------ ------------ ------------
Balance, 12/31/99 -- $ -- 2,692,996 $ 2,692 $ 449,710 $ (1,825,471)
Issuance of common stock
for cash on 1/18/00 -- -- 53,593 54 1,869 --
Issuance of common stock
for Services on 3/1/00 -- -- 68,698 69 (44) --
Issuance of common stock
for Services on 4/4/00 -- -- 27,758 28 (18) --
Net loss -- -- -- -- -- (807,076)
------------ ------------ ------------ ------------ ------------ ------------
Balance, 12/31/00 -- $ -- 2,843,045 $ 2,843 $ 451,517 $ (2,632,547)
Treasury Stock
--------------------------- Total
Other Number Shareholders'
Comprehensive of Equity
Income Shares Amount (Deficit)
------------- ------------ ------------ -------------
Issuance of common stock
for cash on 8/23/98 $ -- -- $ -- $ 20,067
Repurchase of common
stock on 9/29/98 -- 2,400 (50,280) (50,280)
Net loss -- -- -- (195,675)
------------ ------------ ------------ ------------
Balance, 12/31/98 $ -- 2,400 $ (50,280) $ (266,571)
Issuance of common stock
for cash on 9/10/99 -- -- -- 150,000
Net loss -- -- -- (1,306,778)
------------ ------------ ------------ ------------
Balance, 12/31/99 $ -- 2,400 $ (50,280) $ (1,423,349)
Issuance of common stock
for cash on 1/18/00 -- -- -- 1,923
Issuance of common stock
for Services on 3/1/00 -- -- -- 25
Issuance of common stock
for Services on 4/4/00 -- -- -- 10
Net loss -- -- -- (807,076)
------------ ------------ ------------ ------------
Balance, 12/31/00 $ -- 2,400 $ (50,280) $ (2,228,467)
The accompanying notes are an integral part of these statements.
F-6
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Common Stock Accumulated
--------------------------- --------------------------- Deficit
Number Number Additional During
of of Paid-In Development
Shares Amount Shares Amount Capital Stage
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common stock
for services on 7/1/01 -- $ -- 156,960 $ 157 $ (101) $ --
Issuance of common stock
for services on 7/1/01 -- -- 125,000 125 (80) --
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 -- -- 70,000 70 328,055 --
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 -- -- 1,750,000 1,750 1,609,596 --
Issuance of common stock
for conversion of
convertible shareholder
notes payable on 8/10/01 -- -- 208,972 209 135,458 --
Issuance of common stock
for bridge financing
on 8/10/01 -- -- 300,000 300 (192) --
Retirement of treasury
stock on 8/10/01 -- -- -- -- (50,280) --
Issuance of common stock
for net assets of Gemini
on 8/10/01 -- -- 3,942,400 3,942 (3,942) --
Issuance of common stock
for net assets of AFH
on 8/10/01 -- -- 3,899,547 3,900 (3,900) --
Issuance of common stock
for cash on 8/10/01 -- -- 1,346,669 1,347 2,018,653 --
Transaction and fund
raising expenses
on 8/10/01 -- -- -- -- (48,547) --
Issuance of common stock
for services on 8/10/01 -- -- 60,000 60 -- --
Issuance of common stock
for cash on 8/28/01 -- -- 26,667 27 39,973 --
Issuance of common stock
for services on 9/30/01 -- -- 314,370 314 471,241 --
Treasury Stock
---------------------------- Total
Other Number Shareholders'
Comprehensive of Equity
Income Shares Amount (Deficit)
------------ ------------ ------------ -------------
Issuance of common stock
for services on 7/1/01 $ -- -- $ -- $ 56
Issuance of common stock
for services on 7/1/01 -- -- -- 45
Issuance of common stock
for capitalization of
accrued salaries
on 8/10/01 -- -- -- 328,125
Issuance of common stock
for conversion of
convertible debt
on 8/10/01 -- -- -- 1,611,346
Issuance of common stock
for conversion of
convertible shareholder
notes payable on 8/10/01 -- -- -- 135,667
Issuance of common stock
for bridge financing
on 8/10/01 -- -- -- 108
Retirement of treasury
stock on 8/10/01 -- (2,400) 50,280 --
Issuance of common stock
for net assets of Gemini
on 8/10/01 -- -- -- --
Issuance of common stock
for net assets of AFH
on 8/10/01 -- -- -- --
Issuance of common stock
for cash on 8/10/01 -- -- -- 2,020,000
Transaction and fund
raising expenses
on 8/10/01 -- -- -- (48,547)
Issuance of common stock
for services on 8/10/01 -- -- -- 60
Issuance of common stock
for cash on 8/28/01 -- -- -- 40,000
Issuance of common stock
for services on 9/30/01 -- -- -- 471,555
The accompanying notes are an integral part of these statements.
F-7
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A
Preferred Stock Common Stock Accumulated Treasury Stock
---------------- -------------------- Deficit -------------- Total
Number Number Additional During Other Number Shareholders'
of of Paid-In Development Comprehensive of Equity
Shares Amount Shares Amount Capital Stage Income Shares Amount (Deficit)
-------- ------- ---------- -------- ----------- ----------- ----------- ------- ------ -----------
Uncompensated
contribution of
services - 3rd Qtr.
(as restated) -- $ -- -- $ -- $ 55,556 $ -- $ -- $ -- -- $ 55,556
Issuance of common
stock on 11/1/01 -- -- 145,933 146 $ 218,754 -- -- -- -- 218,900
Uncompensated
contribution of
services - 4th Qtr.
(as restated) -- -- -- -- 100,000 -- -- -- -- 100,000
Net loss (as restated) -- -- -- -- -- (1,652,004) -- -- -- (1,652,004)
-------- ------- ---------- -------- ----------- ----------- ----------- ------- ------ -----------
Balance, 12/31/01
(as restated) -- $ -- 15,189,563 $ 5,190 $ 5,321,761 $(4,284,551) $ -- -- $ -- $ 1,052,400
Uncompensated
contribution of
services - 1st Qtr.
(as restated) -- -- -- -- 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for cash on
4/26/02 905,000 905 -- -- 2,817,331 -- -- -- -- 2,818,236
Issuance of preferred
stock for cash on
5/16/02 890,250 890 -- -- 2,772,239 -- -- -- -- 2,773,129
Issuance of preferred
stock for cash on
5/31/02 795,000 795 -- -- 2,473,380 -- -- -- -- 2,474,175
Issuance of preferred
stock for cash on
6/28/02 229,642 230 -- -- 712,991 -- -- -- -- 713,221
Uncompensated
contribution of
services - 2nd Qtr.
(as restated) -- -- -- -- 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for cash on
7/15/02 75,108 75 -- -- 233,886 -- -- -- -- 233,961
Issuance of common
stock for cash on
8/1/02 -- -- 38,400 38 57,562 -- -- -- -- 57,600
Issuance of warrants
for services on 9/06/02 -- -- -- -- 103,388 -- -- -- -- 103,388
Uncompensated
contribution of
services - 3rd Qtr.
(as restated) -- -- -- -- 100,000 -- -- -- -- 100,000
Uncompensated
contribution of
services - 4th Qtr.
(as restated) -- -- -- -- 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for dividends 143,507 144 -- -- 502,517 (502,661) -- -- -- --
Deemed dividend
associated with
beneficial conversion
of preferred stock
(as restated) -- -- -- -- 10,178,944 (10,178,944) -- -- -- --
Comprehensive income:
Net loss (as restated) -- -- -- -- -- (5,433,055) -- -- -- (5,433,055)
Other comprehensive
income, foreign
currency translation
adjustment -- -- -- -- -- -- 13,875 -- -- 13,875
-----------
Comprehensive loss
(as restated) -- -- -- -- -- -- -- -- -- (5,419,180)
--------- ------- ---------- -------- ----------- ----------- ----------- ------- ------ -----------
Balance, 12/31/02
(as restated) 3,038,507 $ 3,039 15,227,963 $ 15,228 $25,573,999 $(20,399,211) $ 13,875 -- $ -- $ 5,206,930
--------- ------- ---------- -------- ----------- ----------- ----------- ------- ------ -----------
The accompanying notes are an integral part of these statements.
F-8
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
For the Year Ended 1995 (date of
December 31, inception) to
---------------------------------------------------- December 31,
2002 2001 2000 2002
-------------- -------------- -------------- --------------
(as restated) (as restated) (as restated) (as restated)
Cash flows from operating activities
Net loss $ (5,433,055) $ (1,652,004) $ (807,076) $ (9,717,606)
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
Uncompensated contribution of services 400,000 155,556 -- 555,556
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
------------- ------------- ------------- -------------
(as restated) (as restated) (as restated) (as restated)
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 disclosures of cash flow
information:
Cash paid for interest $ -- $ 1,020 $ 68,843 $ 150,283
------------- ------------- ------------- -------------
Deemed dividend associated with
beneficial conversion of preferred stock 10,178,944 -- -- 10,178,944
------------- ------------- ------------- -------------
Preferred stock dividend 502,661 -- -- 502,661
------------- ------------- ------------- -------------
Common stock issued for services 157,704 788,970 35 1,209,783
------------- ------------- ------------- -------------
Uncompensated contribution of services 400,000 155,556 -- 555,556
------------- ------------- ------------- -------------
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 ("Isolagen Technologies"). Isolagen
Technologies is the parent company of Isolagen Europe Limited, a company
organized under the laws of the United Kingdom and wholly-owned subsidiary of
Isolagen Technologies ("Isolagen Europe"). Isolagen Technologies is the parent
company of Isolagen Australia Pty Limited, a company organized under the laws of
the Australia and wholly-owned subsidiary of Isolagen Technologies ("Isolagen
Australia"). The common stock, par value $0.001 per share, of the Company
("Common Stock") is traded on the American Stock Exchange ("AMEX") under the
symbol "ILE."
Isolagen is a Houston, Texas based biotechnology company which has developed
a patented process for the propagation of autologous cells to be used to
stimulate a patient's own collagen and elastin production (the "Isolagen
Process"). Autologous cells are a patient's own cells taken from a small skin
sample. From such sample millions of cells are grown and then injected into the
patient to correct and reduce the normal effects of aging like wrinkles, laugh
lines, smokers lines, fine lines and all types of depressed scars. The procedure
is minimally invasive and non-surgical.
In 1995, Isolagen Technologies began treating a small percentage of patients
with the Isolagen Process to correct defects (e.g., wrinkles, depressions and
scarring) in the patient's face. Between 1995 and 1999, approximately 200
doctors utilized the Isolagen Process on approximately 963 patients with
positive results. In 1997, the FDA began regulating the science of biologics.
Biologics, in contrast to drugs that are chemically synthesized, are derived
from living sources (such as humans, animals, and microorganisms) like the
Isolagen Process. In 1995, when Isolagen Technologies began operations, the FDA
had no regulations governing this area of biologics. After reviewing the new
regulations and seeking the advice of consultants, Isolagen concluded that the
use of the Isolagen Process in cosmetic applications did not require the
approval of the FDA. In 1999, Isolagen Technologies filed a request for
authorization from the FDA to administer an investigational drug or biological
product to humans (referred to herein as an "IND"). Such authorization must be
secured prior to commercialization of any new drug or biological product. The
FDA placed the IND on clinical hold until Isolagen Technologies' manufacturing
processes and procedures were changed to meet these new biologics standards, and
FDA approval is obtained. In April 2002, the FDA released Isolagen's IND and
clinical trial negotiations are underway.
As a result, a 397 patient retrospective study has been completed. The
results demonstrated both safety and efficacy as Phase II data. Using Isolagen
Technologies recently completed cGMP laboratory facility in Houston, Texas,
several studies are taking place. These include: dosage management, dental
application relating to gum and bone, cosmetic correction and scarring. They are
operational under currently active INDs with the FDA. The Company anticipates
that these INDs are scheduled for License Application (approval) by the FDA in
2003, although there can be no assurance that such approval will be obtained or
obtained on a timely basis.
The Company's goal is to become the industry leader in the research,
development and commercialization of the Isolagen Process and the use of
autologous cellular systems ("ACS") which stimulate a patient's own collagen
production. The Company is also pursuing, through Isolagen Europe, commercial
operations in the UK and is pursuing commercial operations through subsidiaries,
joint ventures or license arrangements in Australia, South Korea, Hong Kong,
Brazil, Mexico and elsewhere. The Company is investigating regulatory and other
requirements in these countries and evaluating markets and potential joint
venture partners and licensees.
Through December 31, 2002, the Company has been primarily engaged in
developing its initial product technology, recruiting personnel, commencing its
UK operations and raising capital. In the course of its development activities,
the Company has sustained losses and expects such losses to continue through at
least 2003. The Company will finance its operations primarily through its
existing cash, future financing and revenues.
F-11
The Company's ability to operate profitably under its current business plan
is largely contingent upon its success in obtaining further sources of debt and
equity capital, prompt regulatory approval to sell its products and upon its
continued expansion. The Company will require additional capital in the future
to expand its operations. No assurance can be given that the Company will be
able to obtain any such additional capital, either through equity or debt
financing, on satisfactory terms or at all. Additionally, no assurance can be
given that any such financing, if obtained, will be adequate to meet the
Company's ultimate capital needs and to support the Company's growth. If
adequate capital cannot be obtained on satisfactory terms, the Company's
operations could be negatively impacted.
If the Company achieves growth in its operations in the next few years, such
growth could place a strain on its management, administrative, operational and
financial infrastructure. The Company's ability to manage its operations and
growth requires the continued improvement of operational, financial and
management controls, reporting systems and procedures. In addition, the Company
may find it necessary to hire additional management, financial and sales and
marketing personnel to manage the Company's expanding operations. If the Company
is unable to manage this growth effectively and successfully, the Company's
business, operating results and financial condition may be materially adversely
affected.
As of December 31, 2002, the Company had a cash balance of $4,244,640. As of
March 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 and basis of presentation
On August 10, 2001, Isolagen Technologies consummated a merger with American
Financial Holdings, Inc. ("AFH") and Gemini IX, Inc. ("Gemini"). Pursuant to an
Agreement and Plan of Merger, dated August 1, 2001, by and among AFH, ISO
Acquisition Corp, a Delaware corporation and wholly-owned subsidiary of AFH
("Merger Sub"), Isolagen Technologies, Gemini, a Delaware corporation, and
William J Boss, Jr., Olga Marko and Dennis McGill, stockholders of Isolagen
Technologies (the "Merger Agreement"), AFH (i) issued 5,453,977 shares of its
common stock, par value $0.001 to acquire, in a privately negotiated
transaction, 100% of the issued and outstanding common stock (195,707 shares,
par value $0.01, including the shares issued immediately prior to the Merger for
the conversion of certain liabilities, as discussed below) of Isolagen
Technologies, and (ii) issued 3,942,000 shares of its common stock to acquire
100% of the issued and outstanding common stock of Gemini. Pursuant to the terms
of the Merger Agreement, Merger Sub, together with Gemini, merged with and into
Isolagen Technologies (the "Merger"), and AFH was the surviving corporation. AFH
subsequently changed its name to Isolagen, Inc. on November 13, 2001.
Prior to the Merger, Isolagen Technologies had no active business and was
seeking funding to begin U.S. Food and Drug Administration ("FDA") trials of the
Isolagen Process. AFH was a non-operating, public shell company with limited
assets. Gemini was a non-operating private company with limited assets and was
unaffiliated with AFH.
Since AFH and Gemini had no operations and limited assets at the time of the
Merger, the merger has been accounted for as a recapitalization of Isolagen
Technologies and an issuance of common stock by Isolagen Technologies for the
net assets of AFH and Gemini. In the recapitalization, Isolagen Technologies is
treated as having affected (i) a 27.8694 for 1 stock split, whereby the 195,707
shares of its common stock outstanding immediately prior the merger are
converted into the 5,453,977 shares of common stock received and held by the
Isolagen Technologies stockholders immediately after the merger, and (ii) a
change in the par value of its common stock, from $0.01 per share to $0.001 per
share. The stock split and change in par value have been reflected in the
accompanying consolidated financial statements by retroactively restating all
share and per share amounts. The stock issuances are accounted for as the
issuance of (i) 3,942,400 shares for the net assets of Gemini, recorded at their
book value, and (ii) the issuance of 3,899,547 shares (the number of shares AFH
had outstanding immediately prior to the Merger) for the net assets of AFH,
recorded at their book value.
Immediately prior to and as a condition of the Merger, Isolagen Technologies
issued an aggregate of 2,328,972 shares (post split) of its common stock to
convert to equity an aggregate of $2,075,246 of liabilities, comprised of (i)
accrued salaries of $328,125, (ii) convertible debt and related accrued interest
of $1,611,346, (iii) convertible shareholder notes and related accrued interest
of $135,667 and (iv) bridge financing costs of $108. Simultaneous with the
Merger, the Company sold 1,346,669 shares of restricted common
F-12
stock to certain accredited investors in a private placement transaction. The
consideration paid by such investors for the shares of common stock aggregated
$2,020,000 in transactions exempt from the registration requirements of the
Securities Act. The net cash proceeds of this private placement were used to
fund Isolagen's research and development projects and the initial FDA trials of
the Isolagen Process, to explore the viability of entering foreign markets, to
provide working capital and for general corporate purposes.
The financial statements presented include Isolagen, Inc. and its
wholly-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated. Isolagen Technologies was, for accounting
purposes, the continuing entity of the Merger, and accordingly for the periods
prior to the Merger, the financial statements reflect the financial position,
results of operations and cash flows of Isolagen Technologies. The assets,
liabilities, operations and cash flows of AFH and Gemini are included in the
consolidated financial statements from August 10, 2001 onward.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restatement of financial statements
Subsequent to the issuance of the Company's financial statements as of
December 31, 2002 and for the year then ended, the Company identified several
errors that were required to be corrected in the previously reported financial
statements. The principal reasons and effects of the adjustments are summarized
below:
Beneficial Conversion Feature: During 2002, the Company completed a private
placement of Series A Convertible Preferred Stock. Imbedded within the
instruments was a beneficial conversion feature that was not recorded.
Accordingly, the Company revised its financial statements as of December 31,
2002 and for the year then ended to record a deemed dividend to the holders of
the preferred stock totaling $10,178,944. The Company's financial statements
reflect an increase in the retained deficit and a corresponding increase in
paid-in capital for this amount. The deemed dividend associated with the
beneficial conversion is calculated as the difference between the fair value of
the underlying common stock less the proceeds that have been received for the
Series A Preferred Stock limited to the value of the proceeds received. Also,
the Company has included preferred dividends accrued in 2002 totaling $502,661
in the computation of net loss attributable to common shareholders.
Contributed Services: During 2002 and 2001, the certain officers and
directors of the Company were not compensated for a portion of their services
provided to Company. The financial statements are to reflect the total cost of
conducting its business which includes the value of contributed services.
Accordingly, the Company has recorded contribution services from officers
totaling $400,000 and $155,556 for the years ended December 31, 2002 and 2001,
respectively. We estimated the value of the contributed services based upon our
estimate of their fair market value. This contribution of services was recorded
as an increase in compensation expense and an increase in additional paid in
capital.
Weighted Average Shares Utilized in the Calculation Percentage Loss Per
Share: As described in Note 1, the Merger was accounted for as a
recapitalization of Isolagen Technologies and the issuance of shares of common
stock for the net assets of AFH and Gemini. The number of weighted average
shares outstanding computed for the purposed of computing basic and diluted loss
per share were revised to correctly reflect this accounting treatment.
Together these restatements changed the net loss per share from $0.33 to
$1.06 for the year ended December 31, 2002, $0.20 to $0.22 for the year ended
December 31, 2001, from $0.29 to $0.29 for the year ended December 31, 2000, and
the cumulative from inception net loss per share has increased from $1.19 to
$4.02.
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.
F-13
The Company is subject to risks common to companies in the development stage
including, but not limited to, development of new products, development of
markets and distribution channels, dependence on key personnel, and the ability
to obtain additional capital as needed to fund its product plans. The Company
has a limited operating history and has yet to generate any significant revenues
from customers. To date, the Company has been funded by private debt and equity
financings. The Company's ultimate success is dependent upon its ability to
raise additional capital and to successfully develop and market its products.
The products developed by the Company require approvals from the United
States FDA or other international regulatory agencies prior to commercial sales.
There can be no assurance that all of the Company's products will receive the
necessary approvals. If the Company was denied such approvals or such approvals
were delayed, it may have a material adverse impact on the Company.
Inventory
Inventory primarily consists of raw materials used in the Isolagen Process.
Inventory is stated at the lower of cost or market and cost is determined by the
weighted average method.
Property and equipment
Property and equipment, consisting primarily of lab equipment, computer
equipment, leasehold improvements, and office furniture and fixtures is carried
at cost less accumulated depreciation. Depreciation for financial reporting
purposes is provided by the straight-line method over the estimated useful lives
of three to five years subject to half year convention. Leasehold improvements
are amortized using the straight-line method over the remaining life of the
lease. The cost of repairs and maintenance is charged against income as
incurred.
Earnings per share data
Basic earnings (loss) per share is calculated based on the weighted average
common shares outstanding during the period, after giving effect to the manner
in which the merger was accounted for as described in Note 1. Diluted earnings
per share also gives effect to the dilutive effect of stock options, warrants
and convertible preferred stock (calculated based on the treasury stock method).
The Company does not present diluted earnings per share for years in which it
incurred net losses as the effect of potentially dilutive shares from
convertible debt is antidilutive.
Stock-based compensation
The Company accounts for its stock-based compensation under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting
for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to
either record expenses for stock options and other employee compensation plans
based on their fair value at the date of grant or to continue to apply its
current accounting policy under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," ("APB No. 25"), and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
the provisions of APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies 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.
F-14
Revenue recognition
The Company recognizes revenue from product sales when goods are shipped and
the risk of loss transfers to the customer. Revenue from licenses and other
upfront fees are recognized on a ratable basis over the term of the respective
agreement. Milestone payments are recognized upon successful completion of a
performance milestone event. Any amounts received in advance of performance are
recorded as deferred revenue. The Company recognizes revenue over the period the
service is performed in accordance with SEC Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services
rendered, (3) the fee is fixed and determinable, and (4) collectibility is
reasonably assured. We believe that all of these conditions are met at the time
of shipment. Currently, three injections are recommended, although the decision
to utilize one, two or three injections is between the attending physician and
his/her patient. The amount invoiced is fixed and determinable and only varies
among customers depending upon the number of injections requested. There is no
performance provision under any arrangement with any doctor and there is no
right to refund, or returns for unused injections.
Currently the Isologen Process is delivered through an attending physician
to each patient in the Company's recommended regimen of up to three injections.
Each injection has stand alone value to the patient. The Company invoices the
attending physician upon that physician submitting his/her patient's tissue
sample to the Company; thus the contractual arrangement is between the Company
and the medical professional. The amount invoiced varies directly with the
number of injections requested. All orders are paid in advance by the physician
and are not refundable. Revenue is deferred until shipment, provided no
significant obligations remain, and is recognized in installments corresponding
to the number of injections shipped to the attending physician. Due to the short
shelf life, each injection is cultured on an as needed basis and shipped prior
to the individual injection being administered by the physician. The amount of
the revenue deferral represents the fair value of the remaining undelivered
injections defined in accordance with EITF 00-21, which addresses the issue of
accounting for arrangements that involve the delivery of multiple products or
services. Should the physician discontinue the regimen prematurely all remaining
deferred revenue is recognized.
Promotional incentives
The Company periodically offers promotional incentives to physicians on a
case-by-case basis. Promotional incentives are provided to physicians in the
form of 'at no charge' Isolagen Treatments and Isolagen Treatments offered at a
discount to the suggested price list. The Company does not receive any
identifiable benefit from the physicians in exchange for any promotional
incentives granted.
The Company does not record any revenue related to 'at no charge' Isolagen
Treatments and the cost to provide such treatments is expensed as incurred. The
Company records any discounts granted as a reduction in revenue (i.e.net revenue
after discount) from that specific transaction. The Company believes this
accounting treatment complies with Emerging Issues Task Force ("EITF")-01-09:
Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products).
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are generally determined using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Adjustments arising from the use of differing exchange rates from period to
period are included in other comprehensive income in stockholders' equity. Gains
and losses resulting from foreign currency transactions are included in earnings
and have not been material in any one year.
Comprehensive Income
Comprehensive income encompasses all changes in equity other than those with
stockholders and consists of net earnings and foreign currency translation
adjustments. The Company does not provide for U.S. income taxes on foreign
currency translation adjustments since it does not provide for such taxes on
undistributed earnings of foreign subsidiaries.
Research and development expenses
Research and development include direct costs, research-related overhead,
and costs associated with improved process science, manufacturing and cost
reduction are charged to operations as incurred.
F-15
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)
------------ ------------
$ -- $ --
------------ ------------
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.
F-16
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 in accordance with the
terms 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. Thus, the entire amount of the
initial up-front fee of $400,000 has been accrued as management's estimate of
the amount necessary to satisfy the Company's obligation under the Agreement.
Employment agreements
The Company has entered into employment agreements with Olga Marko, William
K. Boss, Jr., Brian Whitley, Robert E. Tompkins and Vaughan Clift.
Ms. Marko entered into an employment agreement with the Company, dated
August 10, 2001, for a term of sixty months at an annual base salary of
$130,000. The base salary shall increase on an annual basis by the same
percentage that the Consumer Price Index has increased during the same time
frame or at the direction of the Board of Directors, whichever is higher. Mrs.
Marko is eligible for an annual bonus to be determined by the Board of Directors
in its sole discretion. If the employment agreement is terminated by the Company
without cause, Mrs. Marko will be entitled to a twelve month severance payment.
Dr. Boss entered into an employment agreement with the Company, dated August
10, 2001, and later amended on February 28, 2002 as follows: (a) during the
first year of the term, Dr. Boss will receive 60,000 shares of Common Stock; (b)
an annual salary of $50,000 for 2002; and (c) an annual salary of $60,000 for
2003. For this compensation, Dr. Boss agrees to devote 25 mutually agreeable
days per year as requested by the Company (i.e., out-of-town meetings, etc.). If
the employment agreement is terminated by the Company without cause, Dr. Boss
will be entitled to a three-month severance payment.
F-17
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 1997. The Company has not been advised of the
outcome of the foregoing, and has had no further contact by the Enforcement
Division of the Commission.
NOTE 6 - EQUITY, STOCK PLAN AND WARRANTS
Uncompensated contributed services
From the date of the Merger through December 31, 2002, the Company has not
paid compensation to certain officers and directors. Accordingly, the Company
has capitalized the estimated fair value of these services. The uncompensated
contributed services totaled $400,000 and $155,556 for the years ended December
31, 2002 and 2001, respectively. We estimated the value of the contributed
services based upon our estimate of their fair market value. This contribution
of services was recorded as an increase to compensation expense and increase in
additional paid in capital.
F-18
Equity instruments issued to non-employees
From time to time, in order to preserve cash and to fund operating
activities of the Company, common stock or other equity instruments may be
issued for cash or in exchange for goods or services. Equity instruments issued
for goods or services are recorded at the fair value of the goods or services
received or the fair value of the equity instruments issued, whichever is more
reliably measurable.
As referred to in Note 1, the Company became a publicly traded enterprise as
a result of the Merger. Non cash transactions involving the issuance of equity
instruments prior to the Merger were recorded at the fair value of the goods or
services received, while transactions occurring after the Merger were recorded
at the fair value of the equity instruments issued, which were determined based
on quoted market prices.
Series A Convertible Preferred Stock
In July 2002, the Company completed a private offering of 2,895,000 shares
of Series A Convertible Preferred Stock, par value $0.001 per share, at an
offering price of $3.50 per share. Each share of Series A Preferred Stock is
convertible into two shares of common stock at any time after issuance and
accrues dividends at 8% per annum payable in cash or additional shares of Series
A Preferred Stock. In conjunction with the private offering, the Company issued
to the placement agent warrants to purchase 1,158,000 shares of common stock
with an exercise price of $1.93 per share. The warrants are exercisable
immediately after grant and expire five years thereafter.
The fair market of the warrants granted to the placement agent, based on the
Black-Scholes valuation model, is estimated to be $1.57 per warrant, assuming
the following: no dividend yield, a risk-free interest rate of 4%, an expanded
term of the warrants of 2 years, and an expected volatility of 129%. The value
of the warrants granted has been offset against the proceeds received from the
sale of the Series A Preferred Stock.
During the year ended December 31, 2002, the Company issued an additional
143,507 shares of Series A Preferred Stock in lieu of cash for payment of
dividends on the Series A Preferred Stock totaling $502,661.
The price of the preferred stock sold was $3.50 per share. The market value
of the Company's common stock sold on the dates that the preferred stock sold or
was issued as a dividend had a range of $2.30 - $5.40 per common share. In
accordance with EITF 00-27 this created a beneficial conversion to the holders
of the preferred stock and a deemed dividend to the preferred stockholders
totaling $10,178,944 was recorded by the Company with a corresponding amount
recorded as additional paid-in capital. The deemed dividend associated with the
beneficial conversion is calculated as the difference between the fair value of
the underlying common stock less the proceeds that have been received for the
Series A Preferred Stock limited to the value of the proceeds received.
2001 Stock Option and Stock Appreciation Rights Plan
Effective August 10, 2001, the Company adopted the Isolagen, Inc. 2001 Stock
Option and Stock Appreciation Rights Plan (the "Stock Plan"). The Stock Plan is
discretionary and allows for an aggregate of up to 5,000,000 shares of the
Company's common stock to be awarded through incentive and non-qualified stock
options and stock appreciation rights. The Stock Plan is administered by the
Company's Board of Directors, who has exclusive discretion to select
participants who will receive the awards and to determine the type, size and
terms of each award granted.
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company has elected to continue to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees", in accounting for
its Stock Plan. Under APB No. 25, the Company does not recognize compensation
expense on the issuance of its stock options because the terms are fixed and the
exercise price equals or exceeds the fair market value of the underlying stock
on the grant date.
Information regarding the options and warrants granted in 2002 and 2001 is
as follows:
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) -- -- --
F-19
Expired or cancelled (200,000) -- (450,000) --
----------- ----------- ----------- -----------
Outstanding, end of year 4,252,100 3,792,500 1,533,000 450,000
----------- ----------- ----------- -----------
Exercisable, end of year 458,017 4,167 1,243,000 --
----------- ----------- ----------- -----------
Available for grant, end of year 509,500 1,207,500
----------- -----------
The weighted average and warrant exercise price information for 2002 and
2001 is as follows:
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:
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001
-------------- --------------
Net loss - as reported $ (5,433,055) $ (1,652,004)
Net loss - pro forma $ (6,441,617) $ (1,801,568)
Net loss per share - as reported
Basic and diluted $ (.36) $ (.14)
Net loss per share - pro forma
Basic and diluted $ (.42) $ (.15)
F-20
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.
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
September 30, December 31,
2003 2002
-------------- --------------
(unaudited) (as restated)
ASSETS
Current assets
Cash and cash equivalents $ 18,546,927 $ 4,244,640
Accounts receivable, net of allowance for doubtful accounts 70,977 40,204
Inventory 413,222 138,910
Other receivables 98,583 153,583
Prepaid expenses 274,582 284,557
-------------- --------------
Total current assets 19,404,291 4,861,894
-------------- --------------
Property and equipment, net 2,621,243 2,159,913
Intangible assets 540,000 --
Other assets 168,831 235,857
-------------- --------------
Total assets $ 22,734,365 $ 7,257,664
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 1,701,370 $ 1,881,236
Accrued expenses 362,693 112,224
Deferred revenue 358,240 57,274
-------------- --------------
Total current liabilities 2,422,303 2,050,734
-------------- --------------
Total liabilities 2,422,303 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; 0 and 3,038,507 shares issued and
outstanding at September 30, 2003 and December 31, 2002, respectively -- 3,039
Preferred Stock - Series B $.001 par value; 200,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.001 par value; 50,000,000 shares
authorized; 26,535,299 and 15,227,963 shares issued and outstanding
at September 30, 2003 and December 31, 2002, respectively 26,535 15,228
Additional paid-in capital 50,170,083 25,573,999
Other comprehensive income 186,544 13,875
Accumulated deficit during development stage (30,071,100) (20,399,211)
-------------- --------------
Total shareholders' equity (deficit) 20,312,062 5,206,930
-------------- --------------
Total liabilities and shareholder's equity $ 22,734,365 $ 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,
Nine Months Ended 1995 (date of
September 30, inception) to
----------------------------- September 30,
2003 2002 2003
------------ ------------ ------------
(as restated)
Revenues
Sales $ 158,371 $ 2,518 $ 1,599,476
License fees -- 40,000 260,000
------------ ------------ ------------
Total revenues 158,371 42,518 1,859,476
Cost of sales 79,161 -- 516,753
------------ ------------ ------------
Gross profit 79,210 42,518 1,342,723
Selling, general and administrative expenses 5,201,411 2,470,703 12,362,070
Research and development 2,292,675 1,149,009 6,062,795
------------ ------------ ------------
Operating loss (7,414,876) (3,577,194) (17,082,142)
Other income (expense)
Interest income 19,404 83,025 256,493
Other income 55,663 -- 88,084
Loss on disposal of asset -- -- (8,222)
Interest expense -- -- (311,628)
------------ ------------ ------------
Net loss $ (7,339,809) $ (3,494,169) $(17,057,415)
------------ ------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock (1,244,880) (9,676,671) (11,423,824)
Preferred stock dividends (1,087,200) (297,958) (1,589,861)
------------ ------------ ------------
Net loss attributable to common stockholders $ (9,671,889) $(13,468,798) $(30,071,100)
------------ ------------ ------------
Per share information
Net loss - basic and diluted (0.44) (0.23) (2.75)
Deemed dividend associated with beneficial
conversion of preferred stock (0.07) (0.64) (1.84)
Preferred stock dividends (0.06) (0.02) (0.26)
------------ ------------ ------------
Net loss common share - basic and diluted $ (0.57) $ (0.89) $ (4.85)
------------ ------------ ------------
Weighted average number of basic and diluted
common shares outstanding 16,824,001 15,189,563 6,206,166
------------ ------------ ------------
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 September 30,
-------------------------------
2003 2002
------------- -------------
(as restated)
Revenues
Sales $ 78,575 --
License fees -- --
------------- -------------
Total revenues 78,575 --
Cost of sales 30,300 --
------------- -------------
Gross profit 48,275 --
Selling, general and administrative expenses 1,678,355 996,594
Research and development 1,088,137 501,655
------------- -------------
Operating loss (2,718,217) (1,498,249)
Other income (expense)
Interest income 8,784 31,541
Other income -- --
Interest expense -- --
------------- -------------
Net loss $ (2,709,433) $ (1,466,708)
------------- -------------
Deemed dividend associated with the beneficial
conversion of preferred stock -- (82,619)
Preferred stock dividends (676,011) (203,452)
------------- -------------
Net loss attributable to common shareholders $ (3,385,444) $ (1,752,779)
------------- -------------
Per share information
Net loss - basic and diluted (0.14) (0.10)
Deemed dividend associated with the beneficial
conversion of preferred stock -- (0.01)
Preferred stock dividend (0.03) (0.01)
------------- -------------
Net loss per common share - basic and diluted $ (0.17) $ (0.12)
------------- -------------
Weighted average number of basic and diluted
common shares outstanding 19,726,478 15,189,563
------------- -------------
The accompanying notes are an integral part of these statements.
F-24
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity
(as restated)
Series A Pre- Series B
ferred Stock Preferred Stock Common Stock Treasury Stock
-------------- ----------------- --------------------- Accumulated --------------
Deficit Other Total Share
Number Number Number Additional During Compre- Number holders'
of of of Paid-In Development hensive of Equity
Shares Amount Shares Amount Shares Amount Capital Stage Income Shares Amount (Deficit)
------ ------- ------ ---------- ---------- --------- ---------- ---------- -------- -------- ------ ----------
Issuance of
common stock
for cash on
12/28/95 -- $ -- -- $ -- 2,285,291 $ 2,285 $ (1,465) $ -- $ -- $ -- $ -- $ 820
Issuance of
common stock
for cash on
11/7/96 -- -- -- -- 11,149 11 49,989 -- -- -- -- 50,000
Issuance of
common stock
for cash on
11/29/96 -- -- -- -- 2,230 2 9,998 -- -- -- -- 10,000
Issuance of
common stock
for cash on
12/19/96 -- -- -- -- 6,690 7 29,993 -- -- -- -- 30,000
Issuance of
common stock
for cash on
12/26/96 -- -- -- -- 11,148 11 49,989 -- -- -- -- 50,000
Net loss -- -- -- -- -- -- -- (270,468) -- -- -- (270,468)
------ ------- ------ ---------- ---------- --------- ---------- ---------- -------- -------- ------ ----------
Balance,
12/31/96 -- $ -- $ -- 2,316,508 $ 2,316 $ 138,504 $ (270,468) $ -- -- $ -- $ -- $ (129,648)
Issuance of
common stock
for cash on
12/27/97 -- -- -- -- 21,182 21 94,979 -- -- -- -- 95,000
Issuance of
common stock
for Services
on 9/1/97 -- -- -- -- 11,148 11 36,249 -- -- -- -- 36,260
Issuance of
common stock
for Services
12/28/97 -- -- -- -- 287,193 287 9,968 -- -- -- -- 10,255
Net loss -- -- -- -- -- -- -- (52,550) -- -- -- (52,550)
------ ------- ------ ---------- ---------- --------- ---------- ---------- -------- -------- ------ ----------
Balance,
12/31/97 -- $ -- -- $ -- 2,636,0031 $ 2,635 $ 279,700 $ (323,018) $ -- -- $ -- $ (40,683)
The accompanying notes are an integral part of these statements.
F-25
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Series B Preferred Stock Common Stock
--------------------------- --------------------------- ---------------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Issuance of
common stock
for cash on
8/23/98 -- $ -- -- $ -- 4,459 $ 4
Repurchase of
common stock
on 9/29/98 -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, 12/31/98 -- $ -- -- $ -- 2,640,490 $ 2,639
Issuance of
common stock
for cash on -- -- -- -- 52,506 53
9/10/99
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, 12/31/99 -- $ -- -- $ -- 2,692,996 $ 2,692
Issuance of
common stock
for cash on -- -- -- -- 53,583 54
1/18/00
Issuance of
common stock
for Services -- -- -- -- 68,698 69
on 3/1/00
Issuance of
common stock
for Services -- -- -- -- 27,758 28
on 4/4/00
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance,
12/31/00 -- $ -- -- $ -- 2,843,045 $ 2,843
Treasury Stock
Accumulated --------------------------
Deficit Total
Additional During Other Number Shareholders'
Paid-In Development Comprehensive of Equity
Capital Stage Income Shares Amount (Deficit)
------------ ------------ ------------ ----------- ----------- -----------
Issuance of
common stock
for cash on
8/23/98 $ 20,063 $ -- $ -- -- $ -- $ 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 $ 299,763 $ (518,693) $ -- 2,400 $ (50,280) $ (266,571)
Issuance of
common stock
for cash on 149,947 -- -- -- -- 150,000
9/10/99
Net loss -- (1,306,778) -- -- -- (1,306,778)
------------ ------------ ------------ ----------- ----------- -----------
Balance, 12/31/99 $ 449,710 $ (1,825,471) $ -- 2,400 $ (50,280) $(1,423,349)
Issuance of
common stock
for cash on 1,869 -- -- -- -- 1,923
1/18/00
Issuance of
common stock
for Services (44) -- -- -- -- 25
on 3/1/00
Issuance of
common stock
for Services (18) -- -- -- -- 10
on 4/4/00
Net loss -- (807,076) -- -- -- (807,076)
------------ ------------ ------------ ----------- ----------- -----------
Balance,
12/31/00 $ 451,517 $ (2,632,547) $ -- 2,400 $ (50,280) $(2,228,467)
The accompanying notes are an integral part of these statements.
F-26
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Series B Preferred Stock Common Stock
--------------------------- --------------------------- ---------------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common
stock for services
on 7/1/01 -- $ -- -- $ -- 156,960 $ 157
Issuance of common
stock for services
on 7/1/01 -- -- -- -- 125,000 125
Issuance of common
stock for
capitalization of
accrued salaries
on 8/10/01 -- -- -- -- 70,000 70
Issuance of common
stock for conversion
of convertible debt
on 8/10/01 -- -- -- -- 1,750,000 1,750
Issuance of common
stock for conversion
of convertible
shareholder notes
payable on 8/10/01 -- -- -- -- 208,972 209
Issuance of common
stock for bridge
financing on 8/10/01 -- -- -- -- 300,000 300
Retirement of
treasury stock on
8/10/01 -- -- -- -- -- --
Issuance of common
stock for net
assets of Gemini
on 8/10/01 -- -- -- -- 3,942,400 3,942
Issuance of common
stock for net assets
of AFH on 8/10/01 -- -- -- -- 3,899,547 3,900
Issuance of common
stock for cash on
8/10/01 -- -- -- -- 1,346,669 1,347
Transaction and fund
raising expenses
on 8/10/01 -- -- -- -- -- --
Issuance of
common stock
for services on
8/10/01 -- -- -- -- 60,000 60
Issuance of common
stock for cash on
8/28/01 -- -- -- -- 26,667 27
Issuance of common
stock for services
on 9/30/01 -- -- -- -- 314,370 314
Treasury Stock
Accumulated --------------------------
Deficit Total
Additional During Other Number Shareholders'
Paid-In Development Comprehensive of Equity
Capital Stage Income Shares Amount (Deficit)
------------ ------------ ------------ ----------- ----------- -----------
Issuance of common
stock for services
on 7/1/01 $ (101) $ -- $ -- -- $ -- $ 56
Issuance of common
stock for services
on 7/1/01 (80) -- -- -- -- 45
Issuance of common
stock for
capitalization of
accrued salaries
on 8/10/01 328,055 -- -- -- -- 328,125
Issuance of common
stock for conversion
of convertible debt
on 8/10/01 1,609,596 -- -- -- -- 1,611,346
Issuance of common
stock for conversion
of convertible
shareholder notes
payable on 8/10/01 135,458 -- -- -- -- 135,667
Issuance of common
stock for bridge
financing on 8/10/01 (192) -- -- -- -- 108
Retirement of
treasury stock on
8/10/01 (50,280) -- -- (2,400) 50,280 --
Issuance of common
stock for net
assets of Gemini
on 8/10/01 (3,942) -- -- -- -- --
Issuance of common
stock for net assets
of AFH on 8/10/01 (3,900) -- -- -- -- --
Issuance of common
stock for cash on
8/10/01 2,018,653 -- -- -- -- 2,020,000
Transaction and fund
raising expenses
on 8/10/01 (48,547) -- -- -- -- (48,547)
Issuance of
common stock
for services on
8/10/01 -- -- -- -- -- 60
Issuance of common
stock for cash on
8/28/01 39,973 -- -- -- -- 40,000
Issuance of common
stock for services
on 9/30/01 471,241 -- -- -- -- 471,555
The accompanying notes are an integral part of these statements.
F-27
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Series B Preferred Stock Common Stock
-------------------------------- -------------------------------- -------------------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
--------------- --------------- --------------- --------------- -------------- ---------------
Uncompensated
contribution of
services - 3rd quarter
(as restated) -- $ -- $ -- $ -- -- $ 55,556
Issuance of common stock
for services on 11/1/01 -- -- -- -- 145,933 146
Uncompensated
contribution of
services - 4th quarter
(as restated) -- -- -- -- -- --
Net loss (as restated) -- -- -- -- -- --
--------------- --------------- --------------- --------------- -------------- ---------------
Balance, 12/31/01
(as restated) -- $ -- -- $ -- 15,189,563 $ 15,190
Uncompensated
contribution of
services - 1st quarter
(as restated) -- -- -- -- -- --
Issuance of preferred
stock for cash on
4/26/02 905,000 905 -- -- -- --
Issuance of preferred
stock for cash on
5/16/02 890,250 890 -- -- -- --
Issuance of preferred
stock for cash on
5/31/02 795,000 795 -- -- -- --
Issuance of preferred
stock for cash on
6/28/02 229,642 230 -- -- -- --
Uncompensated
contribution of
services - 2nd quarter
(as restated) -- -- -- -- -- --
Issuance of preferred
stock for cash on
7/15/02 75,108 75 -- -- -- --
Issuance of common stock
for cash on 8/1/02 -- -- -- -- 38,400 38
Issuance of warrants
for services on 9/06/02 -- -- -- -- -- --
Uncompensated
contribution of services
- 3rd quarter (as restated) -- -- -- -- -- --
Uncompensated
contribution of services -
4th quarter (as restated) -- -- -- -- -- --
Issuance of preferred
stock for dividends 143,507 144 -- -- -- --
Deemed dividend
associated with
beneficial conversion
of preferred stock
(as restated) -- -- -- -- -- --
Comprehensive income:
Net loss (as restated) -- -- -- -- -- --
Other comprehensive
income,
foreign currency
translation adjustment -- -- -- -- -- --
Comprehensive loss
(as restated) -- -- -- -- -- --
--------------- --------------- --------------- --------------- -------------- ---------------
Balance, 12/31/02
(as restated) 3,038,507 $ 3,039 -- $ -- 15,227,963 $ 15,228
Treasury Stock
Accumulated ------------------------------
Deficit Total
Additional During Other Number Shareholders'
Paid-In Development Comprehensive of Equity
Capital Stage Income Shares Amount (Deficit)
--------------- --------------- --------------- -------------- ------------ ------------
Uncompensated
contribution of
services - 3rd quarter
(as restated) $ -- $ -- -- $ -- -- $ 55,556
Issuance of common stock
for services on 11/1/01 218,754 -- -- -- -- 218,900
Uncompensated
contribution of
services - 4th quarter
(as restated) 100,000 -- -- -- -- 100,000
Net loss (as restated) -- (1,652,004) -- -- -- (1,652,004)
--------------- --------------- --------------- -------------- ------------ ------------
Balance, 12/31/01
(as restated) 5,321,761 $ (4,284,551) $ -- $ -- -- $ 1,052,400
Uncompensated
contribution of
services - 1st quarter
(as restated) 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for cash on
4/26/02 2,817,331 -- -- -- -- 2,818,236
Issuance of preferred
stock for cash on
5/16/02 2,772,239 -- -- -- -- 2,773,129
Issuance of preferred
stock for cash on
5/31/02 2,473,380 -- -- -- -- 2,474,175
Issuance of preferred
stock for cash on
6/28/02 712,991 -- -- -- -- 713,221
Uncompensated
contribution of
services - 2nd quarter
(as restated) 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for cash on
7/15/02 233,886 -- -- -- -- 233,961
Issuance of common stock
for cash on 8/1/02 57,562 -- -- -- -- 57,600
Issuance of warrants
for services on 9/06/02 103,388 -- -- -- -- 103,388
Uncompensated
contribution of services
- 3rd quarter (as restated) 100,000 -- -- -- -- 100,000
Uncompensated
contribution of services -
4th quarter (as restated) 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for dividends 502,517 (502,661) -- -- -- --
Deemed dividend
associated with
beneficial conversion
of preferred stock
(as restated) 10,178,944 (10,178,944) -- -- -- --
Comprehensive income:
Net loss (as restated) -- (5,433,055) -- -- -- (5,433,055)
Other comprehensive
income,
foreign currency
translation adjustment -- -- 13,875 -- -- 13,875
------------
Comprehensive loss
(as restated) -- -- -- -- -- (5,419,180)
--------------- --------------- --------------- -------------- ------------ ------------
Balance, 12/31/02
(as restated) $ 25,573,999 $ (20,399,211) $ 13,875 -- $ -- $ 5,206,930
The accompanying notes are an integral part of these statements.
F-28
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders' Equity (Continued)
(as restated)
Series A Preferred Stock Series B Preferred Stock Common Stock
------------------------------ ----------------------------- ------------------------------
Number Number Number
of of of
Shares Amount Shares Amount Shares Amount
------------- ------------- ------------- ------------- ------------- -------------
Issuance of common stock
for cash on 1-7-03 -- -- -- -- 61,600 62
Issuance of common
stock for patent pending
acquisition on 3/31/03 -- -- -- -- 100,000 100
Cancellation of common
stock on 3/31/03 -- -- -- -- (79,382) (79)
Uncompensated
contribution of
services - 1st quarter
(as restated) -- -- -- -- -- --
Issuance of preferred
stock for cash on 5/9/03 -- -- 110,250 110 -- --
Issuance of preferred
stock for cash on 5/16/02 -- -- 45,500 46 -- --
Conversion of preferred
stock into common stock-
2nd qtr (70,954) (72) -- -- 147,062 147
Conversion of warrants
into common stock-
2nd qtr -- -- -- -- 114,598 114
Uncompensated
contribution of
services - 2nd
quarter (as restated) -- -- -- -- -- --
Issuance of preferred
stock for dividends -- -- -- -- -- --
Deemed dividend
associated with beneficial
conversion of preferred stock -- -- -- -- -- --
Issuance of common
stock for cash - 3rd qtr -- -- -- -- 202,500 202
Issuance of common
stock for cash on 8-27-03 -- -- -- -- 3,359,331 3,359
Conversion of preferred
stock Into common stock -
3rd qtr (2,967,553) (2,967) (155,750) (156) 7,188,793 7,189
Conversion of warrants
into Common stock - 3rd
qtr -- -- -- -- 212,834 213
Comprehensive income:
Net loss (as restated) -- -- -- -- -- --
Other comprehensive
income, foreign
currency translation
adjustment -- -- -- -- -- --
Comprehensive loss -- -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Balance, 9/30/03 -- $ -- -- $ -- $ 26,535,299 $ 26,535
------------- ------------- ------------- ------------- ------------- -------------
Treasury Stock
Accumulated --------------------------
Deficit Total
Additional During Other Number Shareholders'
Paid-In Development Comprehensive of Equity
Capital Stage Income Shares Amount (Deficit)
------------- ------------- ------------- ----------- ----------- -----------
Issuance of common stock
for cash on 1-7-03 92,338 -- -- -- -- 92,400
Issuance of common
stock for patent pending
acquisition on 3/31/03 539,900 -- -- -- -- 540,000
Cancellation of common
stock on 3/31/03 -- -- -- -- (119,459)
Uncompensated
contribution of
services - 1st quarter
(as restated) 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for cash on 5/9/03 2,773,218 -- -- -- -- 2,773,328
Issuance of preferred
stock for cash on 5/16/02 1,145,704 -- -- -- -- 1,145,750
Conversion of preferred
stock into common stock-
2nd qtr 40,626 -- -- -- -- 40,701
Conversion of warrants
into common stock-
2nd qtr (114) -- -- -- -- --
Uncompensated
contribution of
services - 2nd
quarter (as restated) 100,000 -- -- -- -- 100,000
Issuance of preferred
stock for dividends -- (1,087,200) -- -- -- (1,087,200)
Deemed dividend
associated with beneficial
conversion of preferred stock 1,244,880 (1,244,880) -- -- -- --
Issuance of common
stock for cash - 3rd qtr 309,798 -- -- -- -- 310,000
Issuance of common
stock for cash on 8-27-03 18,452,202 -- -- -- -- 18,455,561
Conversion of preferred
stock Into common stock -
3rd qtr (82,875) -- -- -- -- (78,809)
Conversion of warrants
into Common stock - 3rd
qtr (213) -- -- -- -- --
Comprehensive income:
Net loss (as restated) -- (7,339,809) -- -- -- (7,339,809)
Other comprehensive
income, foreign
currency translation
adjustment -- -- 172,669 -- -- 172,669
-----------
Comprehensive loss -- -- -- -- -- (7,167,140)
-------------- ------------- ------------- ----------- ----------- -----------
Balance, 9/30/03 $ 50,170,083 $ (30,071,100) $ 186,544 -- $ -- $20,312,062
-------------- ------------- ------------- ------------- ------------ ------------
The accompanying notes are an integral part of these statements.
F-29
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
Cumulative
Period from
December 28,
Nine Months Ended 1995 (date of
September 30, inception) to
----------------------------- September 30,
2003 2002 2003
------------ ------------- -------------
(as restated)
Cash flows from operating activities
Net loss (7,339,809) $ (3,494,169) $ (17,057,415)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for services -- 54,316 1,209,783
Uncompensated contribution of services 200,000 300,000 755,556
Depreciation 631,015 22,403 798,544
Loss on sale of property and equipment 39,488 -- 47,710
Change in operating assets and liabilities:
(Increase) in accounts receivable (30,773) (91,296) (70,977)
(Increase) decrease in other receivables 55,000 -- (98,583)
(Increase) in inventory (274,312) (69,154) (413,222)
(Increase) decrease in prepaid expenses 9,975 -- (274,582)
Increase (decrease) in other assets 67,026 (20,215) (48,481)
Increase (decrease) in accounts payable (179,866) 1,273,826 1,701,370
Increase in accrued expenses 250,469 23,807 362,693
Increase (decrease) in deferred revenue 300,966 (262,289) 358,240
------------- ------------- -------------
Net cash used in operating activities (6,270,821) (2,268,771) (12,729,364)
------------- ------------- -------------
Cash flows from investing activities
Purchase of property and equipment (1,143,548) (784,522) (3,480,212)
Proceeds from the sale of property and equipment 33,300 -- 34,300
------------- ------------- -------------
Net cash used in investing activities (1,110,248) (784,522) (3,445,912)
------------- ------------- -------------
Cash flows from financing activities
Proceeds from the issuance of preferred stock 3,919,078 9,012,723 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 18,857,961 -- 21,383,371
Cash dividends paid on preferred stock (1,087,200) -- (1,087,200)
Merger and acquisition expenses -- -- (48,547)
Repurchase of common stock -- -- (50,280)
------------- ------------- -------------
Net cash provided by financing activities 21,689,839 9,012,723 34,714,811
------------- ------------- -------------
Effect of exchange rate changes on cash balance (6,483) (39,651) 7,392
Net increase (decrease) in cash and cash equivalents 14,302,287 5,919,779 18,546,927
Cash and cash equivalents, beginning of period 4,244,640 1,380,824 --
------------- ------------- -------------
Cash and cash equivalents, end of period $ 18,546,927 $ 7,300,603 $ 18,546,927
------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ -- $ -- $ 150,283
------------- ------------- -------------
Deemed dividend associated with beneficial conversion of
preferred stock 1,244,880 9,676,271 11,423,824
------------- ------------- -------------
Preferred stock dividend 1,087,200 297,958 1,589,861
------------- ------------- -------------
Common stock issued for services -- 54,316 1,209,783
------------- ------------- -------------
Uncompensated contribution of services 200,000 300,000 755,556
------------- ------------- -------------
The accompanying notes are an integral part of these statements.
F-30
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 ("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/Exploratory 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 100% of the patients have had their first consultation. The final
patient injection are scheduled for November 2003. This Phase III/Exploratory
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 is completing its
analysis of the data from the Phase II. Finally, Isolagen also has a Phase I
clinical trial of twenty-one patients for dental applications addressing
gingival recession. Isolagen expects to complete this study in the first quarter
of 2004.
The Company received a letter from the FDA dated October 28, 2003, from the
Office of Cellular, Tissue, and Gene Therapies. The letter is in response to our
request for clarification of study design comments that the FDA alluded to
previously. The Company believes that they will be able to respond to all
comments in the letter and will be doing so in a face to face meeting with the
FDA at the end of 2003. The majority of issues relate to comments that have
already been addressed and are the subject of submissions which we will make in
preparation for our upcoming meeting with the FDA. At that time, the Company
will attempt to resolve any remaining study design issues. Successful resolution
of these issues with the FDA may permit the Company to use the study data from
the Phase III/Exploratory study for license application or to supplement this
data with well controlled additional studies. However, there can be no assurance
that we will be able to satisfy the study design issues presented by the FDA.
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
F-31
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 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 September 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 September 30, 2003, the Company had a cash balance of $18.5
million. As of November 17, 2003, the Company had a cash balance of
approximately $17.6 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 and change in par value have been reflected in the
accompanying consolidated financial statements by retroactively restating all
share and per share amounts. The stock issuances are accounted for as the
issuance of (i) 3,942,400 shares for the net assets of Gemini, recorded at their
book value, and (ii) the issuance of 3,899,547 shares (the number of shares AFH
had outstanding immediately prior to the Merger) for the net assets of AFH,
recorded at their book value.
F-32
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 elsewhere herein.
Restatement of financial statements
Subsequent to the issuance of the Company's financial statements as of June
30, 2003 and for the six month and three month periods ended June 30, 2003 and
2002, the Company identified several errors that were required to be corrected
in the previously reported financial statements. Accordingly, on October 24,
2003 the Company restated its financial statements for fiscal 2002, fiscal 2001
and for each of the quarterly periods ended June 30, 2003 and March 31, 2003.
The amounts referenced below as of and for the nine month period ended September
30, 2003 include the affects of the restatements as per the previously amended
Forms 10-Q/A for June and March 2003. The amounts referenced below as of and for
the nine month and three month periods ended September 30, 2002 have been
revised to reflect the balances and amounts on a restated basis. The principal
reasons and effects of the adjustments are summarized below:
Beneficial Conversion Feature: During 2003 and 2002, the Company completed
private placements of Series A and Series B 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
September 30, 2003 and for the nine month and three month periods ended
September 30, 2003 and 2002 to record deemed dividends to the holders of the
preferred stock totaling $1,244,880 and $9,676,671 for the nine month periods
ended September 30, 2003 and 2002, respectively, and $0 and $82,619 for the
three month periods ended September 30, 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 and the Series B Preferred
Stock limited to the value of the proceeds received. Also, the Company has
included preferred dividends accrued for the nine months ended September 30,
2003 and 2002 of $1,087,200 and $297,958, respectively, and for the three months
ended September 30, 2003 and 2002 of $676,011 and $203,452, respectively, in the
computation of net loss attributable to common shareholders. (see Note 4)
Contributed Services: During 2002 and 2001, certain officers and directors
of the Company were not compensated for a portion of
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their services provided to Company. The financial statements are to reflect the
total cost of conducting its business which includes the value of contributed
services. Accordingly, the Company has recorded contribution services from
officers totaling $200,000 for the nine month period ended September 30, 2003
and $300,000 for the nine month period ended September 30, 2002 and $0 for the
three month period ended September 30, 2003 and $100,000 for the three month
period ended September 30, 2002. We estimated the value of the contributed
services based upon our estimate of their fair market value. This contribution
of services was recorded as an increase in compensation expense and an increase
in additional paid in capital. (see Note 4)
Weighted Average Shares Utilized in the Calculation Percentage Loss Per
Share: As described in Note 1, the Merger was accounted for as a
recapitalization of Isolagen Technologies and the issuance of shares of common
stock for the net assets of AFH and Gemini. The number of weighted average
shares outstanding computed for the purposed of computing basic and diluted loss
per share were revised to correctly reflect this accounting treatment.
Together these restatements changed the net loss per share attributable to
common shareholders from $0.21 to $0.89 for the nine months ended September 30,
2002 and from $0.09 to $0.12 for the three months ended September 30, 2002.
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.
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
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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, after giving effect to the manner
in which the merger was accounted for as described in Note 1. Diluted earnings
per share also gives effect to the dilutive effect of stock options, warrants
and convertible preferred stock (calculated based on the treasury stock method).
The Company does not present diluted earnings per share for years in which it
incurred net losses as the effect is antidilutive.
Stock-based compensation
The Company accounts for its stock-based compensation under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123 - "Accounting
for Stock Based Compensation." Under SFAS No. 123, the Company is permitted to
either record expenses for stock options and other employee compensation plans
based on their fair value at the date of grant or to continue to apply its
current accounting policy under Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees," ("APB No. 25"), and recognize
compensation expense, if any, based on the intrinsic value of the equity
instrument at the measurement date. The Company elected to continue following
the provisions of APB No. 25.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement provides guidance for those companies 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,
"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
F-35
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.
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.
F-36
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,
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
From the date of the Merger through June 30, 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 $200,000 for the nine month ended September 30,
2003 and $300,000 for the nine months ended September 30, 2002. 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 nine months ended September 30, 2003, the Company issued 264,100
shares of common stock for cash totaling $402,400 in connection with the
exercise of stock options and issued 327,432 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. The fair
value of the warrants granted to the placement agent, based on the Black-Scholes
valuation model is estimated to be $2.77 per warrant. The value
F-37
of the warrants granted has been offset from the proceeds received from the sale
of the Series B Preferred Stock and recorded as additional paid in capital.
The price of the preferred stock sold was $28 per share. The market value of
the Company's common stock sold on the dates that the preferred stock was sold
had a range of $4.40 - $4.54 per common share. In accordance with EITF 00-27
this created a beneficial conversion to the holders of the preferred stock and a
deemed dividend to the preferred stockholders totaling $1,244,880 was recorded
by the Company with a corresponding amount recorded as additional paid-in
capital. The deemed dividend associated with the beneficial conversion is
calculated as the difference between the fair value of the underlying common
stock less the proceeds that have been received for the Series B Preferred Stock
limited to the value of the proceeds received.
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 $36,809 during the three months ended September 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
("2001 Stock Option Plan"). The options vest over a three year period from the
date of grant. The Company recognized compensation expense totaling $13,125
during the three months ended September 30, 2003 based on the options intrinsic
value on the grant date.
In August 2003, the Company sold in a private offering 3,359,331 shares of
Common Stock, par value $0.001 per share, at an offering price of $6 per share.
After deducting the costs and expenses associated with the sale, the Company
received cash totaling $18,455,561.
In September 2003, the Company issued 600,000 options to purchase its common
stock with an exercise price of $9.81 per share under the 2003 Stock Option
Plan. The options vest ratably over a 18 month period from 18 months from the
date of grant. 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:
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------ ------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net loss - as reported $ (2,709,433) $ (1,466,708) $ (7,339,809) $ (3,494,169)
Less: total stock-based employee compensation
expense determined under fair value based
method for all awards granted to employees,
net of related tax effect (580,581) (191,134) (1,527,702) (573,402)
--------------- --------------- --------------- ---------------
Net loss - pro forma $ (3,290,014) $ (1,657,842) $ (8,867,511) $ (4,067,571)
--------------- --------------- --------------- ---------------
Net loss per share - as reported
Basic and diluted $ (0.14) $ (0.10) $ (0.44) $ (0.23)
Net loss per share - pro forma
Basic and diluted $ (0.17) $ (0.11) $ (0.53) $ (0.27)
F-38
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 20,000
Legal fees and expenses 45,000
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 $ 113,104
==========
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 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.
II-1
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.
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. Those investors
who purchased shares of our common stock in the July 2002 private placement are
identified in footnote (3) in the Selling Holders table in "Securities Offered,
the Selling Holders and the Plan of Distribution."
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.
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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. Those investors who purchased shares of our common stock in the May
2003 private placement are identified in footnote (4) in the Selling Holders
table in "Securities Offered, the Selling Holders and the Plan of Distribution."
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 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.
II-3
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 (8)
3(ii) Bylaws (2)
4.1 Specimen of Common Stock certificate (3)
4.2 Certificate of Designations of Series A Convertible
Preferred Stock (8)
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 (9)
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 (8)
10.4 "Intentionally Blank"
10.5 Employment Agreement dated May 28, 2002 between Isolagen,
Inc. and Vaughan Clift (8)
10.6 Employment Agreement dated September 5, 2003 between
Isolagen, Inc. and Frank DeLape (8)
10.7 Employment Agreement dated September 5, 2003 between
Isolagen, Inc. and Michael Macaluso (8)
10.8 Employment Agreement dated September 5, 2003 between
Isolagen, Inc. and Jeffrey W. Tomz (8)
10.9 Employment Agreement dated August 10, 2001 between Isolagen,
Inc. and William K. Boss, as amended on February 28, 2002
(8)
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 (8)
II-4
10.12 Lease Agreement dated November 20, 2002 by and between the
Registrant as Lessee and Lego Australia Pty Limited as
Lessor (8)
10.13 Intellectual Property Purchase Agreement between Isolagen
Technologies, Inc., Gregory M. Keller, and PacGen Partners
(9)
21 List of Subsidiaries (7)
23.1 Dilworth Paxson LLP Consent (9)
23.2 Pannell Kerr Forster of Texas, P.C. Consent (10)
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) 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.
(8) Previously filed as appendix to the Registrant's Form S-1 as filed as
filed on September 12, 2003 and is incorporated by reference hereto.
(9) Previously filed as appendix to the Registrant's amended Form S-1 as filed
as filed on October 24, 2003 and is incorporated by reference hereto.
(10) Filed herewith.
II-5
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes the following:
(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 amended
registration statement to be signed on its behalf by the undersigned, in the
City of Houston, State of Texas, November 17, 2003.
ISOLAGEN, INC.
By: /s/ JEFFREY W. TOMZ
Chief Financial Officer and Secretary
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.
/s/ MICHAEL MACALUSO
-----------------------
Michael Macaluso President, Chief Executive Officer and Director November 17, 2003
/s/ FRANK DELAPE
-----------------------
Frank DeLape Chairman of the Board and Director November 17, 2003
/s/ MICHAEL AVIGNON
-----------------------
Michael Avignon Director November 17, 2003
/s/ WILLIAM BOSS
-----------------------
William Boss Director November 17, 2003
/s/ JEFFREY W. TOMZ
-----------------------
Jeffrey W. Tomz Chief Financial Officer and Accounting Officer and Secretary November 17, 2003
/s/ E. ASHLEY SMITH
-----------------------
E. Ashley Smith Director November 17, 2003
/s/ RALPH V. DE MARTINO
-----------------------
Ralph V. De Martino Director November 17, 2003
/s/ STEVEN MORRELL
-----------------------
Steven Morrell Director November 17, 2003
II-7
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 (8)
3 (ii) Bylaws (2)
4.1 Specimen of Common Stock certificate (3)
4.2 Certificate of Designations of Series A Convertible Preferred
Stock (8)
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 (9)
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 (8)
10.4 "Intentionally Blank"
10.5 Employment Agreement dated May 28, 2002 between Isolagen, Inc.
and Vaughan Clift (8)
10.6 Employment Agreement dated September 5, 2003 between Isolagen,
Inc. and Frank DeLape (8)
10.7 Employment Agreement dated September 5, 2003 between Isolagen,
Inc. and Michael Macaluso (8)
10.8 Employment Agreement dated September 5, 2003 between Isolagen,
Inc. and Jeffrey W. Tomz (8)
10.9 Employment Agreement dated August 10, 2001 between Isolagen,
Inc. and William K. Boss, as amended on February 28, 2002 (8)
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 (8)
10.12 Lease Agreement dated November 20, 2002 by and between the
Registrant as Lessee and Lego Australia Pty Limited as Lessor
(8)
10.13 Intellectual Property Purchase Agreement between Isolagen
Technologies, Inc., Gregory M. Keller, and PacGen Partners (9)
21 List of Subsidiaries (7)
23.1 Dilworth Paxson LLP Consent (9)
23.2 Pannell Kerr Forster of Texas, P.C. Consent (10)
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.
II-8
(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) 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.
(8) Previously filed as appendix to the Registrant's Form S-1 as filed as
filed on September 12, 2003 and is incorporated by reference hereto.
(9) Previously filed as appendix to the Registrant's amended Form S-1 as filed
as filed on October 24, 2003 and is incorporated by reference hereto.
(10) Filed herewith.
II-9