-------------------------------
OMB APPROVAL
-------------------------------
OMB Number: 3235-0063
Expires: July 31, 2006
Estimated average burden
hours per response..1,196.00.
-------------------------------
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, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________TO _________
COMMISSION FILE NUMBER 000-14242
CELSION CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1256615
- --------------------------------------- -------------------------------------
State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization Identification No.)
10220-L OLD COLUMBIA ROAD
COLUMBIA, MARYLAND 21046-1705
- --------------------------------------- -------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(410) 290-5390
------------------------------------------------------
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
- --------------------------------------- -------------------------------------
- --------------------------------------- -------------------------------------
COMMON STOCK, PAR VALUE $.01 PER SHARE AMERICAN STOCK EXCHANGE
- --------------------------------------- -------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
As of December 15, 2003, 147,915,201shares of the Registrant's Common Stock
were issued and outstanding. As of March 31, 2003, the aggregate market value of
voting common stock held by non-affiliates of the Registrant was approximately
$42,871,985, based on the closing price for the Registrant's Common Stock on
that date as quoted on The American Stock Exchange.
PERSONS WHO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED
IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM
DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER.
PART I
ITEM 1. BUSINESS
GENERAL
Celsion Corporation, based in Columbia, Maryland, is a biotechnology
company dedicated to the development and commercialization of treatment systems
for cancer and other diseases using focused heat energy, either administered
alone or in combination with other therapeutic devices, heat-activated genes and
heat-activated drugs. We have completed clinical trials and made our application
for premarketing approval (PMA) to the Food and Drug Administration (FDA) for
our Mircrofocus BPH 800 Microwave Urethroplasty(TM) (BPH 800) system for the
treatment of Benign Prostatic Hyperplasia, or BPH, a chronic condition of
enlargement of the prostate common in older men. In addition, we are currently
in active clinical development of (i) systems using our Adaptive Phased Array
(APA) focused microwave technology, licensed from the Massachusetts Institute of
Technology (MIT), to treat both early stage cancer and locally advanced breast
cancer, and (ii) heat-activated liposome technology, licensed from Duke
University, to deliver chemotherapeutic drugs for the treatment of prostate and
liver cancer. In addition, our gene-based Cancer Repair Inhibitor (CRI),
licensed from Memorial Sloan-Kettering Cancer Center (Sloan-Kettering), is in
late-stage animal testing.
BPH TREATMENT SYSTEM
BENIGN PROSTATIC HYPERPLASIA
Millions of aging men experience symptoms resulting from BPH, a
non-cancerous urological disease in which the prostate enlarges and constricts
the urethra. The prostate is a walnut-sized gland surrounding the male urethra
that produces seminal fluid and plays a key role in sperm preservation and
transportation. The prostate frequently enlarges with age. As the prostate
expands, it compresses or constricts the urethra, thereby restricting the normal
passage of urine. This restriction of the urethra may require a patient to exert
excessive bladder pressure to urinate. Because the urination process is one of
the body's primary means of cleansing impurities, the inability to urinate
adequately increases the possibility of infection and bladder and kidney damage.
PREVALENCE OF BPH
As BPH is an age-related disorder, its incidence increases with
maturation of the population. Industry estimates suggest that 9 million men in
the United States experience BPH symptoms and that more than 26 million men are
affected by BPH worldwide. As the United States population continues to age, the
prevalence of BPH can be expected to continue to increase. It is generally
estimated that approximately 50% of all men over the age of 55 and 90% of all
men over 75 will have BPH symptoms at various times. Industry studies estimate
the overall costs of BPH therapy for those patients currently seeking treatment
to be approximately $2.5 to $3.0 billion annually in the United States and $8.0
to $10.0 billion worldwide.
CURRENT TREATMENT ALTERNATIVES FOR BPH
Like cancerous tumors, BPH historically has been treated by surgical
intervention or by drug therapy. The primary treatment for BPH currently is
transurethral resection of the prostate, or TURP, a surgical procedure in which
the prostatic urethra and surrounding diseased tissue in the prostate are
trimmed with a telescopic knife, thereby widening the urethral channel for urine
flow. While the TURP procedure typically has been considered the most effective
treatment available for the relief of BPH symptoms, the procedure has
shortcomings. In the first instance, TURP generally requires from one to three
days of post-operative hospitalization. In addition, a significant percentage of
patients who undergo TURP encounter significant complications, which can include
painful urination, infection, retrograde ejaculation, impotence, incontinence
and excessive bleeding. Furthermore, the cost of the TURP procedure and the
related hospitalization is high, ranging from $8,000 to $12,000. This cost does
not take into account the costs of lost work time, which could amount to several
weeks, or the costs related to adverse effects on patients' quality of life.
Other, less radical, surgical procedures, generally categorized as
"minimally invasive" (MI) therapies, are available as alternatives to the TURP
procedure. The primary MI treatments use microwave heating (TUMT) to treat BPH
by ablating the obstructing portion of the prostate. TUMT involves sedation,
catheterization and high levels of heat to ablate a portion of the prostate. Two
other MI therapies--interstitial RF therapy and laser therapy--employ,
respectively, concentrated radio frequency (RF) waves or laser radiation to
reduce prostate swelling by cauterizing tissue instead of removing it with a
surgical knife. However, these procedures require puncture incisions in order to
insert cauterizing RF or laser probes into the affected tissue and, therefore,
also involve the use of a full operating facility and anesthesia, as well as the
burning of prostate tissue by the probes. Although these procedures result in
less internal bleeding and damage to the urethra than the TURP procedure and may
decrease the adverse effects and costs associated with surgery, anesthesia and
post-operative tissue recovery, they do not entirely eliminate these adverse
consequences.
Finally, drug therapy has emerged as an alternative to surgery in the
last several years. There are several drugs available for BPH treatment, the two
most widely prescribed being Hytrin(R) and Proscar(R). Hytrin(R) works by
relaxing certain involuntary muscles surrounding the urethra, thereby easing
urinary flow, and Proscar(R) is intended actually to shrink the enlarged gland.
However, industry studies have asserted that drug therapy costs $500 to $800 per
year or more, must be maintained for life and does not offer consistent relief
to a large number of BPH patients. In fact, studies have shown that 45% of
patients who begin drug therapy for BPH drop out within the first year,
primarily due to the ineffectiveness of currently available drug therapies. All
of the currently available BPH drugs also have appreciable side effects.
Accordingly, neither the medicinal treatments nor the surgical
alternatives currently available for BPH appear to provide fully satisfactory,
cost-effective treatment solutions for BPH sufferers.
CELSION BPH TREATMENT SYSTEM
We have developed a BPH treatment system--the BPH 800 system--that
combines our microwave thermotherapy capability with a proprietary balloon
compression technology licensed from MMTC, Inc. The system consists of a
microwave generator and conductors and a computer and computer software programs
that control the focusing and application of heat, plus a specially designed
balloon catheter, and consists of two fundamental elements:
- Celsion's proprietary catheter, incorporating a balloon enlargement
device, delivers computer-controlled transurethral microwave heating
directly to the prostate at temperatures greater than 44(degrees)C
(111(degrees) F).
- Simultaneously, the balloon inflates the device and expands to press the
walls of the urethra from the inside outward as the surrounding prostate
tissue is heated.
The combined effect of this "heat plus compression" therapy is twofold:
first, the heat denatures the proteins in the wall of the urethra, causing a
stiffening of the opening created by the inflated balloon. Second, the heat
serves effectively to kill off prostate cells outside the wall of the urethra,
thereby creating sufficient space for the enlarged natural opening.
Pre-clinical animal studies have demonstrated that a natural "stent,"
or reinforced opening, in the urethra forms after the combined heat plus
compression treatment. In addition, the BPH system's relatively low temperature
(43(degrees) C to 45(degrees) C) appears to be sufficient to kill prostatic
cells surrounding the urethra wall, thereby creating space for the enlargement
of the urethra opening. However, the temperature is not high enough to cause
swelling in the urethra.
Celsion's investigational minimally invasive BPH 800 system is designed
to overcome the limitations of all three of the current treatment systems. It is
designed to be a relatively painless, rapid procedure that delivers the efficacy
of surgical treatments without significant risks and the potential for
life-altering side effects. The potential benefits of the BPH 800 system include
walk-in, outpatient treatment that can be completed in less than an hour; no
required sedation; generally no post-operative catheterization; and rapid
symptomatic relief from BPH.
Ultimate FDA approval for a device such as our equipment typically
requires two phases of clinical testing. The purpose of Phase I testing is to
show feasibility and safety. Phase I testing involves a small group of patients.
Phase II testing may involve as many as 160 patients and is designed to show
safety and efficacy. The FDA approved an Investigational Device Exemption, or
IDE, to allow clinical testing of our BPH system, in June 1998 and we completed
initial Phase I clinical feasibility human trials of the BPH system at
Montefiore Medical Center in May 1999. In the Phase I trials, the combination of
computer-controlled microwave heat and balloon catheter expansion was able to
increase peak flow rates and to provide immediate relief of symptoms caused by
BPH. In addition, we undertook an expanded Phase I study to test an accelerated
treatment protocol, which was completed in May 2000, at Montefiore Medical
Center. In July 2000, the FDA approved the commencement of multiple-site Phase
II studies to collect the safety and efficacy data necessary for FDA
premarketing approval for commercialization. All 160 patients required to be
treated under the Phase II trial were treated as of November 29, 2001 and, as of
that date, we submitted the first two of three required modules to the FDA in
support of the PMA. We submitted the last module, consisting of clinical data,
on March 24, 2003 and responded to FDA enquiries on August 18, 2003 when the FDA
accepted our submission as filed. If our BPH system meets all requirements for
2
FDA approval and receives such approval, we intend to begin marketing the BPH
system as promptly as possible following receipt of such approval.
Based on the information we have collected to date, we believe that our
BPH system has the potential to deliver a treatment that is performed in
approximately 45 minutes on an outpatient basis, would not require
post-treatment catheterization and that would deliver symptomatic relief and an
increase in urinary flow rates promptly after the procedure is completed.
BREAST CANCER TREATMENT SYSTEM
PREVALENCE OF BREAST CANCER
Breast cancer is one of the leading causes of death among women in the
United States. According to statistics published in the American Cancer
Society's A Cancer Journal for Clinicians, there were an average of 183,000
newly diagnosed breast cancer cases in the United States in each of the years
from 1995 through 1999.
CURRENT TREATMENT FOR BREAST CANCER
Breast cancer is presently treated by mastectomy, the surgical removal
of the entire breast, or by lumpectomy, the surgical removal of the tumor and
surrounding tissue. Both procedures are often followed by radiation therapy or
chemotherapy. The more severe forms of surgical intervention can result in
disfigurement and a need for extended prosthetic and rehabilitation therapy.
Heat therapy (also known as hyperthermia or thermotherapy) is a
historically recognized method of treatment of various medical conditions, and
heat therapy has been used in the past to treat malignant tumors in conjunction
with radiation and chemotherapy. As summarized in the Fourth Edition of
Radiobiology for the Radiologist, published in 1994 by J.B. Lippincott Company,
in 24 independent studies on an aggregate of 2,234 tumors, treatment consisting
of heat plus radiation resulted in an average doubling of the complete response
rate of tumors, compared to the use of radiation alone. The complete response
rate for this purpose means the total absence of a treated tumor for a minimum
of two years. Comparable increases in the complete response rate were reported
with the use of heat combined with chemotherapy. In addition, it has been
demonstrated on numerous occasions that properly applied heat, alone and without
the concurrent use of radiation or chemotherapy, can also kill cancer cells.
HEAT THERAPY IN CONJUNCTION WITH RADIATION; FIRST GENERATION CELSION
EQUIPMENT
In 1989, we obtained FDA premarketing approval for our microwave-based
Microfocus 1000 heat therapy equipment for use on surface and subsurface tumors
in conjunction with radiation therapy. Until 1995, we marketed our Microfocus
equipment for this use in 23 countries, but microwave heat therapy was not
widely accepted in the United States medical community as an effective cancer
treatment. Moreover, due to the limitations of microwave technology available at
that time, it was difficult to deliver a controlled amount of heat to subsurface
tumors without overheating surrounding healthy tissue.
NEW MICROWAVE TECHNOLOGY FROM MIT
In 1993, we began working with researchers at MIT who had developed,
originally for the United States Defense Department, the microwave control
technology known as "Adaptive Phased Array", or APA. This technology permits
properly designed microwave equipment to focus and concentrate energy targeted
at diseased tissue areas deep within the body and to heat them selectively,
without adverse impact on surrounding healthy tissue. In 1996, MIT granted us an
exclusive worldwide license to use this technology for medical applications and
since that time we have concentrated on developing a second generation of
Microfocus equipment capable of focusing microwave energy on specific tissue
areas. We have incorporated the APA technology in our second-generation
microwave therapy equipment.
SECOND GENERATION CELSION BREAST CANCER TREATMENT SYSTEM
Using the APA technology, we have developed a prototype breast cancer
treatment system intended to destroy localized breast tumors through the
application of heat alone. The system consists of a microwave generator and
conductors, a computer and computer software programs that control the focusing,
application and duration of the thermotherapy, and a specially designed patient
treatment table.
3
In 1998, we completed pre-clinical animal testing of our prototype
system at the Massachusetts General Hospital, a teaching hospital for Harvard
Medical School in Boston, Massachusetts. Using breast tissue-equivalent phantoms
and tumors in live animals, these studies demonstrated that our system is
capable of selectively heating tumors at temperatures up to 46(degrees) C
(115(degrees) F) without damage to surrounding healthy tissues. High
temperatures maintained for eight to ten minutes can cause complete tumor
necrosis (death), leading to the death of viable cancer cells within the tumor
and in its immediate vicinity. A second prototype clinical breast cancer
treatment system at Oxford University in England was used to demonstrate
successfully the ability of our equipment to focus heat deep into animal tissue
at precise locations and in small target areas. In our view, these animal tests
demonstrate that it is possible to eliminate tumors by heat alone and without
the use of radiation. Using the pre-clinical data from Massachusetts General,
the FDA granted Celsion a supplemental premarketing approval to incorporate the
APA technology with Celsion's already approved Microfocus 1000 system. The APA
technology enhances the ability of the Microfocus 1000 system to focus energy.
In January 1999, we received an IDE from the FDA to permit clinical
testing of our breast cancer treatment system, and also received FDA approval to
proceed with Phase I human clinical studies. In August 2000, we completed the
treatment of ten patients in the Phase I study using our breast cancer equipment
at Columbia Hospital in West Palm Beach, Florida, and at Harbor UCLA Medical
Center in Torrance, California. In the study, our equipment was clinically
tested on female breast tumors on a minimally invasive basis through a single
application of precisely controlled and targeted heat. In December 2000, we
received approval from the FDA to commence Phase II trials for our breast cancer
system.
The Phase II trials consist of two protocols--the first is designed to
ablate (kill) small breast tumors including microscopic lesions in the margin of
the tumor, leaving the margins clear of viable cancer cells using heat alone and
the second is designed to downsize large breast cancer tumors using a
combination of heat and chemotherapy, thus allowing a surgeon to perform a
lumpectomy rather than a mastectomy, thereby preserving the affected breast.
These trials are currently under way at St. Joseph's Hospital Breast Center in
Orange, California, Harbor-UCLA Medical Center in Torrance, California, the
University of Oklahoma at Oklahoma City, Comprehensive Breast Center of Coral
Springs in Coral Springs, Florida, Mroz-Baier Breast Care Center in Memphis,
Tennessee, Lynne Clark, M.D. in Tacoma, Washington, Breast Care Specialists in
Norfolk, Virginia, Breast Care in Las Vegas, Nevada and Bolton Breast Unit,
Royal Bolton Hospital in Bolton, England. If the Phase II trials are successful,
we expect to apply for the addition of a new indication of use to the existing
FDA premarketing approval for our Microfocus equipment, denoting that the system
can be used to destroy cancerous tumors and viable cancer cells within the human
breast through the application of focused microwave heat energy alone.
THERMODOX(TM) (DOXORUBICIN(R) ENCAPSULATED IN HEAT-ACTIVATED LIPOSOME)
BACKGROUND
Liposomes are man-made microscopic spheres with a liquid membrane,
developed in the 1980's to encapsulate drugs for targeted delivery. Commercial
liposomes can now encapsulate chemotherapeutic drugs, enabling them to avoid
destruction by the body's immune system, and allowing them to accumulate in
tumors. However, with presently available technology, it often takes two to four
hours for commercial liposomes to release their drug contents to the tumors,
severely limiting the clinical efficacy of liposome chemotherapy treatments.
Celsion and Duke University are pursuing further development work and
pre-clinical studies aimed at using the new thermo-liposome technology in
conjunction with our focused heat technology for a variety of cancer
applications. We view the Duke thermo-liposome technology as a highly promising
improvement in the delivery of medicines used to combat serious diseases. For
example, the drugs used to fight cancer in chemotherapy regimens 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.
DEVELOPMENT OF THERMO-SENSITIVE LIPOSOMES
A team of Duke University scientists has developed heat-sensitive
liposomes comprised of materials that rapidly change porosity when heated to a
specific point. As the heat-sensitive liposomes circulate within the small
arteries, arterioles, and capillaries, the drug contents of the liposomes are
released at significantly higher levels in those tissue areas that have been
heated for 30 to 60 minutes than in areas that do not receive heat. In animal
trials, it has been determined that 50 times the amount of drugs carried by
heat-sensitive liposomes was deposited at a specific heated tissue site, when
compared to conventional liposomes. We have been a sponsor of this research,
which is part of a larger Duke University project to develop new
temperature-sensitive liposomes,
4
temperature-sensitive gene promoters and related compounds, and we are the
exclusive licensee of Duke University's heat-activated liposome technology.
Celsion's focused microwave equipment is used to provide minimally
invasive heating of cancerous tumors to trigger heat-activated liposomes within
the tumors. The heat-activated liposomes, which encapsulate chemotherapeutic
agents, are injected into the bloodstream where they remain encapsulated until
they release their drug payload inside the heated tumor. In preliminary tumor
growth delay studies conducted at Duke University, tumor-bearing mice received a
single intravenous injection of the liposome with a 5 mg per kilogram
Doxorubicin(R) concentration. This was immediately followed by heating of the
tumor to 42(degrees)C (108(degrees)F) for one hour. The result of the study was
a complete regression of the tumors in 11 out of 11 mice. These animals remained
disease free through 60 days of the study.
In November 2001, we completed large animal toxicity studies involving
ThermoDox(TM), our Doxorubicin(R)-laden thermo-liposome, at the Roswell Park
Cancer Institute, a cancer research organization in Buffalo, New York, and at
Dartmouth Hitchcock Medical Center, a teaching hospital associated with
Dartmouth Medical College. In March 2002, we filed an IND application with the
FDA for the use of ThermoDox in the treatment of prostate cancer using our
Microfocus equipment as the means of heat-activation. The IND became effective
in June 2002 and we have had a Phase I clinical trial underway at Roswell Park
and Regional Urology in Shreveport, Louisiana since May 28, 2003.
In addition, in January 2001, we entered into a Material Transfer
Agreement, or MTA, with the National Cancer Institute, or NCI, under which we
are supplying ThermoDox to enable the NCI to conduct clinical trials on liver
cancer. NCI is using an RF heating device to ablate the tumors and to heat the
liver, activating ThermoDox to kill peripheral cancer cells. Liver cancer has
yet to be successfully treated with existing treatment modalities. NCI is
currently completing pre-clinical studies and we filed an IND for the treatment
of liver cancer on December 22, 2003.
ALLIED TECHNOLOGY
On July 18, 2003, we entered into an additional license agreement with
Duke, pursuant to which we have obtained exclusive rights to an advanced phased
array radio frequency heating system designed specifically for use with
chemotherapeutic drugs for the treatment of locally advanced breast cancer. The
system, developed by Duke engineers, uses RF energy to warm a woman's breast to
approximately 42(degrees) C to enhance the effectiveness of liposomal
chemotherapeutic compounds. During the treatment, the breast is immersed in a
pool of distilled water, which helps distribute the heat evenly around the
breast, thus preventing skin burns and "hot spots," which often create pain.
Skin burns and hot spots have, up to now, limited the use of RF hyperthermia as
an effective means for treatment of breast cancer.
This heating system is currently being clinically evaluated at Duke. A
Phase I trial has been completed and a Phase II trial is underway. The
combination of trials was designed to demonstrate the system's ability to
enhance the combined therapeutic effect of liposomal encapsulations of
Doxorubicin(R) plus traditional paclitaxel (Taxol(R)) in the management of
locally advanced breast cancer. Results of the Phase I study, which included 21
women, indicated that tumor growth was halted in all of the women participating
in the trial and that 50% of the treated tumors were reduced in size. Eleven
percent of the trial participants had complete pathologic responses, meaning no
cancer was found in the breast tissue upon analyzing its surgical remains, and
33% of patients had complete clinical responses, meaning visible signs of the
tumor could no longer be detected. An additional 17% of trial participants were
converted from mastectomy candidates to lumpectomy candidates. Celsion intends
to work with Duke University staff to explore the potential for using this
heating system in combination with ThermoDox to treat breast cancer.
PRODUCTION OF HEAT-SENSITIVE LIPOSOMES
We have established a relationship with Celator Corporation of
Vancouver, Canada to provide Quality System Regulation, or QSR (formerly Good
Manufacturing Practices, or GMP), production of our heat-activated liposome for
our completed large animal toxicity studies and our planned Phase I clinical
study in humans. Celator is a leading drug formulation and discovery company
that specializes in liposome drug development. In November 2002, Celsion engaged
Northern Lipids Limited, a Vancouver, Canada-based liposome consulting firm, to
develop a scaled-up manufacturing process for this product and, in September
2003, we engaged Baxter Pharmaceuticals to produce the liposomes on a commercial
scale.
5
HEAT-ACTIVATED, GENE-BASED CANCER REPAIR INHIBITORS
BACKGROUND
Cancer cells have the ability to repair themselves after radiation or
chemotherapy. Thus, patients require repeated treatments to destroy
substantially all of the cancer cells. Celsion has licensed from Sloan-Kettering
a biomedical innovation that promises significant improvements in cancer
therapy. Sloan-Kettering has developed a biological modifier that inhibits
cancer cells' ability to repair themselves. Activated by focused heat, this
Cancer Repair Inhibitor, or CRI, temporarily disables the repair mechanism of
cancer cells, making it possible to reduce significantly the number of
radiation/chemotherapy treatments and/or lower the treatment dosage.
A standard approach to treating cancer is radiation therapy combined
with chemotherapy. High doses of radiation kill cancer cells or keep them from
dividing, but produce chronic or acute side effects, including fatigue,
neutropenia, anemia and leucopenia. In addition, depending on the location of
the tumor, other acute side effects may occur, including diarrhea, alopecia and
various foreign ulcers. Chemotherapy presents comparable or more serious side
effects.
Oncologists are looking for ways to mitigate these side effects. In
radiation therapy, these mitigating techniques include hyperfractionated
radiation, intra-operative radiation, three-dimensional radiation, stereotactic
radiosurgery and the use of radio-labeled monoclonal antibodies and radio
sensitizers. CRI falls into this latter category because it "sensitizes" a
cancer cell for treatment by making it more susceptible to DNA-damaging agents
such as heat, chemicals or radiation. A product of advances in the understanding
of the biology of cancer, CRI is one of a new class of "biologics" that we
expect to become part of the cancer treatment protocol.
THE CELSION TECHNOLOGY--CRI PLUS FOCUSED HEAT
CRI can be activated in tumors by minimally invasive focused heat in
the range of 41(degrees) C (106(degrees) F). This focused heat may be generated
by Celsion's Adaptive Phased Array microwave technology or other heating
systems. Having increased the susceptibility of cancer cells to DNA-damaging
agents, radiation and chemotherapy treatment may then be administered with less
frequency and/or at lower doses than currently is possible. CRI would then
deactivate and the patient would resume normal post-treatment care.
In September 2001, scientists at Sloan-Kettering successfully completed
pre-clinical laboratory feasibility demonstrations to assess safety and
biological activity of CRI. In December 2001, a small animal feasibility study
was completed at Sloan-Kettering's Good Laboratory Practice (GLP) facility to
assist in drug formulation. Further studies with large animals to assess
toxicity effects are expected to be conducted and the Company hopes to be in a
position to commence Phase I clinical (human) trials around the end of calendar
year 2004. At such time as we determine safety and dosage in our preliminary
studies, we expect to form partnership(s) with one or more drug companies to
scale up manufacturing for larger pivotal studies.
In May 2000, we entered into an exclusive worldwide agreement with
Sloan-Kettering for the commercial rights to the heat-activated gene therapy
technology developed by Sloan-Kettering. In the June 15, 2003 issue of Cancer
Research, a Sloan-Kettering scientist summarized the scientific and clinical
rationale leading to the successful development of the heat-activated anti-sense
genetic modifier and the pre-clinical evaluations, which demonstrated the
feasibility of its use as a potent radiation sensitizer for the treatment of
cancer.
In addition, in the July 1, 2000 issue of Cancer Research, a Duke
University research scientist reported on his initial use of heat to activate
gene therapy and to increase the production in animals of Interleukin-12, a
genetic protein, in order to delay tumor growth. On August 8, 2000, we entered
into an agreement with Duke University, subsequently renewed for consecutive
six-month periods, under which Celsion has the right, for a period of six months
thereafter, to negotiate an exclusive license for this technology.
DEVELOPMENT, MARKETING AND SALES STRATEGY
OVERVIEW AND GOALS
We are not currently engaged in marketing and sales, and are focusing
our activities on the development and testing of our products. Our strategic
plan is based upon our expertise and experience in the medical application of
focused microwave heat and our relationships with and license rights from our
institutional research partners. Our goal has been to employ these resources to
develop minimally invasive or non-invasive treatment technologies with efficacy
significantly exceeding that available from other sources.
6
Using our management and staff, scientific advisory personnel and available
financial resources, we are focusing our efforts on the following goals:
o Short-Term Goals: 12 to 24 Months
- complete PMA approval process, obtain PMA and commercialize our BPH
treatment system;
- complete the development, clinical testing, and commercialization of
our second generation technology for the eradication of cancerous
breast tumors; and
- pursue the development and testing of targeted drug delivery via
heat-sensitive liposomes for the purpose of concentrating
chemotherapeutic drugs at tumor sites.
o Longer-Term Goals: Beyond 24 Months
- continue the development of gene therapy to improve significantly the
effectiveness of radiation and chemotherapy on tumors; and
- initiate, either alone or with partners, the development of
cost-effective enhancements and variations of our technology,
including a version of our Microfocus equipment for treating prostate
and other cancers, and additional potential applications for
heat-sensitive liposome therapy and heat-activated gene therapy in the
treatment of inflammatory, infectious and genetic diseases.
We anticipate that, in the near term (up to 24 months), the source of
our revenues will be from our proprietary technology for BPH, if the necessary
testing and regulatory approval processes are completed. We intend to generate
initial sales through the development of marketing alliances.
In the longer term (beyond 24 months), we will seek to develop new
revenue streams from our current work with Duke University in targeted drug
delivery systems and with Sloan-Kettering in gene therapy. We anticipate that
revenues will come from the licensing of this technology to pharmaceutical
manufacturers and major institutional health care providers who would employ
these technologies to deliver drug regimens or gene therapy throughout the body.
Also, because this technology is designed to be used in conjunction with our
focused heat equipment, we expect that the acceptance of the technology will
generate demand for our equipment which, in turn, is expected to create
equipment sales revenues. To prepare for future marketing of our heat-sensitive
drug delivery systems, we intend to explore the possibilities of forming
alliances with medical equipment and pharmaceutical companies.
BPH TREATMENT SYSTEM
Our BPH treatment system is expected to be marketed to the
constituencies critical to its success. In particular, we expect to market to
the approximately two million readily identifiable BPH sufferers currently
employing drug therapies, as well as the estimated seven million men in the
United States afflicted with BPH who are not currently being treated--the
"watchful waiters"--with a focused message designed to encourage these BPH
sufferers to take advantage of a solution that will relieve their symptoms and
help to restore the quality of their lives. We expect that this marketing effort
will include the following elements:
o Reimbursement--We have established reimbursement under the TUMT
reimbursement code for Medicare patients participating in our Phase II
clinical trials. Based on this precedent, we expect that our BPH treatment
will be covered in a like manner by private insurers.
o Targeting Key Constituencies:
- Urology Practices. We expect first to target large urology practices,
starting with the large practices participating in our Phase II trial.
We expect that our BPH 800 equipment will be sold to urologists, who
will purchase unique disposable catheter kits from Celsion or its
marketing partner for each treatment. We believe that urology
practices have experienced a loss of revenue to primary care
physicians as a result of new drug therapies introduced to treat BPH
and other urological disorders and that urologists will be favorably
disposed toward our BPH 800 system, which could offer them a
significant new revenue source.
7
- Patients. We expect BPH sufferers will be targeted through aggressive
use of promotional and advertising media. Due to the specificity of
our target patient audience (males 50 years and older) and the
geographic concentration of retirees, we expect that specific media in
well-defined and discrete markets will generate a high level of
awareness of the availability of, and interest in, our treatment
system. We also expect that the Internet and other electronic methods
will be utilized to direct prospective patients to urology offices
equipped to perform our BPH 800 procedure.
Our marketing approach has been designed to bypass primary care
physicians, whom we believe to be the most significant barrier to the success of
our BPH treatment system. Generally, under current managed care protocols, a
patient must first visit his primary care physician who, after reviewing the
patient's symptoms, may either treat him or refer him to a specialist. With
increasing availability of drug therapies to treat urological disorders, the
number of referrals to urologists has been declining. We intend to ensure that
BPH sufferers are aware of our BPH 800 treatment system so that they are in a
position to insist that they be referred to a urologist to obtain treatment.
Celsion will not develop an internal sales and marketing capability for
its BPH business but, effective January 21, 2003, entered in to a Distribution
Agreement with Boston Scientific Corporation (Boston Scientific), pursuant to
which Celsion granted Boston Scientific exclusive rights to market and
distribute the BPH 800 system and its component parts for the treatment BPH. See
"--Strategic Alliances, License Agreements and Proprietary Rights."
STRATEGIC ALLIANCES, LICENSE AGREEMENTS AND PROPRIETARY RIGHTS
We have entered into a Distribution Agreement, dated as of January 21,
3003, with Boston Scientific, pursuant to which the Company has granted Boston
Scientific exclusive rights to market and distribute our BPH 800 system and its
component parts for the treatment of benign prostatic hyperplasia in all
territories other than China, Taiwan, Hong Kong, Macao, Mexico and Central and
South America for a period of seven years beginning on the Launch Date, defined
as the date the Company first ships the product. The parties will share gross
sales (less certain defined costs and expenses) attributable to the product. The
Company and Boston Scientific have also entered into a Transaction Agreement
effective January 20, 2003, pursuant to which, upon attainment of specified
milestones by the Company prior to the Launch Date, Boston Scientific will make
equity investments in the Company through the purchase of our common stock, par
value $0.01 per share (Common Stock) at a premium to the market price for such
stock over various measurement periods. On January 21, 2003, Boston Scientific
purchased 9,375,354 shares of our Common Stock for $5 million pursuant to the
terms of the Transaction Agreement. Pursuant to the Distribution and Transaction
Agreements, when the Company meets certain milestones, Boston Scientific will
pay us up to an additional $10 million through a combination of license fees and
additional equity investments.
The Company has also granted Boston Scientific the exclusive right to
purchase the assets and technology relating to the manufacture, marketing, sale,
distribution and/or research and development of products using thermal therapy
for the treatment of BPH. This option is exercisable for a period of five years,
with the option price being calculated based on worldwide sales of the product
subject to the Distribution Agreement, subject to a minimum price of $60
million. Additionally, for a period of up to seven years, the Company has
granted Boston Scientific the right to (i) match any unsolicited offer that the
Company may receive for any other product developed by the Company and (ii) make
a written offer to the Company in the event the Company desires to sell, license
or distribute any product developed by it.
We own three United States patents, which are directed to our Adaptive
Phased Array methods of treating breast cancer and BPH. Additionally, we have
seven United States patents pending, all of which have been filed
internationally. Three of our pending United States patent applications are
directed to our BPH treatment system, three are directed to our breast cancer
treatment, and one is directed to our monopole deep tumor treatment system.
Through our license agreements with MIT, MMTC, Duke and Sloan-Kettering, we have
exclusive rights, within defined fields of use, to nine United States patents.
Three of these patents relate to the treatment of BPH, four relate to
thermotherapy for cancer, including the APA technology, one relates to
heat-sensitive liposomes and one relates to gene therapy.
The MIT, MMTC, Duke University and Sloan-Kettering license agreements
each contain license fee, royalty and/or research support provisions, testing
and regulatory milestones, and other performance requirements that we must meet
by certain deadlines with respect to the use of the licensed technologies. In
conjunction with the patent holders, we intend to file international
applications for certain of the United States patents.
8
In 1996, we entered into a patent license agreement with MIT, pursuant
to which we obtained exclusive rights to use of MIT's patented APA technology in
conjunction with application of heat to breast tumor conditions, the application
of heat to prostate conditions and all other medical uses. MIT has retained
certain rights in the licensed technology for non-commercial research purposes.
MIT's technology has been patented in the United States and MIT has patents
pending for its technology in China, Europe, Canada and Japan. The term of our
exclusive rights under the MIT license agreement expires on the earlier of ten
years after the first commercial sale of a product using the licensed technology
or October 24, 2009, but our rights continue on a non-exclusive basis for the
life of the MIT patents.
We entered into license agreements with MMTC in 1996 and 2002, pursuant
to which we currently have exclusive worldwide rights to MMTC's patents related
to its balloon compression technology for the treatment of prostatic disease in
humans. Our exclusive rights under the MMTC license agreements extend for the
life of MMTC's patents. MMTC currently has patents in the United States and
Canada. The terms of these patents expire at various times from April 2008 to
November 2014. In addition, MMTC also has patent applications pending in Japan
and Europe.
On November 10, 1999, we entered into a license agreement with Duke
University under which we received exclusive rights (subject to certain
exceptions) to commercialize and use Duke's thermo-liposome technology. In
January 2003, Celsion purchased these rights from Duke upon the issuance
3,895,366 shares of the Company's Common Stock with a value of $2,175,014,
subject to any agreement to pay a royalty based upon future sales.
Our rights under our license agreement with Duke University extend for
the longer of 20 years or the end of any term for which any relevant patents are
issued by the United States Patent and Trademark Office. Currently, we have
rights to Duke's patent for its thermo-liposome technology in the United States,
which expires in 2018, and to future patents received by Duke in Canada, Europe,
Japan and Australia, where it has patent applications pending. The European
application can result in coverage in the United Kingdom, France and Germany.
For this technology, our license rights are worldwide, with various patent
rights covering the United States, Canada, the United Kingdom, France, Germany
and Japan.
We entered into a license agreement with Sloan-Kettering in November
2000 by which we obtained exclusive rights to Sloan-Kettering's United States
patent and to patents that Sloan-Kettering may receive in the future for its
heat-sensitive gene therapy in Japan, Canada and Europe, where it has patent
applications pending. Our rights under the agreement with Sloan-Kettering will
terminate at the later of 20 years after the date of the agreement or the last
expiration date of any patent rights covered by the agreement.
In addition to the rights available to us under completed or pending
license agreements, we rely on our own proprietary know-how and experience in
the development and use of heat for medical therapies, which we seek to protect,
in part, through proprietary information agreements with employees, consultants
and others. We cannot offer assurances that these information agreements will
not be breached, that we will have adequate remedies for any breach or that
these agreements, even if fully enforced, will be adequate to prevent
third-party use of our proprietary technology. Similarly, we cannot guarantee
that technology rights licensed to us by others will not be successfully
challenged or circumvented by third parties, or that the rights granted will
provide us with adequate protection.
MANUFACTURING
To date, Celsion has manufactured its BPH control units in-house.
However, Celsion has engaged Sanmina/SCI, an established manufacturer of
electronic medical devices, to manufacture BPH controls unit once the product
has been approved by the FDA.
We believe we are best suited to conduct basic research and development
activities, to pursue a prototype product through clinical testing and
regulatory approval, to engage in initial manufacturing and marketing activities
during product launch. Accordingly, we do not intend to engage in large-scale
manufacturing with respect to our breast cancer treatment system or other future
products, but instead intend generally to outsource the manufacture of final
commercial products, components and disposables. Based on past experience, we do
not anticipate any significant obstacles in identifying and contracting with
qualified suppliers and manufacturers.
9
THIRD-PARTY REIMBURSEMENT
Third-party reimbursement arrangements will likely be essential to
commercial acceptance of our new devices and overall cost-effectiveness and
physician advocacy will be keys to obtaining such reimbursement. We believe that
our equipment can be used to deliver treatment at substantially lower total cost
than surgical treatments for BPH or cancer or than continuous drug therapy.
Consequently, we believe that third-party payors seeking procedures that provide
quality clinical outcomes at relatively lower cost will help drive acceptance of
our products.
For BPH, our strategy is to use reimbursement codes currently approved
for TUMT in the United States and which have been approved for Medicare patients
in connection with BPH treatment in our Phase II clinical trials. For breast
cancer, we expect that our strategy for obtaining new reimbursement
authorizations in the United States will be to obtain appropriate reimbursement
codes and to perform studies in conjunction with clinical trials to establish
the efficacy and cost-effectiveness of the procedures as compared to surgical
and drug treatments for cancerous breast tumors.
With the increasing use of managed care and capitation as means to
control health care costs in the United States, we believe that physicians may
view our products as a tool to treat BPH and breast cancer patients at a lower
total cost, thus providing them with a competitive advantage when negotiating
managed care contracts. This is especially important in the United States, where
a significant portion of the aging, Medicare-eligible population is moving into
a managed care system.
Subject to regulatory approval for the use of our equipment to treat
BPH and breast cancer, we anticipate that physicians will submit insurance
claims for reimbursement for such procedures to third-party payors, such as
Medicare carriers, Medicaid carriers, health maintenance organizations and
private insurers. In the United States and in international markets, third-party
reimbursement is generally available for existing therapies used to treat cancer
and BPH. The availability and level of reimbursement from such payors for the
use of our new products will be a significant factor in our ability to
commercialize these systems.
We expect that new regulations regarding third-party reimbursement for
certain investigational devices in the United States will allow us to pursue
early reimbursement from Medicare with individual clinical sites prior to
receiving FDA approval. However, FDA approval likely will be necessary to obtain
a national coverage determination from Medicare. The national coverage
determination for third-party reimbursement will depend on the determination of
the Centers for Medicare and Medicaid Service, or CMS (formerly known as the
United States Health Care Financing Administration, or HCFA), which establishes
national coverage policies for Medicare carriers, including the amount to be
reimbursed, for coverage of claims submitted for reimbursement related to
specific procedures. Private insurance companies and health maintenance
organizations make their own determinations regarding coverage and reimbursement
based upon "usual and customary" fees. Reimbursement experience with a
particular third-party payor does not reflect a formal reimbursement
determination by the third-party payor. New outpatient procedure codes were
instituted on August 1, 2000. Our ability to petition successfully for these new
reimbursement codes will ultimately determine the degree of success we achieve
in implementing our business model.
In July 2003, the editorial panel of the American Medical Association
(AMA) assigned a new Current Procedural Terminology (CPT) code for thermal
therapy for ablation/reduction of malignant breast tumors. The assignment of the
new CPT code by the AMA recognized the use of microwave phased array
thermotherapy for the treatment of breast cancer as an emerging technology for
the management of breast cancer. Having this code in place should enable Celsion
to establish a record of costs and reimbursements, which will be used to
establish reimbursement once our breast cancer treatment system is approve by
the FDA.
Internationally, we expect to seek reimbursement approvals for
procedures utilizing our new products on a country-by-country basis. We expect
to use clinical studies and physician advocacy to support reimbursement requests
in countries in which there is currently no reimbursement for such procedures.
REGULATION OF SALES IN THE UNITED STATES
FDA REGULATION--RESEARCH AND APPROVAL
Our research and development activities, pre-clinical tests and
clinical trials and, ultimately, the manufacturing, marketing and labeling of
our products, are subject to extensive regulation by the FDA. The Federal Food,
Drug and Cosmetic Act, the Public Health Service Act, or PHSA, and the
regulations promulgated by the FDA govern, among other things, the testing,
manufacture, safety, efficacy, labeling, storage, record keeping, approval,
advertising, promotion, import and export of our products.
10
Under these statutes, our BPH 800 system is regulated as a class III
medical device, our heat-activated liposomes may be regulated as a new drug and
our CRI may be regulated as a biological product. The steps ordinarily required
before such products can be marketed in the U.S. include (a) pre-clinical and
clinical studies; (b) the submission to the FDA of an IDE or an IND which must
become effective before human clinical trials may commence; (c) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the product; (d) the submission to the FDA of an application for premarketing
approval (PMA), a New Drug Application (NDA), or a Biological License
Application (BLA); and (e) FDA approval of the application, including approval
of all product labeling.
Pre-clinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of the product. Pre-clinical safety tests must be conducted
by laboratories that comply with FDA regulations regarding Good Laboratory
Practice. The results of pre-clinical tests are submitted to the FDA as part of
an IDE or IND and are reviewed by the FDA before the commencement of human
clinical trials. Submission of an IDE or IND will not necessarily result in FDA
authorization to commence clinical trials and the absence of FDA objection to an
IDE or IND does not necessarily mean that the FDA will ultimately approve a PMA
or that a product candidate otherwise will come to market.
Clinical trials involve the administration of therapy to humans under
the supervision of a qualified principal investigator. Clinical trials must be
conducted in accordance with good clinical practices under protocols submitted
to the FDA as part of an IDE or IND. Also, each clinical trial must be approved
and conducted under the auspices of an internal review board, or IRB, and with
patient informed consent. An IRB will consider, among other things, ethical
factors, the safety of human subjects and the possible liability of the
institution conducting the clinical trials.
Clinical trials are typically conducted in two or three sequential
phases, but the phases may overlap. Phase I clinical trials involve the initial
introduction of the therapy to a small number of subjects. Phase II trials are
generally larger trials conducted in the target population. For devices such as
our BPH 800 system, Phase II studies may serve as the pivotal trials, providing
the demonsration of safety and effectiveness required for approval. In the case
of drugs and biological products, Phase II clinical trials generally are
conducted in a target patient population to gather evidence about the
pharmacokinetics, safety and biological or clinical efficacy of the drug for
specific indications, to determine dosage tolerance and optimal dosage and to
identify possible adverse effects and safety risks. When a drug or biological
compound has shown evidence of efficacy and an acceptable safety profile in
Phase II evaluations, Phase III clinical trials are undertaken to serve as the
pivotal trials to demonstrate clinical efficacy and safety in an expanded
patient population.
There can be no assurance that any of our clinical trials will be
completed successfully, within any specified time period or at all. Either the
FDA or we may suspend clinical trials at any time, if either the FDA or we
conclude that clinical subjects are being exposed to an unacceptable health risk
or for other reasons. The FDA inspects and reviews clinical trial sites,
informed consent forms, data from the clinical trial sites (including case
report forms and record keeping procedures) and the performance of the protocols
by clinical trial personnel to determine compliance with good clinical
practices. The FDA also examines whether there was bias in the conduct of
clinical trials. The conduct of clinical trials is complex and difficult,
especially in pivotal Phase II or Phase III trials. There can be no assurance
that the design or the performance of the pivotal clinical trial protocols or
any of our current or future product candidates will be successful.
The results of pre-clinical studies and clinical trials, if successful,
are submitted in an application for FDA approval to market the device, drug or
biological product for a specified use. The testing and approval process
requires substantial time and effort, and there can be no assurance that any
approval will be granted for any product at any time, according to any schedule,
or at all. The FDA may refuse to approve an application if it believes that
applicable regulatory criteria are not satisfied. The FDA may also require
additional testing for safety and efficacy. Moreover, if regulatory approval is
granted, the approval will be limited to specific indications. There can be no
assurance that any of our product candidates will receive regulatory approvals
for marketing or, if approved, that approval will be for any or all of the
indications that we request.
The FDA is authorized to require user fees for submission of NDAs and
BLAs. The current user fee for such applications is $267,606 and may increase
from year to year.
The FDA is also authorized to require annual user fees for approved
products and for companies with establishments at which finished products are
manufactured, which fees may increase from year to year. The FDA may waive or
reduce such user fees under special circumstances. We intend to seek waivers or
reductions of user fees where possible, but we cannot be assured that we will be
eligible for any such waiver or reduction.
11
FDA REGULATION--POST-APPROVAL REQUIREMENTS
Even if we receive necessary regulatory approvals for one or more of
our product candidates, our manufacturing facilities and products are subject to
ongoing review and periodic inspection. Each U.S. device, drug and biologic
manufacturing establishment must be registered with the FDA. Manufacturing
establishments in the U.S. and abroad are subject to inspections by the FDA and
must comply with the FDA's QSR regulations. Medical devices also must comply
with the FDA's QSR regulations. In order to ensure full technical compliance
with such regulations, manufacturers must expend funds, time and effort in the
areas of production and quality control.
FDA REGULATION--MANUFACTURING STANDARDS
We are also subject to record keeping and reporting regulations,
including the FDA's mandatory Medical Device Reporting, or MDR, regulations.
These regulations require, among other things, the reporting to FDA of adverse
events alleged to have been associated with the use of a product or in
connection with certain product failures.
Labeling and promotional activities also are regulated by the FDA and,
in certain instances, by the Federal Trade Commission (FTC). We must also comply
with record keeping requirements as well as requirements to report certain
adverse events involving our products. The FDA can impose other post-marketing
controls on us as well as our products including, but not limited to,
restrictions on sale and use, through the approval process regulations and
otherwise.
Failure to comply with applicable regulatory requirements can result
in, among other things, warning letters, fines, injunctions and other equitable
remedies, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant approvals,
pre-market clearance or pre-market approval, withdrawal of approvals and
criminal prosecution.
OTHER FEDERAL REGULATION
The Federal Communications Commission (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 FCC has approved the frequency of 915 MHZ for
medical applications, and machines utilizing that frequency do not require
shielding to prevent interference with communications. Our BPH and breast
treatment products utilize the 915 MHZ frequency.
In December 1984, the Health Care Financing Administration (now known
as the Centers for Medicare and Medicaid Service (CMS)) approved reimbursement
under Medicare and Medicaid for thermotherapy treatment when used in conjunction
with radiation therapy for the treatment of surface and subsurface tumors. At
this time, most of the large medical insurance carriers in the U.S. have
approved reimbursement for this type of thermotherapy treatment under their
health policies. Thermotherapy treatment administered using equipment that has
received a PMA is eligible for such reimbursement.
REGULATION OF FOREIGN SALES
Sales of domestically produced drugs, biologics and medical devices
outside of the U.S. are subject to United States export requirements and foreign
regulatory controls. Drugs, biologics, and devices that are subject to PMA
requirements and have not received FDA marketing approval cannot be exported
unless they are approved in the European Union (EU), in a country in the EU or
the European Free Trade Association, or in certain other countries specified in
the U.S. Food, Drug and Cosmetic Act.
Products approved in these countries may be exported to other countries
in which they are legal for marketing. Such products must bear labeling that
complies with both the country of approval and the country to which the product
is exported. In the case of drugs and biologics, there must also be a valid
marketing authorization by a responsible authority and FDA must make detailed
determinations regarding the adequacy of the statutory or regulatory
requirements of the importing country.
Exported products that are not approved in the U.S. are subject to
other FDA regulatory requirements as well, including substantial compliance with
good manufacturing practice requirements. The FDA may prohibit export if there
is a determination that the exportation of the product presents an imminent
hazard to the public health of the importing country or to the U.S. if
reimported.
Upon exportation, our products would be subject to regulation by
national governments and supranational agencies as well as by local agencies
affecting, among other things, product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. There can be no assurance that one or more countries or agencies
will not impose
12
regulations or requirements that could have a material adverse effect on our
ability to sell our products. In the EU, the harmonization of standards has
caused a shift from a country-by-country regulatory system towards a single
EU-wide regulatory system. However, many members of the EU have imposed
additional country-specific regulations/requirements. The approval procedure
varies from member state to member state, and the time required may be longer or
shorter than that required for FDA approval. There can be no assurance that the
changes in the regulatory schemes imposed by the EU, supranational agencies or
individual countries affecting our products will not have a material adverse
effect on the our ability to sell our products in countries other than the U.S.
Failure to comply with foreign regulatory requirements can result in,
among other things, warning letters, fines, injunctions and other equitable
remedies, civil penalties, recall orders or seizure of products, total or
partial suspension of production, refusal of the health authorities to grant
desired approvals, the withdrawal of approvals and criminal prosecution.
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.
COMPETITION
Many companies and institutions are engaged in research and development
of thermotherapy technologies for both cancer and prostate disease products that
seek treatment outcomes similar to those we are pursuing. In addition, a number
of companies and institutions are pursuing alternative treatment strategies
through the use of RF, laser and ultrasound energy sources Potential competitors
engaged in all areas of cancer and prostate treatment research in the U.S. and
other countries include, among others, major pharmaceutical and chemical
companies, specialized technology companies, universities and other research
institutions. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Risk Factors."
There currently are three principal competitors in the MI market for
BPH treatment systems: Medtronic (NYSE:MDT), Urologix (NASDAQ:ULGX) and
TherMatrx (private). In addition to Celsion, one other company, ACMI (a
privately held company selling Prostalund technology from Sweden), is in the
process of FDA review of a minimally invasive BPH treatment system. These
companies utilize one of two major approaches to BPH treatment:
o Transurethral needle ablation, or TUNA, which uses radio
frequency ablation and is offered by Medtronic; and
o TUMT, which uses microwave heating to ablate tissue within the
prostate and is offered by the remaining companies.
Medtronic acquired its TUNA business as part of its acquisition of
Vidamed, Inc. for $329 million in April 2002. TUNA technology is labor intensive
for the physician and requires a significant learning curve prior to perfecting
the technique. Patients require post-treatment catheterization and significant
pre-medication is common.
TUMT technology is currently the dominant MI alternative. Urologix is
the market leader in TUMT systems. Its machines currently list for approximately
$90,000 and its single use catheters cost between $1,000 and $1,200. Urologix's
technology uses a "water cooled" catheter, which is designed to use high
microwave energy without damaging the urethral lining. TherMatrx takes a simpler
approach, offering a low power machine that does not require cooling. The sales
price of the TherMatrx equipment is approximately $25,000. The catheter used in
conjunction with this equipment sells in the same range as the Urologix
catheter. Both Urologix's and TherMatrx's products (and ACMI's Prostalund, which
has not been approved) require pre-medication, are more difficult for the
physician to administer than is the BPH 800 system and require post-treatment
catheterization of the patient.
We believe that our technology is a leap forward in the advancement of
microwave therapy. The addition of balloon compression within the prostatic
portion of the urethra allows for immediate relief to the patient and in most
cases can avoid post treatment catheterization. Thus, Celsion's technology
allows for the type of rapid relief for the patient normally associated with
drug therapies while avoiding the side effects and significant delays in patient
symptomatic relief associated with other minimally invasive therapies.
13
PRODUCT LIABILITY AND INSURANCE
Our business exposes us to potential product liability risks that are
inherent in the testing, manufacturing and marketing of human therapeutic
products. We presently have product liability insurance limited to $5,000,000
per incident, and, if we were to be subject to a claim in excess of this
coverage or to a claim not covered by our insurance and the claim succeeded, we
would be required to pay the claim out of our own limited resources.
EMPLOYEES
As of December 18, 2003, we employed 29 full-time employees and also
utilize the services of part-time consultants from time to time. In addition,
our Scientific Advisory Board actively assists our management with advice on
various projects. None of our employees are represented by a collective
bargaining organization, and we consider our relations with our employees to be
good.
ITEM 2. PROPERTIES
We lease premises consisting of approximately 13,891 square feet of
administrative office, laboratory and workshop space at 10220-L Old Columbia
Road, Columbia, Maryland 21046-1705 from an unaffiliated party under a
seven-year lease that expires on October 31, 2010. Rent expense for the year
ended September 30, 2002 was $300,752. Future minimum lease obligations are as
follows: [here]
2004.......... $ 190,814
2005.......... $ 185,548
2006.......... $ 191,093
2007.......... $ 196,094
2008.......... $ 202,739
2009.......... $ 208,827
2010.......... $ 215,067
2011.......... $ 17,965
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET PRICE FOR OUR COMMON STOCK
Our Common Stock trades on The American Stock Exchange. The following
table sets forth the high and low sales prices for our Common Stock reported by
The American Stock Exchange. The quotations set forth below do not include
retail markups, markdowns or commissions.
14
HIGH LOW
---- ---
FISCAL YEAR ENDED SEPTEMBER 30, 2002
First Quarter (October 1 - December 31, 2001).... $ 0.68 $ 0.40
Second Quarter (January 1 - March 31, 2002)...... $ 0.98 $ 0.59
Third Quarter (April 1 - June 30, 2002).......... $ 0.80 $ 0.40
Fourth Quarter (July 1 - September 30, 2002)..... $ 0.53 $ 0.34
FISCAL YEAR ENDED SEPTEMBER 30, 2003
First Quarter (October 1 - December 31, 2002)..... $ 0.51 $ 0.36
Second Quarter (January 1 - March 31, 2003)...... $ 0.76 $ 0.39
Third Quarter (April 1 - June 30, 2003).......... $ 1.80 $ 0.39
Fourth Quarter (July 1 - September 30, 2003)..... $ 1.29 $ 0.84
On December 18, 2003, the last reported sale price for our Common Stock
on The American Stock Exchange was $1.05. As of December 18, 2003, there were
approximately 1,300 holders of record of our Common Stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our Common Stock
or other securities and do not currently anticipate paying cash dividends in the
foreseeable future.
ISSUANCE OF SHARES WITHOUT REGISTRATION
During the fiscal quarter ended September 30, 2003, we issued the
following securities without registration under the Securities Act of 1933, as
amended (the Securities Act):
- On July 10, 2003, the Company issued 5,860,390 shares of its Common
Stock and warrants to purchase 1,758,117 shares of its Common Stock in
connection with a private placement offering. On July 23, 2003, the
Company issued 3,642,657 shares of its Common Stock and warrants to
purchase 1,092,797 shares of its Common Stock in connection with the
same private placement offering. On September 30, 2003, the Company
issued 1,040,000 shares of its Common Stock and warrants to purchase
312,000 shares of its Common Stock in connection with a separate
private placement offering. These two private placement offerings were
made exclusively to "accredited investors" as that term is defined in
Rule 501 under the Securities Act. These shares were issued at a price
of $0.77 per share. The warrants issued to each investor entitle such
investor to purchase that number of shares of Common Stock equal to
30% of the number of shares of Common Stock initially issued to the
investor in the offerings. The warrants are exercisable at $1.20 per
share of Common Stock, subject to call under certain circumstances. In
connection with the private placement offerings, the Company issued
warrants to placement agents/finders to purchase 1,233,537 shares of
its Common Stock at an exercise price of $0.77 per share. The Company
realized gross proceeds in the amount of $8,118,146 and paid placement
agents' and finders' commissions or fees in the amount of $718,621 in
connection with the sale of these securities. The shares issued are
restricted stock, endorsed with the Company's standard restricted
stock legend, with a stop transfer instruction recorded by the
transfer agent. The certificates representing the warrants have a
similar restrictive legend. Accordingly, the Company views the shares
issued as exempt from registration under Sections 4(2) and/or 4(6) of
the Securities Act.
- The Company issued a total of 2,759,280 shares of its Common Stock for
cash consideration of $1,296,896 upon exercise of stock purchase
warrants. These shares are restricted stock, and the certificates
representing such shares are endorsed with Celsion's standard
restrictive legend, with a stop transfer instruction recorded by the
transfer agent. Accordingly, Celsion views the shares issued as exempt
from registration under Sections 4(2) and/or 4(6) of the Securities
Act.
- The Company also issued 80,559 shares of its Common Stock to
consultants for services valued at $55,100. These shares are
restricted stock, and the certificates representing such shares are
endorsed with the Celsion's standard restricted stock legend, with a
stop transfer instruction recorded by the transfer agent. Accordingly,
Celsion views the shares issued as exempt from registration under
Sections 4(2) and/or 4(6) of the Securities Act.
- The Company issued 2,890,970 shares of its Common Stock upon
conversion of 1,185.3 shares of its Series A 10% Convertible Preferred
Stock. These shares are restricted stock, and the certificates
representing such shares are endorsed with Celsion's standard
restricted stock legend, with a stop transfer instruction recorded by
the transfer agent. Accordingly, Celsion views the shares issued as
exempt from registration under Sections 4(2) and/or 4(6) of the
Securities Act.
- The Company issued 2,253,809 shares of its Common Stock upon
conversion of 1,126.9 shares of its Series B 8% Convertible Preferred
Stock. These shares are restricted stock, and the certificates
representing such shares are endorsed with Celsion's standard
restricted stock legend,
15
with a stop transfer instruction recorded by the transfer agent.
Accordingly, Celsion views the shares issued as exempt from
registration under Sections 4(2) and/or 4(6) of the Securities Act.
Celsion views these issuances as transactions by an issuer not involving
any public offering and therefore as exempt from registration under Sections
4(2) and/or 4(6) of the Securities Act.
See also "Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters--Equity Compensation Plan
Information."
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain financial data for Celsion for the
five fiscal years ended September 30, 2003 is qualified in its entirety by, and
should be read in conjunction with, the "Item 8. Financial Statements and
Supplementary Data and Financial Disclosure" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------- ------------- ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Revenues:
Product Sales (Net) ................ $ -- $ 3,420 $ -- $ -- $ --
Research and development contracts.. -- -- -- -- --
------------- ------------- ------------- ------------- -------------
Total revenues........................... 3,420
Cost of sales ........................... -- 246 -- -- --
------------- ------------- ------------- ------------- -------------
Gross profit on product sales ........... -- 3,174 -- -- --
------------- ------------- ------------- ------------- -------------
Other costs and expenses:
Selling, general and
administrative.................... 1,371,161 2,662,623 3,211,625 4,833,005 5,125,769
Research and development ........... 1,019,941 2,238,292 4,075,249 5,004,687 8,178,680
------------- ------------- ------------- ------------- -------------
Total operating expenses ................ 2,391,102 4,900,915 7,286,874 9,837,692 13,304,449
------------- ------------- ------------- ------------- -------------
(Loss) from operations .................. (2,391,102) (4,897,741) (7,286,874) (9,837,692) (13,304,449)
------------- ------------- ------------- ------------- -------------
Other income (expense) .................. 15,744 -- 45,609 38,289 --
Interest income (expense) ............... (60,834) 350,526 318,038 48,321 30,378
------------- ------------- ------------- ------------- -------------
Net (loss) .............................. $ (2,436,192) $ (4,547,215) $ (6,923,227) $ (9,751,082) $ (13,274,071)
============= ============= ============= ============= =============
Net loss per share ...................... $ (0.05) $ (0.08) $ (0.10) $ (0.11) $ (0.12)
============= ============= ============= ============= =============
Weighted average shares outstanding ..... 45,900,424 59,406,921 72,249,920 87,257,672 113,680,286
16
AS OF SEPTEMBER 30,
------------------------------------------------------------------------------
1999 2000 2001 2002 2003
------------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash and cash equivalents ................ $ 1,357,464 $ 8,820,196 $ 2,510,136 $ 928,819 $ 11,410,533
Working Capital .......................... 906,926 8,509,173 2,388,900 735,216 11,011,594
Total Assets ............................. 1,558,684 9,117,821 2,956,861 2,291,449 13,128,301
Long-term debt, less current maturities .. -- -- 15,203 -- --
Redeemable preferred stock:
Series A 10% Convertible Preferred Stock -- 5,176,000 1,099,584 1,130,500 --
Series B 8% Convertible Preferred Stock -- -- -- 1,396,285 --
Accumulated deficit ...................... (21,900,202) (26,770,917) (33,928,781) (43,820,081) (57,278,383)
Total stockholders' equity (deficit) ..... 1,037,125 8,726,429 2,669,217 1,516,490 11,734,802
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Annual Report on Form 10-K,
including certain in this section, are forward-looking. In addition, from time
to time we may publish forward-looking statements relating to such matters as
anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. These statements involve known and unknown risks, uncertainties, and
other factors that may cause our or our industry's actual results, levels of
activity, performance, or achievements to be materially different from any
future results, levels of activity, performance, or achievements expressed or
implied by such forward-looking statements. Such factors include, among other
things, unforeseen changes in the course of research and development activities
and in clinical trials; possible changes in cost and timing of development and
testing, capital structure, and other financial items; changes in approaches to
medical treatment; introduction of new products by others; possible acquisitions
of other technologies, assets or businesses; possible actions by customers,
suppliers, strategic partners, potential strategic partners, competitors and
regulatory authorities, as well as those listed under "Risk Factors" below and
elsewhere in this Annual Report on Form 10-K. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or
"continue" or the negative of such terms or other comparable terminology.
Forward-looking statements are only predictions. Actual events or results may
differ materially. In evaluating these statements, you should specifically
consider various factors, including the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements, or
for updating such statements after the date hereof, except as required pursuant
to applicable federal securities laws.
BASIS OF PRESENTATION
Since inception, the Company has incurred substantial operating losses,
principally from expenses associated with our research and development programs,
the clinical trials conducted in connection with our thermotherapy systems and
applications for submission to the Food and Drug Administration. We believe
these expenditures are essential for the commercialization of our technologies.
As a result of these expenditures, as well as related general and administrative
expenses, Celsion had an accumulated deficit of $57,278,383 as of September 30,
2003. We expect such operating losses to continue in the near term and for the
foreseeable future as we continue our product development efforts and undertake
marketing and sales activities. Celsion's ability to achieve profitability is
dependent upon its ability successfully to obtain governmental approvals,
produce, market and sell its new technology and integrate such technology into
its thermotherapy systems. There can be no assurance that we will be able to
commercialize our technology successfully or that we ever will achieve
profitability. Our operating results have fluctuated significantly in the past
17
and we expect that such results will fluctuate significantly from quarter to
quarter in the future and will depend on a number of factors, many of which are
outside Celsion's control.
We will need substantial additional funding in order to complete the
development, testing and commercialization of our cancer treatment and BPH
products and of potential new products. It is our current intention both to
increase the pace of development work on our present products and to make a
significant commitment to thermo-sensitive liposome and gene therapy research
and development projects. The increase in the scope of present development work
and such new projects will require additional funding, at least until we are
able to begin marketing our products.
If adequate funding is not available in the future, Celsion 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 us to relinquish rights to certain of our technologies, products
or potential markers. Furthermore, if we cannot fund our ongoing development and
other operating requirements, and particularly those associated with our
obligation to conduct clinical trials under our licensing agreements, Celsion
will be in breach of its commitments under such licensing agreements and could
therefore lose its license rights, with material adverse effects Celsion.
Management is continuing its efforts to obtain additional funds so that Celsion
can meet its obligations and sustain operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company reevaluates its estimates and
bases these reevaluations on historical experience and various other assumptions
that we believe are reasonable under the circumstances. Among other things,
these estimates form the basis for judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these assumptions or conditions. The Company believes the
following critical accounting policy affects its more significant judgments and
estimates used in the preparation of its financial statements.
ACCOUNTING FOR STOCK OPTIONS: In October 1995, the Financial Accounting
Standards Boards (FASB) issued SFAS 123, "Accounting for Stock-Based
Compensation". SFAS 123 allows companies to account for stock based compensation
either under the new provisions of SFAS 123 or using the intrinsic value method
provided by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees", but requires pro forma disclosure in the footnotes
to the financial statements as if the measurement provisions of SFAS 123 had
been adopted.
In December 2002, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" (SFAS 148). SFAS No. 148 amends SFAS 123
to provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
methods of accounting for stock-based compensation and the effect of the method
used on reported results. SFAS 148 is effective for financial statements for
fiscal years ending after December 15, 2002.
RESULTS OF OPERATIONS
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 2003 AND FISCAL YEAR ENDED
SEPTEMBER 30, 2002
We generated no revenues during either the fiscal year ended September
30, 2003 or the fiscal year ended September 30, 2002.
Research and development expenditures in the year ended September 30,
2003 were $8,178,680, an increase of $3,173,993, or 63%, compared to the fiscal
year ended September 30, 2002. The increase was primarily the result of (1) a
payment of $2,175,014 to Duke University pursuant to an obligation under the
License Agreement between the Company and Duke University, which was satisfied
by the issuance of 3,805,366 shares of the Company's Common Stock to Duke
University on January 16, 2003; (2) recognition of compensation expense related
to employee stock options; and (3) increased production costs related to the
scale-up of liposome production.
18
Selling, general and administrative expense increased by 6%, to
$5,125,769 for the fiscal year ended September 30, 2003 compared to $4,833,005
for the fiscal year ended September 30, 2002. The increase was due primarily to
compensation expense related to employee stock options, offset by the absence of
costs associated with the 2002 settlement of litigation brought by the Company's
former Chief Financial Officer and others.
The increase in operating expenses described above, together with the
absence of revenues during the relevant periods, resulted in a loss from
operations of $13,304,449 for the year ended September 30, 2003 compared to a
loss $9,837,692 for the year ended September 30, 2002, an increase of
$3,466,757.
Interest income net of interest expense decreased by $17,943 to $30,378
for the fiscal year ended September 30, 2003 compared to $48,321 for the fiscal
year ended September 30, 2002. This decrease is the result of a combination of
lower average funds available for investment and lower interest rates in fiscal
2003.
COMPARISON OF FISCAL YEAR ENDED SEPTEMBER 30, 2002 AND FISCAL YEAR ENDED
SEPTEMBER 30, 2001
We generated no revenues during the fiscal year ended September 30,
2002 or the fiscal year ended September 30, 2001.
Research and development expenditures in the year ended September 30,
2002 were $5,004,687, an increase of $929,438, or 23%, compared to the fiscal
year ended September 30, 2001. The increase was attributable to costs incurred
in undertaking pivotal Phase II clinical trials for both our BPH and breast
cancer treatment systems. These costs included increased personnel costs, as
well as costs related to the acquisition of equipment and materials necessary to
complete the trials. Additionally, during the year we completed large animal
toxicity studies using our heat-activated liposomes.
Selling, general and administrative expense increased by $1,621,380 or
51%, to $4,833,005 for the fiscal year ended September 30, 2002 compared to
$3,211,625 for the fiscal year ended September 30, 2001. The increase was due
primarily to increased staffing and legal costs associated with private
placements and various related regulatory filings. Celsion also incurred costs
associated with settlement of its ongoing lawsuit with Warren C. Stearns, the
Company's former Chief Financial Officer, and his associates. Under the terms of
the settlement, Celsion issued to the Stearns group certain Common Stock
purchase warrants that were at issue in the litigation, together with additional
warrants as compensation for relinquishment of certain anti-dilution rights
under the disputed warrants and $265,000 in cash to reimburse Stearns for costs
incurred up to the settlement date. Celsion also accrued the remaining amounts
due to Spencer J. Volk, its former President and Chief Executive Officer, under
the terms of the agreement governing his retirement. Finally, Celsion incurred
consulting costs related to the exploration of the feasibility of setting up a
business in China (including Hong Kong, Taiwan and Macao).
The increase operating expenses described above, together with the
absence of revenues during the relevant periods, resulted in a loss from
operations of $9,837,692 for the year ended September 30, 2002 compared to a
loss of $7,286,874 for the year ended September 30, 2001, an increase of
$2,550,818.
Interest income net of interest expense decreased by $269,717 to
$48,321 for the fiscal year ended September 30, 2002 compared to $318,038 for
the fiscal year ended September 30, 2001. This decrease is the result of a
combination of lower average funds available for investment and lower interest
rates in fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, our expenses have significantly exceeded our
revenues, resulting in an accumulated deficit of $57,278,383 at September 30,
2003. We have incurred negative cash flows from operations since our inception
and have funded our operations primarily through the sale of equity securities.
As of September 30, 2003, we had cash of $11,410,533 and total current assets of
$12,405,093, compared with current liabilities of $1,393,499, resulting in a
working capital surplus of $11,011,594. As of September 30, 2002, we had
$928,819 in cash and total current assets of $1,510,175, compared with current
liabilities of $774,959, which resulted in a working capital surplus of $735,216
at fiscal year end. The increase in working capital at September 30, 2003 as
compared to September 30, 2002 was due to the fact that, during the past fiscal
year, we received funding from private placements of our equity securities,
exercises of options and warrants, and an equity investment from Boston
Scientific.
We do not have any bank financing arrangements and have funded our
operations primarily through private placements of our equity securities. On
October 15, 2002, we completed a private placement resulting in net proceeds of
approximately $775,000 and, on November 12, 2002, we completed a private
placement generating approximately $300,000 in net proceeds. The Common Stock
19
issued in these two private placements was priced at $0.33 per share. On
December 31, 2002, we received further funding through a private placement of
$425,000 (1,275,000 shares) of Common Stock and issuance of a note in the amount
of $500,000 payable to Boston Scientific.
On January 21, 2003, Celsion entered into an agreement with Boston
Scientific under which Boston Scientific will market and distribute the
Company's BPH 800 treatment system. In connection with this agreement, Boston
Scientific purchased 9,375,354 shares of Celsion Common Stock for an initial
investment of $5,000,000 and agreed to invest an additional $10 million in a
combination of equity and licensing fees upon Celsion meeting certain
milestones. The initial investment was sufficient to repay the $500,000 note
issued to Boston Scientific on December 31, 2002. Further investments by Boston
Scientific would contribute to Celsion's funding requirements for the future.
In July and September of 2003, we issued a total of 10,543,047 shares
of our Common Stock and warrants to purchase 3,162,914 shares of our Common
Stock in connection with two separate private placement offerings. These shares
were issued at a price of $0.77 per share. The warrants issued to each investor
entitle such investor to purchase that number of shares of Common Stock equal to
30% of the number of shares of Common Stock initially issued to the investor in
the offerings. The warrants are exercisable at $1.20 per share, subject to call
under certain circumstances. The Company realized gross proceeds in the amount
of $8,118,146 and paid placement agents' and finders' commissions or fees in the
amount of $718,621 in connection with the sale of these securities.
In the fiscal year ended September 30, 2003, we also received
$5,771,619 in cash upon exercise of stock purchase options and warrants.
For all of fiscal year 2004, we expect to expend a total of
approximately $10 million for clinical testing of our breast cancer, prostate
cancer and liver cancer systems, as well as corporate overhead, all of which we
expect to fund from our current resources. If, as currently anticipated, our BPH
system is approved for marketing during the course of fiscal 2004, funding could
be generated from product sales. The foregoing amounts are estimates based upon
assumptions as to the scheduling of institutional clinical research and testing
personnel, the timing of clinical trials and other factors, not all of which are
fully predictable.
Our available cash on hand is sufficient to fund our activities through
September 30, 2004. However, our dependence on raising additional capital beyond
fiscal 2004 will continue at least until we are able to begin marketing our new
technologies. Our future capital requirements and the adequacy of our financing
depend upon numerous factors, including the successful commercialization of our
BPH 800 system and breast cancer treatment systems, progress in product
development efforts, progress with pre-clinical studies and clinical trials, the
cost and timing of production arrangements, the development of effective sales
and marketing activities, the cost of filing, prosecuting, defending and
enforcing intellectual property rights, competing technological and market
developments and the development of strategic alliances for the marketing of our
products. We will be required to obtain additional funding through equity or
debt financing, strategic alliances with corporate partners and others, or
through other sources not yet identified. We do not have any committed sources
of additional financing, and cannot guarantee that additional funding will be
available in a timely manner, on acceptable terms, or at all. If adequate funds
are not available, we may be required to delay, scale back or eliminate certain
aspects of our operations or attempt to obtain funds through unfavorable
arrangements with partners or others that may require us to relinquish rights to
certain of our technologies, product candidates, products or potential markets
or which otherwise may be materially unfavorable to us. Furthermore, if we
cannot fund our ongoing development and other operating requirements,
particularly those associated with our obligation to conduct clinical trials
under our licensing agreements, we will be in breach of our commitments under
these licensing agreements and could therefore lose our license rights, which
could have material adverse effects on our business.
The following is a summary of our future minimum payments under contractual
obligations as of September 30, 2003:
Total Less than one year One to three years Four to five years Thereafter
------------ ------------------- ------------------ ------------------ ----------
Operating leases-Property $1,408,147 $190,814 $572,735 $411,566 $233,032
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not engage in any off-balance sheet financing
arrangements. In particular, we do not have any interest in so-called limited
purpose entities, which include special purpose entities (SPEs) and structured
finance entities.
20
RISK FACTORS
Among numerous risk factors that may affect our future performance and
our ability to achieve profitable operations are the following:
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT TO CONTINUE SUCH LOSSES FOR
THE FORESEEABLE FUTURE.
Since Celsion's inception in 1982, our expenses have substantially
exceeded our revenues, resulting in continuing losses and an accumulated deficit
of $57,278,383 at September 30, 2003, including losses of $13,274,071 for the
year ended September 30, 2003 and $9,751,082 for the year ended September 30,
2002. Because we presently have no revenues and are committed to continuing our
product research, development and commercialization programs, we will continue
to experience significant operating losses unless and until we complete the
development of new products and these products have been clinically tested,
approved by the FDA and successfully marketed. In addition, we have funded our
operations for many years primarily through the sale of the Company's securities
and have limited working capital for our product research, development,
commercialization and other activities.
WE DO NOT EXPECT TO GENERATE SIGNIFICANT REVENUE FOR THE FORESEEABLE FUTURE.
We marketed and sold our original microwave thermotherapy products,
which produced modest revenues from 1990 to 1994, but ceased marketing these
products in 1995. We have devoted our resources in ensuing years to developing a
new generation of thermotherapy and other products, but cannot market these
products unless and until we have completed clinical testing and obtained all
necessary governmental approvals. Accordingly, we have no current source of
revenues, much less profits, to sustain our present operations, and no revenues
will be available unless and until our new products are clinically tested,
approved by the FDA and successfully marketed. We cannot guarantee that any or
all of our products will be successfully tested, approved by the FDA or
marketed, successfully or otherwise, at any time in the foreseeable future or at
all.
OUR MICROWAVE HEAT THERAPY TECHNOLOGY IS STILL UNDERGOING CLINICAL TESTING AND
MAY NOT ACHIEVE SUFFICIENT ACCEPTANCE BY THE MEDICAL COMMUNITY TO SUSTAIN OUR
BUSINESS.
To date, microwave heat therapy has not been widely accepted in the
United States medical community as an effective treatment for BPH or for cancer
treatment, with or without the concurrent use of radiation. We believe that this
is primarily due to the inability of earlier technology adequately to focus and
control heat directed at specific tissue locations and to conclusions that were
drawn from a widely publicized study by the Radiation Oncology Therapy Group
that purported to show that thermotherapy in conjunction with radiation was only
marginally effective. Subsequent to the publication of this study, the
HealthCare Financing Administration, a HCFA (now known as the Centers for
Medicare and Medicaid Services, or CMS) established a low medical reimbursement
rate for all thermotherapy equipment designed to be used in conjunction with
radiation. While management believes that our new technology is capable of
overcoming the limitations of the earlier technology, the medical community may
not embrace the perceived advantages of our "Adaptive Phased Array," or APA,
focused heat therapy without more extensive testing and clinical experience than
we will be able to provide. To date, we have completed and submitted to the FDA
only Phase I clinical trials of our BPH 800 system, although we have completed
patient treatments in our Phase II trials. Similarly, our new cancer treatment
technology is currently in Phase II trials. Accordingly, our technology may not
prove as effective in practice as we anticipate based on testing to date. If
further testing and clinical practice do not confirm the safety and efficacy of
our technology or, even if further testing and practice produce positive results
but the medical community does not view this new form of heat therapy as
effective and desirable, our efforts to market our new products may fail, with
material adverse consequences to our business. We intend to petition CMS for a
new reimbursement code for our breast cancer treatment. The success of our
business model depends significantly upon our ability to petition successfully
for reimbursement codes. However, we cannot offer any assurances as to when, if
ever, CMS may act on our request to establish a reimbursement code for our
breast cancer treatment system. In addition, there can be no assurance that the
reimbursement level established for our breast cancer treatment system, if
established, will be sufficient for us to carry out our business plan
effectively.
IF WE ARE NOT ABLE TO OBTAIN NECESSARY FUNDING, WE WILL NOT BE ABLE TO COMPLETE
THE DEVELOPMENT, TESTING AND COMMERCIALIZATION OF OUR TREATMENTS AND PRODUCTS.
We will need substantial additional funding in order to complete the
development, testing and commercialization of our breast cancer treatment system
and heat-activated liposome and cancer repair inhibitor products, as well as
other potential new
21
products. We expended approximately $13,304,449 in the 12-month period ended
September 30, 2003. As of that date, we had available a total of approximately
$11,410,533 to fund additional expenditures. It is our current intention both to
increase the pace of development work on our present products and to make a
significant commitment to our heat-activated liposome and cancer repair
inhibitor research and development projects. The increase in the scope of
present development work and the commitment to these new projects will require
additional external funding, at least until we are able to begin marketing our
products and to generate sufficient cash flow from sale of those products to
support our continued operations. We do not have any committed sources of
financing and cannot offer any assurances that additional funding will be
available in a timely manner, on acceptable terms or at all.
If adequate funding is not available, we may be required to delay,
scale back or eliminate certain aspects of our operations or attempt to obtain
funds through unfavorable arrangements with partners or others that may force us
to relinquish rights to certain of our technologies, products or potential
markets or that could impose onerous financial or other terms. Furthermore, if
we cannot fund our ongoing development and other operating requirements,
particularly those associated with our obligations to conduct clinical trials
under our licensing agreements, we will be in breach of these licensing
agreements and could therefore lose our license rights, which could have
material adverse effects on our business.
OUR BUSINESS IS SUBJECT TO NUMEROUS AND EVOLVING STATE, FEDERAL AND FOREIGN
REGULATIONS AND WE MAY NOT BE ABLE TO SECURE THE GOVERNMENT APPROVALS NEEDED TO
DEVELOP AND MARKET OUR PRODUCTS.
Our research and development activities, pre-clinical tests and
clinical trials, and ultimately the manufacturing, marketing and labeling of our
products, all are subject to extensive regulation by the FDA and foreign
regulatory agencies. Pre-clinical testing and clinical trial requirements and
the regulatory approval process typically take years and require the expenditure
of substantial resources. Additional government regulation may be established
that could prevent or delay regulatory approval of our product candidates.
Delays or rejections in obtaining regulatory approvals would adversely affect
our ability to commercialize any product candidates and our ability to generate
product revenues or royalties.
The FDA and foreign regulatory agencies require that the safety and
efficacy of product candidates be supported through adequate and well-controlled
clinical trials. If the results of pivotal clinical trials do not establish the
safety and efficacy of our product candidates to the satisfaction of the FDA and
other foreign regulatory agencies, we will not receive the approvals necessary
to market such product candidates.
Even if regulatory approval of a product candidate is granted, the
approval may include significant limitations on the indicated uses for which the
product may be marketed. In addition, manufacturing establishments in the United
States and abroad are subject to inspections and regulations by the FDA. Medical
devices must also continue to comply with the FDA's Quality System Regulation,
or QSR. Compliance with such regulations requires significant expenditures of
time and effort to ensure full technical compliance. The FDA stringently applies
regulatory standards for manufacturing.
We are also subject to record keeping and reporting regulations,
including FDA's mandatory Medical Device Reporting, or MDR regulation. Labeling
and promotional activities are regulated by the FDA and, in certain instances,
by the Federal Trade Commission.
Many states in which we do or in the future may do business or in which
our products may be sold impose licensing, labeling or certification
requirements that are in addition to those imposed by the FDA. There can be no
assurance that one or more states will not impose regulations or requirements
that have a material adverse effect on our ability to sell our products.
In many of the foreign countries in which we may do business or in
which our products may be sold, we will be subject to regulation by national
governments and supranational agencies as well as by local agencies affecting,
among other things, product standards, packaging requirements, labeling
requirements, import restrictions, tariff regulations, duties and tax
requirements. There can be no assurance that one or more countries or agencies
will not impose regulations or requirements that could have a material adverse
effect on our ability to sell our products.
The EU has a registration process that includes registration of
manufacturing facilities (known as "ISO certification") and product
certification (known as a "CE Mark"). We have obtained ISO certification for our
existing facilities. However, there is no guarantee that we will be successful
in obtaining European certifications for new facilities or for our products, or
that we will be able to maintain its existing certifications in the future.
22
Foreign government regulation may delay marketing of our new products
for a considerable period of time, impose costly procedures upon its activities
and provide an advantage to larger companies that compete with it. There can be
no assurance that we will be able to obtain necessary regulatory approvals, on a
timely basis or at all, for any products that it develops. Any delay in
obtaining, or failure to obtain, necessary approvals would materially and
adversely affect the marketing of our contemplated products subject to such
approvals and, therefore, our ability to generate revenue from such products.
Even if regulatory authorities approve our product candidates, such
products and our facilities, including facilities located outside the EU, may be
subject to ongoing testing, review and inspections by the European health
regulatory authorities. After receiving premarketing approval, in order to
manufacture and market any of its products, we will have to comply with
regulations and requirements governing manufacture, labeling and advertising on
an ongoing basis.
Failure to comply with applicable domestic and foreign regulatory
requirements, can result in, among other things, warning letters, fines,
injunctions and other equitable remedies, civil penalties, recall or seizure of
products, total or partial suspension of production, refusal of the government
to grant approvals, pre-market clearance or pre-market approval, withdrawal of
approvals and criminal prosecution of the Company and its employees, all of
which would have a material adverse effect on our business.
OUR BUSINESS DEPENDS ON LICENSE AGREEMENTS WITH THIRD PARTIES TO PERMIT US TO
USE PATENTED TECHNOLOGIES. THE LOSS OF ANY OF OUR RIGHTS UNDER THESE AGREEMENTS
COULD IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.
Currently, we have three utility patents pending in the United States
Patent & Trademark Office. Two are directed to our BPH 800 system for the
treatment of BPH and the other is directed to our breast cancer treatment
system. However, even when our pending applications mature into United States
patents, our business will still depend on license agreements that it has
entered into with third parties until the third parties' patents expire.
Our success will depend, in substantial part, on our ability to
maintain our rights under license agreements granting us rights to use patented
technologies. We have entered into exclusive license agreements with MIT, for
APA technology and with MMTC, a privately owned developer of medical devices,
for microwave balloon catheter technology. We have also entered into a license
agreement with Duke University, under which we have exclusive rights to
commercialize medical treatment products and procedures based on Duke
University's thermo-liposome technology, an advanced phased array radio
frequency (RF) heating system designed specifically for use with
chemotherapeutic drugs for the treatment of locally advanced breast cancer and a
license agreement with Memorial Sloan-Kettering Cancer Center under which we
have rights to commercialize certain cancer repair inhibitor products. The MIT,
MMTC, Duke University and Sloan-Kettering agreements each contain license fee,
royalty and/or research support provisions, testing and regulatory milestones,
and other performance requirements that we must meet by certain deadlines. If we
were to breach these or other provisions of the license and research agreements,
we could lose our ability to use the subject technology, as well as compensation
for our efforts in developing or exploiting the technology. Further, loss of our
rights under the MIT license agreement would prevent us from proceeding with
most our current product development efforts, which are dependent on licensed
APA technology. Any such loss of rights and access to technology would have a
material adverse effect on our business.
Further, we cannot guarantee that any patent or other technology rights
licensed to us by others will not be challenged or circumvented successfully by
third parties, or that the rights granted will provide adequate protection. We
are aware of published patent applications and issued patents belonging to
others, and it is not clear whether any of these patents or applications, or
other patent applications of which it may not have any knowledge, will require
us to alter any of our potential products or processes, pay licensing fees to
others or cease certain activities. Litigation, which could result in
substantial costs, may also be necessary to enforce any patents issued to or
licensed by us or to determine the scope and validity of others' claimed
proprietary rights. We also rely on trade secrets and confidential information
that we seek to protect, in part, by confidentiality agreements with our
corporate partners, collaborators, employees and consultants. We cannot
guarantee that these agreements will not be breached, that, even if not
breached, that they are adequate to protect our trade secrets, that we will have
adequate remedies for any breach or that our trade secrets will not otherwise
become known to, or will not be discovered independently by, competitors.
23
TECHNOLOGIES FOR THE TREATMENT OF CANCER ARE SUBJECT TO RAPID CHANGE AND THE
DEVELOPMENT OF TREATMENT STRATEGIES THAT ARE MORE EFFECTIVE THAN OUR
THERMOTHERAPY TECHNOLOGY COULD RENDER OUR TECHNOLOGY OBSOLETE.
Various methods for treating cancer currently are, and in the future
may be expected to be, the subject of extensive research and development. Many
possible treatments that are being researched, if successfully developed, may
not require, or may supplant, the use of our thermotherapy technology. These
alternate treatment strategies include the use of radio frequency (RF), laser
and ultrasound energy sources. The successful development and acceptance of any
one or more of these alternative forms of treatment could render our technology
obsolete as a cancer treatment method.
WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY OFFICERS OR EMPLOYEES THAT WE NEED TO
IMPLEMENT ITS BUSINESS STRATEGY AND DEVELOP ITS PRODUCTS AND BUSINESSES.
Our success depends significantly on the continued contributions of our
executive officers, scientific and technical personnel and consultants, and on
our ability to attract additional personnel as we seek to implement our business
strategy and develop our products and businesses. During our operating history,
we have assigned many essential responsibilities to a relatively small number of
individuals. However, as our business and the demands on our key employees
expand, we have been, and will continue to be, required to recruit additional
qualified employees. The competition for such qualified personnel is intense,
and the loss of services of certain key personnel or our inability to attract
additional personnel to fill critical positions as we implement our business
strategy could adversely affect our business. Further, we do not carry "key man"
insurance on any of our personnel. Therefore, loss of the services of key
personnel would not be ameliorated by the receipt of the proceeds from such
insurance.
OUR SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO GROW AND DIVERSIFY, WHICH IN
TURN WILL REQUIRE THAT WE MANAGE AND CONTROL OUR GROWTH EFFECTIVELY.
Our business strategy contemplates growth and diversification. As
manufacturing, marketing, sales, and other personnel, and expand our
manufacturing and research and development capabilities we add, our operating
expenses and capital requirements will increase. Our ability to manage growth
effectively will require that we continue to expend funds to improve our
operational, financial and management controls, reporting systems and
procedures. In addition, we must effectively expand, train and manage our
employees. We will be unable to manage our businesses effectively if we are
unable to alleviate the strain on resources caused by growth in a timely and
successful manner. There can be no assurance that we will be able to manage our
growth and a failure to do so could have a material adverse effect on our
business.
THE SUCCESS OF OUR PRODUCTS MAY BE HARMED IF THE GOVERNMENT, PRIVATE HEALTH
INSURERS AND OTHER THIRD- PARTY PAYORS DO NOT PROVIDE SUFFICIENT COVERAGE OR
REIMBURSEMENT.
Our ability to commercialize our thermotherapy technology successfully
will depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and other third-party
payors. The reimbursement status of newly approved medical products is subject
to significant uncertainty. We cannot guarantee that adequate third-party
insurance coverage will be available for us to establish and maintain price
levels sufficient for us to realize an appropriate return on our investment in
developing new therapies. Government, private health insurers and other
third-party payors are increasingly attempting to contain health care costs by
limiting both coverage and the level of reimbursement for new therapeutic
products approved for marketing by the FDA. Accordingly, even if coverage and
reimbursement are provided by government, private health insurers and
third-party payors for uses of our products, market acceptance of these products
would be adversely affected if the reimbursement available proves to be
unprofitable for health care providers.
WE FACE INTENSE COMPETITION AND THE FAILURE TO COMPETE EFFECTIVELY COULD
ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.
There are many companies and other institutions engaged in research and
development of thermotherapy technologies, both for prostate disease and cancer
treatment products that seek treatment outcomes similar to those that we are
pursuing. In addition, a number of companies and other institutions are pursuing
alternative treatment strategies through the use of microwave, infrared, radio
frequency, laser and ultrasound energy sources, all of which appear to be in the
early stages of development and testing. We believe that the level of interest
by others in investigating the potential of thermotherapy and alternative
technologies will continue and may increase. Potential competitors engaged in
all areas of prostate and cancer treatment research in the United States and
other countries
24
include, among others, major pharmaceutical and chemical companies, specialized
technology companies, and universities and other research institutions. Most of
our competitors and potential competitors have substantially greater financial,
technical, human and other resources, and may also have far greater experience,
than do we, both in pre-clinical testing and human clinical trials of new
products and in obtaining FDA and other regulatory approvals. One or more of
these companies or institutions could succeed in developing products or other
technologies that are more effective than the products and technologies that we
have been or are developing, or which would render our technology and products
obsolete and non-competitive. Furthermore, if we are permitted to commence
commercial sales of any of our products, we will also be competing, with respect
to manufacturing efficiency and marketing, with companies having substantially
greater resources and experience in these areas.
LEGISLATIVE AND REGULATORY CHANGES AFFECTING THE HEALTH CARE INDUSTRY COULD
ADVERSELY AFFECT OUR BUSINESS.
There have been a number of federal and state proposals during the last
few years to subject the pricing of health care goods and services to government
control and to make other changes to the United States health care system. It is
uncertain which legislative proposals, if any, will be adopted (or when) or what
actions federal, state, or private payors for health care treatment and services
may take in response to any health care reform proposals or legislation. We
cannot predict the effect health care reforms may have on our business and we
can offer no assurances that any of these reforms will not have a material
adverse effect on that business.
WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY CLAIMS AND LITIGATION.
Our business exposes us to potential product liability risks inherent
in the testing, manufacturing and marketing of human therapeutic products. We
presently have product liability insurance limited to $5,000,000 per incident.
If we were to be subject to a claim in excess of this coverage or to a claim not
covered by our insurance and the claim succeeded, we would be required to pay
the claim with our own limited resources, which could have a material adverse
effect on our business. In addition, liability or alleged liability could harm
the business by diverting the attention and resources of our management and by
damaging our reputation.
WE PRESENTLY HAVE LIMITED MARKETING AND SALES CAPABILITY AND WILL BE REQUIRED TO
DEVELOP SUCH CAPABILITIES AND TO ENTER INTO ALLIANCES WITH OTHERS POSSESSING
SUCH CAPABILITIES IN ORDER TO COMMERCIALIZE OUR PRODUCTS SUCCESSFULLY.
We intend to market our BPH 800 system directly, at such time, if any,
as it is approved for commercialization by the FDA, and to market our breast
cancer treatment system, if and when so approved, through strategic alliances
and distribution arrangements with third parties. There can be no assurance that
we will be able to establish such sales and marketing capabilities successfully
or successfully enter into third-party marketing or distribution arrangements.
We have limited experience and capabilities in marketing, distribution and
direct sales, although we expect to attempt to recruit experienced marketing and
sales personnel as we pursue commercialization. In attracting, establishing and
maintaining a marketing and sales force or entering into third-party marketing
or distribution arrangements with other companies, we expect to incur
significant additional expense. There can be no assurance that, to the extent we
enter into any commercialization arrangements with third parties, such third
parties will establish adequate sales and distribution capabilities or be
successful in gaining market acceptance for our products and services. There
also can be no assurance that our direct sales, marketing, licensing and
distribution efforts would be successful or that revenue from such efforts would
exceed expenses.
WE DEPEND ON THIRD-PARTY SUPPLIERS TO PROVIDE US WITH COMPONENTS REQUIRED FOR
OUR PRODUCTS AND MAY NOT BE ABLE TO OBTAIN THESE COMPONENTS ON FAVORABLE TERMS
OR AT ALL.
We are not currently manufacturing any products, but are using our
facilities to assemble prototypes of the equipment for research and development
purposes. We currently purchase certain specialized microwave and thermometry
components and applicator materials and the catheter unit used for our BPH 800
equipment from single or limited source suppliers because of the small
quantities involved. While we have not experienced any significant difficulties
in obtaining these components, the loss of an important current supplier could
require that we obtain a replacement supplier, which might result in delays and
additional expense in being able to make prototype equipment available for
clinical trials and other research purposes. In addition, inasmuch as we expect
to manufacture our BPH 800 equipment at least for some period subsequent to FDA
approval and the commencement of commercialization, such manufacturing and
commercialization also could be delayed. In addition, in the event that we
succeed in marketing our products, we intend to use outside contractors to
supply components and the BPH 800 catheter, and may use such contractors to
assemble finished equipment in the future, which could cause us to become
increasingly dependent on key vendors.
25
WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT INTEND TO DO SO FOR THE
FORESEEABLE FUTURE.
We have never paid cash dividends and do not anticipate paying cash
dividends on our common or preferred stock in the foreseeable future. Therefore,
our stockholders cannot achieve any degree of liquidity with respect to their
shares of Common Stock except by selling such shares.
THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS COULD RESULT IN SIGNIFICANT
DILUTION OF OWNERSHIP INTERESTS IN OUR COMMON STOCK OR OTHER CONVERTIBLE
SECURITIES.
As of September 30, 2003, we had outstanding and exercisable warrants
and options to purchase a total of 23,704,530 shares of our Common Stock at
exercise prices ranging from $0.25 to $5.00 per share (and a weighted average
exercise price of approximately $0.80 per share. In addition, we had outstanding
but unexercisable and unvested warrants and options to purchase a total of
4,477,637 shares of our Common Stock at exercise prices ranging from $0.40 to
$1.36 per share. Some of the prices are below the current market price of our
Common Stock, which has ranged from a low of $1.03 to a high of $1.24 over the
20 trading days ending September 30, 2003. If holders choose to exercise such
warrants and options at prices below the prevailing market price for the Common
Stock, the resulting purchase of a substantial number of shares of our Common
would have a dilutive effect on our stockholders and could adversely affect the
market price of our issued and outstanding Common Stock and convertible
securities. In addition, holders of these options and warrants who have the
right to require registration of the Common Stock under certain circumstances
and who elect to require such registration, or who exercise their options or
warrants and then satisfy the one-year holding period and other requirements of
Rule 144 of the Securities Act, will be able to sell in the public market shares
of Common Stock purchased upon such exercise.
IF THE PRICE OF OUR SHARES REMAINS LOW, WE MAY BE DELISTED BY THE AMERICAN STOCK
EXCHANGE AND BECOME SUBJECT TO SPECIAL RULES APPLICABLE TO LOW PRICED STOCKS
Our Common Stock currently trades on The American Stock Exchange (the
Amex). The Amex, as a matter of policy, will consider the suspension of trading
in, or removal from listing of, any stock when, in the opinion of the Amex, (i)
the financial condition and/or operating results of an issuer appear to be
unsatisfactory; (ii) it appears that the extent of public distribution or the
aggregate market value of the stock has become so reduced as to make further
dealings on the Amex inadvisable; (iii) the issuer has sold or otherwise
disposed of its principal operating assets; or (iv) the issuer has sustained
losses which are so substantial in relation to its overall operations or its
existing financial condition has become so impaired that it appears
questionable, in the opinion of the Amex, whether the issuer will be able to
continue operations and/or meet its obligations as they mature. For example, the
Amex will consider suspending dealings in or delisting the stock of an issuer if
the issuer has sustained losses from continuing operations and/or net losses in
its five most recent fiscal years. Another instance where the Amex would
consider suspension or delisting of a stock is if the stock has been selling for
a substantial period of time at a low price per share and the issuer fails to
effect a reverse split of such stock within a reasonable time after being
notified that the Amex deems such action to be appropriate We have sustained net
losses for our last five fiscal years (and beyond) and our Common Stock has been
trading at relatively low prices. Therefore, our Common Stock may be at risk for
delisting by the Amex.
Upon any such delisting, the Common Stock would become subject to the
penny stock rules of the SEC, which generally are applicable to equity
securities with a price of less than $5.00 per share (other than securities
registered on certain national securities exchanges or quoted on the Nasdaq
system, provided that current price and volume information with respect to
transactions in such securities is provided by the exchange or system). The
penny stock rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a standardized risk
disclosure document prepared by the SEC that provides information about penny
stocks and the nature and level of risks in the penny stock market. The
broker-dealer also must provide the customer with bid and ask quotations for the
penny stock, the compensation of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the market value of each
penny stock held in the customer's account. In addition, the penny stock rules
require that, prior to a transaction in a penny stock that is not otherwise
exempt from such rules, the broker-dealer must make a special written
determination that the penny stock is a suitable investment for the purchaser
and receive the purchaser's written agreement to the transaction. These
disclosure requirements are likely to have a material and adverse effect on
price and the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. If our Common Stock were to become
subject to the penny stock rules it is likely that the price of the Common Stock
would decline and that our stockholders would be likely to find it more
difficult to sell their shares.
26
OUR STOCK PRICE HAS BEEN, AND COULD BE, VOLATILE.
Market prices for our Common Stock and the securities of other medical,
high technology companies have been volatile. Our Common Stock has had a high
price of $1.80 and a low price of $0.34 in the 52-week period ending September
30, 2003. Factors such as announcements of technological innovations or new
products by us or by our competitors, government regulatory action, litigation,
patent or proprietary rights developments and market conditions for medical and
high technology stocks in general can have a significant impact on the market
for our Common Stock.
OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, STOCKHOLDERS MAY NOT
BE ABLE TO SELL THEIR SHARES FREELY.
While our Common Stock is listed on the Amex, the volume of trading
historically has been relatively light. Although trading volume has increased
recently, there can be no assurance that this increased trading volume, our
historically light trading volume, or any trading volume whatsoever will be
sustained in the future. Therefore, there can be no assurance that our
stockholders will be able to sell their shares of our Common Stock at the time
or at the price that they desire, or at all.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT
OR DELAY A CHANGE IN CONTROL.
Our Certificate of Incorporation and Bylaws may discourage, delay or
prevent a merger or acquisition that a stockholder may consider favorable by
authorizing the issuance of "blank check" preferred stock. This preferred stock
may be issued by the Board of Directors, on such terms as it determines, without
further stockholder approval. Therefore, the Board may issue such preferred
stock on terms unfavorable to a potential bidder in the event that is opposes a
merger or acquisition. In addition, our classified Board of Directors may
discourage such transactions by increasing the amount of time necessary to
obtain majority representation on the Board. We also have implemented a
stockholder rights plan and distributed rights to our stockholders. When these
rights become exercisable, these rights entitle their holders to purchase one
share of our Series C Junior Participating Preferred Stock at a price o f $4.46
per one ten-thousandth of a share of Series C Preferred Stock. If any person or
group acquires more than 15% of our Common Stock, the holders of rights (other
than the person or group crossing the 15% threshold) will be able to purchase,
in exchange for the $4.46 exercise price, $8.92 of our Common Stock or the stock
of any company into which we are merged. Because these rights may substantially
dilute stock ownership by a person or group seeking to take us over without the
approval of our Board of Directors, our rights plan could make it more difficult
for a person or group to take us over (or acquire significant ownership interest
in us) without negotiating with our Board regarding such a transaction. Certain
other provisions of our Bylaws and of Delaware law may also discourage, delay or
prevent a third party from acquiring or merging with us, even if such action
were beneficial to some, or even a majority, of our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently hold any derivative instruments and do not engage
in hedging activities and currently do not enter into any transactions
denominated in a foreign currency. Thus, our exposure to interest rate and
foreign exchange fluctuations is minimal.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA AND FINANCIAL DISCLOSURE
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We have conducted an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e)13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) under the supervision of our Chief Executive Officer and
Chief Financial Officer as of the end of the period covered by this Annual
Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that, as of
27
September 30, 2003, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in reports that Celsion files
or submits under the Exchange Act is recorded, processed, summarized and
reported in a timely manner. In designing, implementing and evaluating our
disclosure controls and procedures, our management recognizes that any controls
and procedures, no matter how well designed and implemented, may not be
effective in all circumstances. However, we believe that our disclosure controls
and procedures provide reasonable assurance of achieving the desired disclosure
control objectives. There have not been any significant changes in our internal
controls or in other factors subsequent to the date the evaluation was completed
that could significantly affect such controls and no corrective actions have
been required with regard to significant deficiencies and material weaknesses.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information regarding the Company's current
directors and the Company's non-director executive officers as of December 15,
2003.
NAME AGE POSITION(s)
------------------------ ----- -------------------------------
Max E. Link........... 63 Chairman
Augustine Y. Cheung... 56 President, Chief Executive Officer, Chief
Scientific Officer and Director
John Mon.............. 51 Vice President--New Business Development,
Secretary and Director
Claude Tihon.......... 59 Director
Kris Venkat........... 57 Director
Gary W. Pace.......... 56 Director
Anthony P. Deasey..... 54 Executive Vice President--Finance and
Administration and Chief Financial Officer
Daniel S. Reale....... 49 Executive Vice President and President--Oncology
Division
Each executive officer is elected by, and serves at the pleasure of,
the Board of Directors.
BIOGRAPHICAL INFORMATION ON DIRECTORS
DR. AUGUSTINE Y. CHEUNG. Dr. Cheung has been President and Chief
Executive Officer of the Company since October 2001 and has served as a director
and Chief Scientific Officer since 1982. Dr. Cheung was the founder of the
Company and previously served as President from 1982 to 1986 and Chief Executive
Officer from 1982 to 1996. From 1982 to 1985, Dr. Cheung also was a Research
Associate Professor of the Department of Electrical Engineering and Computer
Science at George Washington University and, from 1975 to 1981, he 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 a Masters degree from the
University of Maryland. Dr. Cheung is the brother-in-law of John Mon, a director
and executive officer of the Company.
DR. MAX E. LINK. Dr. Link has served as a director of the Company since
1997 and has been the Chairman of the Board of Directors since October 2001. Dr.
Link currently provides consulting and advisory services to a number of
pharmaceutical and biotechnology companies. From 1993 to 1994, Dr. Link served
as Chief Executive Officer of Corange, Ltd., a life science company that was
subsequently 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 their Board of Directors in 1992. From 2001 to 2003, Dr. Link served
as Chairman and Chief Executive Officer of Centerpulse Ltd. Dr. Link currently
serves on the Boards of Directors of Human Genome Sciences, Inc. (Nasdaq:HGSI),
Alexion Pharmaceuticals, Inc. (Nasdaq:ALXN), Cell Therapeutics, Inc.
(Nasdaq:CTIC), Access Pharmaceuticals, Inc. (AMEX: AKC), Protein Design Labs,
Inc. (Nasdaq: PDLI), Discovery Laboratories, Inc. (Nasdaq:DSCO), Columbia
Laboratories, Inc. (AMEX: COB) and Cytrx Corporation (Nasdaq:CYTR). Dr. Link
holds a Ph.D. in Economics from the University of St. Gallen (Switzerland).
28
DR. GARY W. PACE. Dr. Pace has served as a director of the Company
since December 2002. He is currently Chairman and Chief Executive Officer of
QrxPharma Pty Ltd., a development stage biopharmaceutical company and a Visiting
Scientist at the Massachusetts Institute of Technology (MIT). He also serves as
a director of ResMed (NYSE:RMD), Transition Therapeutics Inc. (CDNX:TTH),
Protiveris Inc., and CTour A/S. From 1995 to 2001, Dr. Pace was President and
Chief Executive Officer of RTP Pharma, and, from 2000 to 2002, Dr. Pace was
Chairman and Chief Executive Officer of Waratah Pharmaceuticals Inc., a spin-off
company from RTP Pharma. From 1993 to 1994, he was the founding President and
Chief Executive Officer of Transcend Therapeutics Inc. (formerly Free Radical
Sciences Inc.), a biopharmaceutical company. From 1989 to 1993, he was Senior
Vice President of Clintec International, Inc., a Baxter/Nestle joint venture and
manufacturer of clinical nutritional products. Dr. Pace holds a B.Sc. with
honors from the University of New South Wales and a Ph.D. from MIT.
JOHN MON. Mr. Mon has been employed by the Company since 1986, and has
served as the Company's Vice President--New Business Development since 2000,
Treasurer and General Manager of the Company since 1989, and Secretary and a
director since 1997. During the first two years of his employment with the
Company, Mr. Mon was responsible for the Company's filings with the U.S. Food
and Drug Administration (FDA), which resulted in obtaining premarketing approval
for the Company's Microfocus 1000 treatment system. 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 (GNP). Mr. Mon holds a B.S. degree from the University
of Maryland. Mr. Mon is the brother-in-law of Dr. Augustine Y. Cheung, a
director and executive officer of the Company.
DR. CLAUDE TIHON. Dr. Tihon has served as a director of the Company
since 1999. Since 1995, he has been President and Chief Executive Officer of
ContiCare Medical, Inc., a medical device company engaged in 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 and Manager of the Endourology Strategic Business Unit of
American Medical Systems, Inc., a Pfizer Inc. 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 Company.
Dr. Tihon holds a Ph.D. in Pathology from Columbia University.
DR. KRIS VENKAT. Dr. Venkat has been a director of Celsion since May
2001. Since 2000, he has been Chief Executive Officer and Chairman of the Board
of Sundari Enterprises, Inc. He has also been Chairman of the Board of Provid
Pharmaceuticals, Inc. (since 2001), Morphochem, Inc. (since 2000), Automated
Cell, Inc. (since 2000), Than Technologies, Inc. (since 2003), and Indus Biotech
Private Limited (since 2002), as well as two companies based in Germany,
Accentua Pharma AG (since 2001) and Juelich Enzyme Products, GmbH (since 1996).
Dr. Venkat is a director of Sequenom Inc. (Nasdaq:SQNM), Genomics USA, Inc., and
Strand Genomics Private Limited, and Vice Chairman of Transvivo, Inc. Dr. Venkat
is also a Senior Investment Adviser to TVM Techno Venture Management, Germany.
From 1992 to 2000, he served as Chairman of the Board and Chief Executive
Officer of Phyton, Inc. and, from 1993 to 2000, as Chairman of the Board and
Managing Director of its wholly owned German subsidiary, Phyton, GmbH. From 1990
to 1991, Dr. Venkat was President and Chief Executive Officer of Genmap, Inc.
Dr. Venkat is a Visiting Professor of Chemical and Biochemical Engineering at
Rutgers University. He has held visiting faculty positions at Yale University,
Dartmouth College, Anna University in India and University College, Galway in
Ireland. From 1986 to 1998, Dr. Venkat served as an advisor to the government of
India on biotechnology development. Dr. Venkat holds a Ph.D. and a Masters
degree in Chemical and Biochemical Engineering from Rutgers University and an
undergraduate degree in Chemical Engineering from the Indian Institute of
Technology (I.I.T.).
BIOGRAPHICAL INFORMATION ON NON-DIRECTOR EXECUTIVE OFFICERS
ANTHONY P. DEASEY. Mr. Deasey is currently Executive Vice
President--Finance and Chief Financial Officer of the Company. Mr. Deasey joined
the Company as Senior Vice President--Finance and Chief Financial Officer on
November 27, 2000 became Executive Vice President--Finance and Administration in
February 2002. Prior to joining Celsion, he was Senior Vice President--Finance
and Chief Financial Officer of World Kitchen (formerly Corning Consumer
Products). He also has served as Senior Vice President--Chief Financial Officer
of Rollerblade Inc. and Church & Dwight Co. (NYSE:CHD). Mr. Deasey is a
Chartered Accountant who gained his early experience in the international
operations of Chesebrough Ponds and Price Waterhouse.
DANIEL S. REALE. Mr. Reale has served as the Company's Executive Vice
President - Oncology Division since April 2003 prior to that he was Executive
Vice President - President--BPH Division since April 2001. He formerly was
Executive Vice President of Intracel's International Operations and also worked
for Coral Therapeutics, Chartwell Home Therapies and Protocare. Mr. Reale has
experience as a medical industry executive and has spent his career working with
entrepreneurial and start-up ventures.
29
Mr. Reale previously helped to establish three bio-medical start-up companies
(Coral Therapeutics, Chartwell Home Therapies and Protocare). Mr. Reale has a
B.A. in biology and psychology from the University of Rochester, a J.D. from
Northeastern University School of Law and an M.B.A. from the University of North
Carolina.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors has determined that it has an "audit committee financial
expert" serving on its Audit Committee as defined by Item 401(h) of Regulation
S-K. Our audit committee financial expert is Dr. Max E. Link. Dr. Link is deemed
to be "independent" under applicable rules of The American Stock Exchange.
CODE OF ETHICS
Celsion has adopted a Code of Ethics and Business Conduct applicable to
its directors, officers (including its Chief Executive Officer and Chief
Financial Officer) and employees. A copy of the Code of Ethics and Business
Conduct is filed as Exhibit 14.1 to this Annual Report on Form 10-K and will be
available on the Company's website at http://www.celsion.com. The Company
intends to post on its website any amendments to, or waivers from, its Code of
Ethics promptly following any such amendment or waiver.
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, 2002 and September 30, 2003, and on
discussions with directors and officers, the Company believes that during the
last fiscal year all applicable Section 16(a) filing requirements were met.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid,
during each year in the three-year period ended September 30, 2003, to the
Company's Named Executive Officers, its Chief Executive Officer and each of its
other executive officers whose annual salary and bonus for the fiscal year ended
September 30, 2003 exceeded $100,000.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
------------------- -----------------------------
OTHER ANNUAL RESTRICTED STOCK
NAME AND PRINCIPAL POSITION FISCAL SALARY BONUS MPENSATION ($) AWARDS ($) STOCK OPTIONS (#)
- --------------------------- ------ ------ ----- -------------- ---------------- -----------------
Augustine Y. Cheung ............ 2003 $ 281,163 -- $ 5,400 -- --
President and .................. 2002 $ 265,085 $ 11,328 $ 5,400 -- 1,350,000
Chief Executive Officer ...... 2001 $ 252,000 $ 20,000 $ 5,400 -- --
Anthony P. Deasey .............. 2003 $ 224,787 -- $ 5,400 20,000
Executive Vice ................. 2002 $ 212,413 -- $ 5,400 -- 1,150,000
President--Finance and
Administration
and Chief Financial Officer(1).. 2001 $ 171,784 -- -- -- 1,280,000
John Mon ....................... 2003 $ 140,941 -- -- -- 60,000
Vice President--New Business ... 2002 $ 131,501 $ 30,122 -- -- 500,000
Development
and Secretary .................. 2001 $ 114,885 $ 20,000 -- -- 150,000
Daniel S. Reale ................ 2003 $ 224,787 $ 101,709 $ 5,400 -- 120,000
Executive Vice President and ... 2002 $ 212,413 $ 81,022 $ 5,400 -- 1,000,000
President--Oncology Division(2) 2001 $ 119,328 -- $ 2,700 -- 900,000
- ----------------------
(1) Mr. Deasey joined the Company in November 2000.
(2) Mr. Reale joined the Company in April 2001.
30
(3) Consists of new grants to purchase 500,000 shares and grants to
purchase 850,000 shares issued in replacement of cancelled grants to
purchase 1,000,000 shares.
(4) Consists of new grants to purchase 350,000 shares and grants to
purchase 800,000 shares issued in replacement of cancelled grants to
purchase 900,000 shares.
(5) 900,000 of these options were cancelled and partially replaced with
new options in May 2002.
(6) Consists of new grants to purchase 100,000 shares and grants to
purchase 400,000 shares issued in replacement ofcancelled grants to
purchase 450,000 shares.
(7) These options were cancelled and partially replaced with new options
in May 2002.
(8) Consists of new grants to purchase 200,000 shares and grants to
purchase 800,000 shares issued in replacement of cancelled grants to
purchase 900,000 shares.
(9) These options were cancelled and partially replaced with new options
in May 2002.
OPTION GRANTS IN FISCAL YEAR 2003
The following table sets forth information with respect to stock options
granted to each of the Named Executive Officers in fiscal year 2003. The Company
has not granted any stock appreciation rights.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR OPTION
TERM
-------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE
NAME GRANTED IN FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% ($) 10%($)
---- --------------------- -------------- --------- --------------- ------ ------
Augustine Y. Cheung -- -- -- -- -- --
Anthony P. Deasey 120,000 (1) 13% $0.40 December 6, 2012 $30,187 $76,500
Daniel S. Reale 120,000 (1) 13% $0.40 December 6, 2012 $30,187 $76,500
John Mon 60,000 (1) 7% $0.40 December 6, 2012 $15,093 $38,250
- --------------------
(1) All of the options listed in the table above are exercisable.
AGGREGATED OPTION EXERCISES AND YEAR-END OPTION VALUES IN FISCAL YEAR 2003
The following table summarizes, for each of the Named Executive
Officers, the number of stock options held at September 30, 2003 and the
aggregate dollar value of in-the-money unexercised options. The value of
unexercised, in-the-money options at September 30, 2003 is the difference
between (a) the exercise price and (b) the fair market value of the underlying
stock on September 30, 2003, which was $1.09 per share, based on the closing
price of the Company's Common Stock on that date. The options described have not
been and may never be exercised and actual gains, if any, on exercise would
depend on the value of the Common Stock on the actual date of exercise.
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES VALUE SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
ACQUIRED ON REALIZED --------------------------------------- -------------------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------- --------------- ----------- ------------------- ----------------- ------------------- -----------------
Augustine Y. Cheung.. -- -- 1,083,334 666,666 $639,000 $252,000
Anthony P. Deasey.... -- -- 1,093,334 556,666 $501,500 $210,000
John Mon............. -- -- 933,334 226,666 $626,400 $ 82,200
Daniel S. Reale..... -- -- 563,334 556,666 $282,300 $210,300
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company is party to employment agreements with four of its senior
executive officers--Dr. Augustine Y. Cheung, Anthony P. Deasey, John Mon and
Daniel Reale. Certain material terms of each agreement are described in the
sections under the executives' respective names. In addition, all of the
employment agreements contain certain common
31
provisions. First, they provide for a severance payment of 2.99 times the
executive's base salary in the event that there is a "change of control" of the
Company and (i) the executive's employment is terminated without cause or (ii)
there is a material adverse change, without the executive's consent, in his
working conditions or status and he terminates his employment by notice to the
Company. Second, they provide that the executive's base salary will increase on
an annual basis based on the greatest of 105% of the base salary for the prior
year, the annual Consumer Price Index (CPI) Adjustment or the sum offered by the
Company's Board of Directors after taking into account corporate and individual
performance, the Company's prospects and general business conditions. Third,
they provide that all unvested options under the agreements vest and become
immediately exercisable upon the occurrence 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. Fourth, they provide that, upon death,
disability or termination of employment of the executive, such executive and/or
his heirs and legal representatives have the option to exercise all stock
options vested at the time of death, disability or termination of employment,
for a one-year period thereafter, or until the expiration of the stated term of
such option, whichever period is shorter. Any stock option not exercisable upon
death or disability or the effective date of termination of employment would be
forfeited. Finally, the agreements provide for CPI adjustments, restrictive
covenants and confidentiality and other protections of the type generally
included in employment agreements for members of senior management.
AUGUSTINE Y. CHEUNG
Under its agreement with the placement agent that conducted the
Company's private placement consummated on January 31, 2000, Celsion was
required to enter into a three-year employment agreement with Augustine Y.
Cheung, the Company's President, Chief Executive Officer and Chief Scientific
Officer, in order to encourage continuity of management.
The executive employment agreement between the Company and Dr. Cheung,
effective January 1, 2000, provides for an annual salary of $240,000 per year,
renewable annually. In addition, the agreement granted Dr. Cheung a bonus option
(not subject to performance conditions) to purchase up to 300,000 shares of
Common Stock, at an exercise price of $1.20, which is equal to the average
closing price of the Company's Common Stock during the Company's fiscal quarter
ended December 31, 1999. These options became fully vested on October 1, 2002.
Dr. Cheung's employment agreement also granted him performance-based
options to purchase up to a maximum of 700,000 shares of Common Stock, at
exercise prices ranging from $0.80 to $1.60 per share, upon achievement of five
specified corporate milestones, and subject to restrictions comparable to those
imposed on annual bonus compensation shares. Those performance objectives
included 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.
In May 2002, the Company and Dr. Cheung amended his employment
agreement and, as part of that amendment, agreed to cancel all the options to
purchase Common Stock originally granted to him pursuant to the employment
agreement. In exchange, the Company granted Dr. Cheung (1) a bonus option to
purchase 800,000 shares of Common Stock at an exercise price of $0.64 per share,
which vests at intervals until March 31, 2004, and (2) a performance-based
option to purchase 50,000 shares of Common Stock at an exercise price of $0.76
per share, exercisable only if certain corporate milestones are reached during
his employment.
Dr. Cheung's current employment agreement expires on December 12, 2004,
subject to annual renewal unless he informs the Company or the Company informs
him of an intent not to renew at least three months prior to that schedules
expiration date.
ANTHONY P. DEASEY
In November 2000, Celsion entered into a three-year employment
agreement with Anthony P. Deasey, currently the Executive Vice President--
Finance and Chief Financial Officer of the Company. Mr. Deasey's agreement
provides for an annual salary of $200,000. The agreement also provided for
performance-based incentive options to purchase up to 400,000 shares of Common
Stock, exercisable only if certain corporate milestones are reached during his
employment, at exercise prices ranging from $1.4375 to $2.0125. In addition, the
agreement granted Mr. Deasey a bonus option (not subject to performance
conditions) for the purchase of 500,000 shares of Common Stock at a purchase
price of $1.4375 per share, which vested at intervals until November 27, 2002.
In May 2002, the Company and Mr. Deasey amended his employment
agreement and, as part of that amendment, agreed to cancel all the options to
purchase Common Stock originally granted to him pursuant to the
32
employment agreement. In exchange, the Company granted Mr. Deasey (1) a bonus
option to purchase 665,000 shares of Common Stock at an exercise price of $0.64
per share, which vests at intervals until March 31, 2004, and (2) a
performance-based option to purchase 135,000 shares of Common Stock at an
exercise price of $0.76 per share, exercisable only if certain corporate
milestones are reached during his employment.
Mr. Deasey's employment agreement expires on November 30, 2004, subject
to annual renewal unless he informs the Company or the Company informs him of an
intent not to renew at least three months prior to that schedules expiration
date.
JOHN MON
In June 2000, Celsion entered into a three-year employment agreement
with John Mon, a director and Vice President--New Business Development,
Secretary, Treasurer and General Manager of the Company. Mr. Mon's agreement
provides for an annual salary of $100,000, renewable annually. Mr. Mon's
agreement also provided for performance-based incentive options to purchase up
to 250,000 shares of Common Stock, exercisable only if certain corporate
milestones are reached during his employment, on terms similar to those
governing the incentive options provided to Dr. Cheung. In addition, the
agreement granted Mr. Mon a bonus option (not subject to performance conditions)
for the purchase of 50,000 shares of Common Stock at a price of $2.75 per share.
In May 2002, the Company and Mr. Mon amended his employment agreement
and, as part of that amendment, agreed to cancel all the options to purchase
Common Stock originally granted to him pursuant to the employment agreement. In
exchange, the Company granted Mr. Mon (1) a bonus option to purchase 185,000
shares of Common Stock at an exercise price of $0.64 per share, which vests at
intervals until March 31, 2004, and (2) a performance-based option to purchase
65,000 shares of Common Stock at an exercise price of $0.76 per share,
exercisable only if certain corporate milestones are reached during his
employment.
Mr. Mon's employment agreement expires on June 7, 2004, subject to
annual renewal unless he informs the Company or the Company informs him of an
intent not to renew at least three months prior to that schedules expiration
date.
DANIEL S. REALE
In April 2001, Celsion entered into a three-year employment agreement
with Daniel S. Reale, currently Executive Vice President and President--BPH
Division. Mr. Reale's agreement provides for an annual salary of $200,000. The
agreement also provided for performance-based incentive options to purchase up
to 400,000 shares of Common Stock, exercisable only if certain corporate
milestones were reached during his employment, at exercise prices ranging from
$1.12 to $1.52. In addition, the agreement granted Mr. Reale a bonus option (not
subject to performance conditions) for the purchase of 500,000 shares of Common
Stock at a purchase price of $1.03 per share, subject to vesting at intervals
until April 9, 2003.
In May 2002, the Company and Mr. Reale amended his employment agreement
and, as part of that amendment, agreed to cancel all the options to purchase
Common Stock originally granted to him pursuant to the employment agreement. In
exchange, the Company granted Mr. Reale (1) a bonus option to purchase 665,000
shares of Common Stock at an exercise price of $0.64 per share, which vests at
intervals until March 31, 2004, and (2) a performance-based option to purchase
135,000 shares of Common Stock at an exercise price of $0.76 per share,
exercisable only if certain corporate milestones are reached during his
employment.
Mr. Reale's employment agreement expires on April 8, 2004, subject to
annual renewal unless he informs the Company or the Company informs him of an
intent not to renew at least three months prior to that schedules expiration
date
DIRECTORS' COMPENSATION
For the year ended September 30, 2003, each of the members of the Board
of Directors who was not also an officer of the Company received compensation in
the form of shares of the Company's Common Stock with a value equal to $20,000
for his service as a director. Dr. Max Link received additional compensation in
the form of shares of the Company's Common Stock with a value equal to $25,000
for his service as the Chairman of the Board of Directors. The shares were
valued at $1.09 per share.
33
During fiscal year ended September 30, 2003, the Company granted to Dr.
Gary Pace an option to purchase 50,000 shares of its Common Stock at $0.43 per
share, which vested on December 27, 2002 when Dr. Pace became a member of the
Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal year 2003, the Compensation Committee of the Board of
Directors was comprised of Dr. Max Link, Dr. Claude Tihon and Dr. Gary Pace. No
interlocking relationship exists between any of these members of the
Compensation Committee or any executive officer of the Company and any other
company's board of directors or compensation committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information known to the Company
regarding the beneficial ownership of its Common Stock as of December 15, 2003
by:
- each person or group known by the Company to own beneficially more
than 5% of its outstanding Common Stock;
- each of its directors and each executive officer named in the Summary
Compensation Table appearing under the heading "Item 11. Executive
Compensation"; and
- its directors and executive officers, as a group.
Celsion has determined beneficial ownership in accordance with the
rules of the Securities and Exchange Commission. Unless otherwise indicated, the
persons included in the table have sole voting and investment power with respect
to all shares shown to be beneficially owned thereby. Shares of Common Stock
subject to options that are currently exercisable or that become exercisable
within 60 days of December 15, 2003 are treated as outstanding and beneficially
owned by the holder of such options. However, these shares are not treated as
outstanding for purposes of computing the percentage ownership of any other
person.
NUMBER OF
COMMON SHARES PERCENT OF
BENEFICIALLY COMMON SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER* OWNED OUTSTANDING(1)
--------------------------------------------------- ------------------- -----------------
Augustine Y. Cheung (2) 5,620,510 3.90
John Mon (3) 1,281,622 **
Max E. Link (4) 707,186 **
Claude Tihon (5) 270,997 **
Kris Venkat (6) 360,959 **
Anthony P. Deasey (7) 1,245,001 **
Daniel S. Reale (8) 563,334 **
Gary W. Pace (9) 50,000 **
Boston Scientific Corporation 9,375,354 6.55
One Boston Scientific Place
Natick, MA 01760-1537
Directors, Executive Officers as a group (8 10,099,609 6.83
persons)
-----------
* Except as otherwise indicated, the address of each of the persons
named is c/o Celsion Corporation, 10220-L Old Columbia Road, Columbia,
MD 21046-1705.
** Less than 1%.
(1) Based on 147,915,201 shares of Common Stock outstanding as of December
15, 2003.
34
(2) Excludes shares of Common Stock owned through the Augustine Y. Cheung
and Fee-Wah Cheung 2001 Family Trust, as to which Mr. and Mrs. Cheung
have no voting or dispositive power and, therefore, do not have
beneficial ownership. Includes 1,083,334 shares of Common Stock
underlying currently exercisable options.
(3) Includes 933,334 shares of Common Stock underlying currently
exercisable options.
(4) Includes 250,000 shares of Common Stock underlying currently
exercisable options.
(5) Includes 161,000 shares of Common Stock underlying currently
exercisable options.
(6) Includes 300,000 shares of Common Stock underlying currently
exercisable options.
(7) Includes 1,093,334 shares of Common Stock underlying currently
exercisable options.
(8) Includes 563,334 shares of Common Stock underlying currently
exercisable options.
(9) Includes 50,000 shares of Common Stock underlying currently
exercisable options.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER
BE ISSUED UPON EXERCISE EXERCISE PRICE OF EQUITY COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (A) (B) (C)
- --------------------------- ---------------------------- --------------------------------------------------------
Equity compensation plans
approved by security
holders..................... 8,778,292(1) $0.66 887,125
Equity compensation plans
not approved by security
holders...................... 8,922,673 $0.90 -- (2)
--------------------------- ------------------------- -----------------------------
Total............. 17,700,965 $0.78 887,125 (2)
=========================== ========================= =============================
(1) Includes both vested and unvested options to purchase Common Stock
issued to employees, officers, directors and outside consultants under
the Company's 2001 Stock Option Plan (the Plan). Certain of these
options to purchase Common Stock were issued under the Plan in
connection with employment agreements.
(2) Certain of the securities exercisable to purchase Common Stock set
forth in column (a) of this row have price protection or antidilution
rights that entitle the holders to reduce the exercise price of such
securities if the Company issues additional stock, options, warrants or
other convertible securities below the exercise price of the subject
securities.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2001, the Company entered into an Advisory Agreement with Dr.
Kris Venkat, one of its directors, pursuant to which Dr. Venkat is to provide at
least 60 days of consulting services per year to the Company for an initial term
of two years. This agreement was extended for one year in August 2003. Such
consulting services are in addition to Dr. Venkat's services as a director and
include providing (i) strategic business and tactical advice to the Company
regarding its development, management and personnel, (ii) assistance with the
Company's heat-activated liposome business, (iii) assistance with developing a
financial strategy and securing additional capital and/or financing, and (iv)
identifying potential investors that meet the Company's objectives.
As compensation for his consulting services, the Company is obligated
to pay Dr. Venkat a fee of $60,000 per year during the term of the agreement.
Upon prior approval by the Company, he will be paid an additional $1,000 per day
for any time expended beyond 60 days. In addition to the fees, the agreement
provides for performance-based incentive options to purchase up to 400,000
shares of Common Stock, exercisable only if certain corporate milestones are
reached during the term of Dr. Venkat's consulting arrangement with the Company.
The exercise price of such options ranges from $0.85 to $1.36 per share. The
agreement also grants Dr. Venkat an option, not subject to performance
conditions, for the purchase of 300,000 shares of Common Stock at a price of
$0.68 per share, which became fully vested on August 1, 2002.
35
All of Dr Venkat's unvested options (other than the performance-based
options) would immediately vest and become exercisable if the Company terminates
the agreement for any reason other than his breach of the agreement or his
substantial failure to perform his duties under the agreement due to disability
or his death. All of his unvested options (including the performance-based
options) would also immediately vest upon a change of control of the Company.
For purposes of Dr. Venkat's agreement, a change of control is defined as the
change in beneficial ownership of 25% or more of the outstanding Common Stock of
the Company, the change in a majority of the members of the Board, with none of
the new members being approved by at least 75% of the members of the Board as of
August 2000, the sale of substantially all of the assets of the Company, a
transfer of all or substantially all of the Company's liposome business to a
person that is not a subsidiary of the Company, or the Company's entry into a
joint venture with regard to the liposome business in which the Company does not
retain voting control.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. FINANCIAL STATEMENTS
The following is a list of the financial statements of Celsion
Corporation filed with this Annual Report on Form 10-K, together with the report
of our independent public accountants.
TITLE OF DOCUMENTS PAGE NO.
------------------ --------
Independent Auditors' Report........................... F-1
Balance Sheet.......................................... F-2
Statements of Operations............................... F-4
Statements of Changes in Stockholders' Equity.......... F-5
Statements of Cash Flows............................... F-7
Notes to Financial Statements.......................... F-8
2. FINANCIAL STATEMENT SCHEDULES
No schedules are provided because of the absence of conditions under
which they are required.
3. EXHIBITS
The following documents are included as exhibits to this report:
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1.1 Certificate of Incorporation of Celsion (the
"Company"), as amended, incorporated herein by
reference to Exhibit 3.1.1 to the Annual Report on
Form 10-K of the Company for the Year Ended
September 30, 2002.
3.1.2 Certificate of Designations regarding the Series A
10% Preferred Stock of the Company, incorporated
herein by reference to Exhibit 3.1.2 to the Annual
Report on Form 10-K of the Company for the Year
Ended September 30, 2001.
3.1.3 Certificate of Ownership and Merger of Celsion
Corporation (a Maryland Corporation) into Celsion
(Delaware) Corporation (inter alia, changing the
Company's name to "Celsion Corporation" from
"Celsion (Delaware) Corporation), incorporated
herein by reference to Exhibit 3.1.3 to the Annual
Report on Form 10-K of the Company for the Year
Ended September 30, 2000.
3.1.4 Intentionally omitted
3.1.5 Certificate of Designations of Series C
Junior Participating Preferred Stock of Celsion
Corporation, incorporated herein by reference to
Exhibit 4.4 to the Form S-3 Registration Statement
(File No. 333-100638) filed October 18, 2002.
3.2 By-laws of the Company, as amended, incorporated
herein by reference to Exhibit 3.2 to the Quarterly
Report on Form 10-Q of the Company for the Quarter
Ended June 30, 2001.
4.1 Form of Common Stock Certificate, par value $0.01,
incorporated herein by reference to Exhibit 4.1 to
the Annual Report on Form 10-K of the Company for
the Year Ended September 30, 2001.
36
EXHIBIT NO. DESCRIPTION
----------- -----------
4.2 Celsion Corporation and American Stock Transfer &
Trust Company Rights Agreement dated as of August
15, 2002, incorporated by reference to Exhibit 99.1
to the Current Report on Form 8-K filed August 21,
2002.
10.1 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated June 1
1996, incorporated herein by reference to Exhibit
10.1 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996
(Confidential Treatment Requested).
10.2 License Agreement between the Company and MMTC,
Inc. dated August 23, 1996, incorporated herein by
reference to Exhibit 10.2 to the Annual Report on
Form 10-K of the Company for the year ended
September 30, 1996 (Confidential Treatment
Requested).
10.3 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated October
17, 1997, incorporated herein by reference to
Exhibit 10.7 to the Annual Report on Form 10-K
(amended) of the Company for the year ended
September 30, 1998. (Confidential Treatment
Requested).
10.4 Amendment dated November 25, 1997 to the License
Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference
to Exhibit 10.8 to the Annual Report on Form 10-K
(amended) of the Company for the year ended
September 30, 1998. (Confidential Treatment
Requested).
10.5 Patent License Agreement between the Company and
Duke University dated November 10, 1999,
incorporated herein by reference to Exhibit 10.9 to
the Annual Report on Form 10-K of the Company for
the year ended September 30, 1999 (Confidential
Treatment Requested).
10.6 Amendment dated March 23, 1999 to the License
Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference
to Exhibit 10.10 to the Annual Report on Form 10-K
of the Company for the year ended September 30,
1999. (Confidential Treatment Requested).
10.7 * Celsion Corporation 2001 Stock Option Plan.
Incorporated herein by reference to Exhibit 10.23
to the Annual Report on Form 10-K of the Company
for the year ended September 30, 2001.
10.8 * Form of Series 200 Warrant issued to certain
employees, directors and consultants to Purchase
Common Stock of the Company, Incorporated herein by
reference to Exhibit 10.11 to the Annual Report on
Form 10-K of the Company for the year ended
September 30, 1998.
10.9 Form of Series 250 Warrant issued to DunnHughes
Holding, Inc. to Purchase Common Stock of the
Company, incorporated herein by reference to
Exhibit 10.12 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 1998.
10.10 Form of Series 300 Warrant issued to Nace
Resources, Inc. to purchase Common Stock of the
Company, incorporated herein by reference to
Exhibit 10.13 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 1998.
10.11 Intentionally omitted.
10.12 Form of Series 500 Warrant to Purchase Common Stock
of the Company pursuant to the Private Placement
Memorandum dated January 6, 1997, as amended,
incorporated herein by reference to Exhibit 10.15
to the Annual Report on Form 10-K of the Company
for the year ended September 30, 1998.
10.13 Intentionally omitted.
10.14 * Form of Series 600 Warrant issued to Certain
Employees and Directors on May 16, 1996 to Purchase
Common Stock of the Company, incorporated herein by
reference to Exhibit 10.17 to the Annual Report on
Form 10-K of the Company for the year ended
September 30, 1998.
10.15 License Agreement between the Company and
Sloan-Kettering Institute for Cancer Research dated
May 19, 2000, incorporated herein by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of
the Company for the year ended September 30, 2000.
10.16 * Employment Agreement between the Company and
Anthony P. Deasey dated November 27, 2000,
incorporated herein by reference to Exhibit 10.1 to
the Quarterly Report on Form 10-K of the Company
for the quarter ended June 30, 2001.
10.17 * Amended and Restated Executive Employment Agreement
between the Company and Augustine Y. Cheung,
effective January 1, 2000, incorporated herein by
reference to Exhibit 10.17 to the Annual Report on
37
EXHIBIT NO. DESCRIPTION
----------- -----------
Form 10-K of the Company for the Year Ended
September 30, 2002.
10.18 * Amended and Restated Executive Employment Agreement
between the Company and John Mon, effective June 8,
2000, incorporated herein by reference to Exhibit
10.18 to the Annual Report on Form 10-K of the
Company for the Year Ended September 30, 2002.
10.19 * Amended and Restated Executive Employment Agreement
between the Company and Dennis Smith, dated
effective May 19, 2000, incorporated herein by
reference to Exhibit 10.19 to the Annual Report on
Form 10-K of the Company for the Year Ended
September 30, 2002.
10.20 Option Agreement between the Company and Duke
University dated August 8, 2000, incorporated
herein by reference to Exhibit 10.23 to the Annual
Report on Form 10-K of the Company for the year
ended September 30, 2000.
10.21 * Employment Agreement between the Company and Daniel
S. Reale dated April 9, 2001, incorporated herein
by reference to the Annual Report on Form 10-K of
the Company for the year ended September 30, 2001.
10.22 Service Agreement between the British Columbia
Cancer Agency, Division of Medical Oncology,
Investigational Drug Section, Propharma
Pharmaceutical Clean Room and the Company dated
September 20, 2000, incorporated herein by
reference to Exhibit 10.24 to the Annual Report on
Form 10-K of the Company for the year ended
September 30, 2000 (Confidential Treatment
Requested).
10.23 Form of Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement
Memorandum dated October 11, 2001, incorporated
herein by reference to Exhibit 10.23 to the Annual
Report on Form 10-K of the Company for the year
ended September 30, 2001.
10.24 * Advisory Agreement between the Company and Dr. Kris
Venkat dated August 1, 2001, incorporated herein by
reference to Exhibit 10.24 to the Annual Report on
Form 10-K of the Company for the Year Ended
September 30, 2001.
10.25 Amendment dated May 23, 2002 to the Patent License
Agreement between the Company and Massachusetts
Institute of Technology dated October 17, 1997,
incorporated herein by reference to Exhibit 10.25
to the Annual Report on Form 10-K of the Company
for the Year Ended September 30, 2002.
(Confidential Treatment Requested).
10.26 Amendment dated September 17, 2002 to the License
Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference
to Exhibit 10.26 to the Annual Report on Form 10-K
of the Company for the Year Ended September 30,
2002.
10.27 * Employment Agreement between the Company and
William W. Gannon, Jr. dated January 15, 2002,
incorporated herein by reference to Exhibit 10.27
to the Annual Report on Form 10-K of the Company
for the Year Ended September 30, 2002.
10.28 Form of Warrant to Purchase Common Stock Units of
the Company issued to Placement Agents pursuant to
the Private Placement Memorandum dated October 18,
2001, incorporated herein by reference to Exhibit
4.4 to the Registration Statement on Form S-3 of
the Company (File No. 333-82450) filed February 8,
2002.
10.29 Form of Warrant to Purchase Common Stock of the
Company pursuant to private placement by the
Company which closed on June 3, 2002, incorporated
herein by reference to Exhibit 4.6 to the Form S-3
Registration Statement of the Company (File No.
333-100638) filed October 18, 2002.
10.30 Letter dated May 8, 2002, from Legg Mason Wood
Walker, Incorporated ("Legg Mason") to the Company
regarding retention of Legg Mason as financial
advisor, incorporated herein by reference to
Exhibit 10.30 to the Annual Report on Form 10-K of
the Company for the Year Ended September 30, 2002.
10.31 Letter Agreement with Goldpac Investment Partners
dated October 17, 2001, incorporated herein by
reference to Exhibit 4.5 to the Form S-3
Registration Statement (File No. 333-82450) filed
February 8, 2002.
10.32 Letter Agreement with Equity Communications, dated
November 5, 2001, incorporated herein by reference
to Exhibit 4.6 to the Form S-3 Registration
Statement (File No. 333-82450) filed February 8,
2002.
10.33 Form of Warrant to Purchase Common Stock pursuant
to the Private Placement Memorandum (the "PPM") of
the Company dated May 30, 2003 as supplemented,
incorporated herein by reference to Exhibit 4.3 to
38
EXHIBIT NO. DESCRIPTION
----------- -----------
the Form S-3 Registration Statement of the Company
(File No. 333-108318) filed on August 28, 2003.
10.34 Form of Warrant issued to the Placement Agents
pursuant to the PPM, incorporated herein by
reference to Exhibit 4.3 to the Form S-3
Registration Statement of the Company (File No.
333-108318) filed on August 28, 2003.
10.35 License Agreement dated July 18, 2003 between the
Company and Duke University. (Confidential
treatment requested.), incorporated herein by
reference to Exhibit 4.3 to the Form S-3
Registration Statement of the Company (File No.
333-108318) filed on August 28, 2003.
10.36 Agreement Regarding Retirement and Resignation
dated October 4, 2001 between the Company and
Spencer J. Volk, incorporated herein by reference
to Exhibit 4.3 to the Form S-3 Registration
Statement of the Company (File No. 333-108318)
filed on August 28, 2003.
14.1+ Code of Ethics and Business Conduct
23.1+ Consent of Stegman & Company, independent public
accountants of the Company.
31.1+ Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2+ Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1+ Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2+ Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
+ Filed herewith.
*Management contract or compensatory plan, contract or arrangement.
(B) REPORTS ON FORM 8-K.
Celsion filed a report on Form 8-K on July 28, 2003 disclosing the first closing
of a private placement of approximately 9.5 million shares of its common stock,
par value $0.01 per share and warrants to purchase approximately 2.85 million
shares of common stock (representing 30% warrant coverage) exercisable at $1.20
per share. The placement was priced at $0.77 per share and associated warrant
and yielded gross proceeds of approximately $7.3 million.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused its annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
CELSION CORPORATION
December 24, 2003 By: /s/ Augustine Y. Cheung
---------------------------
Augustine Y. Cheung
President and Chief Executive
Officer (Principal Executive
Officer)
By: /s/ Anthony P. Deasey
---------------------------
Anthony P. Deasey
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
----------------------- --------------------------- -----------
/s/ Augustine Y. Cheung Director, President and December 24, 2003
------------------------ Chief Executive Officer
Augustine Y. Cheung (Principal Executive Officer)
/s/ Anthony P. Deasey Executive Vice President December 24, 2003
------------------------ and Chief Financial Officer
Anthony P. Deasey (Principal Financial and
Accounting Officer)
/s/ John Mon Vice President, Director, December 24 2003
------------------------ Secretary, and Vice
John Mon President of New Business
Development
/s/ Max E. Link Chairman of the Board December 24, 2003
------------------------
Max E. Link
/s/ Kris Venkat Director December 9, 2003
------------------------
Kris Venkat
/s/ Claude Tihon Director December 24, 2003
------------------------
Claude Tihon
/s/ Gary W. Pace Director December 18, 2003
------------------------
Gary W. Pace
40
CELSION CORPORATION
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
NO EXTRACTS FROM THIS REPORT MAY BE PUBLISHED WITHOUT OUR WRITTEN CONSENT.
STEGMAN & COMPANY
CELSION CORPORATION
REPORT ON AUDITS OF FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT.................... F-1
FINANCIAL STATEMENTS
Balance Sheets.................................. F-2
Statements of Operations........................ F-4
Statements of Changes in Stockholders' Equity... F-5
Statements of Cash Flows........................ F-7
NOTES TO FINANCIAL STATEMENTS.................. F-8
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Celsion Corporation
Columbia, Maryland
We have audited the accompanying balance sheets of Celsion Corporation
(the "Company") as of September 30, 2003 and 2002, and the related statements of
operations, changes in stockholders' equity, and cash flows for each of the
three years in the period ended September 30, 2003. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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, 2003 and 2002, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Stegman & Company
Baltimore, Maryland
November 21, 2003
F-1
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
ASSETS
2003 2002
----------- -----------
CURRENT ASSETS:
Cash $11,410,533 $ 928,819
Other receivables 90,927 84,493
Inventories 824,791 449,608
Prepaid expenses 78,842 47,255
----------- -----------
Total current assets 12,405,093 1,510,175
----------- -----------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 340,679 311,481
Laboratory and shop equipment 172,006 89,354
----------- -----------
512,685 400,835
Less accumulated depreciation 275,361 190,658
----------- -----------
Net value of property and equipment 237,324 210,177
----------- -----------
OTHER ASSETS:
Deposits 23,622 23,622
Prepaid inventory development costs 417,218 486,602
Patent licenses (net of accumulated amortization
of $144,906 and $129,077 in 2003 and 2002,
respectively) 45,044 60,873
----------- -----------
Total other assets 485,884 571,097
----------- -----------
TOTAL ASSETS $13,128,301 $ 2,291,449
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
2003 2002
------------ ------------
CURRENT LIABILITIES:
Accounts payable - trade $ 883,218 $ 494,650
Accrued noncash compensation 125,395 --
Other accrued liabilities 384,886 280,309
------------ ------------
Total current liabilities 1,393,499 774,959
------------ ------------
Total liabilities 1,393,499 774,959
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - $.01 par value; 200,000,000 shares authorized, 143,101,134 and
92,417,556 shares issued and outstanding for 2003 and 2002,
respectively 1,431,011 924,176
Series A 10% Convertible Preferred Stock, $1,000
par value, 7,000 shares authorized, -0- and
1,131 shares issued and outstanding for 2003
and 2002, respectively -- 1,130,500
Series B 8% Convertible Preferred Stock, $1,000 par value; 5,000 shares
authorized, -0- and 1,591 shares issued and outstanding for 2003 and 2002,
respectively -- 1,396,285
Additional paid-in capital 67,582,174 41,885,610
Accumulated deficit (57,278,383) (43,820,081)
------------ ------------
Total stockholders' equity 11,734,802 1,516,490
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 13,128,301 $ 2,291,449
See accompanying notes.
F-3
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
REVENUES:
Equipment sales and parts $ -- $ -- $ --
Returns and allowances -- -- --
------------- ------------- -------------
Total revenues -- -- --
COST OF SALES -- -- --
------------- ------------- -------------
GROSS PROFIT -- -- --
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 5,125,769 4,833,005 3,211,625
Research and development 8,178,680 5,004,687 4,075,249
------------- ------------- -------------
Total operating expenses 13,304,449 9,837,692 7,286,874
------------- ------------- -------------
INTEREST INCOME 30,378 48,321 318,038
RENTAL INCOME -- 38,289 45,609
------------- ------------- -------------
NET LOSS (13,274,071) (9,751,082) (6,923,227)
BENEFICIAL CONVERSION FEATURE
AND DIVIDENDS ON PREFERRED STOCK (184,231) (391,888) (234,637)
------------- ------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (13,458,302) $ (10,142,970) $ (7,157,864)
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.12) $ (0.12) $ (0.10)
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 113,680,286 87,257,672 72,249,920
See accompanying notes.
F-4
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
Series A
10% Convertible
Common Stock Preferred Stock
---------------------------- -----------------------------
Shares Amount Shares Amount
----------- ----------- ----------- -----------
Balances at October 1, 2000 64,372,067 $ 643,721 5,176 $ 5,176,000
Sale of common stock 510,000 5,100 -- --
Conversion of shares of Series A 10% convertible,
preferred stock plus accrued dividends 10,514,763 105,148 (4,311) (4,311,053)
Exercise of common stock warrants and options 1,160,757 11,607 -- --
Preferred stock dividend -- -- 234 234,637
Stock based compensation expense 319,174 3,192 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at September 30, 2001 76,876,761 768,768 1,099 1,099,584
Sale of preferred and common stock 12,500,000 125,000 -- --
Conversion of shares of Series A 10% convertible,
preferred stock plus accrued dividends 143,836 1,438 (58) (58,972)
Conversion of shares of Series B 8% convertible,
preferred stock plus accrued dividends 918,000 9,180 -- --
Exercise of common stock warrants and options 1,471,250 14,713 -- --
Preferred stock dividend -- -- 90 89,888
Beneficial conversion feature -- -- -- --
Stock based compensation expense 507,709 5,077 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at September 30, 2002 92,417,556 924,176 1,131 1,130,500
Sale of preferred and common stock 24,418,399 244,184 10 10,050
Conversion of shares of Series A 10% convertible,
preferred stock plus accrued dividends 2,996,814 29,968 (1,231) (1,230,595)
Conversion of shares of Series B 8% convertible
preferred stock plus accrued dividends 3,370,453 33,704 -- --
Exercise of common stock warrants and options 15,209,291 152,093 -- --
Preferred stock dividend -- -- 90 90,045
Stock based compensation expense 4,688,621 46,886 -- --
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balances at September 30, 2003 143,101,134 $ 1,431,011 $ -- $ --
See accompanying notes.
F-5
Series B
8% Convertible
Preferred Stock Additional
- -------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
- ------------ ------------- --------------- ------------ ------------
-- $ -- $ 29,677,625 $(26,770,917) $ 8,726,429
-- -- 147,400 -- 152,500
-- -- 4,205,905 -- --
-- -- (11,607) -- --
-- -- -- (234,637) --
-- -- 710,323 -- 713,515
-- -- -- (6,923,227) (6,923,227)
- ------------ ------------ ------------ ------------ ------------
-- -- 34,729,646 (33,928,781) 2,669,217
2,000 2,000,000 5,454,532 -- 7,579,532
-- -- 57,534 -- --
(459) (402,375) 393,195 -- --
-- -- 34,814 -- 49,527
50 50,330 -- (140,218) --
-- (251,670) 251,670 -- --
-- -- 964,219 -- 969,296
-- -- -- (9,751,082) (9,751,082)
- ------------ ------------ ------------ ------------ ------------
1,591 1,396,285 41,885,610 (43,820,081) 1,516,490
-- -- 13,656,290 -- 13,910,524
-- -- 1,200,627 -- --
(1,685) (1,490,471) 1,456,767 -- --
-- -- 5,619,526 -- 5,771,619
94 94,186 -- (184,231) --
-- -- 3,763,354 -- 3,810,240
-- -- -- (13,274,071) (13,274,071)
- ------------ ------------ ------------ ------------ ------------
$ -- $ -- $ 67,582,174 $(57,278,383) $ 11,734,802
F-6
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(13,274,071) $ (9,751,082) $ (6,923,227)
Noncash items included in net loss:
Depreciation and amortization 100,532 82,437 68,845
Inventory valuation -- -- 13,538
Stock based compensation 1,248,640 259,172 372,633
Warrants issued for legal settlement -- 476,724 --
Common stock issued for expenses 2,561,600 233,401 340,758
Loss from disposal of property and equipment -- 1,825 --
Net changes in:
Accounts receivable and other receivables (6,434) (83,288) 1,102
Inventories (375,183) (449,608) --
Accrued interest receivable - related parties -- -- 7,751
Prepaid expenses (31,587) (47,255) 14,832
Other current assets -- 150,000 (115,644)
Prepaid inventory development costs 69,384 (486,602) --
Accounts payable and accrued interest payable 388,568 349,130 (70,324)
Accrued noncash compensation 125,395 -- --
Other accrued liabilities 104,577 153,388 66,275
------------ ------------ ------------
Net cash used in operating activities (9,088,579) (9,111,758) (6,223,461)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in deposits -- 5,915 (21,952)
(Decrease) increase in security deposit liability -- (15,203) 15,203
Purchase of property and equipment (111,850) (89,329) (117,572)
------------ ------------ ------------
Net cash used in investing activities (111,850) (98,617) (124,321)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable 500,000 -- --
Payment on notes payable (500,000) -- (114,778)
Proceeds of stock issuances 19,682,143 7,629,058 152,500
------------ ------------ ------------
Net cash provided by financing activities 19,682,143 7,629,058 37,722
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 10,481,714 (1,581,317) (6,310,060)
CASH AT BEGINNING OF YEAR 928,819 2,510,136 8,820,196
------------ ------------ ------------
CASH AT END OF YEAR $ 11,410,533 $ 928,819 $ 2,510,136
Cash paid during the year for interest $ -- $ -- $ --
Cash paid during the year for income taxes $ -- $ -- $ --
See accompanying notes.
F-7
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
-----------------------
Celsion Corporation ("Celsion" or the "Company"), a Delaware
corporation, is a research and development company dedicated to the development
of medical treatment systems primarily to treat breast cancer and a chronic
prostate enlargement condition, common in older males, known as benign prostatic
hyperplasia, or BPH, using minimally invasive focused heat technology. The
Company is also working with Duke University on the development of
heat-sensitive liposome compounds for use in the delivery of chemotherapy drugs
to tumor sites, and with the Memorial Sloan-Kettering Cancer Center, or
Sloan-Kettering on the development of heat-activated gene therapy compounds.
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 improvements are
capitalized at cost and ordinary repairs and maintenance are charged against
operations as incurred. Depreciation expense was $84,703, $66,608 and $53,016
for the years ended September 30, 2003, 2002 and 2001, respectively.
Prepaid Inventory Development Costs
-----------------------------------
The balance in prepaid development costs represents
research/development costs paid to a vendor for the design and development of
catheters which are to be used with the Company's BPH machines.
Patent Licenses
---------------
The Company has purchased several licenses to use the rights
to patented technologies. Patent license costs are amortized on a straight-line
basis over the remaining patent life.
F-8
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 attributable to common stockholders by the weighted average
number of shares of common stock outstanding during each period. The impact of
common stock equivalents has been excluded from the computation of weighted
average common shares outstanding, as the effect would be antidilutive.
Nonmonetary Transactions
------------------------
Nonmonetary transactions are accounted for in accordance with
Accounting Principles Board Opinion No. 29 "Accounting for Nonmonetary
Transactions" which requires that the transfer or distribution of a nonmonetary
asset or liability generally is based on the fair value of the asset or
liability that is received or surrendered whichever is more clearly evident.
Use of Estimates
----------------
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
Stock-Based Employee Compensation
---------------------------------
The Company has long-term compensation plans that permit the
granting of incentive awards in the form of stock options. The Company had
adopted the disclosure-only provisions of Statement of Financial Accounting
Standard ("SFAS") No. 123, Accounting for Stock-Based Compensation which allows
companies to continue to measure compensation costs for stock options granted to
employees using the value-based method of accounting prescribed by APB Opinion
No. 25 Accounting for Stock Issued to Employees (APB 25). Celsion has elected to
follow APB 25 and the related interpretations in accounting for its employee
stock options. The Company has repriced certain stock options which has resulted
in the recognition of compensation costs as more fully described in Note 7.
The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value recognition
provisions of Statement 123, using the assumptions described in Note 7, to its
stock-based employee plans:
F-9
Year Ended September 30,
--------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Net loss, attributable to common
stockholders, as reported $(13,458,302) $(10,142,970) $ (7,157,740)
Add stock-based employee compensa-
tion expense included in reported
net loss 967,376 -- --
Deduct total stock-based employee
compensation expense determined
using the fair value based method
for all awards 1,187,722 980,962 676,449
------------ ------------ ------------
Pro forma net loss $(13,678,648) $(11,123,932) $ (7,834,189)
============ ============ ============
Loss per share:
Basic - as reported $ (0.12) $ (0.12) $ (0.10)
============ ============ ============
Basic - pro forma $ (0.12) $ (0.13) $ (0.11)
============ ============ ============
Fair Value of Financial Instruments
-----------------------------------
The carrying values of financial instruments approximates fair
value.
2. FINANCIAL CONDITION
Since inception, the Company has incurred substantial operating
losses, principally from expenses associated with the Company's research and
development programs, the clinical trials conducted in connection with the
Company's thermotherapy systems and applications for submission to the Food and
Drug Administration. The Company believes these expenditures are essential for
the commercialization of its technologies. As a result of these expenditures, as
well as related general and administrative expenses the Company had an
accumulated deficit of $57 million as of September 30, 2003. The Company expects
such operating losses to continue in the near term and for the foreseeable
future as it continues its product development efforts, and undertakes marketing
and sales activities. The Company's ability to achieve profitability is
dependent upon its ability to successfully obtain governmental approvals,
produce, market and sell its new technology and integrate such technology into
its thermotherapy systems. There can be no assurance that the Company will be
able to commercialize its technology successfully or that profitability will
ever be achieved. The operating results of the Company have fluctuated
significantly in the past. The Company expects that its operating results will
fluctuate significantly from quarter to quarter in the future and will depend on
a number of factors, many of which are outside the Company's control.
F-10
The Company will need substantial additional funding in order to
complete the development, testing and commercialization of its cancer treatment
and BPH products and of potential new products. It is the Company's current
intention both to increase the pace of development work on its present products
and to make a significant commitment to thermo-sensitive liposome and gene
therapy research and development projects. The increase in the scope of present
development work and such new projects will require additional funding, at least
until the Company is able to begin marketing its products.
If adequate funding is not available in the future, the Company
may be required to delay, scale-back or eliminate certain aspects of its
operations or to attempt to obtain funds through onerous arrangements with
partners or others that may force the Company to relinquish rights to certain of
its technologies, products or potential markets. Furthermore, if the Company
cannot fund its ongoing development and other operating requirements, and
particularly those associated with its obligation to conduct clinical trials
under its licensing agreements, it will be in breach of its commitments under
such licensing agreements and could therefore lose its license rights, with
material adverse effects on the Company. Management is continuing its efforts to
obtain additional funds so that the Company can meet its obligations and sustain
operations.
3. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No.
123, Accounting for Stock-Based Compensation. This statement was issued to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company is following the disclosure
requirements of SFAS No. 148 in its financial statements for the year ended
September 30, 2003.
In April 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, to provide clarification on the meaning of an underlying
derivative, the characteristics of a derivative that contains financing
components and the meaning of an initial investment that is smaller than would
be required for other types of contracts that would be expected to have a
similar response to changes in market factors. This statement is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. In addition, all provisions of
this statement should be applied prospectively. The adoption of SFAS No. 149 did
not have a material impact on the results of operations or financial condition.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those instruments
were previously classified as equity. Some of the provisions of this statement
are consistent with the current definition of liabilities in FASB Concepts
Statement No. 6, Elements of Financial Statements. This statement is effective
for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning
after June 15, 2003, thus the Company adopted the provisions of SFAS No. 150 for
its fourth quarter beginning July 1, 2003. The adoption of this SFAS No. 150 did
not have a material impact on the results of operations or financial condition.
F-11
In January 2003, the FASB issued FASB Interpretation ("FIN") 46,
Consolidation of Variable Interest Entities - an Interpretation of ARAB No. 51.
This interpretation provides guidance related to identifying variable interest
entities (previously known as special purpose entities or SPEs) and determining
whether such entities should be consolidated. Certain disclosures are required
if it is reasonably possible that a company will consolidate or disclose
information about a variable interest entity when it initially applies FIN 46.
This interpretation will be effective for the Company's first quarter beginning
October 1, 2003. The Company has no investment in or contractual relationship or
other business relationship with a variable interest entity and therefore the
adoption of FIN 46 will not have any impact on our results of operations and
financial condition. However, if the Company enters into any such arrangement
with a variable interest entity in the future (or any entity with which we
currently have a relationship is reconsidered based on guidance in FIN 46 to be
a variable interest entity), the Company's results of operations and financial
condition will be impacted.
4. INVENTORIES
Inventories are stated at the lower of cost or market and consist
of the following:
2003 2002
-------- --------
Materials $732,225 $373,786
Work-in-process 51,156 75,822
Finished goods 41,410 --
-------- --------
$824,791 $449,608
======== ========
5. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
2003 2002 2001
------ ------ ------
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%
====== ====== ======
As of September 30, 2003, the Company had net operating loss
carryforwards of approximately $48 million for federal income tax purposes that
are available to offset future taxable income through the year 2023.
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
2003 2002
------------ ------------
Net operating loss carryforwards $ 18,700,000 $ 14,300,000
Valuation allowance (18,700,000) (14,300,000)
------------ ------------
$ -- $ --
============ ============
F-12
The evaluation of the realizability of such deferred tax assets in
future periods is made based upon a variety of factors for generating future
taxable income, such as intent and ability to sell assets and historical and
projected operating performance. At this time, the Company has established a
valuation reserve for all of its deferred tax assets. Such tax assets are
available to be recognized and benefit future periods.
6. RETIREMENT PLAN
The Company provides a SAR-SEP savings plan to which eligible
employees may make pretax payroll contributions up to 15% of compensation. The
Company did not make contributions to the plan in the years ended September 30,
2003, 2002 and 2001.
7. PREFERRED STOCK
The Company had preferred stock known as Series A 10% convertible
preferred stock. All of this preferred stock was converted to common stock
during the year ended September 30, 2003. Holders of shares of preferred stock
were entitled to receive, as and if declared by the Company's Board of
Directors, dividends at the annual rate of 10% per share payable semi-annually
on March 31 and September 30. Such dividends were payable in shares and
fractional shares of preferred stock, valued for this purpose at the rate of
$1,000 per share. There were 1,131 (including accrued dividends) shares of this
stock issued and outstanding at September 30, 2002.
The shares of Series A preferred stock were subject to exchange
and conversion privileges upon the occurrence of major events, including a
public offering of the Company's securities or the Company's merger into another
public company. In addition, the holders of the Series A preferred stock were
entitled to convert their preferred shares into shares of common stock at a
conversion price of $0.41 per share of common stock, subject to certain
adjustments.
During the year ended September 30, 2002, the Company issued 2,000
shares of Series B 8% convertible preferred stock on a private placement basis.
All of this preferred stock was converted to common stock during the year ended
September 30, 2003. Holders of shares of preferred stock were entitled to
receive, as and if declared by the Company's Board of Directors, dividends at
the annual rate of 8% per share payable semi-annually on June 30 and December
31. Such dividends were payable in shares and fractional shares of preferred
stock, valued for this purpose at the rate of $1,000 per share. There was 1,591
(including accrued dividends) shares of this stock issued and outstanding at
September 30, 2002.
The shares of Series B preferred stock were subject to exchange
and conversion privileges at any time after September 30, 2002 at a conversion
price of $0.50 per share of common stock.
As of September 30, 2002, 1,591.33 (including accrued dividends)
shares of Series B 8% preferred stock were outstanding.
8. STOCK OPTIONS AND WARRANTS
The Company has issued stock options and warrants to employees,
directors, vendors and debt holders. Options and warrants are generally granted
at market value at the date of the grant.
F-13
A summary of the Company's stock option and warrant activity and
related information for the years ended September 30, 2003, 2002 and 2001 is as
follows:
Weighted
Options/ Average
Warrants Exercise
Outstanding Price
----------- --------
Outstanding at October 1, 2001 7,531,910 .44
Granted 8,158,308 1.36
Exercised (585,000) .35
Expired/cancelled -- --
-----------
Outstanding at September 30, 2001 15,105,218 .94
Granted 31,307,874 .52
Exercised (1,471,250) .03
Expired/cancelled (10,258,049) .91
-----------
Outstanding at September 30, 2002 34,683,793 .61
Granted 9,013,765 .74
Exercised (15,209,291) .38
Expired/cancelled (306,100) .90
-----------
Outstanding at September 30, 2003 28,182,167 .78
===========
Following is additional information with respect to options and
warrants outstanding at September 30, 2003:
Exercise Exercise Exercise
Price from Price from Price from
$.25 to $.50 $.51 to $1.00 $1.01 to $5.00
------------- ------------- --------------
Outstanding at September 30, 2003:
Number of options/warrants 5,070,951 17,634,302 5,476,914
Weighted average exercise price $ .38 $ .67 $ 1.49
Weighted average remaining contractual life in years 5.79 5.11 4.23
Exercisable at September 30, 2003:
Number of options/warrants 3,564,284 14,963,332 5,176,914
Weighted average exercise price $ .35 $ .66 $ 1.51
Weighted average remaining contractual life in years 5.02 4.51 4.03
Option Repricing
----------------
On March 29, 2002, in order to provide meaningful continuing
stock-based incentives for members of management, and in recognition of the
decline in the market price of the Company's Common Stock, the Compensation
Committee of the Board of Directors approved the cancellation of options to
purchase a total of 3,625,000 shares of Common Stock held by certain key
executives and issued new options to purchase a total of 3,150,000 shares,
resulting in a net decrease of options to
F-14
purchase 475,000 shares. The cancelled options had been issued to the Company's
executives pursuant to their respective employment contracts at exercise prices
in excess of the current market price of the Company's Common Stock. These
options consisted of certain options vested at the time of cancellation, as well
as options with vesting dates through April of 2003, and with expiration dates
through April of 2011. The new options consist of currently vested compensatory
options, bonus options, two-thirds of which are currently vested and the
remainder of which vest on March 31, 2004, and performance-based awards that
vest, if at all, upon achievement, by the Company, of certain specified
milestones, all of which expire in May of 2012. All of the new options were
issued pursuant to the Company's 2001 Stock Option Plan, at exercise prices at
or in excess of the market price for the common stock on the date of grant.
The Company will account for the repriced options using
variable accounting under FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation-An Interpretation of APB Opinion No.
25. Consequently, during each reporting period the Company will record
compensation expense relating to the vested portion of the repriced options to
the extent that the fair market value of the Company's Common Stock exceeds the
exercise price of such options. While the Company did not recognize any such
compensation expense in the years ended September 30, 2002 and 2001, it
recognized $967,376 in the year ended September 30, 2003.
Options Issued to Non-Employees for Services
--------------------------------------------
During each of the years in the three-year period ended
September 30, 2003, the Company entered into agreements with consultants in
which the consultants received stock options in exchange for services. The fair
value of these options was estimated at the date of the grant using a
Black-Scholes option pricing model. The Black-Scholes option pricing model was
developed for use in estimating the fair value of options. It requires the use
of certain somewhat subjective inputs. These inputs are listed below along with
the weighted average of the values used by the Company:
September 30,
----------------------------
2003 2002 2001
------ ------ ------
Risk-free interest rate 2.88% 5.0% 5.0%
Expected volatility 96.4% 50% 50%
Expected option life 5 yrs. 5 yrs. 5 yrs.
Based upon these valuations, the Company recognized
$406,660, $259,171 and $372,633 of expense associated with its issuance of
options in lieu of cash for services to consultants.
Employee Stock Options
----------------------
The Company has long-term compensation plans that permit the
granting of incentive awards in the form of stock options. Generally, the terms
of these plans require that the exercise price of the options may not be less
than the fair market value of Celsion Corporation's common stock on the date the
options are granted. Options generally vest over various time frames or upon
milestone accomplishments. Some vest immediately. Others vest over a period
between one to five years. The Company's options generally expire ten years from
the date of the grant.
F-15
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(Statement No. 123), but applies Accounting Principles Board Opinion No. 25 and
related interpretations. No compensation expense related to the granting of
stock options to employees or directors was recorded during the three years
ended September 30, 2003. The fair value of these equity awards was estimated at
the date of grant using a Black-Scholes option pricing model. The inputs used
along with the weighted average of the values used were as follows:
September 30,
----------------------------------------
2003 2002 2001
--------- --------- ----------
Risk-free interest rate 3.53% 5.27% 4.77%
Expected volatility 96.4% 78% 78%
Expected option life 3 - 5 yrs. 3 - 5 yrs. 3 - 5 yrs.
9. LICENSE AGREEMENTS AND PROPRIETARY RIGHTS
The Company owns three United States patents, which are directed
to our adaptive phased array methods of treating breast cancer and BPH.
Additionally, we have seven United States patents pending, all of which have
been filed internationally. Three of our pending United States patent
applications are directed to the BPH treatment system, three are directed to our
breast cancer treatment, and one is directed to our monopole deep tumor
treatment system.
Through the Company's license agreements with Massachusetts
Institute of Technology ("MIT") MMTC, Inc., Duke University ("Duke") and
Sloan-Kettering, the Company has exclusive rights, within defined fields of use
of nine United States patents. Three of these patents relate to the treatment of
BPH, four relate to thermotherapy for cancer, one relates to heat-sensitive
liposomes and one relates to gene therapy.
The MIT, MMTC, Duke and Sloan-Kettering license agreements each
contains license fee, royalty and/or research support provisions, testing and
regulatory milestones, and other performance requirements that the Company must
meet by certain deadlines with respect to the use of the licensed technologies.
In conjunction with the patent holders, the Company intends to file
international applications for certain of the United States patents.
In 1996, the Company entered into a patent license agreement with
MIT, pursuant to which the Company obtained exclusive rights to use of MIT's
patented APA technology in conjunction with application of heat to breast tumor
conditions, the application of heat to prostate conditions and all other medical
uses. MIT has retained certain rights in the licensed technology for
non-commercial research purposes. MIT's technology has been patented in the
United States and MIT has patents pending for its technology in China and
Europe. The term of the Company's exclusive rights under the MIT license
agreement expires on the earlier of ten years after the first commercial sale of
a product using the licensed technology or October 24, 2009, but the rights
continue on a non-exclusive basis for the life of the MIT patents.
F-16
The Company has entered into a license agreements with MMTC in
1996 and 2002, for exclusive worldwide rights to MMTC's patents related to its
balloon compression technology for the treatment of prostatic disease in humans.
The exclusive rights under the MMTC license agreements extend for the life of
MMTC's patents. MMTC currently has patents in the United States and Canada. The
terms of these patents expire at various times from April 2008 to November 2014.
In addition, MMTC also has patent applications pending in Japan and Europe.
On November 10, 1999, the Company entered into a license agreement
with Duke under which the Company received exclusive rights (subject to certain
exceptions) to commercialize and use Duke's thermo-liposome technology. The
license agreement contains annual royalty and minimum payment provisions and
also requires milestone-based royalty payments measured by various events,
including product development stages, FDA applications and approvals, foreign
marketing approvals and achievement of significant sales. However, in lieu of
such milestone-based cash payments, Duke has agreed to accept shares of the
Company common stock to be issued in installments at the time each milestone
payment is due, with each installment of shares to be calculated at the average
closing price of the common stock during the 20 trading days prior to issuance.
The total number of shares issuable to Duke under these provisions is subject to
adjustment in certain cases, and Duke has "piggyback" registration rights for
public offerings taking place more than one year after the effective date of the
license agreement.
On January 31, 2003, the Company issued 3,805,366 shares of common
stock to Duke University valued at $2,175,000 as payment under this licensing
agreement, which has been included in research and development expenses for the
year ending September 30, 2003.
The Company's rights under our license agreement with Duke
University extend for the longer of 20 years or the end of any term for which
any relevant patents are issued by the United States Patent and Trademark
Office. Currently, the Company has rights to Duke's patent for its
thermo-liposome technology in the United States, which expires in 2018, and to
future patents received by Duke in Canada, Europe, Japan and Australia, where it
has patent applications pending. The European application can result in coverage
in the United Kingdom, France and Germany. For this technology, license rights
are worldwide, with various patent rights covering the United States, Canada,
the United Kingdom, France, Germany and Japan.
The Company has entered into a license agreement with
Sloan-Kettering in November 2000 by which we obtained exclusive rights to
Sloan-Kettering's United States patent and to patents that Sloan-Kettering may
receive in the future for its heat-sensitive gene therapy in Japan, Canada and
Europe, where it has patent applications pending. These rights under the
agreement with Sloan-Kettering will terminate at the later of 20 years after the
date of the agreement or the last expiration date of any patent rights covered
by the agreement.
F-17
10. LITIGATION SETTLEMENT
During the year ended September 30, 2002 the Company settled
litigation with a former director and a related investment group (the "Group")
related to the issuance of common stock warrants. In settlement of this
litigation, the Company agreed to pay the lesser of certain legal costs or
$265,000 and to adjust the exercise price of 6,325,821 warrants originally
issued to the Group. Expense related to this settlement totaled $741,724 and is
included in selling, general and administrative expenses for the year ended
September 30, 2002.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
-----------------
The Company has entered into a lease for their facilities
located in Columbia, Maryland. Future minimum lease obligations are as follows:
2004 $190,814
2005 185,548
2006 191,093
2007 196,094
2008 202,739
Thereafter 441,859
Rent expense for the years ended September 30, 2003, 2002
and 2001 was $367,288, $359,206 and $227,961, respectively.
Rental Income
-------------
In July 2001, the Company began subleasing some of its
office/warehouse space to an unrelated party. The Company rented this space for
three months in each of the years ended September 30, 2002 and 2001, generating
$38,289 and $45,609, respectively. The sublease ended January 1, 2002 and, since
that time, the Company has subleased no other property.
12. CONCENTRATIONS OF CREDIT RISK
As of September 30, 2003 and 2002, the Company had a concentration
of credit represented by cash balances in one large commercial bank in amounts
that exceed current federal deposit insurance limits. The financial stability of
this institution is continually reviewed by senior management.
13. AGREEMENT WITH BOSTON SCIENTIFIC CORPORATION
On January 21, 2003, the Company and Boston Scientific Corporation
("BSC") entered into a distribution agreement pursuant to which the Company has
granted BSC certain rights to market and distribute the Company's BPH
technology.
F-18
The Company and BSC also entered into a transaction agreement on
January 21, 2003. Pursuant to this agreement, upon attainment of specified
milestones by Celsion, BSC will make equity investments in Celsion through the
purchase of the Company's common stock. On January 21, 2003, BSC purchased
9,375,354 shares of the Company's common stock for $5,000,000.
The Company has also granted BSC the exclusive right to purchase
the assets and technology relating to the manufacture, marketing sale,
distribution and/or research and development of products using thermal therapy
for the treatment of BPH.
14. YEAR END CHANGE
The Company's Board of Directors has approved, effective
immediately, a change in the Company's fiscal year end from September 30 to
December 31.
15. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
Gross profit on sales $ -- $ -- $ -- $ --
General and administrative expenses (840,044) (1,141,021) (925,279) (2,219,425)
Research and development expenses (1,097,428) (3,652,560) (1,929,435) (1,499,257)
Other income/expense 2,651 6,564 5,248 15,915
----------- ----------- ----------- -----------
Net loss $(1,934,821) $(4,787,017) $(2,849,466) $(3,702,767)
=========== =========== =========== ===========
Net loss per share - basic and diluted $ (.02) $ (.04) $ (.03) $ (.03)
=========== =========== =========== ===========
F-19