UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
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
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1256615
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State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification No.)
10220-I OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046-1705
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 290-5390
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
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
---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
As of December 20, 2001, 85,292,249 shares of the Registrant's Common
Stock were issued and outstanding. As of December 20, 2001, the aggregate market
value of voting stock held by non-affiliates of the Registrant was approximately
$45,901,693, based on the closing price for the Registrant's Common Stock on
that date as quoted on the American Stock Exchange.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement to be filed in
connection with the Annual Meeting of Stockholders to be held on February 15,
2002, are incorporated by this reference into Part III hereof, as indicated
herein.
PART I
ITEM 1. BUSINESS
GENERAL
We develop medical treatment systems primarily to treat breast cancer
and a chronic prostate enlargement condition, common in older males, known as
benign prostatic hyperplasia, or BPH, using minimally invasive focused heat
technology. Also, we are working with Duke University in the development of
heat-sensitive liposome compounds for use in the delivery of chemotherapy drugs
to tumor sites, and with Sloan-Kettering on the development of heat-activated
gene therapy compounds.
BPH TREATMENT SYSTEM
Benign Prostatic Hyperplasia
Millions of aging men experience symptoms resulting from benign
prostatic hyperplasia, or BPH, a non-cancerous urological disease in which the
prostate enlarges and constricts the urethra. The prostate is a walnut-sized
gland surrounding the male urethra that produces seminal fluid and plays a key
role in sperm preservation and transportation. The prostate frequently enlarges
with age. As the prostate expands, it compresses or constricts the urethra,
thereby restricting the normal passage of urine. This restriction of the urethra
may require a patient to exert excessive bladder pressure to urinate. Because
the urination process is one of the body's primary means of cleansing
impurities, the inability to urinate adequately increases the possibility of
infection and bladder and kidney damage.
Prevalence of BPH
As BPH is an age-related disorder, its incidence increases with
maturation of the population. Industry estimates suggest that more than 9
million men in the United States experience BPH symptoms and that more than 26
million men are affected by BPH worldwide. As the United States population
continues to age the prevalence of BPH can be expected to continue to increase.
It is generally estimated that approximately 50% of all men over 55 and 90% of
all men over 75 will have BPH symptoms at various times. Also, industry studies
estimate the overall costs of BPH therapy at approximately $2.5 to $3.0 billion
annually in the United States and $8.0 to $10.0 billion worldwide for patients
currently seeking treatment.
Current Treatment Alternatives for BPH
Like cancerous tumors, BPH historically has been treated by surgical
intervention or by drug therapy. The primary treatment for BPH currently is
transurethral resection of the prostate, or TURP, a surgical procedure in which
the prostatic urethra and surrounding diseased tissue in the prostate are
trimmed with a telescopic knife, thereby widening the urethral channel for urine
flow. While the TURP procedure typically has been considered the most effective
treatment available for the relief of BPH symptoms, the procedure has
shortcomings. In the first instance, TURP generally requires from one to three
days of post-operative hospitalization. In addition, a significant percentage of
patients who undergo TURP encounter significant complications, which can include
painful urination, infection, retrograde ejaculation, impotence, incontinence
and excessive bleeding. Furthermore, the cost of the TURP procedure and the
related hospitalization is high, ranging from $8,000 to $12,000. This cost does
not take into account the costs of lost work time, which could amount to several
weeks, or the costs related to adverse effects on patients' quality of life.
Other, less radical, surgical procedures, generally categorized as
"minimally invasive" ("MI") therapies, are available as alternatives to the TURP
procedure. The primary MI treatments use
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microwave heating ("TUMT") to treat BPH by incinerating the obstructing portion
of the prostate. TUMT involves sedation, catheterization and high levels of heat
to incinerate a portion of the prostate. Two other MI therapies--interstitial RF
therapy and laser therapy--employ, respectively, concentrated radio frequency
(RF) waves or laser radiation to reduce prostate swelling by cauterizing tissue
instead of removing it with a surgical knife. However, these procedures require
puncture incisions to be made in order to insert cauterizing RF or laser probes
into the affected tissue and, therefore, also involve the use of a full
operating facility and anesthesia, as well as the burning of prostate tissue by
the probes. Although these procedures result in less internal bleeding and
damage to the urethra than the TURP procedure and may decrease the adverse
effects and costs associated with surgery, anesthesia and post-operative tissue
recovery, they do not entirely eliminate these adverse consequences.
Finally, drug therapy has emerged as an alternative to surgery in the
last several years. There are several drugs available for BPH treatment, the two
most widely prescribed being Hytrin and Proscar. Hytrin works by relaxing
certain involuntary muscles surrounding the urethra, thereby easing urinary
flow, and Proscar is intended actually to shrink the enlarged gland. However,
industry studies have asserted that drug therapy costs $500 to $800 per year or
more, must be maintained for life and does not offer consistent relief to a
large number of BPH patients. In fact, studies have shown that 45% of patients
who begin drug therapy for BPH drop out within the first year, primarily due to
the ineffectiveness of currently available drug therapies. Also, all of the BPH
drugs have appreciable side effects.
Accordingly, neither the medicinal treatments nor the surgical
alternatives available for BPH appear to provide fully satisfactory,
cost-effective treatment solutions for BPH sufferers.
Celsion BPH Treatment System
We have developed a BPH treatment system -- "Microwave Uretheroplasty"
- -- that combines our microwave thermotherapy capability with a proprietary
balloon compression technology licensed from MMTC, Inc. The system consists of a
microwave generator and conductors and a computer and computer software programs
that control the focusing and application of heat, plus a specially designed
balloon catheter and consists of two fundamental elements:
- Celsion's proprietary catheter, incorporating a balloon enlargement
device, delivers computer-controlled transurethral microwave heating
directly to the prostate at temperatures greater than 44(degrees) C
(111(degrees) F).
- Simultaneously, the balloon inflates the device and expands to press the
walls of the urethra from the inside outward as the surrounding prostate
tissue is heated.
The combined effect of this "heat plus compression" therapy is twofold: first,
the heat denatures the proteins in the wall of the urethra, causing a stiffening
of the opening created by the inflated balloon. Second, the heat serves
effectively to kill off prostate cells outside the wall of the urethra, thereby
creating sufficient space for the enlarged natural opening.
The following schematic illustrates the Celsion technology:
[GRAPHIC]
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----------------- ----------- ----------- ----------------
1 - PROSTATE WITH 2 - CELSION 3 - BALLOON 4 - URETHRA RE-
BLOCKAGE CATHETER EXPANDED OPENED
----------------- ----------- ----------- ----------------
Pre-clinical animal studies have demonstrated that a natural "stent," or
reinforced opening, in the urethra of the animals tested forms after the
combined heat plus compression treatment. Also, the BPH system's relatively low
temperature (43(degrees) C to 45(degrees) C) appears to be sufficient to kill
prostatic cells surrounding the urethra wall, thereby creating space for the
enlargement of the urethra opening. However, the temperature is not high enough
to cause swelling in the urethra.
Celsion's investigational minimally invasive Microwave Uretheroplasty
treatment system is designed to overcome the limitations of all three of the
current treatment systems. It is designed to be a relatively painless, rapid
procedure that delivers the efficacy of surgical treatments without significant
risks and the potential for life-altering side effects. The potential benefits
of the Microwave Uretheroplasty system include walk-in, outpatient treatment
that can be completed in less than an hour; no required sedation; generally no
post-operative catheterization; and rapid symptomatic relief from BPH.
Ultimate FDA approval for a device such as our equipment typically
requires two phases of clinical testing. The purpose of Phase I testing is to
show feasibility and safety and involves a small group of patients. Phase II
testing may involve as many as 160 patients and is designed to show safety and
efficacy. The FDA approved an Investigational Device Exemption, or IDE, to allow
clinical testing of our BPH system in June 1998 and we completed initial Phase I
clinical feasibility human trials of the BPH system at Montefiore Medical Center
in May 1999. In the Phase I trials, the combination of computer-controlled
microwave heat and balloon catheter expansion was able to increase peak flow
rates and to provide immediate relief of symptoms caused by BPH. In addition, we
undertook an expanded Phase I study to test an accelerated treatment protocol,
which was completed in May 2000, at Montefiore Medical Center. In July 2000, the
FDA approved the commencement of multiple-site Phase II studies to collect the
safety and efficacy data necessary for FDA premarketing approval (PMA) for
commercialization. All 160 patients required to be treated under the Phase II
trial were treated as of November 29, 2001 and, as of that date, we submitted
the first two of three required modules to the FDA in support of the PMA. We
expect to submit the last module, consisting of clinical data, during the second
quarter of 2002. If Phase II testing produces anticipated results and if our BPH
system meets all other requirements for FDA approval and receives such approval,
we intend to begin marketing the BPH system during the summer of 2002.
Based on the information we have collected to date, we believe that our
BPH system has the potential to deliver a treatment that is performed in one
hour or less on an outpatient basis, would not require post-treatment
catheterization and that would deliver symptomatic relief and an increase in
urinary flow rates promptly after the procedure is completed.
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BREAST CANCER TREATMENT SYSTEM
Prevalence of Breast Cancer
Breast cancer is one of the leading causes of death among women in the
United States. According to statistics published in the American Cancer
Society's A Cancer Journal for Clinicians, there were an average of 183,000
newly diagnosed breast cancer cases in the United States in each of the years
from 1995 through 1999.
Current Treatment for Breast Cancer
Breast cancer is presently treated by mastectomy, the surgical removal
of the entire breast, or by lumpectomy, the surgical removal of the tumor and
surrounding tissue. Both procedures are often followed by radiation therapy or
chemotherapy. The more severe forms of surgical intervention can result in
disfigurement and a need for extended prosthetic and rehabilitation therapy.
In addition, heat therapy (also known as hyperthermia or thermotherapy)
is a historically recognized method of treatment of various medical conditions,
and heat therapy has been used in the past to treat malignant tumors in
conjunction with radiation and chemotherapy. As summarized in the Fourth Edition
of Radiobiology for the Radiologist, published in 1994 by J.B. Lippincott
Company, in 24 independent studies on an aggregate of 2,234 tumors, treatment
consisting of heat plus radiation resulted in an average doubling of the
complete response rate of tumors, compared to the use of radiation alone. The
complete response rate for this purpose means the total absence of a treated
tumor for a minimum of two years. Comparable increases in the complete response
rate were reported with the use of heat combined with chemotherapy. In addition,
it has been demonstrated on numerous occasions that properly applied heat, alone
and without the concurrent use of radiation, can also kill cancer cells.
Heat Therapy in Conjunction with Radiation; First Generation Celsion
Equipment
In 1989, we obtained FDA premarketing approval for our microwave-based
Microfocus 1000 heat therapy equipment for use on surface and subsurface tumors
in conjunction with radiation therapy. Until 1995, we marketed our Microfocus
equipment for this use in 23 countries, but microwave heat therapy was not
widely accepted in the United States medical community as an effective cancer
treatment. Moreover, due to the limitations of microwave technology available at
that time, it was difficult to deliver a controlled amount of heat to subsurface
tumors without overheating surrounding healthy tissue.
New Microwave Technology from MIT
In 1993, we began working with researchers at the Massachusetts
Institute of Technology, or MIT, who had developed, originally for the United
States Defense Department, the microwave control technology known as "Adaptive
Phased Array", or APA. This technology permits properly designed microwave
equipment to focus and concentrate energy targeted at diseased tissue areas deep
within the body and to heat them selectively, without adverse impact on
surrounding healthy tissue. In 1996, MIT granted us an exclusive worldwide
license to use this technology for medical applications and thereafter we have
concentrated on developing a second generation of Microfocus equipment capable
of focusing microwave energy on specific tissue areas. We have now incorporated
the APA technology in our second-generation microwave therapy equipment.
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Second Generation Celsion Breast Cancer Treatment System
Using the APA technology, we have developed a prototype breast cancer
treatment system intended to destroy localized breast tumors through the
application of heat alone. The system consists of a microwave generator and
conductors, a computer and computer software programs that control the focusing,
application and duration of the thermotherapy and a specially designed patient
treatment table.
In 1998, we completed pre-clinical animal testing of our prototype
system at the Massachusetts General Hospital, a teaching hospital for Harvard
Medical School in Boston, Massachusetts. Using breast tissue-equivalent phantoms
and tumors in live animals, these studies demonstrated that our system is
capable of selectively heating tumors at temperatures up to 46(degrees) C
(115(degrees) F) without damage to surrounding healthy tissues. High
temperatures maintained for eight to ten minutes can cause complete tumor
necrosis (death), leading to the death of viable cancer cells within the tumor
and in its immediate vicinity. A second prototype clinical breast cancer
treatment system at Oxford University in England was used to demonstrate
successfully the ability of our equipment to focus heat deep into animal tissue
at precise locations and in small target areas. In our view, these animal tests
demonstrate that it is possible to eliminate tumors by heat alone and without
the use of radiation. Using the pre-clinical data from Massachusetts General,
the FDA granted Celsion a supplemental premarketing approval to incorporate the
APA technology with Celsion's already approved Microfocus 1000 system. The APA
technology enhances the ability of the Microfocus 1000 system to focus energy.
In January 1999, we received an IDE approval from the FDA to permit
clinical testing of our breast cancer treatment system, and also received FDA
approval to proceed with Phase I human clinical studies. In August 2000, we
completed the treatment of ten patients in the Phase I study using our breast
cancer equipment at Columbia Hospital in West Palm Beach, Florida, and at Harbor
UCLA Medical Center in Torrance, California. In the study, our equipment was
clinically tested on female breast tumors on a minimally invasive basis through
a single application of precisely controlled and targeted heat. In December
2000, we received approval from the FDA to commence Phase II trials for our
breast cancer system.
The Phase II trials consist of two protocols--the first is designed to
ablate (kill) small breast tumors using heat alone and the second is designed to
downsize large breast cancer tumors using a combination of heat and
chemotherapy, thus allowing a surgeon to perform a lumpectomy rather than a
mastectomy, thereby preserving the affected breast. These trials are currently
under way at Columbia Hospital, in Florida, Harbor UCLA in California and Halle
Martin Luther Breast Center in Halle, Germany. We expect to add additional
sites, both within the United States and in Europe, during the first quarter of
2002 and currently anticipate that we will complete the Phase II trials by the
end of calendar year 2002. If the Phase II trials are successful, we expect to
apply for the addition of a new indication of use to the existing FDA
premarketing approval for our Microfocus equipment, denoting that the system can
be used to destroy cancerous tumors and viable cancer cells within the human
breast through the application of focused microwave heat energy alone. If
testing and approvals proceed as anticipated, we expect to begin marketing this
breast cancer system before the end of 2003.
THERMO-LIPOSOMES; DUKE UNIVERSITY TECHNOLOGY
Background
Liposomes are man-made microscopic spheres with a liquid membrane,
developed in the 1980's to encapsulate drugs for targeted delivery. Commercial
liposomes can now encapsulate chemotherapeutic drugs, enabling them to avoid
destruction by the body's immune system, and allowing them to accumulate in
tumors. However, with presently available technology, it often takes two to four
hours for
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commercial liposomes to release their drug contents to the tumors, severely
limiting the clinical efficacy of liposome chemotherapy treatments.
Development of Thermo-Sensitive Liposomes
A team of Duke University scientists has developed heat-sensitive
liposomes comprised of materials that rapidly change porosity when heated to a
specific point. As the heat-sensitive liposomes circulate within the small
arteries, arterioles, and capillaries, the drug contents of the liposomes are
released in significantly higher levels in those tissue areas which have been
heated for 30 to 60 minutes than in areas that do not receive heat. In animal
trials it has been determined that 50 times the amount of drugs carried by
heat-sensitive liposomes was deposited at a specific heated tissue site, when
compared to conventional liposomes. We have been a sponsor of this research,
which is part of a larger Duke University project to develop new
temperature-sensitive liposomes, temperature-sensitive gene promoters and
related compounds, and we are the exclusive licensee of Duke University's
heat-activated liposome technology.
Celsion's focused microwave equipment is used to provide minimally
invasive heating of cancerous tumors to trigger heat-activated liposomes within
the tumors. The heat-activated liposomes, which encapsulate chemotherapeutic
agents, are injected into the bloodstream where they remain encapsulated until
they release their drug payload inside the heated tumor. In preliminary tumor
growth delay studies conducted at Duke University, tumor-bearing mice received a
single intravenous injection of the liposome with a 5mg per kilogram Doxorubicin
concentration. This was immediately followed by heating of the tumor to
42(degrees) C (108(degrees) F) for one hour. The result of the study was a
complete disappearance of the tumors in 11 out of 11 mice. These animals
remained disease free through 60 days of the study.
In November 2001, we completed large animal toxicity studies involving
our Doxorubicin-laden thermo-liposome at the Roswell Park Cancer Institute, a
cancer research organization in Buffalo, New York. We expect to apply to the
Food and Drug Administration for an IND for the use of this liposome in the
treatment of prostate cancer using our Microfocus equipment as the means of heat
activation during the first quarter of calendar year 2002, and to move forward
with Phase I clinical trials thereafter.
In addition, in January 2001, we entered into a Material Transfer
Agreement, or MTA, with the National Cancer Institute, or NCI, under which we
will supply heat-activated liposomes to enable the NCI to conduct clinical
trials on liver cancer. NCI will use an RF heating device to isolate the tumors
and to heat the liver, activating Celsion's heat-activated liposomes to kill
peripheral cancer cells. Liver cancer has yet to be successfully treated with
existing treatment modalities.
Celsion and Duke University are pursuing further development work and
pre-clinical studies aimed at using the new thermo-liposome technology in
conjunction with our APA focused heat technology for a variety of applications,
including cancer chemotherapy. We view the Duke thermo-liposome technology as a
highly promising improvement in the delivery of medicines used to combat serious
diseases. For example, the drugs used in chemotherapy regimens to fight cancer
are often toxic when administered in large quantities, and produce nausea,
vomiting, and exhaustion--all side effects of the body being poisoned. However,
if such a drug can be delivered directly to a tissue area where it is needed, as
opposed to being distributed through the entire circulatory system, the local
concentration of the drug could be increased without the side effects that
accompany large systemic dosing.
In addition, in the July 1, 2000 issue of Cancer Research, a Duke
University research scientist reported on his initial use of heat to activate
gene therapy and to increase the production in animals of Interleukin-12, a
genetic protein, in order to delay tumor growth. On August 8, 2000, we entered
into an agreement with Duke University, subsequently renewed for six-month
periods, under which Celsion has the right, for a period of six months
thereafter,
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to negotiate an exclusive license for this technology.
Production of Heat-Sensitive Liposomes
We have established a relationship with Celator Corporation of
Vancouver, Canada to provide Quality System Regulation, or QSR (formerly Good
Manufacturing Practices, or GMP), production of our heat-activated liposome for
our recently-completed large animal toxicity studies and our planned Phase I
clinical study in humans. Celator is a leading drug formulation and discovery
company that specializes in liposome drug development. Celsion will require a
large-scale liposome manufacturer at such time as it reaches Phase II clinical
trials and beyond. Toward that end, it has initiated discussions with a major
Japanese liposome manufacturer for large-scale production of the
Doxorubicin-based heat-activated liposome.
SLOAN-KETTERING / CELSION HEAT-ACTIVATED GENE THERAPY COMPOUNDS
Background
Cancer cells have the ability to repair themselves after radiation or
chemotherapy. Thus, patients require repeated treatments to destroy
substantially all of the cancer cells. Celsion has licensed from Sloan-Kettering
Cancer Center, a biomedical innovation that promises significant improvements in
cancer therapy. Sloan-Kettering has developed biological modifiers that inhibit
cancer cells' ability to repair themselves. Activated by focused heat, this
Cancer Repair Inhibitor, or CRI, temporarily disables the repair mechanism of
cancer cells, making it possible to significantly reduce the number of
radiation/chemotherapy treatments and/or lower the treatment dosage.
A standard approach to treating cancer is radiation therapy combined
with chemotherapy. High doses of radiation kill cancer cells or keep them from
dividing, but produce chronic or acute side effects, including fatigue,
neutropenia, anemia and leukopenia. Also, depending on the location of the
tumor, other acute side effects may occur, including diarrhea, allopecia and
various foreign ulcers. Chemotherapy presents comparable or more serious side
effects.
Oncologists are seeking ways to mitigate these side effects. In
radiation therapy, these include hyperfractionated radiation, intra-operative
radiation, three-dimensional radiation, stereotactic radiosurgery and the use of
radio-labeled monoclonal antibodies and radio sensitizers. CRI falls into this
latter category because it "sensitizes" a cancer cell for treatment by making it
more susceptible to DNA damaging agents such as heat, chemicals or radiation. A
product of advances in our understanding of the biology of cancer, CRI is one of
a new class of "biologics" that are expected to become part of the cancer
treatment protocol.
The Celsion Technology--CRI Plus Focused Heat
CRI can be activated in tumors by minimally invasive focused heat in the
range of 41(degrees) C (106(degrees) F). This focused heat may be generated by
Celsion's Adaptive Phased Array microwave technology, which provides deep
heating without damage to surrounding healthy tissue. Having increased the
susceptibility of cancer cells to DNA-damaging agents, radiation and
chemotherapy treatment may then be administered with less frequency and/or at
lower doses than currently is possible. CRI would then deactivate and the
patient would resume normal post-treatment care.
In September 2001, scientists at Sloan-Kettering successfully completed
pre-clinical laboratory feasibility demonstrations to assess safety and
biological activity of CRI. A small animal feasibility
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study, at Sloan-Kettering's Good Laboratory Practice (GLP) facility is expected
to yield additional data during December 2001 to assist in drug formulation.
Further studies with large animals to assess toxicity effects are expected to be
conducted during 2002 and 2003. Based on the current development timeline, we
expect to file an IND application with the Food and Drug Administration by the
end of calendar year 2003 and anticipate that we will be in a position to
commence Phase I clinical (human) trials before the end of calendar year 2004.
At such time as we determine safety and dosage in our preliminary studies, we
expect to form partnership(s) with one or more drug companies to scale-up
manufacturing and marketing for larger pivotal studies
In May 2000, we entered into an exclusive worldwide agreement with
Sloan-Kettering for the commercial rights to the heat-activated gene therapy
technology developed by Sloan-Kettering.
DEVELOPMENT, MARKETING AND SALES STRATEGY
OVERVIEW AND GOALS
We are not currently engaged in marketing and sales, and are focusing
our activities on the development and testing of our products. Our strategic
plan is based upon our expertise and experience in the medical application of
focused microwave heat and our relationships with and license rights from our
institutional research partners. Our goal has been to employ these resources to
develop minimally invasive or non-invasive, non-toxic treatment technologies
with efficacy significantly exceeding that available from other sources. Using
our management and staff, scientific advisory personnel and available financial
resources, we are focusing our efforts on the following goals:
- Short-Term Goals; 12 to 24 Months
- complete the clinical testing and commercialization of
our BPH treatment system;
- complete the development, testing, and commercialization
of our second generation technology for the eradication
of cancerous breast tumors; and
- pursue the development and testing of targeted drug
delivery via heat-sensitive liposomes for the purpose of
concentrating chemotherapeutic drugs at tumor sites.
- Longer-Term Goals; 18 Months and Beyond
- continue the development of gene therapy to
significantly improve the effectiveness of radiation and
chemotherapy on tumors; and
- initiate, either alone or with partners, the development
of cost-effective enhancements and variations of our
technology, including a version of our Microfocus
equipment for treating prostate and other cancers, and
additional potential applications for heat-sensitive
liposome therapy and heat-activated gene therapy in the
treatment of inflammatory, infectious and genetic
diseases.
We anticipate that, in the near term (up to 24 months), the source of
our revenues will be our proprietary technology for BPH and for treatment of
breast cancer and deep-seated tumors through the use of focused microwave heat
therapy equipment, if the necessary testing and regulatory approval
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processes are completed. We intend to generate initial sales through a
combination of direct marketing and development of marketing alliances.
In the longer term (from 18 months to 36 months and beyond), we will
seek to develop new revenue streams from our current work with Duke University
in targeted drug delivery systems and with Sloan-Kettering in gene therapy. We
anticipate that revenues will come from the licensing of this technology to
pharmaceutical manufacturers and major institutional health care providers who
would employ these technologies to deliver drug regimens or gene therapy
throughout the body. Also, because this technology is designed to be used in
conjunction with our APA-improved microwave equipment, we expect that the
acceptance of the technology will generate demand for our equipment which, in
turn, is expected to create equipment sales revenues. To prepare for future
marketing of our heat-sensitive drug delivery systems, we intend to explore the
possibilities of forming alliances with pharmaceutical companies, major
hospitals and health maintenance organizations.
BPH TREATMENT SYSTEM
We intend to market our BPH treatment system by marketing to the
constituencies critical to its success. In particular, we intend to target the
approximately 2 million readily identified BPH sufferers currently employing
drug therapies, as well as the estimated 7 million United States men afflicted
with BPH who have not, as yet, sought treatment--the "watchful waiters"--with a
focused message designed to encourage these anxious BPH sufferers to take
advantage of a solution that will relieve their symptoms and help to restore
the quality of their lives. We expect that this marketing effort will include
the following elements:
- Reimbursement: We have established reimbursement under the TUMT
reimbursement code for Medicare patients participating in our
Phase II clinical trials. Based on this precedent, we expect
that our BPH treatment will be covered in a like manner by
private insurers.
- Key Constituencies:
- Urology Practices. We expect first to target large
urology practices, starting with the large practices
participating in our Phase II trial. We intend to place
our Microwave Uretheroplasty equipment in urologists'
offices with no up-front capital cost to the physicians.
The urologists will pay Celsion for each procedure
performed using the equipment and, additionally, will
purchase a unique disposable catheter from Celsion for
each treatment. We believe that urology practices have
experienced a loss of revenue to primary care physicians
as a result of new drug therapies introduced to treat
BPH and other urological disorders and that urologists
will be favorably disposed toward its Microwave
Uretheroplasty system, which could offer them a
significant new revenue source.
- Consumers. We also expect to target BPH sufferers
through aggressive use of promotional and advertising
media. Due to the specificity of our target patient
audience (males 50 years and older) and the geographic
concentration of retirees, we expect to employ specific
media in well defined and discrete markets to generate a
high level of awareness of the availability of, and
interest in, our treatment system. We also expect to
utilize the Internet and other electronic methods to
direct prospective patients to urology offices equipped
to perform our Microwave Uretheroplasty procedure.
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- Primary Care Physicians. We have designed our marketing approach
to enable us to bypass primary care physicians, whom we believe
to be the most significant barrier to the success of our BPH
treatment system. Generally, under current managed care
protocols, a patient must first visit his primary care physician
who, after reviewing the patient's symptoms, may either treat
him or refer him to a specialist. With increasing availability
of drug therapies to treat urological disorders, the number of
referrals to urologists has been declining. We intend to ensure
that BPH sufferers are aware of our Microwave Uretheroplasty
treatment system so that they are in a position to insist that
they be referred to a urologist to obtain treatment.
We expect to establish a direct sales force to market our Microwave
Uretheroplasty treatment system in the United States. Consistent with our
marketing plan, this sales force will target leading urologists, hospitals and
HMOs on a nationwide basis. We are in discussions with medical device
organizations for distribution of our treatment system in Asian markets and
expect to enter into definitive Asian distribution arrangements during calendar
year 2002.
LICENSE AGREEMENTS AND PROPRIETARY RIGHTS
We do not own any patents, although we do have three United States
patents pending, two of which have been filed internationally. Two of our
pending United States patent applications are directed to our BPH treatment
system, with the third directed to our breast cancer treatment. Through our
license agreements with MIT, MMTC, Duke and Sloan-Kettering, we have exclusive
rights, within defined fields of use of nine United States patents. Three of
these patents relate to the treatment of BPH, four relate to thermotherapy for
cancer, including the APA technology, one relates to heat-sensitive liposomes
and one relates to gene therapy.
The MIT, MMTC, Duke University and Sloan-Kettering license agreements
each contains license fee, royalty and/or research support provisions, testing
and regulatory milestones, and other performance requirements that we must meet
by certain deadlines with respect to the use of the licensed technologies. In
conjunction with the patent holders, we intend to file international
applications for certain of the United States patents.
In 1996, we entered into a patent license agreement with MIT, pursuant
to which we obtained exclusive rights to use of MIT's patented APA technology in
conjunction with application of heat to breast tumor conditions, the application
of heat to prostate conditions and all other medical uses. MIT has retained
certain rights in the licensed technology for non-commercial research purposes.
MIT's technology has been patented in the United States and MIT has patents
pending for its technology in China, Europe, Canada and Japan. The term of our
exclusive rights under the MIT license agreement expires on the earlier of ten
years after the first commercial sale of a product using the licensed technology
or October 24, 2009, but our rights continue on a non-exclusive basis for the
life of the MIT patents.
We entered into a license agreement with MMTC in 1996, by which we
currently have exclusive worldwide rights to MMTC's patents related to its
balloon compression technology for the treatment of prostatic disease in humans.
Our exclusive rights under the MMTC license agreements extend for the life of
MMTC's patents. MMTC currently has patents in the United States and Canada. The
terms of these patents expire at various times from April 2008 to November 2014.
In addition, MMTC also has patent applications pending in Japan and Europe.
On November 10, 1999, we entered into a license agreement with Duke
University under which we received exclusive rights (subject to certain
exceptions) to commercialize and use Duke's thermo-liposome technology. The
license agreement contains annual royalty and minimum payment provisions
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and also requires us to make milestone-based royalty payments measured by
various events, including product development stages, FDA applications and
approvals, foreign marketing approvals and achievement of significant sales.
However, in lieu of such milestone-based cash payments, Duke has agreed to
accept shares of our common stock to be issued in installments at the time each
milestone payment is due, with each installment of shares to be calculated at
the average closing price of the common stock during the 20 trading days prior
to issuance. The total number of shares issuable to Duke under these provisions
is subject to adjustment in certain cases, and Duke has "piggyback" registration
rights for public offerings taking place more than one year after the effective
date of the license agreement. We are currently renegotiating certain terms of
our contractual arrangements with Duke.
Our rights under our license agreement with Duke University extend for
the longer of 20 years or the end of any term for which any relevant patents are
issued by the United States Patent and Trademark Office. Currently, we have
rights to Duke's patent for its thermo-liposome technology in the United States,
which expires in 2018, and to future patents received by Duke in Canada, Europe,
Japan and Australia, where it has patent applications pending. The European
application can result in coverage in the United Kingdom, France and Germany.
For this technology, our license rights are worldwide, with various patent
rights covering the United States, Canada, the United Kingdom, France, Germany
and Japan.
We entered into a license agreement with Sloan-Kettering in November
2000 by which we obtained exclusive rights to Sloan-Kettering's United States
patent and to patents that Sloan-Kettering may receive in the future for its
heat-sensitive gene therapy in Japan, Canada and Europe, where it has patent
applications pending. Our rights under the agreement with Sloan-Kettering will
terminate at the later of 20 years after the date of the agreement or the last
expiration date of any patent rights covered by the agreement.
In addition to the rights available to us under completed or pending
license agreements, we rely on our own proprietary know-how and experience in
the development and use of microwave thermotherapy equipment, which we seek to
protect, in part, through proprietary information agreements with employees,
consultants and others. We cannot offer assurances that these information
agreements will not be breached, that we will have adequate remedies for any
breach or that these agreements, even if fully enforced, will be adequate to
prevent third-party use of our proprietary technology. Similarly, we cannot
guarantee that technology rights licensed to us by others will not be
successfully challenged or circumvented by third parties, or that the rights
granted will provide us with adequate protection. We are aware of published
patent applications filed after November 29, 2001 and issued patents belonging
to other companies, and it is uncertain whether any of those patent documents
found, or patent applications filed before November 29, 2001 of which we may not
have any knowledge, will require us to alter our potential products or
processes, pay licensing fees, or cease certain activities.
MANUFACTURING
Celsion presently manufactures its BPH equipment in-house and
anticipates that it will continue to do so for the immediate future. However, as
the market develops, we expect that we will outsource some or all of our BPH
equipment manufacturing.
We believe we are best suited to conduct basic research and development
activities, to pursue a prototype product through clinical testing and
regulatory approval, to engage in initial manufacturing activities during
product launch and to market the final product. Accordingly, we do not intend to
engage in large-scale manufacturing with respect to our breast cancer treatment
system or any other possible future products, but instead intend generally to
outsource the manufacture of final commercial products,
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components and disposables. Based on past experience, we do not anticipate any
significant obstacles in identifying and contracting with qualified suppliers
and manufacturers.
THIRD-PARTY REIMBURSEMENT
Third-party reimbursement arrangements will likely be essential to
commercial acceptance of our new devices, and overall cost-effectiveness and
physician advocacy will be keys to obtaining such reimbursement. We believe that
our equipment can be used to deliver treatment at substantially lower total cost
than surgical treatments for BPH or cancer or than continuous drug therapy.
Consequently, we believe that third-party payors seeking procedures that provide
quality clinical outcomes at relatively lower cost will help drive acceptance of
our products.
For BPH, our strategy is to use reimbursement codes currently approved
for TUMT in the United States and which have been approved for Medicare patients
in connection with BPH treatment in our Phase II clinical trials. For breast
cancer, we expect that our strategy for obtaining new reimbursement
authorizations in the United States will be to obtain appropriate reimbursement
codes and to perform studies in conjunction with clinical trials to establish
the efficacy and cost-effectiveness of the procedures as compared to surgical
and drug treatments for BPH and cancerous breast tumors. We plan to use this
information when approaching health care payors to obtain new reimbursement
authorizations.
With the increasing use of managed care and capitation as means to
control health care costs in the United States, we believe that physicians may
view our products as a tool to treat BPH and breast cancer patients at a lower
total cost, thus providing them with a competitive advantage when negotiating
managed care contracts. This is especially important in the United States, where
a significant portion of the aging, Medicare-eligible population is moving into
a managed care system.
Subject to regulatory approval for the use of our equipment to treat BPH
and breast cancer, we anticipate that physicians will submit insurance claims
for reimbursement for such procedures to third-party payors, such as Medicare
carriers, Medicaid carriers, health maintenance organizations and private
insurers. In the United States and in international markets, third-party
reimbursement is generally available for existing therapies used to treat cancer
and BPH. The availability and level of reimbursement from such payors for the
use of our new products will be a significant factor in our ability to
commercialize these systems.
We expect that new regulations regarding third-party reimbursement for
certain investigational devices in the United States will allow us to pursue
early reimbursement from Medicare with individual clinical sites prior to
receiving FDA approval. However, FDA approval likely will be necessary to obtain
a national coverage determination from Medicare. The national coverage
determination for third-party reimbursement will depend on the determination of
the Centers for Medicare and Medicaid Service, or CMS (formerly known as the
United States Health Care Financing Administration, or HCFA), which establishes
national coverage policies for Medicare carriers, including the amount to be
reimbursed, for coverage of claims submitted for reimbursement related to
specific procedures. Private insurance companies and health maintenance
organizations make their own determinations regarding coverage and reimbursement
based upon "usual and customary" fees. Reimbursement experience with a
particular third-party payor does not reflect a formal reimbursement
determination by the third-party payor. New outpatient procedure codes were
instituted on August 1, 2000. Our ability to petition successfully for these new
reimbursement codes will ultimately determine the degree of success we achieve
in implementing our business model.
Internationally, we expect to seek reimbursement approvals for
procedures utilizing our new products on an individual country basis. Some
countries currently have established reimbursement
13
authorizations for transurethral microwave therapy. We expect to use clinical
studies and physician advocacy to support reimbursement requests in countries in
which there is currently no reimbursement for such procedures.
REGULATION OF SALES IN THE UNITED STATES
FDA REGULATION--RESEARCH AND APPROVAL
Our research and development activities, pre-clinical tests and clinical
trials and, ultimately, the manufacturing, marketing and labeling of our
products, are subject to extensive regulation by the FDA. The Federal Food,
Drug, and Cosmetic Act, or FDCA, the Public Health Service Act, or PHSA, and the
regulations promulgated by FDA govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising, promotion, import and export of our products.
Under these statutes, our Microwave Uretheroplasty treatment system is
regulated as a class III medical device, our heat-activated liposomes may be
regulated as a new drug and our Cancer Repair Inhibitor may be regulated as a
biological product. The steps ordinarily required before such products can be
marketed in the United States include (a) pre-clinical and clinical studies; (b)
the submission to the FDA of an Investigational Device Exemption, or IDE, or an
Investigational New Drug application, or IND, which must become effective before
human clinical trials may commence; (c) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the product; (d) the
submission to the FDA of a Pre-Market Approval application, or PMA, a New Drug
Application, or NDA, or a Biological License Application, or BLA; and (e) FDA
approval of the application, including approval of all product labeling.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of the product. Pre-clinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of pre-clinical tests are submitted to the FDA as part of
an IDE or IND and are reviewed by the FDA before the commencement of human
clinical trials. Submission of an IDE or IND will not necessarily result in FDA
authorization to commence clinical trials and the absence of FDA objection to
an IDE or IND does not necessarily mean that the FDA will ultimately approve a
PMA or that a product candidate otherwise will come to market.
Clinical trials involve the administration of therapy to humans under
the supervision of a qualified principal investigator. Clinical trials must be
conducted in accordance with Good Clinical Practices, or GCP, under protocols
submitted to the FDA as part of the IDE or IND. Also, each clinical trial must
be approved and conducted under the auspices of an Institutional Review Board,
or IRB, and with patient informed consent. The IRB will consider, among other
things, ethical factors, the safety of human subjects and the possible liability
of the institution conducting the clinical trials.
Clinical trials are typically conducted in two or three sequential
phases, but the phases may overlap. Phase I clinical trials involve the initial
introduction of the therapy to a small number of subjects. Phase II trials are
generally larger trials conducted in the target population. For devices such as
our Microwave Uretheroplasty treatment system, Phase II studies may serve as the
pivotal trials (demonstrating safety and effectiveness required for approval).
In the case of drugs and biological products, Phase II clinical trials generally
are conducted in a target patient population to gather evidence about the
pharmacokinetics, safety and biological or clinical efficacy of the drug for
specific indications, to determine dosage tolerance and optimal dosage and to
identify possible adverse effects and safety risks. When a drug or biological
compound has shown evidence of efficacy and an acceptable safety profile in
Phase II evaluations, Phase III clinical trials are undertaken to serve as the
pivotal trials to demonstrate clinical efficacy and safety in an expanded
patient population.
14
There can be no assurance that any of our clinical trials will be
completed successfully, within any specified time period or at all. Either the
FDA or we may suspend clinical trials at any time, if either the FDA or we
conclude that clinical subjects are being exposed to an unacceptable health risk
or for other reasons. The FDA inspects and reviews clinical trial sites,
informed consent forms, data from the clinical trial sites, including case
report forms and record keeping procedures, and the performance of the protocols
by clinical trial personnel to determine compliance with Good Clinical
Practices. The FDA also examines whether there was bias in the conduct of
clinical trials. The conduct of clinical trials is complex and difficult,
especially in pivotal Phase II or Phase III trials. There can be no assurance
that the design or the performance of the pivotal clinical trial protocols or
any of our current or future product candidates will be successful.
The results of pre-clinical studies and clinical trials, if successful,
are submitted in an application for FDA approval to market the device, drug or
biological product for a specified use. The testing and approval process
requires substantial time and effort, and there can be no assurance that any
approval will be granted for any product at any time, according to any schedule,
or at all. The FDA may refuse to approve an application if it believes that
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy. Moreover, if regulatory approval is
granted, the approval will be limited to specific indications. There can be no
assurance that any of our product candidates will receive regulatory approvals
for marketing or, if approved, that approval will be for any or all of the
indications that we request.
The FDA is authorized to require user fees for submission of NDAs and
BLAs. The current user fee for such applications is $267,606 and may increase
from year to year. The FDA is also authorized to require annual user fees for
approved products and for companies with establishments at which finished
products are manufactured, which fees may increase from year to year. The FDA
may waive or reduce such user fees under special circumstances. We intend to
seek waivers or reductions of user fees where possible, but we cannot be assured
that we will be eligible for any such waiver or reduction.
FDA REGULATION--POST-APPROVAL REQUIREMENTS
Even if we receive necessary regulatory approvals for one or more of our
product candidates, our manufacturing facilities and products are subject to
ongoing review and periodic inspection. Each U.S. device, drug and biologic
manufacturing establishment must be registered with the FDA. Manufacturing
establishments in the U.S. and abroad are subject to inspections by the FDA and
must comply with the FDA's Good Manufacturing Practice, or GMP, regulations.
Medical devices must comply with the FDA's Quality System, or QSR, regulations.
In order to ensure full technical compliance with such regulations,
manufacturers must expend funds, time and effort in the areas of production and
quality control. The FDA stringently applies regulatory standards for
manufacturing.
We are also subject to recordkeeping and reporting regulations,
including the FDA's mandatory Medical Device Reporting, or MDR, regulations.
These regulations require, among other things, the reporting to FDA of adverse
events alleged to have been associated with the use of a product or in
connection with certain product failures.
Labeling and promotional activities also are regulated by the FDA and,
in certain instances, by the Federal Trade Commission, or FTC. We must also
comply with recordkeeping requirements as well as requirements to report certain
adverse events involving our products. The FDA can impose other post-marketing
controls on us as well as our products including, but not limited to,
restrictions on sale and use, through the approval process regulations and
otherwise.
Failure to comply with applicable regulatory requirements can result in,
among other things, warning letters, fines, injunctions and other equity
remedies, civil penalties, recall or seizure of products,
15
total or partial suspension of production, refusal of the government to grant
approvals, pre-market clearance or pre-market approval, withdrawal of approvals
and criminal prosecution.
OUR COMPLIANCE WITH FDA REGULATION
We believe that we are substantially in compliance with FDA regulations
governing the manufacturing and marketing of medical devices. We previously
received pre-marketing approval from the FDA for our original Microfocus 1000
cancer treatment equipment for surface and subsurface tumors in conjunction with
radiation. We have also received a supplemental pre-marketing approval to add
the APA technology from MIT to our Microfocus 1000 equipment. We are seeking a
new indication of use to permit the use of our improved Microfocus equipment
with APA for breast tumor ablation using heat alone.
We also received approval to conduct an expanded Phase I study using our
BPH treatment system. The purpose of the expanded Phase I study was to test a
revised protocol, intended both to shorten significantly the BPH treatment time
for each patient application and to lower the manufacturing cost for a
disposable device used during the treatment. This expanded Phase I study was
completed in May 2000. In July 2000 the FDA approved the commencement of
multiple-site Phase II studies, and the first of such studies commenced
effective October 18, 2000. All 160 patients required to be treated under the
Phase II trial were treated as of November 29, 2001 and, as of that date,
Celsion submitted the first two of three required modules to the FDA in support
of the PMA. We expect to submit the last module, consisting of clinical data,
during the second quarter of 2002.
In August 2000 we completed the treatment of ten patients in a Phase I
Study of our breast cancer treatment system and, in December 2000, we received
FDA approval to commence Phase II clinical trials. The Phase II trials consist
of two protocols--the first is designed to ablate (kill) small breast tumors
using heat alone and the second is designed to downsize large breast cancer
tumors using a combination of heat and chemotherapy, thus allowing a surgeon to
perform a lumpectomy rather than a mastectomy, thereby preserving the affected
breast. If the Phase II trials are successful, we expect to apply for the
addition of a new indication of use to the existing FDA pre-market approval for
its Microfocus equipment, denoting that the system can be used to destroy
cancerous tumors and viable cancer cells within the human breast through the
application of focused microwave heat energy alone. If testing and approvals
proceed as anticipated, we expect to begin marketing this breast cancer system
before the end of 2003.
OTHER FEDERAL REGULATION
The Federal Communications Commission regulates the frequencies of
microwave and radio-frequency emissions from medical and other types of
equipment to prevent interference with commercial and governmental
communications networks. The FCC has approved the frequency of 915 MHZ for
medical applications, and machines utilizing that frequency do not require
shielding to prevent interference with communications. Our Microfocus and BPH
treatment products utilize the 915 MHZ frequency.
In December 1984 the HCFA (now known as the Centers for Medicare and
Medicaid Service, or CMS) approved reimbursement under Medicare and Medicaid for
thermotherapy treatment when used in conjunction with radiation therapy for the
treatment of surface and subsurface tumors. At this time, most of the large
medical insurance carriers in the United States have approved reimbursement for
this type of thermotherapy treatment under their health policies. Thermotherapy
treatment administered using equipment that has received pre-marketing approval
is eligible for such reimbursement.
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REGULATION OF FOREIGN SALES
Sales of domestically produced drugs, biologics and medical devices
outside of the United States are subject to United States export requirements
and foreign regulatory controls. Drugs, biologics, and devices that are subject
to pre-marketing approval requirements and have not received FDA marketing
approval cannot be exported unless they are approved in the European Union, or
EU, in a country in the EU or the European Free Trade Association, or in certain
other countries specified in the FDCA.
Products approved in these countries may be exported to other countries
in which they are legal for marketing. Such products must bear labeling that
complies with both the country of approval and the country to which the product
is exported. In the case of drugs and biologics, there must also be a valid
marketing authorization by a responsible authority and FDA must make detailed
determinations regarding the adequacy of the statutory or regulatory
requirements of the importing country.
Exported products that are not approved in the United States are subject
to other FDA regulatory requirements as well, including substantial compliance
with good manufacturing practice requirements. FDA may prohibit export if there
is a determination that the exportation of the product presents an imminent
hazard to the public health of the importing country or to the United States if
reimported.
Upon exportation, our products would be subject to regulation by
national governments and supranational agencies as well as by local agencies
affecting, among other things, product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. There can be no assurance that one or more countries or agencies
will not impose regulations or requirements that could have a material adverse
effect on our ability to sell our products.
In the EU, the harmonization of standards has caused a shift from a
country-by-country regulatory system towards an EU-wide single regulatory
system. However, many members of the EU have imposed additional country specific
regulations/requirements. The approval procedure varies from member state to
member state, and the time required may be longer or shorter than that required
for FDA approval. There can be no assurance that the changes in the regulatory
schemes imposed either by the EU, supranational agencies or individual countries
affecting our products will not have a material adverse effect on our ability
to sell our products in countries other than the United States.
The rigorous and lengthy steps currently required before a medicinal
product may be marketed in the EU include: (a) adequate non-clinical tests and
clinical trials, (b) the submission to the EMEA or to the respective Member
States' Medicines Agencies of an application for a marketing authorization,
supported by all necessary documents and test results, and (c) approval of the
application, including approval of all product labeling and packaging. In all
cases, the safety, efficacy and quality of candidate products must be
demonstrated according to demanding criteria under EU and national rules. There
can be no assurance that our non-clinical tests and clinical trials performed in
the United States will be recognized and accepted by the various regulatory
authorities in the EU. Such authorities may require additional non-clinical
tests and clinical trials and other studies. Non-clinical tests on chemical
products in the EU must be conducted by laboratories that comply with harmonized
principles of Good Laboratory Practice, or GLP. Member States generally require
that clinical trials be conducted in accordance with specific national Good
Clinical Practices, or GCP. Moreover, many Member States require compliance with
principles of GMP in the manufacture of medicinal products intended for use in
clinical trials. The complex array of national requirements for clinical trials
conducted in the EU may delay the regulatory approvals necessary to commence
"multi-center" clinical trials.
17
Failure to comply with foreign regulatory requirements can result in,
among other things, warning letters, fines, injunctions and other equitable
remedies, civil penalties, recall orders or seizure of products, total or
partial suspension of production, refusal of the health authorities to grant
desired approvals, the withdrawal of approvals and criminal prosecution.
We have sold our original products in 23 countries in Asia, Europe and
South America. Meeting the registration requirements within these countries was
the responsibility of our distributors in each of these countries. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval and the requirements may differ.
We expect to receive approvals for marketing in a number of countries outside
the United States prior to the time that we will be able to market our products
in the United States. However, the timing for such approvals currently is not
known.
COMPETITION
Many companies and institutions are engaged in research and development
of thermotherapy technologies for both cancer and prostate disease products that
seek treatment outcomes similar to those we are pursuing. In addition, a number
of companies and institutions are pursuing alternative treatment strategies
through the use of radio frequency, laser and ultrasound energy sources, all of
which appear to be in the early stages of development and testing. We believe
that the level of interest by others in investigating the potential of
thermotherapy and alternative technologies will continue and may increase.
Potential competitors engaged in all areas of cancer and prostate treatment
research in the United States and other countries include, among others, major
pharmaceutical and chemical companies, specialized technology companies,
universities and other research institutions. Most of our competitors and
potential competitors have substantially greater financial, technical, human and
other resources, and may also have far greater experience than we have, both in
pre-clinical testing and human clinical trials of new products and in obtaining
FDA and other regulatory approvals. One or more of these companies or
institutions could succeed in developing products or other technologies that are
more effective than any which we have been or are developing, or which could
render our technology and products obsolete and non-competitive. Furthermore, if
we are permitted to commence commercial sales of products, we will also be
competing, with respect to manufacturing efficiency and marketing, with
companies having greater resources and experience in these areas.
Several companies in the United States and overseas, including BSD
Medical Corporation and Labthermics Technology, Inc., have marketed equipment
that uses heat produced by microwaves or ultrasound to treat surface and
subsurface cancer, either with or without the concurrent use of radiation or
chemotherapy. To our knowledge, among these entities, BSD Medical Corporation
has the longest business history and has sold the largest number of microwave
thermotherapy units for the treatment of surface and subsurface cancer, but we
do not believe that BSD Medical Corporation has a dominant competitive position
or that its equipment has been widely accepted for use in the treatment of
cancer. We believe BSD Medical Corporation is attempting to develop more
advanced versions of its equipment for use in treating deep-seated tumors.
In the treatment of BPH, EDAP TMS S.A., a French company, has marketed a
device named the "Prostatron," both in the United States and overseas, which
uses microwave-generated heat to destroy enlarged prostate tissue. Also,
Urologix, Inc., a domestic company, has introduced a BPH medical device similar
to the Prostatron. In October 2000, Urologix acquired the Prostatron product
line from EDAP. While we believe these devices have not been widely used or
accepted by providers of medical treatment for BPH, there is no guarantee that
EDAP TMS S.A. or Urologix, Inc. will not seek to introduce improved equipment
for the treatment of BPH. We are aware of other companies currently developing
or marketing devices using other forms of energy, including laser, radio
frequency, ultrasound and infrared
18
technologies, for the treatment of BPH. If any of these treatment technologies
become widely accepted by the medical community in the future, such acceptance
could pose a pose a significant competitive risk to us.
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products. We presently have product liability insurance limited to $5,000,000
per incident, and, if we were to be subject to a claim in excess of this
coverage or to a claim not covered by our insurance and the claim succeeded, we
would be required to pay the claim out of our own limited resources.
EMPLOYEES
We presently employ 17 full-time employees and also utilize the services
of some part-time consultants from time to time. In addition, our Scientific
Advisory Board actively assists our management with advice on various projects.
None of our employees are represented by a collective bargaining organization,
and we consider our relations with our employees to be good.
ITEM 2. PROPERTIES
We lease premises consisting of approximately 22,300 square feet of
administrative office, laboratory and workshop space at 10220-I Old Columbia
Road, Columbia, Maryland 21046-1705 from an unaffiliated party under a five-year
lease that expires on June 30, 2005. Rent expense for the year ended September
30, 2001 was $227,961. Future minimum lease obligations are as follows:
2002 $294,071
2003 302,779
2004 311,789
2005 239,018
In the year ended September 30, 2001 we began subleasing 13,385 square
feet of its office/warehouse space to an unrelated party, generating rental
income of $45,609. The sublease yields rent of $15,203 per month and ends
January 1, 2001. The tenant has indicated that it does not intend to renew the
lease and we currently are seeking a substitute tenant.
ITEM 3. LEGAL PROCEEDINGS
On April 27, 2000, we initiated an action in the United States District
Court for the District of Maryland against Warren C. Stearns, a former director
of Celsion, Mr. Stearn's management company, SMC, and a number of affiliates,
family members and colleagues of Mr. Stearns, who held warrants for the purchase
of approximately 4.1 million shares of our common stock. With the advice of
counsel, we concluded that the warrants should be rescinded because they
violated Section 15 of the Securities and Exchange Act of 1934. Our claims in
this action as originally filed are referred to as "Count I".
On January 18, 2001, the Maryland District Court transferred the case to
the United States District Court for the Northern District of Illinois, in
Chicago, and on July 17, 2001, we filed a motion to amend our complaint to add a
second count, Count II, alleging that Mr. Stearns, on behalf of himself and
19
the other original defendants, had executed a Mutual Release which released any
right the original defendants had to exercise the warrants. This motion was
granted on July 19, 2001.
On August 9, 2001, the original defendants filed a counterclaim against
Celsion, certain of its officers and directors and an attorney and law firm that
had represented Celsion. The counterclaim alleges (i) that Celsion's failure to
register the common stock was a breach of the warrants; (ii) that the filing of
the complaint by Celsion was a breach of the Mutual Release; (iii) that the
parties named in the counterclaim intentionally interfered with Celsion's
contractual relations pursuant to the warrants; (iv) conversion of the common
stock; (v) civil conspiracy among the parties named in the counterclaim in
failing to register the common stock; and (vi) fraudulent misrepresentation
against the parties named in the counterclaim stemming from alleged
representations that the common stock would be registered. The counterclaim does
not request a specific amount of damages.
On September 10, 2001, the Illinois District Court dismissed, with
prejudice, Count I of the complaint, finding that it was barred by a three-year
statute of repose. Count II was not, however, dismissed. On November 23, 2001,
Celsion and certain of its officers and directors filed a motion to dismiss the
counterclaim for failure to state a claim upon which relief can be granted and
that motion remains pending. It is impossible to determine at this point in the
litigation the amount of damages, if any, that may be awarded against Celsion if
it is liable for the claims alleged in the counterclaim. In addition, our
insurance carrier has denied liability as to the claims asserted in the
counterclaim. However, we intend to prosecute this litigation vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE FOR OUR COMMON STOCK
Since May 31, 2000, our common stock has traded on The American Stock
Exchange. Prior to that time, the common stock traded on the over-the-counter
market. The following table sets forth the high and low sales prices for our
common stock reported by The American Stock Exchange since May 31, 2000 and,
prior to that date, the high and low bid prices for our shares as quoted in the
Electronic Bulletin Board operated by The Nasdaq Stock Market, Inc. The
quotations set forth below do not include retail markups, markdowns or
commissions, and, with respect to periods before May 31, 2000, may not
necessarily represent actual transactions.
High Low
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FISCAL YEAR ENDED SEPTEMBER 30, 2000
First Quarter (October 1 - December 31, 1999)............................................ $ 4.13 $0.71
Second Quarter (January 1 - March 31, 2000).............................................. $10.25 $1.68
Third Quarter (April 1 - June 30, 2000).................................................. $ 6.00 $2.84
Fourth Quarter (July 1 - September 30, 2000)............................................. $ 3.56 $1.88
FISCAL YEAR ENDED SEPTEMBER 30, 2001
First Quarter (October 1 - December 31, 2000)............................................ $2.19 $0.75
Second Quarter (January 1 - March 31, 2001).............................................. $3.75 $0.94
Third Quarter (April 1 - June 30, 2001).................................................. $1.25 $0.60
Fourth Quarter (July 1 - September 30, 2001)............................................. $0.85 $0.40
20
On December 20, 2001, the last reported sale price for our common stock
on The American Stock Exchange was $0.57. As of December 20, 2001, there were
approximately 1,300 holders of record of our common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not currently anticipate paying cash dividends in the
foreseeable future.
ISSUANCE OF SHARES WITHOUT REGISTRATION
During the fiscal quarter ended September 30, 2001, we issued the
following securities without registration under the Securities Act of 1933, as
amended (the "Securities Act"):
- On September 5, 2001, we issued 1,545 shares of our common stock
to the holder of a warrant to purchase our Series A 10%
Convertible Preferred in a cashless exercise transaction.
- On September 30, 2001, we issued a total of 128,608 shares of
our common stock, valued at $65,589, to four non-employee
directors in lieu of cash fees for their services as directors
during the fiscal year ended September 30, 2001.
The certificates representing all of the shares issued as described
above were endorsed with Celsion's standard restricted stock legend, and a stop
transfer instruction was recorded by our transfer agent. Accordingly, we view
such issuances as exempt from registration under Sections 4(2) and/or 4(6) of
the Securities Act as transactions by an issuer not involving any public
offering.
21
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial data for Celsion for the
five fiscal years ended September 30, 2001 is qualified in its entirety by, and
should be read in conjunction with, the "Item 8. Financial Statements and
Supplementary Data and Financial Disclosure" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Revenues:
Product Sales (Net) ..................... $121,257 $174,182 $ - $3,420 $ -
Research and development contracts ..... - - -
------------ ------------ ------------ ------------ ------------
Total revenues ............................... 121,257 174,182 3,420
Cost of sales ................................ 46,734 136,500 246
------------ ------------ ------------ ------------ ------------
Gross profit on product sales ................ 74,523 37,682 3,174
------------ ------------ ------------ ------------ ------------
Other costs and expenses:
Selling, general and administrative .... 2,283,245 2,515,822 1,371,161 2,661,333 3,211,625
Research and development ................ 185,974 1,534,872 1,019,941 2,238,292 4,075,249
------------ ------------ ------------ ------------ ------------
Total operating expenses ..................... 2,469,219 4,050,694 2,391,102 4,899,625 7,286,874
------------ ------------ ------------ ------------ ------------
(Loss) from operations ....................... (2,394,696) (4,013,012) (2,391,102) (4,896,451)
------------ ------------ ------------ ------------
Other income (expense) ....................... (471,631) 11,870 15,744 - 45,609
Interest income (expense) ................... (185,562) (199,346) (60,834) 349,236 318,038
------------ ------------ ------------ ------------ ------------
Net (loss) ................................... $(3,051,889) $(4,200,488) $(2,436,192) $(4,547,215) $(6,923,227)
============ ============ ============ ============ ============
Net loss per share ........................... $(0.11) $(0.12) $(0.05) $(0.08) $(0.10)
============ ============ ============ ============ =======
Weighted average shares outstanding .......... 28,386,145 34,867,001 45,900,424 59,406,921 72,249,920
AS OF SEPTEMBER 30,
---------------------------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents .................. $267,353 $54,920 $1,357,464 $8,820,196 $2,510,136
Working Capital ............................ (2,645,908) (2,000,351) 906,926 8,509,173 2,388,900
Total Assets ............................... 823,209 330,738 1,558,684 9,117,821 2,956,861
Long-term debt, less current maturities .... - - - - 15,203
Accumulated deficit ........................ (15,263,522) (19,464,010) (21,900,202) (26,447,417) (33,605,157)
Total stockholders' equity (deficit) ....... 2,460,646 (1,851,067) 1,037,125 8,726,429 2,956,861
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report on Form 10-K,
including certain in this section, are forward-looking. In addition, from time
to time, we may publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, those listed under "Risk Factors" below and elsewhere in this Annual
Report on Form 10-K. In some cases, you can identify forward-looking statements
by terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue" or the negative of
such terms or other comparable terminology. Forward-looking statements are only
predictions. Actual events or results may differ materially. In evaluating these
statements, you should specifically consider various factors, including the
risks outlined under "Risk Factors." Although we believe that the expectations
reflected in the forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
neither we nor any other person assumes responsibility for the accuracy and
completeness of such statements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform such
statements to actual results.
GENERAL
Since inception, we have incurred substantial operating losses. We
expect operating losses to continue and possibly increase in the near term and
for the foreseeable future as we continue our product development efforts,
conduct clinical trials and undertake marketing and sales activities for new
products. Our ability to achieve profitability is dependent upon our ability
successfully to integrate new technology into our thermotherapy systems, conduct
clinical trials, obtain governmental approvals, and manufacture, market and sell
our new products. We have faced a number of major obstacles over the last
several years, including inadequate funding, a negative net worth, and the slow
development of the thermotherapy market due to technical shortcomings of the
thermotherapy equipment previously available commercially. We have not continued
to market our older thermotherapy system, principally because of the system's
inability to provide precise and consistent heat treatment for other than
surface and subsurface tumors. Instead, we have concentrated on a new generation
of thermotherapy products.
Our operating results have fluctuated significantly in the past on an
annual and a quarterly basis. We expect that operating results will continue to
fluctuate significantly from quarter to quarter for the foreseeable future and
will depend on a number of factors, many of which are outside of our control.
RESULTS OF OPERATIONS
Comparison of Fiscal Year Ended September 30, 2001 and Fiscal Year Ended
September 30, 2000
We generated no revenues during the fiscal year ended September 30,
2001, compared to revenues on the sale of parts and equipment in the amount of
$3.240 during the fiscal year ended September 30, 2000.
23
Research and development expenditures in the year ended September 30,
2001 were $4,075,249, an increase of $1,836,957, or 82% compared to the fiscal
year ended September 30, 2000. The increase was attributable to costs incurred
in undertaking pivotal Phase II clinical trials for both our BPH and breast
cancer treatment systems. These costs included increased personnel costs as well
as costs related to the acquisition of equipment and materials necessary to
complete the trials. Additionally, during the year we also initiated development
of our heat-activated liposomes by formulating the drug and undertaking large
animal toxicity studies.
Selling, general and administrative expense increased by 21%, to
$3,211,625 for the fiscal year ended September 30, 2001 compared to $2,661,333
for the fiscal year ended September 30, 2000. The increase was due primarily to
increased staffing, principally our newly retained Chief Financial Officer, and
legal costs associated with the conversion of the Series A 10% Convertible
Preferred Stock, various SEC filings and settlement of a long-standing trade
dispute with a former distributor in Hong Kong.
The increase in research and development, selling, general and
administrative expenses described above resulted in a loss from operations of
$(7,286,874) for the year ending September 30, 2001 compared to a loss
$(4,896,451) for the year ended September 30, 2000, representing an increase of
$2,387,249.
Interest income net of interest expense decreased by $31,198, to
$318,038 for the fiscal year ended September 30, 2001 compared to $349,236 for
the fiscal year ended September 30, 2000. This decrease reflects the fact that,
as Celsion has no revenues, all expenditures are met from cash reserves. As cash
reserves declined, interest income is likewise reduced.
Comparison of Fiscal Year Ended September 30, 2000 and Fiscal Year Ended
September 30, 1999
Product sales for the year ended September 30, 2000 were $3,420, as
compared to none for the prior fiscal year. The limited revenue in the more
recent period resulted from a parts reorder for older, previously sold
equipment. Additional significant product revenues are not expected unless and
until development of our second generation, of equipment incorporating APA
technology, is completed and such equipment is clinically tested and receives
necessary approvals from governmental regulatory agencies.
Research and development expense increased by 120%, to $2,238,292 for
the fiscal year ended September 30, 2000 from $1,019,941 for the fiscal year
ended September 30, 1999. The increase of $1,218,351 in the fiscal year ended
September 30, 2000 was attributable to payments, through the issuance of shares
of common stock, to Duke University under a license agreement for
thermo-liposome technology, research on thermo-liposome technology, expenditures
in connection with our Phase I breast cancer treatment system trials,
expenditures for our Phase II BPH and breast cancer treatment trials and
payments made to Sloan-Kettering for licensing of its gene therapy technology
during the fiscal year ended September 30, 2000.
Selling, general and administrative expense increased by 94%, to
$2,661,333 for the fiscal year ended September 30, 2000 from $1,371,161 for the
fiscal year ended September 30, 1999. The increase of $1,290,172 was due
primarily to expenses associated with increased legal and financial services in
connection with our various securities offerings and technology licensing,
increased office staffing, costs associated with our annual meeting and
increased public relations activities.
Due mainly to the increase in the expenditures listed above for the
fiscal year ending September 30, 2000, the loss from operations rose by
$2,505,349 to $(4,896,451) from $(2,391,102) in the prior fiscal year.
24
Interest income net of interest expense increased to $349,236 for the
fiscal year ended September 30, 2000 from $(60,834) for the fiscal year ended
September 30, 1999. The $410,070 increase was due to increased cash balances
representing the proceeds from our private placement in January 2000 which were
invested in money market instruments and time deposits.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our revenues,
resulting in an accumulated deficit of $33,605,157 at September 30, 2001. We
have incurred negative cash flows from operations since our inception and have
funded our operations primarily through the sale of equity securities. As of
September 30, 2001, we had cash and cash equivalents of $2,510,136 and total
current assets of $2,661,341, compared with current liabilities of $272,441,
resulting in a working capital surplus of $2,388,900. As of September 30, 2000,
we had $8,820,196 in cash and cash equivalents and total current assets of
$8,900,565, compared with current liabilities of $391,392, which resulted in a
working capital surplus of $8,509,173 at fiscal year end. The decrease in
working capital at September 30, 2001 as compared to September 30, 2000 was due
to the fact that, during the past fiscal year, we drew on our cash reserves to
pay for our ongoing operations. In addition, we applied approximately $500,000,
in settlement costs and legal expenses, in settling a long-standing trade
dispute with a former distributor in Hong Kong.
We do not have any bank financing arrangements and have funded our
operations in recent years primarily through private placement offerings of
equity securities. On December 13, 2001, we conducted a first closing on a
private placement of equity securities consisting of units, each comprised of
one share of our common stock and one common stock purchase warrant exercisable
for a period of five years at $0.60 per share. The offering is being conducted
on a "best efforts, minimum/maximum basis" with a minimum of $3,000,000 and a
maximum of $5,000,000 (subject to a $1,250,000 oversubscription allowance). At
the first closing, we realized gross proceeds of $3,360,000 from the sale of
6,720,000 units, representing net proceeds to Celsion of $3,004,986 after
deduction of commissions and offering expenses. As of December 20, 2001, we had
realized gross proceeds of $4,135,826 from the sale of 8,271,652 units,
representing net proceeds to Celsion of $3,707,110. By its terms, the private
placement will terminate on January 31, 2002, unless earlier terminated at the
election of Celsion.
For all of fiscal year 2002, we expect to expend a total of
approximately $7,000,000 for clinical testing of our breast cancer and BPH
treatment systems, as well as corporate overhead, which we expect to fund from
our current resources. The foregoing amounts are estimates based upon
assumptions as to the availability of funding, the scheduling of institutional
clinical research and testing personnel, the timing of clinical trials and other
factors, not all of which are fully predictable. Accordingly, estimates and
timing concerning projected expenditures and programs are subject to change. We
expect that the proceeds from the first closing of our private placement,
together with any additional proceeds from subsequent closings and our current
cash resources, will be sufficient to fund our operations through the 2002
fiscal year.
Our dependence on raising additional capital will continue at least
until we are able to begin marketing our new technologies. Our future capital
requirements and the adequacy of our financing depend upon numerous factors,
including the successful commercialization of our Microwave Urethroplasty and
breast cancer treatment systems, progress in product development efforts,
progress with pre-clinical studies and clinical trials, the cost and timing of
production arrangements, the development of effective sales and marketing
activities, the cost of filing, prosecuting, defending and enforcing
intellectual property rights, competing technological and market developments
and the development of
25
strategic alliances for the marketing of our products. We will be required to
obtain such funding through equity or debt financing, strategic alliances with
corporate partners and others, or through other sources not yet identified. We
do not have any committed sources of financing, and cannot guarantee that
additional funding will be available in a timely manner, on acceptable terms, or
at all. If adequate funds are not available, we may be required to delay, scale
back or eliminate certain aspects of our operations or attempt to obtain funds
through unfavorable arrangements with partners or others that may require us to
relinquish rights to certain of our technologies, product candidates, products
or potential markets or which otherwise may be materially unfavorable to us.
Furthermore, if we cannot fund our ongoing development and other operating
requirements, particularly those associated with our obligation to conduct
clinical trials under our licensing agreements, we will be in breach of our
commitments under these licensing agreements and could therefore lose our
license rights, which could have material adverse effects on our business.
RISK FACTORS
Among numerous risk factors that may affect our future performance and
our ability to achieve profitable operations are the following:
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT TO CONTINUE SUCH LOSSES FOR
THE FORESEEABLE FUTURE.
Since Celsion's inception in 1982, its expenses have substantially
exceeded its revenues, resulting in continuing losses and an accumulated deficit
of $(33,605,157) at September 30, 2001, including losses of $(4,547,215) for the
year ended September 30, 2000 and $(6,923,227) for the year ended September 30,
2001. Because we presently have no revenues and are committed to continuing our
product research, development and commercialization programs, we will continue
to experience significant operating losses unless and until we completes the
development of new products and these products have been clinically tested,
approved by the FDA and successfully marketed. In addition, we have funded our
operations for many years primarily through the sale of the Company's securities
and have limited working capital for our product research, development,
commercialization and other activities.
WE DO NOT EXPECT TO GENERATE SIGNIFICANT REVENUE FOR THE FORESEEABLE FUTURE.
We marketed and sold our original microwave thermotherapy products,
which produced modest revenues from 1990 to 1994, but ceased marketing these
products in 1995. We have devoted our resources in ensuing years to developing a
new generation of thermotherapy and other products, but cannot market these
products unless and until we have completed clinical testing and obtained all
necessary governmental approvals. Accordingly, we have no current source of
revenues, much less profits, to sustain our present operations, and no revenues
will be available unless and until our new products are clinically tested,
approved by the FDA and successfully marketed. We cannot guarantee that any or
all of our products will be successfully tested, approved by the FDA or marketed
at any time in the foreseeable future or at all.
OUR MICROWAVE HEAT THERAPY TECHNOLOGY IS STILL UNDERGOING HUMAN TESTING AND MAY
NOT ACHIEVE SUFFICIENT ACCEPTANCE BY THE MEDICAL COMMUNITY TO SUSTAIN OUR
BUSINESS.
To date, microwave heat therapy has not been widely accepted in the
United States medical community as an effective treatment for BPH or for cancer
treatment, with or without the concurrent use of radiation. We believe that this
is primarily due to the inability of earlier technology adequately to focus and
control heat directed at specific tissue locations and to conclusions that were
drawn from a
26
widely publicized study by the Radiation Oncology Therapy Group that purported
to show that thermotherapy in conjunction with radiation was only marginally
effective. Subsequent to the publication of this study, the HCFA (now known as
the CMS) established a low medical reimbursement rate for all thermotherapy
equipment designed to be used in conjunction with radiation. While management
believes that our new technology is capable of overcoming the limitations of the
earlier technology, the medical community may not embrace the perceived
advantages of our "adaptive phased array," or APA, focused heat therapy without
more extensive testing and clinical experience than we will be able to provide.
To date, we have completed and submitted to the FDA only Phase I clinical trials
of our Microwave Uretheroplasty treatment system, although we have completed
patient treatments in our Phase II trials. Similarly, our new cancer treatment
technology is currently in Phase II trials. Accordingly, our technology may not
prove as effective in practice as we anticipate based on testing to date. If
further testing and clinical practice do not confirm the safety and efficacy of
our technology or, even if further testing and practice produce positive results
but the medical community does not view this new form of heat therapy as
effective and desirable, our efforts to market our new products may fail, with
material adverse consequences to our business. We intend to petition CMS to
include our Microwave Uretheroplasty treatment system under the existing
reimbursement code for TUMT, the present minimally invasive BPH treatment that
employs microwave heating, and for a new reimbursement code for our breast
cancer treatment. The success of our business model depends significantly upon
our ability to petition successfully for these reimbursement codes. However, we
cannot offer any assurances as to when, if ever, CMS may act on our request to
include its Microwave Uretheroplasty treatment within the TUMT reimbursement
code or establish a reimbursement code for our breast cancer treatment system.
In addition, there can be no assurance that the reimbursement level established
for our breast cancer treatment system (and for our Microwave Uretheroplasty
treatment system, if not included in the TUMT code), if established, will be at
a level sufficient for us to carry out our business plan effectively.
IF WE ARE NOT ABLE TO OBTAIN NECESSARY FUNDING, WE WILL NOT BE ABLE TO COMPLETE
THE DEVELOPMENT, TESTING AND COMMERCIALIZATION OF OUR TREATMENTS AND PRODUCTS.
We will need substantial additional funding in order to complete the
development, testing and commercialization of our breast cancer treatment system
and heat-activated liposome and cancer repair inhibitor products, as well as
other potential new products. We expended approximately $6.8 million in the
fiscal year ending September 30, 2001. As of that date, we had available a total
of approximately $2.5 million to fund additional expenditures. In addition, as
of December 13, 2001, we had received approximately $3,100,000 in net proceeds
from a private placement of our equity securities. As of December 20, 2001, we
had realized gross proceeds of $4,135,826 from the sale of 8,271,652 units,
representing net proceeds to Celsion of $3,707,110. It is our current intention
both to increase the pace of development work on our present products and to
make a significant commitment to our heat-activated liposome and cancer repair
inhibitor research and development projects. The increase in the scope of
present development work and the commitment to these new projects will require
additional external funding, at least until we are able to begin marketing our
products and to generate sufficient cash flow from sale of those products to
support our continued operations. We do not have any committed sources of
financing and cannot offer any assurances that additional funding will be
available in a timely manner, on acceptable terms or at all.
If adequate funding is not available, we may be required to delay, scale
back or eliminate certain aspects of our operations or attempt to obtain funds
through unfavorable arrangements with partners or others that may force us to
relinquish rights to certain of our technologies, products or potential markets
or that could impose onerous financial or other terms. Furthermore, if we cannot
fund our ongoing development and other operating requirements, particularly
those associated with our obligations to
27
conduct clinical trials under our licensing agreements, we will be in breach of
these licensing agreements and could therefore lose our license rights, which
could have material adverse effects on our business.
OUR BUSINESS IS SUBJECT TO NUMEROUS AND EVOLVING STATE, FEDERAL AND FOREIGN
REGULATIONS AND WE MAY NOT BE ABLE TO SECURE THE GOVERNMENT APPROVALS NEEDED TO
DEVELOP AND MARKET OUR PRODUCTS.
Our research and development activities, pre-clinical tests and clinical
trials, and ultimately the manufacturing, marketing and labeling of our
products, all are subject to extensive regulation by the FDA and foreign
regulatory agencies. Pre-clinical testing and clinical trial requirements and
the regulatory approval process typically take years and require the expenditure
of substantial resources. Additional government regulation may be established
that could prevent or delay regulatory approval of our product candidates.
Delays or rejections in obtaining regulatory approvals would adversely affect
our ability to commercialize any product candidates and our ability to generate
product revenues or royalties.
The FDA and foreign regulatory agencies require that the safety and
efficacy of product candidates be supported through adequate and well-controlled
clinical trials. If the results of pivotal clinical trials do not establish the
safety and efficacy of our product candidates to the satisfaction of the FDA and
other foreign regulatory agencies, we will not receive the approvals necessary
to market such product candidates.
Even if regulatory approval of a product candidate is granted, the
approval may include significant limitations on the indicated uses for which the
product may be marketed. Also, manufacturing establishments in the United States
and abroad are subject to inspections and regulations by the FDA. Medical
devices must also continue to comply with the FDA's Quality System Regulation,
or QSR. Compliance with such regulations requires significant expenditures of
time and effort to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing.
We are also subject to recordkeeping and reporting regulations,
including FDA's mandatory Medical Device Reporting, or MDR regulation. Labeling
and promotional activities are regulated by the FDA and, in certain instances,
by the Federal Trade Commission.
Many states in which we do or in the future may do business or in which
our products may be sold impose licensing, labeling or certification
requirements that are in addition to those imposed by the FDA. There can be no
assurance that one or more states will not impose regulations or requirements
that have a material adverse effect on our ability to sell our products.
In many of the foreign countries in which we may do business or in which
our products may be sold, we will be subject to regulation by national
governments and supranational agencies as well as by local agencies affecting,
among other things, product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. There can be no assurance that one or more countries or agencies
will not impose regulations or requirements that could have a material adverse
effect on our ability to sell our products.
The EU has a registration process that includes registration of
manufacturing facilities (known as "ISO certification") and product
certification (known as a "CE Mark"). We have obtained ISO certification for our
existing facilities. However, there is no guarantee that we will be successful
in obtaining European certifications for new facilities or for our products, or
that we will be able to maintain its existing certifications in the future.
Foreign government regulation may delay marketing of our new products
for a considerable period of time, impose costly procedures upon its activities
and provide an advantage to larger companies that compete with it. There can be
no assurance that we will be able to obtain necessary regulatory approvals, on a
timely basis or at
28
all, for any products that it develops. Any delay in obtaining, or failure to
obtain, necessary approvals would materially and adversely affect the marketing
of our contemplated products subject to such approvals and, therefore, our
ability to generate revenue from such products.
Even if regulatory authorities approve our product candidates, such
products and our facilities, including facilities located outside the EU, may be
subject to ongoing testing, review and inspections by the European health
regulatory authorities. After receiving pre-marketing approval, in order to
manufacture and market any of its products, we will have to comply with
regulations and requirements governing manufacture, labeling and advertising on
an ongoing basis.
Failure to comply with applicable domestic and foreign regulatory
requirements, can result in, among other things, warning letters, fines,
injunctions and other equitable remedies, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant approvals, pre-market clearance or pre-market approval, withdrawal of
approvals and criminal prosecution of the Company and its employees, all of
which would have a material adverse effect on our business.
OUR BUSINESS DEPENDS ON LICENSE AGREEMENTS WITH THIRD PARTIES TO PERMIT US TO
USE PATENTED TECHNOLOGIES. THE LOSS OF ANY OF OUR RIGHTS UNDER THESE AGREEMENTS
COULD IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.
Currently, we have three utility patents pending in the United States
Patent & Trademark Office. Two are directed to our Microwave Uretheroplasty
treatment for BPH and the other is directed to our breast cancer treatment
system. However, even when our pending applications mature into United States
patents, our business will still depend on license agreements that it has
entered into with third parties until the third parties' patents expire.
Our success will depend, in substantial part, on our ability to maintain
our rights under license agreements granting us rights to use patented
technologies. We have entered into exclusive license agreements with MIT, for
APA technology and with MMTC, a privately owned developer of medical devices,
for microwave balloon catheter technology. We have also entered into a license
agreement with Duke University, under which we have exclusive rights to
commercialize medical treatment products and procedures based on Duke
University's thermo-liposome technology and a license agreement with Memorial
Sloan-Kettering Cancer Center under which we have rights to commercialize
certain cancer repair inhibitor products. The MIT, MMTC, Duke University and
Sloan-Kettering agreements each contain license fee, royalty and/or research
support provisions, testing and regulatory milestones, and other performance
requirements that we must meet by certain deadlines. If we were to breach these
or other provisions of the license and research agreements, we could lose our
ability to use the subject technology, as well as compensation for our efforts
in developing or exploiting the technology. Also, loss of our rights under the
MIT license agreement would prevent us from proceeding with most our current
product development efforts, which are dependent on licensed APA technology.
Any such loss of rights and access to technology would have a material adverse
effect on our business.
Further, we cannot guarantee that any patent or other technology rights
licensed to us by others will not be challenged or circumvented successfully by
third parties, or that the rights granted will provide adequate protection to
it. We are aware of published patent applications and issued patents belonging
to others, and it is not clear whether any of these patents or applications, or
other patent applications of which it may not have any knowledge, will require
us to alter any of our potential products or processes, pay licensing fees to
others or cease certain activities. Litigation, which could result in
substantial costs, may also be necessary to enforce any patents issued to or
licensed by us or to determine the scope and
29
validity of others' claimed proprietary rights. We also rely on trade secrets
and confidential information that we seek to protect, in part, by
confidentiality agreements with our corporate partners, collaborators, employees
and consultants. We cannot guarantee that these agreements will not be breached,
that, even if not breached, that they are adequate to protect our trade secrets,
that we will have adequate remedies for any breach or that our trade secrets
will not otherwise become known to, or will not be discovered independently by,
competitors.
TECHNOLOGIES FOR THE TREATMENT OF CANCER ARE SUBJECT TO RAPID CHANGE AND THE
DEVELOPMENT OF TREATMENT STRATEGIES THAT ARE MORE EFFECTIVE THAN OUR
THERMOTHERAPY TECHNOLOGY COULD RENDER OUR TECHNOLOGY OBSOLETE.
Various methods for treating cancer currently are, and in the future may
be expected to be, the subject of extensive research and development. Many
possible treatments that are being researched, if successfully developed, may
not require, or may supplant, the use of our thermotherapy technology. These
alternate treatment strategies include the use of radio frequency (RF), laser
and ultrasound energy sources. The successful development and acceptance of any
one or more of these alternative forms of treatment could render our technology
obsolete as a cancer treatment method.
WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY OFFICERS OR EMPLOYEES THAT WE NEED TO
IMPLEMENT ITS BUSINESS STRATEGY AND DEVELOP ITS PRODUCTS AND BUSINESSES.
Our success depends significantly on the continued contributions of its
executive officers, scientific and technical personnel and consultants, and on
our ability to attract additional personnel as we seek to implement our business
strategy and develop our products and businesses. During our operating history,
we have assigned many essential responsibilities to a relatively small number of
individuals. However, as our business and the demand on our key employees
expand, we have been, and will continue to be, required to recruit additional
qualified employees. The competition for such qualified personnel is intense,
and the loss of services of certain key personnel or our inability to attract
additional personnel to fill critical positions as we implement our business
strategy could adversely affect our business.
Effective October 4, 2001, Spencer J. Volk, formerly the President,
Chief Executive Officer and a director of Celsion, resigned from all of these
positions. Our Board has appointed Dr. Augustine Y. Cheung, the Chairman and
Chief Scientific Officer, to serve as Celsion's President and Chief Executive
Officer and Dr. Max Link, a director since 1997, has assumed the position of
Chairman of the Board.
OUR SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO GROW AND DIVERSIFY, WHICH IN
TURN WILL REQUIRE THAT WE MANAGE AND CONTROL OUR GROWTH EFFECTIVELY.
Our business strategy contemplates growth and diversification. As
manufacturing, marketing, sales, and other personnel are added, and
manufacturing and research and development capabilities are expanded, our
operating expenses and capital requirements will increase. Our ability to manage
growth effectively will require that we continue to expend funds to improve our
operational, financial and management controls, reporting systems and
procedures. In addition, we must effectively expand, train and manage our
employees. We will be unable to effectively manage our businesses if we are
unable to alleviate the strain on resources caused by growth in a timely and
successful manner. There can be no assurance that we will be able to manage our
growth and a failure to do so could have a material adverse effect on our
business.
30
THE SUCCESS OF OUR PRODUCTS MAY BE HARMED IF THE GOVERNMENT, PRIVATE HEALTH
INSURERS AND OTHER THIRD- PARTY PAYORS DO NOT PROVIDE SUFFICIENT COVERAGE OR
REIMBURSEMENT.
Our ability to commercialize our thermotherapy technology successfully
will depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. The reimbursement status of newly approved medical products is subject
to significant uncertainty. We cannot guarantee that adequate third-party
insurance coverage will be available for us to establish and maintain price
levels sufficient for realization of an appropriate return on our investment in
developing new therapies. Government, private health insurers and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA. Accordingly, even if coverage and
reimbursement are provided by government, private health insurers and
third-party payors for uses of our products, market acceptance of these products
would be adversely affected if the reimbursement available proves to be
unprofitable for health care providers.
WE FACE INTENSE COMPETITION AND THE FAILURE TO COMPETE EFFECTIVELY COULD
ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.
There are many companies and other institutions engaged in research and
development of thermotherapy technologies, both for prostate disease and cancer
treatment products, that seek treatment outcomes similar to those that we are
pursuing. In addition, a number of companies and other institutions are pursuing
alternative treatment strategies through the use of microwave, infrared, radio
frequency, laser and ultrasound energy sources, all of which appear to be in the
early stages of development and testing. We believe that the level of interest
by others in investigating the potential of thermotherapy and alternative
technologies will continue and may increase. Potential competitors engaged in
all areas of prostate and cancer treatment research in the United States and
other countries include, among others, major pharmaceutical and chemical
companies, specialized technology companies, and universities and other research
institutions. Most of our competitors and potential competitors have
substantially greater financial, technical, human and other resources, and may
also have far greater experience, than do we, both in pre-clinical testing and
human clinical trials of new products and in obtaining FDA and other regulatory
approvals. One or more of these companies or institutions could succeed in
developing products or other technologies that are more effective than the
products and technologies that we have been or are developing, or which would
render our technology and products obsolete and non-competitive. Furthermore, if
we are permitted to commence commercial sales of any of our products, we will
also be competing, with respect to manufacturing efficiency and marketing, with
companies having substantially greater resources and experience in these areas.
LEGISLATIVE AND REGULATORY CHANGES AFFECTING THE HEALTH CARE INDUSTRY COULD
ADVERSELY AFFECT OUR BUSINESS.
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services to government
control and to make other changes to the United States health care system. It is
uncertain which legislative proposals, if any, will be adopted (or when) or what
actions federal, state, or private payors for health care treatment and services
may take in response to any health care reform proposals or legislation. We
cannot predict the effect health care reforms may have on our business and we
can offer no assurances that any of these reforms will not have a material
adverse effect on that business.
WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY CLAIMS AND LITIGATION.
31
Our business exposes us to potential product liability risks inherent in
the testing, manufacturing and marketing of human therapeutic products. We
presently have product liability insurance limited to $5,000,000 per incident.
If we were to be subject to a claim in excess of this coverage or to a claim not
covered by our insurance and the claim succeeded, we would be required to pay
the claim with our own limited resources, which could have a material adverse
effect on our business. In addition, liability or alleged liability could harm
the business by diverting the attention and resources of our management and by
damaging our reputation.
WE PRESENTLY HAVE LIMITED MARKETING AND SALES CAPABILITY AND WILL BE REQUIRED TO
DEVELOP SUCH CAPABILITIES AND TO ENTER INTO ALLIANCES WITH OTHERS POSSESSING
SUCH CAPABILITIES IN ORDER TO COMMERCIALIZE OUR PRODUCTS SUCCESSFULLY.
We intend to market our Microwave Uretheroplasty treatment system
directly, at such time, if any, as it is approved for commercialization by the
FDA, and to market our breast cancer treatment system, if and when so approved,
through strategic alliances and distribution arrangements with third parties.
There can be no assurance that we will be able to establish such sales and
marketing capability successfully or successfully enter into third-party
marketing or distribution arrangements. We have limited experience and
capabilities in marketing, distribution and direct sales, although we expect to
attempt to recruit experienced marketing and sales personnel as we pursue
commercialization. In attracting, establishing and maintaining a marketing and
sales force or entering into third-party marketing or distribution arrangements
with other companies, we expect to incur significant additional expense. There
can be no assurance that, to the extent we enter into any commercialization
arrangements with third parties, such third parties will establish adequate
sales and distribution capabilities or be successful in gaining market
acceptance for our products and services. There also can be no assurance that
our direct sales, marketing, licensing and distribution efforts would be
successful or that revenue from such efforts would exceed expenses.
WE DEPEND ON THIRD-PARTY SUPPLIERS TO PROVIDE US WITH COMPONENTS REQUIRED FOR
OUR PRODUCTS AND MAY NOT BE ABLE TO OBTAIN THESE COMPONENTS ON FAVORABLE TERMS
OR AT ALL.
We are not currently manufacturing any products, but are using our
facilities to assemble prototypes of the equipment for research and development
purposes. We currently purchase certain specialized microwave and thermometry
components and applicator materials and the catheter unit used for our Microwave
Uretheroplasty equipment from single or limited source suppliers because of the
small quantities involved. While we have not experienced any significant
difficulties in obtaining these components, the loss of an important current
supplier could require that we obtain a replacement supplier, which might result
in delays and additional expense in being able to make prototype equipment
available for clinical trials and other research purposes. In addition, inasmuch
as we expect to manufacture our Microwave Uretheroscopy equipment at least for
some period subsequent to FDA approval and the commencement of
commercialization, such manufacturing and commercialization also could be
delayed. In addition, in the event that we succeed in marketing our products, we
intend to use outside contractors to supply components and the Microwave
Uretheroplasty catheter, and may use such contractors to assemble finished
equipment in the future, which could cause us to become increasingly dependent
on key vendors.
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT INTEND TO DO SO FOR THE
FORESEEABLE FUTURE.
We have never paid cash dividends and do not anticipate paying cash
dividends on our common stock or Preferred Stock in the foreseeable future.
Therefore, our stockholders cannot achieve any degree
32
of liquidity with respect to their shares of common stock except by selling such
shares.
THE EXERCISE OR CONVERSION OF OUR OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE
PREFERRED STOCK COULD RESULT IN SIGNIFICANT DILUTION OF OWNERSHIP INTERESTS IN
OUR COMMON STOCK OR OTHER CONVERTIBLE SECURITIES.
Options and Warrants. As of September 30, 2001, we had outstanding and
exercisable warrants and options to purchase a total of 9,767,884 shares of our
common stock at exercise prices ranging from $0.13 to $5.00 per share (and a
weighted average exercise price of approximately $0.67 per share). In addition,
we had outstanding but unexercisable and unvested warrants and options to
purchase a total of 5,337,333 shares of our common stock at exercise prices
ranging from $0.70 to $5.00 per share. Some of the prices are below the current
market price of our common stock, which has ranged from a low of $0.45 to a high
of $0.60 over the 20 trading days ending December 20, 2001. If holders choose to
exercise such warrants and options at prices below the prevailing market price
for the common stock, the resulting purchase of a substantial number of shares
of our Common would have a dilutive effect on our stockholders and could
adversely affect the market price of our issued and outstanding common stock and
convertible securities. In addition, holders of these options and warrants who
have the right to require registration of the common stock under certain
circumstances and who elect to require such registration, or who exercise their
options or warrants and then satisfy the one-year holding period and other
requirements of Rule 144 of the Securities Act of 1933, will be able to sell in
the public market shares of common stock purchased upon such exercise.
Preferred Stock. As of September 30, 2001, we had outstanding a total of
942.5 shares of Series A 10% Convertible Preferred Stock (plus 157 shares
representing accrued dividends). The shares of Series A Preferred Stock are
subject to exchange and conversion privileges upon the occurrence of major
events, including a public offering of our securities or our merger with a
public company. In addition, the holders of the Series A Preferred Stock are
entitled to convert their preferred shares into shares of common stock at a
conversion price of $0.41 per share of common stock, subject to certain
adjustments. The conversion of the Series A Preferred Stock could have a
dilutive effect on our stockholders and could adversely affect the market price
of our issued and outstanding common stock and convertible securities. The
holders of the Series A Preferred Stock also have registration rights at such
time, if any, as we undertake a registered public offering of securities. Even
without such registration, holders of the Series A Preferred Stock who satisfy
the requirements of Rule 144 of the Securities Act of 1933 will be able to sell
in the public market shares of common stock acquired upon the conversion of
Series A Preferred Stock. There also were outstanding warrants to purchase 36
shares of Series A Preferred Stock (convertible into an additional 87,805 shares
of common stock) as of September 30, 2001.
33
IF THE PRICE OF OUR SHARES REMAINS LOW, WE MAY BE DELISTED BY THE AMERICAN STOCK
EXCHANGE AND BECOME SUBJECT TO SPECIAL RULES APPLICABLE TO LOW PRICED STOCKS.
Our common stock currently trades on The American Stock Exchange (the
"Amex"). The Amex, as a matter of policy, will consider the suspension of
trading in, or removal from listing of, any stock when, in the opinion of the
Amex, (i) the financial condition and/or operating results of an issuer appear
to be unsatisfactory; (ii) it appears that the extent of public distribution or
the aggregate market value of the stock has become so reduced as to make further
dealings on the Amex inadvisable; (iii) the issuer has sold or otherwise
disposed of its principal operating assets; or (iv) the issuer has sustained
losses which are so substantial in relation to its overall operations or its
existing financial condition has become so impaired that it appears
questionable, in the opinion of the Amex, whether the issuer will be able to
continue operations and/or meet its obligations as they mature. For example, the
Amex will consider suspending dealings in or delisting the stock of an issuer if
the issuer has sustained losses from continuing operations and/or net losses in
its five most recent fiscal years. Another instance where the Amex would
consider suspension or delisting of a stock is if the stock has been selling for
a substantial period of time at a low price per share and the issuer fails to
effect a reverse split of such stock within a reasonable time after being
notified that the Amex deems such action to be appropriate. We have sustained
net losses for our last five fiscal years (and beyond) and our common stock has
been trading at relatively low prices. Therefore, our common stock may be at
risk for delisting by the Amex.
Upon any such delisting, the common stock would become subject to the
penny stock rules of the SEC, which generally are applicable to equity
securities with a price of less than $5.00 per share (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the SEC that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with bid and ask quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock that is not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements are likely to have a material and adverse effect on
price and the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. If our common stock were to become
subject to the penny stock rules it is likely that the price of the common stock
would decline and that our stockholders would be likely to find it more
difficult to sell their shares.
OUR STOCK PRICE COULD BE VOLATILE.
Market prices for our common stock and the securities of other medical
and high technology companies have been volatile. Factors such as announcements
of technological innovations or new products by us or by our competitors,
government regulatory action, litigation, patent or proprietary rights
developments and market conditions for medical and high technology stocks in
general can have a significant impact on the market for our common stock.
34
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL.
Our Certificate of Incorporation and Bylaws may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable by
authorizing the issuance of "blank check" preferred stock. In addition, our
classified Board of Directors may discourage such transactions by increasing the
amount of time necessary to obtain majority representation on the Board. Certain
other provisions of our Bylaws and of Delaware law may also discourage, delay or
prevent a third party from acquiring or merging with us, even if such action
were beneficial to some, or even a majority, of our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently hold any derivative instruments and do not engage
in hedging activities and currently do not enter into any transactions
denominated in a foreign currency. Thus, our exposure to interest rate and
foreign exchange fluctuations is minimal.
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA AND FINANCIAL DISCLOSURE
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated herein by
reference to the information set forth under the captions "Directors and
Executive Officers" and "Compliance with Section 16(a) of the Securities
Exchange At of 1934, as Amended" in Celsion's Definitive Proxy Statement in
connection with the Annual Meeting of Stockholders to be held on February 15,
2002, which has been, or will be, filed with the Securities and Exchange
Commission within 120 days after the end of our fiscal year ended September 30,
2001.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Executive
Compensation" in Celsion's Definitive Proxy Statement in connection with the
Annual Meeting of Stockholders to be held on February 15, 2002, which has been,
or will be,
35
filed with the Securities and Exchange Commission within 120 days after the end
of our fiscal year ended September 30, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in Celsion's Definitive Proxy
Statement in connection with the Annual Meeting of Stockholders to be held on
February 15, 2002, which has been, or will be, filed with the Securities and
Exchange Commission within 120 days after the end of the our fiscal year ended
September 30, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference to the information set forth under the caption "Certain Transactions"
in Celsion's Definitive Proxy Statement in connection with the Annual Meeting of
Stockholders to be held on February 15, 2002, which has been, or will be, filed
with the Securities and Exchange Commission within 120 days after the end of our
fiscal year ended September 30, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,
SCHEDULES AND REPORTS ON FORM 8-K
(a)
1. FINANCIAL STATEMENTS.
The following is a list of the financial statements of Celsion
Corporation, together with the report of its independent public accountants.
TITLE OF DOCUMENTS PAGE NO.
- ------------------ --------
Independent Auditors' Report F-1
Balance Sheet F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7
2. FINANCIAL STATEMENT SCHEDULES.
No schedules are provided because of the absence of conditions under
which they are required.
36
3. EXHIBITS.
The following documents are included as exhibits to this report:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1.1 Certificate of Incorporation of Celsion (the "Company"), as
amended, incorporated herein by reference to Exhibit 3.1 to the
Quarterly Report on Form 10-Q of the Company for the Quarter Ended
June 30, 2001.
3.1.2 Certificate of Designations regarding the Series A 10% Preferred
Stock of the Company, incorporated herein by reference to Exhibit
3.1.2 to the Annual Report on Form 10-K of the Company for the
Year Ended September 30, 2001.
3.1.3 Certificate of Ownership and Merger of Celsion Corporation (a
Maryland Corporation) into Celsion (Delaware) Corporation (inter
alia, changing the Company's name to "Celsion Corporation" from
"Celsion (Delaware) Corporation), incorporated herein by reference
to Exhibit 3.1.3 to the Annual Report on Form 10-K of the Company
for the Year Ended September 30, 2000.
3.2 By-laws of the Company, as amended, incorporated herein by
reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q of
the Company for the Quarter Ended June 30, 2001.
4.1 Form of Common Stock Certificate, par value $0.01 per share,
incorporated herein by reference to Exhibit 4.1 to the Annual
Report on Form 10-K of the Company for the Year Ended September
30, 2001.
10.1 Patent License Agreement between the Company and Massachusetts
Institute of technology dated June 1 1996, incorporated herein by
reference to Exhibit 10.1 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996 (Confidential
Treatment Requested).
10.2 License Agreement between the Company and MMTC, Inc. dated August
23, 1996, incorporated herein by reference to Exhibit 10.2 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 1996 (Confidential Treatment Requested).
10.3 Patent License Agreement between the Company and Massachusetts
Institute of Technology dated October 17, 1997, incorporated
herein by reference to Exhibit 10.7 to the Annual Report on Form
10-K (amended) of the Company for the year ended September 30,
1998. (Confidential Treatment Requested).
10.4 Amendment dated November 25, 1997 to the License Agreement between
the Company and MMTC, Inc. dated August 23, 1996, incorporated
herein by reference to Exhibit 10.8 to the Annual Report on Form
10-K (amended) of the Company for the year ended September 30,
1998. (Confidential Treatment Requested).
10.5 Patent License Agreement between the Company and Duke University
dated November 10, 1999, incorporated herein by reference to
Exhibit 10.9 to the Annual Report on Form 10-K of the Company for
the year ended September 30, 1999 (Confidential Treatment
Requested).
37
10.6 Amendment dated March 23, 1999 to the License Agreement between
the Company and MMTC, Inc. dated August 23, 1996, incorporated
herein by reference to Exhibit 10.10 to the Annual Report on Form
10-K of the Company for the year ended September 30, 1999.
(Confidential Treatment Requested).
10.7+ Celsion Corporation 2001 Stock Option Plan.
10.8 Form of Series 200 Warrant issued to certain employees, directors
and consultants to Purchase Common Stock of the Company,
incorporated herein by reference to Exhibit 10.11 to the Annual
Report on Form 10-K of the Company for the year ended September
30, 1998.
10.9 Form of Series 250 Warrant issued to DunnHughes Holding, Inc. to
Purchase Common Stock of the Company, incorporated herein by
reference to Exhibit 10.12 to the Annual Report on Form 10-K of
the Company for the year ended September 30,1998
10.10 Form of Series 300 Warrant issued to Nace Resources, Inc. to
purchase Common Stock of the Company, incorporated herein by
reference to Exhibit 10.13 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 1998.
10.11 Form of Series 400 Warrant issued to Stearns Management Company
Assignees to Purchase Common Stock of the Company, incorporated
herein by reference to Exhibit 10.14 to the Annual Report on Form
10-K of the Company for the year ended September 30, 1998.
10.12 Form of Series 500 Warrant to Purchase Common Stock of the Company
pursuant to the Private Placement Memorandum of the Company dated
January 6, 1997, as amended, incorporated herein by reference to
Exhibit 10.15 to the Annual Report on Form 10-K of the Company for
the year ended September 30, 1998.
10.13 Intentionally omitted.
10.14 Form of Series 600 Warrant issued to Certain Employees and
Directors on May 16, 1996 to Purchase Common Stock of the Company,
incorporated herein by reference to Exhibit 10.17 to the Annual
Report on Form 10-K of the Company for the year ended September
30, 1998.
10.15 License Agreement between the Company and Sloan-Kettering
Institute for Cancer Research dated May 19, 2000, incorporated
herein by reference to Exhibit 10.18 to the Annual Report on Form
10-K of the Company for the year ended September 30, 2000-.
10.16 Employment Agreement between the Company and Anthony P. Deasey
dated November 27, 2000, incorporated herein by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-K of the Company
for the quarter ended June 30, 2001.
10.17 Employment Agreement between the Company and Augustine Y. Cheung
dated January 1, 2000, incorporated herein by reference to Exhibit
10.2 to the Quarterly Report on Form 10-Q (amended) of the Company
for the quarter ended December 31, 1999.
38
10.18 Employment Agreement between the Company and John Mon dated June
8, 2000, incorporated herein by reference to Exhibit 10.21 to the
Annual Report on Form 10-K of the Company for the year ended
September 30, 2000.
10.19 Employment Agreement between the Company and Dennis Smith dated
May 19, 2000, incorporated herein by reference to Exhibit 10.22 to
the Annual Report on Form 10-K of the Company for the year ended
September 30, 2000.
10.20 Option Agreement between the Company and Duke University dated
August 8, 2000, incorporated herein by reference to Exhibit 10.23
to the Annual Report on Form 10-K of the Company for the year
ended September 30, 2000.
10.21+ Employment Agreement between the Company and Daniel S. Reale dated
April 9, 2001.
10.22 Service Agreement between the British Columbia Cancer Agency,
Division of Medical Oncology, Investigational Drug Section,
Propharma Pharmaceutical Clean Room and the Company dated
September 20, 2000, incorporated herein by reference to Exhibit
10.24 to the Annual Report on Form 10-K of the Company for the
year ended September 30, 2000 (Confidential Treatment Requested).
10.23+ Form of Warrant to Purchase Common Stock of the Company pursuant
to the Private Placement Memorandum of the Company dated
October 11, 2001.
10.24+ Advisory Agreement between the Company and Dr. Kris Venkat dated
August 1, 2001.
23.1+ Consent of Stegman & Company, independent public accountants of
the Company.
+ Filed herewith.
(b) REPORTS ON FORM 8-K.
The Company filed a report on Form 8-K on August 9, 2001 and a report on
Form 8-K on August 20, 2001.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused its annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CELSION CORPORATION
December 20, 2001 By: /s/ Augustine Y. Cheung
---------------------------
Augustine Y. Cheung
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Anthony P. Deasey
---------------------
Anthony P. Deasey
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Augustine Y. Cheung Director, President and Chief December 20, 2001
- ----------------------- Executive Officer
Augustine Y. Cheung (Principal Executive Officer)
/s/ Anthony P. Deasey Senior Vice President and Chief December 20, 2001
- --------------------- Financial Officer
Anthony P. Deasey (Principal Financial and
Accounting Officer)
/s/ John Mon Vice President, Secretary, December 20, 2001
- ------------ Treasurer and Director
John Mon
/s/ Max E. Link Chairman of the Board December 20, 2001
- ---------------
Max E. Link
/s/ LaSalle D. Leffall, Jr. Director December 20, 2001
- ---------------------------
LaSalle D. Leffall, Jr.
/s/ Claude Tihon Director December 20, 2001
- ----------------
Claude Tihon
40
CELSION CORPORATION
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 2001, 2000 AND 1999
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Equity F-5
Statements of Cash Flows F-6
NOTES TO FINANCIAL STATEMENTS F-7
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celsion Corporation
Columbia, Maryland
We have audited the accompanying balance sheets of Celsion
Corporation as of September 30, 2001 and 2000, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Celsion
Corporation as of September 30, 2001 and 2000, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
2001 in conformity with accounting principles generally accepted in the United
States.
/s/Stegman & Company
Baltimore, Maryland
November 6, 2001
F-1
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 2001 AND 2000
ASSETS
2001 2000
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $2,510,136 $8,820,196
Accounts receivable - trade 1,205 2,307
Accrued interest receivable - 7,751
Inventories - 13,538
Prepaid expenses - 22,417
Other current assets 150,000 34,356
---------- ----------
Total current assets 2,661,341 8,900,565
---------- ----------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 229,643 146,287
Laboratory and shop equipment 87,193 52,978
---------- ----------
316,836 199,265
Less accumulated depreciation 127,556 74,540
---------- ----------
Net value of property and equipment 189,280 124,725
---------- ----------
OTHER ASSETS:
Deposits 29,537 -
Patent licenses (net of accumulated amortization
of $113,247 and $97,419 in 2001 and 2000,
respectively) 76,703 92,531
---------- ----------
Total other assets 106,240 92,531
---------- ----------
TOTAL ASSETS $2,956,861 $9,117,821
========== ==========
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
2001 2000
------------ ------------
CURRENT LIABILITIES:
Accounts payable - trade $ 145,520 $ 60,472
Notes payable - other - 114,778
Accrued interest payable - other - 155,373
Other accrued liabilities 126,921 60,769
------------ ------------
Total current liabilities 272,441 391,392
LONG-TERM LIABILITIES:
Security deposit 15,203 -
------------ ------------
Total liabilities 287,644 391,392
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; 150,000,000 shares
authorized, 76,876,761 and 64,372,067 issued
and outstanding for 2001 and 2000, respectively 768,768 643,721
Series A 10% Convertible Preferred Stock, $1,000
par value, 7,000 shares authorized, 1,099 and
5,176 shares issued and outstanding 1,099,584 5,176,000
Additional paid-in capital 34,406,022 29,354,125
Accumulated deficit (33,605,157) (26,447,417)
------------ ------------
Total stockholders' equity 2,669,217 8,726,429
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,956,861 $ 9,117,821
============ ============
See accompanying notes.
F-3
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------ ------------
REVENUES:
Equipment sales and parts $ - $ 3,420 $ -
Returns and allowances - - -
------------ ------------ ------------
Total revenues - 3,420 -
COST OF SALES - 246 -
------------ ------------ ------------
GROSS PROFIT - 3,174 -
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 3,211,625 2,661,333 1,371,161
Research and development 4,075,249 2,238,292 1,019,941
------------ ------------ ------------
Total operating expenses 7,286,874 4,899,625 2,391,102
------------ ------------ ------------
LOSS FROM OPERATIONS (7,286,874) (4,896,451) (2,391,102)
INTEREST INCOME 318,038 350,526 15,744
RENTAL INCOME 45,609 - -
INTEREST EXPENSE - (1,290) (60,834)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (6,923,227) (4,547,215) (2,436,192
INCOME TAXES - - -
------------ ------------ ------------
NET LOSS $ (6,923,227) $ (4,547,215) $ (2,436,192)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.10) $ (.08) $ (.05)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 72,249,920 59,406,921 45,900,424
============ ============ ============
See accompanying notes.
F-4
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
Series A
10% Convertible
Common Stock Preferred Stock Additional
------------------ ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
------ ------ ------ ------ ------- ------- -----
Balances at October 1, 1998 39,945,826 $399,458 - $ - $ 17,213,485 $(19,464,010) $(1,851,067)
Sale of common stock 9,545,500 95,455 - - 3,517,420 - 3,612,875
Issuance of shares of common stock as
payment of indebtedness and expenses 3,879,172 38,792 - - 1,672,717 - 1,711,509
Net loss - - - - - (2,436,192) (2,436,192)
---------- -------- ------ ----------- ------------ ------------ -----------
Balances at September 30, 1999 53,370,498 533,705 - - 22,403,622 (21,900,202) 1,037,125
Sale of common stock 10,248,544 102,485 - - 7,122,893 - 7,225,378
Issuance of shares of common stock as
payment of indebtedness and expenses 753,025 7,531 - - 771,965 - 779,496
Issuance of shares of Series A 10%
convertible preferred stock (net of
issuance costs) - - 4,853 4,852,500 (620,855) - 4,231,645
Preferred stock dividend - - 323 323,500 (323,500) - -
Net loss - - - - - (4,547,215) (4,547,215)
---------- -------- ------ ----------- ------------ ------------ -----------
Balances at September 30, 2000 64,372,067 643,721 5,176 5,176,000 29,354,125 (26,447,417) 8,726,429
Sale of common stock 510,000 5,100 - - 147,400 - 152,500
Issuance of shares of common stock as
payment for operating expenses 319,174 3,192 - - 337,566 - 340,758
Conversion of shares of Series A 10%
convertible, preferred stock plus
accrued dividend 10,514,763 105,148 (4,311) (4,311,053) 4,205,905 - -
Exercise of preferred stock warrants 1,160,757 11,607 - - (11,607) - -
Preferred stock dividend - - 234 234,637 - (234,513) 124
Stock option compensation - - - - 372,633 - 372,633
Net loss - - - - - (6,923,227) (6,923,277)
---------- -------- ------ ----------- ------------ ------------ -----------
Balances at September 30, 2001 76,876,761 $768,768 1,099 $ 1,099,584 $ 34,406,022 $(33,605,157) $ 2,669,217
========== ======== ====== =========== ============ ============ ===========
See accompanying notes.
F-5
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
2001 2000 1999
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,923,227) $ (4,547,215) $(2,436,192)
Noncash items included in net loss:
Depreciation and amortization 68,845 39,478 28,674
Inventory valuation 13,538 17,000 20,000
Stock option compensation 372,633 - -
Common stock issued for operating expenses 340,758 542,745 200,304
Net changes in:
Accounts receivable 1,102 (495) -
Inventories - (8,479) -
Accrued interest receivable - related parties 7,751 (7,751) -
Prepaid expenses 14,832 197,103 73,424
Other current assets (115,644) 4,847 (21,594)
Accounts payable and accrued interest payable (70,324) (73,370) (223,255)
Accrued compensation - (91,009) 189,239
Accrued professional fees - - (100,000)
Other accrued liabilities 66,275 60,681 (13,551)
----------- ------------ -----------
Net cash used in operating activities (6,223,461) (3,866,465) (2,282,951)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in deposits (6,749) - -
Purchase of property and equipment (117,572) (122,108) (8,297)
----------- ------------ -----------
Net cash used in investing activities (124,321) (122,108) (8,297)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable - other (114,778) - (18,000)
Payment on capital lease obligation - (5,719) (1,083)
Proceeds of stock issuances 152,500 11,457,024 3,612,875
----------- ------------ -----------
Net cash provided by financing activities 37,722 11,451,305 3,593,792
----------- ------------ -----------
NET (DECREASE) INCREASE IN CASH (6,310,060) 7,462,732 1,302,544
CASH AT BEGINNING OF YEAR 8,820,196 1,357,464 54,920
----------- ------------ -----------
CASH AT END OF YEAR $ 2,510,136 $ 8,820,196 $ 1,357,464
=========== ============ ===========
Conversion of accounts payable, debt and accrued interest
payable through issuance of common stock $ - $ 20,750 $ 1,511,205
=========== ============ ===========
Prepaid expenses funded through issuance of
common stock $ - $ 216,000 $ -
=========== ============ ===========
Cash paid during the year for interest $ - $ 1,290 $ 21,356
=========== ============ ===========
See accompanying notes
F-6
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2001, 2000 AND 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Celsion Corporation ("Celsion" or the "Company"), a Delaware corporation, is a
research and development company dedicated to developing and commercializing
medical devices and biotechnologies for the treatment of Benign Prostatic
Hyperplasia ("BPH"), cancer and other diseases using focused heat technology
delivered by patented microwave technology. The Company is in pivotal Phase II
clinical trials of its treatment systems that use focused heat for the treatment
of both BPH and breast cancer. The Company is also in the pre-clinical stages of
development of a system that would use its focused heat technology in
combination with heat-activated liposomes for the thermodynamic treatment of
cancer. In addition, the Company has licensed a Cancer Repair Inhibitor ("CRI")
from Memorial Sloan-Kettering Cancer Center, which is in pre-clinical
development.
Cash and Cash Equivalents
The Company classifies highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is
provided over the estimated useful lives of the related assets of three to seven
years using the straight-line method. Major renewals and betterments are
capitalized at cost and ordinary repairs and maintenance are charged against
operations as incurred. Depreciation expense was $53,016, $23,648 and $12,845
for the years ended September 30, 2001, 2000 and 1999, respectively.
Patent Licenses
The Company has purchased several licenses to use the rights
to patented technologies. Patent license costs are amortized straight-line over
the remaining patent life.
Revenue Recognition
Revenue is recognized when systems, products or components are
shipped and when consulting services are rendered. Deferred revenue is recorded
for customer deposits received on contingent sale agreements.
F-7
Research and Development
Research and development costs are expensed as incurred.
Equipment and facilities acquired for research and development activities which
have alternative future uses are capitalized and charged to expense over their
estimated useful lives.
Net Loss Per Common Share
Basic and diluted net loss per common share was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.
Nonmonetary Transactions
Nonmonetary transactions are accounted for in accordance with
Accounting Principles Board Opinion No. 29 "Accounting for Nonmonetary
Transactions" which requires that the transfer or distribution of a nonmonetary
asset or liability generally is based on the fair value of the asset or
liability that is received or surrendered whichever is more clearly evident.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Financial Instruments
For most financial instruments, including cash, accounts
payable and accruals, management believes that the carrying amount approximates
fair value, as the majority of these instruments are short-term in nature.
2. FINANCIAL CONDITION
Since inception, the Company has incurred substantial operating
losses, principally from expenses associated with the Company's research and
development programs, the clinical trials conducted in connection with the
Company's thermotherapy systems and applications for submission to the Food and
Drug Administration. The Company believes these expenditures are essential for
the commercialization of its technologies. As a result of these expenditures, as
well as related general and administrative expenses the Company had an
accumulated deficit of $34 million as of September 30, 2001. The Company expects
such operating losses to continue in the near term and for the foreseeable
future as it continues its product development efforts, and undertakes marketing
and sales activities. The Company's ability to achieve profitability is
dependent upon its ability to
F-8
successfully obtain governmental approvals, produce, market and sell its new
technology and integrate such technology into its thermotherapy systems. There
can be no assurance that the Company will be able to commercialize its
technology successfully or that profitability will ever be achieved. The
operating results of the Company have fluctuated significantly in the past. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future and will depend on a number of factors, many
of which are outside the Company's control.
The Company will need substantial additional funding in order
to complete the development, testing and commercialization of its cancer
treatment and BPH products and of potential new products. It is the Company's
current intention both to increase the pace of development work on its present
products and to make a significant commitment to thermosensitive liposome and
gene therapy research and development projects. The increase in the scope of
present development work and such new projects will require additional funding,
at least until the Company is able to begin marketing its products. Subsequent
to September 30, 2001 and through December 20, 2001, the Company had realized
net proceeds of 3,707,110 in a private placement of units consisting of its
common stock and common stock warrants. The Company believes that these
additional funds will be sufficient to fund operations through September 30,
2002.
If adequate funding is not available in the future, the Company
may be required to delay, scale-back or eliminate certain aspects of its
operations or to attempt to obtain funds through onerous arrangements with
partners or others that may force the Company to relinquish rights to certain of
its technologies, products or potential markets. Furthermore, if the Company
cannot fund its ongoing development and other operating requirements, and
particularly those associated with its obligation to conduct clinical trials
under its licensing agreements, it will be in breach of its commitments under
such licensing agreements and could therefore lose its license rights, with
material adverse effects on the Company.
3. INVENTORIES
Inventories are comprised of the following:
2001 2000
------------ -----------
Materials $ - $13,538
Finished products - -
------------ -----------
$ - $13,538
============ ===========
4. NOTES PAYABLE - OTHER
Notes payable - other consists of a term note without interest
and payable on demand that was paid off during the year ended September 30,
2001.
5. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
2001 2000 1999
------ ------- -------
Federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 4.6 4.6 4.6
Valuation allowance (38.6) (38.6) (38.6)
----- ----- -----
.0% .0% .0%
===== ===== =====
F-9
As of September 30, 2001, the Company had net operating loss
carryforwards of approximately $29 million for federal income tax purposes that
are available to offset future taxable income through the year 2021.
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
2001 2000
------------ -------------
Net operating loss carryforwards $ 11,400,000 $ 9,215,000
Valuation allowance (11,400,000) (9,215,000)
------------ -------------
$ - $ -
============ =============
The evaluation of the realizability of such deferred tax assets
in future periods is made based upon a variety of factors for generating future
taxable income, such as intent and ability to sell assets and historical and
projected operating performance. At this time, the Company has established a
valuation reserve for all of its deferred tax assets. Such tax assets are
available to be recognized and benefit future periods.
6. RETIREMENT PLAN
The Company provides a SAR-SEP savings plan to which eligible
employees may make pretax payroll contributions up to 15% of compensation. The
Company does not make contributions to the plan.
7. PREFERRED STOCK
During the year ended September 30, 2000 the Company issued
4,852.5 shares of Series A 10% convertible preferred stock. Holders of shares of
preferred stock are entitled to receive when, as and if declared by the
Company's Board of Directors, dividends at the annual rate of 10% per share
payable semi-annually on March 31 and September 30. Such dividends are payable
in shares and fractional shares of preferred stock, valued for this purpose at
the rate of $1,000 per share.
The shares of Series A preferred stock are subject to exchange
and conversion privileges upon the occurrence of major events, including a
public offering of the Company's securities or the Company's merger into another
public company. In addition, the holders of the Series A preferred stock are
entitled to convert their preferred shares into shares of common stock at a
conversion price of $0.41 per share of common stock, subject to certain
adjustments.
As of September 30, 2001, 4,283.55 (including accrued dividends)
shares of the Series A preferred stock had been converted into 10,447,690 shares
of the Company's common stock and 1,099 shares (including accrued dividends) of
the Series A preferred stock remained outstanding.
There are outstanding warrants to purchase 36 shares of Series A
preferred stock (convertible into an additional 87,805 shares of common stock)
as of September 30, 2001.
8. STOCK OPTIONS AND WARRANTS
The Company has issued stock options and warrants to employees,
directors, vendors and debt holders. Options and warrants are generally granted
at market value at the date of the grant.
F-10
A summary of the Company's stock option and warrant activity and
related information for the years ended September 30, 2001, 2000 and 1999 is as
follows:
Weighted
Options/ Average
Warrants Exercise
Outstanding Price
----------- --------
Outstanding at October 1, 1998 10,603,983 $.39
Granted 6,749,627 .81
Exercised (587,500) .25
Expired/cancelled (112,340) .52
-----------
Outstanding at September 30, 1999 16,653,770 .59
Granted 1,125,214 .94
Exercised (10,247,074) .70
Expired/cancelled - -
-----------
Outstanding at September 30, 2000 7,531,910 .44
Granted 8,158,308 1.36
Exercised (585,000) .35
Expired/cancelled - -
-----------
Outstanding at September 30, 2001 15,105,218 .94
===========
Following is additional information with respect to options and
warrants outstanding at September 30, 2001:
Exercise Exercise Exercise Exercise Exercise
Price from Price from Price from Price from Price from
$.13 to $.51 $.60 to $.85 $.92 to $1.03 $1.19 to $1.60 $1.73 to $5.00
------------ ------------ ------------- -------------- --------------
Outstanding at September 30, 2001:
Number of options/warrants 5,948,148 1,992,000 2,330,470 2,923,600 1,911,000
Weighted average exercise price $.18 $.73 $.98 $1.34 $3.01
Weighted average remaining
contractual life in years 4.41 5.63 5.12 6.10 4.55
Exercisable at September 30, 2001:
Number of options/warrants 5,948,148 952,000 1,282,137 630,600 955,000
Weighted average exercise price $.18 $.72 $.98 $1.30 $2.81
Subsequent to September 30, 2001, the Company's Chief Executive
Officer retired from employment with the Company. In connection with his
retirement, unvested stock options to purchase 900,000 shares of the Company's
stock with a weighted average exercise price of $1.18 became immediately
exercisable.
During the year ended September 30, 2001, the Company entered
into agreements with
F-11
consultants in which the consultants received stock options in exchange for
services. The fair value of these options was estimated at the date of the grant
using a Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.41%, expected volatility of 50%;
expected option life 5 years from vesting and an expected dividend yield of 0%.
As a result of these agreements, additional expense of $372,633 was recognized
in the year ended September 30, 2001.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principles Board Opinion No.
25 and related interpretations. No compensation expense related to the granting
of stock options to employees or directors was recorded during the three years
ended September 30, 2001. The fair value of these equity awards was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 2001, 2000 and 1999: risk-free interest rate of
4.77%, 6.54% and 5.16% for 2001, 2000 and 1999, respectively; expected
volatility of 50%; expected option life of 3 to 5 years from vesting and an
expected dividend yield of 0.0%. If the Company had elected to recognize cost
based on the fair value at the grant dates consistent with the method prescribed
by SFAS No. 123, net loss and loss per share would have been changed to the pro
forma amounts as follows:
Year Ended September 30,
-------------------------------------------------------
2001 2000 1999
---------------- ------------ ----------
Net loss $(7,599,676) $(5,032,715) $(2,448,402)
Net loss per common share - basic (.11) (.08) (.05)
9. LICENSE AGREEMENTS AND PROPRIETARY RISKS
Through the Company's license agreements with Massachusetts
Institute of Technology ("MIT") MMTC, Inc., Duke University ("Duke") and
Sloan-Kettering, the Company has exclusive rights, within defined fields of use
, of nine United States patents. Three of these patents relate to the treatment
of BPH, four relate to thermotherapy for cancer, one relates to heat-sensitive
liposomes and one relates to gene therapy.
The MIT, MMTC, Duke and Sloan-Kettering license agreements each
contains license fee, royalty and/or research support provisions, testing and
regulatory milestones, and other performance requirements that the Company must
meet by certain deadlines with respect to the use of the licensed technologies.
In conjunction with the patent holders, the Company intends to file
international applications for certain of the United States patents.
In 1996, the Company entered into a patent license agreement
with MIT, pursuant to which the Company obtained exclusive rights to use of
MIT's patented APA technology in conjunction with application of heat to breast
tumor conditions, the application of heat to prostate conditions and all other
medical uses. MIT has retained certain rights in the licensed technology for
non-commercial research purposes. MIT's technology has been patented in the
United States and MIT has patents pending for its technology in China, Europe,
Japan and Canada. The term of the Company's exclusive rights under the MIT
license agreement expires on the earlier of ten years after the first commercial
sale of a product using the licensed technology or October 24, 2009, but the
rights continue on a non-exclusive basis for the life of the MIT patents.
F-12
The Company entered into a license agreement with MMTC in 1996,
for exclusive worldwide rights to MMTC's patents related to its balloon
compression technology for the treatment of prostatic disease in humans. The
exclusive rights under the MMTC license agreements extend for the life of MMTC's
patents. MMTC currently has patents in the United States and Canada. The terms
of these patents expire at various times from April 2008 to November 2014. In
addition, MMTC also has patent applications pending in Japan and Europe.
On November 10, 1999, the Company entered into a license
agreement with Duke under which the Company received exclusive rights (subject
to certain exceptions) to commercialize and use Duke's thermo-liposome
technology. The license agreement contains annual royalty and minimum payment
provisions and also requires milestone-based royalty payments measured by
various events, including product development stages, FDA applications and
approvals, foreign marketing approvals and achievement of significant sales.
However, in lieu of such milestone-based cash payments, Duke has agreed to
accept shares of the Company common stock to be issued in installments at the
time each milestone payment is due, with each installment of shares to be
calculated at the average closing price of the common stock during the 20
trading days prior to issuance. The total number of shares issuable to Duke
under these provisions is subject to adjustment in certain cases, and Duke has
"piggyback" registration rights for public offerings taking place more than one
year after the effective date of the license agreement. The Company is currently
renegotiating certain terms of our contractual arrangements with Duke.
The rights under the license agreement with Duke extend for the
longer of 20 years or the end of any term for which any relevant patents are
issued by the United States Patent and Trademark Office. Currently, the Company
has rights to Duke's patent for its thermo-liposome technology in the United
States, which expires in 2018, and to future patents received by Duke in Canada,
Europe, Japan and Australia, where it has patent applications pending.
The Company entered into a license agreement with
Sloan-Kettering in 2000 under which it obtained exclusive rights to
Sloan-Kettering's United States patent and to patents that Sloan-Kettering may
receive in the future for its heat-sensitive gene therapy in Japan, Canada and
Europe, where it has patent applications pending. Rights under the agreement
with Sloan-Kettering will terminate at the later of 20 years after the date of
the agreement or the last expiration date of any patent rights covered by the
agreement.
10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into a lease for their facilities
located in Columbia, Maryland. Future minimum lease obligations are as follows:
2002 $294,071
2003 302,779
2004 311,789
2005 239,018
Thereafter -
Rent expense for the years ended September 30, 2001, 2000 and
1999 was $227,961, $70,848 and $67,796, respectively.
Rental Income
In the year ended September 30, 2001 the Company began
subleasing some of its office/warehouse space to an unrelated party, generating
rental income of $45,609. The sublease yields rent of $15,203 per month and ends
January 1, 2001. At the end of the lease term, the tenant has the option to
renewing its sublease for an additional three months.
F-13
Product Liability Insurance
The Company's business exposes it to potential product liability
risks which are inherent in the testing, manufacturing, and marketing of human
therapeutic products. The Company presently has product liability insurance
limited to $5,000,000 per incident, and, if the Company were to be subject to a
claim in excess of such coverage and such claim succeeded, the Company would be
required to pay such claim out of its own limited resources.
Litigation
The Company has initiated legal action against a former director
of the Company and the director's related entities who held warrants for the
purchase of 4.1 million shares of common stock. The Company has concluded that
the warrants should be rescinded because they violated Section 15 of the
Securities and Exchange Act of 1934. The original defendants have filed a
counterclaim against the Company, certain of its officers and directors and an
attorney and law firm that represented the Company alleging certain acts in
connection with the warrants. The counterclaim does not request a specific
amount of damages.
It is impossible to determine at this point in the litigation
the amount of damages, if any that may be awarded against Celsion if it is
liable for the claims alleged in the counterclaim. In addition, the Company's
insurance carrier has denied liability as to the claims asserted in the
counterclaim. However, the Company intends to prosecute this litigation
vigorously.
11. CONCENTRATIONS OF CREDIT RISK
As of September 30, 2001, the Company has a concentration of
credit represented by cash balances in one large commercial bank in amounts
that exceed current federal deposit insurance limits. The financial stability
of this institution is continually reviewed by senior management.
12. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Gross profit on sales $ - $ 1,858 $ 1,462 $ (3,320)
General and administrative expenses (930,600) (982,792) (1,127,585) (170,648)
Research and development expenses (556,375) (669,820) (552,934) (2,296,120)
Other income/expense 112,523 94,883 62,438 93,803
----------- ----------- ----------- -----------
Net loss $(1,374,452) $(1,555,871) $(1,616,619) $(2,376,285)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (.02) $ (.02) $ (.02) $ (.03)
=========== =========== =========== ===========
13. SUBSEQUENT EVENT
On December 13, 2001, the Company conducted a first closing on a
private placement of equity securities consisting of units, each comprised of
one share of its common stock and one common stock purchase warrant exercisable
for a period of five years at $0.60 per share. The offering is being conducted
on a "best efforts, minimum/maximum basis" with a minimum of $3,000,000 and a
maximum of $5,000,000 (subject to a $1,250,000 oversubscription allowance). At
the first closing, the Company realized gross proceeds of $3,360,000 from the
sale of 6,720,000 units, representing net proceeds to the Company of $3,004,986
after deduction of commissions and offering expenses. As of December 20, 2001,
the Company had realized gross proceeds of $4,135,826 from the sale of 8,271,652
units, representing net proceeds to the Company of $3,707,110. By its terms, the
private placement will terminate on January 31, 2002, unless earlier terminated
at the election of the Company.
F-14