UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________to _________ Commission file number 000-14242 CELSION CORPORATION ------------------- (Exact name of registrant as specified in its charter) Maryland 52-1256615 -------- ---------- State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization 10220-I Old Columbia Road Columbia, Maryland 21046-1705 ------------------ ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (410) 290-5390 -------------- CHEUNG LABORATORIES, INC. ------------------------- (Former name, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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. Yes X No --- --- As of March 31, 1998, the Registrant had outstanding 36,014,782 shares of Common Stock, $.01 par value.
PART I FINANCIAL INFORMATION Item 1. Financial Statements CELSION CORPORATION BALANCE SHEETS March 31, 1998 and September 30, 1997 ASSETS 3/31/1998 9/30/1997 --------- --------- Current assets: Cash and cash equivalents $112,883 $267,353 Accounts receivable 33,132 5,891 Inventories 388,009 329,741 Prepaid expenses 1,259 8,207 Other current asset 52,362 26,755 -------- -------- Total current assets 587,645 637,947 -------- -------- Property and equipment - at cost: --------------------------------- Furniture and office equipment 185,367 180,348 Laboratory and shop equipment 47,048 92,228 -------- -------- 232,415 272,576 Less accumulated depreciation 205,599 213,885 -------- -------- Net value of property and equipment 26,816 58,691 Other assets: ------------- Patent licenses (net of amortization) 132,104 126,571 -------- -------- Total other assets 132,104 126,571 -------- -------- Total assets $746,565 $823,209 ======== ======== 2
<TABLE> LIABILITIES AND STOCKHOLDERS' EQUITY <CAPTION> 3/31/1998 9/30/1997 --------- --------- Current liabilities: - -------------------- <S> <C> <C> Accounts payable - trade $ 797,344 $ 614,173 Notes payable-other 142,542 1,369,800 Notes payable - related parties 32,148 221,943 Accrued interest payable - related parties 44,551 245,784 Accrued interest payable - other 153,243 116,604 Accrued compensation 360,216 331,715 Accrued professional fees 193,097 256,301 Other accrued liabilities 20,538 15,504 Deferred revenues 112,031 112,031 ------------ ------------ Total current liabilities 1,855,710 3,283,855 ------------ ------------ Long term liabilities: - ---------------------- Long term debt -- -- Total long-term liabilities -- -- ------------ ------------ Total liabilities 1,855,710 3,283,855 ------------ ------------ Stockholders' equity: - --------------------- Capital stock - $.01 par value; 51,000,000 shares authorized, 36,014,782 and 29,095,333 issued and outstanding for 3/31/1998 and 9/30/1997, respectively 360,147 290,953 Additional paid-in capital 15,708,412 12,511,923 Accumulated deficit (17,177,704) (15,263,522) ------------ ------------ Total stockholders'(deficit) equity (1,109,145) (2,460,646) ------------ ------------ Total liabilities and shareholders' equity $ 746,565 $ 823,209 ============ ============ </TABLE> See accompanying notes. 3
<TABLE> CELSION CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) <CAPTION> Three Months Ended March 31, Six Months Ended March 31 1998 1997 1998 1997 Revenue: <S> <C> <C> <C> <C> Hyperthermia sales and parts $ 110,260 $ 19,253 $ 110,260 $ 113,293 Total revenue 110,260 19,253 110,260 113,293 Cost of sales 45,500 12,248 45,500 44,111 ------------ ------------ ------------ ------------ Gross profit 64,760 7,005 64,760 69,182 Operating expenses: Selling, general and administrative 655,494 577,735 1,341,069 974,011 Research and development 458,780 (133) 601,107 42,101 Total operating expenses 1,114,274 577,602 1,942,176 1,016,112 ------------ ------------ ------------ ------------ (Loss) Income from operations (1,049,514) (570,597) (1,877,416) (946,930) Loss in investment fund -- -- -- (40,000) Other(expense) income -- 8,287 -- 24,865 Interest income (expense) (7,494) (40,381) (43,004) (78,882) Miscellaneous income-non -- -- 6,239 -- operating Total other income & expenses (7,494) -- (36,765) -- (Loss) Income before income taxes (1,057,008) (602,691) (1,914,181) (1,040,948) Income taxes -- -- -- -- Net (loss) income ($1,057,008) ($602,691) ($1,914,181) ($1,040,948) ============ ============ ============ ============ Net (loss)income per common share ($0.03) ($0.02) ($0.06) ($0.04) ============ ============ ============ ============ Weighted average shares outstanding $ 34,386,021 $ 25,638,317 $ 32,584,716 $ 25,433,061 ============ ============ ============ ============ </TABLE> See accompanying notes. 4
<TABLE> CELSION CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) <CAPTION> Six Months Ended March 31, 1998 1997 Cash flows from operating activities: <S> <C> <C> Net (loss) income ($1,914,181) ($1,040,948) Noncash items included in net (loss) income: Loss in investment fund -- 40,000 Depreciation and amortization 9,947 5,655 Bad debt expense -- 1,133 Net changes in: Accounts receivable (27,241) (21,528) Inventories (58,268) (34,795) Accrued interest receivable -- (16,376) Other current assets (18,449) -- Prepaid expenses (210) (1,651) Accounts payable-trade 209,420 457,935 Accrued interest payable - related parties (143,205) (115,057) Accrued interest payable - other 36,639 48,813 Accrued compensation 28,501 85,384 Accrued professional fees (63,204) 60,000 Other accrued liabilities 5,034 (85,452) ----------- ----------- Net cash (used) provided by operating activities (1,935,218) (616,886) Cash flows from investing activities: Purchase of property and equipment 26,394 (3,428) Investment in patents (10,000) -- ----------- ----------- Net cash provided (used) by investing activities 16,394 (3,428) ----------- ----------- Cash flows from financing activities: Payment on notes (net) (89,522) (3,750) 5
<CAPTION> Six Months Ended March 31, 1998 1997 <S> <C> <C> Proceeds of stock issuances 1,853,876 383,889 ----------- ----------- Net cash provided by financing activities 1,764,354 380,084 ----------- ----------- Net increase(decrease) in cash (154,470) (240,175) Cash at beginning of period 267,353 246,931 ----------- ----------- Cash at end of the period $ 112,882 $ 6,756 =========== =========== Schedule of noncash investing and financing transactions: Conversion of accounts payable, debt and accrued interest payable through issuance of common stock $ 1,411,808 $ -- =========== =========== </TABLE> See accompanying notes. 6
CELSION CORPORATION NOTES TO FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying unaudited condensed financial statements of Cheung Laboratories, Inc. (the"Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The September 30, 1997 balance sheet was derived from audited financial statements. The balance sheet as of March 31, 1998 and the statements of operations for the three and six-month periods ended March 31, 1998 and 1997, and the statements of cash flows for the six month periods ended March 31, 1998 and 1997, are unaudited but include all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at such dates and the operating results and cash flows for those periods. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally-accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended September 30, 1997, which were included as part of the Company's Report on Form 10-K/A. Note 2. Common Stock Outstanding and Per Share Information Net loss per common and common equivalent share was computed by dividing net loss by the weighted average number of shares of Common Stock. For the six months ended March 31, 1998 and the comparable prior year period, weighted average shares increased to 32,584,716 from 25,433,061. The increase is due primarily to certain conversions of convertible notes and debts, issuance of common stock for certain private placements, exercise of stock options, and executive compensation. In accordance with the requirements of Financial Accounting Standard No. 128, which the Company adopted as of December 31, 1997, common stock equivalents have been excluded from the calculation of net loss per share as their inclusion would be anti-dilutive. Note 3. Inventories Inventories are carried at the lower of actual cost or market and cost is determined using the average cost matter. The components of inventories on 3/31/1998 and 9/30/1997 are as follows: 3/31/1998 9/30/1997 --------- --------- Materials $277,406 $235,748 Work in process 19,993 16,990 Finished products 90,610 77,003 ------ ------ $388,009 $329,741 ======== ======== 7
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements in this report that relate to future plans, events or performance are forward-looking statements. Actual results, events or performance may differ materially due to a variety of factors, including the factors described on the Form 10-K/A for the year ended September 30, 1997. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview Celsion Corporation (the "Company") was incorporated in the State of Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The Company changed its name to Cheung Laboratories, Inc. on June 31, 1984 and to Celsion Corporation on May 1, 1998. It has been engaged in developing and marketing minimally invasive thermotherapy devices utilized in the treatment of cancer as well as genitourinary diseases associated with benign growth of the prostate in older males, the most common being benign prostatic hyperplasia ("BPH"). Thermotherapy (also known as hyperthermia), or heat therapy, is a historically recognized successful method of treatment. In modern thermotherapy, a controlled heat dose is targeted to treatment sites using microwave and/or other energy for therapeutic benefits. Thermotherapy is a clinically established, adjuvant modality for at least doubling tumor response to radiation therapy or chemotherapy. However, delivering the necessary heat within the body without damaging surrounding tissue has been a major impediment to the use of thermotherapy for deep seated disease. The Company has an exclusive license from the Massachusetts Institute of Technology ("MIT") for adaptive phase array ("APA") technology which the Company believes will overcome this problem. This technology, originally developed for the Strategic Defense Initiative (Star Wars) plans of the Department of Defense, applies adaptive phased arrays of microwave energy in conjunction with traditional radiation or chemotherapy for the deep heating of breast, prostate and other deep seated cancers. The Company will be concentrating its business on the development of two recently acquired technologies: (i) from MIT, APA targeting of microwave energy, which the Company believes will have broad cancer and other medical applications, and (ii) balloon catheter technology for enhanced thermotherapy of BPH and other genitourinary tract conditions. While the balloon catheter technology is related to the Company's previous BPH thermotherapy devices, the Company believes the APA technology has the potential to serve as the core technology for a broad array of medical devices, and accordingly the Company will devote most of its resources to the exploitation of the APA technology. 8
Results of Operations Six Months Ended March 31, 1997 and 1998 The Company is concentrating on the development of the new technologies it recently acquired to significantly expand the capabilities and market for its products and has ceased active sales of its current equipment. The Company received revenue of $110,260 in the six months ended March 31, 1998, compared to revenue of $113,293 in the same period in the prior fiscal year. With the focus on the development and marketing of the new thermotherapy systems utilizing the patented technologies, the Company anticipates that most of its future revenue will be generated by treatments administered utilizing its thermotherapy systems and the sales of disposable kits. Revenue from the new technologies is not expected until the new technologies are developed and approved for sale by governmental regulatory agencies. Cost of sales for the six months ended March 31, 1998 was $45,500, compared to $44,111 in the six months ended March 31, 1997. Research and development expense increased to $601,107 in the six months ended March 31, 1998 from $42,101 in the six months ended March 31, 1997 due to increased emphasis on technology enhancements. The year to year increase reflects the increased availability of funds for research during the current year period. The Company expects to significantly increase its expenditures for research and development to fund the development or enhancement of products by incorporating the APA technology and the MMTC technology. Selling, general and administrative expenses increased substantially to $1,341,069 in the six months ended March 31, 1998 from $974,011 in the six months ended March 31, 1997. The higher expenses were primarily due to the increase in consulting and legal expenses, and compensation expenses, including $234,375 in compensation expense recorded for the 250,000 shares of common stock issued to Spencer Volk. The Company expects selling and marketing expense to increase substantially as it expands its advertising and promotional activities and increases its marketing and sales force, in anticipation of the commercialization of its new thermotherapy systems. Interest expense decreased to $43,004 in the six months ended March 31, 1998 from $78,882 in the six months ended March 31, 1997. The decrease was due to the repayment on certain notes. The net loss for the six months ended March 31, 1998 was $1,914,181. The loss per share was $0.06. Operating losses will continue while the Company is developing its new equipment. Losses thereafter will depend upon a number of factors including the market acceptance of the new technologies. Liquidity and Capital Resources Since inception, the Company's expenses have significantly exceeded its revenues, resulting in an accumulated deficit of $17,177,704 and a shareholders' deficit of $1,109,145 at March 31, 1998. The Company has funded its operations 9
primarily through the sale of equity securities. At March 31, 1998, the Company had cash, cash equivalents and short-term investments aggregating approximately $112,883. Net cash used in the Company's operating activities was $2,019,496 for the six months ended March 31, 1998. The Company must raise additional cash to continue its operations. The Company has incurred negative cash flows from operations since its inception, and has expended, and expects to continue to expend in the future, substantial funds to complete its planned product development efforts, including seeking FDA approval for the domestic sale of the Company's products, expand its sales and marketing activities. The Company expects that its existing capital resources will not be adequate to fund the Company's operations through the next twelve months. The Company is dependent on raising additional capital to fund its development of technology and to implement its business plan. Such dependence will continue at least until the Company begins marketing its new technologies. The Company does not have any firm commitments for additional capital and there can be no assurance that the Company will be able to raise sufficient additional capital to continue its operations. The Company's future capital requirements and the adequacy of available funds will depend on numerous factors, including: the successful commercialization of the thermotherapy systems; progress in its product development efforts; the magnitude and scope of such efforts; progress with preclinical studies and clinical trials; the cost and timing of manufacturing scale-up; the development of effective sales and marketing activities; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; the emerging of competing technological and market developments; and the development of strategic alliances for the marketing of the Company's products. To the extent that funds generated from the Company's operations are insufficient to meet current or planned operating requirements, the Company will be required to obtain additional funds through equity or debt financing, strategic alliances with corporate partners and others, or through other sources. The Company does not have any committed sources of additional financing, and there can be no assurance that additional funding, if necessary, will be available on acceptable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale-back or eliminate certain aspects of its operations or attempt to obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, product candidates, products or potential markets. If adequate funds are not available, the Company's business, financial condition and results of operations will be materially and adversely effected. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company presently is not a party to any litigation, and the Company is not aware of any threat of litigation, except as follows: The Company has been named as a defendant in a lawsuit filed by Eastwell Management Services, Ltd. ("Eastwell") in the United States District Court for the District of Maryland. In the lawsuit, Eastwell is seeking damages in the amount of $125,000, plus interest. The Company denies that any funds are 10
due to Eastwell and intends to defend the lawsuit. Eastwell has moved the court for permission to amend its complaint to increase the claimed damages to $250,000 and to request punitive damages. The Company has requested that the court deny such motion. In the normal course of business, the Company may be subject to warranty and product liability claims on its thermotherapy equipment. The Company does not have a product liability insurance policy in effect. The assertion of any product liability claim against the Company, therefore, may have an adverse affect on its financial condition. As of March 31, 1998, no liability claims against the Company have been asserted. Item 2. Changes in Securities At the April 27, 1998 Annual Meeting, the shareholders increased the Company's authorized capitalization to 100,000,000 shares of common stock, $.01 par value. See Item 3 below. During the quarter ended March 31, 1998, the Company issued the following securities without registration under the Securities Act of 1933: 1. The Company issued 1,356,166 shares to twelve persons upon conversion of previously outstanding convertible notes totalling $556,028. The issuance was made to a limited number of accredited investors upon conversion of previously outstanding convertible securities. The Company believes the issuance was exempt from registration under the Securities Act pursuant to Sections 3(a)(9), 4(2) or 4(6) of the Securities Act and Regulation D promulgated thereunder. 2. The Company issued 1,778,000 shares to forty-one accredited investors for cash consideration totalling $889,000. The issuance was made to a limited number of accredited investors. The Company believes the issuance was exempt from registration under the Securities Act pursuant to Section 4(2) or 4(6) of the Securities Act and Regulation D promulgated thereunder. 3. The Company issued 75,000 shares to a shareholder on exercise of a stock option. The Company received consideration of $26,250. The issuance was made to a single accredited investor. The Company believes the issuance was exempt from registration under the Securities Act pursuant to Section 4(2) or 4(6) of the Securities Act and Regulation D promulgated thereunder. 4. The Company issued 44,942 shares to two shareholders. These two shareholders had received shares from the Company in January, 1997 on conversion of debt. The Company determined, at the prompting of one of the shareholders, that it had miscalculated the number of shares issued in 1997, and these shares were issued as an adjustment to correct such miscalculation. The issuance was made to a limited number of accredited investors. The Company believes the issuance was exempt from registration under the Securities Act pursuant to Section 4(2) or 4(6) of the Securities Act and Regulation D promulgated thereunder. 11
Item 3. Defaults upon Senior Securities In its Form 10-Q for the quarter ended December 31, 1997, the Company reported on a default in its loan from the George T. Horton Trust. During the quarter ended March 31, 1998 the principal balance of such loan (other than $100,000 which the holder has agreed to convert to common stock) has been reduced to $18,000. Item 4. Submission of Matters to a Vote of Securities Holders On April 27, 1998 the Company held its Annual Shareholders meeting. Listed below are the names of the seven directors elected at the meeting and their respective terms of office. Name Term Expires Spencer J. Volk 2001 Augustine Y. Cheung 2001 Warren C. Stearns 1999 Walter B. Herbst 2000 Mel D. Soule 2000 Max E. Link 2001 John Mon 1999 Listed below is the vote count related to the other matters approved at the meeting: <TABLE> <CAPTION> Proposition For Against Abstain <S> <C> <C> <C> To approve an amendment to the Company's by- 28,531,934 171,083 142,050 laws adopting a staggered board of directors. To ratify the appointment of Stegman & Company 32,186,822 5,425 152,768 as auditors to examine the Company's accounts for the fiscal year ending September 30, 1998; To amend the Company's Articles of Incorporation 31,672,167 466,873 205,975 to increase the number of authorized shares to 100,000,000 shares. To amend the Company's Articles of Incorporation 32,016,210 112,147 216,658 to change the Company's name to Celsion Corporation or variations thereof approved by the Directors. 12
Proposition For Against Abstain <S> <C> <C> <C> To approve an omnibus stock option plan. 27,626,867 357,943 418,451 </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. Those exhibits previously filed with the Securities and Exchange Commission as required by Item 601 of Regulation S-K, are incorporated herein by reference in accordance with the provisions of Rule 12b-32. 3.1 Certificate of Amendment to Certificate of Incorporation effective May 1, 1998. 3.2 Amendment to By-laws 10.1 Omnibus Stock Option Plan 11. Computation of per share earnings. 27. Financial Data Schedule (b) Reports on Form 8-K No report on Form 8-K was filed during the period reported upon. 13
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 15, 1998 Celsion Corporation (Registrant) /s/ Spencer J. Volk Spencer J. Volk President /s/ John Mon John Mon Treasurer, Chief Accounting Officer 14