UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 1997
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 2-93826-W
CHEUNG LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1256615
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 290-5390
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
(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
As of March 31,1997, the Registrant had outstanding 25,727,775 shares of
Common Stock, $.01 par value.
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
March 31, 1997(unaudited) and September 30, 1996(audited)
<TABLE>
<CAPTION>
ASSETS
3/31/1997 9/30/1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $6,756 $246,931
Accounts receivable (net of an allowance for
doubtful accounts of $21,903 and $20,770 on
3/3/1997 and 9/30/1996 respectively) 175,863 154,335
Interest receivable - Ardex 21,709 5,333
Inventories 305,747 270,952
Prepaid expenses 3,320 1,669
Other current asset 26,755 26,755
-------- --------
Total current assets 540,149 705,975
Property and equipment - at cost:
Furniture and office equipment 179,970 176,541
Laboratory and shop equipment 62,228 62,228
-------- --------
242,197 238,769
Less accumulated depreciation 210,041 205,766
-------- --------
Net value of property and equipment 32,156 33,003
Other assets:
Investment in Aestar Fine Chemical Company - at - 8,000,000
cost
Funds held under investment contract - 40,000
Notes receivable - Ardex Equipment, L.L.C. 400,000 400,000
Patent licenses (net of accumulated
amortization of $45,178 and $37,328 on
3/31/1997 and 9/30/1996, RESPECTIVELY 134,772 142,622
-------- ----------
Total other assets 534,772 8,582,622
----------- -----------
Total assets $1,107,077 $9,321,600
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
3/31/1997 9/30/1996
<S> <C> <C>
Current liabilities:
Accounts payable - trade $655,125 $197,190
Notes payable - related parties, current portion 237,962 331,712
Accrued interest payable - related parties 224,603 339,660
Accrued interest payable - other 57,230 8,417
Accrued compensation 271,843 186,459
Accrued professional fees 136,352 76,352
Other accrued liabilities 15,453 100,905
Deferred revenues 112,031 115,531
---------- ----------
Total current liabilities 1,710,599 1,352,726
Long term liabilities:
Note payable - related party, due after one year 8,000 8,000
Notes payable - private placement 1,295,000 1,205,000
---------- ----------
Total long-term liabilities 1,303,000 1,213,000
---------- ----------
Total liabilities 3,013,599 2,565,726
========= =========
Stockholders' equity:
Capital stock - $.01 par value; 51,000,000
shares authorized, 25,727,775 and 41,206,360
issued and tstanding for 3/31/1997 and
9/30/1996, respectively. 257,758 412,063
Additional paid-in capital 11,090,970 18,555,444
Accumulated deficit (13,255,249) (12,211,633)
------------ ------------
Total stockholders' equity (1,906,522) 6,755,874
----------- -----------
Total liabilities and shareholders' equity 1,107,077 $9,321,600
========= ==========
</TABLE>
<NOTE>
See accompanying notes.
</NOTE>
<PAGE>
CHEUNG LABORATORIES, INC.STATEMENTS OF OPERATIONS
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31 March 31
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue:
Hyperthermia sales and parts $19,253 $89,312 113,293 90,312
Consulting service and repair 0 8,750 0 8,750
Returns and allowance 0 0 0 0
Total revenue 19,253 98,062 113,293 99,062
Cost of sales 12,248 25,442 44,111 25,887
Gross profit 7,005 72,629 69,182 73,175
Operating expenses:
Selling, general and administrative 577,735 257,443 974,011 483,497
Research and development (133) 0 42,101 7,610
-------- -------- ---------- --------
Total operating expenses 577,602* 257,443 1,016,112 491,107
======= ======= ========= =======
(Loss) Income from operations (570,597) (184,823) (946,930) (417,932)
Loss in investment fund 0 (40,000)
Other(expense) income 8,287 194 24,865 1,750
Interest expense (40,381) (21,732) (78,882) (43,379)
(Loss) Income before income taxes (602,691) (206,361) (1,040,948) (459,561)
Income taxes 0 0 0 0
Net (loss) income (602,691) (206,361) (1,040,948) (459,561)
Net (loss)income per common share (0.024) ($0.005) ($0.040) ($0.012)
Weighted average shares outstanding 25,638,317 39,414,081 25,433,061 39,371,243
</TABLE>
<NOTE>
* This amount included $190,000 consulting fees for services rendered in the
current and prior quarters.
See accompanying notes.
</NOTE>
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income (1,040,948) (459,561)
Noncash items included in net (loss) income:
Loss in investment fund (40,000)
Depreciation and amortization 5,655 (4,219)
Bad debt expense 1,133 990
Net changes in:
Accounts receivable (21,528) (34,213)
Inventories (34,795) 13,634
Accrued interest receivable (16,376) 0
Prepaid expenses (1,651) 5,500
Accounts payable-trade 457,935 54,946
Accrued interest payable - related parties (115,057) 38,377
Accrued interest payable - other 48,813 1,891
Accrued compensation 85,384 44,353
Accrued professional fees 60,000 42,842
Other accrued liabilities (85,452) (18,281)
Net cash (used) provided by operating
activities (616,886) (296,193)
Cash flows from investing activities:
Investment in Ardex Equipment L.L.C. 50,000
Purchase of property and equipment (3,428) (150)
Funds returned - investment contract 139,000
Net cash provided (used) by investing
activities (3,428) 188,850
Cash flows from financing activities:
Payment on notes payable (3,750) (28,500)
Proceeds of stock issuances 383,889 133,945
Net cash provided by financing activities 380,084 105,445
Net increase(decrease) in cash (240,175) (1,898)
Cash at beginning of period 246,931 7,238
Cash at end of the period 6,756 5,340
</TABLE>
<NOTE>
See accompanying notes.
</NOTE>
CHEUNG LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The information presented for the six month periods ended March 31,
1996 and March 31, 1997 is unaudited, but includes all adjustments
(consisting only of normal recurring accruals) that Cheung Laboratories,
Inc.'s (the "Company") management believes to be necessary for the fair
presentation of results for the periods presented. The September 30, 1996
balance sheet was derived from audited financial statements. These financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended September 30, 1996, which were included as part
of the Company's Report on Form 10-K.
Note 2. Common Stock Outstanding and Per Share Information
Per share data is based on the weighted average number of shares of
Common Stock outstanding during each of the periods, including conversion of
debt in the amount of $339,867 to 449,415 shares using the closing price
$0.75625 of January 15, 1997, the date of the transaction. Outstanding
warrants, options and Notes which can be converted into Common Stock, are not
included in the calculation of the per share data.
Note 3. Inventories
Inventories are carried at the lower of actual cost or market and cost is
determined using the average cost matter. The components of inventories on
3/31/97 and 9/30/96 are as follows:
<TABLE>
<CAPTION>
3/31/1997 9/30/1996
<S> <C> <C>
Finished products $62,218 $55,138
Work in process 51,977 46,062
Materials 191,551 169,752
$305,747 $270,952
======== ========
</TABLE>
Note 4. Private Placement
On January 7, 1997, the Company offered the following: (i) up to an
aggregate of $300,000 of its 8% Senior Secured Convertible Promissory Notes
(the "Offering Notes") for sale (the "Offering") and warrants to purchase
Common Stock of the Company ("Warrants") to accredited investors; and (ii)
to rescind its 1996 sale of 8% Senior Secured Convertible Promissory Notes
("Rescission Notes") and underlying warrants ("Rescission Warrants") for an
aggregate amount of $1,205,000 (the "Rescission Offer"). Rescission for
$1,090,000 has been rejected and remains as an investment under the new
terms, amount for $115,000 has been rescinded and will be refunded.
<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements in this report that relate to future plans, events or
performance are forward-looking statements. Actual results, events or
performance may differ materially due to a variety of factors, including
the factors described on the Form 10-K for the year ended September 30, 1996.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
Cheung Laboratories, Inc. is engaged in developing, licensing and
marketing minimally invasive medical devices and systems utilized in the
treatment of cancer and genitourinary diseases associated with benign growth
of the prostate in older males, the most common being benign prostatic
hyperplasia ("BPH"). The Company has recently acquired the right to use
technologies which the Company believes have the potential to significantly
enhance the capabilities of both its cancer and BPH treatment systems.
The Company's current cancer treatment system is the Microfocus 1000,
which is designed to increase the efficacy of existing cancer treatment
modalities, including external beam radiation, interstitial radiation,
brachytherapy and chemotherapy. The Microfocus 1000 has Food and Drug
Administration ("FDA") pre-market approval ("PMA") and has been marketed by
the Company since 1989.
The Company acquired an exclusive license to use three patents involving
a technology known as Adaptive Phased Array ("APA") from the Massachusetts
Institute of Technology ("MIT"). APA technology was originally developed
for use in microwave radar systems for the U.S. Department of Defense to
track targets and to nullify the energy beam from enemy jamming equipment.
The Company has incorporated the APA technology into a device based on the
current Microfocus 1000 to be used in the treatment of breast cancer. Based
upon information currently available, the Company believes the APA technology
will allow focusing microwave heat on target tumors inside the body and will
nullify undesired heat induced in healthy tissue. The Company is in the
engineering stage to develop additional commercial applications of the APA
technology.
The Company is required to seek an investigational device exemption
("IDE") from the FDA to begin patient studies in the United States. Data
from such studies will be used to seek PMA which must be received prior to
commercial distribution of the Microfocus APA in the United States.
On March 5, 1997 the Company delivered its new breast cancer treatment
system to Massachusetts General Hospital (MGH) under a collaborative research
arrangement. MGH plans to evaluate the APA technology in vivo studies using
animal tumor models in its ability to focus heat to the tumor models.
The Company's current BPH system is the Microfocus 800 (Microfocus 800)
which utilizes a non-surgical catheter-based therapy that incorporates
proprietary microwave technology and is designed to preferentially heat
diseased areas of the prostate to a temperature sufficient to cause cell
death in those areas. The Company does not have an IDE or PMA on its current
BPH system and it is therefore not currently available for commercial
distribution in the United States. The Microfocus 800 is manufactured in
Canada and is approved for export from Canada.
The Company has acquired by license patented compression technology from
MMTC, Inc. ("MMTC") which has been incorporated into the current Microfocus
800. The new device consists of a microwave antenna combined with a balloon
mechanism which expands to compress the walls of the urethra as the prostate
is heated. The Company believes the compression technology will provide the
following advantages: Immediate relief, no drainage catheter required, more
efficient therapeutic temperatures, minimum discomfort, allows use of lower
temperatures and minimizes urethral damage. The device will also require
the Company to seek an IDE and PMA from the FDA prior to any commercial sales
of the device in the United States. On March 26, 1997 the Company delivered
its new BPH treatment system to the Albert Einstein College of Medicine in
New York city to conduct preclinical evaluation. The data resulting from
animal test will be used in obtaining approval from the FDA to begin clinical
test.
The Company's objective is to establish itself as a leader in the design,
development, and marketing of clinically effective minimally-invasive
thermotherapy solutions for the treatment of cancer and for urological
disorders. The Company's focus is to integrate new technology recently
acquired by the Company to significantly expand the capabilities and market
for its products and increase efforts for FDA approval of all products. Key
elements to achieve the broadened strategy are to (i) develop products for
the oncology market, (ii) focus on the large and growing urology market,
(iii) develop new marketing strategies and relationships based upon selling
services and sharing treatment revenue, (iv) establish strategic
partnerships, (v) maintain technological leadership and protect technology
advantages through patents and (vi) seek early regulatory approvals in target
markets.
Results of Operations
Six Months Ended March 31, 1996 and 1997
Revenue increased to $113,293 in the six months ended March 31, 1997
from $90,312 in the same period in the prior fiscal year. The increase was
due primarily to increased sales of Microfocus products. With the renewed
focus on the development and sale of the Microfocus products, the Company
anticipates that sales of its thermotherapy systems will account for all
sales in the foreseeable future. The Company will focus on developing its
new products. Increased sales of products are not expected until the new
technologies are developed and approved for sale by governmental regulatory
agencies.
Cost of product sales increased to $44,111 in the six months ended
March 31, 1997 from $25,887 in the six months ended March 31, 1996 due
to increased sales volume.
Research and development expense increased to $42,101 in the six months
ended March 31, 1997 from $7,610 in the six months ended March 31, 1996
due to increased emphasis on technology enhancements. The Company
expects to significantly increase its expenditures for research and
development to fund the development or enhancement of products by
incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased in amount to
$974,011 in the six months ended March 31, 1997 from $483,497 in the six
months ended March 31, 1997. The increase was primarily due to activities
related to the restructuring of the Company. The Company expects selling and
marketing expense to increase substantially as it expands its advertising
and promotional activities and increases its marketing and sales force,
principally for the commercialization of its thermotherapy systems.
Interest expense increased to $78,882 in the six months ended March 31,
1997 from $43,379 in the six months ended March 31, 1996.
<PAGE>
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $13,255,249 at March 31,
1997. The Company has funded its operations primarily through the sale of
equity securities. At March 31, 1997, the Company had cash, cash
equivalents and short-term investments aggregating approximately $6,756. Net
cash used in the Company's operating activities was $616,886 for the six
months ended March 31, 1997.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts,
including seeking FDA approval for the domestic sale of the Company's
products, expand its sales and marketing activities. The Company expects that
its existing capital resources will not be adequate to fund the Company's
operations through the next twelve months. The Company is dependent on
raising additional capital to fund its development of technology and to
implement its business plan. Such dependence will continue at least until
the Company begins marketing its new technologies.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including the successful
commercialization of the thermotherapy systems progress in its product
development efforts, the magnitude and scope of such efforts, progress with
preclinical studies and clinical trials, the cost and timing of manufacturing
scale-up, the development of effective sales and marketing activities, the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and market
developments, and the development of strategic alliances for the marketing of
its products. To the extent that funds generated from the Company's
operations are insufficient to meet current or planned operating
requirements, the Company will be required to obtain additional funds through
equity or debt financing, strategic alliances with corporate partners and
others, or through other sources. The Company does not have any committed
sources of additional financing, and there can be no assurance that
additional funding, if necessary, will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be required to
delay, scale-back or eliminate certain aspects of its operations or attempt
to obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. If adequate
funds are not available, the Company's business, financial condition and
results of operations will be materially and adversely effected.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
none.
Item 2. Change in Securities
none
Item 3. Defaults upon Senior Securities
none.
Item 4. Submission of Matters to a Vote of Securities Holders
none.
Item 5. Other Information
On April 23, 1997, Mr. Verle Blaha resigned as interim President and CEO
of CLI as well as a Director. In addition, Mr. Richard H. Jackson and Dr.
Robert F. Schiffmann resigned as Directors on April 23, 1997 and May 5, 1997
respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of earning per share
27 Financial Data Schedule
(b) Reports on From 8-K
Two reports on Form 8-K were filed during the period pertaining the following
events:
(i) On March 5, 1997 the Company delivered its new breast cancer
treatment systems to Massachusetts General Hospital (MGH) under a
collaborative research arrangement. MGH plans to evaluate the APA technology
in vivo studies using animal tumor models in its ability to focus heat to
the tumor models.
(ii) On March 26, 1997 the Company delivered its new Benign Prostatic
Hyperplasia (BPH) treatment system to the Albert Einstein College of Medicine
in New York City for preclinical evaluations. The data resulting from the
animal test will be used in obtaining approval from the Food and Drug
Administration to begin clinical test.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: May 14, 1997 Cheung Laboratories, Inc.
------------------ -------------------------
(Registrant)
/s/ Augustine Y. Cheung
-------------------------------------
Augustine Y. Cheung
Chairman of the Board
/s/ John Mon
-------------------------------------
John Mon
Treasurer
(Principal Financial Officer)
EXHIBIT 11
CHEUNG LABORATORIES, INC.
COMPUTATION OF EARNING PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Net (loss) income (602,691) (206,361) (1,040,948) (459,561)
weighted average shares
outstanding 25,638,317 39,414,081 25,433,061 39,371,243
Net (loss) income per
common share (0.024) (0.005) (0.040) (0.012)
</TABLE>
<NOTE>
* Outstanding warrants, options and Notes which can be converted into Common
Stock, are not included in the calculation of the per share data.
</NOTE>
<TABLE> <S> <C>
<S><C>
<ARTICLE>5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in this 10Q and is qualified in its entirety by
reference to such financial statements
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 6,756
<SECURITIES> 0
<RECEIVABLES> 197,572
<ALLOWANCES> 21,903
<INVENTORY> 305,747
<CURRENT-ASSETS> 540,149
<PP&E> 242,197
<DEPRECIATION> 210,041
<TOTAL-ASSETS> 1,107,077
<CURRENT-LIABILITIES> 1,710,599
<BONDS> 0
0
0
<COMMON> (1,906,522)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,107,077
<SALES> 113,293
<TOTAL-REVENUES> 113,293
<CGS> 44,111
<TOTAL-COSTS> 44,111
<OTHER-EXPENSES> 946,930
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 78,882
<INCOME-PRETAX> (1,040,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,040,948)
<EPS-PRIMARY> (.024)
<EPS-DILUTED> 0
</TABLE>
