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| ILE > SEC Filings for ILE > Form 10-K on 15-Apr-2009 | All Recent SEC Filings |
15-Apr-2009
Annual Report
We will require additional capital to continue our operations past approximately
the end of April 2009. There is no assurance that we will be able to obtain any
such additional capital as we need 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. If we do not obtain additional funding, or do not anticipate
additional funding, prior to approximately the end of April 2009, we will likely
enter into bankruptcy and/or cease operations. Further, if we do raise
additional cash resources prior to the end of April 2009, it may be raised in
contemplation of or in connection with 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 allows 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. However, in general, companies
that are under $75 million in market capitalization, such as Isolagen, are
limited to selling up to one-third of the value of such company's common stock
held by non-affiliates in any twelve month period.
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 market's
reception of the Company and the offering terms. Currently the credit and equity
markets both in the United States and internationally are severely contracted,
which will make our task of raising additional debt or equity capital even more
difficult. In addition, our ability to raise additional financing through the
issuance of common stock or convertible securities may be adversely affected by
uncertainties regarding the continued listing of our common stock on the NYSE
Amex (see Part II, Item 5). Finally, our ability to complete an offering may be
dependent on the status of our FDA regulatory milestones and our clinical
trials, and in particular, the status of our indication for the treatment of
nasolabial folds, the status of the related Biologics License Application, and
the status of our Phase II/III acne scar trial, 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
approximately the end of April 2009. If we do not obtain additional funding, or
do not anticipate additional funding, prior to or during approximately the end
of April 2009, we will likely enter into bankruptcy and/or cease operations.
Further, if we do raise additional cash resources prior to the end of
April 2009, it may be raised in contemplation of or in connection with
bankruptcy. If we enter into bankruptcy, it is likely that our common stock and
common stock equivalents will become worthless and our creditors will receive
significantly less than what is owed to them.
Due to the likelihood of bankruptcy and in connection with the Company's review
for impairment of long-lived assets in accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-lived Assets," we have recorded a full
impairment on all of our long-lived assets as of December 31, 2008, and as such,
we have recorded an impairment charge of $6.7 million during the year ended
December 31, 2008.
Closure of the United Kingdom Operation
As part of our continuing efforts to evaluate the best uses of our resources, in
the fourth quarter of 2006 our Board of Directors approved the proposed closing
of the United Kingdom operation. On March 31, 2007, we completed the closure of
the United Kingdom manufacturing facility.
Since our public announcement regarding the closure of the United Kingdom
operation, we have received negative publicity and negative correspondence from
former patients in the United Kingdom that previously received our treatment. We
received a written demand by an attorney representing approximately 132 former
patients each claiming negligent misstatements were made and each claiming, on
average, £3,500 (or approximately $5,250), plus unquantified interest and
incidental expenses. 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. Further, during 2008
we received written correspondence from one former patient claiming physical
injury allegedly from the use of Isolagen Therapy. To date, no formal legal
action has been brought by the former patient against the Company, and no
provision has been recorded in the consolidated financial statements related to
this matter.
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 critical
accounting policies and estimates.
Going Concern: As disclosed in Note 2 to the Consolidated Financial Statements,
management has concluded that substantial doubt exists about the Company's
ability to continue as a going concern. This conclusion is based on estimates of
our future spending and future funding required during 2009. We will be required
to obtain additional capital in April 2009 to continue and expand our
operations. There is no assurance that we will be able to obtain any such
additional capital as we need to finance these efforts, through asset sales,
equity or debt financing, or any combination thereof, or on satisfactory terms
or at all.
At December 31, 2008, our cash and cash equivalents was $2.9 million. For the
year ended December 31, 2008, our cash used for operations was $20.0 million.
These factors, as well as our future spending estimates, were important factors
in concluding that substantial doubt exists about our ability to continue as a
going concern. We believe these estimates are particularly important to the
understanding of our financial position.
Due to the likelihood of bankruptcy and in connection with the Company's review
for impairment of long-lived assets in accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-lived Assets," we have recorded a full
impairment on all of our long-lived assets as of December 31, 2008, and as such,
we have recorded an impairment charge of $6.7 million during the year ended
December 31, 2008.
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.
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. This change in accounting
resulted in the recognition of compensation expense of $0.7 million and
$1.8 million related to our employee and director stock options for the years
ended December 31, 2008 and 2007, respectively. During the year ended
December 31, 2008, we granted stock options to purchase 1.1 million shares of
our common stock. As of December 31, 2008, there was $0.7 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 1.7 years. As of December 31, 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.
In March 2007, and in connection with the separation of the Company's President,
the Company agreed to modify certain of the President's 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 will 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
year ended December 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 during the
year ended December 31, 2007. Two other employee stock option modifications
resulted in less than $0.1 million charge to selling, general and administrative
expense during the year ended December 31, 2007.
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. Teti's 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. Teti's 1,166,665
vested stock options. Further, related to Mr. Teti's 833,335 unvested stock
options at the date of modification, we 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."
Accounting for Legal Matters: As discussed in Note 11 of Notes to Consolidated
Financial Statements, set forth elsewhere in this Report, we have settled in
principle our class and derivative actions. We have also received threats of
litigation and demands from former patients associated with our United Kingdom
operation. 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 is not recorded until it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. We expense our legal costs as they are incurred and
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.
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.
Due to the likelihood of bankruptcy and in connection with the Company's review
for impairment of long-lived assets in accordance with SFAS 144, "Accounting for
the Impairment or Disposal of Long-lived Assets," we have recorded a full
impairment on all of our long-lived assets as of December 31, 2008, and as such,
we have recorded an impairment charge of $6.7 million during the year ended
December 31, 2008 in the consolidated statement of operations.
-Results of Operations-Comparison of Years Ending December 31, 2008 and 2007
REVENUES. Revenue decreased $0.3 million to $1.1 million for the year ended
December 31, 2008, as compared to $1.4 million for the year ended December 31,
2007. Our revenue from continuing operations is from the operations of Agera
which we acquired on August 10, 2006. Agera markets and sells a complete line of
advanced skin care systems based on a wide array of proprietary formulations,
trademarks and non-peptide technology. Due to our financial statement
presentation of our United Kingdom operation as a discontinued operation, our
revenue for all periods presented is representative of only Agera, as all
historical United Kingdom revenue is reflected in loss from discontinued
operations. We believe that the decline in Agera's sales in fiscal 2008 was due
to the general economic conditions during 2008. In addition, for cash
conservation purposes, we have reduced marketing expenses from the prior year.
Agera management is undergoing efforts to increase and diversify its customer
base. We currently expect first quarter 2009 revenue to be approximately
$0.2 million.
COST OF SALES. Costs of sales decreased $0.1 million to $0.6 million for the
year ended December 31, 2008, as compared to $0.7 million for the year ended
December 31, 2007. Our cost of sales relates to the operation of Agera.
As a percentage of revenue, Agera cost of sales were approximately 55% for the
year ended December 31, 2008 and approximately 47% for the year ended
December 31, 2007. The increase in 2008 cost of sales as a percentage of
revenue, as compared to 2007, is primarily due to inventory reserves recorded
during 2008 of less than $0.1 million. Excluding the increase in inventory
reserve, Agera cost of sales as a percentage of revenue would have been
approximately 46% for the year ended December 31, 2008.
IMPAIRMENT OF LONG-LIVED ASSETS. Due to the likelihood of bankruptcy and in
connection with the Company's review for impairment of long-lived assets in
accordance with SFAS 144, "Accounting for the Impairment or Disposal of
Long-lived Assets," we have recorded a full impairment on all of our long-lived
assets as of December 31, 2008, and as such, we have recorded an impairment
charge of $6.7 million during the year ended December 31, 2008 in the
consolidated statement of operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased approximately $10.3 million, or 55%, to
$8.5 million for the year ended December 31, 2008, as compared to $18.7 million
for the year ended December 31, 2007. The decrease in selling, general and
administrative expense is primarily due to the following:
a) For the year ended December 31, 2008, there was no severance expense as
compared to the year ended December 31, 2007. Severance expense and related
costs associated with the termination of our former president, pursuant to a
settlement agreement executed in June 2007, resulted in an additional
$4.6 million of selling, general and administrative expense for the year ended
December 31, 2007 (see Notes 11 and 13 of Notes to Consolidated Financial
Statements).
b) Salaries, bonuses and payroll taxes decreased by approximately $1.5 million
to $3.8 million for the year ended December 31, 2008, as compared to
$5.3 million for the year ended December 31, 2007, due to a decrease in the
number of our employees, primarily at the executive management level, which
resulted in lower salary expense. In addition to the lower salary expense, there
was no bonus expense for the year ended December 31, 2008 as compared to
December 31, 2007, due to our financial position at December 31, 2008.
c) Marketing expense decreased by approximately $0.7 million to $0.1 million for
the year ended December 31, 2008, as compared to $0.8 million during the year
ended December 31, 2007 due primarily to decreased marketing and promotional
efforts related to marketing and selling our Agera line of advanced skin care
systems.
d) Travel expense decreased by approximately $0.5 million to $0.2 million for
the year ended December 31, 2008, as compared to $0.7 million for the year ended
December 31, 2007 due to the decrease in the number of our employees, primarily
at the executive management level, decrease in business development activities
during 2008, and focused efforts to conserve cash resources during 2008.
e) Other general and administrative expenses decreased by approximately
$2.7 million to $4.1 million for the year ended December 31, 2008, as compared
to $6.8 million for the year ended December 31, 2007. The majority of this
decrease, or $1.5 million, was due to 2007 activities which did not occur during
2008, such as costs related to debt restructuring and business development
activities. The remaining decrease of $1.2 million in other general and
administrative expenses are due to cost-saving measures implemented during 2008,
including savings related to accounting and audit expenses, insurance premiums,
consultants and other general costs.
f) Legal expenses decreased by approximately $0.3 million to $0.3 million for
the year ended December 31, 2008, as compared to $0.6 million for the year ended
December 31, 2007. For the years ended December 31, 2008 and December 30, 2007,
we received $1.3 million and $1.7 million, respectively, of reimbursements from
our insurance carrier as reimbursement for defense costs related to our class
action and derivative matters. If we had not received these reimbursements, our
legal expenses would have been $1.6 million for the year ended December 31, 2008
and $2.3 million for the year ended December 31, 2007. As such, excluding
reimbursements of legal defense costs, our legal expenses have decreased
. . .
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