UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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For the quarterly period ended June 30, 2008
OR
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
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Isolagen, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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001-31564
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87-0458888
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(State or other jurisdiction
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(Commission File Number)
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(I.R.S. Employer
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of incorporation)
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Identification No.)
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405 Eagleview Boulevard
Exton, Pennsylvania 19341
(Address of principal executive offices, including zip code)
(484) 713-6000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for any shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
þ
Yes
o
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
o
Yes
þ
No
As of July 30, 2008, issuer had 41,639,492 shares of issued and 37,639,492 shares outstanding
common stock, par value $0.001.
PART I FINANCIAL INFORMATION
Isolagen, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
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June 30
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December 31,
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2008
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2007
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Assets
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Current assets:
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Cash and cash equivalents
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$
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11,251,424
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$
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16,590,720
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Restricted cash
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451,382
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Accounts receivable, net
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301,144
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319,674
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Inventory, net
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594,644
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669,119
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Other receivables
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143,334
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29,250
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Prepaid expenses
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527,752
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701,214
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Current assets of discontinued operations, net
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52,519
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14,515
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Total current assets
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12,870,817
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18,775,874
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Property and equipment, net of accumulated depreciation and amortization of $3,458,996
and $2,921,651, respectively
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2,858,108
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3,395,723
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Intangibles, net of amortization of $886,119 and $718,762 , respectively
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4,432,181
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4,599,538
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Other assets, net of amortization of $2,747,208 and $2,372,589, respectively
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1,049,849
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1,424,456
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Assets of discontinued operations held for sale (see Note 3)
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11,202,725
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Other long-term assets of discontinued operations
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92,786
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92,874
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Total assets
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$
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21,303,741
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$
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39,491,190
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Liabilities, Minority Interests and Shareholders Deficit
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Current liabilities:
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Accounts payable
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$
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704,807
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$
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403,815
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Accrued expenses
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3,113,073
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4,348,256
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Current liabilities of discontinued operations
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430,790
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217,822
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Total current liabilities
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4,248,670
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4,969,893
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Long term debt
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90,000,000
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90,000,000
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Other long term liabilities of continuing operations
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1,228,440
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1,206,721
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Long term liabilities of discontinued operations
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71,491
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107,511
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Total liabilities
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95,548,601
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96,284,125
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Commitments and contingencies (see Note 7)
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Minority interests
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1,797,531
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1,858,026
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Shareholders deficit:
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Preferred stock, $.001 par value; 5,000,000 shares authorized
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Series C junior participating preferred stock, $.001 par value; 10,000 shares authorized
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Common stock, $.001 par value; 100,000,000 shares authorized
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41,639
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41,640
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Additional paid-in capital
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130,924,051
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129,208,631
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Treasury stock, at cost, 4,000,000 shares
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(25,974,000
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)
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(25,974,000
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)
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Accumulated other comprehensive (loss) income
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(24,596
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)
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718,926
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Accumulated deficit during development stage
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(181,009,485
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)
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(162,646,158
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)
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Total shareholders deficit
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(76,042,391
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)
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(58,650,961
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)
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Total liabilities, minority interests and shareholders deficit
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$
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21,303,741
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$
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39,491,190
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The accompanying notes are an integral part of these consolidated financial statements.
1
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
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Three Months Ended
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June 30,
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2008
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2007
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Revenue
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Product sales
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$
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271,721
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$
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346,716
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License fees
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Total revenue
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271,721
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346,716
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Cost of sales
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147,787
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157,373
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Gross profit
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123,934
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189,343
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Selling, general and administrative expenses
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2,211,562
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5,706,525
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Research and development
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3,251,355
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3,372,032
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Operating loss
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(5,338,983
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)
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(8,889,214
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)
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Other income (expense)
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Interest income
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46,886
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234,932
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Other income
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65,137
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Interest expense
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(974,810
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)
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(974,810
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)
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Minority interest
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21,910
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142,047
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Loss from continuing operations
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(6,244,997
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)
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(9,421,908
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)
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Loss from discontinued operations, net of tax
(see Notes 3 and 5)
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(153,408
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)
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(318,952
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)
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Net loss
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$
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(6,398,405
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)
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$
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(9,740,860
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)
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Per share information:
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Loss from continuing operationsbasic and diluted
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$
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(0.17
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)
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$
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(0.31
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)
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Loss from discontinued operationsbasic and diluted
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(0.00
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)
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(0.01
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)
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Deemed dividend associated with beneficial
conversion of preferred stock
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Preferred stock dividends
|
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Net loss per common sharebasic and diluted
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$
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(0.17
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)
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$
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(0.32
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)
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Weighted average number of basic and diluted common shares outstanding
|
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37,639,492
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30,377,439
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The accompanying notes are an integral part of these consolidated financial statements.
2
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Operations
(Unaudited)
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Cumulative
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Period from
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December 28,
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|
|
|
|
|
|
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1995 (date of
|
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|
Six Months Ended
|
|
|
inception) to
|
|
|
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June 30,
|
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|
June 30,
|
|
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|
2008
|
|
|
2007
|
|
|
2008
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
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Product sales
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$
|
489,674
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$
|
660,338
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|
$
|
3,665,163
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|
License fees
|
|
|
|
|
|
|
|
|
|
|
260,000
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
489,674
|
|
|
|
660,338
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|
|
|
3,925,163
|
|
Cost of sales
|
|
|
318,762
|
|
|
|
316,460
|
|
|
|
1,571,447
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
170,912
|
|
|
|
343,878
|
|
|
|
2,353,716
|
|
|
|
|
|
|
|
|
|
|
|
|
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Selling, general and administrative expenses
|
|
|
6,156,400
|
|
|
|
12,043,830
|
|
|
|
72,302,485
|
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Research and development
|
|
|
6,145,211
|
|
|
|
6,461,103
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|
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|
50,134,245
|
|
|
|
|
|
|
|
|
|
|
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Operating loss
|
|
|
(12,130,699
|
)
|
|
|
(18,161,055
|
)
|
|
|
(120,083,014
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
133,518
|
|
|
|
533,682
|
|
|
|
6,941,295
|
|
Other income
|
|
|
|
|
|
|
65,137
|
|
|
|
322,581
|
|
Interest expense
|
|
|
(1,949,620
|
)
|
|
|
(1,949,620
|
)
|
|
|
(14,608,461
|
)
|
Minority interest
|
|
|
60,495
|
|
|
|
241,481
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|
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|
384,974
|
|
|
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|
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Loss from continuing operations before income taxes
|
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|
(13,886,306
|
)
|
|
|
(19,270,375
|
)
|
|
|
(127,042,625
|
)
|
Income tax benefit
|
|
|
|
|
|
|
|
|
|
|
190,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(13,886,306
|
)
|
|
|
(19,270,375
|
)
|
|
|
(126,851,871
|
)
|
Loss from discontinued operations, net of tax
(see Notes 3 and 5)
|
|
|
(4,477,021
|
)
|
|
|
(1,411,878
|
)
|
|
|
(41,143,929
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(18,363,327
|
)
|
|
|
(20,682,253
|
)
|
|
|
(167,995,800
|
)
|
Deemed dividend associated with beneficial conversion
|
|
|
|
|
|
|
|
|
|
|
(11,423,824
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(1,589,861
|
)
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(18,363,327
|
)
|
|
$
|
(20,682,253
|
)
|
|
$
|
(181,009,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operationsbasic and diluted
|
|
$
|
(0.37
|
)
|
|
$
|
(0.63
|
)
|
|
$
|
(8.04
|
)
|
Loss from discontinued operationsbasic and diluted
|
|
|
(0.12
|
)
|
|
|
(0.05
|
)
|
|
|
(2.61
|
)
|
Deemed dividend associated with beneficial
conversion of preferred stock
|
|
|
|
|
|
|
|
|
|
|
(0.72
|
)
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common sharebasic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.68
|
)
|
|
$
|
(11.47
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of basic and diluted common
shares outstanding
|
|
|
37,639,492
|
|
|
|
30,376,134
|
|
|
|
15,780,981
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Shareholders Equity (Deficit) and Comprehensive Loss
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(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 on
12/28/97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
287,193
|
|
|
|
287
|
|
|
|
9,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,255
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(52,550
|
)
|
|
|
(52,550
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/97
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
2,636,031
|
|
|
$
|
2,635
|
|
|
$
|
279,700
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(323,018
|
)
|
|
$
|
(40,683
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Issuance of common stock for cash on
8/23/98
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
4,459
|
|
|
$
|
4
|
|
|
$
|
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
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
2,640,490
|
|
|
$
|
2,639
|
|
|
$
|
299,763
|
|
|
|
2,400
|
|
|
$
|
(50,280
|
)
|
|
$
|
|
|
|
$
|
(518,693
|
)
|
|
$
|
(266,571
|
)
|
Issuance of common stock for cash
on 9/10/99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,506
|
|
|
|
53
|
|
|
|
149,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,306,778
|
)
|
|
|
(1,306,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/99
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
2,692,996
|
|
|
$
|
2,692
|
|
|
$
|
449,710
|
|
|
|
2,400
|
|
|
$
|
(50,280
|
)
|
|
$
|
|
|
|
$
|
(1,825,471
|
)
|
|
$
|
(1,423,349
|
)
|
Issuance of common stock for cash
on 1/18/00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,583
|
|
|
|
54
|
|
|
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,923
|
|
Issuance of common stock for
services on 3/1/00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,698
|
|
|
|
69
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
Issuance of common stock for
services on 4/4/00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,768
|
|
|
|
28
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(807,076
|
)
|
|
|
(807,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/00
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
2,843,045
|
|
|
$
|
2,843
|
|
|
$
|
451,517
|
|
|
|
2,400
|
|
|
$
|
(50,280
|
)
|
|
$
|
|
|
|
$
|
(2,632,547
|
)
|
|
$
|
(2,228,467
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Issuance of common stock for services on 7/1/01
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
156,960
|
|
|
$
|
157
|
|
|
$
|
(101
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
56
|
|
Issuance of common stock for services on 7/1/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
|
|
125
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
Issuance of common stock for capitalization of accrued salaries on 8/10/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
|
|
70
|
|
|
|
328,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,125
|
|
Issuance of common stock for conversion of convertible debt on 8/10/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,750,000
|
|
|
|
1,750
|
|
|
|
1,609,596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,611,346
|
|
Issuance of common stock for conversion of convertible shareholder notes payable on 8/10/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,972
|
|
|
|
209
|
|
|
|
135,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,667
|
|
Issuance of common stock for bridge financing on 8/10/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
300,000
|
|
|
|
300
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,942,400
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
|
|
Issuance of common stock for cash on 8/28/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,667
|
|
|
|
27
|
|
|
|
39,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
Issuance of common stock for services on 9/30/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
314,370
|
|
|
|
314
|
|
|
|
471,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
471,555
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Uncompensated contribution of services3rd quarter
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
55,556
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
55,556
|
|
Issuance of common stock for services on 11/1/01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,933
|
|
|
|
146
|
|
|
|
218,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,900
|
|
Uncompensated contribution of services4th quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,652,004
|
)
|
|
|
(1,652,004
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/01
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
15,189,563
|
|
|
$
|
15,190
|
|
|
$
|
5,321,761
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(4,284,551
|
)
|
|
$
|
1,052,400
|
|
Uncompensated contribution of services1st quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 services2nd quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 services3rd quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Uncompensated contribution of services4th quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,178,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,178,944
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,433,055
|
)
|
|
|
(5,433,055
|
)
|
Other comprehensive income, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,875
|
|
|
|
|
|
|
|
13,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,419,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/02
|
|
|
3,038,507
|
|
|
$
|
3,039
|
|
|
|
|
|
|
$
|
|
|
|
|
15,227,963
|
|
|
$
|
15,228
|
|
|
$
|
25,573,999
|
|
|
|
|
|
|
$
|
|
|
|
$
|
13,875
|
|
|
$
|
(20,399,211
|
)
|
|
$
|
5,206,930
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Issuance of common stock for cash on 1/7/03
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
61,600
|
|
|
$
|
62
|
|
|
$
|
92,338
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
92,400
|
|
Issuance of common stock for patent pending acquisition on 3/31/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
100
|
|
|
|
539,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,000
|
|
Cancellation of common stock on 3/31/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,382
|
)
|
|
|
(79
|
)
|
|
|
(119,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119,459
|
)
|
Uncompensated contribution of services1st quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Issuance of preferred stock for cash on 5/9/03
|
|
|
|
|
|
|
|
|
|
|
110,250
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
2,773,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,773,328
|
|
Issuance of preferred stock for cash on 5/16/03
|
|
|
|
|
|
|
|
|
|
|
45,500
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
1,145,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145,750
|
|
Conversion of preferred stock into common stock2nd qtr
|
|
|
(70,954
|
)
|
|
|
(72
|
)
|
|
|
|
|
|
|
|
|
|
|
147,062
|
|
|
|
147
|
|
|
|
40,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,701
|
|
Conversion of warrants into common stock2nd qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,598
|
|
|
|
114
|
|
|
|
(114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncompensated contribution of services2nd quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
Issuance of preferred stock 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 cash3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,500
|
|
|
|
202
|
|
|
|
309,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310,000
|
|
Issuance of common stock for cash on 8/27/03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,359,331
|
|
|
|
3,359
|
|
|
|
18,452,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,455,561
|
|
Conversion of preferred stock into common stock3
rd
qtr
|
|
|
(2,967,553
|
)
|
|
|
(2,967
|
)
|
|
|
(155,750
|
)
|
|
|
(156
|
)
|
|
|
7,188,793
|
|
|
|
7,189
|
|
|
|
(82,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,809
|
)
|
Conversion of warrants into common stock3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,834
|
|
|
|
213
|
|
|
|
(213
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense on warrants issued to non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412,812
|
|
Issuance of common stock for cash4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136,500
|
|
|
|
137
|
|
|
|
279,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,500
|
|
Conversion of warrants into common stock4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,268,294
|
)
|
|
|
(11,268,294
|
)
|
Other comprehensive income, foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
360,505
|
|
|
|
|
|
|
|
360,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,907,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/03
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
26,672,192
|
|
|
$
|
26,672
|
|
|
$
|
50,862,258
|
|
|
|
|
|
|
$
|
|
|
|
$
|
374,380
|
|
|
$
|
(33,999,585
|
)
|
|
$
|
17,263,725
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Conversion of warrants into common stock1
st
qtr
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
78,526
|
|
|
$
|
79
|
|
|
$
|
(79
|
)
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Issuance of common stock for cash in connection with exercise of stock options1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15
|
|
|
|
94,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,000
|
|
Issuance of common stock for cash in connection with exercise of warrants1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
4
|
|
|
|
7,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,720
|
|
Compensation expense on options and warrants issued to non-employees and directors1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,410,498
|
|
Issuance of common stock in connection with exercise of warrants2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,828
|
|
|
|
52
|
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,200,000
|
|
|
|
7,200
|
|
|
|
56,810,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,817,434
|
|
Compensation expense on options and warrants issued to non-employees and directors2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,462
|
|
Issuance of common stock in connection with exercise of warrants3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,431
|
|
|
|
7
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash in connection with exercise of stock options3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,000
|
|
|
|
110
|
|
|
|
189,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
190,000
|
|
Issuance of common stock for cash in connection with exercise of warrants3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,270
|
|
|
|
28
|
|
|
|
59,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,695
|
|
Compensation expense on options and warrants issued to non-employees and directors3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229,133
|
|
Issuance of common stock in connection with exercise of warrants4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,652
|
|
|
|
28
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense on options and warrants issued to non-employees, employees, and
directors4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,497
|
|
Purchase of treasury stock4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000,000
|
|
|
|
(25,974,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(25,974,000
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,474,469
|
)
|
|
|
(21,474,469
|
)
|
Other comprehensive income, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,725
|
|
|
|
|
|
|
|
79,725
|
|
Other comprehensive income, net unrealized gain on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,005
|
|
|
|
|
|
|
|
10,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,384,739
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/04
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
34,194,899
|
|
|
$
|
34,195
|
|
|
$
|
109,935,174
|
|
|
|
4,000,000
|
|
|
$
|
(25,974,000
|
)
|
|
$
|
464,110
|
|
|
$
|
(55,474,054
|
)
|
|
$
|
28,985,425
|
|
The accompanying notes are an integral part of these consolidated financial statements.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Stage
|
|
|
(Deficit)
|
|
Issuance of common stock for cash in connection with exercise of stock
options1
st
qtr
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
25,000
|
|
|
$
|
25
|
|
|
$
|
74,975
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
75,000
|
|
Compensation expense on options and warrants issued to non-employees1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,565
|
|
Conversion of warrants into common stock2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,785
|
|
|
|
28
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense on options and warrants issued to non-employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,762
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61,762
|
)
|
Compensation expense on options and warrants issued to non-employees3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137,187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137,187
|
)
|
Conversion of warrants into common stock3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,605
|
|
|
|
12
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense on options and warrants issued to non-employees4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,844
|
|
Compensation expense on acceleration of options4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,950
|
|
Compensation expense on restricted stock award issued to employee4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
Conversion of predecessor company shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,777,584
|
)
|
|
|
(35,777,584
|
)
|
Other comprehensive loss, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,372,600
|
)
|
|
|
|
|
|
|
(1,372,600
|
)
|
Foreign exchange gain on substantial liquidation of foreign entity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,851
|
|
|
|
|
|
|
|
133,851
|
|
Other comprehensive loss, net unrealized gain on available-for-sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,005
|
)
|
|
|
|
|
|
|
(10,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,026,338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, 12/31/05
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
34,260,383
|
|
|
$
|
34,260
|
|
|
$
|
109,879,125
|
|
|
|
4,000,000
|
|
|
$
|
(25,974,000
|
)
|
|
$
|
(784,644
|
)
|
|
$
|
(91,251,638
|
)
|
|
$
|
(8,096,897
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Stage
|
|
|
(Deficit)
|
|
Compensation expense on options and warrants issued to non-employees1
st
qtr
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
42,810
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42,810
|
|
Compensation expense on option awards issued to employee and directors1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,336
|
|
Compensation expense on restricted stock issued to employees1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,750
|
|
|
|
129
|
|
|
|
23,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,497
|
|
Compensation expense on options and warrants issued to non-employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,177
|
|
Compensation expense on option awards issued to employee and directors2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
407,012
|
|
Compensation expense on restricted stock to employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,210
|
|
Cancellation of unvested restricted stock 2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(97,400
|
)
|
|
|
(97
|
)
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash in connection with exercise of stock
options2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10
|
|
|
|
16,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,500
|
|
Compensation expense on options and warrants issued to non-employees3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,627
|
|
Compensation expense on option awards issued to employee and directors3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
389,458
|
|
Compensation expense on restricted stock to employees3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,605
|
|
Issuance of common stock for cash in connection with exercise of stock
options3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,000
|
|
|
|
76
|
|
|
|
156,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
156,900
|
|
Compensation expense on options and warrants issued to non-employees4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,772
|
|
Compensation expense on option awards issued to employee and directors4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
390,547
|
|
Compensation expense on restricted stock to employees4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Cancellation of unvested restricted stock award4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,002
|
)
|
|
|
(15
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,821,406
|
)
|
|
|
(35,821,406
|
)
|
Other comprehensive gain, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
657,182
|
|
|
|
|
|
|
|
657,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,164,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 12/31/06
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
34,362,731
|
|
|
$
|
34,363
|
|
|
$
|
111,516,561
|
|
|
|
4,000,000
|
|
|
$
|
(25,974,000
|
)
|
|
$
|
(127,462
|
)
|
|
$
|
(127,073,044
|
)
|
|
$
|
(41,623,582
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Stage
|
|
|
(Deficit)
|
|
Compensation expense on options and warrants issued to non-employees1
st
qtr
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
39,742
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
39,742
|
|
Compensation expense on option awards issued to employee and directors1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
448,067
|
|
Compensation expense on restricted stock issued to employees1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Issuance of common stock for cash in connection with exercise of stock options1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15
|
|
|
|
23,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,100
|
|
Expense in connection with modification of employee stock
options 1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,178,483
|
|
Compensation expense on options and warrants issued to non-employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,981
|
|
Compensation expense on option awards issued to employee and directors2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
462,363
|
|
Compensation expense on restricted stock issued to employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Compensation expense on option awards issued to employee and directors3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
478,795
|
|
Compensation expense on restricted stock issued to employees3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Issuance of common stock upon exercise of warrants3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
492,613
|
|
|
|
493
|
|
|
|
893,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
894,304
|
|
Issuance of common stock for cash, net of offering costs3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,767,647
|
|
|
|
6,767
|
|
|
|
13,745,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,752,167
|
|
Issuance of common stock for cash in connection with exercise of stock options3
rd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,666
|
|
|
|
2
|
|
|
|
3,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,166
|
|
Compensation expense on option awards issued to employee and directors4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378,827
|
|
Compensation expense on restricted stock issued to employees4
th
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,573,114
|
)
|
|
|
(35,573,114
|
)
|
Other comprehensive gain, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
846,388
|
|
|
|
|
|
|
|
846,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,726,726
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 12/31/07
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
41,639,657
|
|
|
$
|
41,640
|
|
|
$
|
129,208,631
|
|
|
|
4,000,000
|
|
|
$
|
(25,974,000
|
)
|
|
$
|
718,926
|
|
|
$
|
(162,646,158
|
)
|
|
$
|
(58,650,961
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Series A
|
|
|
Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Treasury Stock
|
|
|
Other
|
|
|
During
|
|
|
Shareholders
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Paid-In
|
|
|
Number of
|
|
|
|
|
|
|
Comprehensive
|
|
|
Development
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Stage
|
|
|
(Deficit)
|
|
Compensation expense on options and warrants issued to non-employees1
st
qtr
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
44,849
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
44,849
|
|
Compensation expense on option awards issued to employee and directors1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,305
|
|
Expense in connection with modification of employee stock options 1
st
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,262,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,262,815
|
|
Retirement of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(249
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Compensation expense on options and warrants issued to non-employees2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62,697
|
|
Compensation expense on option awards
issued to employee and directors2
nd
qtr
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,754
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,363,327
|
)
|
|
|
(18,363,327
|
)
|
Reclassification of foreign exchange gain on substantial liquidation of foreign entity...
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,133,905
|
)
|
|
|
|
|
|
|
(2,133,905
|
)
|
Other comprehensive gain, foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,390,383
|
|
|
|
|
|
|
|
1,390,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,106,849
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 06/30/08
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
41,639,408
|
|
|
$
|
41,639
|
|
|
$
|
130,924,051
|
|
|
|
4,000,000
|
|
|
$
|
(25,974,000
|
)
|
|
$
|
(24,596
|
)
|
|
$
|
(181,009,485
|
)
|
|
$
|
(76,042,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
13
Isolagen, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
|
|
|
|
|
|
|
Period from
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
|
|
|
|
|
|
|
|
|
|
|
|
1995 (date of
|
|
|
|
Six months ended
|
|
|
inception) to
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(18,363,327
|
)
|
|
$
|
(20,682,253
|
)
|
|
$
|
(167,995,800
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense related to equity awards
|
|
|
1,715,420
|
|
|
|
2,168,812
|
|
|
|
9,608,369
|
|
Uncompensated contribution of services
|
|
|
|
|
|
|
|
|
|
|
755,556
|
|
Depreciation and amortization
|
|
|
719,762
|
|
|
|
759,925
|
|
|
|
8,434,889
|
|
Provision for doubtful accounts
|
|
|
(3,746
|
)
|
|
|
8,511
|
|
|
|
326,372
|
|
Provision for excessive and/or obsolete inventory
|
|
|
59,972
|
|
|
|
|
|
|
|
59,972
|
|
Amortization of debt issue costs
|
|
|
374,619
|
|
|
|
374,620
|
|
|
|
2,747,210
|
|
Amortization of debt discounts on investments
|
|
|
|
|
|
|
|
|
|
|
(508,983
|
)
|
Loss on disposal or impairment of property and equipment
|
|
|
6,326,855
|
|
|
|
20,803
|
|
|
|
10,935,957
|
|
Foreign exchange gain on substantial liquidation of foreign entity
|
|
|
(2,133,905
|
)
|
|
|
|
|
|
|
(2,267,755
|
)
|
Minority interest
|
|
|
(60,495
|
)
|
|
|
(241,481
|
)
|
|
|
(384,974
|
)
|
Change in operating assets and liabilities, excluding effects of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
451,382
|
|
|
|
498,154
|
|
|
|
|
|
Decrease (increase) in accounts receivable
|
|
|
22,276
|
|
|
|
(121,258
|
)
|
|
|
(134,519
|
)
|
Decrease (increase) in other receivables
|
|
|
(116,675
|
)
|
|
|
275,217
|
|
|
|
31,801
|
|
Decrease (increase) in inventory
|
|
|
14,503
|
|
|
|
(605,536
|
)
|
|
|
(581,851
|
)
|
Decrease (increase) in prepaid expenses
|
|
|
187,639
|
|
|
|
621,838
|
|
|
|
(470,579
|
)
|
Decrease (increase) in other assets
|
|
|
(12
|
)
|
|
|
71,547
|
|
|
|
140,492
|
|
Increase (decrease) in accounts payable
|
|
|
363,202
|
|
|
|
(759,396
|
)
|
|
|
657,463
|
|
Increase (decrease) in accrued expenses and other liabilities
|
|
|
(1,221,434
|
)
|
|
|
(54,034
|
)
|
|
|
3,096,471
|
|
Decrease in deferred revenue
|
|
|
|
|
|
|
(347,630
|
)
|
|
|
(50,096
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(11,663,964
|
)
|
|
|
(18,012,161
|
)
|
|
|
(135,600,005
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Agera, net of cash acquired
|
|
|
(6,679
|
)
|
|
|
|
|
|
|
(2,016,520
|
)
|
Purchase of property and equipment
|
|
|
(29,892
|
)
|
|
|
(97,780
|
)
|
|
|
(25,511,725
|
)
|
Proceeds from the sale of property and equipment, net of selling costs
|
|
|
6,444,153
|
|
|
|
925
|
|
|
|
6,542,201
|
|
Purchase of investments
|
|
|
|
|
|
|
|
|
|
|
(152,998,313
|
)
|
Proceeds from sales and maturities of investments
|
|
|
|
|
|
|
|
|
|
|
153,507,000
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
6,407,582
|
|
|
|
(96,855
|
)
|
|
|
(20,477,357
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible debt
|
|
|
|
|
|
|
|
|
|
|
91,450,000
|
|
Offering costs associated with the issuance of convertible debt
|
|
|
|
|
|
|
(19,655
|
)
|
|
|
(3,746,193
|
)
|
Proceeds from notes payable to shareholders, net
|
|
|
|
|
|
|
|
|
|
|
135,667
|
|
Proceeds from the issuance of preferred stock, net
|
|
|
|
|
|
|
|
|
|
|
12,931,800
|
|
Proceeds from the issuance of common stock, net
|
|
|
|
|
|
|
23,100
|
|
|
|
93,753,857
|
|
Cash dividends paid on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,087,200
|
)
|
Cash paid for fractional shares of preferred stock
|
|
|
|
|
|
|
|
|
|
|
(38,108
|
)
|
Merger and acquisition expenses
|
|
|
|
|
|
|
|
|
|
|
(48,547
|
)
|
Repurchase of common stock
|
|
|
|
|
|
|
|
|
|
|
(26,024,280
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
3,445
|
|
|
|
167,326,996
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash balances
|
|
|
(82,914
|
)
|
|
|
(2,893
|
)
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(5,339,296
|
)
|
|
|
(18,108,464
|
)
|
|
|
11,251,424
|
|
Cash and cash equivalents, beginning of period
|
|
|
16,590,720
|
|
|
|
31,783,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
11,251,424
|
|
|
$
|
13,675,081
|
|
|
$
|
11,251,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
1,575,000
|
|
|
$
|
1,575,000
|
|
|
$
|
11,140,283
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deemed dividend associated with beneficial conversion of preferred stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,423,824
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
1,589,861
|
|
|
|
|
|
|
|
|
|
|
|
Uncompensated contribution of services
|
|
|
|
|
|
|
|
|
|
|
755,556
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for intangible assets
|
|
|
|
|
|
|
|
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired through capital lease
|
|
|
|
|
|
|
|
|
|
|
167,154
|
|
|
|
|
|
|
|
|
|
|
|
Increase in receivable in connection with sale of Swiss property
|
|
|
49,115
|
|
|
|
|
|
|
|
49,115
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accrued expenses related to sale of Swiss property
|
|
$
|
16,454
|
|
|
$
|
|
|
|
$
|
16,454
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
14
Isolagen, Inc.
(A Development Stage Company)
Notes to Consolidated Financial Statements
Note 1Basis of Presentation, Business and Organization
Isolagen, Inc. (Isolagen), a Delaware corporation, is the parent company of Isolagen
Technologies, Inc., a Delaware corporation (Isolagen Technologies) and Agera Laboratories, Inc.,
a Delaware corporation (Agera). Isolagen Technologies is the parent company of Isolagen Europe
Limited, a company organized under the laws of the United Kingdom (Isolagen Europe), Isolagen
Australia Pty Limited, a company organized under the laws of Australia (Isolagen Australia), and
Isolagen International, S.A., a company organized under the laws of Switzerland (Isolagen
Switzerland). The common stock of the Company, par value $0.001 per share, (Common Stock) is
traded on the American Stock Exchange (AMEX) under the symbol ILE.
The accompanying consolidated financial statements should be read in conjunction with the
Companys consolidated financial statements and footnotes contained within the Companys Report of
Form 10-K filed with the Securities and Exchange Commission (SEC) on March 07, 2008.
The Company is an aesthetic and therapeutic development stage company focused on developing
novel skin and tissue rejuvenation products. The Companys clinical development product candidates
are designed to improve the appearance of skin injured by the effects of aging, sun exposure, acne
and burns with a patients own, or autologous, fibroblast cells produced in the Companys
proprietary Isolagen Process. The Company also develops and markets an advanced skin care line with
broad application in core target markets through its Agera subsidiary.
The Company acquired 57% of the outstanding common shares of Agera on August 10, 2006. Agera
offers a complete line of skincare systems based on a wide array of proprietary formulations,
trademarks and nano-peptide technology. These technologically advanced skincare products can be
packaged to offer anti-aging, anti-pigmentary and acne treatment systems. Agera markets its product
in both the United States and Europe (primarily the United Kingdom). The results of Ageras
operations and cash flows have been included in the consolidated financial statements from the date
of the acquisition. The assets and liabilities of Agera have been included in the consolidated
balance sheet since the date of the acquisition.
In October 2006, the Company reached an agreement with the FDA on the design of a Phase III
pivotal study protocol for the treatment of nasolabial folds. The randomized, double-blind protocol
was submitted to the FDA under the agencys Special Protocol Assessment (SPA) regulations.
Pursuant to this assessment process, the FDA has agreed that the Companys study design for two
identical trials, including patient numbers, clinical endpoints, and statistical analyses, is
acceptable to the FDA to form the basis of an efficacy claim for a marketing application. The
randomized, double-blind, pivotal Phase III trials will evaluate the efficacy and safety of
Isolagen Therapy against placebo in approximately 400 patients with approximately 200 patients
enrolled in each trial. The Company completed enrollment of the study and commenced injection of
subjects in early 2007. All injections were completed in January 2008 and the data results from
this trial are expected during August 2008.
In March 2004, the Company announced positive results of a first Phase III exploratory
clinical trial for the Companys lead facial aesthetics product candidate, and in July 2004 the
Company commenced a 200 patient Phase III study of Isolagen Therapy for facial wrinkles consisting
of two identical, simultaneous trials. The study was concluded during the second half of 2005. In
August 2005 the Company announced that results of this study failed to meet co-primary endpoints.
Based on the results of this study, the Company commenced preparations for our second Phase III
pivotal study discussed in the preceding paragraph.
During 2006, 2005 and 2004, the Company sold its aesthetic product primarily in the United
Kingdom. However, during the fourth quarter of fiscal 2006, the Company decided to close the United
Kingdom operation. The Company completed the closure of the United Kingdom operation on March 31,
2007, and as of March 31, 2007, the United Kingdom, Swiss and Australian operations were presented
as discontinued operations for all periods presented, as more fully discussed in Note 5.
15
Through June 30, 2008, the Company has been primarily engaged in developing its initial
product technology. In the course of its development activities, the Company has sustained losses
and expects such losses to continue through at least 2008. The Company expects to finance its
operations primarily through its existing cash and any future financing. However, as described in
Note 2, there exists substantial doubt about the Companys ability to continue as a going concern.
The Companys ability to operate profitably is largely contingent upon its success in obtaining
financing, obtaining regulatory approval to sell one or a variety of applications of the Isolagen
Therapy, upon its successful development of markets for its products and upon the development of
profitable scaleable manufacturing processes. The Company will be required to obtain additional
capital prior to or during the fourth quarter of 2008 to continue and expand its operations. No
assurance can be given that the Company will be able to obtain such regulatory approvals,
successfully develop the markets for its products or develop profitable manufacturing methods.
There is no assurance that the Company will be able to obtain any such additional capital as it
needs to finance these efforts, through asset sales, equity or debt financing, or any combination
thereof, on satisfactory terms or at all. Additionally, no assurance can be given that any such
financing, if obtained, will be adequate to meet the Companys ultimate capital needs and to
support the Companys growth. If adequate capital cannot be obtained on a timely basis and on
satisfactory terms, the Companys operations would be materially 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 may find it necessary to hire additional management, financial and sales and marketing
personnel to manage the Companys expanding operations. In addition, the Companys ability to
manage its current operations and future growth requires the continued improvement of operational,
financial and management controls, reporting systems and procedures. If the Company is unable to
manage this growth effectively and successfully, the Companys business, operating results and
financial condition may be materially adversely affected.
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., a Delaware corporation, (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, 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 3,942,400 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 FDA trials of
the Isolagen Therapy. 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.
The consolidated financial statements presented include Isolagen, Inc., its wholly-owned
subsidiaries and its majority-owned subsidiary. All significant intercompany transactions and
balances have been eliminated. Isolagen Technologies was, for accounting purposes, the surviving
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.
The consolidated financial statements included herein as of June 30, 2008, and for each of the
three and six months ended June 30, 2008 and 2007, have been prepared by the Company without an
audit, pursuant to accounting principles generally accepted in the United States, and the rules and
regulations of the SEC. The consolidated financial statements do not include all of the information
and footnotes required by accounting principles generally accepted in the United States for
complete financial statements. The information presented reflects all adjustments consisting solely
of normal recurring adjustments which are, in the opinion of management, considered necessary to
present fairly the financial position, results of operations, and cash flows for the periods
discussed above. Operating results for the three
and six months ended June 30, 2008, are not necessarily indicative of the results which will be
realized for the year ending December 31, 2008.
16
Unless the context requires otherwise, the Company refers to Isolagen, Inc. and all of its
consolidated subsidiaries, Isolagen refers to Isolagen, Isolagen Technologies, Isolagen Europe,
Isolagen Australia and Isolagen Switzerland, and Agera refers to Agera Laboratories, Inc.
Note 2Going Concern
At June 30, 2008, the Company had cash and cash equivalents of $11.3 million and working
capital of $8.6 million (including cash and cash equivalents). The Company believes that its
existing capital resources are adequate to finance its operations through approximately December 1,
2008, under the Companys normal operating conditions. As such, the Company estimates that it will
require additional cash resources prior to or during the fourth quarter of 2008 based upon its
current operating plan and condition.
Through June 30, 2008, the Company has been primarily engaged in developing its initial
product technology. In the course of its development activities, the Company has sustained losses
and expects such losses to continue through at least 2008. The Company expects to finance its
operations primarily through its existing cash and any future financing, including the sale of
assets. However, there exists substantial doubt about the Companys ability to continue as a going
concern.
As discussed in Note 1, the Company expects to receive in August 2008 the results of pivotal
Phase III trials to evaluate the efficacy and safety of Isolagen Therapy for the treatment of
nasolabial folds. If those results support the efficacy and safety of the Isolagen Treatment for
that purpose, further efforts will be required to obtain final regulatory approval, develop a
scalable manufacturing process, and develop the market for the use of the Isolagen Therapy for the
treatment of nasolabial folds. The Company would be required to obtain additional capital in the
future to continue its operations. There is no assurance that the Company will be able to obtain
any such additional capital as it needs to finance these efforts, through asset sales, equity or
debt financing, or any combination thereof, on satisfactory terms or at all. Additionally, no
assurance can be given that any such financing, if obtained, will be adequate to meet the Companys
ultimate capital needs and to support the Companys growth. If adequate capital cannot be obtained
on a timely basis and on satisfactory terms, the Companys operations would be materially
negatively impacted. Further, if the Company does not obtain additional funding prior to or during
the fourth quarter of 2008, it may enter into bankruptcy soon thereafter, and possibly cease
operations.
Conversely, if the results of these pivotal Phase III trials do not support the efficacy and
safety of Isolagen Therapy for the treatment of nasolabial folds, it may indicate that the Isolagen
Therapy as currently manufactured and administered will not obtain regulatory approval and could
not be successfully marketed. In that case, the Company would be required to research and develop
significant changes to the Isolagen Therapy. Such an effort would require substantial additional
capital, and there is substantial doubt that the Company could obtain such capital. In such event,
the Company might be forced to cease operations and enter into bankruptcy.
The Company filed a shelf registration statement on Form S-3 during June 2007, which was
subsequently declared effective by the SEC. The shelf registration allows the Company the
flexibility to offer and sell, from time to time, up to an original amount of $50 million of common
stock, preferred stock, debt securities, warrants or any combination of the foregoing in one or
more future public offerings. In August 2007, the Company sold under this shelf registration
statement 6,746,647 shares of common stock to institutional investors, raising proceeds of $13.8
million, net of offering costs. The Company may offer and sell up to an additional $36.2 million of
securities pursuant to this shelf registration.
The Companys ability to complete additional offerings, including any additional offerings
under its shelf registration statement, is dependent on the state of the debt and/or equity markets
at the time of any proposed offering, and such markets reception of the Company and the offering
terms. In addition, the Companys ability to complete an offering may be dependent on the status of
its clinical trials, and in particular, the status of its Phase III clinical trial for the
treatment of nasolabial folds as discussed above, which cannot be predicted. There is no assurance
that capital in any form would be available to the Company, and if available, on terms and
conditions that are acceptable.
17
As a result of the conditions discussed above, and in accordance with generally accepted
accounting principles in the United States, there exists substantial doubt about the Companys
ability to continue as a going concern, and the Companys ability to continue as a going concern is
contingent, among other things, upon its ability to secure additional adequate financing or capital
prior to or during the fourth quarter of 2008. If the Company is unable to obtain additional
sufficient funds during this time, the Company will be required to terminate or delay its efforts
to obtain regulatory approval of one, more than one, or all of its product candidates, curtail or
delay the implementation of manufacturing process improvements and/or delay the expansion of its
sales and marketing capabilities. Any of these actions would have an adverse effect on the
Companys operations, the realization of its assets and the timely satisfaction of its liabilities.
Further, if the Company does not obtain additional funding prior to or during the fourth quarter of
2008, it may enter into bankruptcy soon thereafter, and possibly cease operations. The Companys
financial statements are presented on a going concern basis, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The financial statements
do not include any adjustments relating to the recoverability of the recorded assets or the
classification of liabilities that may be necessary should it be determined that the Company is
unable to continue as a going concern.
Note 3Summary of Significant Accounting Policies
Use of 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, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Examples include provisions for bad debts and inventory
obsolescence, useful lives of property and equipment and intangible assets, impairment of property
and equipment and intangible assets, deferred taxes, the provision for and disclosure of litigation
and loss contingencies (see Note 7) and estimates and assumptions related to equity-based
compensation expense (see Note 8). Actual results may differ materially from those estimates.
Foreign Currency Translation
The financial position and results of operations of the Companys foreign subsidiaries are
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 period end. Income statement
accounts are translated at the average rate of exchange prevailing during the period. Adjustments
arising from the use of differing exchange rates from period to period are included in accumulated
other comprehensive (loss) income in shareholders deficit. Gains and losses resulting from foreign
currency transactions are included in earnings and, other than discussed below, have not been
material in any one period. Balances of related after-tax components comprising accumulated other
comprehensive income (loss) included in shareholders deficit at June 30, 2008 and December 31,
2007 related solely to foreign currency translation adjustments.
Upon sale or upon complete or substantially complete liquidation of an investment in a foreign
entity, the amount attributable to that entity and accumulated in the translation adjustment
component of equity is removed from the separate component of equity and is reported as gain or
loss for the period during which the sale or liquidation occurs. During March 2008, the Company
substantially liquidated the assets of the Companys Swiss entity (in connection with the sale of
the Companys Swiss campus; see
Assets of Discontinued Operations Held for Sale
below). As such, the amount of the accumulated foreign currency translation adjustment account in
stockholders deficit which related to the Companys Swiss franc assets and liabilities was removed
from equity by recording income of $2.1 million, which is included in loss from discontinued
operations in the accompanying consolidated statement of operations for the three and six months
ended June 30, 2008.
Statement of Cash Flows
For purposes of the statements of cash flows, the Company considers all highly liquid
investments (i.e., investments which, when purchased, have maturities of three months or less) to
be cash equivalents. The Company had restricted cash of $0.0 million and $0.5 million at June 30,
2008 and December 31, 2007, respectively, reserved for the payment of the original non-cancelable
portion of the Exton, Pennsylvania facility lease.
18
Concentration of Credit Risk
The Company maintains its cash primarily with major U.S. domestic banks. The amounts held in
these banks generally exceed the insured limit of $100,000. The terms of these deposits are on
demand to minimize risk. The Company has historically not incurred bank default losses related to
these deposits. Cash equivalents are maintained with one domestic financial institution. The
Company invests its cash equivalents primarily in government securities.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts related to its accounts receivable
that have been deemed to have a high risk of collectibility. Management reviews its accounts
receivable on a monthly basis to determine if any receivables will potentially be uncollectible.
Management analyzes historical collection trends and changes in its customer payment patterns,
customer concentration, and creditworthiness when evaluating the adequacy of its allowance for
doubtful accounts. In its overall allowance for doubtful accounts, the Company includes any
receivable balances that are determined to be uncollectible. Based on the information available,
management believes the allowance for doubtful accounts is adequate; however, actual write-offs
might exceed the recorded allowance.
Inventory
Agera purchases the large majority of its inventory from one contract manufacturer. Agera
accounts for its inventory on the first-in-first-out method. During the three months ended March
31, 2008 and six months ended June 30, 2008, the Company recorded a charge for excessive and/or
obsolete inventory of $60,000, and as such, the inventory balance within the accompanying
consolidated balance sheet at June 30, 2008 is presented net of this $60,000 inventory reserve. At
June 30, 2008, Ageras inventory, net of reserves, consisted of $0.2 million of raw materials and
$0.4 million of finished goods. At December 31, 2007, Ageras inventory consisted of $0.1 million
of raw materials and $0.6 million of finished goods.
Assets of Discontinued Operations Held for Sale
In April 2005, the Company acquired land and a two-building, 100,000 square foot campus (the
Swiss campus) in Bevaix, Canton of Neuchâtel, Switzerland. In March 2008, the Company sold its
Swiss campus to a third party for approximately $6.4 million, net of transaction costs. The net
book value of the Swiss campus on the date of sale was approximately $12.7 million (or $10.6
million, net of the related cumulative foreign currency translation gain of approximately $2.1
million, as discussed in
Foreign Currency Translation
above). In connection with this sale of the
Swiss campus, the Company recorded a net loss of $4.2 million which is reflected in loss from
discontinued operations in the accompanying consolidated statement of operations for the six months
ended June 30, 2008 (refer to Note 5 for further detail related to the net loss on the sale of the
Swiss campus). As of June 30, 2008, $6.4 million of the net sale proceeds had been paid to the
Company, and less than $0.1 million was recorded as a receivable within currents assets of
discontinued operations in the accompanying consolidated balance sheet.
Property and equipment
Property and equipment is carried at cost less accumulated depreciation and amortization.
Generally, depreciation and amortization for financial reporting purposes is provided by the
straight-line method over the estimated useful life of three years, except for leasehold
improvements which are amortized using the straight-line method over the remaining lease term or
the life of the asset, whichever is shorter. The cost of repairs and maintenance is charged as an
expense as incurred.
Intangible assets
Intangible assets primarily include proprietary formulations and trademarks, which were
acquired in connection with the acquisition of Agera (see Note 4), as well as certain in-process
patents. Proprietary formulations and trademarks are amortized on a straight-line basis over their
estimated useful lives, generally for periods ranging from 13 to 18 years. The Company periodically
evaluates the reasonableness of the useful lives of these assets. Intangibles are tested for
recoverability whenever events or changes in circumstances indicate the carrying amount
may not be recoverable. An impairment loss, if any, would be measured as the excess of the carrying
value over the fair value determined by discounted cash flows.
19
Intangible assets are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Proprietary formulations
|
|
$
|
3,101,100
|
|
|
$
|
3,101,100
|
|
Trademarks
|
|
|
1,511,400
|
|
|
|
1,511,400
|
|
Other intangibles
|
|
|
705,800
|
|
|
|
705,800
|
|
|
|
|
|
|
|
|
|
|
|
5,318,300
|
|
|
|
5,318,300
|
|
Less: Accumulated amortization
|
|
|
(886,119
|
)
|
|
|
(718,762
|
)
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
4,432,181
|
|
|
$
|
4,599,538
|
|
|
|
|
|
|
|
|
Debt Issue Costs
The costs incurred in issuing the Companys 3.5% Convertible Subordinated Notes, including
placement agent fees, legal and accounting costs and other direct costs are included in other
assets and are being amortized to expense using the effective interest method over five years,
through November 2009 (the first call date of the $90 million of convertible subordinated debt).
Debt issuance costs, net of amortization, were approximately $1.0 million at June 30, 2008 and
approximately $1.4 million at December 31, 2007 and were included in other assets, net, in the
accompanying consolidated balance sheets.
Treasury Stock
The Company utilizes the cost method for accounting for its treasury stock acquisitions and
dispositions.
Revenue recognition
The Company recognizes revenue over the period the service is performed in accordance with SEC
Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (SAB 104). In
general, SAB 104 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.
Continuing operations
: Revenue from the sale of Ageras products is recognized upon transfer
of title, which is upon shipment of the product to the customer. The Company believes that the
requirements of SAB 104 are met when the ordered product is shipped, as the risk of loss transfers
to its customer at that time, the fee is fixed and determinable and collection is reasonably
assured. Any advanced payments are deferred until shipment.
Discontinued operations:
The Isolagen Therapy was administered, in the United Kingdom, to each
patient using a recommended regimen of injections. Due to the shelf life, each injection was
cultured on an as needed basis and shipped prior to the individual injection being administered by
the physician. The Company believes each injection had stand alone value to the patient. The
Company invoiced the attending physician when the physician sent his or her patients tissue sample
to the Company which created a contractual arrangement between the Company and the medical
professional. The amount invoiced varied directly with the dose and number of injections requested.
Generally, orders were paid in advance by the physician prior to the first injection. There was no
performance provision under any arrangement with any physician, and there was no right to refund or
returns for unused injections.
As a result, the Company believes that the requirements of SAB 104 were met as each injection
was shipped, as the risk of loss transferred to its physician customer at that time, the fee was
fixed and determinable and collection was reasonably assured. Advance payments were deferred until
shipment of the injection(s). The amount of the revenue deferred represented the fair value of the
remaining undelivered injections measured in accordance with Emerging Issues Task Force Issue
(EITF) 00-21,
Accounting for Revenue Arrangements with Multiple Deliverables,
which addresses
the issue of accounting for arrangements that involve the delivery of multiple products or
services. Should the physician have discontinued the regimen prematurely all remaining deferred
revenue was recognized.
20
Shipping and handling costs
Agera charges its customers for shipping and handling costs. Such charges to customers are
presented net of the costs of shipping and handling, as selling, general and administrative
expense, and are not significant to the consolidated statements of operations.
Advertising cost
Agera advertising costs are expensed as incurred and include the costs of public relations and
certain marketing related activities. These costs are included in selling, general and
administrative expenses in the accompanying consolidated statements of operations.
Research and development expenses
Research and development costs are expensed as incurred and include salaries and benefits,
costs paid to third-party contractors to perform research, conduct clinical trials, develop and
manufacture drug materials and delivery devices, and a portion of facilities cost. Research and
development costs also include costs to develop manufacturing, cell collection and logistical
process improvements.
Clinical trial costs are a significant component of research and development expenses and
include costs associated with third-party contractors. Invoicing from third-party contractors for
services performed can lag several months. The Company accrues the costs of services rendered in
connection with third-party contractor activities based on its estimate of management fees, site
management and monitoring costs and data management costs. Actual clinical trial costs may differ
from estimated clinical trial costs and are adjusted for in the period in which they become known.
Stock-based compensation
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)).
SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R) requires entities to recognize compensation expense for
all share-based payments to employees and directors, including grants of employee stock options,
based on the grant-date fair value of those share-based payments, adjusted for expected
forfeitures. The Company adopted SFAS No. 123(R) using the modified prospective application method.
Under the modified prospective application method, the fair value measurement requirements of SFAS
No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after January
1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service
has not been rendered that were outstanding as of January 1, 2006 is recognized as the requisite
service is rendered on or after January 1, 2006. The compensation cost for that portion of awards
is based on the grant-date fair value of those awards as calculated for pro forma disclosures under
SFAS No. 123. Changes to the grant-date fair value of equity awards granted before January 1, 2006
are precluded.
Prior to the adoption of SFAS No. 123(R), the Company followed the intrinsic value method in
accordance with APB No. 25 to account for its employee stock options. Historically, substantially
all stock options have been granted with an exercise price equal to the fair market value of the
common stock on the date of grant. Accordingly, no compensation expense was recognized from
substantially all option grants to employees and directors. Compensation expense was recognized in
connection with the issuance of stock options to non-employee consultants in accordance with EITF
96-18, Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or
in Conjunction with Selling Goods and Services. SFAS No. 123(R) did not change the accounting for
stock-based compensation related to non-employees in connection with equity based incentive
arrangements.
21
Income taxe
s
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.
In the event the Company is charged interest or penalties related to income tax matters, the
Company would record such interest as interest expense and would record such penalties as other
expense in the consolidated statement of operations. No such charges have been incurred by the
Company. As of June 30, 2008 and December 31, 2007, the Company had no accrued interest related to
uncertain tax positions.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No.
48 Accounting for Uncertainty in Income Taxes (FIN 48), an interpretation of FASB Statement No.
109 (SFAS 109) on January 1, 2007. No material adjustment in the liability for unrecognized
income tax benefits was recognized as a result of the adoption of FIN 48. At June 30, 2008 and
December 31, 2007, the Company had $60.4 million and $54.8 million, respectively, of unrecognized
tax benefits; the large majority of which relates to loss carryforwards for which the Company has
provided a full valuation allowance. The tax years 2004 through 2007 remain open to examination by
the major taxing jurisdictions to which we are subject.
Loss per share data
Basic 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 (calculated based on the treasury stock method) and convertible notes and
convertible preferred stock. The Company does not present diluted earnings per share for years in
which it incurred net losses as the effect is antidilutive.
At June 30, 2008, options and warrants to purchase 8,798,412 shares of common stock at
exercise prices ranging from $0.41 to $9.81 per share were outstanding, but were not included in
the computation of diluted earnings per share as their effect would be antidilutive. Also,
9,828,009 shares issuable upon the conversion of the Companys convertible notes, at a conversion
price of approximately $9.16, were not included as their effect would be antidilutive.
At June 30, 2007, options and warrants to purchase 9,178,089 shares of common stock at
exercise prices ranging from $1.50 to $9.81 per share were outstanding, but were not included in
the computation of diluted earnings per share as their effect would be antidilutive. Also,
9,828,009 shares issuable upon the conversion of the Companys convertible notes, at a conversion
price of approximately $9.16, were not included as their effect would be antidilutive.
Fair Value of Financial Instruments
The Companys financial instruments consist of accounts receivable, marketable debt
securities, accounts payable and convertible subordinated debentures. The fair values of the
Companys accounts receivable and accounts payable approximate, in the Companys opinion, their
respective carrying amounts. The Companys convertible subordinated debentures were quoted at
approximately 10% and 74% of par value at June 30, 2008 and December 31, 2007, respectively.
Accordingly, the fair value of the Companys convertible subordinated debentures was approximately
$8.7 million and $66.6 million at June 30, 2008 and December 31, 2007, respectively. The Companys
convertible subordinated debentures are publicly traded. The fair value of the convertible
subordinated debentures are estimated based on primary factors such as (1) the most recent trade
prices of the convertible subordinated debentures on or near the respective reporting period end
and/or (2) the bid and ask prices of the convertible subordinated debentures at the end of the
reporting period. Historically, these factors have fluctuated significantly, and these factors are
expected to fluctuate in future periods. Accordingly, the fair value of the convertible
subordinated debentures has historically fluctuated significantly, and is expected to fluctuate in
future periods.
22
Recently Issued Accounting Standards Not Yet Effective
In December 2007, the Financial Accounting Standards Board released SFAS No. 141-R, Business
Combinations. This Statement applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, which is any business combination in the year ending December 31, 2009 for
the Company. SFAS No. 141-R makes changes to the manner in which purchase business combinations,
and in particular partial and step acquisitions, and minority interests, are measured and recorded.
The objective of this Statement is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its financial reports about a
business combination and its effects. The Company is currently assessing the impact the adoption of
this pronouncement will have on the financial statements.
In December 2007, the Financial Accounting Standards Board released SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements an amendment of ARB No. 51. This
Statement is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008, which for the Company is the year ending December 31, 2009 and the
interim periods within that fiscal year. SFAS No. 160 changes the manner in which minority
interests are classified in consolidated financial statements, and the accounting for changes in
minority interests. The objective of this pronouncement is to improve the relevance, comparability
and transparency of the financial information that a reporting entity provides in its consolidated
financial statements. The Company is currently assessing the impact the adoption of this
pronouncement will have on the financial statements.
Note 4Acquisition of Agera Laboratories, Inc.
On August 10, 2006, the Company acquired 57% of the outstanding common shares of Agera
Laboratories, Inc. (Agera). Agera is a skincare company that has proprietary rights to a
scientifically-based advanced line of skincare products. Agera markets its product in both the
United States and Europe. The Company believes that the acquisition of Agera will complement the
Companys Isolagen Therapy and will broaden the Companys position in the skincare market as Agera
has a comprehensive range of technologically advanced skincare products that can be packaged to
offer anti-aging, anti-pigmentary and acne treatment systems.
The acquisition has been accounted for as a purchase. Accordingly, the bases in Ageras assets
and liabilities have been adjusted to reflect the allocation of the purchase price to the 57%
interest the Company acquired (with the remaining 43% interest, and the minority interest in Agera
net assets, recorded at Ageras historical book values), and the results of Ageras operations and
cash flows have been included in the consolidated financial statements from the date of the
acquisition.
The Company paid $2.7 million in cash to acquire the 57% interest in Agera and in connection
with the acquisition contributed $0.3 million to the working capital of Agera. Included in the
purchase price was an option to acquire an additional 8% of Ageras outstanding common shares for
an exercise price of $0.5 million in cash. This option expired unexercised in February 2007. In
addition, the acquisition agreement includes future contingent payments up to a maximum of $8.0
million. Such additional purchase price is based upon certain percentages of Ageras cost of sales
incurred after June 30, 2007. Accordingly, based upon the financial performance of Agera, up to an
additional $8.0 million of purchase price may be due the selling shareholder in future periods. As
of June 30, 2008, less than $0.1 million has been paid with respect to the additional purchase
price and less than $0.1 million was due.
23
The following table summarizes the allocation of the purchase price to the estimated fair
values of the assets acquired and liabilities assumed at the date of acquisition. These assets and
liabilities were included in the consolidated balance sheet as of the acquisition date.
|
|
|
|
|
Current assets
|
|
$
|
1,531,926
|
|
Intangible assets
|
|
|
4,522,120
|
|
|
|
|
|
Total assets acquired
|
|
|
6,054,046
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
30,284
|
|
Deferred tax liability, net
|
|
|
190,754
|
|
Other longterm liabilities
|
|
|
695,503
|
|
Minority interest
|
|
|
2,182,505
|
|
|
|
|
|
Total liabilities assumed and
minority interest
|
|
|
3,099,046
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,955,000
|
|
|
|
|
|
Of the $4.5 million, net, of acquired intangible assets, $4.4 million, net, was assigned to
product formulations and trademarks, which have a weighted average useful life of approximately 16
years. No amount of the purchase price was assigned to goodwill.
Note 5 Discontinued Operations and Exit Costs
As part of the Companys continuing efforts to evaluate the best uses of its resources, in the
fourth quarter of 2006 the Companys Board of Directors approved the closing of the Companys
United Kingdom operation. On March 31, 2007, the Company completed the closure of its United
Kingdom manufacturing facility. The United Kingdom operation was located in London, England with
two locations; a manufacturing site and an administrative site. Both sites were under operating
leases. The manufacturing site lease expires February 2010 and, as of June 30, 2008, the remaining
lease obligation approximated $0.4 million. The administrative site lease expired in April 2007.
The Company believes that substantially all costs related to the closure of the United Kingdom
operation have been incurred by June 30, 2008, excluding the remaining lease obligation discussed
above and any potential claims or contingencies unknown or which cannot be estimated at this time
(see Note 7).
As a result of the closure of the Companys United Kingdom operation, the operations that the
Company previously conducted in Switzerland and Australia, which when closed had been absorbed into
the United Kingdom operation, were also classified as discontinued operations as of March 31, 2007.
The Company recorded a fixed asset impairment charge related to its United Kingdom operation of
$1.4 million during 2006, which is included in loss from discontinued operations in the
consolidated statement of operations for the cumulative period from December 28, 1995 (date of
inception) to June 30, 2008. During March 2008, the Company sold its buildings located in
Switzerland (see Note 3). All assets, liabilities and results of operations of the United Kingdom,
Switzerland and Australian operations are reflected as discontinued operations in the accompanying
consolidated financial statements. All prior period information has been restated to reflect the
presentation of discontinued operations.
24
The following sets forth the components of assets and liabilities of discontinued operations
as of June 30, 2008 and December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in millions)
|
|
2008
|
|
|
2007
|
|
Receivable due on sale of Swiss campus and other, net
|
|
$
|
0.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
0.1
|
|
|
|
|
|
Assets held for sale
|
|
|
|
|
|
|
11.2
|
|
Long term assets
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
0.2
|
|
|
$
|
11.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
0.1
|
|
|
$
|
|
|
Accrued expenses and other current liabilities
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
0.4
|
|
|
|
0.2
|
|
Long term liabilities
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
|
|
|
|
|
|
The following sets forth the results of operations of discontinued operations for the three
months ended June 30, 2008, and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in millions)
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
|
|
Loss on sale of Swiss campus, gross of foreign currency gain
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Foreign exchange gain on substantial liquidation of foreign
entity
|
|
|
|
|
|
|
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(0.2
|
)
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
The following sets forth the results of operations of discontinued operations for the six
months ended June 30, 2008, and June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in millions)
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Gross loss
|
|
|
|
|
|
|
(0.3
|
)
|
Loss on sale of Swiss campus, gross of foreign currency gain
|
|
|
(6.3
|
)
|
|
|
|
|
Operating loss
|
|
|
(6.7
|
)
|
|
|
(1.5
|
)
|
Foreign exchange gain on substantial liquidation of foreign
entity
|
|
|
2.1
|
|
|
|
|
|
Other income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(4.5
|
)
|
|
$
|
(1.4
|
)
|
|
|
|
|
|
|
|
The foreign exchange gain recorded during the six months ended June 30, 2008 results from
removing from the accumulated foreign currency translation adjustment account in stockholders
deficit a credit balance which related to the translation into U.S. dollars of the Companys Swiss
franc assets and liabilities. The credit balance which had accumulated, and the resulting gain
recorded upon the substantial liquidation of the Companys Swiss franc assets, reflected the
increase in the value of the Swiss franc relative to the U.S. dollar over the period that the
Company operated in Switzerland.
25
The following sets forth information about the major components of the United Kingdom
operation exit costs incurred through March 31, 2007. No such costs for employee severance or fixed
asset impairments were incurred subsequent to March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
Costs Incurred for the
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Cumulative Costs
|
|
|
|
March 31, 2007
|
|
|
Incurred to Date
|
|
Employee severance
|
|
$
|
183,222
|
|
|
$
|
467,318
|
|
Fixed asset impairment
|
|
|
|
|
|
|
1,445,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
183,222
|
|
|
$
|
1,912,965
|
|
|
|
|
|
|
|
|
The following sets forth information about the changes in the UK accrued exit costs for the
three months ended March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Liability
|
|
|
Costs Charged
|
|
|
Costs Paid
|
|
|
Accrued Liability
|
|
|
|
January 1, 2007
|
|
|
to Expense
|
|
|
or Settled
|
|
|
March 31, 2007
|
|
Employee severance
|
|
$
|
284,096
|
|
|
$
|
183,222
|
|
|
$
|
467,318
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
284,096
|
|
|
$
|
183,222
|
|
|
$
|
467,318
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6Accrued Expenses
Accrued expenses are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
Accrued professional fees
|
|
$
|
1,786,306
|
|
|
$
|
2,243,319
|
|
Accrued compensation
|
|
|
370,978
|
|
|
|
840,641
|
|
Accrued severance
|
|
|
59,999
|
|
|
|
379,402
|
|
Accrued interest
|
|
|
525,000
|
|
|
|
525,000
|
|
Accrued other
|
|
|
370,790
|
|
|
|
359,894
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
3,113,073
|
|
|
$
|
4,348,256
|
|
|
|
|
|
|
|
|
Note 7Commitments and Contingencies
Federal Securities Litigation
The Company and certain of its current and former officers and directors are defendants in
class action cases pending in the United States District Court for the Eastern District of
Pennsylvania.
In August 2005 and September 2005, various lawsuits were filed alleging securities fraud and
asserting claims on behalf of a putative class of purchasers of publicly traded Isolagen securities
between March 3, 2004 and August 1, 2005. These lawsuits were
Elliot Liff v. Isolagen, Inc. et al.
,
C.A. No. H-05-2887, filed in the United States District Court for the Southern District of Texas;
Michael Cummiskey v. Isolagen, Inc. et al.
, C.A. No. 05-cv-03105, filed in the United States
District Court for the Southern District of Texas;
Ronald A. Gargiulo v. Isolagen, Inc. et al.
,
C.A. No. 05-cv-4983, filed in the United States District Court for the Eastern District of
Pennsylvania, and
Gregory J. Newman v. Frank M. DeLape, et al.
, C.A. No. 05-cv-5090, filed in the
United States District Court for the Eastern District of Pennsylvania.
The
Liff
and
Cummiskey
actions were consolidated on October 7, 2005. The
Gargiolo
and
Newman
actions were consolidated on November 29, 2005. On November 18, 2005, the Company filed a motion
with the Judicial Panel on Multidistrict Litigation (the MDL Motion) to transfer the Federal
Securities Actions and the
Keene
derivative case (described below) to the United States District
Court for the Eastern District of Pennsylvania. The
Liff
and
Cummiskey
actions were stayed on
November 23, 2005 pending resolution of the MDL Motion. The
Gargiulo
and
Newman
actions were stayed
on December 7, 2005 pending resolution of the MDL Motion. On February 23, 2006, the MDL Motion was
granted and the actions pending in the Southern District of Texas were transferred to the Eastern
District of Pennsylvania, where they have been captioned
In re Isolagen, Inc. Securities &
Derivative Litigation
, MDL No. 1741 (the Federal Securities Litigation).
On April 4, 2006, the United States District Court for the Eastern District of Pennsylvania
appointed Silverback Asset Management, LLC, Silverback Master, Ltd., Silverback Life Sciences
Master Fund, Ltd., Context
Capital Management, LLC and Michael F. McNulty as Lead Plaintiffs, and the law firms of Bernstein
Litowitz Berger & Grossman LLP and Kirby McInerney & Squire LLP as Lead Counsel in the Federal
Securities Litigation.
26
On July 14, 2006, Lead Plaintiffs filed a Consolidated Class Action Complaint in the Federal
Securities Litigation on behalf of a putative class of persons or entities who purchased or
otherwise acquired Isolagen common stock or convertible debt securities between March 3, 2004 and
August 9, 2005. The complaint purports to assert claims for securities fraud in violation of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Isolagen and certain of its
former officers and directors. The complaint also purports to assert claims for violations of
Section 11 and 12 of the Securities Act of 1933 against the Company and certain of its current and
former directors and officers in connection with the registration and sale of certain shares of
Isolagen common stock and certain convertible debt securities. The complaint also purports to
assert claims against CIBC World Markets Corp., Legg Mason Wood Walker, Inc., Canaccord Adams, Inc.
and UBS Securities LLC as underwriters in connection with an April 2004 public offering of Isolagen
common stock and a 2005 sale of convertible notes. On November 1, 2006, the defendants moved to
dismiss the complaint. On September 26, 2007, the court denied the Companys motions to dismiss the
complaint. On November 6, 2007, the court entered a scheduling order that provides for discovery to
be complete by June 8, 2009.
On April 1, 2008, the court entered an order staying the schedule set forth in its November 6,
2007 order for a period of 90 days and directing the parties (together with the parties in the
Beattie action, described under Derivative Actions, below) to participate in mediation before a
private mediator. The mediation occurred on June 2, 2008 and June 5, 2008, and the parties continue
attempts toward reaching a resolution of the actions. However, there can be no assurance that a
resolution of the actions will be accomplished in the future.
If the parties efforts do not lead to a resolution of the lawsuits, the Company intends to
continue to defend them vigorously. The Company cannot currently estimate the amount of loss, if
any, that may result from the resolution of these actions, and no provision has been recorded in
the consolidated financial statements. The Company will expense its legal costs as they are
incurred and will record any insurance recoveries on such legal costs in the period the recoveries
are received.
Derivative Actions
The Company is the nominal defendant in derivative actions (the Derivative Actions) pending
in State District Court in Harris County, Texas, the United States District Court for the Eastern
District of Pennsylvania, and the Court of Common Pleas of Chester County, Pennsylvania.
On September 28, 2005, Carmine Vitale filed an action styled, Case No. 2005-61840,
Carmine
Vitale v. Frank DeLape, et al.
in the 55
th
Judicial District Court of Harris County,
Texas and in February 2006 Mr. Vitale filed an amended petition. In this action, the plaintiff
purports to bring a shareholder derivative action on behalf of the Company against certain of the
Companys current and former officers and directors. The Plaintiff alleges that the individual
defendants breached their fiduciary duties to the Company and engaged in other wrongful conduct.
Jeffrey Tomz, who formerly served as Isolagens Chief Financial Officer, was accused of engaging in
insider trading of Isolagen stock through a proxy. The plaintiff did not make a demand on the Board
of Isolagen prior to bringing the action and plaintiff alleges that a demand was excused under the
law as futile.
On December 2, 2005, the Company filed its answer and special exceptions pursuant to Rule 91
of the Texas Rules of Civil Procedure based on pleading defects inherent in the Vitale petition.
The plaintiff filed an amended petition on February 15, 2006, to which the defendants renewed their
special exceptions. On September 6, 2006, the Court granted the special exceptions and permitted
the plaintiff thirty days to attempt to replead. Thereafter the plaintiff moved the Court for an
order compelling discovery, which the Court denied on October 2, 2006. On October 18, 2006, the
Court entered an order explaining its grounds for granting the special exceptions. On November 3,
2006, the plaintiff filed a second amended petition. On February 8, 2007, the Company filed its
answer and special exceptions to the second amended petition. On August 9, 2007, the Court granted
the special exceptions and dismissed the second amended petition with prejudice. On September 4,
2007, the plaintiff moved for reconsideration of the dismissal with prejudice of the second amended
petition, for a new trial, and for leave to further amend the petition, and the defendants opposed
that motion on September 20, 2007. On October 23, 2007, that motion was deemed denied by operation
of law because the court had not acted on it by that date.
27
On October 8, 2005, Richard Keene filed an action styled, C.A. No. H-05-3441, Richard Keene v.
Frank M. DeLape et al., in the United States District Court for the Southern District of Texas.
This action makes substantially similar allegations as the original complaint in the Vitale action.
The plaintiff also alleges that his failure to make a demand on the Board prior to filing the
action is excused as futile.
The Company sought to transfer the Keene action to the United States District Court for the
Eastern District of Pennsylvania as part of the MDL Motion. On January 21, 2006, the court stayed
the Keene action pending resolution of the MDL Motion. On February 23, 2006, the Keene action was
transferred with the Federal Securities Actions from the Southern District of Texas to the Eastern
District of Pennsylvania. Thereafter, on May 15, 2006, the plaintiff filed an amended complaint,
and on June 5, 2006, the defendants moved to dismiss the amended complaint. On August 21, 2006, the
plaintiff moved for leave to file a second amended complaint, and on September 15, 2006, defendants
filed an opposition to that motion. On January 24, 2007, the court denied the plaintiffs motion to
file a second amended complaint, and on April 10, 2007 the court granted the defendants motion to
dismiss and dismissed the amended complaint without prejudice. On May 9, 2007, plaintiff filed a
notice of appeal from the January 24, 2007 order denying plaintiffs motion to file a second
amended complaint, and from the April 10, 2007 order dismissing plaintiffs amended complaint
without prejudice. The appeal is fully briefed. On or about April 5, 2008, Keene moved the appeals
court to stay the appeal for a period of 90 days to permit Keene to participate in the mediation of
the federal securities litigation (described above) and the Beattie derivative litigation
(described below). The mediation is described under Federal Securities Litigation above.
On October 31, 2005, William Thomas Fordyce filed an action styled, C.A. No. GD-05-08432,
William Thomas Fordyce v. Frank M. DeLape, et al., in the Court of Common Pleas of Chester County,
Pennsylvania. This action makes substantially similar allegations as the original complaint in the
Vitale action. The plaintiff also alleges that his failure to make a demand on the Board prior to
filing the action is excused as futile.
On January 20, 2006, the Company filed its preliminary objections to the complaint. On August
31, 2006, the Court of Common Pleas entered an opinion and order sustaining the preliminary
objections and dismissing the complaint with prejudice. On September 19, 2006, Fordyce filed a
motion for reconsideration, which the Court of Common Pleas denied. On September 28, 2006, Fordyce
filed a notice of appeal to the Superior Court of Pennsylvania. On July 27, 2007, the Superior
Court affirmed the decision of the Court of Common Pleas.
On February 14, 2008, Ronald Beattie filed an action styled C.A. No. 08-724, Ronald Beattie v.
Michael Macaluso, et al., in the United States District Court for the Eastern District of
Pennsylvania. This action makes substantially similar allegations as the original complaint in the
Vitale action.
On April 1, 2008, the court entered an order extending the defendants time to respond to the
complaint for a period ending 150 days from April 1, 2008 and directing the parties, together with
the parties to the federal securities litigation described above, to mediation before a private
mediator. The mediation is described under Federal Securities Litigation above.
The Derivative Actions are purportedly being prosecuted on behalf of the Company and any
recovery obtained, less any attorneys fees awarded, will inure to the benefit of the Company. The
Company is advancing legal expenses to certain current and former directors and officers of the
Company who are named as defendants in the Derivative Actions and expects to receive reimbursement
for those advances from its insurance carriers. The Company will expense its legal costs as they
are incurred and will record any insurance recoveries on such legal costs in the period the
recoveries are received. The Company cannot currently estimate the amount of loss, if any, that may
result from the resolution of these actions, and no provision has been recorded in the consolidated
financial statements.
28
Indemnity Demands
Mr. Jeffrey Tomz
After the above referenced litigations were commenced, Mr. Jeffrey Tomz, who formerly served
as Isolagens Chief Financial Officer, demanded reimbursement of his costs of defense, and
reimbursement for the
costs of responding to a Securities and Exchange Commission investigation of his alleged
insider trading in Isolagen stock. It is understood that Mr. Tomzs defense costs to date amount to
approximately $0.3 million.
As the Vitale matter has now been resolved in favor of all defendants, including Mr. Tomz, the
Company is presently obligated to reimburse him for the reasonable and necessary costs of defending
all claims asserted therein other than the insider trading allegations. Although decided on
jurisdictional grounds, it is likely the Company is also obligated to reimburse Mr. Tomz for the
reasonable and necessary costs incurred in defending the Fordyce matter given that it has also been
resolved in favor of all defendants. The Company would be liable to reimburse Mr. Tomz for the
reasonable and necessary costs of defense in the Keene case if it is affirmed on appeal and in the
putative securities cases should he prevail in that action. The Company has refused to pay the
amount of fees and expenses for which Mr. Tomz has sought reimbursement because it believes they
are excessive, duplicative and have not been properly segregated between reimbursable and
non-reimbursable claims. The Company has negotiated an acceptable compromise for the amounts billed
by Mr. Tomzs local Pennsylvania counsel for an amount less than $0.1 million.
Prior to the resolution of the various derivative actions, Mr. Tomz filed a demand for
arbitration seeking advancement of his defense costs. He subsequently agreed to stay those
proceedings. At present, Mr. Tomz has not sought to lift this stay and it is uncertain whether he
will attempt to do so in the future.
The Company has accrued less than $0.1 million in the accompanying Consolidated Financial
Statements as of June 30, 2008 with respect to Mr. Tomzs existing defense costs in dispute. The
Company intends to seek reimbursement under its directors and officers liability policy for any
amounts paid to reimburse Mr. Tomz for his defense costs, which includes less than $0.1 million
paid to date.
Underwriters
The Underwriters have each demanded that the Company indemnify, hold harmless and defend them
with respect to the claims asserted in the putative securities actions. The total amount demanded
to date is approximately $0.8 million, and the total future amount cannot be estimated at this
time. The Underwriters demands for indemnification are a subject of the ongoing mediation efforts
described under Federal Securities Litigation above.
Isolagen has denied this demand on numerous grounds, including that: (i) as to the November
2004 convertible notes offering, it only agreed to indemnify the Underwriters for any losses
resulting from any untrue statement, or alleged untrue statement, of material fact in the offering
documents provided by the Company to a holder or prospective purchaser of securities, and
plaintiffs claims in the securities action are not based upon alleged untrue statements in any
such documents; (ii) as to the June 2004 secondary offering, it only agreed to indemnify the
Underwriters for untrue statements, or alleged untrue statements, of material fact, in the
preliminary prospectus, registration statement, prospectus or any amendment thereof, and the
Company believes there were no such untrue statements in any such document; (iii) Isolagen assumed
no duty to defend or advance defense costs; and (iv) Isolagen satisfied whatever duty to defend it
may have to the Underwriters by offering to assume the Underwriters defense. Accordingly, the
Company has not accrued any amounts related to the Underwriters defense costs in its Consolidated
Financial Statements.
Dispute with Former President and Member of the Board of Directors
On March 16, 2007, the Company disclosed in its Form 10-K for the year ended December 31, 2006
(the Form 10-K), that the Company and Susan Ciallella had reached an understanding pursuant to
which Ms. Ciallella would resign from the Company in all capacities. The understanding, which was
described in the Form 10-K, was subject to the negotiation and execution of a definitive
agreement. On May 10, 2007, the Company disclosed in its Form 10-Q for the quarter ended March 31,
2007, that no such definitive agreement had been concluded with Ms. Ciallella, and that Ms.
Ciallella was asserting claims against the Company in connection with her separation from the
Company. On June 8, 2007, the Company and Ms. Ciallella participated in a voluntary mediation
before a former federal judge. Upon conclusion of the mediation, the Company and Ms. Ciallella
entered into a Settlement Agreement and Release (the Settlement Agreement) pursuant to which the
parties agreed to settle and resolve all claims that Ms. Ciallella may have against the Company as
well as all aspects of Ms. Ciallellas separation from the Company. The Settlement Agreement
provided Ms. Ciallella the following:
(i) severance payments as follows: (a) $450,000, which was paid by June 2007; (b) $240,000
paid on September 17, 2007; and (c) $40,000 per month to be paid each month beginning October 17,
2007 through July 15, 2008 with a $20,000 payment to be made on July 30, 2008;
(ii) $1,745,000, which was paid during June 2007 in satisfaction and settlement of Ms.
Ciallellas legal claims relating to her termination;
29
(iii) $5,000 paid during June 2007 in connection with Ms. Ciallellas release of claims under
the Age Discrimination in Employment Act;
(iv) $159,245 paid during June 2007 for the reimbursement of Ms. Ciallellas legal fees in
connection with the negotiation and execution of the Settlement Agreement;
(v) $198,950 related to Ms. Ciallellas legal support services to be provided to the Company,
of which approximately $158,000 had been paid as of December 31, 2007;
(vi) Ms. Ciallella retained 300,000 of the 400,000 performance options issued to her in June
2006, which expire in June 2016; Ms. Ciallella retained 160,000 of the options issued to her in
April 2006, which expire in April 2016 and which were fully vested; and Ms. Ciallella retained her
vested 300,000 options, which were issued to her in April 2005 and expire in April 2015 (see Note
8).
Each of the Company and Ms. Ciallella released the other party from any and all claims that
it/she may have; and Ms. Ciallella agreed to resign from all officer and director positions she
held with the Company or any of its subsidiaries.
During the three months ended March 31, 2007, the Company recorded termination costs
aggregating $2.6 million to reflect the March 16, 2007 understanding between the parties, which
were included in selling, general, and administrative expenses. As a result of the June 2007
Settlement Agreement, during the three months ended June 30, 2007 the Company recorded an
additional $2.0 million of termination costs, which are also included in selling, general, and
administrative expenses. No such expenses were incurred subsequent to June 30, 2007. Accordingly,
for the three months ended March 31, 2007, three months ended June 30, 2007 and for the six months
ended June 30, 2007, the Company recorded total termination costs of approximately $4.6 million, as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
Three months ended
|
|
|
Six months ended
|
|
(in millions)
|
|
March 31, 2007
|
|
|
June 30, 2007
|
|
|
June 30, 2007
|
|
Salary and
severance
|
|
$
|
1.2
|
|
|
$
|
1.6
|
|
|
$
|
2.8
|
|
Consulting fee
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
|
0.2
|
|
Legal fee
reimbursement to
Ms. Ciallella
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
Company legal fees
|
|
|
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Stock option
modifications (see
Note 8)
|
|
|
1.1
|
|
|
|
|
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.6
|
|
|
$
|
2.0
|
|
|
$
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
Of the $0.3 million of Company legal fees above, approximately $133,000 related to the Board
of Directors Special Committee legal counsel retained in connection with the Ciallella matter and
was paid directly by the Company. Less than $10,000 related to the legal fees of one the Companys
Board members in connection with the Ciallella matter was paid directly by the Company. Also, less
than $10,000 related to the legal fees of the Companys Chief Executive Officer in connection with
the Ciallella matter was paid directly by the Company. The Company is pursuing reimbursement of the
amounts paid in excess of Ms. Ciallellas contractual severance, plus defense costs, from its
insurance carriers. There can be, however, no assurance that there will be a recovery or if there
is, of the amount thereof. As of June 30, 2008, $0.1 million remains due to Ms. Ciallella and is
recorded in accrued expenses on the consolidated balance sheet.
30
United Kingdom Customer Settlement
During 2005, the Company began an informal study and surveyed a number of patients who had
previously received the Isolagen treatment to assess patient satisfaction. Some patients surveyed
reported sub-optimal results
from treatment. One hundred forty-nine patients who claimed to have received sub-optimal
results were retreated for the purpose of determining the reasons for sub-optimal results. Only
those patients who completed the survey, provided adequate medical records including before and
after photographs and who were deemed both to have received a sub-optimal result from a first
treatment administered according to the Isolagen protocol and who were considered to be appropriate
patients for treatment with the Isolagen Therapy received re-treatment. No one completing the
survey was offered re-treatment unless they agreed to these conditions. Following re-treatment, a
number of patients reported better results than first obtained through the initial treatment by
their initial treating physician.
During the first quarter of 2006, the Company received a number of complaints from certain
patients who had learned of the limited re-treatment program and also learned that a number of
physicians with dissatisfied patients were generating public ill-will as a result of the Companys
decision to limit the number of patients offered re-treatment and were encouraging dissatisfied
patients to seek recourse against the Company. In response, in March 2006 the Company decided that
it was in its best interest to address these complaints to foster goodwill in the marketplace and
avoid the cost of any potential patient claims. Accordingly, the Company agreed to resolve any
properly documented and substantiated patient complaints by offering to retreat the patient
pursuant to the same criteria stated above or pay £1,000 (approximately US$1,750) to the patients
identified to the Company as having received a sub-optimal result. In order to qualify for
re-treatment and in addition to the criteria set forth above, the patient will be treated by a
physician identified by the Company who will treat these patients pursuant to a protocol. In
addition, these patients must have agreed to follow-up visits and assessments of their response to
treatment. No patient unlikely to benefit from Isolagen Therapy has been or will be retreated.
The Company made this offer to approximately 290 patients during late March 2006. Accordingly,
the Company believed its range of liability was between £290,000 (or approximately $0.5 million),
assuming all 290 patients were to choose the £1,000 payment, and approximately £580,000 (or
approximately $1.0 million), assuming all 290 patients elected to be retreated. The estimated costs
for retreatment include the cost of treatment, physician fees and other ancillary costs. The
Company estimated that 60% of the patients would elect the £1,000 offer and 40% would elect to be
retreated. Accordingly, the Company recorded a charge reflected under loss from discontinued
operations for the three months ended March 31, 2006 of $0.7 million. During the three months ended
June 30, 2006, an additional 31 patients were entered into the settlement program, resulting in an
additional charge reflected under loss from discontinued operations of $0.1 million.
During the year ended December 31, 2006, payments to patients and retreatments reduced the
accrual by $0.6 million. During the three months ended March 31, 2007 and June 30, 2007, payments
and retreatments to patients reduced the accrual by approximately $0.1 million and $0.0 million,
respectively. As of June 30, 2008, the accrual, which is included in current liabilities of
discontinued operations in the consolidated balance sheet, was $0.1 million. The estimates related
to this liability may change in future periods and the effects of any changes will be accounted for
in the period in which the estimate changes.
U
nited Kingdom Claims
Subsequent to the Companys public announcement regarding the closure of the United Kingdom
operation, the Company received negative publicity and negative correspondence from former patients
in the United Kingdom that previously received the Companys treatment. More recently, the Company
received a written demand by an attorney representing approximately 114 former patients, as of June
30, 2008, each claiming negligent misstatements were made and each claiming, on average, £3,500 (or
approximately $7,000), plus unquantified interest and incidental expenses. The Company has
responded to the written demand and is in the process of evaluating the merits of the claims. To
date, no formal legal action has been brought by the attorney against the Company, and no provision
has been recorded in the consolidated financial statements related to this matter.
Other Litigation
The Company is involved in various other legal matters that are being defended and handled in
the ordinary course of business. Although it is not possible to predict the outcome of these other
matters, management currently believes that the results will not have a material impact on the
Companys financial statements.
31
American Stock Exchange Noncompliance
On March 12, 2008, the Company received a notice from the American Stock Exchange (AMEX)
advising the Company that it does not meet certain of the continued listing standards as set forth
in Part 10 of the AMEX Company Guide. AMEX notified the Company that it was not in compliance with
Sections 1003 (a)(i)-(iii) of the AMEX Company Guide. Specifically, the AMEX staff noted that the
Companys stockholders equity was less than $2,000,000 and losses from continuing operations and
net losses were incurred in two out of its three most recent fiscal years; that the Companys
stockholders equity was less than $4,000,000 and losses from continuing operations and/or net
losses were incurred in three out of its four most recent fiscal years; and that the Companys
stockholders equity was less than $6,000,000 and losses from continuing operations and/or net
losses were incurred in its five most recent fiscal years.
The Company submitted a plan to AMEX on April 14, 2008 that outlined the Companys strategy to
bring itself back into compliance by September 14, 2009. The plan was not accepted by AMEX, and as
such, the Company is subject to delisting procedures as set forth in Section 1010 and Part 12 of
the Amex Company Guide. Under AMEX rules, the Company has the right to appeal any determination by
AMEX to initiate delisting proceedings. The Company has appealed the determination and the Company
will present its appeal to AMEX at a hearing scheduled for August 19, 2008. There can be no
assurance that the Companys request for continued listing will be granted after such hearing.
Note 8Equity-based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment (SFAS
No. 123(R)). SFAS No. 123(R) replaced SFAS No. 123, Accounting for Stock-Based Compensation,
superseded APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
amended SFAS No. 95, Statement of Cash Flows. SFAS No. 123(R) requires entities to recognize
compensation expense for all share-based payments to employees and directors, including grants of
employee stock options, based on the grant-date fair value of those share-based payments, adjusted
for expected forfeitures. Further, compensation expense is recognized in connection with the
issuance of stock options to non-employee consultants in accordance with EITF 96-18, Accounting
for Equity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling Goods and Services.
The Company utilizes the straight-line attribution method for recognizing stock-based
compensation expense under SFAS No. 123(R). The Company recorded $0.2 million and $0.5 million of
compensation expense, net of tax, during the three months ended June 30, 2008 and June 30, 2007,
respectively, for stock option awards to employees and directors based on the estimated fair
values, at the grant dates, of the awards. The Company recorded $0.4 million and $0.9 million of
compensation expense, net of tax, during the six months ended June 30, 2008 and June 30, 2007,
respectively, for stock option awards to employees and directors based on the estimated fair
values, at the grant dates, of the awards. Further, in connection with the departure of the
Companys former Chief Executive Officer and former President, and the related modification of the
former Chief Executive Officer and Presidents stock options, the Company recorded $1.3 million and
$1.1 million in stock option modification expense during the three months ended March 31, 2008 and
March 31, 2007, respectively, as discussed further below under
Modification of Stock Options.
No
such stock option modifications occurred during the three months ended June 30, 2008 or three
months ended June 30, 2007.
32
The weighted average fair market value using the Black-Scholes option-pricing model of the
options granted was $0.92 and $1.92 for the six months ended June 30, 2008 and 2007, respectively.
The fair market value of the stock options at the date of grant was estimated using the
Black-Scholes option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
Expected life (years)
|
|
5.8 years
|
|
|
4.2 years
|
|
Interest rate
|
|
|
2.9
|
%
|
|
|
4.9
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
92
|
%
|
|
|
77
|
%
|
The risk-free interest rate is based on U.S. Treasury interest rates at the time of the grant
whose term is consistent with the expected life of the stock options. Expected volatility is based
on the Companys historical experience. Expected life represents the period of time that options
are expected to be outstanding and is based on the Companys historical experience or the
simplified method, as permitted by SEC Staff Accounting Bulletin No. 107 where appropriate.
Expected dividend yield was not considered in the option pricing formula since the Company does not
pay dividends and has no current plans to do so in the future. The forfeiture rate used was based
upon historical experience. As required by SFAS No. 123(R), the Company will adjust the estimated
forfeiture rate based upon actual experience.
During December 2005, the Companys Board of Directors approved the full vesting of all
unvested, outstanding stock options issued to current employees and directors. The Board decided to
take this action (the acceleration event) in anticipation of the adoption of SFAS No. 123(R). As
a result of this acceleration event, approximately 1.4 million stock options were vested that would
have otherwise vested during 2006 and later periods. At the time of the acceleration event, the
unamortized grant date fair value of the affected options was approximately $3.6 million (for SFAS
No. 123 and SFAS No. 148 pro forma disclosure purposes), which was charged to pro forma expense in
the fourth quarter of 2005. As the Company accelerated the vesting of outstanding employee and
director stock options during December 2005, there was no remaining expense related to such options
to be recognized in the Companys statements of operations in future periods.
There were no stock options exercised during the six months ended June 30, 2008. There were 0
and 15,000 stock options exercised during the three and six months ended June 30, 2007,
respectively, resulting in cash proceeds to the Company of $0 and $23,100, respectively. The
options exercised had an intrinsic value of $15,900. The following table summarizes option activity
for the six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
Options
|
|
Shares
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at January 1, 2008
|
|
|
7,723,999
|
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,132,000
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(225,833
|
)
|
|
|
3.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
8,630,166
|
|
|
$
|
3.16
|
|
|
$
|
5.68
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2008
|
|
|
5,865,162
|
|
|
$
|
3.79
|
|
|
$
|
4.96
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes non-vested stock option activity for the six months ended June 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
Non-vested Options
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average Fair
|
|
|
|
Shares
|
|
|
Value
|
|
Non-vested at January 1, 2008
|
|
|
2,546,838
|
|
|
$
|
1.43
|
|
Granted
|
|
|
1,132,000
|
|
|
|
0.92
|
|
Vested
|
|
|
(731,334
|
)
|
|
|
1.22
|
|
Forfeited
|
|
|
(182,500
|
)
|
|
|
2.07
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2008
|
|
|
2,765,004
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
33
The total fair value of shares vested during the six months ended June 30, 2008 and June 30,
2007 was $0.9 million and $1.3 million, respectively. As of June 30, 2008 and December 31, 2007,
there was $1.1 million and $1.8 million of total unrecognized compensation cost, respectively,
related to non-vested director and employee stock options which vest over time (excluding stock
options measured pursuant to EITF 96-18, see Modification of Stock Options further below). That
cost is expected to be recognized over a weighted-average period of 2.0 years. As of June 30, 2008
and December 31, 2007, there was $0.3 million and $0.8 million, respectively, of total unrecognized
compensation cost related to performance-based, non-vested employee stock options. That cost will
begin to be recognized when the performance criteria within the respective performance-base option
grants become probable of achievement.
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 2001 Stock Plan). The 2001 Stock Plan is discretionary and allows
for an aggregate of up to 5,000,000 shares of the Companys common stock to be awarded through
incentive and non-qualified stock options and stock appreciation rights. The 2001 Stock Plan is
administered by the Companys 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 of June 30, 2008, there were 2,933,500 options outstanding under the Stock Plan and
1,440,834 options were available to be issued under the Stock Plan.
During the three months ended March 31, 2008, the Company issued under the 2001 Stock Plan the
following ten-year life option grants to Mr. Declan Daly, Chief Executive Officer: (a) an option to
purchase 350,000 shares of common stock at an exercise price of $2.36, which vests in twelve equal
quarterly installments commencing March 31, 2008; and (b) a performance stock option to purchase
100,000 shares of common stock at an exercise price of $2.36 that shall vest as follows: (i) 50% of
performance stock option shall vest upon the Companys accepted filing of a Biologics License
Application by the FDA and (ii) the remaining 50% of the performance stock option shall vest upon
the FDAs approval of the Companys Biologics License Application filing; provided in each case
that Mr. Daly is the Companys Chief Executive Officer at the time of said event.
Further, during the three months ended March 31, 2008, the following options grants were
issued: (1) options issued to nine employees to purchase a total of 102,000 shares of common stock
at an exercise price of $0.61, which vest in equal annual installments over three years and have a
five year life, (2) an option issued to the Companys Chief Financial Officer to purchase 200,000
shares of common stock at an exercise price of $0.48, which vests in equal annual installments over
three years and have a ten year life and (3) performance options issued to two consultants to
purchase 200,000 shares of common stock at an average exercise price of $0.51 (or exercise price
range of $0.41 to $0.61), which vest upon the attainment of certain performance criteria. No
compensation cost has been recorded for the performance stock option grants as the Company does not
currently believe that the vesting events are probable of occurrence. A total of 952,000 stock
options were granted during the three months ended March 31, 2008 under the 2001 Stock Plan.
The grant date fair value of the employee performance option awards issued during the three
months ended March 31, 2008 was approximately $0.2 million. This fair value of $0.2 million, or any
portion thereof, will not be recognized as compensation expense until the vesting of the award
becomes probable. The fair value of the total non-employee performance awards issued during the
three months ended March 31, 2008 was less than $0.1 million as of March 31, 2008. Compensation
expense related to the non-employee performance option awards will not be recognized until vesting
of the awards occur, and the actual amount of expense will be based upon the valuation factors in
effect at that time.
During the three months ended March 31, 2007, the Company issued, under the 2001 Stock Plan,
395,000 options to employees and Board of Director members, with exercise prices ranging from $2.37
to $3.10 and with contractual lives of 5 years for employees and 10 years for Board members. During
the three months ended June 30, 2007, the Company issued, under the 2001 Stock Plan, 140,000
options to three employees, with exercise prices ranging from $4.20 to $4.55 and with contractual
lives of 5 years.
34
During the three months ended June 30, 2008, the company issued to its six independent Board
of Director members, under the 2001 Stock Plan, a total of 180,000 options to purchase its common
stock with an exercise price of $0.62 per share and a ten year maximum contractual life. The
options vest one-fourth upon grant and one-fourth over the three remaining fiscal quarters of 2008.
2003 Stock Option and Stock Appreciation Rights Plan
On January 29, 2003, the Companys 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 2,250,000 shares of the Companys common stock to be awarded through
incentive and non-qualified stock options and stock appreciation rights. The 2003 Stock Plan is
administered by the Companys 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 of June 30, 2008, there were 1,823,333 options outstanding under the 2003 Stock Plan
and 426,667 shares were available for issuance under the 2003 Stock Plan. No options have been
granted under the 2003 Stock Plan since November 2006.
2005 Equity Incentive Plan
On April 26, 2005, the Companys Board of Directors approved the 2005 Equity Incentive Plan
(the 2005 Stock Plan). The 2005 Stock Plan is discretionary and allows for an aggregate of up to
2,100,000 shares of the Companys common stock to be awarded through incentive and non-qualified
stock options, stock units, stock awards, stock appreciation rights and other stock-based awards.
The 2005 Stock Plan is administered by the Compensation Committee of the Companys 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 of June 30, 2008, there were 305,000
options outstanding and 1,712,818 shares were available for issuance under the 2005 Stock Plan. No
options have been granted under the 2005 Stock Plan since June 2006.
During the three months ended March 31, 2007, the Company modified a 400,000 share performance
option grant, as discussed below under
Modification of Stock Options.
This 400,000 share
performance option grant was issued during the three months ended June 30, 2006 to purchase common
stock with an exercise price of $1.88 per share to the Companys former President. These options
had a ten year maximum contractual life and the options were to vest, and no longer be subject to
forfeiture, upon the occurrence of any of the following events: (i) upon the closing of the sale of
substantially all of the assets of the Company or the reorganization, consolidation or the merger
of the Company; provided that the event results in the payment or distribution of consideration
valued in good faith by the Board of Directors at $25 per share or more; or (ii) upon the closing
of a tender offer or exchange offer to purchase 50% or more of the issued and outstanding shares of
common stock of the Company at a price per share valued in good faith by the Board of Directors at
$25 or more; or (iii) immediately following a Stock Acquisition Date, as that term is defined in
the Rights Plan adopted by the Company on May 12, 2006 (provided that said rights are not
subsequently redeemed by the Company or that the Rights Plan is not subsequently amended to
preclude exercise of the rights issued thereunder, prior to the Distribution Date, as that term is
defined in the Rights Pan), or (iv) at such other time as the Board of Directors, in its sole
discretion, deems appropriate; provided in each case that the President is employed by the Company
at the time of said event. The 400,000 share option grant was considered a grant of a performance
stock option. No compensation cost was recorded during 2006 for this grant as the Company did not
believe that the vesting events were probable of occurrence. The 2006 grant date fair value of the
award was approximately $0.6 million. Subsequently, this 400,000 share option grant was modified
during the three months ended March 31, 2007, as discussed below under
Modification of Stock
Options.
Other Stock Options
The Company has not issued any options outside the 2001 Stock Plan, the 2003 Stock Plan or the
2005 Stock Plan since June 2006. As of June 30, 2008, there were 3,568,333 nonqualified stock
options outstanding outside of the shareholder approved plans discussed above.
35
Modification of Stock Options
On January 7, 2008, the Company and Mr. Nicholas L. Teti, Jr. entered into a consulting and
non-competition agreement (the Consulting Agreement), pursuant to which Mr. Teti agreed to
continue as the Companys non-executive Chairman of the Board and to become a consultant to the
Company, and Mr. Teti resigned his position as Chief Executive Officer and President of the
Company. Pursuant to the Consulting Agreement, Mr. Tetis original employment agreement, dated
June 5, 2006, was terminated and the parties agreed that he was owed no severance payments under
the original employment agreement. Mr. Teti retained his previously issued stock options which were
modified such that Mr. Teti will continue to vest in accordance with the original terms, except as
a non-employee. As a result of the modifications to Mr. Tetis stock options set forth in the
Consulting Agreement, the Company recorded a non-cash compensation charge during the three months
ended March 31, 2008 of approximately $1.3 million related to Mr. Tetis 1,166,665 vested stock
options on the date of modification.
Further, stock compensation expense relating to the 833,335 unvested stock options Mr. Teti
held at the time of modification will be recorded as stock option expense over the remaining
periods those stock options are earned in accordance with EITF 96-18, Accounting for Equity
Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction with Selling
Goods and Services. These stock options vest ratably through June 30, 2009.
In connection with the separation of the Companys former President (see Note 7), the Company
agreed on March 16, 2007 to modify certain of her stock options such that (1) 120,000 unvested,
time-based stock options would vest immediately and (2) of 400,000 performance based stock options,
100,000 would be cancelled and the remaining 300,000 would be extended such that the 300,000
options would expire 10 years from the original grant date, as opposed to expiring upon termination
of employment. The 300,000 performance based stock options would continue to be subject to the same
performance based vesting requirements. The 120,000 modified stock options were valued using the
Black-Scholes valuation model, and resulted in $0.3 million charge to selling, general and
administrative expense during the months ended March 31, 2007. The 300,000 modified performance
stock options were valued using the Black-Scholes valuation model, and resulted in $0.8 million
charge to selling, general and administrative expense in the year ended December 31, 2007.
Equity Instruments Issued for Services
As of June 30, 2008, the Company had outstanding 1,436,935 warrants and options issued to
non-employees under consulting agreements, including the 833,335 options related to Mr. Teti, the
Companys former CEO, which were unvested at the time of modification, as discussed above. The
following sets forth certain information concerning these warrants and options:
|
|
|
|
|
Vested
|
Warrants and options outstanding
|
|
936,934
|
Range of exercise prices
|
|
$1.506.00
|
Weighted average exercise price
|
|
$3.36
|
Expiration dates
|
|
20092016
|
|
|
|
|
|
Unvested
|
Warrants and options outstanding
|
|
500,001
|
Range of exercise prices
|
|
$1.88
|
Weighted average exercise price
|
|
$1.88
|
Expiration dates
|
|
2016
|
36
All of the above unvested equity instruments relate to the Companys former Chief Executive
Officer, as of June 30, 2008. Expense related to these contracts was less than $0.1 million in each
three month period ended June 30, 2008 and 2007. Expense related to these contracts was $0.1
million and less than $0.1 million in the six month period ended June 30, 2008 and 2007. This
expense, which is in addition to the stock option expense related to employees and directors based
on the grant date fair value discussed above, was calculated using the Black Scholes option-pricing
model based on the following assumptions:
|
|
|
Expected life (years)
|
|
44.3 Years
|
Interest rate
|
|
3.03.13%
|
Dividend yield
|
|
|
Volatility
|
|
100106%
|
Further, there were 168,246 warrants outstanding as of June 30, 2008 and December 31, 2007,
which were primarily issued in connection with past equity offerings.
Note 9Segment Information and Geographical information
With the acquisition of Agera on August 10, 2006 (see Note 4), the Company now has two
reportable segments: Isolagen Therapy and Agera. Prior to the acquisition of Agera, the Company
reported one reportable segment. The Isolagen Therapy segment specializes in the development and
commercialization of autologous cellular therapies for soft tissue regeneration. The Agera segment
maintains proprietary rights to a scientifically-based advanced line of skincare products. The
following table provides operating financial information for the continuing operations of the
Companys two reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
|
|
|
$
|
271,721
|
|
|
$
|
271,721
|
|
Intersegment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
|
|
|
|
271,721
|
|
|
|
271,721
|
|
Cost of revenue
|
|
|
|
|
|
|
147,787
|
|
|
|
147,787
|
|
Selling, general and administrative expense
|
|
|
2,036,668
|
|
|
|
174,894
|
|
|
|
2,211,562
|
|
Research and development expense
|
|
|
3,251,355
|
|
|
|
|
|
|
|
3,251,355
|
|
Management fee
|
|
|
(69,000
|
)
|
|
|
69,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,219,023
|
|
|
|
243,894
|
|
|
|
5,462,917
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(5,219,023
|
)
|
|
|
(119,960
|
)
|
|
|
(5,338,983
|
)
|
Interest income
|
|
|
46,879
|
|
|
|
7
|
|
|
|
46,886
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(974,810
|
)
|
|
|
|
|
|
|
(974,810
|
)
|
Minority interest
|
|
|
|
|
|
|
21,910
|
|
|
|
21,910
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss from continuing operations
|
|
$
|
(6,146,954
|
)
|
|
$
|
(98,043
|
)
|
|
$
|
(6,244,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
|
|
|
$
|
489,674
|
|
|
$
|
489,674
|
|
Intersegment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
|
|
|
|
489,674
|
|
|
|
489,674
|
|
Cost of revenue
|
|
|
|
|
|
|
318,762
|
|
|
|
318,762
|
|
Selling, general and administrative expense
|
|
|
5,844,777
|
|
|
|
311,623
|
|
|
|
6,156,400
|
|
Research and development expense
|
|
|
6,145,211
|
|
|
|
|
|
|
|
6,145,211
|
|
Management fee
|
|
|
(219,000
|
)
|
|
|
219,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,770,988
|
|
|
|
530,623
|
|
|
|
12,301,611
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(11,770,988
|
)
|
|
|
(359,711
|
)
|
|
|
(12,130,699
|
)
|
Interest income
|
|
|
133,493
|
|
|
|
25
|
|
|
|
133,518
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,949,620
|
)
|
|
|
|
|
|
|
(1,949,620
|
)
|
Minority interest
|
|
|
|
|
|
|
60,495
|
|
|
|
60,495
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss from continuing operations
|
|
$
|
(13,587,115
|
)
|
|
$
|
(299,191
|
)
|
|
$
|
(13,886,306
|
)
|
|
|
|
|
|
|
|
|
|
|
37
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
For the three months ended June 30, 2008 and as of June 30, 2008:
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Depreciation and amortization expense
|
|
$
|
270,510
|
|
|
$
|
81,711
|
|
|
$
|
352,221
|
|
Capital expenditures
|
|
|
13,013
|
|
|
|
|
|
|
|
13,013
|
|
Equity awards issued for services
|
|
|
256,452
|
|
|
|
|
|
|
|
256,452
|
|
Amortization of debt issuance costs
|
|
|
187,310
|
|
|
|
|
|
|
|
187,310
|
|
Total assets, including assets from discontinued
operations, June 30, 2008
|
|
|
16,371,793
|
|
|
|
4,931,948
|
|
|
|
21,303,741
|
|
Property and equipment, June 30, 2008
|
|
|
2,858,108
|
|
|
|
|
|
|
|
2,858,108
|
|
Intangible assets, net, June 30, 2008
|
|
|
525,937
|
|
|
|
3,906,244
|
|
|
|
4,432,181
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
For the six months ended June 30, 2008:
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Depreciation and amortization expense
|
|
$
|
556,343
|
|
|
$
|
163,419
|
|
|
$
|
719,762
|
|
Capital expenditures
|
|
|
29,892
|
|
|
|
|
|
|
|
29,892
|
|
Equity awards issued for services
|
|
|
1,715,420
|
|
|
|
|
|
|
|
1,715,420
|
|
Amortization of debt issuance costs
|
|
|
374,619
|
|
|
|
|
|
|
|
374,619
|
|
An intercompany receivable of $1.0 million, due from the Agera segment to the Isolagen
Therapy segment as of June 30, 2008, is eliminated in consolidation. This intercompany
receivable is primarily due to the intercompany management fee charge to Agera by Isolagen,
as well as Agera working capital needs provided by Isolagen, and has been excluded from total
assets of the Isolagen Therapy segment in the above table. Total assets on the consolidated
balance sheet at June 30, 2008 are approximately $21.3 million, which includes assets of
continuing operations of $21.1 million and assets of discontinued operations of $0.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Three months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
|
|
|
$
|
346,716
|
|
|
$
|
346,716
|
|
Intersegment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
|
|
|
|
346,716
|
|
|
|
346,716
|
|
Cost of revenue
|
|
|
|
|
|
|
157,373
|
|
|
|
157,373
|
|
Selling, general and administrative expense
|
|
|
5,193,263
|
|
|
|
513,262
|
|
|
|
5,706,525
|
|
Research and development expense
|
|
|
3,365,412
|
|
|
|
6,620
|
|
|
|
3,372,032
|
|
Management fee
|
|
|
(150,000
|
)
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,408,675
|
|
|
|
669,882
|
|
|
|
9,078,557
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8,408,675
|
)
|
|
|
(480,539
|
)
|
|
|
(8,889,214
|
)
|
Interest income and other
|
|
|
299,872
|
|
|
|
197
|
|
|
|
300,069
|
|
Interest expense
|
|
|
(974,810
|
)
|
|
|
|
|
|
|
(974,810
|
)
|
Minority interest
|
|
|
|
|
|
|
142,047
|
|
|
|
142,047
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss from continuing operations
|
|
$
|
(9,083,613
|
)
|
|
$
|
(338,295
|
)
|
|
$
|
(9,421,908
|
)
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Six months ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
External revenue
|
|
$
|
|
|
|
$
|
660,338
|
|
|
$
|
660,338
|
|
Intersegment revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
|
|
|
|
660,338
|
|
|
|
660,338
|
|
Cost of revenue
|
|
|
|
|
|
|
316,460
|
|
|
|
316,460
|
|
Selling, general and administrative expense
|
|
|
11,151,279
|
|
|
|
892,551
|
|
|
|
12,043,830
|
|
Research and development expense
|
|
|
6,444,721
|
|
|
|
16,382
|
|
|
|
6,461,103
|
|
Management fee
|
|
|
(300,000
|
)
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
17,296,000
|
|
|
|
1,208,933
|
|
|
|
18,504,933
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(17,296,000
|
)
|
|
|
(865,055
|
)
|
|
|
(18,161,055
|
)
|
Interest income and other
|
|
|
595,347
|
|
|
|
3,472
|
|
|
|
598,819
|
|
Interest expense
|
|
|
(1,949,620
|
)
|
|
|
|
|
|
|
(1,949,620
|
)
|
Minority interest
|
|
|
|
|
|
|
241,481
|
|
|
|
241,481
|
|
|
|
|
|
|
|
|
|
|
|
Segment loss from continuing operations
|
|
$
|
(18,650,273
|
)
|
|
$
|
(620,102
|
)
|
|
$
|
(19,270,375
|
)
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
For the three months ended June 30, 2007 and as of
December 31, 2007:
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Depreciation and amortization expense
|
|
$
|
298,218
|
|
|
$
|
81,709
|
|
|
$
|
379,927
|
|
Capital expenditures
|
|
|
82,968
|
|
|
|
|
|
|
|
82,968
|
|
Equity awards issued for services
|
|
|
502,431
|
|
|
|
|
|
|
|
502,431
|
|
Amortization of debt issuance costs
|
|
|
187,310
|
|
|
|
|
|
|
|
187,310
|
|
Total assets, including assets from discontinued
operations, as of December 31, 2007
|
|
|
34,162,693
|
|
|
|
5,328,497
|
|
|
|
39,491,190
|
|
Property and equipment, net, as of December 31, 2007
|
|
|
3,395,723
|
|
|
|
|
|
|
|
3,395,723
|
|
Intangible assets, net, as of December 31, 2007
|
|
|
529,875
|
|
|
|
4,069,663
|
|
|
|
4,599,538
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
|
|
|
|
|
Isolagen
|
|
|
|
|
|
|
|
For the six months ended June 30, 2007:
|
|
Therapy
|
|
|
Agera
|
|
|
Consolidated
|
|
Depreciation and amortization expense
|
|
$
|
596,505
|
|
|
$
|
163,420
|
|
|
$
|
759,925
|
|
Capital expenditures
|
|
|
97,780
|
|
|
|
|
|
|
|
97,780
|
|
Equity awards issued for services and equity award
modifications
|
|
|
2,168,812
|
|
|
|
|
|
|
|
2,168,812
|
|
Amortization of debt issuance costs
|
|
|
374,620
|
|
|
|
|
|
|
|
374,620
|
|
An intercompany receivable of $1.1 million, due from the Agera segment to the Isolagen
Therapy segment as of December 31, 2007, is eliminated in consolidation. This intercompany
receivable is primarily due to the intercompany management fee charge to Agera by Isolagen
and has been excluded from total assets of the Isolagen Therapy segment in the above table.
Total assets on the consolidated balance sheet at December 31, 2007 are approximately $39.5
million, which includes assets of continuing operations of $28.2 million and assets of
discontinued operations of $11.3 million.
39
Geographical information concerning the Companys operations and assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Three months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
United States
|
|
$
|
82,325
|
|
|
$
|
79,184
|
|
United Kingdom
|
|
|
163,810
|
|
|
|
262,854
|
|
Other
|
|
|
25,586
|
|
|
|
4,678
|
|
|
|
|
|
|
|
|
|
|
$
|
271,721
|
|
|
$
|
346,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
United States
|
|
$
|
179,605
|
|
|
$
|
203,275
|
|
United Kingdom
|
|
|
271,320
|
|
|
|
435,596
|
|
Other
|
|
|
38,749
|
|
|
|
21,467
|
|
|
|
|
|
|
|
|
|
|
$
|
489,674
|
|
|
$
|
660,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
United States
|
|
$
|
2,858,108
|
|
|
$
|
3,395,723
|
|
|
|
|
|
|
|
|
|
|
$
|
2,858,108
|
|
|
$
|
3,395,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets, net
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
United States
|
|
$
|
4,432,181
|
|
|
$
|
4,599,538
|
|
|
|
|
|
|
|
|
|
|
$
|
4,432,181
|
|
|
$
|
4,599,538
|
|
|
|
|
|
|
|
|
During the three months ended June 30, 2008 revenue from one foreign customer and one domestic
customer represented 60% and 22% of consolidated revenue, respectively. During the three months
ended June 30, 2007 revenue from one foreign customer and one domestic customer represented 76% and
14% of consolidated revenue, respectively.
During the six months ended June 30, 2008, revenue from one foreign customer and one domestic
customer represented 55% and 26% of consolidated revenue, respectively. During the six months ended
June 30, 2007 revenue from one foreign customer and one domestic customer represented 66% and 19%
of consolidated revenue, respectively.
As of June 30, 2008 and December 31, 2007, one foreign customer represented 91% and 94%,
respectively, of accounts receivable, net.
40
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with our consolidated
financial statements, including the notes thereto.
Forward-Looking Information
This report contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended, as well as information relating to Isolagen that is based on managements exercise of
business judgment and assumptions made by and information currently available to management. When
used in this document and other documents, releases and reports released by us, the words
anticipate, believe, estimate, expect, intend, the facts suggest and words of similar
import, are intended to identify any forward-looking statements. 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. Although we believe that our expectations are
based on reasonable assumptions, we can give no assurance that our expectations will materialize.
Many factors could cause actual results to differ materially from our forward looking statements.
Several of these factors include, without limitation:
|
|
|
our ability to finance our business;
|
|
|
|
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, treatment of restrictive scars and
burns and other health-related markets;
|
|
|
|
whether our clinical human trials relating to autologous cellular therapy
applications for the treatment of dermal defects, gingival recession, and such other
indications as we may identify and pursue 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;
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higher than anticipated dropout rates of subjects in our clinical trials which could
adversely affect trial results and make it more difficult to obtain regulatory
approval;
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whether the results of our full Phase III pivotal study will support a successful
BLA filing;
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adverse results from, or changes in, any pending or threatened legal proceedings;
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our ability to maintain AMEX continued listing of our common stock (see Part II,
Item 1a.);
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our ability to provide and deliver any autologous cellular therapies that we may
develop on a basis that is competitive with other therapies, drugs and treatments that
may be provided by our competitors;
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our ability to decrease our manufacturing costs for our Isolagen Therapy product
candidates through the improvement of our manufacturing process, and our ability to
validate any such improvements with the relevant regulatory agencies;
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our ability to reduce our need for fetal bovine calf serum by improved use of less
expensive media combinations and different media alternatives;
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our ability to improve our historical pricing model;
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our ability to meet requisite regulations or receive regulatory approvals in the
United States, Europe, Asia and the Americas, and our ability to retain any regulatory
approvals that we may obtain; and the absence of adverse regulatory developments in the
United States, Europe, Asia and the Americas or any other country where we plan to
conduct commercial operations;
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a stable currency rate environment in the world, and specifically the countries we
are doing business in or plan to do business in;
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continued availability of supplies at satisfactory prices;
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new entrance of competitive products or further penetration of existing products in
our markets;
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the effect on us from adverse publicity related to our products or the company
itself;
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any adverse claims relating to our intellectual property;
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the adoption of new, or changes in, accounting principles;
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our ability to efficiently integrate our past acquisition and future acquisitions,
if any, or any other new lines of business that we may enter in the future;
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our issuance of certain rights to our shareholders that may have anti-takeover
effects;
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our dependence on physicians to correctly follow our established protocols for the
safe administration of our Isolagen Therapy;
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our ability to effectively and efficiently manage the closure of our UK operation;
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whether past or future amendments to our Informed Consent Forms, based on new
knowledge obtained during the execution of our clinical trials or based on changes to
the basic design or administration of our clinical trials, give rise to delays in our
clinical study timelines; and
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other risks referenced from time to time elsewhere in this report and in our filings
with the SEC, including, without limitation, the risks and uncertainties described in
Item 1A of our Form 10-K for the year ended December 31, 2007, as well as Part II, Item
1A of this Form 10-Q.
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These factors are not necessarily all of the important factors that could cause actual results
of operations to differ materially from those expressed in these forward-looking statements. Other
unknown or unpredictable factors also could have material adverse effects on our future results. We
undertake no obligation and do not intend to update, revise or otherwise publicly release any
revisions to these forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of any unanticipated events. We cannot assure you that
projected results will be achieved.
General
We are an aesthetic and therapeutic development stage company focused on developing novel skin
and tissue rejuvenation products. Our clinical development product candidates are designed to
improve the appearance of skin injured by the effects of aging, sun exposure, acne and burn scars
with a patients own, or autologous, fibroblast cells produced by our proprietary Isolagen Process.
Our clinical development programs encompass both aesthetic and therapeutic indications. Our most
advanced indication utilizing the Isolagen Therapy is for the treatment of nasolabial
folds/wrinkles and is currently in Phase III clinical development. We also have an ongoing Phase
II/III study for the treatment of acne scars and ongoing Phase II studies related to full face
rejuvenation, restrictive burns scars and periodontal disease.
We also develop and market an advanced skin care product line through our Agera Laboratories,
Inc. subsidiary, in which we acquired a 57% interest in August 2006.
Going Concern
At June 30, 2008, we had cash and cash equivalents of $11.3 million and working capital of
$8.6 million (including cash and cash equivalents). We believe that our existing capital resources
are adequate to finance our operations through approximately December 1, 2008, under our normal
operating conditions. As such, we estimate that we will require additional cash resources prior to
or during the fourth quarter of 2008 based upon our current operating plan and condition.
Through June 30, 2008, we have been primarily engaged in developing our initial product
technology. In the course of our development activities, we have sustained losses and expect such
losses to continue through at least 2008. We expect to finance our operations primarily through our
existing cash and any future financing, including the sale of assets. However, there exists
substantial doubt about our ability to continue as a going concern.
As discussed in below under Clinical Development Programs, we expect to receive in August,
2008 the results of our pivotal Phase III trials to evaluate the efficacy and safety of Isolagen
Therapy for the treatment of nasolabial folds. If those results support the efficacy and safety of
the Isolagen Treatment for that purpose, further efforts will be required to obtain final
regulatory approval, develop a scalable manufacturing process, and develop the market for the use
of the Isolagen Therapy for the treatment of nasolabial folds. In such case, we would be required
to obtain additional capital in the future to continue our operations. There is no assurance that
we will be able to obtain any such additional capital to finance these efforts, through asset
sales, equity or debt financing, or any combination
thereof, on satisfactory terms or at all. 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 a timely basis and on satisfactory terms, our
operations would be materially negatively impacted. Further, if we do not obtain additional funding
prior to or during the fourth quarter of 2008, we may enter into bankruptcy soon thereafter, and
possibly cease operations.
42
Conversely, if the results of these pivotal Phase III trials do not support the efficacy and
safety of Isolagen Therapy for the treatment of nasolabial folds, it may indicate that the Isolagen
Process as currently manufactured and administered will not obtain regulatory approval and could
not be successfully marketed. In that case, we would be required to research and develop
significant changes to the Isolagen Therapy. Such an effort would require substantial additional
capital, and there is substantial doubt that we could obtain such capital. In such event, we might
be forced to cease operations and enter into bankruptcy.
We filed a shelf registration statement on Form S-3 during June 2007, which was subsequently
declared effective by the SEC. The shelf registration allowed us the flexibility to offer and sell,
from time to time, up to an original amount of $50 million of common stock, preferred stock, debt
securities, warrants or any combination of the foregoing in one or more future public offerings. In
August 2007, we sold under this shelf registration statement 6,746,647 shares of common stock to
institutional investors, raising proceeds of $13.8 million, net of offering costs. We may offer and
sell up to an additional $36.2 million of securities pursuant to this shelf registration.
Our ability to complete additional offerings, including any additional offerings under our
shelf registration statement, is dependent on the state of the debt and/or equity markets at the
time of any proposed offering, and such markets reception of our company and the offering terms.
In addition, our ability to complete an offering may be dependent on the status of our clinical
trials, and in particular, the status of our Phase III clinical trial for the treatment of wrinkles
as discussed above, which cannot be predicted. There is no assurance that capital in any form would
be available to us, and if available, on terms and conditions that are acceptable.
As a result of the conditions discussed above, and in accordance with generally accepted
accounting principles in the United States, there exists substantial doubt about our ability to
continue as a going concern, and our ability to continue as a going concern is contingent, among
other things, upon our ability to secure additional adequate financing or capital prior to or
during the fourth quarter of 2008. If we are unable to obtain additional sufficient funds during
this time, we will be required to terminate or delay our efforts to obtain regulatory approval of
one, more than one, or all of our product candidates, curtail or delay the implementation of
manufacturing process improvements and/or delay the expansion of our sales and marketing
capabilities. Any of these actions would have an adverse effect on our operations, the realization
of our assets and the timely satisfaction of our liabilities. Further, if we do not obtain
additional funding prior to or during the fourth quarter of 2008, we may enter into bankruptcy soon
thereafter, and possibly cease operations. Our financial statements are presented on a going
concern basis, which contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The financial statements do not include any adjustments relating to the
recoverability of the recorded assets or the classification of liabilities that may be necessary
should it be determined that we are unable to continue as a going concern.
Recent Management Changes
In January 2008, Mr. Declan Daly assumed the role of our Chief Executive Officer. Our former
Chief Executive Officer, Mr. Nicholas L. Teti, Jr., continues to serve as Chairman of the Board of
Directors and as a consultant to the company. In March 2008, Mr. Todd J. Greenspan assumed the role
of Chief Financial Officer.
Clinical Development Programs
Our product development programs are focused on the aesthetic and therapeutic markets. These
programs are supported by a number of clinical trial programs at various stages of development.
Our aesthetics development programs include product candidates to treat targeted areas or
wrinkles and to provide full-face rejuvenation that includes the improvement of fine lines,
wrinkles, skin texture and appearance. Our therapeutic development programs are designed to treat
acne scars, restrictive burn scars and dental papillary recession. All of our product candidates
are non-surgical and minimally invasive. Although the discussions below include
estimates of when we expect trials to be completed, the prediction of when a clinical trial
will be completed is subject to a number of factors and uncertainties.
43
Aesthetic Development Programs
Wrinkles/Nasolabial Folds
Phase III Trials
:
In October 2006, we reached an agreement
with the U.S. Food and Drug Administration, or FDA, on the design of a Phase III pivotal study
protocol for the treatment of nasolabial folds (lines which run from the sides of the nose to the
corners of the mouth). The randomized, double-blind protocol was submitted to the FDA under the
agencys Special Protocol Assessment, or SPA. Pursuant to this assessment process, the FDA has
agreed that our study design for two identical trials, including subject numbers, clinical
endpoints, and statistical analyses, is adequate to provide the necessary data that, depending on
the outcome, could form the basis of an efficacy claim for a marketing application. The pivotal
Phase III trials will evaluate the efficacy and safety of Isolagen Therapy against placebo in
approximately 400 subjects total with approximately 200 subjects enrolled in each trial. We
completed enrollment of the study and commenced injection of subjects in early 2007. These
injections were completed in January 2008 and we expect the Phase III trial data results in August
2008.
Refer to Part II, Item 1A of this Form 10-Q for a discussion of certain of our risk factors.
Full Face Rejuvenation
Phase II Trial:
In March 2007 we commenced an open label
(unblinded) trial of approximately 50 subjects. Injections of Isolagen Therapy began to be
administered in July 2007. This trial is designed to further evaluate the safety and use of
Isolagen Therapy to treat fine lines and wrinkles for the full face. Five investigators across the
United States are participating in this trial. The subjects received two series of injections
approximately one month apart. In late December 2007, all 45 remaining subjects completed
injections. The subjects will be followed for twelve months following each subjects last
injection. Efficacy and primary safety data analyses from the trial are expected to be completed
during August 2008.
Therapeutic Development Programs
Acne Scars
Phase II/III Trial:
In November 2007, we commenced an acne scar Phase
II/III study. This study currently includes approximately 100 subjects. This placebo controlled
trial is designed to evaluate the use of our Isolagen Therapy to correct or improve the appearance
of acne scars. Each subject will serve as their own control, receiving Isolagen Therapy on one side
of their face and placebo on the other. The subjects will receive three injections two weeks apart.
The follow-up and evaluation period will be complete four months after each subjects last
injection.
We filed a pre-Investigational New Drug application, or pre-IND, for a Phase III clinical
trial program in July 2007 together with our protocol. In September 2007, the IND was accepted by
the FDA. We held an investigator meeting in early November 2007 and commenced biopsies shortly
thereafter. Injections of subjects began in February 2008 and are currently ongoing.
In connection with this acne scar program, we have developed a validated photo guide for use
in the evaluators assessment of acne study subjects. We had originally designed the acne scar
clinical program as two randomized, double-blind, Phase III, placebo-controlled trials of
approximately 120 subjects each. However, our evaluator assessment scale and photo guide have never
been utilized in a clinical trial. In November 2007, the FDA recommended that we consider
conducting a Phase II study in order to address certain study issues, including additional
validation related to our evaluator assessment scale. As such, we modified our clinical plans to
initiate a single Phase II/III trial. This Phase II/III study, which is powered to demonstrate
efficacy, will allow for a closer assessment of the evaluator assessment scale and photo guide.
Upon successful completion of the Phase II/III study, we expect to initiate a subsequent,
additional Phase III trial. We believe that the two trials may have the potential to form the basis
of a licensure submission to the FDA.
Restrictive Burn Scars
- Phase II Trial:
In January 2007, we met with the FDA to
discuss our clinical program for the use of Isolagen Therapy for restrictive burn scar patients.
This Phase II trial will evaluate the use of Isolagen Therapy to improve range of motion, function
and flexibility, among other parameters, in existing restrictive burn scars in approximately 20
patients. We are currently in the process of screening and enrolling subjects at three academic
burn centers across the United States.
44
Dental Study
- Phase II Trial:
In late 2003, we completed a Phase I clinical trial for
the treatment of condition relating to periodontal disease, specifically to treat Interdental
Papillary Insufficiency. In the second quarter of 2005, we concluded the Phase II dental clinical
trial with the use of Isolagen Therapy and subsequently announced that investigator and subject
visual analog scale assessments demonstrated that the Isolagen Therapy was statistically superior
to placebo at four months after treatment. Although results of the investigator and subject
assessment demonstrated that the Isolagen Therapy was statistically superior to placebo, an
analysis of objective linear measurements did not yield statistically significant results.
In 2006, we commenced a Phase II open-label dental trial for the treatment of Interdental
Papillary Insufficiency. This single site study includes 11 subjects. We are identifying a
development strategy for this application as we do not expect to fund an additional trial related
to this application.
Agera Skincare Systems
We market and sell a skin care product line through our majority-owned subsidiary, Agera
Laboratories, Inc., which we acquired in August 2006. Agera offers a complete line of skincare
systems based on a wide array of proprietary formulations, trademarks and nano-peptide technology.
These skincare products can be packaged to offer anti-aging, anti-pigmentary and acne treatment
systems. Agera markets its products in both the United States and Europe (primarily the United
Kingdom).
Closure of the United Kingdom Operation
In the fourth quarter of 2006 our Board of Directors approved the closing of the United
Kingdom operation. On March 31, 2007, we completed the closure of the United Kingdom manufacturing
facility. With the closure of the United Kingdom operation on March 31, 2007, our European
operations (both the United Kingdom and Switzerland) and Australian operations have been presented
in the financial statements as discontinued operations for all periods presented. See Note 5 of
Notes to Consolidated Financial Statements.
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 of America. Our significant
accounting policies are more fully described in Note 3 of the Notes to the Consolidated Financial
Statements. However, certain accounting policies and estimates are particularly important to the
understanding of our financial position and results of operations and require the application of
significant judgment by our management or can be materially affected by changes from period to
period in economic factors or conditions that are outside of the control of management. As a result
they are subject to an inherent degree of uncertainty. In applying these policies, our management
uses their judgment to determine the appropriate assumptions to be used in the determination of
certain estimates. Those estimates are based on our historical operations, our future business
plans and projected financial results, the terms of existing contracts, our observance of trends in
the industry, information provided by our customers and information available from other outside
sources, as appropriate. The following discusses our significant accounting policies and estimates.
Stock-Based Compensation
: In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123 (R)). SFAS No. 123 (R) replaces SFAS No. 123, Accounting for Stock-Based
Compensation, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB No.
25), and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123 (R) requires entities to
recognize compensation expense for all share-based payments to employees and directors, including
grants of employee stock options, based on the grant-date fair value of those share-based payments,
adjusted for expected forfeitures.
We adopted SFAS No. 123(R) as of January 1, 2006 using the modified prospective application
method. Under the modified prospective application method, the fair value measurement requirements
of SFAS No. 123(R) is applied to new awards and to awards modified, repurchased, or cancelled after
January 1, 2006. Additionally,
compensation cost for the portion of awards for which the requisite service has not been
rendered that were outstanding as of January 1, 2006 is recognized as the requisite service is
rendered on or after January 1, 2006. The compensation cost for that portion of awards is based on
the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No.
123. Changes to the grant-date fair value of equity awards granted before January 1, 2006 are
precluded.
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The fair value of stock options is determined using the Black-Scholes valuation model, which
is consistent with our valuation techniques previously utilized for awards in footnote disclosures
required under SFAS No. 123. Prior to the adoption of SFAS No. 123(R), we followed the intrinsic
value method in accordance with APB No. 25 to account for our employee and director stock options.
Historically, substantially all stock options have been granted with an exercise price equal to the
fair market value of the common stock on the date of grant. Accordingly, no compensation expense
was recognized from substantially all option grants to employees and directors prior to the
adoption of SFAS No. 123(R). However, compensation expense was recognized in connection with the
issuance of stock options to non-employee consultants in accordance with EITF 96-18, Accounting
for Equity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction
with Selling Goods and Services. SFAS No. 123(R) did not change the accounting for stock-based
compensation related to non-employees in connection with equity based incentive arrangements.
The adoption of SFAS No. 123(R) requires additional accounting related to the income tax
effects and additional disclosure regarding the cash flow effects resulting from share-based
payment arrangement. SFAS No. 123(R) resulted in the recognition of compensation expense of $0.2
million and $0.5 million for three months ended June 30, 2008 and 2007, respectively, and $0.4
million and $0.9 million for the six months ended June 30, 2008 and 2007, respectively, related to
our employee and director stock options. During the three months ended June 30, 2008, we granted
stock options to purchase 0.2 million shares of our common stock. As of June 30, 2008, there was
$1.1 million of total unrecognized compensation cost related to non-vested director and employee
stock options which vest over time. That cost is expected to be recognized over a weighted-average
period of 2.0 years. As of June 30, 2008, there was $0.3 million of total unrecognized compensation
cost related to performance-based, non-vested employee stock options. That cost will begin to be
recognized when the performance criteria within the respective performance-base option grants
become probable of achievement.
During December 2005, the board of directors approved the full vesting of all unvested,
outstanding stock options issued to current employees and directors. The board decided to take this
action (the acceleration event) in anticipation of the adoption of SFAS No. 123 (R). As a result
of this acceleration event, stock options to purchase approximately 1.4 million shares of our
common stock were vested that would have otherwise vested during 2006 and later periods. At the
time of the acceleration event, the unamortized grant date fair value of the affected options was
approximately $3.6 million (for SFAS No. 123 and SFAS No. 148 pro forma disclosure purposes), which
was charged to pro forma expense in the fourth quarter of 2005. Substantially all of the unvested
employee stock options that were subject to the acceleration event had exercise prices above market
price of our common stock at the time the board approved the acceleration event. However, in
accordance with SFAS 123 (R) if we had not completed this acceleration event in December 2005, the
majority of the $3.6 million amount discussed above would have been charged against the future
results of operations, beginning in the first quarter of fiscal 2006 and continuing through later
periods as the options vested. As discussed above, substantially all of the unvested employee stock
options which were accelerated had exercise prices above market price at the time of acceleration.
For the purposes of applying APB No. 25 to such stock options in the statement of operations for
the year ended December 31, 2005, the acceleration event was treated as the acceleration of the
vesting of employee and director options that otherwise would have vested as originally scheduled,
and accordingly was not a modification requiring the remeasurement of the intrinsic value of the
options, or the application of variable option accounting, under APB No. 25. For stock options that
had exercise prices below market price at the time of acceleration and that would not have vested
originally, a charge of approximately $15,000 was recorded in the statement of operations for the
year ended December 31, 2005.
On January 7, 2008, we and Mr. Nicholas L. Teti, Jr. entered into a consulting and
non-competition agreement (the Consulting Agreement), pursuant to which Mr. Teti agreed to
continue as our non-executive Chairman of the Board and to become a consultant to the company, and
Mr. Teti resigned his position as Chief Executive Officer and President. Mr. Teti retained his
previously issued stock options which were modified such that Mr. Teti will continue to vest in
accordance with the original terms, except as a non-employee. As a result of the
modifications to Mr. Tetis stock options set forth in the Consulting Agreement, we recorded a
non-cash compensation charge during the three months ended March 31, 2008 of approximately $1.3
million related to Mr. Tetis 1,166,665 vested stock options. Further, related to Mr. Tetis
833,335 unvested stock options at the date of modification, we will record stock option expense
over the remaining periods those stock options are earned in accordance with EITF 96-18,
Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling Goods and Services.
46
Federal Securities and Derivative Actions and Other Legal Matters:
As discussed in Note 7 of
Notes to Consolidated Financial Statements, set forth elsewhere in this Report, we are currently
defending ourselves against various class and derivative actions. We intend to defend ourselves
vigorously against these actions. We cannot currently estimate the amount of loss, if any, that may
result from the resolution of these actions, and no provision has been recorded in our consolidated
financial statements. Generally, a loss must be both reasonably estimable and probable in order to
record a provision for loss. We will expense our legal costs as they are incurred and will record
any insurance recoveries on such legal costs in the period the recoveries are received. Although we
have not recorded a provision for loss regarding these matters, a loss could occur in a future
period.
As discussed in Note 7 of Notes to Consolidated Financial Statements, we have received a
written demand by an attorney representing approximately 114 former patients in the United Kingdom
that previously received the our treatment each claiming negligent misstatements were made and each
claiming, on average, £3,500 (or approximately $7,000), plus unquantified interest and incidental
expenses. To date, no formal legal action has been brought by the attorney against us, and no
provision has been recorded in the consolidated financial statements related to this matter.
We are involved in various other legal matters that are being defended and handled in the
ordinary course of business. Although it is not possible to predict the outcome of these other
legal matters, management currently believes that the results will not have a material impact on
our financial statements.
Research and Development Expenses:
Research and development costs are expensed as incurred
and include salaries and benefits, costs paid to third-party contractors to perform research,
conduct clinical trials, develop and manufacture drug materials and delivery devices, and a portion
of facilities cost. Clinical trial costs are a significant component of research and development
expenses and include costs associated with third-party contractors. Invoicing from third-party
contractors for services performed can lag several months. We accrue the costs of services rendered
in connection with third-party contractor activities based on our estimate of management fees, site
management and monitoring costs and data management costs. Actual clinical trial costs may differ
from estimated clinical trial costs and are adjusted for in the period in which they become known.
Impairment of Long-lived Assets:
SFAS No.144 (SFAS 144), Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed Of addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than
the projected future undiscounted net cash flows from such asset (excluding interest), an
impairment loss is recognized. Impairment losses are calculated as the difference between the cost
basis of an asset and its estimated fair value.
At June 30, 2008, we had $2.9 million of property and equipment, net, related to our Isolagen
Therapy business segment and $4.4 million of intangible assets related primarily to our Agera
business segment. Intangible assets primarily include proprietary formulations and trademarks
acquired in connection with the acquisition of Agera, and to a lesser extent certain in-process
patents related to our Isolagen Therapy business segment. Proprietary formulations and trademarks
are amortized on a straight-line basis over their estimated useful lives, generally for periods
ranging from 13 to 18 years. Our process of evaluation of impairment with respect to our property
and equipment and intangible assets primarily includes the utilization of internal projections and
forecasts, which inherently include significant judgments and assumptions. Such significant
judgments and assumptions include those related to the future business performance of Agera, as
well as those related to obtaining statistically significant results from our Phase III
Wrinkle/Nasolabial Folds trials, obtaining timely FDA approval within certain timeframes and
reaching certain levels of commercial revenue. Our judgments and assumptions are subject to change
in the future, based on
anticipated events or actual events, which may result in a partial impairment or full
impairment of our property and equipment and/or intangible assets in future periods. In particular,
if the results of the pivotal Phase III trials we expect to receive in August 2008 do not support
the efficacy and safety of Isolagen Therapy for the treatment of nasolabial folds, our assumptions
concerning the future use and recovery of assets related to the efforts to research and develop the
Isolagen Therapy may require revision, and we may be required to recognize partial of full
impairment of some of these assets.
47
Results of Operations
Comparison of the three months ended June 30, 2008 and 2007
REVENUE. Revenue decreased less than $0.1 million to $0.3 million for the three months ended
June 30, 2008, as compared to $0.3 million for the three months ended June 30, 2007. 60% and 76% of
Ageras revenue were to one foreign customer during the three months ended June 30, 2008 and June
30, 2007, respectively. As such, total revenue is subject to fluctuation depending primarily on the
orders received and orders fulfilled with respect to this large customer. Further, we believe that
the decline in general economic conditions during 2008 have also contributed to the decline in
revenue associated with our Agera line of skincare products.
COST OF SALES. Costs of sales were $0.1 million for the three months ended June 30, 2008, as
compared to $0.2 million for the three months ended June 30, 2007. Our cost of sales relates to the
operation of Agera. As a percentage of revenue, Agera cost of sales were approximately 54% for the
three months ended June 30, 2008 and 45% for the three months ended June 30, 2007. Cost of sales as
a percentage of revenue have increased primarily due to changes in our product mix, as well as
decreased overall volumes (which can result in higher per unit costs for components associated with
our Agera product line).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses
decreased approximately $3.5 million, or 61%, to $2.2 million for the three months ended June 30,
2008, as compared to $5.7 million for the three months ended June 30, 2007. The decrease in
selling, general and administrative expense is primarily due to the following:
a) Employee compensation, bonuses and payroll taxes decreased by approximately $2.1
million to $0.7 million for the three months ended June 30, 2008, as compared to $2.8 million
for the three months ended June 30, 2007, due primarily to (1) the departure of senior-level
employees, including our former CEO and former President (and savings related to salaries,
severance and bonus earned during the three months ended June 30, 2007) and (2) lower stock
option compensation expense as a result of the departure of these employees. Also, the fair
value of the stock options granted during the current period has been lower as compared to the
similar prior year comparable period primarily as a result of the lower average price of our
common stock.
b) Marketing expense decreased by approximately $0.4 million to less than $0.1 million for
the three months ended June 30, 2008, as compared to $0.4 million for the three months ended
June 30, 2007. Agera marketing expenses have decreased during the three months ended June 30,
2008 due primarily to a decrease in marketing and promotional efforts related to selling our
Agera line of advanced skin care systems undertaken to offset decreased revenue.
c) Travel expense decreased by approximately $0.2 million to less than $0.1 million
for the three months ended June 30, 2008, as compared to $0.3 million for the three months
ended June 30, 2007 due to the decrease in the number of our employees, primarily at the
executive management level.
d) Other general and administrative operating costs decreased by approximately $0.6
million to $0.9 million for the three months ended June 30, 2008, as compared to $1.5 million
for the three months ended June 30, 2007 due primarily to reduced business development expenses
and cost savings initiatives within the company.
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e) Legal expenses decreased by $0.2 million to $0.4 million for the three months
ended June 30, 2008, as compared to the three months ended June 30, 2007. For the three months
ended June 30, 2008, we received a $0.4 million reimbursement from our insurance carrier as
reimbursement for defense costs related to our
class action and derivative matters. If we had not received this $0.4 million
reimbursement, our legal expenses would have been $0.8 million for the three months ended June
30, 2008. For the three months ended June 30, 2007, we received a $0.6 million reimbursement
from our insurance carrier as reimbursement for defense costs related to our class action and
derivative matters. If we had not received this $0.6 million reimbursement, our legal expenses
would have been approximately $1.0 million for the three months ended June 30, 2007. Our legal
expenses fluctuate primarily as a result of the amount and timing of defense costs related to
our class action and derivative action matters, as well as a result of the amount and timing of
defense cost reimbursements from our insurance carrier. We also incurred $0.1 million in legal
costs, during the three months ended June 30, 2008, related to investigating and responding to
claims related to the United Kingdom (refer Note 7 Commitments and Contingencies for a
discussion of our various legal matters).
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by approximately $0.1
million for the three months ended June 30, 2008 to $3.3 million, as compared to $3.4 million for
the three months ended June 30, 2007. The decrease of $0.1 million is primarily due to reduced
salaries with the departure of two senior-level personnel.
Research and development costs are composed primarily of costs related to our efforts to gain
FDA approval for our Isolagen Therapy for specific dermal applications in the United States, as
well as costs related to other potential indications for our Isolagen Therapy. Also, research and
development expense includes costs to develop manufacturing, cell collection and logistical process
improvements.
Research and development costs primarily include personnel and laboratory costs related to our
FDA clinical trials (see Clinical Development Programs discussion above) and certain consulting
costs. The total inception to date cost of research and development as of June 30, 2008 was $50.1
million. 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 for
our dermal product candidate or requires changes in our study protocols or in the event that the
results of the studies are not consistent with our expectations, as occurred during 2005 with
respect to our first pivotal Phase III dermal trial, the process will be more expensive and time
consuming. Due to the complexities of the FDA approval process, we are unable to predict what the
cost of obtaining approval for our dermal product candidate will be at this time. We have other
research projects currently underway. However, research and development costs related to these
projects were not material during the three months ended June 30, 2008 and 2007.
LOSS FROM DISCONTINUED OPERATIONS. As discussed above under Closure of the United Kingdom
Operation, during the three months ended December 31, 2006, the Board of Directors approved the
closure of our United Kingdom operation. The United Kingdom operation was closed in March 2007.
The loss from discontinued operations decreased by approximately $0.1 million for the three
months ended June 30, 2008 to $0.2 million, as compared to $0.3 million for the three months ended
June 30, 2007. The $0.3 million loss from discontinued operations during the three months ended
June 30, 2007 primarily consisted of facility expense, legal expense and public relations costs.
The $0.2 million loss from discontinued operations for the three months ended June 30, 2008 is
primarily due to administrative expenses related to our dormant Swiss legal entity and facility
expenses related to our United Kingdom legal entity.
INTEREST INCOME. Interest income decreased approximately $0.2 million to less than $0.1
million for the three months ended June 30, 2008, as compared to $0.2 million for the three months
ended June 30, 2007. The decrease in interest income of $0.2 million resulted principally from a
decrease in the amount of cash, cash equivalents and restricted cash balances, as compared to the
prior year comparable period, as a result of the use of those cash resources to finance our normal
operating activities primarily related to our efforts to gain FDA approval for our Isolagen
Therapy, and due to declining interest rates.
INTEREST EXPENSE. Interest expense remained constant at $1.0 million for the three months
ended June 30, 2008, as compared to the three months ended June 30, 2007. Our interest expense is
related to our $90.0 million, 3.5% convertible subordinated notes, as well as the related
amortization of deferred debt issuance costs of $0.2 million for the three months ended June 30,
2008 and 2007, respectively.
49
NET LOSS. Net loss decreased approximately $3.3 million to $6.4 million for the three months
ended June 30, 2008, as compared to a net loss of $9.7 million for the three months ended June 30,
2007. This decrease in net loss primarily represents the effects of the decreases in our selling,
general and administrative expenses and research and development expenses, as well as our decrease
in loss from discontinued operation, as discussed above.
Comparison of the six months ended June 30, 2008 and 2007
REVENUES. Revenue decreased $0.2 million to $0.5 million for the six months ended June 30,
2008, as compared to $0.7 million for the six months ended June 30, 2007. Of Ageras revenue, 55%
and 66% were to one foreign customer during the six months ended June 30, 2008 and June 30, 2007,
respectively. As such, total revenue is subject to fluctuation depending primarily on the orders
received and orders fulfilled with respect to this large customer. Further, we believe the decline
in general economic conditions during 2008 have also contributed to the decline in revenue
associated with our Agera line of skincare products.
COST OF SALES. Costs
of sales remained constant at $0.3 million for the six months ended June
30, 2008 and June 30, 2007. Our cost of sales relates to the operation of Agera. As a percentage
of revenue, Agera cost of sales were approximately 65% for the six months ended June 30, 2008 and
48% for the six months ended June 30, 2007. The increase in costs of sales as a percentage of
revenue is due to a reserve of less than $0.1 million for excessive and/or obsolete inventory
recorded during the three months ended March 31, 2008. Had no reserve been recorded during the
three months ended March 31, 2008, Agera cost of sales would have been approximately 53% for the
six months ended June 30, 2008. Also cost of sales as a percentage of revenue have increased
due to changes in the product mix, as well as decreased overall volumes (which can result in higher per
unit costs for components associated with our Agera product line).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses
decreased approximately $5.9 million, or 49%, to $6.2 million for the six months ended June 30,
2008, as compared to $12.0 million for the six months ended June 30, 2007. The decrease in selling,
general and administrative expense is primarily due to the following:
a) Employee compensation, bonuses and payroll taxes decreased by approximately $4.4
million to $2.8 million for the six months ended June 30, 2008, as compared to $7.2 million for
the six months ended June 30, 2007, due primarily to (1) the departure of senior-level
employees, including our former CEO and former President (and savings related to salaries,
severance and bonus) and (2) lower stock option compensation expense as a result of the
departure of these employees. Also, the fair value of the stock options granted during the
current period has been lower as compared to the similar prior year comparable period primarily
as a result of the lower average price of our common stock.
b) Marketing expense decreased by approximately $0.6 million to less than $0.1 million
for the six months ended June 30, 2008, as compared to $0.6 million during the six months ended
June 30, 2007 due primarily to a decrease in marketing and promotional efforts related to
selling our Agera line of advanced skin care systems undertaken to offset decreased revenue.
c) Travel expense decreased by approximately $0.3 million to $0.2 million for the six
months ended June 30, 2008, as compared to $0.5 million for the six months ended June 30, 2007
due to the decrease in the number of our employees, primarily at the executive management
level, and decrease in business development activities.
d) Other general and administrative operating costs decreased by approximately $0.7
million to $2.4 million for the six months ended June 30, 2008, as compared to $3.1 million for
the six months ended June 30, 2007 due primarily to a decreased in costs related to corporate
development and due diligence activities.
50
e) Legal expenses increased by $0.1 million, to $0.8 million for the six months ended
June 30, 2008, as compared to $0.7 million for the six months ended June 30, 2007. For the six
months ended June 30, 2008, we received a $0.5 million reimbursement from our insurance carrier
as reimbursement for defense costs related to our class action and derivative matters. If we
had not received this $0.5 million reimbursement, our legal expenses would have been $1.3
million for the six months ended June 30, 2008. For the six months ended
June 30, 2007, we received a $1.4 million reimbursement from our insurance carrier as
reimbursement for defense costs related to our class action and derivative matters. If we had
not received this $1.4 million reimbursement, our legal expenses would have been approximately
$2.1 million for the six months ended June 30, 2007. Our legal expenses fluctuate primarily as
a result of the amount and timing of defense costs related to our class action and derivative
action matters, as well as a result of the amount and timing of defense cost reimbursements
from our insurance carrier. We also incurred $0.2 million in legal costs, during the six months
ended June 30, 2008, related to investigating and responding to claims related to the United
Kingdom (refer Note 7 Commitments and Contingencies for a discussion of our various legal
matters).
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by approximately $0.4
million for the six months ended June 30, 2008 to $6.1 million, as compared to $6.5 million for the
six months ended June 30, 2007. The decrease of $0.4 million is primarily due to reduced salaries
with the departure of two senior-level personnel.
Research and development costs are composed primarily of costs related to our efforts to gain
FDA approval for our Isolagen Therapy for specific dermal applications in the United States, as
well as costs related to other potential indications for our Isolagen Therapy. Also, research and
development expense includes costs to develop manufacturing, cell collection and logistical process
improvements.
Research and development costs primarily include personnel and laboratory costs related to our
FDA clinical trials (see Clinical Development Programs discussion above) and certain consulting
costs. The total inception to date cost of research and development as of June 30, 2008 was $50.1
million. 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 for
our dermal product candidate or requires changes in our study protocols or in the event that the
results of the studies are not consistent with our expectations, as occurred during 2005 with
respect to our first pivotal Phase III dermal trial, the process will be more expensive and time
consuming. Due to the complexities of the FDA approval process, we are unable to predict what the
cost of obtaining approval for our dermal product candidate will be at this time. We have other
research projects currently underway. However, research and development costs related to these
projects were not material during the six months ended June 30, 2008 and 2007.
LOSS FROM DISCONTINUED OPERATIONS. As discussed above under Closure of the United Kingdom
Operation, during the three months ended December 31, 2006, the Board of Directors approved the
closure of our United Kingdom operation. The United Kingdom operation was closed in March 2007.
The loss from discontinued operations increased by approximately $3.1 million for the six
months ended June 30, 2008 to $4.5 million, as compared to $1.4 million for the six months ended
June 30, 2007. The $4.5 million loss from discontinued operations for the six months ended June 30,
2008 primarily related to the sale of our Swiss campus in March 2008. In connection with this sale,
we recorded a loss on sale of $6.3 million, offset by a foreign currency exchange gain of $2.1
million upon the substantial liquidation of the Swiss subsidiary. The foreign exchange gain
recorded during the three months ended March 31, 2008 results from removing from the accumulated
foreign currency translation adjustment account in stockholders equity a credit balance which
related to the translation into U.S. dollars of our Swiss franc assets and liabilities. The credit
balance which had accumulated, and the resulting gain recorded upon the substantial liquidation of
our Swiss franc assets, reflected the increase in the value of the Swiss franc relative to the U.S.
dollar over the period that we had operated in Switzerland. Refer to Notes 3 and 5 of Notes to the
Consolidated Financial Statements for further discussion regarding the sale of the Swiss campus and
results from discontinued operations. Administrative and facility costs related to the United
Kingdom and Switzerland comprised the remaining costs of approximately $0.3 million, net.
51
The $1.4 million loss from discontinued operations during the six months ended June 30, 2007
consisted of $1.1 million of losses incurred during the first quarter 2007, which was the United
Kingdoms last quarter of full operations, and $0.3 million of second quarter 2007 losses, as
discussed under Comparison of the three months ended June 30, 2008 and 2007 above. The $1.1
million loss from discontinued operations during the three months ended March 31, 2007 primarily
consisted of the following:
a) Salaries, severance expense and payroll taxes were approximately $0.3 million for
the three months ended March 31, 2007.
b) Other general and administrative operating costs were approximately $0.5 million
primarily related to lease expense and operating costs incurred during the three months ended
March 31, 2007.
c) Gross loss was $0.3 million during the three months ended March 31, 2007,
primarily due to low production volumes during the shutdown period and due to the write-off of
unrealizable inventory used in the manufacturing process.
INTEREST INCOME. Interest income decreased approximately $0.4 million to $0.1 million for the
six months ended June 30, 2008, as compared to $0.5 million for the six months ended June 30, 2007.
The decrease in interest income of $0.4 million resulted principally from a decrease in the amount
of cash, cash equivalents and restricted cash, as a result of the use of those cash resources to
finance our normal operating activities primarily related to our efforts to gain FDA approval for
our Isolagen Therapy, and due to declining interest rates.
INTEREST EXPENSE. Interest expense remained constant at $2.0 million for the six months ended
June 30, 2008, as compared to the six months ended June 30, 2007. Our interest expense is related
to our $90.0 million, 3.5% convertible subordinated notes, as well as the related amortization of
deferred debt issuance costs of $0.4 million for the six months ended June 30, 2008 and 2007,
respectively.
NET LOSS. Net loss decreased $2.3 million to $18.4 million for the six months ended June 30,
2008, as compared to a net loss of $20.7 million for the six months ended June 30, 2007. This
decrease in net loss primarily represents the effects of the decreases in our selling, general and
administrative expenses and research and development expenses, offset by our increase in loss from
discontinued operation, as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by (used in) operating, investing and financing activities for the six
months ended June 30, 2008 and 2007, respectively, were as follows:
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Six Months Ended June 30,
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2008
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2007
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(in millions)
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Cash flows from operating activities
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$
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(11.7
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$
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(18.0
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)
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Cash flows from investing activities
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6.4
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(0.1
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)
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Cash flows from financing activities
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Operating Activities
Cash used in operating activities during the six months ended June 30, 2008 amounted to $11.7
million, as compared to $18.0 million of cash used in operating activities during the six months
ended June 30, 2007. The decrease in the cash used in operations of $6.3 million is primarily due
to our decrease in net loss, adjusted for noncash items, of $6.2 million. Our net loss, adjusted
for noncash items, decreased from $17.6 million during the six months ended June 30, 2007 to $11.4
million during the six months ended June 30, 2008 (refer to
Results of Operations-Comparison of the
six months ended June 30, 2008 and 2007
discussion above and
Cash Flows Related to Discontinued
Operations
below). This decrease in net loss, adjusted for noncash items, was offset by changes in
net operating assets and liabilities, which positively impacted cash flows by $0.1 million. During
the six months ended June 30, 2008, our changes in net operating assets and liabilities resulted in
a cash outflow of $0.3 million, as compared to a cash outflow of $0.4 million during the six months
ended June 30, 2007. For the six months ended June 30, 2008, we financed our operating cash flow
needs from our cash on hand at the beginning of the period, which were primarily the result of
previously completed debt and equity offerings, as well as from the proceeds of the sale of our
Swiss campus in March 2008, discussed further below.
52
Investing Activities
Cash provided by investing activities during the six months ended June 30, 2008 amounted to
approximately $6.4 million as compared to cash used in investing activities of less than $0.1
million during the six months ended June 30, 2007. Investing activities during the six months ended
June 30, 2008 related primarily to the sale of our Swiss campus in March 2008 for approximately
$6.4 million, net of selling costs.
Cash Flows Related to Discontinued Operations
Cash flows related to discontinued operations, which are included in the table of cash flows
above, were as follows:
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Six Months Ended June 30,
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2008
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2007
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(in millions)
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Cash flows from operating activities
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$
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(0.2
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$
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(2.2
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)
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Cash flows from investing activities
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6.4
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Cash flows from financing activities
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The cash provided by investing activities during the six months ended June 30, 2008 of $6.4
million is discussed above under Investing Activities.
Cash flows used in discontinued operations during the six months ended June 30, 2007 was $2.2
million. Our United Kingdom operation was active during the three months ended March 31, 2007, and
was shutdown on March 31, 2007. The net loss from our United Kingdom operation during the three
months ended March 31, 2007 was $1.1 million. In addition, accrued expenses and deferred revenue
decreased by $1.2 million during this shutdown period (cash outflows), primarily related to the
payment of severance and refunds to customers. The United Kingdom net loss and the large decrease
in United Kingdom accrued expenses and United Kingdom deferred revenue is what primarily generated
$2.2 million of cash outflow from discontinued operations for the six months ended June 30, 2007.
Working Capital
General
As of June 30, 2008, we had cash, cash equivalents of $11.3 million and working capital of
$8.6 million (including our cash and cash equivalents). We believe our existing capital resources
are adequate to finance our operations through approximately December 1, 2008, under our normal
operating plan; however, our long-term viability is dependent upon the approval of our products,
the successful operation of our business, our ability to improve our manufacturing process, and the
ability to raise additional debt and/or equity to meet our business objectives. We estimate that we
will require additional cash resources prior to or during the fourth quarter of 2008 based upon our
current operating plan and condition. See Going Concern above.
We filed a shelf registration statement on Form S-3 during June 2007, which was declared
effective by the Securities and Exchange Commission (SEC). In August 2007, we raised $13.8
million, net of offering costs, under this shelf registration via the sale of 6.8 million shares of
our common stock to institutional investors. The shelf registration allowed us the flexibility to
offer and sell, from time to time, up to an original amount of $50 million of common stock,
preferred stock, debt securities, warrants or any combination of the foregoing in one or more
future public offerings. As of June 30, 2008, we can offer and sell up to an additional $36.2
million of securities pursuant to this shelf registration.
Our ability to complete an offering, including any additional offerings under our shelf
registration statement, is dependent on the state of the debt and/or equity markets at the time of
any proposed offering, and such markets reception of Isolagen and the offering terms. Our ability
to commence an offering may be dependent on our ability to complete the registration process, which
is subject to the SECs regulatory calendar, as well as our ability to timely respond to any SEC
comments. There is no assurance that capital in any form would be available to us, and if
available, on terms and conditions that are acceptable.
53
As a result of the conditions discussed above, and in accordance with generally accepted
accounting principles in the United States, there exists substantial doubt about our ability to
continue as a going concern, and our ability to continue as a going concern is contingent upon our
ability to secure additional adequate financing or capital prior to or during the fourth quarter of
2008. If we are unable to obtain additional sufficient funds prior to this time, we will be
required to terminate or delay regulatory approval of one, more than one, or all of our product
candidates, curtail or delay the implementation of manufacturing process improvements or delay the
expansion of our sales and marketing capabilities. Any of these actions would have an adverse
affect on our operations, the realization of our assets and the timely satisfaction of our
liabilities. Our financial statements are presented on a going concern basis, which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. The
financial statements do not include any adjustments relating to the recoverability of the recorded
assets or the classification of liabilities that may be necessary should it be determined that we
are unable to continue as a going concern.
$90.0 million, 3.5% Convertible Subordinated Notes
In November 2004, we issued $90.0 million in principal amount of 3.5% convertible subordinated
notes due November 1, 2024.
The notes are our general, unsecured obligations. The notes are subordinated in right of
payment, which means that they will rank in right of payment behind other indebtedness of ours. In
addition, the notes are effectively subordinated to all existing and future liabilities of our
subsidiaries. We will be required to repay the full principal amount of the notes on November 1,
2024 unless they are previously converted, redeemed or repurchased.
The notes bear interest at an annual rate of 3.5% from the date of issuance of the notes. We
pay interest twice a year, on each May 1 and November 1, until the principal is paid or made
available for payment or the notes have been converted. Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months.
The note holders may convert the notes into shares of our common stock at any time before the
close of business on November 1, 2024, unless the notes have been previously redeemed or
repurchased as discussed below. The initial conversion rate (which is subject to adjustment) for
the notes is 109.2001 shares of common stock per $1,000 principal amount of notes, which is
equivalent to an initial conversion price of approximately $9.16 per share. Holders of notes called
for redemption or submitted for repurchase will be entitled to convert the notes up to and
including the business day immediately preceding the date fixed for redemption or repurchase.
At any time on or after November 1, 2009, we may redeem some or all of the notes at a
redemption price equal to 100% of the principal amount of such notes plus accrued and unpaid
interest (including additional interest, if any) to, but excluding, the redemption date.
The note holders will have the right to require us to repurchase their notes on November 1 of
2009, 2014 and 2019. In addition, if we experience a fundamental change (which generally will be
deemed to occur upon the occurrence of a change in control or a termination of trading of our
common stock), note holders will have the right to require us to repurchase their notes. In the
event of certain fundamental changes that occur on or prior to November 1, 2009, we will also pay a
make-whole premium to holders that require us to purchase their notes in connection with such
fundamental change.
Factors Affecting Our Capital Resources
An adverse result related to our class action matters and/or derivative action matters, or
related to our United Kingdom claims (see Note 7 in Notes to Consolidated Financial Statements),
could materially, adversely affect our existing working capital, thereby materially impacting the
financial position of the Company.
Inflation did not have a significant impact on the Companys results during the three months
ended June 30, 2008.
54
Off-Balance Sheet Transactions
We do not engage in material off-balance sheet transactions, except for our long-term Exton,
Pennsylvania facility operating lease (refer to our previously filed Form 10-K for the year ending
December 31, 2007).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices,
such as foreign currency exchange rates or interest rates. We are exposed to market risk in the
form of foreign exchange rate risk and interest rate risk.
Foreign Exchange Rate Risk
As the result of the sale of our Swiss campus in March 2008, we now have less than $0.2
million of foreign assets and $0.5 million of foreign liabilities on our consolidated balance sheet
as of June 30, 2008. As such, we do not believe that we have significant foreign exchange rate risk
at June 30, 2008.
Interest Rate Risk
Our 3.5%, $90.0 million convertible subordinated notes, pay interest at a fixed rate and,
accordingly, we are not exposed to interest rate risk as a result of this debt. However, the fair
value of our $90.0 million convertible subordinated notes does vary based upon, among other
factors, the price of our common stock and current interest rates on similar instruments.
We do not enter into derivatives or other financial instruments for trading or speculative
purposes.
ITEM 4. CONTROLS AND PROCEDURES
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(a)
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Disclosure Controls and Procedures. Our management, with the participation of our Chief
Executive Officer, and our Chief Financial Officer (the Certifying Officers), has
evaluated the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the Exchange Act)) as of the end of the period covered by this report. Based on
that evaluation, the Certifying Officers have concluded that our disclosure controls and
procedures were effective for the purpose of ensuring that material information required to
be in this quarterly report is made known to them by others on a timely basis and that
information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is accumulated and communicated to our management, including our principal
executive and principal financial officers, as appropriate to allow timely decisions
regarding required disclosure.
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(b)
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Changes in Internal Controls. There has been no change in our internal control over
financial reporting that occurred during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to Note 7 of Notes to the Consolidated Financial Statements, within Part I of this Form
10-Q, for a discussion of legal proceedings.
ITEM 1A. RISK FACTORS
In addition to the Risk Factors disclosed in our December 31, 2007 Form 10-K, investors should
consider the following risks and uncertainties, or updates to such risks and uncertainties, prior
to making an investment decision with respect to our securities.
55
Higher than anticipated dropout rates of subjects in our clinical trials could adversely affect
trial results and make it more difficult to obtain regulatory approval.
Enrollment of 421 patients in our Phase III nasolabial/wrinkle trials was completed in
February 2007. Our Phase III clinical trials include three separate treatment sessions for each
subject followed by a 26 week efficacy observation period. Patient dropouts are expected and can
occur for a variety of reasons. A subject who drops out of the trial prior to the 26 week
post-treatment observation would, under the current protocol, be considered a failure to respond
in the results of the clinical trial. As fewer patients complete a trial, a higher positive
response rate to the therapy must be obtained for the group of remaining treated subjects in order
to demonstrate statistically significant benefit compared to placebo. Our Phase III
nasolabial/wrinkle trial consists of two studies, 006 and 005. Our 006 study enrolled 218 subjects
and 191 completed the study. Our 005 study enrolled 203 subjects and 168 completed the study.
Higher than anticipated dropout rates may result in additional time, expense and uncertainty
which may also affect our ability to obtain FDA clearance of our product and which could ultimately
adversely affect our profitability and financial position.
Protocol deviations may release the FDA from its binding acceptance of our Special Protocol
Assessment (SPA) study design, which may result in the delay, or non-approval, by the FDA of the
Isolagen Therapy.
In connection with preparations for FDA Investigator Inspections related to our nasolabial
fold/wrinkle Phase III studies, we identified protocol deviations related to the timing of visits
and other types of deviations. The possibility exists that our special protocol assessment could no
longer be binding on the FDA if the FDA considers these deviations, individually or in aggregate,
to be significant. Further, future investigator audits may identify deviations unknown at this
time. Accordingly, the possibility exists that our Phase III studies may yield statistically
significant results, yet may not be acceptable to the FDA under the SPA.
We are not in compliance with the American Stock Exchanges continued listing standards and, as a
result, our common stock may be delisted from the American Stock Exchange.
On March 12, 2008, we received a notice from the American Stock Exchange (AMEX) advising us
that we did not meet certain of the continued listing standards as set forth in Part 10 of the AMEX
Company Guide. AMEX notified us that we were not in compliance with Sections 1003 (a)(i)-(iii) of
the AMEX Company Guide. Specifically, the AMEX staff noted that our stockholders equity was less
than $2,000,000 and losses from continuing operations and net losses were incurred in two out of
our three most recent fiscal years; that our stockholders equity was less than $4,000,000 and
losses from continuing operations and/or net losses were incurred in three out of our four most
recent fiscal years; and that our stockholders equity was less than $6,000,000 and losses from
continuing operations and/or net losses were incurred in our five most recent fiscal years.
However, AMEX will not normally consider suspending dealings in the securities of a company which
is below any of the above standards if the company (a) has a market capitalization of at least
$50,000,000, and (b) has at least 1,100,000 shares publicly held, with a market value of publicly
held shares of at least $15,000,000 and 400 round lot shareholders. We do not currently meet these
market capitalization amounts.
We submitted a plan to AMEX on April 14, 2008 that outlined our strategy to bring ourself back
into compliance by September 14, 2009. The plan was not accepted by AMEX, and as such, we are
subject to delisting procedures as set forth in Section 1010 and Part 12 of the Amex Company Guide.
Under AMEX rules, we have the right to appeal any determination by AMEX to initiate delisting
proceedings. We have appealed the determination and we will present our appeal to AMEX at a hearing
scheduled for August 19, 2008. There can be no assurance that our request for continued listing
will be granted after such hearing.
56
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 12, 2008, we held our 2008 Annual Meeting of Stockholders at our offices in Exton,
Pennsylvania. Mr. Declan Daly and Mr. Henry Toh were elected as directors by our stockholders at
the meeting to serve until the
2011 annual meeting of stockholders or until their respective successors have been duly
elected and qualified. Our stockholders ratified the appointment of BDO Seidman, LLP as our
auditors for the year ending December 31, 2008.
The results of the vote were as follows:
1. To elect two directors to hold office until our 2011 annual meeting of stockholders, or
until his successor is duly elected and qualified.
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Shares voted FOR/WITHHELD Mr. Declan Daly:
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28,606,776 / 3,049,394
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Shares voted FOR/WITHHELD: Mr. Henry Toh
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23,276,077 / 8,380,093
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2. To ratify the appointment of BDO Seidman, LLP as our auditors for the year ending December
31, 2008.
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Shares voted FOR/AGAINST/ABSTAINING:
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31,405,826 / 201,369 / 48,974
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In addition, to Messrs. Daly and Toh, the following persons continued as directors after the
meeting: Nicholas L. Teti, Jr., Steven Morrell, Marshall Webb, Terry
Vandewarker and Kenneth Selzer.
ITEM 6. EXHIBITS
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EXHIBIT NO.
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IDENTIFICATION OF EXHIBIT
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31.1
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2
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Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
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ISOLAGEN, INC.
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Date: July 29, 2008
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By:
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/s/ Todd J. Greenspan
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Todd J. Greenspan, Chief Financial Officer
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(Principal Financial Officer)
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57
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