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, 1999
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 000-14242
CELSION CORPORATION
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(Exact name of registrant as specified in its charter)
Maryland 52-1256615
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State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 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. [ ]
As of December 9, 1999, 53,580,448 shares of the Registrant's Common
Stock were issued and outstanding. As of December 9, 1999, the aggregate market
value of voting stock held by non-affiliates of the Registrant was approximately
$43,894,740 based on the closing price for the Registrant's Common Stock as
quoted on the Over-the- Counter Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
this Report on Form 10-K: None.
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PART I
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ITEM 1. BUSINESS
General
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Celsion Corporation (the "Company") was incorporated in the State of
Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The Company changed
its name to Cheung Laboratories, Inc. on June 31, 1984 and to Celsion
Corporation on May 1, 1998. The Company is a biomedical research and development
company headquartered in Columbia, Maryland, dedicated to creating and marketing
medical treatment systems for cancer, benign prostatic hyperplasia ("BPH") and
other diseases using focused heat energy.
Breast Cancer Treatment
Current Treatment for Breast Cancer
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 each of the years from 1995 through 1997, and breast
cancer is one of the leading causes of death among U.S. women. This form of
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.
In addition, the more severe forms of surgical intervention for breast cancer
can result in disfigurement and a need for extended prosthetic and
rehabilitation therapy.
Heat Therapy in Conjunction with Radiation; Earlier Celsion Equipment
Heat therapy (also known as hyperthermia or thermotherapy), is an
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, it was reported that
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,
with the complete response rate being defined as the total absence of a treated
tumor for a minimum of two years. Comparable increases in the complete response
rate were reported to have occurred with the use 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.
In 1989, Celsion obtained pre-marketing approval from the Food and Drug
Administration ("FDA") for its microwave-based Microfocus 1000 heat therapy
machine for use on surface and subsurface tumors in conjunction with radiation
therapy. Until 1995, the Company marketed its Microfocus 1000 units for such use
in 23 countries, but microwave heat therapy was not widely accepted in the U.S.
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 internal tumors without burning
surrounding healthy tissue.
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New Microwave Technology from MIT
In 1993, the Company began working with researchers at Massachusetts
Institute of Technology ("MIT") who had developed, originally for the U.S.
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 the Company an exclusive worldwide license to use
this technology for medical applications, and Celsion concentrated its efforts
on developing a second generation of Microfocus equipment capable of focusing
microwave energy on specific tissue areas. Celsion has now incorporated the APA
technology in its second-generation microwave therapy equipment.
Celsion Breast Cancer Treatment System
Using the APA technology, Celsion has 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 which control the
focusing, application and duration of the thermotherapy, and a specially
designed patient treatment table.
In 1998 Celsion completed pre-clinical animal testing of its 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, such studies verified that Celsion's system is
capable of selectively heating tumors at temperatures up to 46 (degrees) Celsius
without damage to surrounding healthy tissues. Such high temperatures maintained
for 8-10 minutes can cause complete tumor necrosis 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 the Celsion
equipment to focus heat deep into animal tissue at precise locations and in a
small target area. In the Company's view, such animal tests demonstrate that it
is possible to ablate (kill) tumors by heat alone and without the use of
radiation.
Testing and FDA Approval Process
The Company has obtained an Investigational Device Exemption ("IDE")
for the new equipment from the FDA, and has also obtained approval to commence
Phase I human trials at Harbor UCLA Medical Center in Torrance, California and
Columbia Hospital, West Palm Beach, Florida. The procedure for which Celsion's
equipment is being clinically tested will be performed on female breast tumors
on a minimally invasive basis and is expected to require a single application of
precisely controlled and targeted heat. Patient testing has recently begun.
Ultimate FDA approval for a device requires two phases. 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 100 patients and is designed
to show safety and efficacy. Assuming successful completion of Phase I, the
Company will undertake multi-site Phase II clinical trials to obtain the
necessary safety and efficacy data. If Phase II tests are successful, the
Company will apply to add a "tumor ablation" indication to the existing FDA
pre-marketing approval for Celsion's Microfocus equipment, denoting that the
system can be used to destroy cancerous tumors and viable cancer cells within
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the human breast through the application of focused microwave heat energy alone.
If testing and approvals proceed as planned, Celsion expects the breast cancer
system will be available for marketing in 2001 through a strategic partner to be
identified and selected as the approval process nears completion.
BPH Treatment System
Benign Prostatic Hyperplasia
Millions of aging males experience symptoms resulting from a
non-cancerous urological disease in which the prostate enlarges and constricts
the urethra, a condition known medically as benign prostatic hyperplasia, or
"BPH". 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. In many adult males, the prostate enlarges with age, and 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. Since 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
Because BPH is an age-related disorder, its incidence increases with
maturation of the population. Industry estimates suggest that more than 17
million U.S. males aged 50 and over experience BPH symptoms and that more than
26 million men in similar age categories are affected by BPH worldwide. As the
population continues to age, it is expected that the prevalence of BPH will
continue to increase. It is generally estimated that approximately 50% of all
men over 55 and 75% of all men over 80 will have BPH symptoms at various times.
One survey of the medical urology market indicates that at least $3 billion is
spent on BPH treatment annually in the U.S. and $9 billion worldwide, although
Celsion believes the market may be even larger, because many men with BPH
symptoms do not opt for 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 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,
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. A large number of
patients who undergo TURP encounter significant complications, which can include
painful urination, infection, 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. Also, this high cost fails to reflect the
cost of lost work time, which could amount to several weeks, and a reduction in
quality of life.
Other less radical surgical procedures are available in addition to the
TURP procedure. For example, Interstitial RF Therapy and Laser Therapies are
procedures which employ, respectively, concentrated radio frequency waves or
laser radiation to reduce prostate swelling by cauterization of tissue instead
of removal of tissue with a surgical knife. However, these procedures require
puncture incisions to be made in a patient in order to insert cauterizing RF or
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laser probes into the affected tissue, and therefore also may involve the use of
a full operating facility and anaesthesia, as well as the burning of tissue by
the probes. While these procedures result in less internal bleeding and damage
to the urethra compared with TURP procedures, they do not completely eliminate
the adverse effects and costs associated with hospital surgery, anaesthesia and
post-operative tissue recovery.
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 drugs being Hytrin and Proscar. Hytrin works by relaxing
certain involuntary muscles surrounding the urethra, thereby easing urinary
flow, and Proscar is intended to actually shrink the enlarged gland. However,
industry studies have asserted that drug therapy costs $500 to $800 per year or
more, and does not offer consistent relief to a large number of BPH patients,
with the best of the drugs being estimated to be only 50% as effective as the
TURP procedure. Since both surgical and drug treatment alternatives involve
appreciable side effects and high costs, the Company believes there is a
substantial opportunity for a less invasive and lower-cost treatment option.
Thermotherapy involving high heat treatment using microwaves is another
new alternative treatment approach. In May 1996, the FDA approved a
microwave-based BPH treatment device manufactured by EDAP Technomed, Inc.
("Technomed"), called Prostatron. The FDA has recently approved another similar
microwave treatment device manufactured by Urologix, another thermotherapy
company. However, based on information obtained by the Company at trade shows,
from the manufacturers and from urologists who have considered acquiring the
equipment, the relatively higher treatment temperatures used in such equipment
appear to create initial swelling in the tissues surrounding the urethra for a
substantial portion of the patients treated. This can result in no immediate
symptomatic relief and in a need for post-treatment catheterization of the
urethra in order to relieve blockage for a number of patients undergoing such
treatment.
Celsion BPH Treatment System
The Company has developed a BPH treatment system which combines
Celsion's microwave thermotherapy capability with a proprietary balloon
compression technology licensed from MMTC, Inc. ("MMTC"). The treatment system
deals with the problem of enlarged prostates in two ways. A catheter
incorporating a balloon enlargement device delivers computer-controlled
transurethral microwave heating which damages and kills the enlarged prostate
cells constricting the wall of the urethra. Simultaneously, the balloon device
inflates and expands to press the walls of the urethra from the inside outward
as the surrounding prostate tissue is heated.
In pre-clinical animal studies, a natural "stent," or reinforced
opening in the urethra of the animals tested, was shown to be formed after the
combined heat plus compression treatment. Also, the system's relatively low
temperature (43(degree)C to 45(degree)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.
The FDA approved an IDE for Celsion's BPH system in June 1998, and
initial Phase I clinical feasibility human trials of the BPH system were
completed 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
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caused by BPH. The Company has received FDA approval to conduct an expanded
Phase I study to test a shortened treatment protocol. Patient testing has
recently begun. Assuming additional FDA approval, Celsion will undertake
multiple-site Phase II studies to collect the safety and efficacy data necessary
to obtain an FDA pre-marketing approval for commercialization. If Phase II
produces anticipated results, the Company intends to begin marketing the BPH
system by the end of 2000, using a strategic partner to be identified and
selected at that time.
Based on its information to date, the Company believes that its BPH
system, assuming continued positive clinical test results, could deliver a
treatment that is performed in one hour or less on an outpatient basis, would
not require post-treatment catheterization, and would deliver symptomatic relief
and an increase in urinary flow rates.
Thermo-Liposomes; Duke University Technology
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 evade
destruction by the body's immune system, and allowing them to accumulate in
tumors. However, with presently available technology, it often takes 18 to 24
hours for commercially available liposomes to release their drug contents to the
tumors, severely limiting the clinical efficacy of liposome chemotherapy
treatments.
A team of Duke University scientists has developed heat-sensitive
liposomes comprised of materials that rapidly change porosity when heated to a
specific point. For application to mammalian tissue, the heat-sensitive
liposomes are injected into the blood stream. As the heat-sensitive liposomes
circulate repeatedly 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 were deposited at a
specific heated tissue site, as compared to conventional liposomes. Celsion has
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.
The Company and Duke University are pursuing further development work
and pre-clinical studies aimed at using the new thermo-liposome technology in
conjunction with Celsion's APA focused heat technology for a variety of
applications, including cancer chemotherapy. The Company views 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.
On November 10, 1999, the Company entered into a License Agreement with
Duke Unversity, under which Duke has granted the Company exclusive rights
(subject to certain exceptions) to commercialize and use Duke's patented
thermo-liposome technology. See "Business -- License Agreements and Proprietary
Rights - Duke University"
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Sloan-Kettering / Celsion - Heat-Activated Gene Therapy Compounds
Celsion has also been working with Memorial Sloan-Kettering Cancer
Center ("Sloan-Kettering") on the development of a thermo-genetic technology for
cancer treatment that employs a heat-activated, genetic modifier. The modifier
is designed to improve the effectiveness of, and lower the treatment dose for,
chemotherapy, heat, and radiation treatment of localized cancers, by suppressing
the action of the protein responsible for DNA damage repair in tumor cells. Once
heated, the genetic modifier multiplies rapidly in the cancer cells. The genetic
modifier deletes the repairing protein from the cancer cells, rendering them
temporarily incapable of reversing DNA damage incurred during chemotherapy,
heat, and radiation treatment. Preclinical studies in vitro suggest that the
genetic modifier has the potential to significantly reduce the levels of a
radiation or chemotherapy dose required to destroy a tumor, thus decreasing the
toxicity and associated side effects of such treatment on other areas of the
body.
Celsion and scientists from Sloan-Kettering are planning to conduct
initial preclinical tests to evaluate the safety and efficacy of the modifier
technology in an animal model. Celsion has been holding discussions with
Sloan-Kettering on finalizing terms and conditions for an exclusive license
agreement for such modifier technology. See "Business - License Agreements and
Proprietary Rights - Sloan-Kettering"
Development, Marketing and Sales Strategy
Celsion is not currently engaged in marketing and sales, and is
focusing its activities on the development and testing of its products. The
Company's strategic plan is based upon (i) its expertise and experience in the
medical application of focused microwave heat and (ii) its relationships with
and license rights from its institutional research partners. Celsion's 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 its management and staff, scientific
advisory personnel, and available financial resources, Celsion is focusing its
efforts on the following goals:
Short-Term Goals; 12 to 24 Months
1. Completing the development, testing, and commercialization of
its second-generation technology for the eradication of
cancerous breast tumors when used alone or combined with
radiation or chemotherapy;
2. Completing the clinical testing and commercialization of its
BPH treatment system; and
3. Pursuing 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 Longer
4. Continuing with the development of gene therapy to
significantly improve the effectiveness of radiation and
chemotherapy on tumors; and
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5. Initiating, either alone or with partners, the development of
cost-effective enhancements and variations of its technology
base. These include a version of its 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.
Assuming successful completion of its product development efforts, the
Company plans to place its new products with hospitals, clinics, health
maintenance organizations and pharmaceutical companies at modest initial cost.
The emphasis of the Company's marketing strategy for its breast cancer and BPH
systems will be to create ongoing cash flow by selling disposable medical
procedure kits for each patient use and by charging a per-usage fee to recoup
its costs and generate profits. The Company intends to stimulate demand for its
treatment systems by educating patients through various forms of media
publicity, consistent with FDA regulations.
The Company's planning anticipates that, in the near term (up to 24
months), the source of the Company's revenues will be its proprietary technology
for BPH and for treatment of breast cancer and deep-seated tumors through the
use of focused microwave heat therapy equipment, after the necessary testing and
regulatory approval processes are completed. The Company intends 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), the
Company will seek to generate new revenue streams from its current development
work with Duke University in targeted drug delivery systems and with
Sloan-Kettering in gene therapy. It is anticipated that such revenues will come
from the licensing of such 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, since such
technology is designed to be used in conjunction with the Company's APA-improved
microwave equipment, the Company expects that the acceptance of such technology
will mean demand for such equipment, which, in turn, is expected to created
equipment sales revenues. To prepare for future marketing of its heat sensitive
drug delivery systems, the Company intends to explore the possibilities of
forming alliances with pharmaceutical companies, major hospitals and health
maintenance organizations.
License Agreements and Proprietary Rights
The Company owns no patents. Through the Company's license agreements
with MIT, MMTC, Haim Bitcher Cancer Institute and Duke University, the Company
has exclusive rights within defined fields of use to various U.S. patents. The
patents relate to the cancer equipment and to the BPH equipment. The patents
expire at various times from May, 1999 to November, 2014. The Company, in
conjunction with the patent holders, has filed or intends to file international
applications for certain of the U.S. patents. A summary of the Company's various
agreements follows.
MIT
The material terms of the MIT license agreement provide for a grant of
exclusive rights for the permitted uses under a number of U.S. patents and
various U.S. and foreign pending patent applications, along with two copyrighted
software programs. The grant includes the right to sublicense for end-users, and
the license term expires at the earlier of 10 years after the first commercial
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sale of a licensed product or 12 years after the date of the license agreement,
which expiration date may be extended with the consent of MIT. The agreement
contains various milestone requirements and payments, provides for certain
minimum sales, and may be terminated (i) by the Company at any time upon at
least six months notice and payment of all amounts which may then be owed to
MIT, and (ii) by MIT upon the occurrence of a breach by the Company.
MMTC
The Company's exclusive rights under the MMTC license agreements extend
for the life of MMTC's patents. The patent terms expire at various times from
May 2011 to November 2014. The MMTC license agreement contains, license fee,
royalty and/or research support provisions, testing and regulatory milestones,
and other performance requirements which the Company must meet by certain
deadlines with respect to the use of the licensed technologies.
Duke University
On November 10, 1999, the Company entered into a License Agreement with
Duke Unversity, under which Duke has granted the Company exclusive rights
(subject to certain exceptions) to commercialize and use Duke's thermo-liposome
technology. The license is for a term which is the longer of 20 years or the end
of any term for which any relevant patents are issued by the U.S. Patent and
Trademark Office, and includes the right to sublicense. For portions of the
technology, Celsion's rights are worldwide, and, for various patent rights, the
license covers the United States, Canada, the United Kingdom, France, Germany
and Japan, and other countries in which Celsion desires to seek patent
protection, provided that Celsion will be responsible for the costs of obtaining
such protection.
The License Agreement contains annual royalty and minimum payment
provisions, and also requires the Company to make milestone-based royalty
payments measured by such events as 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 Celsion 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 such
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. As a result of the foregoing
provisions, the Company expects that, over time, Duke University will become a
significant shareholder of Celsion.
Sloan-Kettering
Under the Company's research agreement with Sloan-Kettering, the
Company had an option to negotiate the terms of an exclusive license agreement
to commercialize the results of the Sloan-Kettering research sponsored by
Celsion concerning patented thermo-genetic modifier technology. Celsion
exercised its option to commence such negotiations on November 9, 1999, and has
until February 9, 2000 to negotiate the terms of a final license agreement.
Celsion has been holding discussions with Sloan-Kettering on such terms, and
anticipates that the terms will be finalized by the February 9, 2000 expiration
date.
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In addition to the rights available to it under completed or pending
license agreements, the Company also relies upon its own proprietary know-how
and experience in the development and use of microwave thermotherapy equipment,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and others. The Company cannot guarantee that such
information agreements will not be breached, that the Company would have
adequate remedies for any such breach or that such agreements, even if fully
enforced, would be adequate to prevent third party use of the Company's
proprietary technology. Similarly, the Company cannot guarantee that technology
rights licensed to the Company by others will not be successfully challenged or
circumvented by third parties, or that the rights granted will provide adequate
protection to the Company. The Company is aware of patent applications and
issued patents belonging to other companies, and it is uncertain whether any of
these, or patent applications filed of which the Company may not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees, or cease certain activities.
Manufacturing of Products
The Company believes it is best suited to conduct basic research and
development activities, to pursue a prototype product through clinical testing
and regulatory approval, and to market the final product. The Company does not
intend to engage in manufacturing, but intends to out source the manufacture of
final commercial products, components and disposable patient use kits. Based on
past experience, the Company does not anticipate any significant obstacles in
identifying and contracting with qualified suppliers and manufacturers.
Third Party Reimbursement
The Company believes that third party reimbursement will be essential
to commercial acceptance of the Deep Focused Heat Systems and Microfocus BPH
System procedures, and that overall cost effectiveness and physician advocacy
will be keys to obtaining such reimbursement. The Company believes that its
procedures can be performed for substantially lower total cost than surgical
treatments for BPH or cancer or continuous drug therapy. Consequently, the
Company believes that third party payers seeking procedures that provide quality
clinical outcomes at lower cost will help drive acceptance of the Company's
products.
The Company's strategy for obtaining reimbursement in the United States
is to obtain appropriate reimbursement codes and perform studies in conjunction
with clinical studies to establish the efficacy and cost effectiveness of the
procedures as compared to surgical and drug treatments for BPH and cancer. The
Company plans to use this information when approaching health care payers to
obtain reimbursement authorizations.
With the increasing use of managed care and capitation as a means to
control health care costs in the United States, the Company believes that
physicians may view the Company's products as a tool to treat efficaciously BPH
and 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 population appears to be moving into a managed care system.
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Subject to regulatory approval for the Deep Focused Heat Systems to
treat cancer and the new Microfocus BPH System to treat BPH, it is anticipated
that physicians will submit insurance claims for reimbursement for the procedure
to third party payers, such as Medicare carriers, Medicaid carriers, HMOs, and
private insurers. In the United States, third party reimbursement is generally
available for existing therapies used to treat cancer and BPH. The availability
and level of reimbursement from such payers for the use of the Company's new
Deep Focus Heat Systems and the new Microfocus BPH System will be a significant
factor in the Company's ability to commercialize these systems.
The Company believes that new regulations regarding third party
reimbursement for certain investigational devices in the United States will
allow it to pursue early reimbursement from Medicare with individual clinical
sites prior to receiving FDA approval. However, the Company believes that FDA
approval 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 United States Health Care Financing
Administration ("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 HMOs make their own determinations regarding coverage and
reimbursement based upon "usual and customary" fees. Reimbursement experience
with a particular third party payer does not reflect a formal reimbursement
determination by the third party payer.
Internationally, reimbursement approvals for procedure utilizing the
Company's new products will be sought on an individual country basis. Some
countries currently have established reimbursement authorizations for
transurethral microwave therapy. Clinical studies and physician advocacy will be
used to support reimbursement requests in countries where there is currently no
reimbursement for such procedures.
United States Regulation
In the United States, the FDA regulates the sale and use of medical
devices, which include the Company's thermotherapy systems for both cancer and
BPH. A company introducing a medical device in the United States must go through
a two-step process. The company must first obtain an IDE permit from the FDA. An
IDE is granted upon the manufacturer's adequately demonstrating the safety and
feasibility of the device for patient use. Receipt of the IDE allows the use of
the device on patients for the purpose of obtaining safety and efficacy
confirmation. An FDA pre-marketing approval is granted upon compilation of
sufficient clinical data to establish safety and efficacy for the indicated use
of the device. This process is not only time consuming but is also expensive.
Obtaining pre-marketing approval is a significant barrier to entry into the
thermotherapy market. Firms which lack pre-marketing approval face significant
impediments to the successful marketing of their thermotherapy equipment
because, under applicable regulations, customers can only obtain reimbursement
from Medicare, Medicaid and health insurers for treatment with products which
have received such pre-marketing approval.
The Federal Communications Commission (the "FCC") 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 frequency of 915 MHZ has been approved by the FCC
for medical applications, and machines utilizing that frequency do not require
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shielding to prevent interference with communications. The Company's Microfocus
and BPH treatment products utilize the 915 MHZ frequency.
In December 1984, the HCFA 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 such thermotherapy treatment under their health policies.
Thermotherapy treatment administered using equipment which has received
pre-marketing approval is eligible for such reimbursement.
The Company and its facilities are subject to inspection by the FDA at
any time to insure compliance with FDA regulations in the production and sale of
medical products. The Company believes that it is substantially in compliance
with FDA regulations governing the manufacturing and marketing of medical
devices. The Company previously received pre-marketing approval from the FDA for
its original Microfocus 1000 cancer treatment equipment for treatment of surface
and sub-surface tumors in conjunction with radiation therapy. The Company has
also received a supplemental pre-marketing approval to add the APA technology
from MIT to the Microfocus 1000 equipment. The Company is seeking a new
indication of use to enable its improved Microfocus equipment with APA to be
used for breast tumor ablation using heat alone. In connection with this new
indication of use, the Company has received Phase I approval from the FDA to
conduct clinical trials.
Celsion has also received approval to conduct an expanded Phase I study
using its BPH treatment system. The purpose of the expanded Phase I study is to
test a revised protocol, which is intended both to significantly shorten the BPH
treatment time for each patient application and to lower the manufacturing cost
for a disposable device used during the treatment.
Regulation of Foreign Sales
Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory controls. Export sales
of investigational devices that are subject to PMA requirements and have not
received FDA marketing approval generally may be subject to FDA export permit
requirements under the Federal Food, Drug and Cosmetic Act ("FDC Act") depending
upon, among other things, the purpose of the export (investigational or
commercial) and on whether the device has valid marketing authorization in a
country listed in the FDA Export Reform and Enhancement Act of 1996. In order to
obtain such a permit, when required, the Company must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the device has the approval of such
country. In addition, the FDA must find that export of the device is not
contrary to public health and safety of such country.
The Company sold its original product, Microfocus 1000, in
approximately 23 countries in Asia, Europe, and South America. Meeting the
registration requirements within these countries has been the responsibility of
the 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. The timing for obtaining such
approvals is not presently known.
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Competition
(1) Thermotherapy For Cancer
The Company believes that there are at least six other domestic firms,
as well as a number of foreign firms, producing, or designing and intending to
produce, thermotherapy systems to treat cancer. Of those firms, at least four
have obtained PMA for their machines and several have obtained IDE for their
machines. Some, and possibly all of those firms, have greater resources than
those which the Company now has or may reasonably be expected to have in the
near future. Other firms not presently in competition with the Company may
decide to produce thermotherapy systems which compete with those of the Company.
At least some of those firms may reasonably be expected to have resources
greater than those of the Company. As acceptance of thermotherapy as a cancer
treatment increases, the Company expects that the competition will also
increase. The two main competitors of the Company are BSD Medical Corporation in
Salt Lake City, Utah ("BSD"), and Labthermics Technology, Inc. in Champaign,
Illinois ("Labthermics"), each of which manufactures thermotherapy machines
competitive with the Company's current Microfocus 1000. The major factors in
competition for sales of thermotherapy equipment are product performance,
product service, and product cost. The system manufactured by BSD uses microwave
technology. Labthermics uses ultrasound technology to heat the cancer site.
BSD received its FDA approval in 1983 and was allowed to begin
marketing its system at that time. To date, BSD has sold approximately 200
thermotherapy systems worldwide and has a much larger presence in the
thermotherapy market than has the Company.
(2) Thermotherapy For Prostatic Diseases
The Company believes there are as many as 10 companies in the USA and
as many as 15 companies worldwide that are planning to enter or already active
in the prostatic device market marketplace.
In 1996, the FDA for the first time approved a microwave-based BPH
treatment device manufactured by EDAP Technomed, Inc. ("Technomed"), called
"Prostatron." In addition, Urologix and Dornier recently received FDA approval
on their BPH systems. These approvals should enhance market acceptance of
microwave BPH treatment systems both in the United States and abroad, but gives
Technomed a competitive advantage of being first to the market in the United
States. The Company's new BPH system has not been approved by the FDA for sale
in the United States. The Company has obtained an IDE approval from the FDA for
conducting clinical trials of the Company's BPH system at the Montefiore Medical
Center.
Large companies such as Dornier, Olympus, and Technomed are expected to
spend large amounts of resources for marketing and development of BPH products.
In addition to the above companies, the following are companies offering BPH
thermotherapy systems in the worldwide marketplace: BSD, Direx Medical,
Technomatix (Primus), Lund Science, Quantum, GENEMED, Bruker, and Meditherm.
There are several other companies which have not yet brought their products to
the international marketplace. Presently, Technomed is considered the market
leader with its Prostatron system. The Prostatron unit is a high cost system
which sells for approximately U.S. $300,000. Other companies are marketing their
systems in the range of US $100,000 to $300,000. To date, it is believed there
are over 600 installed BPH Systems worldwide of which Technomed and Direx have
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the largest share of approximately 30% combined. There are approximately 75 of
the Company's older Microfocus BPH Systems installed worldwide.
Product Service, Warranty and Training
Service in the thermotherapy business includes maintenance of the
thermotherapy machines to minimize downtime as well as training for personnel
who will utilize the machines to render treatment to patients. The Company has
warranty and service policies which are competitive within the industry. The
Company's warranty for the Microfocus 1000 is for a period of 12 months and the
Company offers a service policy following expiration of the warranty. The
Company no longer markets the Microfocus 1000, and its warranty obligations on
virtually all Microfocus 1000 machines previously sold have expired. On the
Company's new products, it plans to offer warranties substantially similar to
the warranties and service policies offered by competitors. The Company has
provided, and will in the future, three to four days of training for the
personnel who will be operating each machine that the Company places at a
treatment center. The Company also has provided, and will provide in the future
training programs at its facility in Maryland for doctors who desire to receive
training on the Company's products. Both training courses are helpful in
marketing the Company's products, because users who become familiar with one
machine have a reluctance to switch to another machine which would require
additional training. For this reason, the Company will seek to increase the
frequency of its training sessions given at its facility in Maryland.
Product Liability and Insurance
The business of the Company entails the risk of product liability
claims. Although the Company has not experienced any product liability claims to
date, any such claims could have an adverse impact on the Company. In the past,
the Company had not maintained product liability insurance. Recently, the
Company has secured product liability insurance in the amount of $5,000,000 and
directors and officers insurance in the amount of $3,000,000. There is no
assurance, however, that claims will be covered by such insurance and will not
exceed such insurance coverage limits.
Employees
The Company utilizes the services of 16 individuals on a regular basis,
including seven full-time employees and nine full or part-time consultants. In
addition, Celsion's Scientific Advisory Board actively assists the Company's
management with advice on numerous projects. None of the Company's employees is
represented by a collective bargaining organization, and the Company considers
its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's facilities consists of approximately 6,000 square feet of
administrative office, laboratory and workshop space at 10220-I Old Columbia
Road, Columbia, Maryland 21046-1705. The Company leases the premises from an
unaffiliated party under a three- year lease which will expires May 31, 2000.
Monthly rent is $5,887.07
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ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not have a stockholders meeting during the fiscal year
ended September 30, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market.
Prices for the Company's shares are quoted in the Electronic Bulletin Board
operated by NASDAQ. The quotations set forth below do not include retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions. There were approximately 1,208 holders of record of the Common
Stock as of December 8, 1999. The Company has never paid cash dividends on its
stock and does not expect to pay any cash dividends in the foreseeable future.
<TABLE>
<CAPTION>
September 30
------------
Period 1998 1999
------ ---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter (Oct.1 to Dec. 31) 1.13 0.75 0.34 0.23
2nd Quarter (Jan. 1 to March 31) 1.03 0.69 2.26 0.25
3rd Quarter (April 1 to June 30) 0.90 0.36 0.84 0.75
4th Quarter (July 1 to Sept. 30) 0.52 0.21 1.21 0.81
</TABLE>
Issuance of Shares Without Registration
During the fourth quarter of the fiscal year ended September 30, 1999,
the Company issued the following securities without registration under the
Securities Act of 1933, as amended (the "Securities Act"):
1. On August 21, 1999, the Company called its Series 700 Warrants for
redemption pursuant to the terms thereof. The Series 700 Warrants had previously
been issued in a private placement offering to accredited investors under
Regulation D, and permitted the holders to purchase shares of Common Stock at an
exercise price of $0.50 per share. In response to the redemption call, holders
elected to exercise their warrants to the extent of 2,293,000 shares of Common
Stock. As a result, the Company received total proceeds of $1,146,500 and issued
a total of 2,293,000 shares of Common Stock to the exercising warrant holders.
The shares issued to such holders were endorsed with the Company's standard
restricted stock legend, and a stop transfer instruction was recorded by the
transfer agent. Accordingly, the Company views the shares issued as exempt from
registration under Sections 4(2) and/or 4(6) of the Securities Act.
2. During the quarter, the Company issued 15,400 shares to a finder in
lieu of paying a cash finder's fee of $7,700. The shares issued to the finder
were endorsed with the Company's standard restricted stock legend, and a stop
transfer instruction was recorded by the transfer agent. Accordingly, the
Company views the shares issued as exempt from registration under Sections 4(2)
and/or 4(6) of the Securities Act.
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3. The Company issued a total of 187,500 shares of Common Stock upon
the exercise of certain options and warrants, for a total cash consideration of
$46,875 or an exercise price of $0.25 per share. The shares issued to the
holders of such options and warrants were endorsed with the Company's standard
restricted stock legend, and a stop transfer instruction was recorded by the
transfer agent. Accordingly, the Company views the shares issued as exempt from
registration under Sections 4(2) and/or 4(6) of the Securities Act.
4. During the quarter, the Company issued a total of 66,666 shares to
its current directors in lieu of cash fees for services rendered as directors
during the prior fiscal year. In addition, the Company issued 50,000 shares to a
non-director consultant for services performed over the past two years. All of
such shares were valued at a total of $83,613. The shares issued to the
directors and non-director consultant were endorsed with the Company's standard
restricted stock legend, and a stop transfer instruction was recorded by the
transfer agent. Accordingly, the Company views the shares issued as exempt from
registration under Sections 4(2) and/or 4(6) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial data for the Company for
the five fiscal years ended September 30, 1999 is qualified in its entirety by,
and should be read in conjunction with, the Company's Financial Statements and
the related Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Product Sales (Net) $ 157,618 $ 74,006 $ 121,257 $ 174,182 --
Research and development contracts -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total revenues $ 157,618 $ 74,006 $ 121,257 $ 174,182 --
Cost of sales 67,350 64,406 46,734 136,500 --
------------ ------------ ------------ ------------ ------------
Gross profit on product sales 90,268 9,600 74,523 37,682 --
------------ ------------ ------------ ------------ ------------
Other costs and expenses:
Selling, general and administrative 1,386,854 1,321,361 2,283,245 2,515,822 1,371,161
Research and development 18,546 94,012 185,974 1,534,872 1,019,941
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,405,400 1,415,373 2,469,219 4,050,694 2,391,102
------------ ------------ ------------ ------------ ------------
(Loss) from operations (1,315,132) (1,405,773) (2,394,696) (4,013,012) (2,391,102)
------------ ------------ ------------ ------------ ------------
Other income (expense) 8,620 (442,192) (471,631) 11,870 15,744
Interest income (expense) (90,805) (85,506) (185,562) (199,346) (60,834)
------------ ------------ ------------ ------------ ------------
Net (loss) $ (1,397,317) $ (1,933,471) $ (3,051,889) $ (4,200,488) $ (2,436,192)
============ ============ ============ ============ ============
Net loss per share ($ .06) ($ 0.05) ($ 0.11) (0.12) (0.05)
============ ============ ============ ============ ============
Weighted average shares outstanding 23,466,070 39,499,650 28,386,145 34,867,001 45,900,424
</TABLE>
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<TABLE>
<CAPTION>
September 30,
-------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working Capital (1,101,136) (646,754) (2,645,908) (2,000,351) 906,926
Total Assets 9,710,742 9,321,600 823,209 330,738 1,558,684
Long-term debt, less current maturities 2,000 1,213,000 -- -- --
Accumulated deficit (10,278,162) (12,211,633) (15,263,522) (19,464,010) (21,900,202)
Total stockholders' equity (deficit) 8,128,768 6,755,874 (2,460,646) (1,851,067) 1,037,125
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements and terms such as "expect," "anticipate," "estimate,"
"plan," "believe" and words of similar import, regarding the Company's
expectations as to the development and effectiveness of its technology, the
potential demand for its products and other aspects of its present and future
business, constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Company believes
that its expectations are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, it cannot guarantee that actual
results will not differ materially from its expectations. Factors which could
cause actual results to differ from expectations include, but are not limited
to, those set forth under "Risk Factors."
General
Since inception, the Company has incurred substantial operating losses.
The Company expects operating losses to continue and possibly increase in the
near term and for the foreseeable future as it continues its product development
efforts, conducts clinical trials and undertakes marketing and sales activities
for new products. The Company's ability to achieve profitability is dependent
upon its ability to successfully integrate new technology into its thermotherapy
systems, conduct clinical trials, obtain governmental approvals, and
manufacture, market and sell its new products. Major obstacles facing the
Company over the last several years have included 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.
The Company has not continued to market its older thermotherapy system,
principally because of the system's inability to provide precise and consistent
heat treatment for other than surface and sub-surface tumors.
The operating results of the Company have fluctuated significantly in
the past on an annual and a quarterly basis. The Company expects that its
operating results will fluctuate significantly from quarter to quarter in the
foreseeable future and will depend on a number of factors, many of which are
outside the Company's control.
Material Non-Operating Transactions and Losses in 1997
For the year ended September 30, 1997, the Company had a non-operating
loss of $(438,803) resulting from its 1996 investment in Ardex Equipment, LLC
("Ardex"). The Ardex investment arrangements were originally made with persons
who were then directors of the Company and principals of Ardex, as described
under "Certain Relationships and Related Transactions".
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<PAGE>
After Ardex experienced financial difficulties, the Company reviewed the
financial status of Ardex and determined that the entire amount due from Ardex,
including accrued interest, was uncollectible as of September 30, 1997. See Note
9 of Notes to Financial Statements.
Results of Operations
Comparison of Fiscal Year Ended September 30, 1999
to Fiscal Year Ended September 30, 1998
There were no product sales for the year ended September 30, 1999,
compared with sales of $174,182 for the year ended September 30, 1998, which
represented re-orders of the Company's older equipment. Product revenues are not
expected until development of the Company's second generation equipment
incorporating APA technology is completed and such equipment is clinically
tested and receives necessary approvals from governmental regulatory agencies.
There was no cost of sales for the current year, as compared with the
cost of sales for the year ended September 30, 1999 of $136,500.
Research and development expense decreased substantially to $1,019,941
for the year ended September 30, 1999 from $1,534,872 for the prior year. The
difference in expenditure levels reflects the fact that the major portion of
development work on the Company's new equipment took place in the 1998 period.
However, the Company expects research and development expenses to increase over
the next several months as BPH clinical trials and Phase I breast cancer testing
begin.
Selling, general and administrative expense decreased substantially to
$1,371,161 for the year ended September 30, 1999 from $2,515,822 for the
previous year. The decrease was due to the absence in fiscal 1999 of the
following expenses which were recorded in the earlier period: incentive stock
issued to the Company's President, recorded on the Company books in the amount
of $700,640; consulting fees and expenses paid to Stearns Management, a company
affiliated with a former officer and director, in the amount of $195,297; legal
fees in the amount of $145,000; and a write-off of approximately $112,000 of
inventory stocked as replacement parts for older equipment sold in prior years
by the Company.
Due mainly to the absence of expenditures for equipment development and
for clinical trials for the year ended September 30, 1999 and the decrease in
executive bonus, legal, and consulting fees, the net loss decreased by
$1,764,296 to $(2,436,192) from $(4,200,488) in the prior year.
Comparison of Fiscal Year Ended September 30, 1998
to Fiscal Year Ended September 30, 1997
Product sales for the fiscal year ended September 30, 1998 were
$174,182. These sales occurred due to limited re-orders of the Company's older
equipment. During the prior fiscal year, gross product sales, taking returns and
allowances into consideration, were $121,257. Significant product revenues are
not expected until development of equipment incorporating the Company's new
technologies is completed and such equipment is clinically tested and receives
necessary approvals from governmental regulatory agencies.
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<PAGE>
Cost of sales increased to $136,500 in fiscal 1998 from $46,734 in
fiscal 1997. Cost of sales as a percentage of sales increased over the prior
period because newer components and enhancements were added to existing
inventory in conjunction with upgrading the Company's products to incorporate
new technology.
Research and development expense grew substantially to $1,534,872 in
fiscal 1998 from $185,974 in fiscal 1997. During fiscal 1998, the Company
increased its research and development efforts to enhance its products and to
incorporate APA and other technological advances into its equipment. The
increases included $ 561,238 for engineering work performed outside the Company
on the breast cancer treatment device, $289,868 for animal studies for the
improved BPH system, $245,976 for animal studies and other development work on
the new breast cancer equipment and $76,000 for work at Duke University in
connection with the development of targeted drug delivery and gene-therapy
technology. In addition, after a review of the Company's inventory,
approximately $175,000 of components and parts acquired in the course of
developing older equipment, including slower, DOS-based electronic components,
were deemed to be unusable for the development of the Company's newer models,
and were therefore classified as obsolete and written off as additional research
and development expense during fiscal 1998. The Company expects to continue its
higher levels of expenditures for research and development in order to continue
to enhance its products.
Selling, general and administrative expense increased to $2,515,822 in
fiscal 1998 from $2,283,245 in fiscal 1997. Such increased expense included a
write-off of approximately $112,000 of inventory stocked as replacement parts
for older equipment sold in prior years by the Company, which inventory was
being carried at the lower of cost or market value and which was determined to
have no appreciable market value at year-end because of the absence of demand.
The remainder of the increase was attributable to a combination of somewhat
higher outside consulting, advertising and administrative expenses. The Company
expects selling and marketing expense to increase substantially as it completes
the development and testing of its new thermotherapy systems and expands its
related advertising, and promotional and marketing activities.
Due mainly to the ramping up of research and development activities in
the 1998 fiscal year, the loss from operations increased by $1,618,316 to
$(4,013,012) from $(2,394,696) in the prior year. However, the increase in the
1998 loss before income taxes was not as large compared with 1997 because of the
non-operating losses reflected in the earlier year as described above.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $21,900,202 at September 30,
1999. The Company has incurred negative cash flows from operations since its
inception, and has funded its operations primarily through the sale of equity
securities. As of September 30,1999, the Company had cash of $1,357,464 and
total current assets of $1,424,058 compared with current liabilities of
$517,132, resulting in a working capital surplus of $906,926. As of September
30, 1998, the Company had only $54,920 in cash and total current assets of
$175,735 compared with current liabilities of $2,176,086, which resulted in a
working capital deficit of $(2,200,351) at September 30, 1998. The improvement
in the Company's working capital was due to several factors, including receipt
of gross proceeds of approximately $2,300,000 from two private placements, the
receipt of $1,146,500 from the exercise of Series 700 Warrants called for
redemption, and the conversion of debt, accrued interest payable, and accrued
compensation through the issuance of restricted shares of Common Stock in the
total amount of $1,511,205.
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<PAGE>
The Company also received several concessions on certain accounts payable and
debt previously recorded on the books of the Company. Net cash used in the
Company's operating activities was $2,282,951 for the year ended September 30,
1999.
The Company does not have any bank financing arrangements and has
funded its operations in recent years primarily through private placement
offerings. For all of fiscal year 2000, the Company expects to expend a total of
about $4 million for breast cancer and BPH clinical testing and for corporate
overhead. The foregoing amounts are estimates based upon assumptions as to the
availability of funding, the scheduling of institutional 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.
The Company expects to meet its funding needs for fiscal year 2000
through a private placement offering to accredited investors under Regulation D,
which has commenced and is anticipated to be either consummated or to expire in
January 2000.
The Company's dependence on raising additional capital will continue at
least until the Company is able to begin marketing its new technologies. The
Company's future capital requirements and the adequacy of its financing depend
upon numerous factors, including the successful commercialization of the
thermotherapy systems, progress in its product development efforts, progress
with preclinical 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
strategic alliances for the marketing of its products. The Company 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. The Company does not have any committed sources of additional
financing, and cannot guarantee that additional funding 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.
Year 2000 Compliance
The Company previously adopted a plan to address the potential impact
of what is commonly referred to as Year 2000 or Y2K issues, concerning the
inability of certain information systems to properly recognize and process dates
containing the year 2000 and beyond.
Management has undertaken assessment and testing of the Company's
newer Microfocus and BPH treatment equipment, which equipment incorporates
software designed to be Y2K compliant. Testing included operating such medical
treatment systems by moving internal timekeeping functions beyond December 31,
1999 and printing out sufficient records to indicate full functioning of the
systems beyond January 1, 2000. Similar testing has been carried out for
Celsion's accounting, record-keeping and other internal computer systems, and
has also indicated that such systems are fully Y2K compatible.
Nevertheless, as a standard precautionary step, software data generated
by the Company is backed-up on a daily basis. The worst case scenario, if the
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Company experienced computer equipment failure due to Y2K, would be that, once
the failed equipment was fixed, the backed-up data would have to be reinstalled
onto any fixed system. Concerning the actual operation of the machinery, the
worst case scenario would be distorted patient data recorded on the machinery's
storage unit. However, the machine would continue to operate properly with
distorted patient records, but would require the operator of the machinery to
re-enter corrected patient information. As previously reported, the Company's
older medical treatment equipment, including the Microfocus equipment sold
several years ago, virtually all of which is no longer under warranty, are not
date driven and are "stand alone" systems which are not required to be linked
with other computers in order to function. The Company has notified users of
such older equipment that they can elect either (i) to purchase from the
Company, at modest cost, software upgrades to make their existing machines fully
Y2K compliant and capable of printing patient records with contemporaneous Year
2000 dating, or (ii) to operate such older equipment by making a one-time entry
of a date sometime before Year 2000, in which case such equipment will continue
to operate but will generate records printed with an invalid date. Also as
previously reported, the Company prepared and sent out a Y2K survey directed to
its vendors and suppliers. On the basis of the survey and follow-up contacts by
the Company, management believes that all of the Company's essential vendors and
suppliers, including utilities, are Y2K compliant. The Y2K compliance of vendors
who are non-essential is being followed up by the Company's Controller. At this
time, Celsion's management does not foresee significant Y2K risks resulting from
its dealings with vendors or suppliers. All Y2K compliance costs of the Company
to date, which have been modest, have been funded and paid by it. Celsion does
not anticipate incurring any further significant costs related to Y2K issues.
Although the Company does not anticipate that Y2K will have a material impact on
the Company's financial condition or its ability to operate at current levels,
it cannot guarantee that the steps taken in preparation for the year 2000 will
be sufficient to avoid any adverse impact on the Company.
Risk Factors
Among numerous risk factors which may affect the future performance of
the Company and its ability to achieve profitable operations are the following:
Continuing Losses and Accumulated Deficit; Limited Working Capital
Since inception, the Company's expenses have substantially exceeded its
revenues, resulting in continuing losses and an accumulated deficit of
$(21,900,202) at September 30, 1999, including losses of $(2,436,192) for the
year ended September 30, 1999. Since the Company presently has no significant
source of revenues and is committed to continuing its product research and
development program, operating losses will continue until development of new
products is completed and such products have been clinically tested, approved by
the FDA, and successfully marketed. In addition, the Company has funded its
operations for many years primarily through the sale of Company securities, and
has not had sufficient working capital for its desired product development and
other activities.
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Limited Revenue History and Lack of Current Revenues and Profits
The Company previously marketed and sold its original microwave
thermotherapy products which produced modest revenues from 1990 to 1994, when
the Company effectively ceased marketing such older products. The Company has
devoted its resources in recent years to developing a new generation of
thermotherapy products, but such products cannot be marketed until clinical
testing is completed and governmental approvals have been obtained. Accordingly,
there is no current source of revenues, much less profits, to sustain the
Company's present operations, and no revenues will be available until and unless
the new products are clinically tested, approved by the FDA and successfully
marketed, an outcome which the Company is not able to guarantee.
Need for Medical Acceptance of Heat Therapy and Prior History
In 1989 the Company received FDA pre-marketing approval for its first
generation Microfocus 1000 equipment, which included a permitted use of the
equipment to apply microwave-generated heat in conjunction with radiation for
the treatment of surface and subsurface tumors. The FDA approval had been based
on test data supplied by the Company, which indicated 50% fewer tumor
reoccurrences over a two-year period in instances where microwave heat was
applied along with radiation, as opposed to use of radiation alone. However,
after the Company had begun to market the Microfocus 1000 in 1989, a study by
the Radiation Oncology Therapy Group ("ROTG") was published in 1990, which
purported to show that thermotherapy in conjunction with radiation was only
marginally effective. The study was based on the use of a variety of equipment
from a number of manufacturers, some custom-made, and included numerous attempts
to treat tumors too large or too deep for the equipment used. Such equipment was
not able to focus heat accurately on internal organs, and the study combined the
relatively poor results from the use of such other equipment to treat internal
tumors with the more positive results from the Company's equipment and from
studies concerning surface and subsurface cancers, resulting in the study's
conclusion that thermotherapy in conjunction with radiation was of questionable
value. The study was widely publicized, and the U.S. Healthcare Financing
Administration subsequently established a low medical reimbursement rate for all
thermotherapy equipment designed to be used in conjunction with radiation. Such
low reimbursement rate effectively hampered sales of the Microfocus 1000 in the
U.S. Despite the RTOG study results, the Company was able to market its
Microfocus systems in Europe and Asia and derived modest revenues from
continuing sales of the product until 1995.
In 1996, overseas studies conducted at Hammersmith Hospital in London
on breast cancer and at the Danish Cancer Society on Melanoma in Denmark
confirmed that thermotherapy in conjunction with radiation significantly
increased the tumor response rate as compared to radiation alone.
As indicated above, microwave heat therapy has not been widely accepted
in the U.S. medical community as an effective cancer treatment, with or without
the concurrent use of radiation. The Company believes that this has been due
primarily to the inability of earlier technology to adequately focus and control
heat directed at specific tissue locations and to the conclusions which were
improperly drawn from the widely publicized RTOG study. While the Company feels
its new technology is capable of overcoming such prior limitations, the medical
community may not embrace the perceived advantages of APA-focused heat therapy
without more extensive testing and clinical experience than the Company will be
able to provide. Also, the Company's new cancer treatment technology has only
been tested on animals, and its new BPH system has been subjected to only Phase
I testing on humans.
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Accordingly, it is possible that the Company's technology will not be as
effective in practice as the Company anticipates based on preliminary testing.
If further testing and clinical practice do not confirm the efficacy of the
Company's technology, or, even if such testing and practice produce positive
results but the medical community does not view such new form of heat therapy as
effective and desirable, the efforts of the Company to market its new products
may fail, with serious adverse consequences to the Company.
Need for Substantial Additional Funds
The Company will need substantial additional funding in order to
complete the development, testing and commercialization of its products and to
continue its operations. The Company's cash requirements may vary materially
because of results of research and development, results of pre-clinical testing,
relationships with collaborators, changes in the focus and direction of the
Company's research and development programs, competitive and technological
advances, the FDA's regulatory process, and other factors. The Company is
dependent on raising new capital to fund operations to commercialize its
products and to satisfy the commitments made by the Company for its fiscal year
and 2000, as revenues are not expected to begin until late 2000 at the earliest,
with early year 2001 being more likely. The Company does not have any committed
sources of financing, and cannot guarantee that additional funding 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 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 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.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable agencies in foreign countries impose substantial
requirements upon the introduction of medical products through lengthy and
detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures. Satisfaction of these requirements
typically takes several years or more and varies substantially based upon the
type, complexity, and novelty of the product. For medical systems such as
Celsion's breast cancer treatment product, the FDA will require data from a
Phase-I clinical feasibility and safety demonstration using 10- 20 patients, and
then a Phase II patient study which establishes safety and efficacy (60-100
patients) before commercialization approval is granted. Similarly, the BPH
treatment system will require data from an expanded Phase I study and from a
Phase II study.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities, and to provide an advantage to larger companies that
compete with the Company. There can be no assurance that FDA or other regulatory
approval for any products developed by the Company will be granted on a timely
basis or at all. Any such delay in obtaining, or failure to obtain, such
approvals would materially and adversely affect the marketing of any
contemplated products and the ability to earn product revenue. Further,
regulation of manufacturing facilities by state, local, and other authorities is
subject to change. Any additional regulation could result in limitations or
restrictions on the Company's ability to utilize any of its technologies,
thereby adversely affecting the Company's operations.
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License Agreements; Uncertain Ability to Protect Technology
The Company's success will depend, in substantial part, on its ability
to maintain its rights under license agreements granting it rights to use
patented technology. The Company has entered into exclusive license agreements
with MIT for APA technology, with MMTC for balloon catheter technology and with
Duke University for thermo-liposome technology. In addition, Celsion is
negotiating, and also expects to finalize in the near future, an exclusive
license with Sloan-Kettering for the commercialization of thermo-genetic
modifier technology. The MIT, MMTC and the Duke University agreements each
contain, and the Sloan-Kettering agreement is expected to contain, license fee,
royalty and/or research support provisions, testing and regulatory milestones,
and other performance requirements which the Company must meet by certain
deadlines with respect to the use of the licensed technologies. If the Company
were to breach these or other provisions of its license and research agreements,
the Company would lose its ability to use the applicable technology and would
also not receive compensation for its efforts in developing or exploiting the
technology. Also, loss of the Company's rights under the MIT license agreement
would prevent the Company from proceeding with most of its current product
development efforts, which are dependent on licensed APA technology.
Also, the Company cannot guarantee that any patent or other technology
rights licensed to the Company by others will not be successfully challenged or
circumvented by third parties, or that the rights granted will provide adequate
protection to the Company. The Company is aware of patent applications and
issued patents belonging to other companies, and it is uncertain whether any of
these, or patent applications filed of which the Company may not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees, or cease certain activities. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce any patents issued to or licensed by the Company or determine the scope
and validity of others' claimed proprietary rights. The Company also relies on
trade secrets and confidential information that it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, and consultants. The Company cannot guarantee that these agreements
will not be breached, that the Company will have adequate remedies for any such
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors. See "Business-License Agreements and
Proprietary Rights."
Technological Change and Obsolescence
Various modalities for the treatment of cancer are the subject of
extensive research and development. Many possible treatments which are being
researched, if successfully developed, may not require, or may supplant, the use
of the Company's thermotherapy technology for an effective cure. Such alternate
treatment strategies include the use of radio frequency, laser and ultrasound
energy sources, and the successful development and acceptance of any such forms
of treatment could render the Company's technology obsolete.
Dependence upon Key Personnel
The Company's success depends (i) on the continued contributions of its
executive officers, scientific and technical personnel, and consultants, and
(ii) on the Company's ability to attract new personnel as the Company seeks to
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implement its business strategy. During the Company's operating history, many
key responsibilities within the Company have been assigned to a relatively small
number of individuals. The competition for qualified personnel is intense, and
the loss of services of certain key personnel could adversely affect the
business of the Company. Of the Company's personnel, Spencer J. Volk, the
Company's Chief Executive Officer and President, has an existing employment
agreement, and an employment agreement has been negotiated and is expected to be
finalized in January 2000 with Dr. Augustine Y. Cheung, the Company's Chairman
and Chief Scientific Officer. See "Executive Compensation - Executive Employment
Agreements."
Uncertain Availability and Amounts of Health Care Reimbursement
The Company's ability to commercialize its 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. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. The Company cannot guarantee that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its 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 the Company's products, the market acceptance
of these products would be adversely affected if the amount of reimbursement
available for the use of the Company's therapies proved to be unprofitable for
health care providers.
Effects of Outstanding Options and Warrants;
Possible Dilution and Additional Trading Shares; Registration Rights
As of September 30, 1999, the Company had outstanding commitments to
issue shares to management, and outstanding options and warrants to purchase
shares in, an aggregate amount of approximately 16,653,770 shares of Common
Stock, a significant portion of which are exercisable at exercise prices
substantially below the current market price. If holders choose to exercise such
warrants and options, the resulting purchase of a substantial number of shares
of Common Stock at prices below the current market price of the Common Stock
could have the effect of adversely affecting the market price of the issued and
outstanding Common Stock of the Company. Accordingly, the issuance of shares of
Common Stock upon exercise of the options or warrants may result in dilution of
the equity represented by the then-outstanding shares of Common Stock held by
other stockholders. Also, while the shares of Common Stock to be issued upon any
such exercise will not be registered and will initially be restricted
securities, the holders of warrants and options for the purchase of
approximately 15,000,000 shares have various registration rights, which, if
exercised, would require the Company to register such shares for sale in the
public market. Furthermore, even without such registration, holders of the
warrants and options who are able, after the exercise of such warrants and
options, to satisfy the one-year holding period and other requirements of Rule
144 of the Securities and Exchange Commission, will be able to sell shares of
Common Stock purchased upon the exercise of such warrants and options in the
public market. Future sales of significant numbers of shares of Common Stock in
the public market could adversely affect the prevailing market price of the
Common Stock and also could impair the Company's ability to raise capital
through subsequent offerings of securities.
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Competitive Risks
There are many companies and institutions that are engaged in research
and development on thermotherapy technologies for both cancer and prostate
disease products, and such activities seek treatment outcomes similar to those
being pursued by the Company. 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. The Company believes 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. Many of these have substantially greater financial,
technical, human, and other resources, and may also have far greater experience
than the Company both in undertaking preclinical testing and human clinical
trials of new products and in obtaining FDA and other regulatory approvals.
There is always a possibility that one or more of such companies or institutions
will succeed in developing products or other technologies that are more
effective than any which have been or are being developed by the Company, or
which would render the Company's technology and products obsolete and
non-competitive. Furthermore, if the Company is permitted to commence commercial
sales of products, it will also be competing, with respect to manufacturing
efficiency and marketing, with companies having greater resources and experience
in these areas.
There are several U.S. and overseas companies, such as BSD Medical
Corporation and Labthermics Technology, Inc., which have marketed equipment
using heat produced by microwaves or ultrasound to treat surface and subsurface
cancer, either with or without the concurrent use of radiation or chemotherapy.
To the Company's knowledge, among such entities, BSD Medical Corporation has had
the longest business history and has sold the largest number of microwave
thermotherapy units for the treatment of surface and subsurface cancer, but the
Company does 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. The Company believes 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 U.S. 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 that of
the Prostatron. While Celsion's management believes these devices have not been
widely used or accepted by providers of medical treatment for BPH, there is no
guarantee that EDAP or Urologix will not seek to introduce improved equipment
for the treatment of BPH.
Uncertainty Related to Health Care Reform Measures
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 health care system of the United
States. It is uncertain which legislative proposals will be adopted 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.
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The Company cannot predict the effect health care reforms may have on its
business, and there is no guarantee that any such reforms will not have a
material adverse effect on the Company.
Limited 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, which could have a
serious adverse effect on the Company.
Importance of Suppliers; Future Dependence
The Company is not currently manufacturing any products but is using
its facilities to assemble prototypes of its new equipment for research and
development purposes. Certain specialized microwave and thermometry components
and applicator materials, and the catheter unit used for the Company's BPH
equipment, are now purchased only from single or limited source suppliers
because of the small quantities involved. While the Company has not experienced
any significant difficulties in obtaining such components, the loss of an
important current supplier could require the Company to 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. Also, in the event the Company should succeed in marketing its
products, it will most likely use outside contractors to supply components and
to assemble finished equipment, at which time the Company will become dependent
on key vendors.
Possible Volatility of Share Price
Market prices for the Company's 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 the Company or its
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 any future market for the
Common Stock.
Absence of Dividends
The Company has never paid cash dividends on Common Stock, and does not
intend to do so in the foreseeable future.
Potential Effect of Future Issuances of Common Stock
The Company as of September 30, 1999 has a total of approximately
53,580,448 shares of Common Stock issued, excluding shares which may be issued
pursuant to outstanding warrants and options.
The Company's Board of Directors has the authority to issue additional
shares of Common Stock and other classes of capital stock and to issue options
and warrants to purchase shares of Common Stock and other stock without
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stockholder approval. Future issuance of shares of Common Stock and/or preferred
stock could be at values below prevailing market prices and therefore could
represent further dilution to investors.
NASDAQ Listing Requirements; Risks of Low-Priced Stocks
The Company's Common Stock is currently traded through the OTC
Electronic Bulletin Board. In the future, when it anticipates that it would be
able to meet listing requirements, the Company intends to apply have its Common
Stock listed on the NASDAQ SmallCap Market. At the present time, such a listing
application would require, among other criteria, net tangible assets of at least
$4 million, a market capitalization of at least $50 million, or net income of at
least $750,000, while the Company had, as of September 30, 1999, a net tangible
surplus of $1,037,125, market capitalization of only approximately $45 million,
and a net loss of $(2,436,192). Accordingly, the Company can not offer any
assurances that they will meet these listing requirements. If the Company is
unable to satisfy NASDAQ's initial listing criteria in the future, its
securities will continue to be traded through the Electronic Bulletin Board or
the Pink Sheets.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a penny
stock. Regulations generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include any equity security listed on NASDAQ and any equity
security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000, if such issuer has been in continuous operation for less
than three years.
If the Company's securities are not quoted on NASDAQ, or the Company
does not have $2,000,000 in net tangible assets, trading in the Company's
securities will continue to be covered by Rules 15g-1 through 15g-6 promulgated
under the Exchange Act for non-NASDAQ and non-exchange listed securities. Under
such rules, broker-dealers who recommend such securities to persons (other than
established customers and accredited investors) must make a special written
suitability determination that the penny stock is a suitable investment for the
purchaser and must receive other information from the purchaser.
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-17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Directors are elected for staggered terms of three years each. The
following table sets forth the names and ages of the members of the Company's
Board of Directors and executive officers, and sets forth the position with the
Company held by each: <TABLE> <CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Augustine Y. Cheung+ 52 Chairman of the Board of Directors, Chief Scientific Officer
Spencer J. Volk+ 65 President, Chief Executive Officer and Director
Max E. Link+ 58 Director
LaSalle D. Leffall, Jr.* 70 Director
Claude Tihon ** 55 Director
John Mon* 47 Secretary, Treasurer/General Manager and Director
Walter B. Herbst** 61 Director
</TABLE>
* Term as director expires at 1999 annual meeting
** Term as director expires at 2000 annual meeting
+ Term as director expires at 2001 annual meeting
Augustine Y. Cheung. Dr. Cheung is Chairman of the Board of Directors
and has served as a director, principal executive officer and Chief Scientific
Officer of the Company since 1982. Dr. Cheung was the founder of the Company and
served as President from 1982 to 1986 and Chief Executive Officer from 1982 to
1996. From 1982 to 1985, Dr. Cheung was a Research Associate Professor of the
Department of Electrical Engineering and Computer Science at George Washington
University and from 1975 to 1981 was a Research Associate Professor and
Assistant Professor at the Institute for Physical Science and Technology and the
Department of Radiation Therapy at the University of Maryland. Dr. Cheung holds
a Ph.D. and Masters Degree from the University of Maryland. Dr. Cheung is the
brother-in-law of John Mon, a director and officer of the Company.
Spencer J. Volk. Mr. Volk has been a director, President, and Chief
Executive Officer of the Company since May 22, 1997. From 1994 to 1996, Mr. Volk
was President and Chief Operating Officer of Sunbeam International. From 1991 to
1993, Mr. Volk was President and Chief Executive Officer of the Liggett Group,
Inc. From 1989 to 1991, he was the President and Chief Operating Officer of
Church and Dwight (Arm and Hammer), and from 1984 to 1986, he was the President
and Chief Executive Officer of Tropicana Products, Inc. Prior to that, he spent
thirteen years in various staff and management positions at Pepsico, ultimately
as Senior Vice President for the Western Hemisphere. Mr. Volk holds an Honors BA
in Economics and Math from Queens University in Ontario, Canada and a BA in
Economics from Royal Military College in Ontario, Canada.
Max E. Link. Dr. Link has been a director of the Company since
September 23, 1997. Dr. Link currently provides consulting and advisory services
to a number of pharmaceutical and biotechnology companies. From 1993 to 1994,
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Dr. Link served as Chief Executive Officer of Corange, Ltd., a medical
diagnostics company acquired by Hoffman-LaRoche. From 1971 to 1993, Dr. Link
served in numerous positions with Sandoz Pharma AG culminating in his
appointment as Chairman of the Board of Directors in 1992. Dr. Link serves on
the Board of Directors of the following publicly held companies: Human Genome
Sciences; Alexion Pharmaceuticals; Cell Therapeutics; Access Pharmaceuticals;
Protein Design Laboratories; Osiris Therapeutics; Procept, Inc.; Discovery
Laboratories Inc. and Cytrx Corp. Dr. Link holds a Ph.D. in economics from the
University of St. Galen (Switzerland).
La Salle D. Leffall, Jr. Dr. Leffall has served as Professor of Surgery
at Howard University College of Medicine since 1970, and in 1992, was named the
Charles R. Drew Professor of Surgery. Dr. Leffall also served as Chairman of the
College's Department of Surgery from 1970 to 1985. He is also a Professional
Lecturer in Surgery at Georgetown University. Dr. Leffall holds a B.S. from
Florida A&M and a medical degree from Howard University. Dr. Leffall is a
director of Warner Lambert, Mutual of America, Chevy Chase Bank and the Charles
A. Dana Foundation. He is a former President of the American College of Surgeons
and the American Cancer Society. He is also a consultant for the National Cancer
Institute, a diplomat of the American Board of Surgery and a fellow of the
American College of Surgeons.
Claude Tihon. Dr. Tihon is currently President and Chief Executive
Officer of Contimed, Inc., a medical device company for developing urological
products to manage women's stress incontinence and men's prostate obstruction.
From 1987 to 1995, Dr. Tihon served in numerous positions with Pfizer, Inc.,
culminating in his appointment as Vice President of Research and Technology
Assessment of American Medical Systems, Inc., a Pfizer Co. subsidiary. From 1983
to 1987, Dr. Tihon served as Director of Cellular Diagnostics Development of
Miles Scientific, a division of Miles Laboratories. From 1979 to 1983, Dr. Tihon
served as Senior Research Scientist and Assistant Director of Clinical Cancer
Research of Bristol Laboratories, a division of Bristol Myers Squibb Co. Dr.
Tihon holds a Ph.D. in Pathology from Columbia University.
John Mon. Mr. Mon has been employed by the Company since 1986, and has
served as Treasurer and General Manager of the Company since 1989, and also as
Secretary and a director since June 1997. During the first two years of his
employment with the Company, Mr. Mon was responsible for the Company's FDA
filings, which resulted in obtaining pre-marketing approval for the Microfocus
1000. From 1983 to 1986, he was an economist with the U.S. Department of
Commerce in charge of forecasting business sales, inventory and prices for all
business sectors in the estimation of Gross National Product. Mr. Mon holds a
B.S. degree from the University of Maryland. Mr. Mon is the brother-in-law of
Dr. Cheung.
Walter B. Herbst. Mr. Herbst has been a director of the Company since
May 28, 1997. Mr. Herbst is the Chairman and a director of Herbst Lazar Bell,
Inc., the engineering firm he founded in 1962. Mr. Herbst also serves as a
faculty fellow in industrial design at the Northwestern University McCormick
School of Engineering and Applied Sciences, teaching materials and process.
Additionally, he serves on the faculty at Northwestern University's Kellogg
Graduate School teaching a course in product development. Mr. Herbst holds a
Bachelors Degree in Industrial Design from the University of Illinois and a
Master Degree in Management from the Kellogg Graduate School of Northwestern
University.
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Committees of the Board of Directors
The Board of Directors presently maintains an Audit Committee, a
Compensation Committee, and a Research and Development Oversight Committee. The
Audit Committee's principal responsibilities are to recommend annually a firm of
independent auditors to the Board of Directors, to review the annual audit of
the Company's Financial Statements and to meet with the independent auditors of
the Company from time to time in order to review the Company's general policies
and procedures with respect to audits and accounting and financial controls.
The principal responsibilities of the Compensation Committee are to
establish compensation policies for the executive officers of the Company and
the administration of the Company's incentive plans. The Research and
Development Oversight Committee is responsible for reviewing the performance,
scheduling and cost-effectiveness of the Company's research and development
programs. Messrs. Mon and Tihon serve on the Audit Committee, Messrs. Volk and
Herbst comprise the Compensation Committee, and Dr. Cheung and Mr. Herbst are
the members of the Research and Development Oversight Committee.
Compensation Committee Interlocks and Insider Participation
No interlocking relationship exists between the Compensation Committee
or the Board of Directors and any other company's board of directors or
compensation committee. Spencer J. Volk, President and Chief Executive Officer,
is party to an employment agreement with the Company and has made loans and
advances to the Company which were repaid through conversion into Common Stock.
See "Certain Relationships and Related Transactions." The employment and
compensation arrangements for Mr. Volk were established prior to the formation
of the Compensation Committee. The Committee believes that Mr. Volk's
compensation package aligns his interests with those of the stockholders. See
"Employment Agreements" below.
Directors Compensation
For the year ended September 30, 1999, the four members of the Board of
Directors who are not officers of the Company were entitled to directors fees at
the annual rate of $20,000 each. In lieu of a cash payment of such directors
fees, each outside director was paid in shares of Common Stock, valued at a
price of $0.88 per share, the closing price on September 30, 1999. Accordingly,
Dr. Max E. Link and Walter B. Herbst each received 22,727 shares, while Dr. La
Salle D. Leffall and Dr. Claude Tihon each received 7,576 shares reflecting
pro-rated compensation for the service of Messrs. Leffall and Tihon as directors
beginning May 27, 1999. In addition, Mr. Herbst received an option to purchase
15,000 shares of Common Stock of the Company at $0.50 per share, exercisable
during the period from October 1, 1999 through September 30, 2004, for prior
service on the Board of Directors. The Company has agreed also that Dr. Link
will receive an option to purchase 50,000 shares of Common Stock of the Company,
exercisable at $0.75 per share, which will vest if Dr. Link is still serving as
a director after December 31, 1999 and will terminate on December 30, 2004, and
that Dr. Tihon and Dr. Leffall will each receive options to purchase 50,000
shares, exercisable at $0.74 per share, which will vest on May 27, 2000 (if each
is then serving as a director) and will terminate May 26, 2005.
Officers of the Company who also act as directors each receive 2000
shares of Common Stock for a full year of service on the Board.
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Key Consultant
The Company regularly uses the services of Robert Barnett, M.D., as a
consultant on matters relating to oncological surgery. Dr. Barnett, currently
the Oncology Surveyor for the American College of Surgeons, holds an American
Board of Surgery Diplomat, and is the former President of the Maryland Chapter
of the American Cancer Society.
Scientific Advisory Board
The Company currently has a scientific advisory board ("SAB") which is
chaired by Dr. Cheung, the Company's Chief Scientific Officer, and is comprised
of the persons listed below. The main purpose of the SAB is to assist management
of the Company in identifying and developing technology trends and business
opportunities within the Company's industry. The SAB members operate as
consultants and not as officers or directors of the Company.
Donald Beard. Mr. Beard is a retired businessman and is the former
senior program manager for the United States Department of Energy. Mr. Beard
consults with the Company in connection with technology and business development
matters.
Mark Dewhirst, Ph.D. Dr. Dewhirst currently serves as a Professor of
Radiology and Oncology and the Director of the Tumor Microcirculation
Laboratories in the Department of Radiation & Oncology at Duke University. Dr.
Dewhirst consults with the Company in connection with research on temperature
sensitive liposomes.
Gloria Li, Ph.D. Dr. Li currently serves as the Director of the
Radiation Biology Laboratory at Memorial Sloan-Kettering Hospital. Dr. Li
consults with the Company on heat shock and gene therapy.
Arnold Melman, M.D. Dr. Melman currently serves as the Chairman of the
Department of Urology at Albert Einstein College of Medicine. Dr. Melman
consults with the Company on clinical studies in urology and is the Company's
primary investigator on BPH.
David Needham, Ph.D. Dr. Needham currently serves as the Director of
Cell and Micro-carrier Research and as an Associate Professor in the Duke
University Department of Mechanical Engineering and Materials Science. Dr.
Needham consults with the Company in connection with research on temperature
sensitive liposomes.
Thomas Ripley, Ph.D. Dr. Ripley currently serves as Director of
Operations for the Grace Biomedical Division at W.R. Grace & Co. Dr. Ripley
consults with the Company on technology and business development.
Mays Swicord, Ph.D. Dr. Swicord currently serves as Director of
Research at Motorola, Inc. Dr. Swicord consults with the Company on the
biological effects of microwave technology.
-32-
<PAGE>
All members of the SAB serve at the discretion of the Board of
Directors. Each member of the SAB, other than Dr. Cheung and Dr. Swicord,
received an option to purchase 5,000 shares of the Common Stock of the Company
at the time they were appointed. The options are exercisable for a five-year
term at $.50 per share. In addition, each member of the SAB will receive an
option exercisable over a five-year term to purchase 3,000 shares of the Common
Stock of the Company for each 12 months served by such member on the SAB,
exercisable at the market price of the Common Stock on the date of grant. During
fiscal year 1999, each member of the SAB, other than Messrs. Cheung and Swicord,
received an option to purchase 3,000 shares of the Common Stock of the Company
at $0.74 per share. In addition, members of the SAB (except for Dr. Cheung) are
compensated at the rate of $125 per hour or a maximum of $1,000 per day,
together with expenses, on consulting matters undertaken by such member.
Company Performance and Chief Executive Officer Compensation
The compensation of Spencer Volk was established prior to organization
of the Compensation Committee. The Committee believes that Spencer Volk's
compensation package aligns his interests with those of the stockholders.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section 16(a)
forms they file. Based solely on a review of the copies of such forms furnished
to the Company between October 1, 1998 and September 30, 1999, and on
discussions with directors and officers, the Company believes during the last
fiscal year all applicable 16(a) filing requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the aggregate cash compensation paid for
services rendered to the Company in all capacities during each year of the
three-year period ended September 30, 1998 to the Company's Chief Executive
Officer and to each of the Company's other executive officers listed in Item 10
whose annual combined salary and bonus for the most recent fiscal year exceeded
$100,000 (the "Named Executive Officers").
-33-
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Other Annual All Other
Name and Principal Fiscal Bonus Compensation Restricted Stock Stock Compensation
Position Year Salary ($) ($) ($) Awards ($) Options (#) ($)
- ---------------------------- ------------ ----- ----- ------------ ----------- ----
<S> <C> <C> <C> <C> <C>
Spencer J. Volk, 1999 $240,000 $ 1,760 (1)
President and Chief
Executive Officer
1998 $240,000 $700,640 (1)(2)
1997 $ 96,923 (3) $281,995 (1)(2)
Augustine Y. 1999 $180,000 $ 1,760 (1)
Cheung, Chairman
of the Board of
Directors
1998 $125,000 $ 640 (1)
1997 $125,000 $ 2,120 (1)
John Mon 1999 $90,000 $ 28,760 (1)
Treasurer,
Secretary, and
General Manager
1998 $78,000 $ 640 (1)
1997 $78,000 $ 844 (1)
</TABLE>
(1) In each of fiscal years 1997, 1998 and 1999, Dr. Cheung received 2,000
shares of the Common Stock of the Company for his services as a member
of the Board of Directors of the Company. For his service on the Board,
Mr. Volk received 701 shares of Common Stock for fiscal year 1997 and
2,000 shares of Common Stock for fiscal year 1998 and 1999. John Mon
received 2,000 shares of Common Stock of the company for his services
as a member of the Board of Directors in each of fiscal years
1997,1998, and 1999. In the past fiscal year, John Mon also received a
one-time bonus of 100,000 shares of the Common Stock of the Company for
his services as an employee of the company.
(2) Pursuant to his 1997 employment agreement, Mr. Volk was granted 500,000
shares of Common Stock in fiscal year 1997 and has the right to receive
up to 1,400,000 additional shares of the Common Stock of the Company if
the Company meets certain financing goals during his tenure and if he
is employed by the Company after one year. As of September 30, 1999,
Mr. Volk had received 1,000,000 shares of such amount. See "Executive
Employment Agreements."
(3) Reflects compensation for a portion of the fiscal year; Mr. Volk became
President and Chief Executive Officer of the Company on May 11, 1997.
Aggregate Option Exercises and Year-End Option Values in 1999
The following table summarizes for each of the Named Executive Officers
the number of stock options held at September 30, 1999 and the aggregate dollar
value of in-the-money unexercised options. The value of unexercised,
in-the-money options at September 30, 1999 is the difference between exercise
price and the fair market value of the underlying stock on September 30, 1999,
which was $0.88 per share based on the closing price of the Common Stock of the
Company on September 30, 1999. The options described have not been and may never
be exercised, and actual gains, if any, on exercise will depend on the value of
the Common Stock of the Company on the actual date of exercise. No options were
exercised by any Named Executive Officer in fiscal 1999.
-34-
<PAGE>
<TABLE>
Aggregate Option Exercises in Fiscal 1999 and Year-End Option Values
<CAPTION>
Number of Unexercised Value of Unexercised
--------------------- --------------------
Options at In-the-Money Options at
---------- -----------------------
9/30/99 9/30/99
------- -------
Shares Acquired
Name on Exercise Value Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------------- ----------- ------------- ----------- -------------
($)
<S> <C> <C> <C> <C> <C> <C>
Augustine Y. Cheung 0 $0 400,000 0 $252,000 $0
Spencer J. Volk 0 $0 0 0 $0 $0
John Mon 0 $0 600,000 0 $378,000 $0
- -------------------
</TABLE>
Stock Option Plans
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. The plan commits up to 2,000,000 shares for option
grants to directors, employees and consultants. The Company has agreed to allow
Spencer J. Volk to recommend the recipients of options for up to 1,570,000
shares under the option plan, to be reviewed by the Board of Directors. To date,
options for a total of 190,000 of such shares have been granted upon the
recommendation of Mr. Volk.
Executive Employment Agreements
In May 1997, the Company and Spencer J. Volk, President and Chief
Executive Officer, entered into a one-year executive employment agreement,
automatically renewable annually unless terminated by either party at least 90
days prior to the end of each one-year period. The agreement provides for an
annual salary of $240,000, which was to be increased to at least $360,000 upon
the Company's successful raising of an aggregate of at least $5,000,000 in
additional capital. In addition, under the provisions of the agreement, Mr. Volk
was awarded incentive compensation of 500,000 shares of Common Stock at
commencement and had the right to receive up to an additional 1,400,000 shares
based on the Company's increased capital base and Mr. Volk's continued
employment. As of September 30, 1999, Mr. Volk had received only 1,000,000 of
such additional shares and had agreed, at the request of the Company to defer
the issuance of the remaining 400,000 shares to a later date. In addition, and
at the further request of the Company, Mr. Volk agreed to waive any salary
increase due him for any period prior to September 30, 1999.
With regard to such 400,000 shares, on November 11, 1999, Mr. Volk
agreed to waive his right under his existing employment agreement to receive
such shares, in consideration of (i) the Company's concurrent grant to him of an
option to purchase 400,000 shares of restricted Common Stock at a price equal to
two-thirds of the average closing price of Common Stock during the prior three
trading days (which closing price amounted to approximately $.75 per share) and
(ii) the Company's issuance to him of 100,000 shares of Common Stock at a price
of $.01 per share prior to February 15, 2000.
Also, in order to provide for continuity and stability of management at
a critical point in the development of the Company's business, the Company has
requested that Mr. Volk enter into a new three-year employment agreement in
place of his existing annually renewable agreement, and that Augustine Y.
Cheung, Chairman and Chief Scientific Officer, also enter into a three-year
employment agreement, such agreements to be concluded by approximately January
10, 2000. Mr. Volk has consented to terminate his existing agreement and to
enter into a new agreement.
-35-
<PAGE>
at an initial annual salary of $240,000, with future increases to be
commensurate with those set forth in his existing agreement, if his new contract
contains bonus and performance-based option terms substantially similar to those
being negotiated in connection with Dr. Cheung's pending employment agreement.
The Company and Dr. Cheung have been negotiating the terms of a
three-year executive employment agreement, which is expected to be signed and to
commence in January 2000. The agreement will provide for a salary of $240,000
per year, except that, until a final closing of the Company's next financing,
Dr. Cheung's salary installments will be computed and paid at his former salary
rate of $180,000, with the unpaid salary differential to be accrued as a Company
obligation to Dr. Cheung and to be paid when the Company's working capital
position permits. Such employment agreement will also provide that, as a form of
annual bonus, Dr. Cheung will be permitted to purchase shares of Common Stock at
a nominal price equal to par value ($.01 per share), in three separate
installments of 100,000 shares each, with the first installment to be
purchasable after March 15, 2000, the next installment after October 1, 2001,
and the final installment after October 1, 2002. The annual bonus shares will be
subject to restrictions on transfer for a minimum period of two years, and each
installment will be purchasable only if Dr. Cheung continues to be employed by
the Company on the applicable installment date. Furthermore, the employment
agreement will provide for the issuance in installments, during the term of
employment, of performance-based options to purchase up to a maximum aggregate
limit of 700,000 shares of Common Stock, at exercise prices ranging from a low
of $.80 to a high of $1.60 per share, on achieving five significant corporate
milestones. An option for a specified portion of the incentive shares would
become issuable and exercisable only after reaching various, specific
performance objectives, such as obtaining final FDA approval for Company
products, consummating alliances with strategic marketing and distribution
partners, and attaining annual pre-tax earnings of at least $1,000,000 for the
Company.
The new agreements for each executive will provide for continued
payment of salary and benefits during the full terms of the agreements in the
event of a change of control of the Company. A change of control is defined as a
merger, asset sale, tender offer or other substantial change in voting control,
or the election of a new majority of the Board of Directors or of three or more
directors whose election is opposed by a majority of the Board. In addition, the
agreements will provide for restrictive covenants and for confidentiality and
other protections in the form generally included in employment agreements for
senior management.
Other than as set forth above, there are no employment contracts,
termination of employment or change in control arrangements.
Report of the Compensation Committee on Executive Compensation
The Company formed a Compensation Committee in June 1997, consisting of
Spencer J. Volk, President and Chief Executive Officer and a director, and
Walter Herbst, a non-employee director. The Committee is responsible for
establishing and administering the compensation policies applicable to the
Company's officers and key personnel. The Committee's responsibilities include,
establishing general compensation policy and recommending compensation
arrangements to the Board of Directors. The Committee also evaluates the
performance of and makes compensation recommendations for senior management.
The Committee and the Board have adopted the following executive
compensation approaches:
-36-
<PAGE>
Executive Compensation Philosophy
The Company attempts to design executive compensation to achieve two
principal objectives. First, the program is intended to be fully competitive so
that the Company may attract, motivate and retain talented executives. Second,
the program is intended to create an alignment of interests between the
Company's executives and stockholders such that a significant portion of each
executive's compensation varies with business performance.
The Committee's philosophy is to pay competitive annual salaries,
coupled with an incentive system which, through stock compensation, that pays
more than competitive total compensation for superior performance reflected in
increases in the Company's stock price.
Based on assessments by the Board and the Committee, the Committee
believes that the Company's compensation program for its senior executive
officers has the following characteristics that serve to align executive
interests with long-term stockholder interests:
* Emphasizes "at risk" pay such as options and grants of
restricted stock;
* Emphasizes long-term compensation through options and
restricted stock awards; and
* Rewards financial results and promotion of Company objectives
rather than individual performance against individual
objectives.
Annual Salaries
Salary ranges and increases for executives are established annually
(unless subject to longer term contracts) based on competitive data. Within
those ranges, individual salaries vary based upon the individual's work
experience, performance, level of responsibility, impact on the business, tenure
and potential for advancement within the organization. Annual salaries for
newly-hired executives are determined at time of hire taking into account the
above factors other than tenure.
Long-Term Incentives
The grant of restricted stock or options to key employees encourages
equity ownership and closely aligns management interests with the interests of
stockholders. The amount and nature of any option or restricted stock award is
determined by the Committee on a case by case basis, depending upon the
individual's perceived future benefit to the Company and the perceived need to
provide additional incentive to align performance with the objectives of the
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding shares of voting
securities of the Company beneficially owned as of September 30, 1999,
determined in accordance with Rule 13d-3 under the Securities Exchange Act of
1934, by: (i) each person known by the Company to beneficially own 5% or more of
the outstanding voting securities; (ii) by each current director, (iii) by each
-37-
<PAGE>
current executive officer and (iv) by all current directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Addresses of Officers, Amount of Percentage of
Directors and Principal Shareholders Common Shares Voting Securities(1)
------------------------------------ ------------- --------------------
<S> <C> <C>
Augustine Y. Cheung (2) 7,031,176 13.2%
Spencer J. Volk (3) 2,795,485 5.2%
John Mon (4) 1,008,288 1.9%
Walter B. Herbst (5) 326,595 **
Max E. Link (6) 184,765 **
LaSalle D. Leffall, Jr. 7,576 **
Claude Tihon (7) 18,576 **
Executive Officers and Directors as a
group (7 individuals) 11,346,309 21.3%
** Less than 1%.
</TABLE>
(1) Except as noted, the above table does not give effect to outstanding
options and warrants for the purchase of approximately 16,653,770
shares of Common Stock. Outstanding options and warrants do not carry
voting rights.
(2) Includes 400,000 shares purchasable under an option exercisable through
May 16, 2001.
(3) Does not include an additional 400,000 shares of Common Stock that may
be earned by Mr. Volk pursuant to his employment agreement upon the
occurrence of certain events. See "Management-Executive Employment
Agreements." Includes 100,000 shares of Common Stock purchasable under
a warrant exercisable through December 10, 2001.
(4) Includes 400,000 shares of Common Stock purchasable under an option
exercisable through May 16, 2001 and 200,000 shares of Common Stock
purchasable under an option exercisable through March 31, 2002.
(5) Includes options to purchase an aggregate of 115,000 shares of Common
Stock exercisable during various periods through September 30, 2004.
Does not include options to purchase 20,000 shares of Common Stock
exercisable through October 30, 2002, and 1,322,898 shares of Common
Stock, both owned by Herbst, Lazar, Bell, Inc. ("HLB"), a company of
which Mr. Herbst is a director. Mr. Herbst disclaims beneficial
ownership of the options and shares of Common Stock owned by HLB.
(6) Includes an option to purchase 50,000 shares of Common Stock
exercisable through December 31, 2003 and an option which vests as to
the purchase of 50,000 shares of Common Stock on December 31, 1999.
(7) Includes options to purchase 11,000 shares of Common Stock exercisable
through May 15, 2003.
The address of each of the named principal stockholders is c/o Celsion
Corporation, 10220-I Old Columbia Road, Columbia, MD 21046-1705
-38-
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Compensation to Warren C. Stearns
Warren C. Stearns, a former director and financial consultant to the
Company, was previously engaged to provide services to Celsion for a two-year
period beginning May 1996 under a consulting agreement between Celsion and Mr.
Stearns' company, SMC. Pursuant to the agreement, Mr. Stearns was to perform
various services related to financing and capital structure, including locating
and soliciting sources of funding for Celsion. In consideration for such
services, the agreement provided for the issuance to SMC's designees of
five-year warrants (the "Stearns Warrants") to purchase approximately 4.8% of
the Company's Common Stock at an initial exercise price of $0.41 per share,
subject to anti-dilution provisions intended to maintain such equity interest
and to a provision permitting renewal of the Stearns Warrants for an additional
period of five-years. Such warrants were issued but have not been exercised.
Also, SMC was paid approximately $266,666 in cash compensation and $38,824 for
reimbursement of expenses during the 1997 fiscal year and approximately $95,297
for additional compensation and expenses in the 1998 fiscal year. At the time
Mr. Stearns resigned, the Company agreed to settle, for $100,000, claims which
he made for additional consulting fees and expenses, and such amount was
subsequently paid.
On the basis of a review of the circumstances surrounding the issuance
of the Stearns Warrants and the consulting agreement between SMC and the
Company, the Company believes that the issuance of the Stearns Warrants may be a
voidable transaction under provisions of the Securities Exchange Act of 1934.
While the Company has commenced discussions with Mr. Stearns in order to seek an
amicable settlement without litigation, the Company is prepared to contest the
Stearns Warrants if settlement efforts are not successful.
George T. Horton Trust Loan
The Company was obligated under a secured note to the George T. Horton
Trust in the original principal amount of $220,000, which bore interest at 1%
per month, was payable December 15, 1997, and was secured by certain equipment
and software. The George T. Horton Trust is a part equity owner of SMC. In full
satisfaction of such note, the Company paid $120,000 and issued 200,000 shares
of the Common Stock.
HLB
The Company previously used the services of HLB, an engineering firm,
to assist in the development of commercial versions of its new breast cancer and
BPH treatment systems. Walter B. Herbst, a director of the Company, was the
founder and is a director of HLB. In the 1998 fiscal year, HLB billed the
Company $561,238 for extensive engineering and design work it performed, on
terms which, in the judgment of the Board of Directors, were comparable to terms
which would be available from a non-affiliated vendor. Of this amount, HLB was
paid $106,500 in cash, and on September 23, 1998, HLB converted $250,000 of the
amount owed into 833,334 shares of restricted Common Stock at the then market
price of $.30 per share. On June 16, 1999 HLB converted the remaining balance of
$204,738 into 409,476 shares of restricted Common Stock at $ .50 a share.
-39-
<PAGE>
Promissory Notes and Conversions into
Common Stock; Purchase of Common Stock
From 1987 through 1998, the Company borrowed sums needed for working
capital at various times from related parties, and issued promissory notes as
follows:
A note dated January 26, 1987 payable to Dr. Augustine Cheung, accruing
interest at the rate of twelve percent (12%) per annum, in the principal amount
of $78,750 due December 31, 1998.
A note dated June 30, 1994 payable to Dr. Augustine Cheung, accruing
interest at the rate of ten percent (10%) per annum, in the principal amount of
$42,669 due December 31, 1998.
A note dated June 23, 1998 payable to Spencer J. Volk, accruing
interest at the rate of eight percent (8%) per annum, in the principal amount of
$50,000 due September 30, 1998.
All of such notes and accrued interest have been converted into Common
Stock at prices equal to fair market value at the time of conversion. In
addition to conversion of the foregoing notes, on September 23, 1998, Mr. Volk
converted $50,134 of amounts owed him by the Company for unpaid expense
reimbursements into 167,114 shares of the Common Stock at $0.30 per share.
On June 16, 1999 the various officers converted accrued salary payable
to them into restricted Common Stock as follows. Spencer J. Volk converted
$289,884 into 579,768 shares at $ .50 a share. Dr. Augustine Cheung converted
$177,884 into 355,768 shares at $ .50 a share. John Mon converted $68,538 into
137,076 shares.
On June 3, 1997, Spencer J. Volk purchased 243,902 shares of restricted
Common Stock at a price of $.41 per share or a total of $100,000, paid by Mr.
Volk to the Company. The funds were intended as working capital, and were
primarily used to pay Mr. Volk's salary under his employment agreement. At the
time of the purchase, the Company was conducting a private placement of 8%
Convertible Notes, convertible at $.41 per share, and consummated the sale of
$1,505,000 aggregate principal amount of such Notes to investors.
Agreement with Gao Yu Wen
On February 16, 1995, Gao Yu Wen executed a subscription agreement with
the Company to purchase 20,000,000 shares of Common Stock at $0.50 per share or
a total of $10,000,000. This amount was paid $2,000,000 in cash and by
transferring to the Company 9.5% of the outstanding equity of Aestar Fine
Chemical Company ("Aestar"), valued at $8,000,000 by the parties based on
Aestar's assets, revenues and earnings.
In 1996, the Company and Mr. Gao entered into agreements under which
the Company returned all of its shares in Aestar to Mr. Gao and Gao returned
16,000,000 out of the 20,000,000 shares of the Company's Common Stock originally
purchased by him, and the Company received the right to repurchase the remaining
four million shares for $2.2 million, which the Company did not elect to
exercise.
-40-
<PAGE>
In a related transaction, on April 26, 1995, the Company entered into
an Investment Agreement with Mr. Gao whereby the Company transferred $700,000 to
Gao to invest as agent of the Company at the rate of no less than 17% per annum.
Mr. Gao repaid $190,000 by September 30, 1996. The balance owed to the Company
by Mr. Gao was offset against a claim by Mr. Gao and Aestar for $470,000
advanced them to start a cosmetics division with the Company, which was
abandoned.
Rescission of Ardex Acquisition
On or about March 31, 1995, the Company paid $400,000 to Ardex
Equipment, LLC ("Ardex") and $50,000 to Charles C. Shelton and Joseph Colino in
exchange for an aggregate 19.25% interest in Ardex. At the time Messrs. Shelton
and Colino were directors of Celsion. In 1996, the Company received a $50,000
distribution from Ardex.
On August 2, 1996, the Company and Ardex entered into an agreement
rescinding the Company's investment in Ardex (the "Rescission Agreement").
Pursuant to the Rescission Agreement, the Company was to receive a 5-year
negotiable promissory note for $350,000 bearing interest at 8% per annum.
Interest only was to be paid until the principal became due. Principal was due
upon the first of the following events to occur: (i) completion of public or
private offerings by Ardex in the aggregate of $1,500,000 or more; (ii) 90 days
following the year end in which sales have been or exceed $3,000,000; (iii)
Ardex having a cash balance of $800,000 or more from operations; or (iv) five
years from the date of the note. The note was to be secured by a limited
guarantee of Charles C. Shelton, Joseph Colino and John Kohlman but only to the
extent of their interest in Ardex and their options in the Company. In addition,
Messrs. Shelton, Colino and Kohlman were to deliver their personal promissory
notes for a total of $50,000.
The terms of the Recission Agreement were not performed by Ardex and
Messrs. Shelton, Colino and Kohlman, and Celsion was advised by Ardex and such
persons that they could not honor the terms of the Recission Agreement because
Ardex had not been successful and the Ardex individuals were in financial
difficulties. The Company is no longer continuing with its efforts to obtain the
documents contemplated by the Rescission Agreement.
On September 30, 1998, the Company and Charles Shelton entered into a
settlement agreement pursuant to which the Company released any claims against
Mr. Shelton and Mr. Shelton waived his right to an option to purchase 420,000
shares of the Common Stock of the Company at a price of $.35 per share and his
claim for approximately $110,000 against the Company in exchange for 50,000
shares of Common Stock of the Company. At the time of such settlement, the
Company's shares were trading at a price of approximately $.30 per share.
-41-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS,
SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements and Supplemental Schedules
<TABLE>
<CAPTION>
Title of Documents Page No.
- ------------------ --------
<S> <C>
Independent Auditors' Report F-3
Balance Sheet F-4
Statements of Operations F-6
Statements of Changes in Stockholders' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-10
</TABLE>
-42-
<PAGE>
CELSION CORPORATION
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1999, 1998 AND 1997
<PAGE>
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT F-3
FINANCIAL STATEMENTS
Balance Sheets F-4
Statements of Operations F-6
Statements of Changes in Stockholders' Equity (Deficit) F-7
Statements of Cash Flows F-8
NOTES TO FINANCIAL STATEMENTS F-10
<PAGE>
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, 1999 and 1998, and the related statements of
operations, changes in stockholders' equity (deficit), and cash flows for each
of the three years in the period ended September 30, 1999. 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 generally accepted
auditing standards. 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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1999 in conformity with generally accepted accounting principles.
/s/ Stegman & Co.
- ----------------
Stegman & Co.
Baltimore, Maryland
November 1, 1999
F-3
<PAGE>
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1999 AND 1998
ASSETS
1999 1998
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $1,357,464 $ 54,920
Accounts receivable - trade 1,812 1,812
Inventories 22,059 42,059
Prepaid expenses 3,520 76,944
Other current assets 39,203 --
---------- ----------
Total current assets 1,424,058 175,735
---------- ----------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 203,156 195,794
Laboratory and shop equipment 47,983 47,048
---------- ----------
251,139 242,842
Less accumulated depreciation 224,874 212,029
---------- ----------
Net value of property and equipment 26,265 30,813
---------- ----------
OTHER ASSETS:
Patent licenses (net of accumulated amortization
of $81,589 and $65,760 in 1999 and 1998,
respectively) 108,361 124,190
---------- ----------
TOTAL ASSETS $1,558,684 $ 330,738
========== ==========
See accompanying notes.
F-4
<PAGE>
<TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable - trade $ 130,792 $ 1,034,767
Notes payable ? other 114,778 132,778
Notes payable - related parties 10,000 146,041
Accrued interest payable - related parties 13,800 150,020
Accrued interest payable - other 155,373 127,538
Accrued compensation 91,009 470,220
Accrued professional fees -- 100,000
Other accrued liabilities 88 13,639
Capital lease ? current 1,292 1,083
------------ ------------
Total current liabilities 517,132 2,176,086
LONG-TERM LIABILITIES:
Capital lease ? long-term 4,427 5,719
------------ ------------
Total liabilities 521,559 2,181,805
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - $.01 par value; 100,000,000 shares
authorized, 53,370,498 and 39,945,826 issued
and outstanding for 1999 and 1998, respectively 533,705 399,458
Additional paid-in capital 22,403,622 17,213,485
Accumulated deficit (21,900,202) (19,464,010)
------------ ------------
Total stockholders' equity (deficit) 1,037,125 (1,851,067)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS?
EQUITY (DEFICIT) $ 1,558,684 330,738
============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Equipment sales and parts $ -- $ 174,182 $ 121,257
Returns and allowances -- -- --
------------ ------------ ------------
Total revenues -- 174,182 121,257
COST OF SALES -- 136,500 46,734
------------ ------------ ------------
GROSS PROFIT -- 37,682 74,523
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 1,371,161 2,515,822 2,283,245
Research and development 1,019,941 1,534,872 185,974
------------ ------------ ------------
Total operating expenses 2,391,102 4,050,694 2,469,219
------------ ------------ ------------
LOSS FROM OPERATIONS (2,391,102) (4,013,012) (2,394,696)
LOSS ON FUNDS HELD IN INVESTMENT CONTRACT -- -- (40,000)
LOSS ON WRITE-OFF OF ARDEX EQUIPMENT,
L.L.C. NOTES RECEIVABLE AND RELATED
ACCRUED INTEREST RECEIVABLE -- -- (438,803)
OTHER INCOME 15,744 11,870 7,172
INTEREST EXPENSE (60,834) (199,346) (185,562)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (2,436,192) (4,200,488) (3,051,889)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (2,436,192) $ (4,200,488) $ (3,051,889)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.05) $ (.12) $ (.11)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 45,900,424 34,867,001 28,386,145
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
<TABLE>
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<CAPTION>
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at October 1, 1996 41,206,360 $ 412,063 $ 18,555,444 $(12,211,633) $ 6,755,874
Sale of common stock 1,409,902 14,099 668,901 -- 683,000
Issuance of 2,479,071 shares
of common stock as payment
of indebtedness and expenses 2,479,071 24,791 1,127,578 -- 1,152,369
Retirement of shares (16,000,000) (160,000) (7,840,000) -- (8,000,000)
Net loss -- -- -- (3,051,889) (3,051,889)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 1997 29,095,333 290,953 12,511,923 (15,263,522) (2,460,646)
Sale of common stock 4,315,000 43,150 1,981,850 -- 2,025,000
Issuance of 6,535,493 shares of
common stock as payment
of indebtedness and expenses 6,535,493 65,355 2,719,712 -- 2,785,067
Net loss -- -- -- (4,200,488) (4,200,488)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 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 3,879,172 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
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE>
<TABLE>
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,436,192) $(4,200,488) $(3,051,889)
Noncash items included in net loss:
Funds held under investment contract used
for cosmetic division expenses -- -- 40,000
Depreciation and amortization 28,674 24,291 24,169
Bad debt expense -- -- 120,865
Loss on disposal of property and equipment -- 45,180 --
Inventory valuation 20,000 287,682 --
Write-off of Ardex Equipment - note
receivable and accrued interest -- -- 438,803
Common stock issued for operating expenses 200,304 796,745 297,542
Net changes in:
Accounts receivable -- 4,079
Inventories -- -- (58,789)
Accrued interest receivable - related parties -- -- (33,470)
Prepaid expenses 73,424 5,430 --
Other current assets (21,594) 10,085 --
Accounts payable and accrued interest payable (223,255) 903,900 837,172
Accrued compensation 189,239 168,732 145,256
Accrued professional fees (100,000) (156,300) 179,950
Other accrued liabilities (13,551) (1,865) (85,401)
----------- ----------- -----------
Net cash used in operating activities (2,282,951) (2,112,529) (1,154,751)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of patent licenses -- (10,000) --
Purchase of property and equipment (8,297) (21,935) (3,807)
----------- ----------- -----------
Net cash used in investing activities (8,297) (31,935) (3,807)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 50,000 615,000
Payment on notes payable - related parties -- (63,240) (24,020)
Payment on notes payable - other (18,000) (79,254) (95,000)
Payment on capital lease obligation (1,083) (475) --
Proceeds of stock issuances 3,612,875 2,025,000 683,000
----------- ----------- -----------
Net cash provided by financing activities 3,593,792 1,932,031 1,178,980
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 1,302,544 (212,433) 20,422
CASH AT BEGINNING OF YEAR 54,920 267,353 246,931
----------- ----------- -----------
CASH AT END OF YEAR $ 1,357,464 $ 54,920 $ 267,353
=========== =========== ===========
</TABLE>
F-8
<PAGE>
<TABLE>
Celsion Corporation
Statements of Cash Flows (Continued)
For the Years Ended September 30, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Schedule of noncash investing and financing transactions:
Rescission of a 9.5% interest in the Aestar Fine
Chemical Company in exchange for 16,000,000
shares of common stock $ -- $ -- $ (8,000,000)
=========== =========== ============
Conversion of accounts payable, debt and accrued
interest payable through issuance of common stock $ 1,511,205 $ 1,988,322 $ 854,826
=========== =========== ============
Equipment reacquired for internal use $ -- $ -- $ 30,000
=========== =========== ============
Acquisition of equipment:
Cost of equipment $ -- $ 7,277 $ --
Capital lease payable -- (7,277) --
----------- ----------- ------------
Cash down payment for equipment $ -- $ -- $ --
=========== =========== ============
Payment on notes payable:
Decrease in notes payable $ -- $ 16,670 $ --
Offset of accounts receivable -- (16,670) --
----------- ----------- ------------
Net cash paid $ -- $ -- $ --
=========== =========== ============
Cash paid during the year for interest $ 21,356 $ 103,470 $ --
=========== =========== ============
</TABLE>
See accompanying notes.
F-9
<PAGE>
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
1. DESCRIPTION OF BUSINESS
Celsion Corporation (the "Company") was incorporated in the State of
Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The Company changed
its name to Cheung Laboratories, Inc. on June 30, 1984 and to Celsion
Corporation on May 1, 1998. The Company is a biomedical research and development
company headquartered in Columbia, Maryland, dedicated to creating and marketing
medical treatment systems for cancer, benign prostatic hyperplasia and other
diseases using focused heat energy.
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. The Company has experienced
significant operating losses and as of September 30, 1999 had an accumulated
deficit of approximately $21 million. The Company expects such operating losses
to continue and possibly increase 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 successfully obtain governmental approvals,
produce, market and sell its new technology and integrate such technology into
its thermotherapy systems. The Company has not been able to successfully market
its older thermotherapy cancer treatment system because of its inability to
provide heat treatment for other than surface and sub-surface tumors. There can
be no assurance that the Company will be able to successfully commercialize its
newer technology 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's dependence on raising additional capital will continue
at least until the Company is able to begin marketing its new technologies. The
Company's future capital requirements and the adequacy of its financing depend
upon numerous factors, including the successful commercialization of the
thermotherapy systems, progress in its product development efforts, progress
with preclinical 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
strategic alliances for the marketing of its products. The Company 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. The Company does not have any committed sources of additional
financing, and cannot guarantee that additional funding 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
F-10
<PAGE>
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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 $12,845, $11,910 and $8,119 for the years
ended 1999, 1998 and 1997, 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.
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 anti-dilutive.
Non-monetary Transactions
-------------------------
Non-monetary transactions are accounted for in accordance with
Accounting Principles Board Opinion No. 29 "Accounting for Non-monetary
F-11
<PAGE>
Transactions" which requires that the transfer or distribution of a non-monetary
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
generally accepted accounting principles 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 Institutions
----------------------
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.
4. INVENTORIES
Inventories are comprised of the following:
1999 1998
------- --------
Materials $ 5,059 $ 5,059
Finished products 17,000 37,000
------- --------
$22,059 $42,059
======= =======
During the year ended September 30, 1998, management completed a
thorough review of all its components inventory. As a result of this review the
Company identified and wrote off approximately $287,000 of parts and components
inventory acquired in the course of developing older equipment now considered to
be obsolete. This includes approximately $175,000 of components and parts
acquired in the course of developing the Company's older equipment, which was
deemed unusable in the Company's newer models that incorporate advanced
microwave technology, and $112,000 of replacement parts inventory for older
equipment sold in prior years by the Company which was determined to have no
appreciable market value because of absence of demand. The write off of $175,000
is included in research and development expenses and the write off of $112,000
is included in operating expenses. During the year ended September 30, 1999 an
additional $20,000 reduction was made to the carrying value of the inventory
account. The write-off is included in operating expense.
F-12
<PAGE>
5. RELATED PARTY TRANSACTIONS
Note Payable - Related Parties
------------------------------
<TABLE>
<CAPTION>
Note payable to related parties as of September 30 are
comprised of the following:
1999 1998
-------- --------
<S> <C> <C>
Demand note payable to relative of an officer and
stockholder of the Company, accruing interest at
12% per annum $ -- $ 36,041
Term notes payable to interested parties of the
Company accruing interest at 12% per annum 10,000 10,000
Term note payable to an officer and stockholder of
the Company accruing interest at 8% per annum -- 50,000
Term note payable to stockholder of the Company accruing interest at 10% per
annum payable in monthly payments of $2,000 for 25 months The note is secured
by all accounts receivable and
general intangibles of the Company -- 50,000
-------- --------
10,000 146,041
Less current portion 10,000 146,041
-------- --------
Long-term portion - due in 1998 $ -- $ --
======== ========
</TABLE>
Accrued interest payable on these notes amounted to $13,800 and
$150,020 at September 30, 1998 and 1997, respectively.
Stock Based Compensation Plan
As part of the Company's employment agreement with its current
chief executive officer (CEO), the Company has granted to the CEO 1,900,000
shares of the Company's capital stock which vests in certain milestones
throughout the term of employment. The shares become fully vested provided that
the CEO remains with the Company through the term of the contract. Under the
Plan there was no compensation expense recognized in the year ended September
30, 1999, and $699,375 and $280,000 of compensation expense was recognized in
the years ended September 30, 1998 and 1997, respectively.
6. NOTES PAYABLE - OTHER
<TABLE>
<CAPTION>
Notes payable - other consist of the following as of September 30:
1999 1998
-------- --------
<S> <C> <C>
Term note with interest accruing at 24% per annum,
compounded monthly. The note matured April 30, 1996 $114,778 $114,778
Term note with accrued interest payable each month
at 12% per annum. The note was secured by inventory
and property. The note matured December 18, 1997 -- 18,000
-------- --------
$114,778 $132,778
======== ========
</TABLE>
Accrued interest payable on these notes amounted to $155,373 and
$127,538 at September 30, 1999 and 1998, respectively.
7. 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.
F-13
<PAGE>
8. INVESTMENT IN AESTAR FINE CHEMICAL COMPANY - AT COST
During 1995, the Company acquired a 9.5% equity interest in Aestar
Fine Chemical Company (Aestar) in exchange for 16,000,000 shares of its common
stock. The investment was carried at cost, as measured by the $.50 per share
fair market value of the 16,000,000 shares of the Company's common stock. The
Company subsequently rescinded this investment during the year ended September
30, 1997 by exchanging its interest in Aestar for the 16,000,000 shares of its
common stock.
9. INVESTMENT IN ARDEX EQUIPMENT, L.L.C. - AT EQUITY
The Company purchased a 19.25% equity interest in Ardex Equipment,
L.L.C. (Ardex) during the year ended September 30, 1995. The investment was
carried at cost, adjusted for the Company's proportionate share of Ardex's loss
from the purchase date through September 30, 1995. During the year ended
September 30, 1996, the Company agreed to rescind its purchase of the interest
in Ardex through the conversion of its equity investment into a note receivable
from Ardex and its principals, a conversion which did not result in a gain or
loss because the amount of the note was equal to the carrying amount of the
investment. During the year ended September 30, 1997, Ardex experienced
financial difficulties and the receivable plus accrued interest totaling
$438,803 was written-off as being uncollectible and is reported separately in
the statement of operations.
10. LICENSE AGREEMENTS
The Company has exclusive license agreements with Massachusetts
Institute of Technology (the "MIT Agreement") and MMTC, Inc. (the "MMTC
Agreement") for the use of certain patented technologies. The MIT Agreement and
the MMTC Agreement each contain license fee and royalty requirements and other
performance requirements which the Company must meet by certain deadlines with
respect to the use of the patented technologies. If the Company were to breach
the MIT Agreement or the MMTC Agreement, the Company would lose its rights to
the respective licensed technology and would not receive compensation for its
efforts in developing or exploiting the technology.
In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company has agreed to pay
Duke University for all direct and indirect costs incurred in the performance of
the research contemplated under such agreements not to exceed $625,062 and Duke
University has agreed to grant to the Company an option to acquire an exclusive,
worldwide, royalty bearing license of Duke University's rights to any invention,
development, or discovery resulting from the subject research. The sponsored
research agreements were terminated, and, on November 10, 1999, the Company
entered into a License Agreement with Duke University, under which Duke has
granted the Company exclusive rights (subject to certain exceptions) to
commercialize and use Duke's patented thermo-liposome technology. For portions
of the technology, Celsion's rights are worldwide, and, for various patent
rights, the license covers the United States, Canada, the United Kingdom,
France, Germany and Japan, and other countries in which Celsion desires to seek
patent protection, provided that Celsion will be responsible for the costs of
obtaining such protection. The License Agreement contains annual royalty and
minimum payment provisions, and also requires the Company to make
milestone-based royalty payments measured by such events as 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 Celsion Common Stock to be issued
in installments at the time each milestone payment is due.
Under the Company's research agreement with Sloan-Kettering, the
Company had an option to negotiate the terms of an exclusive license agreement
to commercialize the results of the Sloan-Kettering research sponsored by
Celsion concerning patented thermo-genetic modifier technology. Celsion
exercised its option to commence such negotiations on November 9, 1999, and has
until February 9, 2000 to negotiate the terms of a final license agreement.
F-14
<PAGE>
Celsion has been holding discussions with Sloan-Kettering on such terms, and
anticipates that the terms will be finalized by the February 9, 2000 expiration
date.
11. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
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%
====== ====== ======
</TABLE>
As of September 30, 1999, the Company had net operating loss
carryforwards of approximately $21,300,000 for federal income tax purposes that
are available to offset future taxable income through the year 2019.
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
1999 1998
------------- -------------
Net operating loss carryforwards
$7,893,000 $ 6,952,000
Valuation allowance
(7,893,000) (6,952,000)
$ -- $ --
------------- -------------
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.
12. COMMON STOCK
During the year ended September 30, 1999, the Company issued an
aggregate of 9,545,500 shares of common stock for net or gross cash of
$3,612,875. In addition, a total of 3,343,976 shares were issued to extinguish
debt, and 535,196 shares were issued as payment for various operating expenses.
During the year ended September 30, 1998, the Company issued a total
of 4,315,000 shares of common stock for $2,025,000. In addition, 5,274,961
shares were issued to extinguish debt, and 1,260,532 shares were issued as
payment for various operating expenses.
During the year ended September 30, 1997, the Company issued
1,409,902 shares of common stock for $683,000; also 1,317,143 shares were issued
to extinguish debt, and 1,161,828 shares were issued as payments for various
operating expenses. Additionally, the Company retired 16,000,000 shares of
common stock in connection with the rescission in its investment in Aestar.
F-15
<PAGE>
13. STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees, directors,
vendors and debt holders. Options are granted at market value at the date of the
grant and are generally exercisable immediately.
A summary of the Company's stock option activity and related
information for the years ended September 30, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------------- -------------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,745,000 $.41 3,565,000 $.38 3,050,000 $.34
Granted - - - - 515,000 .61
Exercised (587,500) .25 (125,000) .45 - -
Expired/cancelled (10,000) .69 (695,000) .25 - -
--------- --------- --------- --------- --------- ---------
Outstanding at end of year 2,147,500 $.45 2,745,000 $.41 3,565,000 $.38
========= ========= ========= ========= ========= =========
</TABLE>
F-16
<PAGE>
Additionally, the Company has issued warrants to purchase the
Company's stock as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------- --------------------- -------------------------
Weighted Weighted Weighted
Common Average Common Average Common Average
Stock Exercise Stock Exercise Stock Exercise
Options Price Options Price Options Price
------ ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 7,858,983 $.45 3,276,818 $.35 2,218,035 $.29
Issued 6,749,627 .81 4,582,165 .52 1,058,783 .48
Expired/cancelled (102,340) .50 - - - -
---------- --------- --------- --------- --------- ---------
Outstanding at end of year 14,506,270 $.59 7,858,983 $.45 3,276,818 $.35
========== ========= ========= ========= ========= =========
</TABLE>
The following summarizes information about options and warrants at
September 30, 1999:
<TABLE>
<CAPTION>
Options/
Options/Warrants Outstanding Warrants Exercisable
---------------------------- -------- -----------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
$0.16 - $3.00 16,653,770 4.63 years $0.57 12,898,659 $0.60
</TABLE>
F-17
<PAGE>
Additionally, certain agreements with stockholders have antidilutive provisions
which require that additional shares and options be issued under certain
circumstances.
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 was recorded during the three years ended September 30, 1999.
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 1999, 1998 and 1997: risk-free interest rate of 5.71%, 5.75% and
6.50% for 1999, 1998 and 1997, 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:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Net loss $(5,477,762) $(5,272,699) $(3,476,159)
Net loss per common share - basic (.09) (.12) (.12)
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
Potential Liability and Insurance
---------------------------------
In the normal course of business, the Company may be subject to
warranty and product liability claims on its hyperthermia equipment. Although
the Company has obtained liability insurance, assertion of any product liability
claim against the Company, in excess of such insurance limits, may have an
adverse effect on its financial condition. As of September 30, 1999, no product
warranty claims or other liabilities against the Company have been asserted.
15. LEASE OBLIGATIONS
During the year ended September 30, 1997, the Company entered into a
three-year lease for their facilities in Columbia, Maryland. Future minimum
lease obligations are as follows:
Year ended September 30:
2000 $ 55,877
Total amounts charged to rent expense for 1999, 1998 and 1997 were
$67,796, $75,018 and $64,594, respectively.
16. CONCENTRATIONS OF CREDIT RISK
As of September 30, 1999, the Company has a concentration of credit
represented by cash balances in one large commercial bank in amounts which
exceed current federal deposit insurance limits. The financial stability of this
institution is continually reviewed by senior management.
F-18
<PAGE>
17. CAPITAL LEASE COMMITMENTS
The Company leases a telephone system under an agreement classified
as a capital lease. The cost and accumulated depreciation for the equipment as
of September 30, 1999 was $7,276 and $2,183, respectively, and as of September
30, 1998 was $7,276 and $728, respectively.
The following is a schedule of future minimum lease payments under
the capital lease together with the present value of the next minimum lease
payments as of September 30, 1999:
Year Ending September 30:
2000 $ 2,206
2001 2,206
2002 2,206
2003 1,103
-------
Total future minimum lease payments 7,721
Amount representing interest (2,002)
Present value of future minimum lease payments 5,719
Current portion (1,292)
-------
Long-term portion $ 4,427
=======
Total interest expense on the long-term capital lease obligation for
the years ended September 30, 1999 and 1998 was $1,123 and $629, respectively.
F-19
<PAGE>
(a)(2) No schedules are provided because of the absence of conditions under
which they are required.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended September 30, 1998.
-42-
<PAGE>
(c) Exhibits.
The following documents are included as exhibits to this report:
Exhibit Description
Number -----------
------
3.1 Articles of Incorporation of the Company as filed on May
19, 1982 with the State of Maryland Department of
Assignments and Taxation, incorporated herein by reference
to the exhibits to the Company's Registration Statement on
Form S-1, as amended, originally filed with the Securities
and Exchange Commission on October 17, 1984, Registration
No. 2-93826-W.
3.1.1 Articles of Amendment and Restatement to the Articles of
Incorporation of the Company as filed on June 21, 1984 with
the State of Maryland Department of Assignments and
Taxation, incorporated herein by reference to Exhibit 3.1.1
to the Annual Report on Form 10-K of the Company for the
year ended September 30, 1996.
3.1.2 Articles of Amendment to the Articles of Incorporation of
the Company as filed on December 14, 1994 with the State of
Maryland Department of Assignments and Taxation,
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, 1996
3.1.3 Certificate of Amendment to Certificate of Incorporation as
filed on May 1, 1998 with the State of Maryland Department
of Assignment and Taxation, incorporated herein by
reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q of the Company for the quarter ended March 30, 1998.
3.2 By-laws, incorporated herein by reference to Exhibit 3.2 to
the Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
3.2.1 Amendment to the By-laws of the Company adopted December 9,
1994, incorporated herein by reference to Exhibit 3.2.1 to
the Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
-43-
<PAGE>
Exhibit Description
Number -----------
------
3.2.2 Amendment to the By-laws of the Company adopted April 27,
1998, incorporated herein by reference to Exhibit 3.2 to
the Quarterly Report on Form 10-Q of the Company for the
quarter ended March 30, 1998.
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 Letter Agreement between the Company and H.B.C.I., Inc.,
dated September 17, 1996, incorporated herein by reference
to Exhibit 10.3 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
10.4 Letter Agreement between the Company and Herbst, Lazar,
Bell, Inc. dated October 4, 1996, incorporated herein by
reference to Exhibit 10.4 to the Annual Report on Form 10-K
of the Company for the year ended September 30, 1996.
10.5 Sponsored Research Agreement dated March 17, 1998 between
the Company and Duke University and Sponsored Research
Agreement dated February 26, 1998 between the Company and
Duke University.
10.6 Engagement Letter dated August 6, 1998 between the Company
and Josephberg Grosz & Co., Inc.
10.7 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated October 17,
1997 (Confidential Treatment Requested).
10.8 Amendment dated November 25, 1997 to the License Agreement
between the Company and MMTC, Inc. dated August 23, 1996
(Confidential Treatment Requested).
10.9 Patent License Agreement between the Company and Duke
University dated November 10, 1999 (Confidential Treatment
Requested).+
10.10 Amendment dated March 23, 1999 to the License Agreement
between the Company and MMTC, Inc. dated August 23, 1996
(Confidential Treatment Requested).+
10.11 Option Agreement between the Company and Sloan-Kettering
Institute for Cancer Research dated February 26, 1999
(Confidential Treatment Requested).+
10.12 Amendment Letter dated August 31, 1999 to the Option
Agreement between the Company and Sloan-Kettering Institute
for Cancer Research dated February 26, 1999.+
10.13 Omnibus Stock Option Plan, incorporated herein by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
10.14 Letter of Intent between the Company and Mr. Sun Shou Yi,
representative of Mr. Gao Yu Wen, dated May 27, 1996 and
Redemption Agreement between the Company and Mr. Sun Shou
Yi., representative of Mr. Gao Yu Wen, dated June 6, 1996,
incorporated herein by reference to Exhibit 10.8 to the
Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
-44-
<PAGE>
Exhibit Description
Number -----------
------
10.15 Amendment among the Company, Sun Shou Yi, Ou Yang An, Gao
Yu Wen, dated October 23, 1996, 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, 1996.
10.16 Unsecured Promissory Note, dated June 23, 1998, in the
amount of $50,000 and bearing interest at the rate of eight
percent, payable to Spencer J. Volk.
10.17 Form of Series 200 Warrant issued to certain employees,
directors, and consultants to Purchase Common Stock of the
Company.
10.18 Form of Series 250 Warrant Issued to DunnHughes Holding,
Inc. to Purchase Common Stock of the Company.
10.19 Form of Series 300 Warrant Issued to Nace Resources, Inc.
and George T. Horton Trust to Purchase Common Stock of the
Company.
10.20 Form of Series 400 Warrant Issued to Stearns Management
Company Assignees to Purchase Common Stock of the Company.
10.21 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.
10.22 Form of Series 550 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended.
10.23 Form of Series 600 Warrant Issued to Certain Employees and
Directors on May 16, 1996 to Purchase Common Stock of the
Company.
10.24 Form of Series 700 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated September 10, 1998, as amended.
10.25 Form of Series 800 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated February 23, 1999, as amended.+
10.26 Form of Registration Rights Agreement pursuant to the
Private Placement Memorandum of the Company dated January
6, 1997, as amended.
10.27 Form of Registration Rights Agreement pursuant to the
Private Placement Memorandum of the Company dated September
10, 1998, as amended.
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Annual Report on Form 10-K
of the Company for the year ended September 30, 1996.
23.1 Consent of Stegman & Company, independent public
accountants of the Company.+
27.1 Financial Data Schedule.+
- ------------------
+ Denotes exhibits filed with this Form 10-K
-45-
<PAGE>
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 28, 1999 By: /s/ Spencer J. Volk
-------------------------------------
Spencer J. Volk
Chief Executive Officer and President
By: /s/ John Mon
-------------------------------------
John Mon
Chief Accounting Officer, General
Manager, Secretary and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registrant's annual report on Form 10-K has been signed by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Spencer J. Volk Chief Executive Officer, December 28, 1999
--------------------------------
Spencer J. Volk President and Director
/s/ John Mon General Manager, Treasurer, December 28, 1999
- ---------------------------------
John Mon Secretary and Director
/s/ Augustine Y. Cheung Chairman, Director December 28, 1999
- ---------------------------------
Dr. Augustine Y. Cheung
/s/ Walter Herbst Director December 28, 1999
- ---------------------------------
Walter Herbst
/s/ Claude Tihon Director December 28, 1999
- ---------------------------------
Claude Tihon
/s/ LaSalle D. Leffall, Jr. Director December 28, 1999
- ---------------------------------
LaSalle D. Leffall, Jr.
/s/ Max E. Link Director December 28, 1999
- ---------------------------------
Max E. Link
</TABLE>
-46-
EXHIBIT 10.9
LICENSE AGREEMENT
THIS AGREEMENT made and entered into as of the tenth day of November,
1999 (this "AGREEMENT"), by and between DUKE UNIVERSITY, a North Carolina
not-for-profit corporation organized under the laws of North Carolina (the
"LICENSOR"), having its principal office at Durham, North Carolina 27708, and
CELSION CORPORATION, a corporation organized under the laws of Maryland (the
"LICENSEE"), having its principal office at Columbia, MD.
WHEREAS, David Needham and Mark Dewhirst (the "DISCLOSERS"), employees
of LICENSOR, have filed an Invention Disclosure Form that has been assigned Duke
University Office of Science and Technology file number 1544 relating to a
method whereby encapsulated chemotherapeutic drugs and other agents can be
caused to be released by the local application of heat; and
WHEREAS, LICENSOR represents that it is the sole owner of the entire
right, title and interest in and to the HEAT TRIGGERED DELIVERY TECHNOLOGY (as
hereinafter defined) and PATENT RIGHTS related thereto (as hereinafter defined);
and
WHEREAS, LICENSOR has the right to grant licenses to said HEAT
TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS and wishes to have the HEAT
TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS utilized in the public interest;
and
WHEREAS, LICENSEE represents that it owns proprietary technology that
may allow it to develop HEAT TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS
into products that will be useful in the treatment of disease; and
WHEREAS, LICENSEE wishes to obtain a license to develop the HEAT
TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS into such useful products;
NOW THEREFORE, in consideration of the premises and the faithful
performance of the covenants herein contained, IT IS AGREED:
ARTICLE 1 - DEFINITIONS
1.01 - For the purposes of this AGREEMENT, and solely for that purpose,
the terms and phrases set forth hereinafter in capital letters shall be defined
as follows:
a. "AFFILIATE" shall mean any corporation, partnership or other entity
at least fifty percent (50%) of whose voting or other capital stock
is owned or controlled, directly or indirectly, by a party.
b. "FIELD" shall mean the use of the HEAT TRIGGERED DELIVERY TECHNOLOGY
and PATENT RIGHTS in thermally sensitive formulations designed to
release, activate, or express pharmaceutically active agents
locally, such release, activation, or expression being initiated by
local application of heat and being made for the purpose of treating
any disease or altering a physiological process in animals,
including, without restriction, in humans.
1
<PAGE>
c. "HEAT TRIGGERED DELIVERY TECHNOLOGY" shall mean PATENT RIGHTS and
know-how related to the use in the FIELD of liposomes that contain
pharmacologically active agents at normal body temperature and that
can be induced to release said agents locally by the local
application of heat as heretofore conceived and/or reduced to
practice by DISCLOSERS as evidenced by written records, including,
without limitation, Duke University Office of Science & Technology
File #1544.
d. "PATENT RIGHTS" shall mean all existing and presently being drafted
US and Foreign patent applications relating to Duke University
Office of Science and Technology file number 1544. The parties agree
that all such existing and presently being drafted applications are
US Patent Application Serial #09/099688 and PCT application
US99/12964 designating all countries of the EPO, Australia, Canada,
and Japan. In addition PATENT RIGHTS shall mean all U.S. and foreign
patent application(s) hereafter issuing on any such existing patent
application, substitutes, continuations, divisionals, or reissues
thereof.
e. "LICENSED PRODUCT" shall mean any product which is produced or sold
by or on behalf of LICENSEE, its AFFILIATES or sublicensees that
utilizes the HEAT TRIGGERED DELIVERY TECHNOLOGY or PATENT RIGHTS or
that is covered by one or more claims of the PATENT RIGHTS, and
which is intended for use in, or is used in, the FIELD.
f. "ALLIANCE FEES" shall include upfront cash fees, sublicensing fees,
periodic maintenance fees, and other cash payments or non-cash
consideration actually received by LICENSEE pursuant to the
formation, maintenance, extension or continuation of a DEVELOPMENT
ALLIANCE. ALLIANCE FEES shall not include amounts received by
LICENSEE in the form of research and development funding, equity
investments, performance-based research milestones, royalties on net
sales, sales bonuses, commercialization or development milestones,
or fees for hiring subcontractors to manufacture all or components
of the LICENSED PRODUCTS.
g. "DEVELOPMENT ALLIANCE" shall mean any strategic alliance,
partnership, joint venture, sublicense arrangement, manufacturing
arrangement, or other business relationship between LICENSEE and
another commercial party or parties which involves the development
of LICENSED PRODUCTS based on HEAT TRIGGERED DELIVERY TECHNOLOGY or
the PATENT RIGHTS.
h. "NETSALES" shall mean the aggregate United States dollar equivalent
of gross revenues paid LICENSEE, its AFFILIATES and sublicensees
from or on account of the sale or distribution of LICENSED PRODUCTS
to third parties who are not AFFILIATES of LICENSEE, less a
provision, determined under generally accepted accounting principles
in the United States for, first, shipping, handling, trade, cash,
prompt payment and/or quantity discounts or rebates (other than
price discounts granted at the time of invoicing and which are
included in the determination of gross revenues from sales); and,
second, credits or allowances, if any, actually made or granted
(prospectively or retroactively) on account of price adjustments,
recalls, rejection or return of, or on account of uncollectible
amounts on, LICENSED PRODUCT previously sold, including Medicare or
other similar rebates or discounts; and, third, credits or
allowances given or made for wastage replacement or indigent patient
programs;
2
<PAGE>
NET SALES shall not include any transfer between LICENSEE, its
AFFILIATES or sublicensees, on the one hand, and any of their
AFFILIATES or sublicensees, on the other hand, for resale, but shall
include the resale price to a third party payable to such AFFILIATES
or sublicensees.
If LICENSEE or any of its AFFILIATES or sublicensees sells any
LICENSED PRODUCT to a distributor which is not an AFFILIATE of
LICENSEE, the gross revenues derived by or payable to LICENSEE, such
AFFILIATE or sublicensee on account of such sale shall be the gross
revenues received by LICENSEE or such AFFILIATE or sublicensee from
the sale of such LICENSED PRODUCTS to such distributor. If such
distributor is an AFFILIATE of LICENSEE, then gross revenues derived
by or payable to LICENSEE, such AFFILIATE or sublicensee from the
sale of such LICENSED PRODUCTS shall be those received from the sale
of such LICENSED PRODUCTS to the first third party which is not an
AFFILIATE of LICENSEE.
If any LICENSED PRODUCT is sold as part of a system, package or
combination product wherein other components are or have been sold
as separate products not dependent on such LICENSED PRODUCT, NET
SALES for the purpose of calculating payments under Section 4.01
hereof shall be calculated by multiplying the NET SALES of the
combination product by the fraction A/B, where "A" is the average
unit price of such LICENSED PRODUCT when sold separately and "B" is
the average unit price of the combination product. If such LICENSED
PRODUCT is not sold separately, the NET SALES of such combination
product shall be negotiated in good faith by the Parties.
Notwithstanding the foregoing, no transfer of any LICENSED PRODUCT
for testing, pre-clinical, clinical or development purposes or as
samples shall be considered a sale hereunder for accounting purposes
and for payments under Section 4.01 hereof.
i. "FDA" shall mean the Food and Drug Administration of the United
States of America.
j. "MAJOR MARKET COUNTRY" shall mean the United States of America,
Canada, the United Kingdom, France, Germany, and Japan.
k. "EFFECTIVE DATE" shall mean November 20, 1999.
ARTICLE 2 - LICENSE
2.01 - LICENSOR hereby grants to LICENSEE and LICENSEE hereby accepts
from LICENSOR, upon the terms and conditions herein specified, an exclusive,
sublicensable license under the HEAT TRIGGERED DELIVERY TECHNOLOGY and the
PATENT RIGHTS to practice the INVENTIONS and to, directly or indirectly, make,
import, export, use, lease, sell or otherwise dispose of LICENSED PRODUCTS for a
period of (i) twenty (20) years or (ii) until the full end of the term or terms
for which a patent is issued by the U.S. Patent and Trademark Office in respect
of the PATENT RIGHTS, whichever is longer, unless sooner terminated as
hereinafter provided. With regard to HEAT TRIGGERED DELIVERY TECHNOLOGY, this
license shall be world-wide; with regard to PATENT RIGHTS, this license shall
extend to the United States of America, MAJOR MARKET COUNTRIES, and DESIGNATED
COUNTRIES as defined and specified under ARTICLE 7 hereof.
3
<PAGE>
2.02 - LICENSEE shall have the right to grant sublicenses. Any such
sub-licenses shall be subject to the terms of this AGREEMENT. LICENSEE agrees to
be responsible for the performance hereunder by its sub-licensees, if any, but
not to be a guarantor for such sublicensees. If, for any reason, this AGREEMENT
is terminated, LICENSEE hereby agrees to assign all such sublicenses directly to
LICENSOR, to the extent permitted by such sublicenses.
2.03 - It is agreed that, notwithstanding anything to the contrary
contained herein, LICENSOR is free to use the HEAT TRIGGERED DELIVERY TECHNOLOGY
and PATENT RIGHTS for its own non-commercial educational, teaching, research and
clinical purposes without restriction and without payment of royalties or other
fees, provided that LICENSOR discloses in connection with such use that the HEAT
TRIGGERED DELIVERY TECHNOLOGY and PATENTS RIGHTS are licensed to LICENSEE
pursuant to the terms of this AGREEMENT.
2.04 - If LICENSEE, acting alone or together with any of its officers,
directors, employees, agents or sublicensees, makes any modification,
enhancement or improvement to the HEAT TRIGGERED DELIVERY TECHNOLOGY and/or the
PATENT RIGHTS (the "IMPROVEMENTS") then LICENSEE shall own all right, title and
interest in and to such IMPROVEMENTS and shall be responsible for patent and
other intellectual property protection thereon.
2.05 - LICENSOR shall provide reasonable opportunities for LICENSEE'S
personnel to have access to DISCLOSERS so that DISCLOSERS can provide training
and information with respect to the HEAT TRIGGERED DELIVERY TECHNOLOGY and
PATENT RIGHTS. Once available information concerning HEAT TRIGGERED DELIVERY
TECHNOLOGY and PATENT RIGHTS has been transmitted to LICENSEE, DISCLOSERS shall
be entitled to be compensated by LICENSEE if additional training or consulting
is necessary. Such arrangement shall be made between DISCLOSERS and LICENSEE and
shall comply with all regulations and policies of LICENSOR governing faculty
consulting relationships.
ARTICLE 3 - ROYALTIES, RECORDS AND REPORTS
3.01 - LICENSEE shall pay to LICENSOR a running royalty (i) during the
term of this AGRREMENT up to the date on which the U.S. Patent and Trademark
Office shall issue a patent in respect of the PATENT RIGHTS, at the rate of
[Confidential Treatment Requested] percent ([Confidential Treatment Requested]%)
of NET SALES of LICENSED PRODUCTS and (ii) during the terms of this Agreement
from and after the date on which the U.S. Patent and Trademark Office shall
issue a patent in respect of the PATENT RIGHTS at the rate of (Confidential
Treatment Requested) percent ([Confidential Treatment Requested]%) of NET SALES
of LICENSED PRODUCTS. If LICENSEE demonstrates through written records (i) that
it has been necessary to license additional technology from third parties in
order to commercialize the LICENSED PRODUCTS (the "NECESSARY TECHNOLOGY") and
(ii) that such additional license for NECESSARY TECHNOLOGY obligates LICENSEE to
4
<PAGE>
pay royalties on NET SALES of LICENSED PRODUCTS such that the aggregates
royalties on NET SALES due to third parties exceeds [Confidential Treatment
Requested] percent ([Confidential Treatment Requested]%) of NET SALES, then
LICENSEE shall be permitted to reduce the royalty due LICENSOR under this
AGREEMENT by one-half of any such additional royalties payable to third parties
in excess of [Confidential Treatment Requested] percent ([Confidential Treatment
Requested]%] percent of NET SALES of LICENSED PRODUCTS; provided, however, in no
case shall the royalty rate payable by LICENSEE to LICENSOR pursuant to this
Section 3.01 from and after the date on which the U.S. Patent and Trademark
Office shall issue a patent in respect of the PATENT RIGHTS, when reduced by any
royalties due to third parties for NECESSARY TECHNOLOGY, be less than
[Confidential Treatment Requested] percent ([Confidential Treatment Requested]%)
of NET SALES.
3.02 - Beginning with the year that ensues on the second January 1
after the approval of the first LICENSED PRODUCT by the FDA or a comparable
regulatory authority in a MAJOR MARKET COUNTRY, LICENSEE shall pay to LICENSOR a
minimum annual royalty of [Confidential Treatment Requested]dollars
($[Confidential Treatment Requested]). For avoidance of doubt, this means that
should the running royalties due under Section 3.01 hereof for a calendar year
not equal [Confidential Treatment Requested] dollars ($[Confidential Treatment
Requested]), LICENSEE shall pay to LICENSOR an additional amount so that the
total royalties paid to LICENSOR for such calendar year shall be [Confidential
Treatment Requested]dollars ($[Confidential Treatment Requested]).
3.03 - LICENSEE shall render to LICENSOR prior to February 28th and
August 31st of each year during the term of this AGREEMENT a written account of
the NET SALES of LICENSED PRODUCTS subject to royalty payments hereunder made
during the prior six month periods ending December 31st and June 30th,
respectively, and shall simultaneously pay to LICENSOR the royalties due on such
NET SALES in United States Dollars. Minimum annual royalties, if any, which are
due LICENSOR for any calendar year, shall be paid by LICENSEE along with the
written report due on February 28 of each year.
3.04- Specified reports shall be submitted on the forms giving the same
information and having substantially the same layout as the sample form in
EXHIBIT A of this AGREEMENT.
3.05 - LICENSEE will make all payments on or before the later of the
date required by the terms of this AGREEMENT, or within [Confidential Treatment
Requested] ([Confidential Treatment Requested]) days of any invoice date on
invoices received from LICENSOR. If LICENSEE has not paid any uncontested amount
due to LICENSOR in accordance with this Article 3, LICENSOR shall increase the
amount due (in US Dollars) by an annual percentage rate equal to [Confidential
Treatment Requested] percent ([Confidential Treatment Requested]%) on such
unpaid amount. Such increase(s) shall compound monthly until such time as
LICENSEE has met the full financial obligation due at the time of the next
payment or invoice due date.
3.06 - LICENSEE shall keep full, true and accurate books of accounts
and other records containing all particulars which may be necessary to properly
ascertain and verify the royalties payable by it hereunder. Upon [Confidential
Treatment Requested] ([Confidential Treatment Requested]) days advance notice by
5
<PAGE>
LICENSOR, LICENSEE shall permit an independent Certified Public Accountant
selected by LICENSOR (except one to whom LICENSEE has some reasonable objection)
to have access during ordinary business hours to such of LICENSEE's records as
may be necessary to determine, in respect of any quarter ending not more than
two (2) years prior to the date of such request, the correctness of any report
and/or payment made under this AGREEMENT, provided that such access shall not
interfere unreasonably with the business and affairs of LICENSEE, and provided
further that such audits are conducted no more than once during each calendar
year or portion thereof during the term hereof.
3.07 - During the term of this AGREEMENT, LICENSEE will submit annual
progress reports to LICENSOR by February 28 of each year which discuss the
progress and results, as well as ongoing plans, with respect to the HEAT
TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS. LICENSOR shall have the right
to request one meeting per year at times and places mutually agreed upon between
LICENSOR and LICENSEE to discuss the progress and results, as well as ongoing
plans, with respect to the evaluation and development of the HEAT TRIGGERED
DELIVERY TECHNOLOGY and PATENT RIGHTS; provided, however, that should LICENSOR's
personnel be required by LICENSEE to meet with LICENSEE outside of Durham, North
Carolina, LICENSEE will reimburse reasonable travel and living expenses for two
(2) individuals incident thereto.
ARTICLE 4 - MILESTONE-BASED ROYALTIES
4.01 - LICENSEE will pay royalties (each, a "MILESTONE-BASED ROYALTY";
collectively, the "MILESTONE-BASED ROYALTIES") to LICENSOR upon the attainment
of the commercial milestones specified below by LICENSOR, LICENSEE, an AFFILIATE
of LICENSOR or LICENSEE or any other person or entity with whom LICENSEE has
formed a DEVELOPMENT ALLIANCE. Unless specifically noted, no MILESTONE-BASED
ROYALTIES shall be credited towards other royalties or minimum royalties due to
LICENSOR under any other Article of this AGREEMENT:
a. Execution of this AGREEMENT, [Confidential Treatment
Requested]United States Dollars ($[Confidential Treatment
Requested]);
b. Filing of the first Investigational New Drug (IND) application or
comparable foreign application for a LICENSED PRODUCT, [Confidential
Treatment Requested]United States Dollars ($[Confidential Treatment
Requested]);
c. First demonstration of the efficacy of a LICENSED PRODUCT in a
clinical trial using the definition of efficacy determined at the
outset of the trial, [Confidential Treatment Requested] United
States Dollars ($[Confidential Treatment Requested]);
d. Filing of the first New Drug Application (NDA), Biologic Licensing
Application (BLA) or comparable foreign applications for marketing
approval of a LICENSED PRODUCT, [Confidential Treatment
Requested]United States Dollars ($[Confidential Treatment
Requested]);
e. Approval of the first NDA, BLA or comparable foreign application for
marketing approval of a Licensed Product, [Confidential Treatment
Requested]United States Dollars ($[Confidential Treatment
Requested]);
6
<PAGE>
f. Approval of each second, third and fourth NDA, BLA or comparable
foreign applications for marketing approval for additional LICENSED
PRODUCTS, [Confidential Treatment Requested] United States Dollars
($[Confidential Treatment Requested]);
g. Approval of each additional NDA, BLA or comparable foreign
application for marketing approval for new indications of an already
approved LICENSED PRODUCT:
second indication, [Confidential Treatment Requested]United
States Dollars($[Confidential Treatment Requested])
third indication, [Confidential Treatment Requested]United
States Dollars ($[Confidential Treatment Requested])
fourth indication, [Confidential Treatment Requested]United
States Dollars ($[Confidential Treatment Requested]);
h. First attainment of total aggregate Net Sales of all LICENSED
PRODUCTs of [Confidential Treatment Requested] United States Dollars
($[Confidential Treatment Requested]) in a single calendar year,
[Confidential Treatment Requested]United States Dollars
($[Confidential Treatment Requested]); and
i. First attainment of total aggregate Net Sales of all LICENSED
PRODUCTS of [Confidential Treatment Requested]United States Dollars
($[Confidential Treatment Requested]) in a single calendar year,
[Confidential Treatment Requested]United States Dollars
($[Confidential Treatment Requested]).
4.02. a. Notwithstanding anything to the contrary contained herein,
LICENSOR and LICENSEE hereby agree that, in lieu of paying any such
MILESTONE-BASED ROYALTY in cash, LICENSEE may issue and LICENSOR shall accept
shares of the Common Stock of LICENSEE. The number of shares of the Common Stock
of LICENSEE to be issued at the time that such MILESTONE-BASED ROYALTY is due
and payable with respect to each such MILESTONE-BASED ROYALTY shall be
determined by dividing the amount of such MILESTONE BASED ROYALTY by the average
closing price of the Common Stock of LICENSEE during the twenty (20) trading
days immediately preceding the date that such MILESTONE-BASED ROYALTY became due
and payable.
b. Within ten (10) days after the first anniversary of the
EFFECTIVE DATE, LICENSEE shall determine, in good faith, the market value of the
shares of Common Stock issued by LICENSEE to LICENSOR hereunder as of the first
anniversary of the EFFECTIVE DATE (the "FIRST ANNIVERSARY MARKET VALUE") by
multiplying the number of shares of Common Stock of LICENSEE issued by LICENSEE
to LICENSOR hereunder prior to the first anniversary of the EFFECTIVE DATE by
the average closing price of the Common Stock of LICENSEE during the twenty (20)
trading days immediately preceding the first anniversary of the EFFECTIVE DATE.
In the event that the FIRST ANNIVERSARY MARKET VALUE of such shares of Common
Stock is less than the aggregate amount of the MILESTONE-BASED ROYALTIES that
LICENSEE would have been required to pay to LICENSOR on or before the first
anniversary of the EFFECTIVE DATE had LICENSEE chosen to make such MILESTONE
- -BASED ROYALTIES in cash rather than in shares of Common Stock of LICENSEE (the
"AGGREGATE FIRST ANNIVERSARY CASH VALUE") then LICENSEE shall issue to LICENSOR
and LICENSOR shall accept additional shares of the Common Stock of LICENSEE, the
number of which shall be determined by dividing (i) the difference between the
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AGGREGATE FIRST ANNIVERSARY CASH VALUE and the FIRST ANNIVERSARY MARKET VALUE by
(ii) the average closing price of the Common Stock of LICENSEE during the twenty
(20) trading days immediately preceding the first anniversary of the EFFECTIVE
DATE.
c. Within ten (10) days after the second anniversary of the
EFFECTIVE DATE, LICENSEE shall determine, in good faith, the aggregate market
value of the shares of Common Stock issued by LICENSEE to LICENSOR hereunder
prior to the second anniversary of the EFFECTIVE DATE (the "SECOND ANNIVERSARY
AGGREGATE MARKET VALUE"). For the purposes hereof, the "market value" of each
share of Common Stock of LICENSEE issued by LICENSEE to LICENSOR pursuant to
Section 4.02(a) hereof with respect to any MILESTONE-BASED ROYALTY due hereunder
shall be equal to the average closing price of the Common Stock of LICENSEE
during the twenty (20) trading days immediately preceding the date that such
MILESTONE -BASED ROYALTY became due and payable and the "market value" of each
share of Common Stock of LICENSEE issued by LICENSEE to LICENSOR pursuant to
Section 4.02(b) hereof shall be equal to the average closing price of the Common
Stock of LICENSEE during the twenty (20) trading days immediately preceding the
first anniversary of the EFFECTIVE DATE. In the event that SECOND ANNIVERSARY
MARKET VALUE of such shares of Common Stock is less than the aggregate amount of
the MILESTONE-BASED ROYALTIES that LICENSEE would have been required to pay to
LICENSOR on or before the second anniversary of the EFFECTIVE DATE had LICENSEE
chosen to pay such MILESTONE-BASED ROYALTIES in cash rather than in shares of
Common Stock of LICENSEE (the "Aggregate Second Anniversary Cash Value") then
LICENSEE shall issue to LICENSOR and LICENSOR shall accept additional shares of
the Common Stock of LICENSEE, the number of which shall be determined by
dividing (i) the difference between the AGGREGATE SECOND ANNIVERSARY CASH VALUE
and the SECOND ANNIVERSARY MARKET VALUE by (ii) the average closing price of the
Common Stock of LICENSEE during the twenty (20) trading days immediately
preceding the second anniversary of the EFFECTIVE DATE.
d. In addition, (i) LICENSOR may not sell, transfer or assign
any shares of the Common Stock of LICENSEE issued to LICENSOR hereunder as
MILESTONE-BASED ROYALTIES on or before the first anniversary of the EFFECTIVE
DATE until the first anniversary of the EFFECTIVE DATE and (ii) LICENSOR shall
be prohibited from selling, transferring or assigning any shares of the Common
Stock of LICENSEE issued to LICENSOR hereunder with respect to milestones during
the period commencing on the first anniversary of the EFFECTIVE DATE and ending
on the second anniversary of the EFFECTIVE DATE until the second anniversary of
the EFFECTIVE DATE.
e. In the event that, on or before the second anniversary of the
EFFECTIVE DATE, (i) LICENSEE forms a subsidiary to which LICENSEE's rights under
this AGREEMENT are assigned (the "SUBSIDIARY") and (ii) the SUBSIDIARY
undertakes an initial public offering of its Common Stock or otherwise registers
its Common Stock with the Securities and Exchange Commission (the "SEC") so as
to permit a public trading market to develop for such Common Stock, LICENSOR
shall have a one-time right to exchange all or any portion of the Common Stock
of LICENSEE which LICENSOR received under this AGREEMENT and which LICENSOR is
then holding for shares of the Common Stock of the SUBSIDIARY. Such right may be
exercised by LICENSOR's written notice to LICENSEE, to be given not earlier than
ninety (90) and not later than one hundred eighty (180) days after the Common
Stock of LICENSEE first becomes publicly traded, which notice shall specify the
number of shares of the Common Stock of LICENSEE to be so exchanged for Common
Stock of the SUBSIDIARY. Within ten (10) days after receipt of such notice (the
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"NOTICE DATE"), LICENSEE shall notify LICENSOR of the number of shares of the
Common Stock of the SUBSIDIARY which will be issued in such exchange, and shall
include in such notification the computation of such number, which computation
shall be based on an exchange price which incorporates a thirty percent (30%)
discount from the then market price of the Common Stock of the SUBSIDIARY, and
which shall be determined in accordance with the following formula:
AP x LS divided by .7 (APS) = No. of SS,
where "AP" means the average closing price of the Common Stock of
LICENSEE over the twenty (20) trading days immediately preceding the NOTICE
DATE;
"LS" means the number of shares of the Common Stock of LICENSEE which
LICENSOR desires to exchange;
"APS" means the average closing price of the Common Stock of the
Subsidiary over the twenty (20) trading days immediately preceding the NOTICE
DATE; and
"No. of SS" means the number of shares of the Common Stock of the
SUBSIDIARY to be issued in exchange for the shares of the Common Stock of
LICENSEE being tendered for exchange by LICENSOR.
Within ten (10) days after notice from LICENSEE, LICENSOR shall deliver
a certificate or certificates for the shares of LICENSEE to be exchanged,
accompanied by a validly executed stock power and free and clear of all liens,
charges and encumbrances, and LICENSEE shall cause the SUBSIDIARY to deliver a
certificate for shares of the Common Stock of the SUBSIDIARY, which shares shall
be duly and validly issued, fully paid and free and clear of all liens, charges
and encumbrances.
f. In the event that, on or before the second anniversary of the
EFFECTIVE DATE, (i) LICENSEE does not form the SUBSIDIARY or (ii) the SUBSIDIARY
does not undertake an initial public offering of its Common Stock or otherwise
register its Common Stock with the SEC so as to permit a public trading market
to develop for such Common Stock, LICENSOR, at its option, may by written notice
given to LICENSEE within thirty (30) days after the second anniversary of the
EFFECTIVE DATE, require LICENSEE to pay to LICENSOR, within thirty (30) days
after receipt by LICENSEE of such notice, the amount of all previously unpaid,
unearned MILESTONE-BASED ROYALTIES in shares of the Common Stock of LICENSEE; it
being understood, however, that by doing so, LICENSOR waives any and all right
it may have pursuant to Section 4.02(e) hereof or otherwise to exchange all or
any portion of the Common Stock of LICENSEE which LICENSOR received under this
AGREEMENT and which LICENSOR is holding for shares of the Common Stock of the
SUBSIDIARY. The number of shares of the Common Stock of LICENSEE to be issued
under this Section 4.02(f) shall be determined by dividing the amount of all
previously unpaid, unearned MILESTONE-BASED ROYALTIES by the average closing
price of the Common Stock of LICENSEE during the twenty (20) trading days
immediately preceding the date of receipt by LICENSEE of such notice.
g. LICENSOR acknowledges that the securities which may be issued
under this AGREEMENT are not being initially registered and therefore are
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from LICENSEE in a transaction not involving a public offering,
and that, under such laws and applicable regulations, such securities may not be
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<PAGE>
transferred or resold without registration under the Securities Act of 1933, as
amended (the "SECURITIES ACT ), or pursuant to an exemption therefrom. In this
connection, LICENSOR represents that it is familiar with Rule 144 under the
SECURITIES ACT, as presently in effect, and understands the resale limitations
imposed thereby and by the SECURITIES ACT. LICENSOR is acquiring the shares of
Common Stock subscribed solely for investment purposes and not with a view to a
distribution of all or any part thereof. LICENSOR has the financial ability to
bear the economic risk of its investment for an indefinite period, and has
adequate means of providing for its current needs and anticipated contingencies
without reference to the liquidity of the securities which may be issued to it.
LICENSOR is a not-for-profit organization with more than ($ Confidential
Treatment Requested) in total assets. LICENSOR has such knowledge and experience
in financial and business matters that it is fully capable of evaluating the
merits and risks of an investment in LICENSEE.
h. If LICENSEE intends to make an underwritten public offering
of its Common Stock solely for cash at any time after the first anniversary of
the EFFECTIVE DATE, and files a registration statement in connection therewith,
LICENSEE shall, within ten (10) days after the date of such filing, send written
notice of such filing, together with a copy of the preliminary prospectus
included in such registration statement, to LICENSOR. Upon the written request
of LICENSOR to be included in such registration statement as a selling
stockholder, given not later than twenty (20) days after receipt of such notice,
LICENSEE shall include in such registration statement all or any portion of the
shares of Common Stock previously issued by LICENSEE to LICENSOR hereunder, as
LICENSOR shall so request. However, if the managing underwriter of such public
offering shall express objection to the inclusion of all or part of such shares
of Common Stock of LICENSOR in such public offering because of prevailing market
conditions or other factors, the amount of such shares of Common Stock of
LICENSOR to be so registered in such offering shall be reduced to the level
which such managing underwriter deems appropriate in relation to the size of the
underwritten offering and the ability of the market to accommodate the sale of
such shares of Common Stock of LICENSOR, provided, however, that if any shares
of Common Stock are being included in such offering on behalf of any selling
stockholders other than LICENSOR, any reduction of offered securities imposed on
LICENSOR shall be proportional to any reduction imposed on such other selling
stockholders; and further provided that, at the request of the managing
underwriter of such public offering, LICENSOR may be required to refrain from
selling its shares of Common Stock pursuant to such registration statement for a
"lock-up" period of up to nine (9) months after the completion of the public
sale of securities offered by LICENSEE in such public offering, on terms no less
favorable than those applicable to other selling stockholders.
Whenever required under this Section 4.02(h) to effect the
registration of any securities, LICENSEE shall, as expeditiously as reasonably
possible:
(i) Prepare and file with the SEC a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of LICENSOR,
keep such registration statement effective for at least nine (9) months.
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(ii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the SECURITIES ACT with respect to the disposition of all
securities covered by such registration statement.
(iii) Furnish to LICENSOR such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the SECURITIES ACT, and such other documents as they may
reasonably request in order to facilitate the disposition of securities owned by
them.
(iv) Use its best efforts to register and qualify the
securities covered by such registration statement under the securities laws of
such jurisdictions as shall be reasonably requested by LICENSOR for the
distribution of the securities covered by the registration statement, provided
that LICENSEE shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such jurisdiction.
(v) In the event of an underwritten public offering,enter
into and perform its obligations under an underwriting agreement with terms
generally satisfactory to LICENSEE and the managing underwriter of such
offering.
(vi) Notify LICENSOR promptly after LICENSEE shall have
received notice thereof, of the time when the registration statement becomes
effective or any supplement to any prospectus forming a part of the registration
statement has been filed.
(vii) Notify LICENSOR of any stop order suspending the
effectiveness of the registration statement and use its reasonable best efforts
to remove such stop order.
It shall be a condition precedent to the obligations of LICENSEE
to take any action pursuant to the provisions of this Section 4.02(h) that
LICENSOR shall furnish to LICENSEE such information in writing regarding itself,
the securities held by it, and the intended method of disposition of such
securities, as LICENSEE shall reasonably request and as shall be required to
effect the registration of such securities. In that connection, LICENSOR shall
be required to represent to LICENSEE that all such information which is given is
both complete and accurate in all material respects. LICENSOR shall also deliver
to LICENSEE a statement in writing that it has a bona fide intention to sell,
transfer or otherwise dispose of such securities.
"Registration Expenses" shall mean all expenses incurred by
LICENSEE in complying with the provisions of this Section 4.02(h), including,
without limitation, all registration and filing fees, printing expenses, fees
and disbursements of counsel for LICENSEE, blue sky fees and expenses, and the
expense of any special audits incident to or required by any such registration.
"Selling Expenses" shall mean all underwriting discounts, selling commissions
and underwriters' expense allowances applicable to the sale of the securities of
LICENSOR, and all fees and disbursements of any special counsel or accountant or
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other expert for LICENSOR. All Registration Expenses incurred in connection with
any registration, qualification or compliance pursuant to this Section 4.02(h)
shall be borne by LICENSEE, and all Selling Expenses shall be borne by LICENSOR.
If LICENSOR proposes to distribute its securities through an
underwriter, LICENSEE shall enter into an underwriting agreement in customary
form with the underwriter or underwriters, provided that the terms thereof shall
not be materially less favorable to LICENSEE than those customarily arranged in
comparable underwritten offerings.
LICENSOR shall have no right to obtain or seek an injunction
restraining or otherwise delaying any such registration as the result of any
controversy that might arise with respect to the interpretation or
implementation of this Section 4.02(h).
Nothing contained herein shall be deemed to limit the rights of
LICENSOR to offer or make a public sale of any portion of such securities under
Rule 144 of the SEC or any other applicable provisions of federal and state
securities laws. Furthermore, if, in the opinion of counsel for LICENSEE, the
offering or transfer by LICENSOR in the manner proposed (including, without
limitation, the number of shares proposed to be offered or transferred and the
method of offering or transfer) is exempt from the registration requirements of
the Securities Act under Rule 144 or otherwise, LICENSEE shall not be required
to effect any registration of such securities under the Securities Act.
If, instead of a public offering of securities, LICENSOR shall,
at any time, offer or propose to offer all or any part of the securities of
LICENSEE which it holds, for sale in an arms-length private transaction, it
shall, before completing such transaction, notify LICENSEE of the specific terms
and conditions of the intended sale, including the identity of the proposed
buyer, and LICENSEE shall have then have the prior right, during a period of
thirty (30) days from receipt of such notification, to elect to purchase such
securities on the same terms and conditions, such election to be made by notice
to LICENSOR within such thirty (30) day period and to be consummated as set
forth in such notices.
ARTICLE 5- SHARING OF ALLIANCE FEES
5.01 - Upon execution of a DEVELOPMENT ALLIANCE by LICENSEE with a
third party, LICENSEE will pay LICENSOR the greater of [Confidential Treatment
Requested]United States Dollars ($[Confidential Treatment Requested]) or
[Confidential Treatment Requested] percent ([Confidential Treatment Requested]%)
of the total value of any ALLIANCE FEE received by LICENSEE. Such total value of
the ALLIANCE FEE shall mean the value of any cash received by LICENSEE as part
of the ALLIANCE FEE added to the cash value of any non-cash consideration
received by the LICENSEE as part of the ALLIANCE FEE. If LICENSEE receives
non-cash consideration as part of an ALLIANCE FEE, LICENSEE and LICENSOR will
negotiate in good faith to determine the cash value of such non-cash
consideration.
5.02 - In the event that LICENSOR becomes a holder of equity in
SUBSIDIARY under Article 4.02(e) hereof, the parties will renegotiate the
provisions of this Article 5.
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ARTICLE 6 - DUE DILIGENCE REQUIREMENTS
6.01 - LICENSEE shall use commercially reasonable efforts to bring
LICENSED PRODUCTS to market through a diligent program for exploitation of the
PATENT RIGHTS, to develop manufacturing capabilities, and to continue active,
diligent marketing efforts for LICENSED PRODUCTS throughout the term of this
AGREEMENT.
6.02 - Within six months of the EFFECTIVE DATE, LICENSEE shall submit
to LICENSOR a plan (the "PLAN") for development of LICENSED PRODUCTS. LICENSOR
will have the right to review and approve this PLAN so that the PLAN is
reasonably acceptable to LICENSOR. Once approved, this PLAN will be used to
determine if LICENSEE is making acceptable progress to commercialize LICENSED
PRODUCTS. Any proposed changes in the PLAN will be discussed by LICENSOR and
LICENSEE and must be reasonably acceptable to both parties.
6.03 - Within six-months of the time that LICENSEE or LICENSOR
demonstrates in an animal model reasonably acceptably to both parties that a
candidate LICENSED PRODUCT has efficacy in treating a disease or altering a
physiological process in a useful way, LICENSEE shall present to LICENSOR a
development plan outlining how the LICENSEE intends to develop the LICENSED
PRODUCT from the candidate. Said development plan shall include evidence that
LICENSEE has made arrangements for production of GMP grade material for use in
clinical trials and for studies of toxicity that will be carried out under
protocols that meet all standards for approval by the FDA or a comparable
regulatory agency in a foreign country.
6.04 - LICENSEE agrees to use commercially reasonable efforts to
develop a sublicensing program to effect commercialization of LICENSED PRODUCTS
that the LICENSEE decides not to exploit on its own.
6.05 - During the term of this AGREEMENT, LICENSEE will submit annual
progress reports to LICENSOR with the royalty report due pursuant to Article 3
hereof by February 28 of each year which discuss the progress and results, as
well as ongoing plans, with respect to the HEAT TRIGGERED DELIVERY TECHNOLOGY
and PATENT RIGHTS.
6.06 - LICENSEE shall support pre-clinical and clinical research at
Duke University to develop LICENSED PRODUCTS. The nature and scope of these
research projects shall be determined in good faith between the parties. Such
research support shall begin no later than November 20, 1999 and shall continue
for no less than sixteen (16) months from such date. LICENSEE agrees to commit
no less than an aggregate of [Confidential Treatment Requested]United States
Dollars ($[Confidential Treatment Requested]) to total direct and indirect costs
of such preclinical and clinical studies within said sixteen month period. The
details of the research projects and the timing of such funding by LICENSEE will
be embodied in appropriate non-clinical and clinical research agreements between
LICENSEE and LICENSOR.
6.07 - LICENSOR may terminate this AGREEMENT or convert this AGREEMENT
to a non-exclusive AGREEMENT if LICENSEE fails to meet any of the
commercialization milestones in this Article 6 after notice and opportunity to
cure as specified under Section 10.03 hereof.
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ARTICLE 7 - PATENT PROSECUTION, EXPENSES, DEFENSE, AND INFRINGEMENT
7.01 - Subsequent to the EFFECTIVE DATE of this AGREEMENT, LICENSOR
shall continue to have sole responsibility for filing, prosecuting and
maintaining appropriate patent protection in the United States and in those
MAJOR MARKET COUNTRIES where patent protection is available for the PATENT
RIGHTS, and all of the expenses of such protection shall be paid by LICENSOR.
LICENSOR shall keep LICENSEE advised as to the prosecution of such applications
by forwarding to LICENSEE copies of all official correspondence relating
thereto. LICENSEE agrees to cooperate with LICENSOR in the prosecution of the
U.S. Patent Applications to insure that the application reflects, to the best of
LICENSEE'S knowledge, all items of commercial and technical interest and
importance. All final decisions with respect to the prosecution of said
application are reserved to LICENSOR.
7.02 - Subsequent to the EFFECTIVE DATE of this AGREEMENT, LICENSEE
shall designate the foreign countries ("DESIGNATED COUNTRIES") other than MAJOR
MARKET COUNTRIES, if any, in which LICENSEE desires patent protection, and
LICENSOR agrees to proceed to seek patent protection in such DESIGNATED
COUNTRIES. LICENSEE shall be responsible for reimbursing LICENSOR for foreign
patent expenses incurred in perfecting patent protection in DESIGNATED
COUNTRIES. LICENSOR may elect to seek patent protection in countries not so
designated by LICENSEE, in which case LICENSOR shall be solely responsible for
all expenses attendant thereto; however, in such instances LICENSEE shall
forfeit its rights under this AGREEMENT as to those countries.
7.03 - Section 7.01 of this AGREEMENT not withstanding, LICENSEE shall
reimburse LICENSOR for all out-of-pocket legal expenses incurred in the
prosecution and maintenance of PATENT RIGHTS in the United States of America, in
MAJOR MARKET COUNTRIES, and in DESIGNATED COUNTRIES, according to the following
schedule:
a. Within thirty (30) days after the EFFECTIVE DATE of this AGREEMENT,
a sum equal to the amount of all unreimbursed expenses incurred by
LICENSOR in the prosecution of PATENT RIGHTS; and
b. Subsequent to the EFFECTIVE DATE of this Agreement, LICENSOR shall
invoice LICENSEE for additional patent expenses as they are
incurred, and LICENSEE shall reimburse LICENSEE within thirty (30)
days of being invoiced.
7.04 - LICENSEE and LICENSOR shall give prompt notice to each other of
each claim or allegation received by it that the manufacture, use or sale of
LICENSED PRODUCTS constitutes a significant infringement of a third party patent
or patents. LICENSEE shall have the primary right and responsibility at its own
expense to defend and control the defense of any such claim against LICENSEE, by
counsel of its choosing. The settlement of any such actions must be approved by
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LICENSOR, which approval may not be unreasonably withheld. LICENSOR agrees to
cooperate with LICENSEE in any reasonable manner deemed by LICENSEE to be
necessary in defending or prosecuting such action. Notwithstanding the
foregoing, LICENSOR shall in its sole discretion and at its sole cost, be
entitled to participate through counsel of its own choosing in any such action.
7.05 - Upon learning of the infringement of HEAT TRIGGERED DELIVERY
TECHNOLOGY or PATENT RIGHTS by a third party, the party learning of such
infringement shall promptly inform the other party in writing of that fact along
with any evidence available pertaining to the infringement. LICENSEE may at its
own expense take whatever steps are necessary to stop the infringement and
recover damages. In such case, LICENSEE will keep LICENSOR informed of the steps
taken and the progress of any legal actions taken. Any award granted to LICENSEE
by a court or in settlement for lost sales, less any reasonable attorney's fees,
shall be considered as NET SALES by the LICENSEE, and LICENSEE shall pay
royalties on such an awards as specified under Section 3.01 hereof. LICENSEE
will pay to LICENSOR [Confidential Treatment Requested] percent ([Confidential
Treatment Requested]%) of any punitive damages awarded during an infringement
action or settlement that are in excess of legal expenses incurred by LICENSEE
in enforcing its rights to the HEAT TRIGGERED DELIVERY TECHNOLOGY or the PATENT
RIGHTS. If LICENSEE does not undertake, within sixty (60) days of notice, to
enforce its rights to the HEAT TRIGGERED DELIVERY TECHNOLOGY or the PATENT
RIGHTS against the infringing party, the LICENSOR shall have the right, at its
own expense to take whatever steps are necessary to stop the infringement and
recover damages, and shall be entitled to retain damages so recovered.
ARTICLE 8 - GOVERNMENT CLEARANCE AND EXPORT
8.01 - LICENSEE agrees to use its best efforts to have LICENSED
PRODUCTS cleared for marketing in those countries in which LICENSEE intends to
sell LICENSED PRODUCTS by the responsible government agencies requiring such
clearance. To accomplish said clearances at the earliest possible date, LICENSEE
agrees to file, according to the usual practice of LICENSEE, any necessary data
with said government agencies. Should LICENSEE terminate this AGREEMENT,
LICENSEE agrees to assign its full interest and title in such market clearance
application, including all data relating thereto, to LICENSOR at no cost to
LICENSOR.
8.02 - This agreement is subject to all of the United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities and technology.
ARTICLE 9 - PUBLICATION AND CONFIDENTIALITY
9.01 - LICENSEE agrees that the right of publication of the invention
and said HEAT TRIGGERED DELIVERY TECHNOLOGY and PATENT RIGHTS shall reside in
the inventor and other staff of LICENSOR. The LICENSOR shall use its best
efforts to provide a copy of such publication forty-five (45) days in advance of
such submission for review by LICENSEE so that LICENSEE can advise LICENSOR on
issues relating to patent protection, but such review will be in no way
construed as a right to restrict such publication. LICENSEE shall also have the
right to publish and/or co-author any publication on the HEAT TRIGGERED DELIVERY
TECHNOLOGY and PATENT RIGHTS based upon data developed by LICENSEE according to
usual academic procedures.
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9.02 - Each party shall keep confidential and not disclose, directly or
indirectly, for a period of [Confidential Treatment Requested] ([Confidential
Treatment Requested]) years from the date of disclosure, and shall not use for
the benefit of itself of any other individual or entity any CONFIDENTIAL
INFORMATION of the other, except with the prior written approval of the
disclosing party (the "DISCLOSING PARTY"). "CONFIDENTIAL INFORMATION" means any
trade secrets or confidential, propriety information, whether written, oral,
digital or other form, which is unique, confidential or proprietary to the
DISCLOSING PARTY, including but not limited to, the applicable HEAT TRIGGERED
DELIVERY TECHNOLOGY, PATENT RIGHTS, LICENSED PRODUCTS and any other materials or
in formation related to the business or activity of the DISCLOSING PARTY which
is not generally known to others engaged in similar businesses or activities.
Information disclosed in written media shall be clearly marked "CONFIDENTIAL" in
order to be entitled to protection as CONFIDENTIAL INFORMATION. Information
disclosed orally or in other media shall be considered CONFIDENTIAL INFORMATION
only if the information is reduced to a written summary by the DISCLOSING PARTY,
and if said written summary is marked "CONFIDENTIAL" and sent to the party
receiving the disclosure within thirty (30) days of the date of disclosure. The
recipient of such CONFIDENTIAL INFORMATION has no confidentiality obligation
hereunder with respect to CONFIDENTIAL INFORMATION that (a) was in the
possession of, or was rightfully known, by such recipient without a
confidentiality obligation prior to receipt of such CONFIDENTIAL INFORMATION
from the DISCLOSING PARTY; (b) is, or becomes, generally known to the public
without violation of this AGREEMENT; (c) is retained by such recipient in good
faith from a third party having the right to disclose such CONFIDENTIAL
INFORMATION without a confidentiality obligation; (d) is independently developed
by such recipient without the participation of individuals who have had access
to the CONFIDENTIAL INFORMATION; or (e) is required to be disclosed by law or
government authority, provided such recipient provides the DISCLOSING PARTY with
reasonable advance written notice.
ARTICLE 10 - DURATION AND TERMINATION
10.01 - This AGREEMENT shall become effective upon the EFFECTIVE DATE,
and unless sooner terminated in accordance with any of the provisions herein,
shall remain in full force and effect for the life of the last-to-expire of the
patents and patent applications included in the PATENT RIGHTS.
10.02 - LICENSEE may terminate this AGREEMENT at any time by giving
LICENSOR written notice at least three (3) months prior to such termination, and
thereupon terminate the manufacture, use or sale of LICENSED PRODUCTS.
10.03 - Except as provided above, if either party fails to fulfill any
of its obligations under this AGREEMENT, the non-breaching party may terminate
this AGREEMENT, upon written notice to the breaching party, as provided below.
Such notice must contain a full description of the event or occurrence
constituting a breach of this AGREEMENT. The party receiving notice of the
breach will have the opportunity to cure that breach within ninety (90) days of
receipt of notice. If the breach is not cured within that time, the termination
will be effective as of the ninetieth (90th) day after receipt of notice. A
party's ability to cure a breach will apply only to the first two breaches
properly noticed under the terms of this AGREEMENT, regardless of the nature of
those breaches. Any subsequent breach by that party will entitle the other party
to terminate this AGREEMENT upon proper notice.
16
<PAGE>
10.04 - Either party may immediately terminate this AGREEMENT for
fraud, willful misconduct, or illegal conduct of the other party upon written
notice of same to that other party.
10.05 - Upon the termination of this AGREEMENT, LICENSEE may notify
LICENSOR of the amount of LICENSED PRODUCT LICENSEE then has on hand and
LICENSEE shall then have a license to sell that amount of LICENSED PRODUCT, but
no more, provided LICENSEE shall pay the royalty thereon at the rate and at the
time provided for.
10.06 - If during the term of this AGREEMENT, LICENSEE shall become
bankrupt or insolvent or if the business of LICENSEE shall be placed in the
hands of a receiver or trustee, whether by the voluntary act of LICENSEE or
otherwise, or if LICENSEE shall cease to exist as an active business, this
AGREEMENT shall immediately terminate.
ARTICLE 11 - LAW TO GOVERN
11.01 - This AGREEMENT shall be construed and enforced in accordance
with the laws of the State of North Carolina.
ARTICLE 12 - NOTICES
12.01 - Notice hereunder shall be deemed sufficient if given by
registered mail, postage prepaid, and addressed to the party to receive such
notice at the address given below, or such other address as may hereafter be
designated by notice in writing.
LICENSOR
- --------
Office of Science and Technology
Duke University
Room 230, North Building
Box 90083
Durham, NC 27708
cc:
Office of the University Counsel
Duke University
2400 Pratt Street, Suite 4000
Durham, NC 27710
LICENSEE
- --------
Celsion Corporation
10220-1 Old Columbia Road
Columbia, MD 21046-1705
cc:
Bresler Goodman & Unterman, LLP
521 Fifth Avenue
New York, NY 10175
Attention: Kevin J. Lake, Esq.
ARTICLE 13 - ASSIGNMENT
13.01 - This AGREEMENT shall be binding upon and inure to the benefit
of the respective successors and assigns of the parties hereto. However,
17
<PAGE>
LICENSEE may not assign its rights in this AGREEMENT without approval by
LICENSOR, such approval not to be unreasonably withheld. Notwithstanding the
foregoing, the LICENSEE may assign its rights under this AGREEMENT, without the
consent of the LICENSOR, to (i) the SUBSIDIARY referred to in Section 4.02
hereof and (ii) a third party which acquires all or substantially all of its
assets.
ARTICLE 14 - INDEMNITY, INSURANCE, REPRESENTATIONS, STATUS
14.01 - Except for intellectual property infringement, LICENSEE agrees
to indemnify, hold harmless and defend LICENSOR, its officers, and directors,
employees, and agents, against any and all claims, suits, losses, damages,
costs, fees, and expenses asserted by third parties, both government and
non-government, resulting from or arising out of the exercise of the license
granted hereunder; provided, however, that LICENSEE shall not be responsible for
the negligence or intentional wrong doing of LICENSOR.
14.02 - LICENSEE shall maintain in force at its sole cost and expense,
with reputable insurance companies, general liability insurance and products
liability insurance coverage in an amount reasonably sufficient to protect
against liability under paragraph 14.01 above. LICENSOR shall have the right to
ascertain from time to time that such coverage exists, such right to be
exercised in a reasonable manner.
14.03 -NOTHING IN THIS AGREEMENT SHALL BE DEEMED TO BE A REPRESENTATION
OR WARRANTY BY LICENSOR OF THE VALIDITY OF ANY OF THE PATENTS OR THE ACCURACY,
SAFETY, EFFICACY, OR USEFULNESS, FOR ANY PURPOSE, OF THE HEAT TRIGGERED DELIVERY
TECHNOLOGY AND PATENT RIGHTS. LICENSOR SHALL HAVE NO OBLIGATION, EXPRESS OR
IMPLIED, TO SUPERVISE, MONITOR, REVIEW OR OTHERWISE ASSUME RESPONSIBILITY FOR
THE PRODUCTION, MANUFACTURE, TESTING, MARKETING OR SALE OF ANY LICENSED PRODUCT,
AND LICENSOR SHALL HAVE NO LIABILITY WHATSOEVER TO LICENSEE OR ANY THIRD PARTIES
FOR OR ON ACCOUNT OF ANY INJURY, LOSS, OR DAMAGE, OF ANY KIND OR NATURE,
SUSTAINED BY, OR ANY DAMAGE ASSESSED OR ASSERTED AGAINST, OR ANY OTHER LIABILITY
INCURRED BY OR IMPOSED UPON LICENSEE OR ANY OTHER PERSON OR ENTITY, ARISING OUT
OF OR IN CONNECTION WITH OR RESULTING FROM:
a. the production, use, or sale of any LICENSED PRODUCT;
b. the use of any HEAT TRIGGERED DELIVERY TECHNOLOGY and PATENT
RIGHTS; or
c. any advertising or other promotional activities with respect
to any of the foregoing.
14.04 - Notwithstanding the foregoing, LICENSOR hereby represents as
follows: (i) to the best of its knowledge, LICENSOR has the legal power and
authority to extend the rights granted to LICENSEE in this AGREEMENT and that it
has not made any commitments to others inconsistent with or in degradation of
such rights; and (ii) LICENSOR is not aware of any pending or threatened
litigation involving any of the HEAT TRIGGERED DELIVERY TECHNOLOGY or PATENT
RIGHTS licensed hereunder, and that, to its best knowledge, neither the HEAT
TRIGGERED DELIVERY TECHNOLOGY nor PATENT RIGHTS are subject to any third party
infringement claims.
18
<PAGE>
14.05 - Neither party hereto is an agent of the other party for any
purpose whatsoever.
14.06 - LICENSOR represents that to the best of its knowledge the HEAT
TRIGGERED TECHNOLOGY releases agents under the conditions specified in PATENT
RIGHTS.
14.07 - LICENSOR agrees that, with respect to the HEAT TRIGGERED
DELIVERY TECHNOLOGY and PATENT RIGHTS, it will not assert against LICENSEE, or
its vendees, mediate or immediate, any claim for infringement based on the
manufacture, use or sale of any apparatus or product made or sold by LICENSEE
under the license granted in this AGREEMENT upon which royalty has been paid in
accordance with the provisions of this AGREEMENT.
ARTICLE 15 - USE OF A PARTY'S NAME
15.01 - Neither party will, without the prior written consent of the
other party:
a. use in advertising, publicity or otherwise, any trade-name,
personal name, trademark, trade device, service mark,
symbol, or any abbreviation, contraction or simulation
thereof owned by the other party; or
b. represent, either directly or indirectly, that any product
or service of the other party is a product or service of the
representing party or that it is made in accordance with or
utilizes the information or documents of the other party.
ARTICLE 16 - SEVERANCE, WAIVER AND ALTERATION
16.01 - Each clause of this AGREEMENT is a distinct and severable
clause and if any clause is deemed illegal, void or unenforceable, the validity,
legality or enforceability of any other clause or portion of this AGREEMENT will
not be affected thereby.
16.02 - The failure of a party in any instance to insist upon the
strict performance of the terms of this AGREEMENT will not be construed to be a
waiver or relinquishment of any of the terms of this AGREEMENT, either at the
time of the party's failure to insist upon strict performance or at any time in
the future, and such terms will continue in full force and effect.
16.03 - Any alteration, modification, or amendment to this AGREEMENT
must be in writing and signed by both parties.
19
<PAGE>
ARTICLE 17 - TITLES
17.01 - All titles and article headings contained in this AGREEMENT are
inserted only as a matter of convenience and reference. They do not define,
limit, extend or describe the scope of this AGREEMENT or the intent of any of
its provisions.
ARTICLE 18 - ENTIRE UNDERSTANDING
18.01 - This AGREEMENT represents the entire understanding between the
parties, and supersedes all other agreements, express or implied, between the
parties concerning the FIELD, including the HEAT TRIGGERED DELIVERY TECHNOLOGY
and PATENT RIGHTS.
IN WITNESS WHEREOF, the parties have caused these presents to be
executed in duplicate as of the date and year first above written.
SEAL DUKE UNIVERSITY
By: /s/Gordan O. Williams
---------------------
Gordon O. Williams
Vice Dean, Finance & Administration
SEAL CELSION CORPORATION
By: /s/Augustine Y. Cheung
----------------------
Augustine Y. Cheung
Chairman of the Board
20
EXHIBIT 10.10
Celsion Corporation
- --------------------------------------------------------------------------------
March 23, 1999
To: Dr. Fred Sterzer
President, President of MMTC
12 Rozel Road
Suite A203
Princeton, NJ 08540
RE Amendment for the Use and Treatment of Prostate Cancer to the August 23, 1996
License Agreement and November 25, 1997 Amendment
Dear Fred:
This amendment as agreed is to be added to the existing agreement dated August
23, 1996 and amendment dated November 25, 1997 between MMTC and Celsion
Corporation. The following agreed terms and conditions are for the expanded
"Field of Use" for prostatic diseases in humans, "including the treatment of
cancer and its symptoms of the prostate, except for the use with PULSED
microwave".
The new terms and conditions of this amendment are listed in the following
comparison table under the heading "New Amendment".
Comparison Table of MMTC Sterzer Agreements Dated August 23, 1996f and Proposed
Amendment to Include Usage For Prostate Cancer
================================================================================
Original New Amendment
- --------------------------------------------------------------------------------
Date of Agreement August 23, 1996 Amendment to the original
Amendment to License agreement and Nov. 25,
November 25, 1997 1997 amendment as related to
the use and treatment of
Prostate Cancer. Unless
stated otherwise, the terms
and conditions of the original
and prior amendment remains
in force.
- --------------------------------------------------------------------------------
Field of Use Treatment of prostatic Treatment of prostatic
diseases in humans, diseases in humans, including
excepting the treatment the treatment of cancer of the
of cancer of the prostate prostate, except for the use
with Pulsed microwave
- --------------------------------------------------------------------------------
Rights Perpetual, exclusive and Same
worldwide license
- --------------------------------------------------------------------------------
1
<PAGE>
<TABLE>
<CAPTION>
Comparison Table of MMTC Sterzer Agreements Dated August 23, 1996f and Proposed
Amendment to Include Usage For Prostate Cancer
- ----------------------------------------------------------------------------------
<S> <C> <C>
Up-front License $[Confidential Treatment $[Confidential Treatment
fee Requested] Requested] /month beginning
April 1, 1999 for 12 months
ending March 31, 2000 for a
total of $[Confidential
Treatment Requested]
- ----------------------------------------------------------------------------------
Additional Fees $[Confidential Treatment $[Confidential Treatment
for failure to meet Requested] for each failure Requested] for each failure
development 1. File IDE within 2 months 1. File IDE within 2 months
milestones after completion of necessary after completion of necessary
animal safety data animal safety data (UCSF)
(Montefiore Medical Ctr)
2. Commence clinical safety 2. Same
trial within 60 days of IDE
and IRB approval
3. Commence clinical 3. Same
efficacy trial within 60 of
IDE and IRB approval
- ----------------------------------------------------------------------------------
Royalties payments ([Confidential Treatment Same
Requested]%) annual Net
Sales as defined in 3.3
- ----------------------------------------------------------------------------------
Minimum Royalties $[Confidential Treatment $[Confidential Treatment
Requested]/yr for a period of Requested]/yr for a period of
7 years beginning the earlier 7 years beginning the earlier
of first full year of of the first full year of
commercialization or the commercialization or the fiscal
year beginning after fiscal year beginning after December
31, 1999 December 31, 2001
- ----------------------------------------------------------------------------------
</TABLE>
Unless otherwise mentioned in the New Amendment all terms and conditions remain
in force as worded in the Original Agreement dated August 23, 1996 and the
Amendment dated November 25, 1997. The effective date of this amendment is April
1, 1999 upon payment by Celsion of the first Up-Front license fee of
$[Confidential Treatment Requested]/month, thereafter monthly for an additional
11 months for a total payment of $[Confidential Treatment Requested]
(12X$[Confidential Treatment Requested]). It is agreed, a portion of this
license fee (amount used at the discretion of MMTC) will be used to further
development of the MMTC radiometry technology of which Celsion will pay MMTC
royalties for its use as under the royalty structure of the initial agreement.
In addition, Celsion will give MMTC access to any materials from the proposed
sponsored research agreement between Celsion and UCSF to be used by MMTC for any
grants MMTC desires to make application for. This represents the entirety of
this new amendment and is initiated by the two parties with the following
authorized signatures.
By /s/John Mon By /s/Dr. Fred Sterzer
----------- -------------------
John Mon Dr. Fred Sterzer
General Manager, Celsion Corporation President, MMTC
EXHIBIT 10.11
-------------
OPTION AGREEMENT
(SK#3898)
Effective on February 26,1999 (hereinafter the "Effective Date")
SLOAN-KETTERING INSTITUTE FOR CANCER RESEARCH, a not-for-profit corporation
organized and existing under the laws of the State of New York, and having a
place of business located at 1275 York Avenue, New York, New York 10021
(hereinafter "SKI") and
CELSION CORPORATION, a corporation organized under the laws of the State of
Maryland, and having a place of business located at 10220-1 Old Columbia Road,
Columbia, Maryland 21046-1705 ("CELSION"). .
WHEREAS, SKI possesses certain PATENT RIGHTS (defined herein below), relating to
heat sensitive gene therapy, uses of DNA-PK to enhance sensitization of tumors
to conventional treatments;
WHEREAS, SKI wishes to have the PATENT RIGHTS evaluated and applied to
commercial purposes as quickly as possible in order that products resulting
therefrom may be available for public use and benefit;
WHEREAS, CELSION is focused on hyperthermic treatment of cancer and would like
to have an option to obtain an exclusive license to use said PATENT RIGHTS for
such use in the treatment of cancer; and
WHEREAS, SKI is willing to grant an OPTION to CELSION for a license to use the
PATENT RIGHTS on the terms and conditions hereinafter set forth.
NOW, THEREFORE, in view of these premises and in consideration of the mutual
covenants herein contained, the Parties hereto agree as follows;
ARTICLE 1
DEFINITIONS
-----------
ARTICLE I - DEFINITIONS
-----------------------
For the purpose of this Agreement, the following words and phrases shall have
the following meanings:
<PAGE>
1.1 "CELSION" shall include its Affiliates, that is, any person, firm,
corporation or other entity controlling, controlled by, or under common control
with a party hereto. The term "control" wherever used throughout this Agreement
shall mean ownership, directly or indirectly, of more than 50% of the equity
capital. With regard to SKI, "Affiliate" shall mean the Memorial Sloan-Kettering
Cancer Center and the Memorial Hospital for Cancer and Allied Diseases.
1.2 "Patent Rights" shall mean all of the following SKI intellectual
property:
(a) The United States patent application entitled, "Uses of DNA-PK",
filed on July 1, 1998;
(b) United States and foreign patents issued from such application,
and from divisionals and continuations of this application;
(c) claims of U.S. and foreign continuation-in-part applications, and
of the resulting patents, which are directed to subject matter
specifically described in such United States patent application;
(d) any reissues or re-examinations of patents described in (a), (b),
or (c), above.
1.3 "Field of Use" shall mean the use of the PATENT RIGHTS in the field of
cancer therapy.
ARTICLE 2
OPTION
------
2.1 SKI hereby grants to CELSION for six (6) months from the Effective Date
an exclusive option to an exclusive, world-wide license, with the right to
sublicense for the PATENT RIGHTS in the FIELD, to be negotiated in good faith on
reasonable terms and conditions, including license issue fee, milestone
payments, and royalties. If CELSION decides to exercise this option, it shall so
notify SKI in writing within the term of this agreement. In the event the
parties, acting in good faith, fail to reach a mutually acceptable agreement
within three (3) months after commencing negotiations, SKI shall be entitled to
negotiate a license with a third party for PATENT RIGHTS.
2.2 Notwithstanding any other provisions of this Agreement, it is agreed
that SKI and its Affiliates shall retain the right to practice the licensed
PATENT RIGHTS for its own teaching, research and patient care activities. All
rights reserved to the United States Government and others under 35 USC
ss.ss.200-212, as amended, shall remain and shall in no way be affected by this
Agreement.
<PAGE>
ARTICLE 3
CONSIDERATION
-------------
3.1 Upon signing this Agreement, CELSION shall pay to SKI ($ Confidential
Treatment Requested) U.S. dollars (Confidential Treatment Requested), Such
payment will not be credited against fees, advances or royalties under any
license agreement later negotiated.
ARTICLE 4
PATENT PROSECUTION
------------------
4.1 Upon signing this Agreement, CELSION shall pay to SKI ($ Confidential
Treatment Requested) as reimbursement for past patent expenses.
4.2 CELSION shall be responsible for and pay all reasonable patent costs
and expenses incurred by SKI for the preparation, filing, prosecution, issuance,
and maintenance of the PATENT RIGHTS during the term of this Agreement. CELSION.
shall pay to SKI all such costs and expenses within thirty (30) days of receipt
of an invoice of such costs and expenses.
4.3 SKI shall diligently prosecute and maintain the PATENT RIGHTS in the
United States and in such countries as are determined by SKI and agreed to by
CELSION, using counsel of its choice. If CELSION does not agree to bear the
expense of filing patent applications in any foreign countries in which SKI
wishes to obtain patent protection, then SKI may file and prosecute such
applications at its own expense and any rights granted hereunder shall exclude
such countries.
4.4 SKI shall provide CELSION with copies of all relevant documentation so
that CELSION may be informed and to give CELSION reasonable opportunity to
advise SKI of the continuing prosecution, and CELSION agrees to keep this
documentation confidential.
ARTICLE 5
NOTICES
-------
5.1 Any payment, notice or other communication pursuant to this Agreement
shall be sufficiently made or given when delivered by courier or other means
providing proof of delivery to such party at its address below or as it shall
designate by written notice given to the other party:
<PAGE>
In the case of SKI:
Sloan-Kettering Institute for Cancer Research
1275 York Avenue
New York, New York 10021
Attention: James S. Quirk
Senior Vice President
Research Resources Management
In the case of LICENSEE:
Celsion Corporation
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Attention: Augustine Y. Cheung, Ph.D.
Chairman
ARTICLE 6
NON-USE OF NAMES
----------------
6.1 CELSION shall not use the names of SKI or its Affiliates, nor any of
their employees, nor any adaptation thereof, in any advertising, promotional or
sales literature without prior written consent obtained from SKI in each case.
ARTICLE 7
TERM
----
7.1 This Agreement shall terminate six (6) months after the Effective Date
or three (3) months after CELSION exercises its option granted under Article 2,
whichever is longer, unless terminated sooner as provided in this Article 7.
7.2 CELSION shall be entitled to terminate this Agreement for any reason
upon thirty (30) days advance written notice to SKI.
7.3 Upon any material breach of this Agreement by CELSION, SKI shall have
the right to terminate this Agreement and the rights, privileges and license
granted hereunder by thirty (30) days' notice to CELSION. Such termination shall
become effective unless CELSION shall have cured any such breach prior to the
expiration of the thirty (30) day period.
<PAGE>
7.4 SKI may terminate this Agreement if CELSION becomes insolvent or, a
petition in bankruptcy is filed against CELSION and is consented to, acquiesced
in or remains undismissed for thirty (30) days; or makes a general assignment
for the benefit of creditors, or a receiver is appointed for CELSION, and
CELSION does not return to solvency before the expiration of a thirty (30) day
period.
7.5 Upon termination of this Agreement, for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination,
ARTICLE 8
MISCELLANEOUS PROVISIONS
------------------------
8.1 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York.
8.2 This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective legal representatives, successors and
permitted assigns.
8.3 Except as otherwise expressly set forth in this Agreement, SKI MAKES NO
REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR
IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR
A PARTICULAR PURPOSE, AND VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING.
8.4 Paragraph headings are inserted herein for convenience of reference
only and do not form a part of this Agreement, and no construction or inference
shall be derived therefrom.
8.5 This Agreement and the instruments, documents and other agreements
referred to herein or signed concurrently set forth the entire agreement and
understanding of the parties regarding the subject matter.
8.6 This Agreement may be executed in any number of counterparts and each
of such counterparts shall for all purposes be an original and all such
counterparts shall together constitute but one and the same agreement.
8.7 This Agreement may be amended, modified, superseded or canceled, and
any of the terms hereof may be waived, only by a written instrument executed by
each party hereto or, in the case of waiver, by the party waiving compliance.
The delay or failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect the rights at a later time to
enforce the same. No waiver by any party of any condition or of the breach of
<PAGE>
any term contained in this Agreement, whether by conduct or otherwise, in any
one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such condition or of the breach of such term or any
other term of this Agreement.
8.8 No person not a party to this Agreement, including any employee of any
party to this Agreement, shall have or acquire any rights by reason of this
Agreement, nor shall any party hereto have any obligations or liabilities to
such other Person by reason of this Agreement. Nothing contained in this
Agreement shall be deemed to constitute the parties partners with each other or
any Person.
8.9 This Agreement may not be assigned by CELSION without prior written
consent from SKI, except that CELSION may, without SKI's consent, assign this
Agreement to any entity that it may merge into, consolidate with, or transfer
substantially all of its assets ("substantially" being EIGHTY PERCENT (80%) or
more thereof) as an entirety, so long as the successor surviving corporation in
any such merger, consolidation, transfer or reorganization assumes in writing
the obligations of this Agreement.
8.10 The provisions of this Agreement are severable, and in the event that
any provisions of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their duly authorized representatives as of the date
first written above,
Signed by /s/G.J.Bernhardt Signed by /s/Augustine Y. Cheung
---------------- ----------------------
James S. Quirk Augustine Y. Cheung, Ph.D.
Senior Vice President Chairman
Research Resouces Management
Date": 3/16/99 Date: 3/11/99
------- -------
<PAGE>
(Logo)
Senior Vice President
Research Resources Management
March 16, 1999
TO WHOM IT MAY CONCERN:
In my absence, Mr. Gustave J. Bernhardt, Director, Research Resources
Management, will sign as an institutional official for the Sloan-Kettering
Institute for Cancer Research.
/s/ James S. Quirk
------------------
James S. Quirk
Senior Vice President
JSQ:meb
Memorial Sloan-Kettering Cancer Center
1275 York Avenue, New York, New York l0021
NCI-designated Comprehensive Cancer Center
EXHIBIT 10.12
-------------
(Logo)
Office of Industrial Affairs
August 31.1999
John Mon
General Manager
Celsion Corporation
10220-1 Old Columbia Road
Columbia, MD 21046-1705
Dear John:
It was a pleasure speaking with you last week. This letter will confirm that
April 9, 1999 is the accurate effective date of the Option Agreement between
Sloan-Kettering Institute for Cancer Research and Celsion Corporation signed on
February 26, 1999. The revised effective date was agreed to during a
conversation between you and Steve Bertha in March but has not been made a
formal amendment to the agreement. If Celsion would like a formal amendment to
the option agreement, then we will prepare one. The option period will expire on
November 9, 1999.
Please do not hesitate to contact me if you have any questions. I look forward
to our upcoming meeting.
Sincerely,
/s/Jennifer A. Brooks
---------------------
Jennifer A. Brooks
Licensing Associate
Memorial Sloan-Kettering Cancer Center
1275 York Avenue, New York, New York l0021
NCI-designated Comprehensive Cancer Center
EXHIBIT 10.25
-------------
Form of Warrant
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS AND NEITHER THE SECURITIES
NOR ANY INTEREST THEREIN MAY BE OFFERED, SOLD, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH
ACT OR SUCH LAWS OR AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND SUCH LAWS
WHICH, IN THE OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE
REASONABLY SATISFACTORY TO COUNSEL FOR THIS CORPORATION, IS AVAILABLE.
Warrant Certificate No.: __________
Date of Issue: _____________
Void after 5:00 p.m. New York time on _________________.
CELSION CORPORATION
This certifies that ______________ (the "Holder"), for a value
received, is entitled, subject to the adjustment and to the other terms set
forth below, to purchase from Celsion Corporation, a Maryland corporation (the
"Company"), __________ fully paid and non-assessable shares of the Common Stock,
par value $0.01 per share, of the Company (the "Common Stock") at the Exercise
Price of $0.90 per share. The Warrant shall be exercisable at any time on and
after the date hereof but not later than 5:00 P.M. (New York time) on the third
anniversary of the date hereof (the "Expiration Date"), upon surrender to the
Company at its principle office at 10220-I Old Columbia Road, Columbia, MD
21046-1705, Attention: Dr. Augustine Cheung, Chairman of the Board and Chief
Executive Officer (or at such other location as the Company may advise the
Holder in writing) of this Warrant properly endorsed with the Purchase Form
attached hereto duly filled in and signed and upon payment in cash or cashier's
check of the aggregate Exercise Price for the number of shares for which this
Warrant is being exercised determined in accordance with the provisions hereof.
From and after April 1, 1999, the Company, at its option, may redeem in whole or
in part this Warrant for an amount equal to $0.01per share if the current market
value of the Common Stock, as determined in accordance with paragraph (c)
hereof, rises to more than $1.80 per share at any time from and after April 1,
1999. The Company must give at least thirty (30) days notice of such redemption,
during which period the holders of the Warrants may exercise their Warrants in
accordance with the terms thereof. The Exercise Price and, in some cases, the
number of shares purchasable hereunder are subject to adjustment as provided in
Section (g) of this Warrant. This Warrant and all rights hereunder, to the
extent not exercised in the manner set forth herein shall terminate and become
null and void on the Expiration Date. In the event that the Holder does not
exercise this Warrant pursuant to the terms of this Warrant, then this Warrant
shall expire, be canceled, and be null and void.
1
<PAGE>
(a) Exercise of Warrant. This Warrant may be exercised in whole or in
part at any time or from time to time on or after the date hereof, but not later
than 5:00 p.m. New York time, on the Expiration Date. If such date is a day on
which banking institutions are authorized by law to close, then the expiration
date shall be on the next succeeding day which shall not be such a day. This
Warrant may be exercised by presentation and surrender hereof to the Company or
at the office of its stock transfer agent, if any, with written notice duly
executed and accompanied by payment in cash or cash equivalent of the Exercise
Price for the number of shares specified in such notice, together with all
federal and state taxes applicable upon such exercise. If this Warrant should be
exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, execute and deliver a new Warrant evidencing the right of the
holder to purchase the balance of the shares purchasable hereunder. Upon receipt
by the Company of this Warrant at the office or agency of the Company, in proper
form for exercise, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered to
the Holder.
(b) Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and/or delivery upon exercise of this
Warrant such number of shares of its Common Stock as shall be required for
issuance or delivery upon exercise of this Warrant.
(c) Fractional Shares. No fractional shares or script representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(1) If the Common Stock is listed on a national securities
exchange, admitted to unlisted trading privileges on such exchange or
quoted on the Nasdaq National Market System or other interdealer
trading systems providing last sale information, the current value
shall be the last reported sale price of the Common Stock on such
exchange, Nasdaq/NMS or trading system on the last business day prior
to the date of exercise of this Warrant or if no such sale is made on
such day, the average closing bid and asked prices for such day on such
exchange, Nasdaq/NMS or trading system; or
(2) If the Common Stock is not so listed or admitted to
unlisted trading privileges, the current value shall be the mean of the
last reported bid and asked prices reported by an interdealer quotation
system deemed reliable by the Company on the last business day prior to
the date of the exercise of this Warrant; provided that if the Common
Stock is quoted on more than one such system, the Company shall
utilize, in order of priority, Nasdaq, the NASD OTC Bulletin Board or
the National Quotation Bureau, Inc.; or
(3) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so
reported, the current value shall be an amount, not less than book
value, determined in such reasonable manner as may be prescribed by the
Board of Directors of the Company, such determination to be final and
binding on the Holder.
(d) Restrictions on Transfer. The securities represented hereby and the
shares to be issued on exercise have not been registered under federal or state
securities laws. They may not be sold or offered for sale in the absence of
effective registration under such securities laws, or an opinion of counsel
satisfactory to the Company that such registration is not required.
2
<PAGE>
(e) Exchange, Assignment or Loss of Warrant. This Warrant is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company or at the office of its stock transfer
agent, if any, for other Warrants of different denominations entitling the
holder thereof to purchase in the aggregate the same number of shares of Common
Stock purchasable hereunder. Subject to compliance with Section (d) hereof, this
Warrant is assignable. Any such assignment shall be made by surrender of this
Warrant to the Company or at the office of its stock transfer agent, if any,
with written notice of assignment duly executed and funds sufficient to pay any
transfer tax; whereupon the Company shall, without charge, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other Warrants which carry the same rights upon presentation
hereof at the office of the Company or at the office of its stock transfer
agent, if any, together with a written notice specifying the names and
denominations in which new Warrants are to be issued and signed by the Holder
hereof. The term "Warrant" as used herein includes any Warrant issued in
substitution for or replacement of this Warrant, or into which this Warrant may
be divided or exchanged and the term "original issue date hereof" shall refer to
the date that the Company first issued a Warrant which was subsequently
transferred or exchanged for another. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of this
Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
(f) Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a shareholder in the Company either at law or in
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
(g) Anti-Dilution Provisions.
(1) Adjustment of Number of Shares. Anything in this Section
(g) to the contrary notwithstanding, in case the Company shall at any
time issue Common Stock by way of dividend or other distribution on any
stock of the Company or subdivide or combine the outstanding shares of
Common Stock, the Exercise Price shall be proportionately decreased in
the case of such issuance (on the day following the date fixed for
determining shareholders entitled to receive such dividend or other
distribution) or decreased in the case of such subdivision or increased
in the case of such combination (on the date that such subdivision or
combination shall become effective).
(2) No Adjustment for Small Amounts. Anything in this Section
(g) to the contrary notwithstanding, the Company shall not be required
to give effect to any adjustment in the Exercise Price unless and until
the net effect of one or more adjustments, determined as above
provided, shall have required a change of the Exercise Price by at
least one cent, but when the cumulative net effect of more than one
adjustment so determined shall be to change the actual Exercise Price
by at least one cent, such change in the Exercise Price shall thereupon
be given effect.
3
<PAGE>
(3) Number of Shares Adjusted. Upon any adjustment of the
Exercise Price other than pursuant to Section (g)(1) hereof, the holder
of this Warrant shall thereafter (until another such adjustment) be
entitled to purchase, at the new Exercise Price, the number of shares,
calculated to the nearest full share, obtained by multiplying the
number of shares of Common Stock initially issuable upon exercise of
this Warrant by the Exercise Price in effect on the date hereof and
dividing the product so obtained by the new Exercise Price.
(4) Common Stock Defined. Whenever reference is made in this
Section (g) to the issue or sale of shares of Common Stock, the term
"Common Stock" shall mean the common shares of the Company of the class
authorized as of the date hereof and any other class of stock ranking
on a parity with such Common Stock. However, subject to the provisions
of Section (j) hereof, shares issuable upon exercise hereof shall
include only shares of the class designated as Common Stock of the
Company as of the date hereof.
(h) Officer's Certificate. Whenever the Exercise Price shall be
adjusted as required by the provisions of Section (g) hereof, the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office, and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided
and setting forth in reasonable detail the facts requiring such adjustment. Each
such officer's certificate shall be made available at all reasonable times for
inspection by the Holder and the Company shall, forthwith after each such
adjustment, deliver a copy of such certificate to the Holder. Such certificate
shall be conclusive as to the correctness of such adjustment.
(i) Notice to Warrant Holders. So long as this Warrant shall be
outstanding and unexercised (i) if the Company shall pay any dividend or make
any distribution upon the Common Stock, or (ii) if the Company shall offer to
the holders of Common Stock for subscription or purchase by them any shares of
stock of any class or any other rights or (iii) if any capital reorganization of
the Company, reclassification of the capital stock of the Company, consolidation
or merger of the Company with or into another corporation, sale, lease or
transfer of all or substantially all of the property and assets of the Company
to another corporation, or voluntary or involuntary dissolution, liquidation or
winding up of the Company shall be effected, then, in any such case, the Company
shall cause to be delivered to the Holder, at least ten (10) days prior to the
date specified in (x) or (y) below, as the case may be, a notice containing a
brief description of the proposed action and stating the date on which (x) a
record is to be taken for the purpose of such dividend, distribution or rights,
or (y) such reclassification, reorganization, consolidation, merger, conveyance,
lease, dissolution, liquidation or winding up is to take place and the date, if
any, is to be fixed, as of which the holders of Common Stock of record shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(j) Reclassification, Reorganization or Merger. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company (other than a change in par value, or from par
value to no par value or from no par value to par value, or as a result of an
issuance of Common Stock by way of dividend or other distribution or of a
subdivision or combination), or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger in which the
Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the class issuable upon exercise of this Warrant) or in case
of any sale or conveyance to another corporation of the property of the Company
as an entirety or substantially as an entirety, the Company shall cause
4
<PAGE>
effective provision to be made so that the Holder shall have the right
thereafter, by exercising this Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization or other change, consolidation, merger,
sale or conveyance. Any such provision shall include provisions for adjustments
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Warrant. The foregoing provisions of this Section (j) shall
similarly apply to successive reclassifications, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers,
sale or conveyances. In the event that in any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for or of a security of the Company other than
Common Stock, any such issue shall be treated as an issue of Common Stock
covered by the provisions of Subsection (g)(1) hereof with the amount of the
consideration received upon the issue thereof being determined by the Board of
Directors of the Company, such determination to be final and binding on the
holder.
(k) Applicable Law.This Warrant shall be governed by, and construed in
accordance with, the laws of the State of Maryland.
(l) Optional Waiver. Holder may waive by signed writing any rights of
Holder contained herein.
(m) IN ADDITION TO THE RESTRICTIONS ON TRANSFERABILITY DESCRIBED
HEREIN, THE SECURITIES ISSUABLE ON EXERCISE OF THIS WARRANT SHALL NOT BE SOLD,
PLEDGED, TRANSFERRED, HYPOTHECATED OR ASSIGNED WITHIN 7 DAYS BEFORE OR 180 DAYS
AFTER THE DATE OF EFFECTIVENESS OF A REGISTRATION STATEMENT FILED BY THE COMPANY
WITH THE SECURITIES AND EXCHANGE COMMISSION IN CONNECTION WITH A PUBLIC OFFERING
OF THE COMPANY'S SECURITIES. THIS RESTRICTION IS IN ADDITION TO AND NOT IN LIEU
OF THE RESTRICTIONS CONTAINED HEREIN AND AS SUCH, THIS 180 DAY PERIOD MAY EXPIRE
PRIOR TO OR BEYOND THE RESTRICTIONS IMPOSED HEREIN. THIS RESTRICTION SHALL
OBLIGATE ALL SUCCESSORS IN INTEREST TO THE SHARES ISSUED ON EXERCISE.
CERTIFICATES REPRESENTING THE WARRANT STOCK SHALL BEAR A LEGEND EVIDENCING THIS
RESTRICTION.
THIS WARRANT CERTIFICATE is granted and sold as of the date first above
written.
CELSION CORPORATION
By:__________________________________
Name:
Title:
Attest:
- ------------------------------
Name:
Title:
5
<PAGE>
PURCHASE FORM
Dated: ______________
Celsion Corporation
10220-I Old Columbia Road
Columbia, MD 21046-1705
Attention: Mr. John Mon, Secretary
Dear Mr. Mon:
Attached hereto is Celsion Corporation's Warrant Certificate No.
__________, giving the Holder thereof the right to purchase __________ shares of
the Common Stock, par value $0.01 per share, of the Company (the "Common Stock")
at the Exercise Price of $0.90 per share.
I/We hereby notify you that I/we are exercising my/our right to
purchase __________ shares of the Common Stock at the Exercise Price of $0.90
per share (the "Shares") and have enclosed herewith my/our check in the amount
of $__________, representing the aggregate exercise price of the Shares. If
transfer taxes (federal or state) are applicable to this transaction, I/we
understand that you will be billing me/us for said taxes, which I/we agree will
be promptly remitted to you within ten (10) days of my/our receipt of
notification.
I/We hereby state that the Shares being purchased are to be held by
me/us for investment purposes and not with a view to sale, except pursuant to an
effective registration statement or an exemption therefrom.
Please cancel the enclosed Warrant Certificate and, if applicable, send
me/us a Warrant Certificate, in partial substitution on identical terms, for the
remaining shares not being purchased pursuant to this notification.
Yours very truly,
------------------------------
Please type or print:
- ------------------------------
Name
- ------------------------------
Address
- ------------------------------
City State Zip Code
6
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in Form 10-K for the fiscal year
ended September 30, 1999 of our report dated November 1, 1999 relating to the
financial statements of Celsion Corporation.
/s/ Stegman & Co.
----------------
Stegman & Co.
Baltimore, Maryland
December 30, 1999
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1357464
<SECURITIES> 0
<RECEIVABLES> 1812
<ALLOWANCES> 0
<INVENTORY> 22059
<CURRENT-ASSETS> 1424058
<PP&E> 251139
<DEPRECIATION> 224874
<TOTAL-ASSETS> 1558684
<CURRENT-LIABILITIES> 517132
<BONDS> 0
0
0
<COMMON> 533705
<OTHER-SE> 503420
<TOTAL-LIABILITY-AND-EQUITY> 1558684
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2391102
<LOSS-PROVISION> (2391102)
<INTEREST-EXPENSE> (60834)
<INCOME-PRETAX> (2436192)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2436192)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2436192)
<EPS-BASIC> (.05)
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</TABLE>
