SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1996
SEC File Number. 2-93826-W
CHEUNG LABORATORIES, INC.
A Maryland Corporation
IRS Employer Identification No. 52-1256615
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
Telephone: (410) 290-5390
Fax: (410) 290-5394
NO SECURITIES ARE REGISTERED UNDER SECTION 12(b) OF THE ACT
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
TITLE OF CLASS:
COMMON STOCK ($.01 PAR VALUE)
Registrant 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, and has been subject to such filing
requirements for the past 90 days.
As of June 30, 1996, the Registrant had 39,920,607 shares of
common stock outstanding.
The aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on last known sale price
through June 30, 1996) was approximately $31,936,485.
Documents Incorporated by Reference: NONE
TABLE OF CONTENTS
PAGE
PART I
Item 1. Financial Statements and Supplementary Data . . . . . 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . 9
PART II
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . 17
Item 2. Changes In Securities. . . . . . . . . . . . . . . . 17
Item 3. Market For The Registrants's Common Stock and Related
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 4. Submission Of Matters To A Vote Of Security Holders. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
Item 5. Exhibits and Reports on Form 8-K . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART I
Item 1. Financial Statements and Supplementary Data
Note: The financial information included herein should
be read in conjunction with the Annual Report on
Form 10-K for the fiscal year ended September 30,
1995. Such financial information reflects all
adjustments, consisting of only normal recurring
adjustments which, in the opinion of management,
are necessary for a fair statement of the results
for the periods presented.
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
June 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995 (AUDITED)
ASSETS
June 30, September 30,
1996 1995
_________ ____________
CURRENT ASSETS:
Cash $ 39,307 $ 7,238
Accounts receivable (net of an allowance for
doubtful accounts of $57,962 and $56,659 in
June 1996 and Sept. 1995, respectively) 171,001 137,101
Inventories 276,600 301,279
Prepaid expenses 1,669 7,669
Other current assets 23,634 25,551
====== ======
Total current assets 512,211 478,838
_______ _______
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 168,927 168,777
Laboratory and shop equipment 74,733 74,733
_______ _______
243,660 243,327
Less accumulated depreciation 203,576 197,897
_______ _______
Net value of property and equipment 40,084 45,613
OTHER ASSET -
Investment in Aestar Fine Chemical Company-
at cost 8,000,000 8,000,000
Investment in Ardex Equipment L.L.C. at equity 432,991 482,991
Funds held under investment contract 511,000 650,000
Patent (net of accumulation amortization of
$31,647 and $26,650 in June 1996 and Sept.
1995, respectively) 48,303 53,300
_________ _________
8,992,294 9,186,291
TOTAL ASSETS $9,544,589 $9,719,742
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
June 30, September 30,
1996 1995
--------- -------------
CURRENT LIABILITIES:
Accounts payable - trade $ 232,974 $ 228,360
Notes payable - related parties (Note 1) 469,685 463,685
Accrued interest payable - related party 401,930 343,265
Accrued interest payable - other 7,155 5,264
Accrued compensation 426,492 352,498
Accrued professional fees 89,266 1,500
Other accrued liabilities (Note 2) 154,683 69,8711
Deferred revenues 115,531 115,531
_________ _________
Total current liabilities 1,897,716 1,579,974
LONG-TERM LIABILITIES:
Note payable -less current portion 20,000 2,000
Total liabilities 1,917,716 1,581,974
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Capital stock - $.01 par value; 51,000,000
shares authorized, 39,920,607 and 39,207,664
issued and outstanding in June 1996 and
Sept.1995 respectively 399,206 392,076
Additional paid-in capital 18,302,945 18,014,854
Accumulated Deficit (11,075,278) (10,278,162)
____________ ____________
Total stockholders' equity 7,626,873 8,128,768
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 9,544,589 $9,710,742
============ ============
See accompanying notes.
CHEUNG LABORATORIES, INC.
STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED June 30, 1996 (UNAUDITED),
AND June 30, 1995 (AUDITED)
June 30, June 30,
1996 1995
REVENUES:
Hyperthermia sales and parts $ 31,277 $ 36,008
Consulting service and repairs 0 0
Returns and allowances (60,000) 1,360
________ ________
Total revenues 28,723 37,368
COST OF SALES 0 15,387
GROSS PROFIT 28,723 21,981
______ ______
OPERATING EXPENSES:
Selling, general and administrative 280,009 413,797
Research and development 0 0
Total operating expenses 280,009 413,797
_________ _________
INCOME FROM OPERATIONS (308,732) (391,816)
OTHER (EXPENSE) INCOME 17 7,468
INTEREST EXPENSE (21,388) (28,573)
________ ________
(LOSS) INCOME BEFORE INCOME TAXES (330,103) (412,921)
INCOME TAXES - 0 0
NET (LOSS) INCOME $ (330,103) $ (412,921)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE $(.008) $(.010)
CHEUNG LABORATORIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (AUDITED),
AND FOR THE QUARTER ENDING JUNE 30, 1996 (UNAUDITED)
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
Balance at September 30, 1992 15,580,693 155,806 6,342,571 (9,259,124) (2,760,747)
Retirement of shares (219,251) (2,192) 2,192
Issuance of 538,558 shares of
common stock as payment of
indebtedness and for admission
of a new stockholder 538,558 5,386 421,941 427,327
Net loss (12,601) (12,601)
__________ _______ _________ ___________ ___________
Balance at September 30, 1993 15,900,000 159,000 6,766,704 (9,271,725) (2,346,021)
Reissuance of shares 219,251 2,193 2,192
Issuance of 2,504,400 shares
of common stock as payment
of indebtedness and for
admission of new stockholders 2,504,400 25,044 1,261,363 1,286,407
Net income 390,880 390,880
__________ _______ _________ ___________ _________
Balance at September 30, 1994 18,623,651 186,237 8,028,067 (8,880,845) (666,542)
Sale of common stock 20,003,000 200,030 9,801,470 10,001,500
Issuance of 581,013 shares of
common stock as payment of
indebtedness and expenses 581,013 5,810 185,317 191,127
Net loss (1,397,317) (1,397,317)
__________ _______ _________ ___________ ____________
Balance at September 30 1995 39,207,664 $392,076 $18,014,854 $(10,278,162) $8,128,768
Issuance of 160,000 shares of
common stock for admission
of new stockholders 160,000 1,600 113,400 115,000
Net loss (260,653) (260,653)
__________ _______ ___________ _____________ __________
Balance at December 31, 1995 39,367,664 393,676 $18,128,254 $(10,538,813) $7,983,115
Issuance of 135,000 shares of
common stock for admission
of new stockholders and
options exercised 135,000 1,350 19,900 21,250
Net loss (206,361) (206,361)
Balance at March 31, 1996 39,502,664 395,026 $18,148,153 $(10,745,175) $7,798,005
Issuance of 417,943 shares
of common stock 417,943 4,179 154,792
Net loss (330,103) (330,103)
Balance at June 30, 1996 39,920,607 399,205 18,302,946 (11,075,279) (7,626,872)
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED JUNE 30, 1996 (UNAUDITED)
AND YEAR ENDED SEPTEMBER 30, 1995 (AUDITED)
June 30, September 30,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(330,103) $(1,397,317)
Noncash items included in net (loss) income:
Depreciation and amortization 3,559 13,922
Bad debt expense 313 180,539
Loss on write-off of inventory - -
Forgiveness of debt - -
Common stock issued as wages - 108,926
Equity in loss of Ardex Equipment L.L.C. 17,009
Net changes in:
Accounts receivable 208,680
Inventories (1,887) (80,478)
Prepaid expenses - (5,875)
Other current assets - (25,551)
Accounts payable -trade (50,332) 15,299
Accrued liabilities 103,093 24,803
Accrued compensation 29,641 51,423
Accrued professional fees 47,924 (174,606)
Deferred revenue - 105,531
Accrued interest - related party 20,288 84,889
Accrued interest - other - (41,163)
Net cash provided (used) by operating
activities (177,504) 913,969
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in Ardex Equipment L.L.C. - (500,000)
Purchase of property and equipment - (5,183)
Funds invested - investment contract - (700,000)
Funds returned - investment contract - 50,000
Net cash provided (used) by investing
activities 0 (1,155,183)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of stock issuance 158,971 2,001,500
Payment on note payable (52,500) (24,000)
_________ ___________
Net cash (used) provided by financing
activities 211,471 1,977,500
NET (DECREASE) INCREASE IN CASH 33,967 (91,652)
CASH AT BEGINNING OF PERIOD 5,340 98,890
_________ ___________
CASH AT END OF PERIOD $ 39,307 $ 7,238
Note 1. Notes Payable-Related Parties
Notes payable to related parties as of June 30, 1996 are comprised
of the following:
1996
Term note payable to CEO, accruing interest at 10%
per annum 42,669
Term notes payable to CEO, accruing interest at 12%
per annum 85,000
Demand note payable to relative of CEO accruing
interest at 12% per annum 36,041
Demand note payable to related party for remainder of
funds borrowed for discontinued project, note bears
interest at 12% per annum 53,725
Term notes payable to interested parties of the
Company accruing interest at 9 to 12% per annum 222,250
Term note payable to officer and stockholder of the
Company accruing interest at 10% per annum payable
in monthly payments of $2,000, beginning
January 1, 1996. The note is secured by all accounts
receivable and general intangibles of the Company. 50,000
-------------
489,685
Less current portion 469,685
-------------
Long-term portion -due in 1997 $ 20,000
Interest accrued on these notes amounted to $401,930 at June 30,1996.
Note 2. Other Accrued Liabilities
Other accrued liabilities at June 30, 1996 consisted of:
Accrued miscellaneous expense 49,539
Payroll taxes payable 2,144
Loan 103,000
--------------
$ 154,683
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
A. THE COMPANY'S BUSINESS AND PRODUCT DEVELOPMENT
The Company's Business
Cheung Laboratories, Inc. ("CLI" and/or the "Company") is a
public corporation in the USA whose stock is traded on the NASDAQ Bulletin
Board(symbol CGLB). The Company was started as Cheung Associates, Inc. and
incorporated in the State of Maryland in 1982.
Until 1994, CLI was engaged solely in the business of developing,
manufacturing and marketing medical equipment worldwide. The Company
manufactures and designs high technology microwave hyperthermia systems for
the treatment of cancer, benign prostatic hyperplasia ("BPH") and other
prostatic diseases. In November 1989, the U. S. Government Food and Drug
Administration ("FDA") awarded a premarket approval ("PMA") for CLI's
Microfocus 1000 cancer treatment system to be used in conjunction with
radiation treatment. The PMA allows hospitals and clinics reimbursement
rights from insurance companies, including Medicare, for treatments using
the Microfocus 1000 in the USA. CLI's manufacturing facility has received
a Good Manufacturing Practices certification ("GMP") granted by the FDA for
the manufacturing of medical equipment.
CLI started marketing and selling the Microfocus line of hyperthermia
systems in Asia in 1986 and, to date, has developed an extensive network of
contacts in Asia, the largest number being in China and Hong Kong. In 1994
CLI implemented a business plan it developed in 1993 to create an industrial
division to manufacture and market products using its Asian connections and
to diversify its business from what was exclusively a medical business. CLI
sought to secure a strategic partner/investor to enter into the rapidly
expanding Asian markets.
In the first quarter of 1995 CLI secured a strategic partner/investor
when Mr. GAO Yu Wen entered into a Subscription Agreement with the Company to
invest a total of $10 million in the Company in the form of cash and property.
Mr. GAO is a citizen of the People's Republic of China and owns businesses in
China, Hong Kong and Macau. Mr. GAO serves as Deputy Director of the
Economic Committee of the City of Zhongshan in Guang Dong Province in South
China, the most active economic growth area in China. In his position as
Deputy Director of the Economic Committee, Mr. GAO oversees the activities of
approximately 120 factories and businesses in the Zhongshan area. The
connections which CLI has in Zhongshan and South China provide access to a
diversified base of products, low-cost manufacturing and technology
facilities that CLI plans to selectively utilize to increase the Company's
product diversity and earnings capability.
The activities of 1995, have laid the groundwork for CLI's 1996 business
and product development plans. CLI will focus on CLI's Medical Division and
its new Industrial Division.
I. Medical Division
CLI's hyperthermia machines utilize hyperthermia as a source of heat
therapy. Heat therapy has been used in medicine since antiquity. In modern
hyperthermia, a controlled heat dose is targeted to treatment sites using
focused microwave energy for therapeutic benefits. Two widely accepted uses
of hyperthermia are for the treatment of cancer and the treatment of Benign
Prostatic Hyperplasia ("BPH"), a genitourinary disease associated with
the benign growth of the prostate in older males. The non-toxic, surgery-
free and pharmaceutical drug side-effect free nature of hyperthermia
treatments makes hyperthermia an attractive treatment choice, but a
relatively new choice available to patients.
Hyperthermia is effective in treating cancerous tumors because cancerous
tumors cannot effectively withstand the increased temperatures brought about
by the hyperthermia treatment, while normal tissue can withstand the higher
temperatures. This occurs because cancerous tissue has poor blood
circulation, so its capacity to dissipate heat is less than normal tissue.
Used as an adjunct to surgery, hyperthermia is used to decrease tumor mass
and thereby facilitate its removal surgically. As an adjunct to radiation
therapy, hyperthermia has been shown to be most effective where radiation
therapy is least effective in the central area of cancerous tumors, where
there is poor blood circulation. Hyperthermia has also been shown to
enhance the effectiveness of certain forms of chemotherapy. In the case of
both radiation therapy and chemotherapy, hyperthermia may permit lower
dosages, and therefore fewer side effects.
Hyperthermia can be administered to various anatomical sites. It can be
administered locally, regionally, or to the entire body. Local hyperthermia
treatment may be invasive (internal) or non-invasive (external). Invasive
heating techniques, in turn, may be interstitial (via implants into body
tissue) or intracavitary (via natural bodily orifice). Regional hyperthermia
treatment is primarily non-invasive, via external beam radiation.
Hyperthermia treatment of the entire body is an extremely complicated
procedure.
Products and Proprietary Information
Microfocus 1000
CLI's Microfocus 1000 is FDA approved for the treatment of cancer in
conjunction with radiation therapy. The Microfocus 1000 is manufactured from
various components provided by suppliers. Some of the components are
modified by the Company or by the manufacturer at the Company's direction.
The Company considers there to be proprietary trade secret knowledge involved
in the manufacture of some of the components of the Microfocus 1000 and in
the assembly of the components to form the Microfocus 1000. The Company has
taken what it considers appropriate steps to safeguard that trade secret
information. The Company does not have patents on any of the components of
the Microfocus 1000 or on the complete Microfocus 1000.
The Company continues to enhancement and update its hyperthermia
equipment. Towards this end, for the past three years, the Company has
collaborated with investigators/researchers from Massachusetts Institute of
Technology ("MIT") on a patented technology developed by MIT originally for
use in radar systems in space. The technology allows for the development of
new microwave hyperthermia systems providing effective, non-invasive, non-
toxic and side-effect free treatment for breast cancer and other diseases.
The Company is now devoting its efforts to successful commercialization of
the MIT technology. The Company currently has an exclusive option with
MIT for the technology and is working towards a final agreement. If the
Company is successful in commercializing the MIT technology, the Company
believes that it will become a global leader in the business of therapeutic
hyperthermia equipment.
The Microfocus 1000 system for cancer treatment performed better in the
FDA clinical trials than competing machines, but all hyperthermia systems
have been subject to the same technological deficiency. The systems often
fail to deliver focused and repeatable heating to targeted tumor sites.
Unfocused heating leads to inadequate heating at the tumor site and also
tends to create surface and isolated hot spots outside of the tumor areas,
potentially leading to pain, undesirable burns and blisters. As a result,
hyperthermia treatments using current commercially available systems are
quite often ineffective.
The MIT technology, which the Company is acquiring, remedies this problem by
allowing adaptive focusing of microwave energy within the center of tumors
on a repeatable basis and at the same time eliminating surface heat and hot
spots. The system employing the MIT technology represents the unique
focusing array technology which many hyperthermia experts worldwide
recognize as the technology breakthrough necessary to remedy the existing
problems.
Based upon the technology, the Company has built a working prototype
configured as a dedicated breast cancer treatment hyperthermia system.
Preclinical evaluations in test phantoms have demonstrated that this novel
approach works and for CLI to continue towards commercialization of this
technology. In addition, preliminary testings also confirms the technology
is suitable for other configurations for the treatment of deep seated tumors.
BPH Systems
In addition to the FDA approved Microfocus 1000, in 1991 CLI
designed the MICROFOCUS line of hyperthermia/thermotherapy BPH systems
for the treatment of BPH. BPH is a benign growth associated with aging which
causes the prostate gland to enlarge and the growth can block the flow of
urine. Until the introduction of hyperthermia as a treatment, surgery or
drugs were the main forms of treatment for BPH. Hyperthermia offers an
outpatient treatment for BPH which is safe, does not have the side effects
of drugs or the dangers of surgery.
The three BPH systems are the Microfocus Maxi, Model 100C and the Model
100. These systems are presently being manufactured via a joint venture in
Canada and sold through CLI's distribution network.
CLI is conducting preclinical evaluations on its BPH systems to obtain
data for the filing of an IDE (Investigational Device Exemption) with the
FDA to allow restricted sales of systems to hospitals in the USA. This
procedure is required to place the BPH system in USA hospitals and gather
clinical data for safety and efficacy demonstrations. Such demonstrations
are necessary to obtain a PMA from the FDA for commercialization in the
USA. The USA remains the largest untapped marketplace for the BPH system.
On May 6, 1996 the FDA announced at the American Urological Association
(AUA) meeting in Orlando, FL, it has approved the first microwave based
prostate treatment device manufactured in France called the Prostatron,
based on its studies showing it may help 75% of patients. This development
has created new excitement and interest in the BPH marketplace both in
the USA and abroad. CLI believes that its business will benefit from
this increased level of interest.
Regulatory Considerations
In the USA, the FDA regulates the sale and use of medical devices, which
includes the Company's hyperthermia system Microfocus 1000. A company
introducing a medical device in the USA must go through a two-step process.
The company must first obtain an IDE from the FDA. An IDE permits a
manufacturer to deliver its equipment to hospitals, clinics and private
physicians for clinical research purposes to generate clinical data to
demonstrate the safety and effectiveness of the device through controlled
study. The second step is to obtain PMA from the FDA in order to
commercially market the medical device. Obtaining PMA requires that
clinical data be generated to demonstrate the safety and effectiveness of
the medical equipment. This process is time consuming and expensive.
Obtaining PMA is a significant barrier to entry in the hyperthermia industry.
Firms which lack PMA face significant impediments to the successful marketing
of their hyperthermia equipment, because under applicable regulations
customers can obtain reimbursement from Medicare, Medicaid and health
insurers only for treatment with products that have PMA.
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
communication networks. The frequency of 915 MHZ has been approved by the
FCC for medical applications and machines utilizing that frequency do not
require shielding to prevent interference with communications. Surface
treatment hyperthermia machines, including the Company's Microfocus 1000,
utilize the 915 MHZ frequency.
In December 1984, the Health Care Financing Administration (HCFA)
approved reimbursement under Medicare and Medicaid for hyperthermia
treatment when used in conjunction with radiation therapy for the treatment
of surface and subsurface tumors. At this time, most of the large medical
insurance carriers in the United States have approved reimbursement for such
hyperthermia treatment under their health policies. Hyperthermia
treatment administered using equipment which has received PMA is eligible
for such reimbursement.
The Company and its facilities are subject to inspection by the FDA at
any time to insure compliance with FDA regulation in the production and
sale of medical products. The Company believes that it is substantially in
compliance with FDA regulations governing the manufacturing and marketing
of medical devices.
New Product Development
The Company continues to refine and upgrade the components of its
Microfocus 1000 hyperthermia machine and to pursue the use of hyperthermia
in the treatment of various diseases. The Company is now working on several
projects to broaden the market for its hyperthermia equipment. These
projects are now in the development stage and are expected to be completed
within six months, if they can be successfully completed.
Competition
Hyperthermia For Cancer
The Company believes that there are at least six other domestic firms
producing, or designing and intending to produce, hyperthermia systems, as
well as a number of foreign firms. Of those firms, at least four have
obtained PMA for their machines and several have obtained IDE for their
machines. As acceptance of hyperthermia as a cancer treatment increases,
the Company expects the competition will also increase. The hyperthermia
industry is one of rapid technological change. There can be no assurance
that systems or technologies superior to that of the Company will not be
produced.
Hyperthermia For Prostatic Diseases
The Company believes there are as many as 10 companies in the USA and
as many as 15 companies worldwide which are planning or already active in
this marketplace.
II. Industrial Division
To address the slow development of the hyperthermia market, the Company
initiated a significant change in its business plan to develop additional
products, to diversify its business utilizing its contacts in China, and to
expand its sales of hyperthermia products worldwide. The Company has worked
with several potential investors who have expressed a significant interest
in the Company and that process came to a conclusion in February 1995 when
the Company entered into a funding agreement with Mr. GAO Yu Wen to purchase
20,000,000 shares of the Company's common stock for an aggregate purchase
price of $10,000,000. The first $2,000,000 of this funding was paid to
the Company in February and March of 1995.
The Company's first project is to initiate a cosmetics and fine chemical
business for manufacture and sale of these products in China. The Company
will obtain one or more joint venture partners who are in the cosmetics and
personal care areas of business and desire to do business in China. The
Company will be able to make available to its joint venture partner(s)
cosmetic and fine chemical production facilities in China which have a
license to manufacture and market cosmetic and personal care products
throughout China. Major cosmetic companies are initiating construction
projects in China to build manufacturing capacity for cosmetic and personal
care products to be sold within the domestic China market, the largest
potential market for such products in the world. As a result of the
Company's relationship with Mr. GAO, the Company is in a position to make
cosmetic manufacturing capacity available to joint venture partners,
representing a very significant cost saving to the joint venture partners
in terms of construction expenses and lead time in both construction and
obtaining necessary licenses.
Mr. GAO is a citizen of China and owns businesses both in China and
Hong Kong. Mr.GAO serves as Deputy Director of the Economic Committee of
the City of Zhongshan. Zhongshan is located in Guang Dong Province in South
China, the most active economic growth area in China. To complete the
funding of Mr. GAO's $10,000,000 investment in the Company, in July 1995
Mr. GAO transferred a 9.5% interest in the Aestar Fine Chemical
Incorporation Limited Company ("Aestar") to the Company. Aestar is in the
cosmetic and fine chemicals business and had sales in excess of $50 million
U.S. for 1994. The Company believes that the acquisition of this interest
in Aestar will allow it to receive dividend income from Aestar and also
accelerate its business plan to be involved in the manufacture and sale of
cosmetics and fine chemical products in China with joint venture partners.
Aestar is located in the City of Zhongshan and is 70% owned by the City of
Zhongshan and 30% owned by private parties. The Company believes that
implementation of joint venture projects, principally through Aestar, will
enable it to capitalize on its close contacts with China and develop a
steady revenue base to support the Company in industrial projects.
B. ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Background and 06/30/96 Quarter Results
On June 10, 1996 the company announced, it has reached an agreement
to repurchase 16 million shares of its outstanding common stock by
rescinding its 9.6% ownership in Aestar Fine Chemical Incorporated Limited
("Aestar") and to repurchase an additional 4 million shares at $0.55 per
share from Mr. Gao Yu Wen. The total 20 million share transaction,
which is to be consummated with payment of $2.2 million to Mr. Gao by
November 30, 1996, represents the repurchase of approximately 51% of the
outstanding common shares of the CLI.
On March 31, 1996, there were 39,502,664 shares of common stock outstanding.
The 16 million share redemption associated with rescinding the
Registrant's 9.6% interest in Aestar was effected under the agreement and the
16 million shares will be retired when CLI completes the transactions by
paying Mr. Gao $2.2 million for the remaining 4 million shares in the
transaction.
On July 31 1995, the Registrant announced it had sold a controlling interest
to Mr. Gao in order to position the Registrant to enter into the large
Chinese personal care market through Aestar and to capitalize upon the
businesses and business contacts of Mr. Gao. Mr. Gao, a businessman with
companies in China, Hong Kong and Macau, also serves as Deputy Director of
the Economic Committee of the City of Zhongshan, Guangdong Province, China
(PRC). Because of recent health problems, Mr. Gao will not be able to
fulfill his desires to open business opportunities for the Registrant and
develop an ongoing business with Aestar. Therefore, Mr. Gao and the
Registrant have mutually agreed to end their relationship. This step will
allow the Registrant to focus its resources on its core business, which is
the design, manufacturing and sale of microwave therapy devices for cancer
and prostatic diseases.
On June 12, 1996, CLI entered into an exclusive license agreement with
Massachusetts Institute of Technology (MIT) for the commercialization rights
to a proprietary patented Adaptive Phased Array (APA) technology to be used
in conjunction with The Registrant's hyperthermia systems for the treatment
of cancer.
This innovative proprietary technology was originally developed by MIT for
use in microwave radar systems for the Department of Defense. The
Registrant believes the use of APA technology with the Registrant's
hyperthermia systems represents a major breakthrough in the non-invasive
treatment of cancer. A patent has been granted for the use of APA
hyperthermia systems for non-invasive breast cancer treatment. Patents have
also been granted for use of APA hyperthermia systems for the non-invasive
treatment of deep seated cancer tumors. The APA technology overcomes the
major technological problems of current hyperthermia systems, which are
the inability to focus on a repeatable and reliable basis and the inability
to eliminate undesired hot spots. With the MIT-APA technology, the Registrant
will be in a position to market a complete line of state of the art,
clinically effective and side-effect free hyperthermia cancer treatment
systems for breast cancer, prostate cancer, and deep-seated tumors in the
brain, liver and lungs. The Registrant and MIT have been working for over
four years in the antenna design, system development and preclinical
evaluation of the APA technology used with microwave hyperthermia systems.
The initial company effort will be on the development of a dedicated breast
cancer treatment system that integrates APA with the Registrant's Microfocus
1000 microwave hyperthermia system. The Microfocus 1000 has been approved
by the Food and Drug Administration (FDA) to be used in conjunction with
radiation for cancer treatment. Adding APA to the Microfocus 1000 will
require clinical studies before marketing and sales in the U.S.A. A working
prototype has been completed with encouraging preclinical results. Studies
have shown hyperthermia is effective by significantly improving the clinical
responses of both radiation therapy and chemotherapy in cancer treatment.
By itself, hyperthermia reduces the size of tumors.
With the re-focussing of our business and eliminating our industrial
division, on August 2, 1996 CLI entered into a binding letter of intent
concerning the rescission of CLI's investment in Ardex Equipment, LLC.
Funding of the Company and New Products
CLI is refocussing on its core technology and plans to capitalize upon
the recent interest in the use of microwaves for the treatment of both
cancer and prostatic diseases. In addition, with the recent acquisition by
CLI of certain patented technology from MIT, CLI believes it is well
positioned to capitalize on this new emerging marketplace. CLI has entered
into an agreement with a financial advisor to help with the funding of our
hyperthermia business. CLI has partially completed a senior secured
convertible loan offering for the amount of $1.2 million to fund the
development of our hyperthermia business.
Revenues from the hyperthermia business are currently small due to the
substantial decline in the hyperthermia market over the past several years,
however CLI believes as the technology improves and the use of microwave
heating become more accepted, the market for our products will increase.
Company is actively working on two projects which would be very beneficial
to the hyperthermia business if either or both could be successfully
implemented. The Company anticipates that it will take approximately six
months for these projects to reach the point of development where the
Company will be able to ascertain if they will be successful in increasing
the profitability of the hyperthermia business. At this time the Company
seeks to maintain its position in the hyperthermia market.
As of this date, the Company has not received any dividends for its
investment in Aestar and has been in discussions with related parties to
resolve the matter.
Relisting of Company Stock for Electronic Trading
The combination of Mr. GAO's equity investment in the Company and the
conversion of debt to equity has significantly addressed the Company's
previous negative net worth problem. As of September 30, 1995, the
Company has net equity of $8,128,768. This equity will provide the asset
base for the Company to meet the equity requirements to be relisted for
electronic trading on NASDAQ and other exchanges. The Company is working
diligently to have its stock relisted for electronic trading on NASDAQ
and any other appropriate exchanges.
Change in Fiscal Year End from September 30 to December 31
The Board of Directors has amended the By-Laws of the Company to change
the fiscal year end from September 30 to December 31. This change has been
made effective December 31, 1995. Implementation of the Company business
plan will required that the Company become a majority shareholder in the
Unisol business and Unisol is on a calendar year end. Therefore, it will
be necessary for the Company to be on a calendar year end in order to
consolidate the financial results of operations of Unisol with the Company.
Furthermore, the Company anticipates being affiliated with other entities in
carrying out its business plan and the Board of Directors believes it will
be necessary for the Company to have a calendar year end in order to
implement the Company's business plan as smoothly as possible.
PART II
Item 1. Legal Proceedings
The Company is not presently a party to any litigation, nor to the
knowledge of management is any litigation threatened against the Company,
which may materially affect the operations of the Company. In the normal
course of business, the Company may be subject to warranty and product
liability claims on its hyperthermia equipment.
Item 2. Changes In Securities
There have been no changes in the stock of the Company during the
fiscal quarter ending 6/30/96 other than the issuance of shares as noted
in the Statement of Stockholders' Equity table..
Item 3. Market For The Registrant's Common Stock and Related Matters
The Company's $0.01 par value common stock is traded over-the counter
and until March 5, 1987, was quoted on the National Association of Securities
Dealers, Inc. Automated Quotation System ("NASDAQ") under the symbol CGLB.
Since March 5, 1987, the common stock continues to be traded through the
"pink sheets". NASDAQ delisted the Company's common stock because the
Company's net worth went below the minimum criteria set by NASD. There were
approximately 2600 holders of record of the common stock as of June 30, 1996.
The Company has never paid cash dividends on its stock and does not expect to
pay any cash dividends in the foreseeable future.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters have been submitted to a vote of security holders during the
fiscal quarter ended 6/30/96.
Item 5. Exhibits and Reports on Form 8-K
8-K filings June 10, 1996 and June 12, 1996 as described in Analysis of
Financial Condition and Results of Operations
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
CHEUNG LABORATORIES, INC.
Augustine Y. Cheung
President and CEO
