UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 000-14242
CHEUNG LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1256615
-------- ----------
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 290-5390
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of December 31, 1997, the Registrant had outstanding 32,760,674
shares of Common Stock, $.01 par value.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
December 31, 1997 and September 30, 1997
ASSETS
12/31/1997 9/30/1997
---------- ---------
Current assets:
Cash and cash equivalents $ 32,611 $267,353
Accounts receivable (net of an allowance for doubtful
accounts of $-0- and $-0- on 12/31/1997 and
9/30/1997 respectively) 5,891 5,891
Inventories 349,103 329,741
Prepaid expenses 8,417 8,207
Other current asset 61,068 26,755
-------- --------
Total current assets 457,090 637,947
-------- --------
Property and equipment - at cost:
---------------------------------
Furniture and office equipment 187,748 180,348
Laboratory and shop equipment 92,228 92,228
-------- --------
279,976 272,576
Less accumulated depreciation 217,252 213,885
-------- --------
Net value of property and equipment 62,724 58,691
Other assets:
-------------
Patent licenses (net of accumulated amortization of
$ 53,888 and $53,379 on 12/31/1997 and 9/30/1997,
respectively) 146,061 126,571
-------- --------
Total other assets 146,061 126,571
-------- --------
Total assets $665,875 $823,209
======== ========
2
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/1997 9/30/1997
------------ ------------
Current liabilities:
Accounts payable - trade $ 576,176 $ 614,173
Notes payable - other 498,000 1,369,800
Notes payable-related parties 208,702 221,943
Accrued interest payable - related parties 192,873 245,784
Accrued interest payable - other 54,620 116,604
Accrued compensation 384,866 331,715
Accrued professional fees 104,653 256,301
Other accrued liabilities 17,768 15,504
Deferred revenues 151,631 112,031
------------ ------------
Total current liabilities 2,189,289 3,283,855
------------ ------------
Long term liabilities:
Total long-term liabilities -- --
------------ ------------
Total liabilities 2,189,289 3,283,855
------------ ------------
Stockholders' equity:
Capital stock - $.01 par value; 51,000,000 shares
authorized, 32,760,674 and 29,095,333 issued and
outstanding for 12/31/1997 and 9/30/1997, respectively 336,145 290,953
Additional paid-in capital 14,261,137 12,511,923
Accumulated deficit (16,120,696) (15,263,522)
------------ ------------
Total stockholders' equity (deficit) (1,523,414) (2,460,646)
------------ ------------
Total liabilities and shareholders' equity $ 665,875 $ 823,209
============ ============
See accompanying notes.
3
CHEUNG LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31,
1997 1996
Revenue:
- --------
Hyperthermia sales and parts $ -- $ 94,040
------------ ------------
Total revenue -- 94,040
Cost of sales -- 31,863
------------ ------------
Gross profit (loss) -- 62,177
------------ ------------
Operating expenses:
- -------------------
Selling, general and administrative* 725,058 396,276
Research and development 102,844 42,234
------------ ------------
Total operating expenses 827,902 438,510
------------ ------------
(Loss) Income from operations (827,902) (376,333)
Loss in investment fund -- (40,000)
Other(expense) income 6,255 16,578
Interest expense (35,525) (38,501)
------------ ------------
(Loss) Income before income taxes (857,172) (438,257)
Income taxes -- --
------------ ------------
Net (loss) income (857,172) (438,257)
============ ============
Net (loss)income per common share (basic) ($ 0.028) ($ 0.017)
============ ============
Weighted average shares outstanding 30,802,001 25,237,249
* This amount includes $234,375 in compensation expense recorded for the 250,000
shares of common stock issued to Spencer Volk as part of the compensation
outlined in the Employment Agreement between Mr. Volk and the Company.
See accompanying notes.
4
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended December 31,
1997 1996
Cash flows from operating activities:
Net (loss) income $ (857,172) $ (438,257)
Noncash items included in net (loss) income:
Loss in investment fund -- 40,000
Depreciation and amortization 3,876 3,133
Bad debt expense (54,313) --
Net changes in:
Accounts receivable -- (32,060)
Inventories (19,362) (42,190)
Accrued interest receivable -- (8,107)
Prepaid expenses (210) --
Accounts payable-trade (37,997) 110,745
Accrued interest payable - related parties (52,911) (95,494)
Accrued interest payable - other (61,984) 24,100
Accrued compensation 53,150 49,408
Accrued professional fees (151,648) --
Other accrued liabilities and deferred revenue 41,864 120,247
----------- -----------
Net cash (used) provided by operating activities (1,136,707) (268,475)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (7,400) --
Net cash provided (used) by investing activities (7,400) --
----------- -----------
Cash flows from financing activities:
Payment on notes payable (net) (885,040) --
Proceeds of stock issuances 1,794,405 31,351
----------- -----------
Net cash provided by financing activities 909,365 31,351
----------- -----------
Net increase(decrease) in cash (234,742) (237,124)
Cash at beginning of period 267,353 246,931
----------- -----------
Cash at end of the period $ 32,611 $ 9,807
=========== ===========
See accompanying notes.
5
CHEUNG LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The information presented for the three month periods ended December
31, 1996 and December 31, 1997 is unaudited, but includes adjustments
(consisting only of normal recurring accruals) that Cheung Laboratories, Inc.'s
(the "Company") management believes to be necessary for the fair presentation of
results for the periods presented. The September 30, 1997 balance sheet was
derived from audited financial statements. These financial statements should be
read in conjunction with the Company's audited annual statements for the year
ended September 30, 1997, which were included as part of the Company's Report on
Form 10-K/A.
Note 2. Common Stock Outstanding and Per Share Information
For the quarters ended December 31, 1996 and 1997, per share data is
based on the weighted average number of shares of Common Stock outstanding.
Outstanding warrants, options, and notes which can be converted into Common
Stock are not included as their effect is antidilutive. The 16,000,000 shares
retired in October 1996 are also not included in the calculation of per share
data for the quarter ended December 31, 1996.
Note 3. Inventories
Inventories are carried at the lower of actual cost or market, and cost
is determined using the average cost method. The components of inventories on
12/31/1997 and 9/30/1997 are as follows:
12/30/1997 9/30/1997
---------- ---------
Finished products $81,525 $77,003
Work in process 17,987 16,990
Materials 249,591 235,748
-------- ---------
$349,103 $329,741
========= ========
Note 4. Subsequent Event.
The $498,000 of Notes payable - other reflected on the December 31,
1997 balance sheet and related accrued interest of $59,003 were converted, on or
before February 2, 1998, into 1,356,106 shares of common stock.
6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements in this report that relate to future plans, events or
performance are forward-looking statements. Actual results, events or
performance may differ materially due to a variety of factors, including the
factors described on the Form 10-K/A for the year ended September 30, 1997.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Overview
Cheung Laboratories, Inc. ("CLI" or the "Company") has been engaged in
developing and marketing minimally invasive thermotherapy devices utilized in
the treatment of cancer as well as genitourinary diseases associated with benign
growth of the prostate in older males, the most common being benign prostatic
hyperplasia ("BPH"). Thermotherapy (also known as hyperthermia), or heat
therapy, is a historically recognized successful method of treatment. In modern
thermotherapy, a controlled heat dose is targeted to treatment sites using
microwave and/or other energy for therapeutic benefits. Thermotherapy is a
clinically established, adjuvant modality for at least doubling tumor response
to radiation therapy or chemotherapy. However, delivering the necessary heat
within the body without damaging surrounding tissue has been a major impediment
to the use of thermotherapy for deep seated disease. The Company has an
exclusive license from the Massachusetts Institute of Technology ("MIT") for
adaptive phase array ("APA") technology which the Company believes will overcome
this problem.This technology, originally developed for the Strategic Defense
Initiative (Star Wars) plans of the Department of Defense, applies adaptive
phased arrays of microwave energy in conjunction with traditional radiation or
chemotherapy for the deep heating of breast, prostate and other deep seated
cancers.
The Company will be concentrating its business on the development of
two recently acquired technologies: (i) from MIT, APA targeting of microwave
energy, which the Company believes will have broad cancer and other medical
applications, and (ii) balloon catheter technology for enhanced thermotherapy of
BPH and other genitourinary tract conditions. While the balloon catheter
technology is related to the Company's previous BPH thermotherapy devices, the
Company believes the APA technology has the potential to serve as the core
technology for a broad array of medical devices, and accordingly the Company
will devote most of its resources to the exploitation of the APA technology.
Results of Operations
Three Months Ended December 31, 1996 and 1997
The Company is concentrating on the development of the new technologies
it recently acquired to significantly expand the capabilities and market for its
7
products and has ceased active sales of its current equipment. The Company
therefore did not receive any revenue in the three months ended December 31,
1997, compared to revenue of $94,040 in the same period in the prior fiscal
year. With the focus on the development and marketing of the new thermotherapy
systems utilizing the patented technologies, the Company anticipates that most
of its future revenue will be generated by treatments administered utilizing its
thermotherapy systems and the sales of disposable kits. Revenue from the new
technologies is not expected until the new technologies are developed and
approved for sale by governmental regulatory agencies.
Given the lack of sales and sales efforts in the quarter ended December
31, 1997, there were no cost of sales in the quarter, compared to $31,863 in the
three months ended December 31, 1996.
Research and development expense increased to $102,844 in the three
months ended December 31, 1997 from $42,234 in the three months ended December
31, 1996 due to increased emphasis on technology enhancements. The Company
expects to significantly increase its expenditures for research and development
to fund the development or enhancement of products by incorporating the APA
technology and the MMTC technology.
Selling, general and administrative expenses increased substantially to
$725,058 in the three months ended December 31, 1997 from $396,276 in the three
months ended December 31, 1996. The higher expenses were primarily due to the
increase in consulting and legal expenses, and compensation expenses, including
$234,375 in compensation expense recorded for the 250,000 shares of common stock
issued to Spencer Volk. The Company expects selling and marketing expense to
increase substantially as it expands its advertising and promotional activities
and increases its marketing and sales force, in anticipation of the
commercialization of its new thermotherapy systems.
Interest expense decreased to $35,525 in the three months ended
December 31, 1997 from $38,501 in the three months ended December 31, 1996. The
decrease was due to the repayment on certain notes.
The net loss for the quarter ended December 31, 1997 was $857,172. The
loss per share was $0.028. Operating losses will continue while the Company is
developing its new equipment. Losses thereafter will depend upon a number of
factors including the market acceptance of the new technologies.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $16,120,696 and a shareholders'
deficit of $1,523,414 at December 31, 1997. The Company has funded its
operations primarily through the sale of equity securities. At December 31,
1997, the Company had cash, cash equivalents and short-term investments
aggregating approximately $32,611. Net cash used in the Company's operating
activities was $1,136,707 for the three months ended December 31, 1997.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts, including
8
seeking FDA approval for the domestic sale of the Company's products, expand its
sales and marketing activities. The Company expects that its existing capital
resources will not be adequate to fund the Company's operations through the next
twelve months. The Company is dependent on raising additional capital to fund
its development of technology and to implement its business plan. Such
dependence will continue at least until the Company begins marketing its new
technologies.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including: the successful
commercialization of the thermotherapy systems; progress in its product
development efforts; the magnitude and scope of such efforts; progress with
preclinical studies and clinical trials; the cost and timing of manufacturing
scale-up; the development of effective sales and marketing activities; the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the emerging of competing technological and market
developments; and the development of strategic alliances for the marketing of
the Company's products. To the extent that funds generated from the Company's
operations are insufficient to meet current or planned operating requirements,
the Company will be required to obtain additional funds through equity or debt
financing, strategic alliances with corporate partners and others, or through
other sources. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if necessary,
will be available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate certain
aspects of its operations or attempt to obtain funds through arrangements with
collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates, products or potential
markets. If adequate funds are not available, the Company's business, financial
condition and results of operations will be materially and adversely effected.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
none
Item 2. Change in Securities
During the quarter ended December 31, 1997, the Company issued the following
securities without registration under the Securities Act of 1933:
1. The Company issued 1,779,341 shares to fourteen persons upon
conversion of previously outstanding convertible notes totalling $729,530. The
issuance was made to a limited number of accredited investors upon conversion of
previously outstanding convertible securities. The Company believes the issuance
was exempt from registration under the Securities Act pursuant to Sections
3(a)(9), 4(2) or 4(6) of the Securities Act and Regulation D promulgated
thereunder.
2. The Company issued 1,586,000 shares to thirty nine accredited
investors for cash consideration totalling $793,000. The issuance was made to a
limited number of accredited investors. The Company believes the issuance was
9
exempt from registration under the Securities Act pursuant to Section 4(2) or
4(6) of the Securities Act and Regulation D promulgated thereunder.
3. The Company issued 50,000 shares to Dr. Max Link, a director of the
Company, for the exercise of a stock option. Dr. Link paid $37,500 for the
shares. The Company also issued 250,000 shares to Spencer Volk as part of the
compensation outlined in the Employment Agreement between Mr. Volk and the
Company. The Company believes the issuance was exempt from registration under
the Securities Act as sales to limited numbers of accredited investors pursuant
to Sections 4(2) or 4(6) of the Securities Act.
Item 3. Defaults upon Senior Securities
In May, 1997 the Company obtained a loan from the George T. Horton
Trust in the original principal amount of $220,000. The loan matured on December
15, 1997, at which time the remaining principal balance was $50,000. The Company
failed to pay the loan when due. At February 13, 1998 the outstanding principal
balance of the loan was $40,000, plus approximately $283 of accrued interest.
The Company has scheduled payment of the remaining balance during the second
fiscal quarter ending March 31, 1998.
Item 4. Submission of Matters to a Vote of Securities Holders
none.
Item 5. Other Information
none
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11. Computation of per share earnings.
27. Financial Data Schedule
(b) Reports on Form 8-K
No report on Form 8-K was filed during the period reported upon.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: February 17, 1998 Cheung Laboratories, Inc.
(Registrant)
/s/ Spencer J. Volk
-----------------------------------
Spencer J. Volk
President
/s/ Jon Mon
-----------------------------------
John Mon
Treasurer, Chief Accounting Officer
11
EXHIBIT 11
CHEUNG LABORATORIES, INC.
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended December 31,
1997 1996
Net (loss) income ($857,172) ($438,257)
Net (loss) income per common share (0.028) ($0.017)
Weighted average shares outstanding 30,802,001 25,237,249
* Outstanding warrants, options, notes which can be converted into Common Stock,
and the 16,000,000 shares retired in October 1996 are not included in the
calculation of the per share data for quarters ended December 31, 1996 and 1997
as their effect is antidilutive.
12
5
3-MOS
SEP-30-1997
OCT-01-1997
DEC-31-1997
32611
0
5891
0
349103
457090
279976
217252
665875
2189289
0
0
0
(1523414)
0
665875
0
0
0
0
827902
0
35525
(857172)
0
(857172)
0
0
0
(857172)
(0.028)
0
