UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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, 1998
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)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss. 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
As of December 24, 1998, 41,514,467 shares of the Registrant's Common
Stock were issued and outstanding. As of December 24, 1998, the aggregate market
value of voting stock held by non-affiliates of the Registrant was approximately
$7,338,926 based on the average of the closing bid and asked prices for the
Registrant's Common Stock as quoted on the over-the-counter market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference
in this Report on Form 10-K: None.
PART I
ITEM 1. BUSINESS
General
-------
Celsion Corporation (the "Company") was incorporated in the State of
Maryland in 1982 under the name A.Y. Cheung Associates, Inc. The Company changed
its name to Cheung Laboratories, Inc. on June 31, 1984 and to Celsion
Corporation on May 1, 1998. The Company is a biomedical research and development
company headquartered in Columbia, Maryland, dedicated to creating and marketing
medical treatment systems for cancer, benign prostatic hyperplasia ("BPH") and
other diseases using focused heat energy.
Thermotherapy (also known as hyperthermia), or heat therapy, is an
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. Heat is a well-known treatment modality
for cancer in combination with radiation and chemotherapy. In 23 worldwide
independent studies on 2,234 tumors, heat plus radiation doubled the complete
response rate of tumors (from 38% to 78%) compared to radiation alone. Complete
response rate is defined as the total absence of a tumor for a minimum of two
years. The same doubling of complete response rate occurred with heat and
chemotherapy. The past technical difficulty has been delivering a controlled
amount of heat to internal tumors without burning surrounding healthy tissues.
The Company has an exclusive license from the Massachusetts Institute of
Technology ("MIT") for adaptive phased array ("APA") technology which the
Company believes will overcome this problem.
The Company will therefore be concentrating its business on the
development of two 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 an array of new medical devices.
MIT "Adaptive Phased Array" Technology
--------------------------------------
- the Enabling Platform
-----------------------
In mid 1996, the Company obtained an exclusive license to patented MIT
"adaptive phased array" technologies which were originally developed for the
Strategic Defense Initiative (Star Wars) plans of the Department of Defense to
track targets and to nullify the energy beam from enemy jamming equipment. The
APA technology allows microwave energy to be accurately targeted deep within the
body, resulting in heating a well defined target area without damaging
surrounding tissue. On October 24, 1997, the Company entered into a revised
exclusive license agreement with MIT covering the above mentioned patents in the
1996 agreement as well as an additional patent pending technology using the APA
technology for activating thermo-sensitive liposomes.
Under the terms of the license agreement with MIT, the APA technology
is available for exclusive use by the Company in conjunction with (i) breast
hyperthermia, or the application of heat to breast tumors, (ii) prostate
hyperthermia, or the application of heat to prostate conditions, and (iii) all
other medical uses. Under a revised license agreement with MIT, the Company has
also been granted similar rights to use APA technology for activating heat
sensitive pharmaceutical agents, developed by others, which are targeted to
specific tumor sites. There are no restrictions in the permitted uses of the
product, but no other areas of commercialization for the APA technology are
allowed under the license, and MIT has retained certain rights in the licensed
technology for non-commercial research purposes.
The Company intends to use the ability of APA technology to
selectively heat targeted internal areas of the human body as a technological
platform, both in the near term and the long term. On September 17, 1997, the
Food and Drug Administration (the "FDA") granted the Company a Premarketing
Approval ("PMA") for its system of deep focused heat, incorporating the APA
technology, as a treatment modality for use in conjunction with radiation for
the treatment of recurrent surface and subsurface tumors. This approval was
obtained as a supplement to an existing approval for the Microfocus 1000, a
thermotherapy device that the Company produced and marketed from 1989 through
1994, albeit without the APA technology. The Company plans to conduct clinical
tests of the use of its APA-improved Microfocus equipment to treat localized
tumors through heat alone and without concurrent radiation.
Total costs for incorporating APA technology in commercially
marketable Microfocus equipment for treating tumors through heat alone will
depend upon (i) any further product development costs, including costs incurred
for or with MIT, (ii) the final costs of the required clinical studies, and
(iii) the marketing investment required in order to gain acceptance of the new
2
technology. Such total costs cannot be predicted at this time, and the Company
will only be able to establish responsible pricing when all clinical trials are
completed and when marketing and other commercialization costs and profit margin
factors are finalized. In addition, the new treatment technology, when
commercialized, will require new medical treatment reimbursement rates and
codes, which cannot yet be applied for and which will have a bearing on the
pricing of the equipment, as will competitive factors which may prevail at the
time the new equipment is marketed. Notwithstanding the foregoing uncertainties,
the Company believes that, while the total costs and pricing of its new
equipment will be greater than for its older Microfocus 1000 units, such
increase will not be severe.
There are numerous technologies that currently exist or are being
developed that can utilize the unique properties of the Company's heat delivery
technology, as well as numerous other applications dependent on the heat
delivery technology that should evolve over time. Several of the leading
applications that have been identified include:
(1) Tumor Ablation-Using Heat Alone
The Company's older Microfocus 1000 equipment, designed to be used as
an adjunct to radiation therapy, is no longer being marketed by the Company. The
Company's present intention is to complete the development of, and to market ,
an improved microwave thermotherapy product with APA technology, for the
ablation (destruction) of breast tumors through the use of heat alone, rather
than in conjunction with radiation and chemotherapy, thereby seeking to avoid
the well-established risks and side effects of radiation and chemotherapy.
However, in applications where the older Microfocus 1000 equipment continues to
be used in conjunction with radiation, or where a Company microwave
thermotherapy product might be used in the future to deliver treatment in
addition to a separate course of radiation or chemotherapy, the established
risks and side effects of radiation or chemotherapy will remain and will not be
diminished by any such use of the Company's equipment.
It has been scientifically demonstrated on numerous occasions that
properly applied heat can kill cancer cells. For example, see the article
entitled "Biological Effects of Heat" by Eric J. Hall and Laurie Roizin-Towle,
In Cancer Research (Suppl.), Vol 44 (Oct. 1984). Our microwave equipment applies
heat to specific tissue areas, and the APA technology licensed from MIT has
improved the ability of our equipment to focus such heat in a controlled manner
in a targeted internal location. In connection with its application to the FDA
for pre-marketing approval of its APA-improved Microfocus product, the Company
submitted the results of animal studies demonstrating the ability of such
equipment to ablate tumors in animal tissue. The FDA granted such approval in
1997 on the basis of the study results. The Company intends to commence Phase I
studies in humans for the purpose of establishing the ability of the equipment
to ablate human tumors using heat alone.
In the spring of 1998, the Company's Microfocus equipment, improved
through the addition of APA technology, was used in animal studies at
Massachusetts General Hospital ("MGH") and Oxford University, confirming the
system's ability to focus heat deep within the body. In August, 1998,
Hammersmith Hospital in London received approval from its ethics committee to
conduct human trials. At MGH's Center for Imaging and Pharmaceutical Research,
animal studies were conducted under the direction of Dr. Gerald Wolf. The
Company's treatment system was successfully demonstrated to completely ablate
tumors in animals using heat alone. In this modality, the tumor is heated to
46(degree) - 48(degree) C (114(degree) - 118(degree) F) or hot enough to kill
all cancer cells in one eight minute treatment session.
Whenever ablation is possible, the Company's system will be used
without radiation or chemotherapy. The Company needs to obtain a new indication
of use (that is, the ablation of breast tumors with heat alone) from the FDA for
its already PMA - approved equipment. The FDA strictly regulates indications of
permitted use of medical equipment, and its approvals are based upon successful
safety and efficacy studies. The Company's current FDA approval for its
Microfocus equipment is based upon its previous clinical testing in which
microwave-generated heat was used in conjunction with radiation.
In order to have the right to such an indication of permitted use for
heat alone, the Company must perform a new clinical study which must be reviewed
by the FDA before we can market and sell our Microfocus equipment with a heat
alone indication of use. The Company is submitting an application for
Investigational Device Exemption ("IDE") to the FDA, and Dr. Gerald Wolf of MGH
will oversee coming clinical trials at MGH, at Hammersmith Hospital London, and
Columbia HCA's JFK Hospital in Palm Beach.
(2) Radiation Plus Deep Focused Heat
In addition to using heat alone to destroy certain tumors, the Company
believes that the combination of thermotherapy (hyperthermia) and radiation can
provide a significant market opportunity for the Company. Traditional radiation
therapy is an expensive, multi-treatment process that is physically debilitating
to the person receiving it, and has several inherent systemic limitations:
3
S-phase cancer cells are resistant to radiation. (S-phase cells
represent about 40 percent of the cell cycle; tumeric cells go
through a 24 hour cycle of S and G phases.) The S-phase cells
are highly susceptible to destruction by heat; and
Poorly oxygenated (hypoxic) cancer cells are resistant to radiation.
Thermotherapy is known to improve the chances of killing the cancer cells,
because
S-phase cancer cells missed by radiation can be killed by
thermotherapy; and
Thermotherapy increases the oxygenation of cancer cells making them
more susceptible to radiation.
As indicated above, the dual treatment modality of thermotherapy and
radiation has already been shown in independent studies to double the complete
response rates of sub-surface and surface cancers when used in conjunction with
radiation or chemotherapy. To date, the problem with this dual treatment
application has been the inability of the thermotherapy treatment to focus heat
deep within the body. As stated earlier, the Company's APA technology provides a
method through which this can now be accomplished. It should be noted, however,
that the side effects and risks of radiation therapy will not be eliminated by
the use of such additional focused heat technology.
(3) Chemotherapy Plus Deep Focused Heat
Traditional chemotherapy is limited in its ability to kill cancer
cells for two major reasons:
Poor blood perfusion in the vicinity of tumor cells such that
chemotherapy delivered through the blood stream does not reach
the tumor; and
Tumor cell pressure prevents chemotherapy from penetrating tumor
cell membranes.
Thermotherapy improves the performance of chemotherapy in each of these areas
by:
Increasing the blood flow in the vicinity of tumors in the temperature
range of 41(degree) C to 43(degree) C, thereby increasing the
delivery of drugs to the tumor site;
Decreasing the blood flow within the tumor itself to the point where
the tumor is easily heated and killed at temperatures above
43(degree) C (tumor vascularity is not robust and does not
expand significantly when heated), compared to normal tissue
for which heat is easily removed and the tissue is protected;
and
Increasing the toxicity of the chemotherapy agent at 43(degree)C,
compared to the toxicity of the same agent at 37(degree) C.
Subject to obtaining FDA and other approvals, animal trials for
chemotherapy in conjunction with focused heat generated by the Company's
equipment are planned for Duke University Medical Center as well as Hammersmith
Hospital in London, and clinical trials are planned for Hammersmith Hospital. It
should be noted, however, that the side effects and risks of chemotherapy will
not be eliminated by the use of such additional focused heat technology.
(4) Heat Sensitive Liposomes ("Thermalsomes") - Targeted and
Effective Drug Delivery
One of the initial opportunities for this patented technology relates
to temperature sensitive liposomes ("Thermalsomes") that are being developed at
Duke University. Thermalsomes are microscopic man-made lipid particles (organic
compounds including fats, fat-like compounds and steroids) that can be
engineered to encapsulate drugs, creating new pharmaceuticals with enhanced
efficacy, better safety or both. Toxicity of effective drugs can be mitigated
through Thermalsomes technology.
For application to the human body, the Thermalsomes are injected into
the blood stream. As the Thermalsomes circulate repeatedly within the small
arteries, arterioles, and capillaries, the drug contents of the Thermalsomes are
released in significantly higher levels in areas that have been heated for 30 to
60 minutes, than in areas that do not receive heat. Hence, the Thermalsome
technology is made effective by the Company's focussed thermotherapy treatment
modality.
4
The Company has been collaborating with Duke University Medical Center
("Duke") in preliminary research on the use of heat-sensitive liposomes in
conjunction with precisely focused heat. In ongoing animal research studies
conducted under the Company's Sponsored Research Agreement with Duke, a drug
encapsulated in heat-sensitive liposome particles is circulated through animal
tissue. While animal studies are not yet completed, the Company believes, based
on continuing discussions with Duke researchers, that the combination of
liposome-encapsulated drug therapy with the ability of the improved Microfocus
equipment to heat specific internal tissue to a predetermined temperature will
permit more concentrated application of therapeutic drugs at actual tumor sites.
In addition to completing the ongoing animal studies, the Company and Duke will
be required to seek and obtain FDA approval for human trials before definitive
benefits are established. Duke is in the process of patenting the formulation
technology for its heat-sensitive liposomes, and the Company and Duke are
presently exploring a revised sponsored research relationship.
In addition to the increased efficacy, there is potential for great
improvement in the life process of chemotherapy patients. Chemotherapy is
essentially a poisoning of the body with toxins that attack cancerous cells more
readily than normal cells. The side effects include nausea, vomiting, and
exhaustion - all side effects of the body being poisoned. If the poisoning can
be limited to the tumor area, and performed only once (due to the increased
efficacy) as is possible with the Thermalsome related treatments, chemotherapy
should cease to be the horrid, debilitating process that it is today.
(5) Gene Therapy - Making Tumors Susceptible to Eradication
Another application of the APA technology relates to gene therapy. The
Company has been collaborating with a researcher, Dr. Gloria Li of the
Sloan-Kettering Institute for Cancer Research, who has developed heat sensitive,
genetic biological modifiers which suppress a tumor's resistance to heat,
radiation and chemotherapy damage. The Company has now entered into an option
agreement with Sloan-Kettering under which we will have the right to acquire an
exclusive license to commercialize the technology for commercial use. In
applying this technology in clinical applications to management of cancer, the
biological modifiers can be attached to a heat shock promoter to form a gene
therapy construct. The construct can be delivered to deep seated tumors. The
action of focused heat is intended to both release and trigger the action of the
modifier. The gene modifier thus weakens the tumor's resistance to therapy and
greatly enhances the effectiveness of any combination therapy approach using
heat in conjunction with radiation or chemotherapy. Recently, a patent
application has been filed by the researcher's institution, and the Company has
entered into negotiation for the exclusive rights to license the technology for
commercial use, although the Company cannot provide assurance that such license
agreement will be consummated.
(6) Projected Deep Focused Heat Product Line
The Company has current plans to produce specialized thermotherapy
products, each utilizing the APA technology for specific deep seated tumors, and
one BPH product utilizing the Company's microwave equipment and balloon catheter
technology developed by MMTC, Inc. ("MMTC") and licensed to the Company.
Breast cancer treatment equipment. According to the American Cancer
Society, breast cancer is the most prevalent cancer in the U.S. with over
183,000 new cases diagnosed each year. The amount indicated is a three-year
average of estimated national cancer case data for 1995, 1996 and 1997 published
by the American Cancer Society in its bi-monthly journal, A Cancer Journal for
Clinicians. Early stage breast cancer accounts for two thirds of the breast
cancers in the U.S. today. This assertion is based on the statement that, of
newly diagnosed cancers, two thirds were "node negative", made in the article
"The Surgical Management of Primary Invasive Breast Cancer" by Dr. Michael P.
Moore and Dr. David W. Kinne, in Vol. 45, No. 5 (September/October 1995) of A
Cancer Journal for Clinicians.
Early stage breast cancer is presently treated via mastectomy, the
removal of the entire breast, or via lumpectomy, the removal of the tumor and
surrounding tissue. In lumpectomy, the area at the edge of the removed tissue is
examined for the existence of cancerous cells, and if any are found, the
procedure is repeated. Full breast radiation or chemotherapy usually follows
this procedure in order to destroy any cancer cells that may not have been
captured by the surgical procedure or that may have been spread during the
procedure.
The Company's breast cancer treatment system is intended for use prior
to lumpectomy to completely destroy the cancerous tissue through use of heat
alone. Initially, radiation therapy or chemotherapy will follow the lumpectomy
as is the current practice. However, the Company expects, with FDA approval of
the Company's breast cancer treatment system, that, eventually, neither
radiation nor chemotherapy will be required for use with the Company's system.
The Company believes thermal ablation will offer a safe and thorough treatment
in stand-alone mode, eliminating the necessity for radiation or chemotherapy and
their debilitating side effects. This alteration in standard practice requires
additional clinical trials for FDA clearance.
5
The Company recently completed animal trials of its prototype clinical
breast cancer treatment system at MGH. The results confirmed that the Company's
new Microfocus equipment with APA technology accurately focused heat where
targeted, and that it is possible to kill tumors with the Company's equipment.
The Company received an Investigational Device Exemption from the FDA, enabling
it to commence Phase I human clinical trials using the equipment at MGH.
However, instead of conducting Phase I human clinical trials at MGH, the Company
has decided to conduct such trials at two other sites, Harbor UCLA Medical
Center in Los Angeles, and the Breast Center at Columbia Hospital, West Palm
Beach, Florida. The Company is now in the process of finalizing arrangements and
costs and payment schedules with both institutions.
The FDA has been notified of the changes in site and in principal
investigators, and the Company does not anticipate receiving any FDA objections
to such change. The cost of the Phase I trials is estimated at approximately
$500,000, to be paid by the Company out of funding which the Company has
obtained. The Company expects that the Phase I trials will begin by the end of
1999.
Prostate cancer treatment equipment. There are over 163,000 new cases
of prostate cancer diagnosed in the United States each year. Building on its
experience in BPH treatment, the Company is planning to develop prostate cancer
thermotherapy equipment as the second of its APA product line. Although the
Company has developed several critical components of this equipment, hospital
research is not expected to begin prior to year 2000.
Deep Seated Tumor Treatment Equipment. The Company is also considering
an APA product for deep seated tumors, including liver, pancreas, colon and lung
cancers, but no commitment to a development program or timetable has been made.
MMTC Benign Prostatic Hyperplasia Technology
--------------------------------------------
- Major Treatment
-----------------
(1) BPH Background
BPH is a non-cancerous urological disease in which the prostate
enlarges and constricts the urethra. Symptoms associated with BPH affect the
quality of life of millions of sufferers worldwide, and BPH can lead to
irreversible bladder or kidney damage. The prostate is a walnut-size gland
surrounding the male urethra that produces seminal fluid and plays a key role in
sperm preservation and transportation. As the prostate expands, it compresses or
constricts the urethra, thereby restricting the normal passage of urine. This
restriction of the urethra may require a patient to exert excessive bladder
pressure to urinate. Since the urination process is one of the body's primary
means of cleansing impurities, the inability to urinate adequately increases the
possibility of infection and bladder and kidney damage.
Because BPH is an age-related disorder, its incidence increases with
age. It is estimated that over 17 million U.S. males aged 50 and over experience
BPH symptoms and that 26 million men in similar age categories are affected by
BPH worldwide. As the population continues to age, the prevalence of BPH will
continue to increase dramatically. It is generally estimated that approximately
50% of all men over 50 and 90% of men in the 70's and 80's age group will have
some symptoms of BPH.
Like cancer, BPH historically has been treated by surgical
intervention or by drug therapy. The primary surgical treatment for BPH is
transurethral resection of the prostate ("TURP"), a procedure in which the
prostatic urethra and surrounding diseased tissue in the prostate are trimmed,
thereby widening the urethral channel for urine flow. While the TURP procedure
typically has been considered the most effective treatment available, the
procedure has many shortcomings which undermine its value. A large number of
patients who undergo TURP encounter significant complications, which can include
painful urination, infection, impotence, incontinence, and excessive bleeding.
Furthermore, the cost of the TURP procedure is also very high, ranging from
$8,000 to $12,000, including hospital stay. This high cost also fails to reflect
the cost of lost work time and reduction in quality of life. Finally, the TURP
procedure is time consuming, requiring hospitalization for up to three days.
Other less radical surgical procedures are available in addition to
the TURP procedure. For example, Interstitial RF Therapy and Laser Therapies are
procedures which employ, respectively, concentrated radio frequency waves or
laser radiation to reduce prostate swelling by cauterization of tissue instead
of removal of tissue with a surgical knife. However, these procedures require
puncture incisions to be made in a patient in order to insert cauterizing RF or
laser probes into the affected tissue, and therefore also may involve the use of
a full operating facility and anaesthesia, as well as the burning of tissue by
the probes. While these procedures result in less internal bleeding and damage
to the urethra compared with TURP procedures, they do not completely eliminate
the adverse effects and costs associated with hospital surgery, anaesthesia and
post-operative tissue recovery.
Drug therapy has emerged as an alternative to surgery in the last
several years. There are several drugs available for BPH treatment, the two most
widely prescribed drugs being Hytrin and Proscar. Hytrin works by relaxing
6
certain involuntary muscles surrounding the urethra, thereby easing urinary
flow, and Proscar is intended to actually shrink the enlarged gland. However,
industry studies have asserted that drug therapy costs $500 to $800 per year or
more, and does not offer consistent relief to a large number of BPH patients,
with the best of the drugs being estimated to be only 50% as effective as the
TURP procedure. Since both surgical and drug treatment alternatives involve
appreciable side effects and high costs, the Company believes there is a
substantial opportunity for a less invasive and lower-cost treatment option.
Thermotherapy involving high heat treatment using microwaves is
another new alternative treatment approach. In May 1996, the FDA approved a
microwave-based BPH treatment device manufactured by EDAP Technomed, Inc.
("Technomed"), called Prostatron. The FDA has recently approved another similar
microwave treatment device manufactured by Urologix, another thermotherapy
company. However, based on information obtained by the Company at trade shows,
from the manufacturers and from urologists who have considered acquiring the
equipment, the relatively higher treatment temperatures used in such equipment
appear to create initial swelling in the tissues surrounding the urethra for a
substantial portion of the patients treated. This can result in no immediate
symptomatic relief and in a need for post-treatment catheterization of the
urethra in order to relieve blockage for a number of patients undergoing such
treatment.
(2) MMTC Technology--Combination of Heat and Compression
On August 23, 1996, the Company acquired a patented compression
technology from MMTC, which has been incorporated into a device to be utilized
with the catheter used in the Company's existing Microfocus BPH system. The
device consists of a microwave antenna combined with a balloon dilation (similar
to angioplasty) mechanism which expands to compress the walls of the urethra as
the prostate is heated.
On December 1, 1997, the Company entered into an amended License
agreement with MMTC, Inc., the original licensor, to give the Company rights to
two additional patents, of which one was approved November 17, 1997. These
additional patents relate to an innovative approach to monitor and control
intra-prostatic temperatures using a radiometer apparatus. The combination of
these two patents and the one received in 1996 is expected to enhance the safety
and efficacy of the Company's BPH system.
(3) Testing of BPH Equipment
Based on the Company's preliminary development work and the successful
use of the technology in animal research conduced at the Montefiore Medical
Center under the direction of Dr. Arnold Melman, the Company believes that the
combined use of balloon compression and microwave heating will provide
significantly improved treatment benefits over the "heat alone" systems
currently available commercially. In the animal studies, a natural "stent" or
reinforced opening in the urethra of the animals tested was shown to be formed
after the treatment. The opening is the result of combining heat and compression
to create the stent, thus permitting immediate relief for urinary tract blockage
due to prostate enlargement. Also, the system's relatively low temperature
(43(degree)C to 45(degree)C) appears to be sufficient to kill prostatic cells
outside the urethra, creating space for the enlargement of the urethra opening.
However, the heat is not high enough to cause swelling in the urethra as is
often associated with competitive treatments using higher temperatures and no
compression.
The Company's prototype clinical BPH treatment system has also been
used in Phase I human clinical trials at Montefiore, also under the direction of
Dr. Melman, and the Company feels that the results to date have warranted
proceeding with an FDA application to conduct Phase II trials.
It is estimated that only 20% of men with moderate to severe BPH
symptoms seek medical treatment. The Company believes that this number will be
greatly increased with the introduction of the Company's BPH treatment device
that improves on the major drawbacks of the current treatment methods. These
drawbacks include issues such as extended procedure stays, required
catheterization and a worsening of conditions immediately after the procedure.
Based on the Company's preliminary development work, and subject to
further testing in Phase II trials and ultimate FDA approval, the Company
believes that its new proprietary BPH device addresses each one of these
drawbacks and can deliver a treatment that is performed on an outpatient basis,
does not require post-treatment catheterization and delivers immediate relief
that permits urination as soon as the procedure is completed.
Marketing Strategy
------------------
The emphasis of the Company's marketing strategy for its new products
will be to create cash flow by selling disposable procedure kits and by charging
a per-use fee. The Company plan calls for hospitals, clinics, Health Maintenance
7
Organizations ("HMOs") and pharmaceutical companies to acquire equipment at a
minimal cost and to pay for utilizing such equipment, together with necessary
disposable products -- on a per-use basis. The Company intends to increase the
demand for its treatment products by educating patients about the benefits of
its treatment via various means of media publicity, consistent with FDA
regulation. The Company will pursue long-term growth along two discrete
development paths:
- It is anticipated that, in the near term - from two to four
years, the Company's treatment revenues will come from an
exploitation of its proprietary technology for BPH, and from
its deep focused heat technology for breast cancer and
deep-seated tumors. The Company intends to generate initial
sales through a combination of direct marketing and
development of marketing alliances. The Company has been
engaged for many months in serious discussions with a national
healthcare company providing HMO services, but the entity has
required its identity to be kept confidential until a binding
agreement is consummated. The Company has also had discussions
with a number of manufacturers and distribution organizations
which have expressed an interest in the products now under
development. No agreements or commitments have resulted from
such discussions, and no single discussion has reached a stage
where disclosure is appropriate in the view of the Company's
management. The Company is currently considering other offers
to establish a series of value-added marketing alliances with
certain manufacturers that sell directly to the nation's
hospital community.
- In the longer term - from four to six years, the Company
intends to generate new revenue streams from its current
development work with Duke University and Memorial Sloan
Kettering in targeted drug delivery systems and gene therapy.
The Company has a first option to acquire Duke University
patents covering heat sensitive liposome targeted drug
delivery technology. It is anticipated that treatment revenues
will come from pharmaceutical manufacturers, hospitals, and
clinics employing these technologies to deliver drug regimens
or change genes throughout the body. Duke has commenced
development of this integrated, targeted drug delivery system
employing the Company's focused heat technology. To market its
liposome, heat sensitive drug delivery systems, the Company is
currently seeking alliances with pharmaceutical companies,
major hospitals, and HMOs. The Company's intended marketing
strategy will be to place its microwave equipment at minimal
cost, and to share revenues from drug delivery on a per
transaction basis. It is anticipated that there will also be
significant revenues from both the Company's targeted drug
delivery and gene therapy delivery to major drug companies.
Assuming FDA approval, the Company plans to launch its BPH treatment
system in 2000. Pending FDA approvals, the Company's focused heat breast cancer
system could reach the market in 2001. Microwave liposome drug delivery
treatments could reach the market as early as 2002.
Patents and Proprietary Rights
------------------------------
The Company owns no patents. Through the Company's license agreements
with MIT, MMTC and Haim Bitcher Cancer Institute ("HBCI"), the Company has
exclusive rights within defined fields of use to eight U.S. patents. Five of the
patents relate to the cancer equipment and three relate to the BPH equipment.
The patents expire at various times from May, 1999 to November, 2014. The
Company, in conjunction with the patent holders, has filed or intends to file
international applications for certain of the U.S. patents.
The material terms of the MIT license agreement provide for a grant of
exclusive rights for the permitted uses under a number of U.S. patents and
various U.S. and foreign pending patent applications, along with two copyrighted
software programs. The grant includes the right to sublicense for end-users, and
the license term expires at the earlier of 10 years after the first commercial
sale of a licensed product or 12 years after the date of the license agreement,
which expiration date may be extended with the consent of MIT. The agreement
contains various milestone requirements and payments, provides for certain
minimum sales, and may be terminated (i) by the Company at any time upon at
least six months notice and payment of all amounts which may then be owed to
MIT, and (ii) by MIT upon the occurrence of a breach by the Company.
The Company has been collaborating with Duke University under 1998
sponsored research agreements covering (i) the development of heat-sensitive
liposomes for delivery of drug therapy to selected tissue areas to be heated
with the Company's APA-improved microwave equipment, and (ii) the development of
heat-sensitive gene- based biological agents for treatment of cancer. The
agreements provide for research at various fixed costs for one-year periods
ending in February, 1999, can be renewed, and can be terminated by either party
on 60 days notice after such renewal. Under the agreements, Duke is obligated to
disclose promptly to the Company any new invention, development or discovery
resulting from the subject research, and the Company is granted a cost-free
option, exercisable for a period of 90 days after notification, to enter into an
agreement for an exclusive, worldwide, royalty-bearing license for the new
8
proprietary technology. The Company paid all sums invoiced by Duke for research
work through February 1999 under the agreements. However, Duke and the Company
have been conducting discussions for the purpose of revising the research
agreements, and expect to conclude new arrangements by the beginning of August,
1999, pending which the prior research activities have been temporarily
suspended.
The Company also relies upon trade secrets and proprietary know-how,
which it seeks to protect, in part, through proprietary information agreements
with employees, consultants and others. There can be no assurance that
proprietary information agreements will not be breached, that the Company would
have adequate remedies for any such breach or that such agreements, even if
fully enforced, would be adequate to prevent third party use of the Company's
proprietary technology.
Third Party Reimbursement
-------------------------
The Company believes that third party reimbursement will be essential
to commercial acceptance of the Deep Focused Heat Systems and Microfocus BPH
System procedures, and that overall cost effectiveness and physician advocacy
will be keys to obtaining such reimbursement. The Company believes that its
procedures can be performed for substantially lower total cost than surgical
treatments for BPH or cancer or continuous drug therapy. Consequently, the
Company believes that third party payers seeking procedures that provide quality
clinical outcomes at lower cost will help drive acceptance of the Company's
products.
The Company's strategy for obtaining reimbursement in the United
States is to obtain appropriate reimbursement codes and perform studies in
conjunction with clinical studies to establish the efficacy and cost
effectiveness of the procedures as compared to surgical and drug treatments for
BPH and cancer. The Company plans to use this information when approaching
health care payers to obtain reimbursement authorizations.
With the increasing use of managed care and capitation as a means to
control health care costs in the United States, the Company believes that
physicians may view the Company's products as a tool to treat efficaciously BPH
and cancer patients at a lower total cost, thus providing them with a
competitive advantage when negotiating managed care contracts. This is
especially important in the United States, where a significant portion of the
aging Medicare population is moving into a managed care system.
Subject to regulatory approval for the Deep Focused Heat Systems to
treat cancer and the new Microfocus BPH System to treat BPH, it is anticipated
that physicians will submit insurance claims for reimbursement for the procedure
to third party payers, such as Medicare carriers, Medicaid carriers, HMOs, and
private insurers. In the United States 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 the Company's new Deep Focus Heat Systems and the new Microfocus BPH
System will be a significant factor in the Company's ability to commercialize
these systems.
The Company believes that new regulations regarding third party
reimbursement for certain investigational devices in the United States will
allow it to pursue early reimbursement from Medicare with individual clinical
sites prior to receiving FDA approval. However, the Company believes that FDA
approval will be necessary to obtain a national coverage determination from
Medicare. The national coverage determination for third party reimbursement will
depend on the determination of the United States Health Care Financing
Administration ("HCFA"), which establishes national coverage policies for
Medicare carriers, including the amount to be reimbursed, for coverage of claims
submitted for reimbursement related to specific procedures. Private insurance
companies and HMOs make their own determinations regarding coverage and
reimbursement based upon "usual and customary" fees. Reimbursement experience
with a particular third party payor does not reflect a formal reimbursement
determination by the third party payor.
Internationally, reimbursement approvals for procedure utilizing the
Company's new products will be sought on an individual country basis. Some
countries currently have established reimbursement authorizations for
transurethral microwave therapy. Clinical studies and physician advocacy will be
used to support reimbursement requests in countries where there is currently no
reimbursement for such procedures.
Commercial Design and Manufacturing
-----------------------------------
The Company believes it is best suited to conduct basic research and
development, pursue a development idea through clinical testing and regulatory
approval and market the final product. The Company intends to outsource the
development of a commercial product from its development stage product and the
actual manufacture of the commercial product. The Company has engaged Herbst
Lazar Bell, Inc. to develop the commercial versions of its future products. See
"Certain Transactions". It is intended that manufacture of future products will
be contracted to manufacturers who are currently being solicited for interest
and cost estimates. The Company will continue to produce their prototype
products at the Company.
9
The Company's existing prototype BPH treatment devices were designed
and manufactured by the Company. The Company does not use raw materials in its
business. The Company produces its prototypes from a number of components, which
it either builds itself or purchases from various suppliers. Items such as power
supplies, thermocouple sensors, microprocessors and other circuit board
components are generally available from a number of competitive suppliers.
Certain specialized microwave and thermometry components and applicator
materials, and the catheter unit used for the Company's BPH equipment, are now
purchased only from single or limited source suppliers because of the small
quantities involved, but such supply sources could be duplicated or replaced if
necessary. While the Company has not experienced any significant difficulties in
obtaining such components, the loss of an important current supplier could
require the Company to obtain a replacement supplier, which might result in
delays and additional expense in the production of equipment. In the future, and
assuming that the Company's need for components will increase, the Company will
seek to develop multiple source suppliers.
Competition
-----------
(1) Thermotherapy For Cancer
The Company believes that there are at least six other domestic firms,
as well as a number of foreign firms, producing, or designing and intending to
produce, thermotherapy systems to treat cancer. Of those firms, at least four
have obtained PMA for their machines and several have obtained IDE for their
machines. Some, and possibly all of those firms, have greater resources than
those which the Company now has or may reasonably be expected to have in the
near future. Other firms not presently in competition with the Company may
decide to produce thermotherapy systems which compete with those of the Company.
At least some of those firms may reasonably be expected to have resources
greater than those of the Company. As acceptance of thermotherapy as a cancer
treatment increases, the Company expects that the competition will also
increase.
The two major competitors of the Company are BSD Medical Corporation
in Salt Lake City, Utah ("BSD"), and Labthermics Technology, Inc. in Champaign,
Illinois ("Labthermics"), each of which manufactures thermotherapy machines
competitive with the Company's current Microfocus 1000. The major factors in
competition for sales of thermotherapy equipment are product performance,
product service, and product cost. The system manufactured by BSD uses microwave
technology. Labthermics uses ultrasound technology to heat the cancer site.
BSD received its FDA approval in 1983 and was allowed to begin
marketing its system at that time. To date, BSD has sold approximately 200
thermotherapy systems worldwide and has a much larger presence in the
thermotherapy market than has the Company.
(2) Product Service, Warranty and Training
Service in the thermotherapy business includes maintenance of the
thermotherapy machines to minimize downtime as well as training for personnel
who will utilize the machines to render treatment to patients. The Company has
warranty and service policies which are competitive within the industry. The
Company's warranty for the Microfocus 1000 is for a period of 12 months and the
Company offers a service policy following expiration of the warranty. The
Company no longer markets the Microfocus 1000, and its warranty obligations on
virtually all Microfocus 1000 machines previously sold have expired. On the
Company's new products, it plans to offer warranties substantially similar to
the warranties and service policies offered by competitors. The Company has
provided, and will in the future, three to four days of training for the
personnel who will be operating each machine that the Company places at a
treatment center. The Company also has provided, and will provide in the future
training programs at its facility in Maryland for doctors who desire to receive
training on the Company's products. Both training courses are helpful in
marketing the Company's products, because users who become familiar with one
machine have a reluctance to switch to another machine which would require
additional training. For this reason, the Company will seek to increase the
frequency of its training sessions given at its facility in Maryland.
(3) Thermotherapy For Prostatic Diseases
The Company believes there are as many as 10 companies in the USA and
as many as 15 companies worldwide that are planning to enter or already active
in the prostatic device market marketplace.
In 1996, the FDA for the first time approved a microwave-based BPH
treatment device manufactured by Technomed, called "Prostatron." In addition,
10
Urologix and Dornier recently received FDA approval on their BPH systems. These
approvals should enhance market acceptance of microwave BPH treatment systems
both in the United States and abroad but gives Technomed a competitive advantage
of being first to the market in the United States. The Company's new BPH system
has not been approved by the FDA for sale in the United States. The Company has
obtained an IDE approval from the FDA for clinical trials at the Montefiore
Medical Center.
Large companies such as Dornier, Olympus, and Technomed are expected
to spend large amounts of resources for marketing and development of BPH
products. In addition to the above companies, the following are companies
offering BPH thermotherapy systems in the worldwide marketplace: BSD, Direx
Medical, Technomatix (Primus), Lund Science, Quantum, GENEMED, Bruker, and
Meditherm. There are several other companies which have not yet brought their
products to the international marketplace. Presently, Technomed is considered
the market leader with its Prostatron system. The Prostatron unit is a high cost
system which sells for approximately U.S. $300,000. Other companies are
marketing their systems in the range of US $100,000 to $300,000. To date, it is
believed there are over 600 installed BPH Systems worldwide of which Technomed
and Direx have the largest share of approximately 30% combined. There are
approximately 75 of the Company's older Microfocus BPH Systems installed
worldwide.
Government Regulation
---------------------
(1) United States Regulation
In the United States, the FDA regulates the sale and use of medical
devices, which include the Company's thermotherapy systems for both cancer and
BPH. A company introducing a medical device in the United States must go through
a two step process. The company must first obtain an Investigational Device
Exemption ("IDE") permit from the FDA. An IDE is granted upon the manufacturer
adequately demonstrating the safety of the device for patient use. Receipt of
the IDE allows the use of the device on patients for the purpose of obtaining
efficacy confirmation. A PMA is granted upon compilation of sufficient clinical
data to establish efficacy for the indicated use of the device. This process is
not only time consuming but is also expensive. Obtaining PMA is a significant
barrier to entry into the thermotherapy market. Firms which lack PMA face
significant impediments to the successful marketing of their thermotherapy
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 (the "FCC") regulates the
frequencies of microwave and radio-frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The frequency of 915 MHZ has been approved by the FCC
for medical applications and machines utilizing that frequency do not require
shielding to prevent interference with communications. The Microfocus 1000 and
the Microfocus BPH System utilize the 915 MHZ frequency.
In December 1984, the Health Care Financing Administration ("HCFA")
approved reimbursement under Medicare and Medicaid for thermotherapy treatment
when used in conjunction with radiation therapy for the treatment of surface and
subsurface tumors. At this time, most of the large medical insurance carriers in
the United States have approved reimbursement for such thermotherapy treatment
under their health policies. Thermotherapy treatment administered using
equipment which has received 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 regulations in the production and sale of
medical products. The Company believes that it is substantially in compliance
with FDA regulations governing the manufacturing and marketing of medical
devices. The Company has received a PMA from the FDA for its Microfocus 1000
cancer treatment equipment for surface and sub-surface tumors in conjunction
with radiation. The Company is seeking a new indication of use to enable this
equipment to be used for breast cancer ablation.
(2) Foreign Regulation
Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory requirements. Export
sales of investigational devices that are subject to PMA requirements and have
not received FDA marketing approval generally may be subject to FDA export
permit requirements under the Federal Food, Drug and Cosmetic Act ("FDC Act")
depending upon, among other things, the purpose of the export (investigational
or commercial) and on whether the device has valid marketing authorization in a
country listed in the FDA Export Reform and Enhancement Act of 1996. In order to
obtain such a permit, when required, the Company must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the device has the approval of the
country. In addition, the FDA must find that exportation of the device is not
contrary to the public health and safety of the country in order for the Company
to obtain the permit.
11
The Company has sold products in approximately twenty selected
countries in Asia, Europe, and South America. Meeting the registration
requirements within these countries is the sole responsibility of the
distributors in each of these countries. Legal restrictions on the sale of
imported medical devices vary from country to country. The time required to
obtain approval by a foreign country may be longer or shorter than that required
for FDA approval, and the requirements may differ. The Company expects to
receive approvals for marketing in a number of countries outside the United
States prior to the time that it will be able to market its products in the
United States. The timing for such approvals is not known.
Product Liability and Insurance
-------------------------------
The business of the Company entails the risk of product liability
claims. Although the Company has not experienced any product liability claims to
date, any such claims could have an adverse impact on the Company. In the past,
the Company had not maintained product liability insurance. Recently, the
Company has secured product liability insurance in the amount of $5,000,000 and
directors and officers insurance in the amount of $3,000,000. There is no
assurance, however, that claims will be covered by such insurance and will not
exceed such insurance coverage limits.
Employees
---------
As of September 30, 1998, the Company had six full-time employees. None
of the Company's employees is represented by a collective bargaining
organization. The Company considers its relations with its employees to be good.
ITEM 2. PROPERTIES
The Company's corporate headquarters consists of approximately 5,918
square feet of office, laboratory and production space at 10220-I Old Columbia
Road, Columbia, Maryland 21046-1705. The Company leases the premises from an
unaffiliated party on a three year lease which will terminate on May 31, 2000.
Monthly rent is $5,779.91.
ITEM 3. LEGAL PROCEEDINGS
The Company presently is not a party to any litigation, and the
Company is not aware of any threat of litigation, except as follows:
The Company was named as a defendant in a lawsuit filed by Eastwell
Management Services, Ltd. ("Eastwell") in the United States District
Court for the District of Maryland claiming, inter alia, breach of
contract. On December19, 1998, the U.S. District Court of Maryland
found in favor of the Company. In a related decision the U.S. District
Court of Maryland also found in favor of the Company regarding its
countersuit, concluding that the Company is entitled to $100,000 from
Eastwell, which breached the original contract between the two
parties. The Company intends to pursue all legally possible avenues to
collect the $100,000 from Eastwell.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 27, 1998 the Company held its Annual Shareholders meeting.
Listed below are the names of the seven directors elected at the meeting and
their respective terms of office.
Name Term Expires
----- ------------
Spencer J. Volk 2001
Augustine Y. Cheung 2001
Warren C. Stearns* 1999
Walter B. Herbst 2000
Mel D. Soule* 2000
12
Name Term Expires
---- ------------
Max E. Link 2001
` John Mon 1999
* Messrs. Stearns and Soule resigned from the Board of Directors of the Company
in July 1998. Listed below is the vote count related to the other matters
approved at the meeting:
Proposition For Against Abstain
----------- --- ------- -------
To approve an amendment to the Company's by-laws 28,531,934 171,083 142,050
adopting a staggered board of directors.
To ratify the appointment of Stegman & Company as 32,186,822 5,425 152,768
auditors to examine the Company's accounts for the fiscal
year ending September
30, 1998.
To amend the Company's Articles of Incorporation to 31,672,167 466,873 205,975
increase the number of authorized shares to 100,000,000
shares.
To amend the Company's Articles of Incorporation to 32,016,210 112,147 216,658
change the Company's name to Celsion Corporation or
variations thereof approved by the Directors.
To approve an omnibus stock option plan. 27,626,867 357,943 418,451
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market.
Prices for the Company's shares are quoted in the Electronic Bulletin Board
operated by NASDAQ. The quotations set forth below reflect inter-dealer prices,
do not include retail markups, markdowns or commissions, and may not necessarily
represent actual transactions. There were approximately 1,298 holders of record
of the Common Stock as of December 8, 1998. The Company has never paid cash
dividends on its stock and does not expect to pay any cash dividends in the
foreseeable future.
September 30
------------
Period 1997 1998
------ ---- ----
High Low High Low
---- --- ---- ---
1st Quarter (Oct.1 to Dec. 31) $1.13 $0.69 $1.13 $0.75
2nd Quarter (Jan. 1 to March 31) 0.81 0.56 1.03 0.69
3rd Quarter (April 1 to June 30) 0.94 0.48 0.90 0.36
4th Quarter (July 1 to Sept. 30) 1.31 0.63 0.52 0.21
Issuance of Shares Without Registration
During the fourth quarter of the fiscal year ended September 30, 1998,
the Company issued the following securities without registration under the
Securities Act of 1933, as amended (the "Securities Act"):
13
1. During the quarter, the Company issued 2,006,238 shares to 11
persons in satisfaction of previously outstanding debt and
contractual obligations totaling $650,271. The issuance was
made to a limited number of accredited investors. Messrs.
Spencer Volk, Augustine Cheung, and Herbst Lazar Bell, Inc.
were three of the investors. No commissions were paid with
respect to the conversions. The Company believes the issuance
was exempt from registration under the Securities Act pursuant
to Sections 4(2) or 4(6) of the Securities Act and Regulation
D promulgated thereunder.
2. During the quarter, the Company issued 580,000 shares to 7
accredited investors for cash consideration totaling $145,000.
The issuance was made to a limited number of accredited
investors. No commissions were paid with respect to the
issuance, but finders fees of $4,500 were paid to persons who
introduced the Company to certain investors. The Company
believes the issuance was 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. During the quarter, the Company issued 73,866 shares to its
current and certain past directors as directors fees and
certain members on the Scientific Advisory Board for their
services. Such shares were valued at a total of $23,637. The
issuance was made to a limited number of accredited investors.
No commissions were paid with respect to the issuance. The
Company believes the issuance was exempt from registration
under the Securities Act pursuant to Sections 4(2) or 4(6) of
the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes certain financial data for the Company
for the years ended September 30, 1998, 1997, 1996, 1995, and 1994 and is
qualified in its entirety by, and should be read in conjunction with the
Financial Statements, the related Notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this report.
14
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues:
Product Sales (Net) $1,025,651 $157,618 $74,006 $121,257 $174,182
Research and development contracts 60,742 0 0 0 0
Total revenues $1,086,393 $157,618 $74,006 $121,257 $174,182
Cost of product sales 494,946 67,350 64,406 46,734 136,500
Gross profit on product sales 591,447 90,268 9,600 74,523 37,682
Other costs and expenses:
Research and development 202,569 18,546 94,012 185,974 1,534,872
Selling, general and administrative 704,295 1,386,854 1,321,361 2,283,245 2,515,822
Total operating expenses 906,864 1,405,400 1,415,373 2,469,219 4,050,694
Profit(Loss) from operations (315,417) (1,315,132) (1,405,773) (2,394,696) (4,013,012)
Other income (expense) 170,997 8,620 (442,192) (471,631) (2) 11,870
(1)
Interest income (expense) (184,700) (90,805) (85,506) (185,562) (199,346)
Extraordinary Item - Gain on forgiveness
of debt 591,728
Net income (loss) 390,880 (1,397,317) (1,933,471) (3,051,889) (4,200,488)
Net Income (loss) per share $.02 ($.06) ($0.05) ($0.11) (0.12)
Weighted average shares outstanding 16,712,978 23,466,070 39,499,650 28,386,145 34,867,001
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Working Capital (748,193) (1,101,136) (646,754) (2,645,908) (2,000,351)
Total Assets 955,456 9,710,742 (3) 9,321,600 (4) 823,209 330,738
Long-term debt, less current maturities 26,000 2,000 1,213,000 0 5,719
Redeemable Convertible Preferred Stock
Accumulated deficit (8,880,845) (10,278,162) (12,211,633) (15,263,522) (19,464,010)
Total stockholders' equity (deficit) (666,542) 8,128,768 6,755,874 (3) (2,460,646) (1,851,077)
(1) Includes $17,009 gain on disposition of investment in Ardex
Equipment, L.L.C.
(2) Includes $438,803 loss on write off of Ardex Notes Receivable.
(3) Includes the Company's equity interest in Aestar Fine Chemical
Company valued at $8,000,000 on the Company's September 30,
1995 balance sheet.
(4) On October 23, 1996, the Company, based on the provisions of
an agreement reached on June 6, 1996, as amended, redeemed
16,000,000 shares of its Common Stock. The redemption provided
for the Company to return its investment in Aestar Fine
Chemical Company (valued at $8,000,000 on the Company's
September 30, 1996 balance sheet) and to relinquish its rights
to the funds held under an investment contract ($40,000 at
September 30, 1996) in order to effect the transaction. This
transaction has a significant impact on the financial
position, current ratios and stockholder's equity of the
Company. If the foregoing transaction had occurred on or
before September 30, 1996, total assets would have been
reduced by $8,040,000 and stockholder's equity would have
reduced by $8,040,000, resulting in a negative stockholder's
equity of ($1,284,126).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Forward-Looking Statements
Statements regarding the Company's expectations as to the effectiveness
of its technology, demand for its products and certain other information
presented in this amendment to the Company's Form 10-K constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Company believes that its expectations are
15
based on reasonable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results will not
differ materially from its expectations. Factors which could cause actual
results to differ from expectations include, but are not limited to, the
following:
1. Decreasing Sales, Increasing Losses and Undercapitalization.
The Company's product sales have been substantially decreasing
over the past three years as the Company pursued its new
technologies and ceased marketing of its older Microfocus 1000
product. Assuming approval of the new technologies by the
appropriate government agencies, the Company expects revenue
to increase in the future. However, there is no assurance
sales will increase with the application of new technologies
being developed by the Company. The Company has had increasing
losses which have resulted in an accumulated deficit of
$19,464,010 as of September 30, 1998. Losses will continue
until current and future sales increase substantially. The
Company lacks adequate capital to finance its research and
development and marketing. Lack of adequate capital and
governmental regulatory approvals will affect future sales.
2. Acceptance of Products. Thermotherapy has not been accepted by
the medical community as an effective cancer treatment. The
Company believes that this is primarily due to the inability
to adequately focus heat prior to introduction of the
Company's APA technology. The Company believes the APA
technology allows microwave energy to be accurately targeted
deep within the body, resulting in heating a well defined
target area without damaging surrounding tissue. The medical
community may not embrace the advantages of APA-focused
thermotherapy without more extensive testing and clinical
experience than the Company could afford to conduct. It is
also possible that the technology will not be as effective in
practice as theory and testing in animals have indicated.
Similarly, the medical community has no experience with
balloon catheter treatment for BPH.
3. Limited Products. The Company currently has a limited number
of products. Failure to develop new products utilizing current
products and newly acquired technology would affect the future
profitability of the Company. The development of new products
and application of new technology to existing products is
subject to uncertainty and delay.
4. Lack of a Proven Marketing Plan. The Company intends to market
its new products by concentrating on per-use revenue. Such
plan has not been proven and is dependant on market acceptance
and adequate capitalization.
General
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 system and PMA application for submission to the FDA.
The Company believes these expenditures are essential for the commercialization
of its technologies. The Company has experienced significant operating losses
and as of September 30, 1998 had an accumulated deficit of $19,464,010. The
Company expects such operating losses to continue and possibly increase in the
near term and for the foreseeable future as it continues its product development
efforts, expands its marketing and sales activities and scales up its
manufacturing operations. The Company's ability to achieve profitability is
dependent upon its ability to successfully obtain governmental approvals,
manufacture, market and sell its new technology and integrate such technology
into its thermotherapy systems. The Company has not been able to successfully
market its current thermotherapy system because of its inability to provide heat
treatment for other than surface and sub- surface tumors. There can be no
assurance that the Company will be able to successfully commercialize its newly
acquired technology and apply it to its current thermotherapy systems or that
profitability will ever be achieved. The operating results of the Company have
fluctuated significantly in the past on an annual and a quarterly basis. The
Company expects that its operating results will fluctuate significantly from
quarter to quarter in the future and will depend on a number of factors, many of
which are outside the Company's control.
The major obstacles facing the Company over the last several years
have been inadequate funding, a negative net worth, and the slow development of
the thermotherapy market as a sizeable market due to technical shortcomings of
the thermotherapy equipment available commercially.
The Company has refocused the Company's efforts on the enhancement of
current products through the development of new technology and sale of the
thermotherapy products as the Company's core business. The Company is currently
16
focused on the enhancement of its thermotherapy equipment and obtaining
governmental approvals. Towards this end the Company has licensed the APA
technology and the MMTC technology.
The Company anticipates that its results of operations will be
affected for the foreseeable future by a number of factors, including its
ability to develop the new technology to enhance its current systems, regulatory
matters, health care cost reimbursements, clinical studies and market
acceptance.
Material Non-Operating Transactions and Losses in 1997 and 1996
For the year ended September 30, 1997, the Company had an
extraordinary loss of $(438,803) resulting from its 1996 investment in Ardex
Equipment, LLC ("Ardex"). The Ardex investment arrangements were originally made
with persons who were then directors of the Company and principals of Ardex, as
described under "Certain Relationships and Related Transactions -- Recission of
Ardex Acquisition". After Ardex experienced financial difficulties, the Company
reviewed the financial status of Ardex and determined that $438,803,
representing the entire amount due from Ardex, including accrued interest, was
uncollectible as of September 30, 1997. See Note 10 of Notes to Financial
Statements.
For the September 30, 1996 fiscal year, the Company had a
non-operating loss of $(471,000) resulting from the recission of agreements to
acquire an interest in Aestar Fine Chemical Company and to develop a cosmetics
division in association with Mr. Gao Yu Wen, who had become a substantial
stockholder of the Company in 1995, as described under "Certain Relationships
and Related Transactions -- Redemption Agreement." In addition, in the 1997
fiscal year, Company incurred a non-operating loss of $40,000 on Company funds
which were to be invested by Mr. Gao. See Note 11 of Notes to Financial
Statements.
Results of Operations
Comparison of Fiscal Year Ended September 30, 1998 to Fiscal Year Ended
September 30, 1997
Product sales for the fiscal year ended September 30, 1998 ("fiscal
1998") were $174,182. These sales occurred due to re-orders of the Company's
original equipment. During the prior fiscal year, gross product sales, taking
returns and allowances into consideration, were $121,257. Significant product
revenues are not expected until development of equipment incorporating the
Company's new technologies is completed and such equipment is clinically tested
and receives necessary approvals from governmental regulatory agencies.
Cost of sales increased to $136,500 in fiscal 1998 from $46,734 in
fiscal 1997. Cost of sales as a percentage of sales increased over the prior
period because newer components and enhancements were added to existing
inventory in conjunction with upgrading the Company's products to incorporate
the latest technology.
Research and development expense grew substantially to $1,534,872 in
fiscal 1998 from $185,974 in fiscal 1997. During fiscal 1998 we increased our
research and development efforts to enhance our products and to incorporate APA
and other technological advances. The increases included $561,238 for
engineering work performed outside the Company on our breast cancer treatment
device, $289,868 for animal studies for our improved BPH system, $245,976 for
animal studies and other development work on our new breast cancer equipment and
$76,000 for work at Duke University in connection with the development of
targeted drug delivery and gene-therapy technology. In addition, after a review
of the Company's inventory, approximately $175,000 of components and parts
acquired in the course of developing our older equipment, including slower,
DOS-based electronic components, were deemed to be unusable for the development
of the Company's newer models which incorporate advanced microwave and other
technology, and were therefore classified as obsolete and written off as
additional research and development expense during fiscal 1998. The Company
expects to continue its higher levels of expenditures for research and
development in order to continue to enhance its products by incorporating APA
technology and MMTC technology.
Selling, general and administrative expense increased to $2,515,822 in
fiscal 1998 from $2,283,245 in fiscal 1997. Such increased expense included a
write-off of approximately $112,000 of inventory stocked as replacement parts
for older equipment sold in prior years by the Company, which inventory was
being carried at the lower of cost or market value and which was determined to
have no appreciable market value at year-end because of the absence of demand.
The remainder of the increase was attributable to a combination of somewhat
higher outside consultant, advertising and administrative expense. The Company
expects selling and marketing expense to increase substantially as it completes
the development and testing of its new thermotherapy systems and expands its
related advertising, and promotional and marketing activities.
17
Due mainly to the ramping up of research and development activities in
the 1998 fiscal year, the loss from operations increased by $1,618,316 to
$(4,013,012) from $(2,394,696) in the prior year. However, the increase in the
1998 loss before income taxes was not as large compared with 1997 because of the
non-operating losses reflected in the earlier year as described above.
Comparison of Fiscal Year Ended September 30, 1997 to Fiscal Year Ended
September 30, 1996
Product sales for the fiscal year ended September 30, 1997 were
$121,257, compared with prior year product sales of $134,006, reduced to $74,006
after returns and allowances of $60,000. Significant product sales were not
expected until equipment incorporating the Company's new technologies is
developed, tested and approved for sale by governmental regulatory agencies.
Cost of sales decreased to $46,734 in fiscal 1997 from $64,406 in
fiscal 1996. This primarily reflects the decrease in gross sales. The Company
does not believe that fluctuations in gross margin are meaningful at the current
low level of sales.
Research and development expense increased to $185,974 in fiscal 1997
from $94,012 in fiscal 1996, reflecting increased activity in the development of
the Company's new products. The Company's plans call for significant increases
in its expenditures for research and development to support its new product
efforts and the incorporation of the APA technology and the MMTC technology.
Selling, general and administrative expense in fiscal 1997 rose to
$2,283,245 from $1,321,361 in fiscal 1996, an increase of 73%. Of this increase,
approximately $377,000 was attributable to compensation paid under an employment
agreement with Spencer J. Volk, who became the Company's President and Chief
Executive Officer in May, 1997, of which amount $280,000 represented shares of
Common Stock issued as incentive compensation. Such increased expense for fiscal
1997 also included (i) $177,100 of executive compensation to Verle D. Blaha, the
predecessor President, compared with compensation of only $81,000 to Mr. Blaha
for the portion of the prior year during which he was employed, (ii)
compensation of $266,666 to Warren C. Stearns, formerly the Company's acting
Chief Financial Officer, compared with $66,753 for the portion of the prior year
during which he performed services, and (iii) increased legal and professional
fees. For additional information on such compensation, see Item 11, "Executive
Compensation", and Item 13, Certain Relationships and Related Transactions.
As indicated above, during fiscal 1997 the Company wrote off as
uncollectible the principal and interest receivable from Ardex in the amount of
$438,803, and, as part of its settlement with Gao Yu Wen, the Company incurred a
loss of $40,000 in funds previously held for investment by Mr. Gao.. These two
extraordinary items totaled $478,803 in non-operating expense in fiscal 1997,
compared with an extraordinary loss in 1996 of $471,000 from a terminated effort
to develop a cosmetics division.
Interest expense increased to $185,562 in fiscal 1997 from $85,506 in
fiscal 1996. This primarily reflects an increase in short term debt incurred to
finance the Company's operations.
Due mainly to the increase in selling, general and administrative
expense for the 1997 fiscal year, the loss from operations increased to
$(2,394,696) from $(1,405,773) in the prior year. The loss before income taxes
in 1997 reflected the larger interest expense compared with 1996, and both years
included expenses incurred in non-operating transactions as described above.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded
its revenues, resulting in an accumulated deficit of $19,464,010 at September
30, 1998. The Company has incurred negative cash flows from operations since its
inception, and has funded its operations primarily through the sale of equity
securities. As of September 30, 1998, the Company had cash of $ 54,920 and total
current assets of $174,735, compared with current liabilities of $2,176,086,
resulting in a working capital deficit of $(2,000,351). Net cash used in the
Company's operating activities was $ 2,112,529 for fiscal 1998.
The Company does not have any bank financing arrangements. As of
September 30, 1998, the Company's indebtedness consisted of a promissory note
payable to Yu Shai Lai in the principal amount of $36,041; a promissory note
payable to Lake Shu Loon in the principal amount of $10,000; a promissory note
payable to Charles Shelton in the principal amount of $50,000; a secured
promissory note payable to George T. Horton Trust (the "Horton Note") in the
original principal amount of $220,000, the payment of which is secured by
certain equipment owned by the Company and was due by its terms on December 15,
1997; and a promissory note payable to Spencer J. Volk in the amount of $50,000,
which was subsequently converted into 200,000 shares of the Company's Common
Stock and a Warrant to purchase 200,000 share of the Company's Common Stock (see
"Certain Relationships and Related Transactions"). At September 30, 1998, the
outstanding principal amount of the Horton Note was $18,000. The holder's
18
remedies for non-payment include foreclosing on the collateral, increasing the
interest rate to 17% per annum or converting the balance into common stock
having a market value of 200% of the note balance.
As of March, 1999, the Company had planned to raise and spend
approximately $10,000,000 for calendar 1999, of which between $5 million and $6
million was to be devoted to research and development and clinical trials for
the Company's breast cancer and BPH therapy products, and approximately $4
million was to be devoted to research and development in the areas of targeted
drug delivery, gene therapy and prostate cancer, as well as to corporate
overhead. As of July 1, 1999, the Company expects to raise and spend a total of
about $6 million for all of calendar 1999, of which $4 million is being devoted
to breast cancer and BPH research and clinical trials, and $2 million to new
products and to corporate overhead. As is indicated by the change in estimated
expenditures between March and July 1999, the foregoing amounts are estimates
based upon assumptions as to the availability of funding, the scheduling of
institutional personnel, the timing of clinical trials and other factors, not
all of which are fully predictable. Accordingly, estimates and timing concerning
projected expenditures and programs are subject to change.
Of the currently planned total expenditures of approximately $6
milllion, the Company has raised $2.3 million as of June 30, 1999, with
approximately $3.7 million remaining to be raised during the remainder of
calendar 1999. The Company recently entered into an exclusive investment banking
agreement with a brokerage and investment banking firm, looking toward the
completion of a private placement of approximately $2.5 million in August 1999,
but such offering will be made on a "best efforts" basis, and the Company does
not have any firm commitment for the offering proceeds or the additional funds
it will require later this year. If the Company cannot fund its 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 stand to lose its license
rights unless, at the time of any such breach, it could arrange for additional
time, and could obtain the funding needed, to conduct such clinical trials. If,
because of a failure to obtain funding or other cause, the Company were to
commit a breach of its license agreements, the Company could well lose any
benefit it has previously received from association with various research
institutions with which it has previously worked.
The Company's dependence on raising additional capital will continue
at least until the Company is able to begin marketing its new technologies. The
Company's future capital requirements and the adequacy of its financing depend
upon numerous factors, including the successful commercialization of the
thermotherapy systems, progress in its product development efforts, progress
with preclinical studies and clinical trials, the cost and timing of production
arrangements, the development of effective sales and marketing activities, the
cost of filing, prosecuting, defending and enforcing intellectual property
rights, competing technological and market developments, and the development of
strategic alliances for the marketing of its products. The Company will be
required to obtain such funding through equity or debt financing, strategic
alliances with corporate partners and others, or through other sources not yet
identified. The Company does not have any committed sources of additional
financing, and cannot guarantee that additional funding will be available on
acceptable terms, if at all. If adequate funds are not available, the Company
may be required to delay, scale-back or eliminate certain aspects of its
operations or attempt to obtain funds through arrangements with collaborative
partners or others that may require the Company to relinquish rights to certain
of its technologies, product candidates, products or potential markets.
Note 2 of the Notes to the Company's Financial Statements describes a
going concern uncertainty based on the continuation of substantial operating
losses and the need for substantial amounts of working capital to fund its
present and intended operations. As discussed above, the continued operation of
the Company is dependent upon the Company's ability to obtain sufficient funding
to complete clinical trials of its products, obtain FDA and other approvals, and
conduct a successful marketing campaign. As indicated in Note 2, the
continuation of the Company as a going concern and the realization of a majority
of the Company's assets is dependent upon its ability to obtain such funding.
Year 2000 Compliance
The Company is evaluating the potential impact of what is commonly
referred to as Year 2000 or Y2K issues, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company believes that all of its current medical systems
are year 2000 compliant. In addition, the Company's older medical systems,
which, with one exception, are no longer under warranty and are no longer being
serviced by the Company, have been tested and are expected to function properly
beginning January 1, 2000, for two reasons. First, the older systems' software,
operations, and control systems are not date-driven, and second, the older
systems are "stand alone" systems and, therefore, are not linked to any other
computer systems. Accordingly, in the Company's view, this equipment can
continue to function beyond January 1, 2000. The record and storage programs
used by such systems are, however, date driven, and, although not required to do
so, the Company is currently testing the record storage programs to determine
the most effective method for permitting such programs to properly record
treatment information after January 1, 2000.
19
The Company has installed accounting software that is Y2K compliant.
The Company is currently evaluating its other computerized systems. The
aggregate costs to upgrade such other systems for Y2K compliance are estimated
to be below $8,000.
The Company uses various vendors and subcontractors to provide parts
and components. The Company is surveying these vendors and subcontractors
concerning Y2K issues, but has not yet determined the extent of Y2K readiness of
these entities. The Company expects to complete a written survey of its vendors
by September 30, 1999, and the Company continues to monitor the Y2K progress of
its vendors to determine the potential impact to the Company of their Y2K
readiness or lack thereof. In addition, the Company has multiple suppliers for
most of the parts used in its APA-improved Microfocus equipment, and has been
seeking alternate sources for those items now being purchased from single
sources. To date, management does not anticipate that its Y2K readiness plans
will result in any material costs to the Company, and the Company does not view
the going concern reservation set forth in its Financial Statements as having an
impact on the Company's ability to be Y2K compliant.
As a standard precautionary step, software data generated at the
Company, by the Company, is backed- up on a daily basis. The worst case scenario
if the Company experienced computer equipment failure due to Y2K would be that
once the failed equipment was fixed, the backed-up data would have to be
reinstalled onto any fixed system. Concerning the actual operation of the
machinery, the worst case scenario would be distorted patient data recorded on
the machinery's storage unit. Nevertheless, the machine will continue to operate
properly with distorted patient records, but will require the operator of the
machinery to re-enter corrected patient information.
Although the Company does not anticipate that Y2K will have a material
impact on the Company's financial condition or its ability to operate at current
levels, it cannot guarantee that the steps taken in preparation for the year
2000 will be sufficient to avoid any adverse impact on the Company.
Risk Factors
Unfunded Research Obligations
The Company engages third party research institutions and hospitals to
perform research and clinical trials for the Company. As of September 30, 1998,
the Company entered into agreements to fund a minimum of $900,000 of research
and clinical trials through March 30, 1999. The Company does not have the
capital to fund such obligations, nor does it have commitments for such capital.
The Company recently entered into an exclusive investment banking agreement with
a brokerage and investment banking firm, looking toward the completion of a
private placement of approximately $2.5 million later in 1999, but such offering
will be made on a "best efforts" basis, and the Company does not have any firm
commitment for the offering proceeds or the additional funds it will require
later this year. There is no assurance that these funds will be raised and if
they are not raised, the clinical trials will likely be delayed or not
completed. If the Company cannot fund such obligations, it will lose the data
necessary to develop and commercialize its products. The Company may also lose
any benefit it has previously received from association with well known research
institutions.
Additional research and development spending of $4.0 million is
planned for 1999 to complete breast cancer and BPH clinical trials. It will be
necessary to raise capital to conduct these trials and there is no assurance
that this will occur as revenues are not expected to begin until the year 2000
at the earliest. If the Company is unable to fund research and development
activities which are called for in any of its license agreements, it will be in
breach of its license agreements. The Company's business plan incorporates the
planned 1998 and 1999 expenditures for research and development, and clinical
trials have been updated to include latest developments. Phase I of the BPH
clinical trials has been conducted at the Montefiore Medical Center under the
direction of Dr. Arnold Melman. The Company has submitted an IDE application to
the FDA to start the Phase I clinical trials to use its new breast cancer
treatment system to ablate breast cancer tumors through heat alone. The Company
has also applied for FDA approval of Phase I clinical trials of such breast
cancer treatment system. All of the above research is dependent on the raising
of additional capital and there is no assurance that this will be achieved.
The Company has paid Duke University a total of $134,745 for
development work through February, 1999, conducted under two sponsored research
agreements. The Company and Duke University have been negotiating a new research
agreement under which the Company expects to be obligated to pay Duke
approximately $200,000 during the remainder of 1999 and approximately $200,000
to $300,000 during 2000, for further research work in the area of heat-sensitive
liposomes. Assuming the Company enters into the anticipated agreements with
Duke, it will be required to obtain funding for these obligations. If such
funding cannot be obtained by the Company, the Company could be in breach of the
anticipated new agreement with Duke, which could result in the loss of any
ability by the Company to obtain license rights to heat-sensitive liposome and
other medical technology being developed at Duke.
20
History of Losses; Accumulated Deficit; No Assurance of Revenue or Operating
Profit
Since inception, the Company's expenses have significantly exceeded
its revenues, resulting in an accumulated deficit of $19,464,010 and a
shareholders' deficit of $1,851,067 at September 30, 1998, including losses for
the quarter ended September 30, 1998 of $678,662. The Company has funded its
operations primarily through the sale of Company securities. Losses are expected
to continue until the product enhancements have been completed and approved by
the FDA or until the Company can implement its marketing plan. The Company has
experienced diminishing revenue from product sales in recent years. There can be
no assurance that it will be able to develop such revenue sources or that its
operations will become profitable, even if it is able to commercialize any
products. The Company will be required to conduct significant research,
development, testing and regulatory compliance activities which, together with
projected general and administrative expenses, are expected to result in
substantial operating losses in the future.
Early Stage of Product Development; Continuing Uncertainty of Technology
The Company's current commercialized products have not produced any
significant profit to date and the Company believes that without successful
development of its newer technology, it is likely that future profits will not
materialize. Progress with any of the Company's potential products will require
significant further research, development, testing and regulatory clearances and
will be subject to the risks of failure inherent in the development of products
based on innovative technologies. These risks include the possibility that the
technologies used by the Company may be found to be ineffective or impractical;
that new products, even if safe and effective, could fail to receive necessary
regulatory clearances or be difficult to market; that the proprietary rights of
third parties may preclude the Company from marketing the products; or that
third parties may market superior or equivalent products. There can be no
assurance that the Company's research and development activities will result in
any commercially viable products.
The field of hyperthermia is rapidly evolving, and it is expected to
continue to undergo significant and rapid technological changes. Rapid
technological development could result in actual and proposed products,
services, or processes becoming obsolete before the Company recovers a
significant portion of its related research, development and capital expenses.
Although to date the Company has engaged in substantial research and development
efforts, the Company does not expect to be able to commercialize any products
utilizing the new technology for a number of years, if at all. The Company is
unable to predict precisely when a product might be commercialized due to
uncertainties as to the time that will be required for, and the nature of,
additional research and development, human clinical trials to assess each
potential product and satisfying government regulatory requirements.
Need for Substantial Additional Funds
It is anticipated that additional financing of approximately
$6,000,000 will be needed for 1999. In addition, the Company's cash requirements
may vary materially from those now planned because of results of research and
development, results of pre-clinical testing, relationships with collaborators,
changes in the focus and direction of the Company's research and development
programs, competitive and technological advances, the FDA's regulatory process,
and other factors. The Company has engaged an investment banking firm, looking
toward the completion of a private placement of approximately $2.5 million later
in 1999, but such offering will be made on a "best efforts" basis, and the
Company does not have any firm commitment for the offering proceeds or the
additional funds it will require later this year. The Company is dependent on
raising new capital to fund operations to commercialize its products and to
satisfy the commitments made by the Company for 1998 and 1999, as revenues are
not expected to begin until late 1999 at the earliest, with early year 2000
being more likely. Failure to meet commitments may result in a loss of licensed
technology. There is no assurance that adequate funds for these purposes,
whether obtained through the financial markets, collaborative or other
arrangements with corporate partners, or from other sources, will be available
when needed or on terms acceptable to the Company. Insufficient funds may cause
the loss of licenses on new technology and may require the Company to delay,
scale back, or eliminate certain of its research and product development
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop or commercialize itself.
Dependence upon Key Personnel and Collaborators
The Company's success depends (i) on the continued contributions of its
executive officers, scientific and technical personnel, and consultants and (ii)
on the Company's ability to attract new personnel as the Company seeks to
implement its business strategy. During the Company's limited operating history,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. The competition for qualified personnel is intense,
and the loss of services of certain key personnel could adversely affect the
business of the Company. There are no employment agreements with any of current
management other than Mr. Spencer J. Volk, the Company's Chief Executive Officer
and President.
21
Competition
There are many companies and institutions that are conducting research
and development activities on thermotherapy technologies for both oncology and
prostate products that are similar to the efforts of the Company. The Company
believes that the interest in investigating the potential of thermotherapy
technologies will continue and may accelerate. Competitors engaged in all areas
of cancer and prostate treatment in the United States and other countries are
numerous and include, among others, major pharmaceutical and chemical companies,
specialized technology companies, universities, and other research institutions.
There can be no assurance that the Company's competitors will not succeed in
developing products or other technologies that are more effective than any which
have been or are being developed by the Company or which would render the
Company's technology and products obsolete and non-competitive.
Many of the Company's actual and potential competitors have
substantially greater financial, technical, human, and other resources. In
addition, many of these competitors have significantly greater experience than
the Company in undertaking preclinical testing and human clinical trials of new
products and obtaining FDA and other regulatory approvals. Accordingly, certain
of the Company's competitors may succeed in obtaining FDA approval for products
more rapidly than the Company. Furthermore, if the Company is permitted to
commence commercial sales of products, it will also be competing with respect to
manufacturing efficiency and marketing with companies having greater resources
and experience in these areas. The Company currently has limited experience in
these areas.
Uncertain Ability to Protect Proprietary Technology
As indicated above under "Patents and Proprietary Rights," the Company
owns no patents but holds various license rights under eight patents held by
others. Accordingly, the Company's success will depend, in part, on its ability
to maintain license agreements on patented technology. No assurance can be given
that any patents issued to or licensed by the Company will not be successfully
challenged or circumvented by others, or that the rights granted will provide
adequate protection to the Company. The Company is aware of patent applications
and issued patents belonging to competitors and it is uncertain whether any of
these, or patent applications filed of which the Company may not have any
knowledge, will require the Company to alter its potential products or
processes, pay licensing fees, or cease certain activities. Litigation, which
could result in substantial cost to the Company, may also be necessary to
enforce any patents issued to or licensed by the Company or determine the scope
and validity of others' claimed proprietary rights. The Company also relies on
trade secrets and confidential information that it seeks to protect, in part, by
confidentiality agreements with its corporate partners, collaborators,
employees, and consultants. There can be no assurance that these agreements will
not be breached, that the Company would have adequate remedies for any such
breach, or that the Company's trade secrets will not otherwise become known or
be independently discovered by competitors.
Technological Change
Various modalities for the treatment of cancer are the subject of
extensive research and development. Many possible treatments which are being
researched may not be amenable to enhancement with the Company's technology, or
may not require thermotherapy for an effective cure. The development and
acceptance of any such treatment could make the Company's technology obsolete.
No Assurance of FDA Approval; Government Regulation
The FDA and comparable agencies in foreign countries impose
substantial requirements upon the introduction of medical products through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures. Satisfaction of these
requirements typically takes several years or more and varies substantially
based upon the type, complexity, and novelty of the product.
The effect of government regulation may be to delay marketing of new
products for a considerable period of time, to impose costly procedures upon the
Company's activities, and to furnish a competitive advantage to larger companies
that compete with the Company. There can be no assurance that FDA or other
regulatory approval for any products developed by the Company will be granted on
a timely basis or at all. Any such delay in obtaining, or failure to obtain,
such approvals would adversely affect the marketing of any contemplated products
and the ability to earn product revenue. Further, regulation of manufacturing
facilities by state, local, and other authorities is subject to change. Any
additional regulation could result in limitations or restrictions on the
Company's ability to utilize any of its technologies, thereby adversely
affecting the Company's operations.
22
License Agreements for Patented Technology
The Company has entered into exclusive license agreements with
Massachusetts Institute of Technology (the "MIT Agreement") and MMTC, Inc. (the
"MMTC Agreement") for the use of certain patented technologies. The MIT
Agreement and the MMTC Agreement each contain license fee and royalty
requirements and other performance requirements which the Company must meet by
certain deadlines with respect to the use of the patented technologies. If the
Company were to breach the MIT Agreement or the MMTC Agreement, the Company
would lose its rights to the respective licensed technology and would not
receive compensation for its efforts in developing or exploiting the technology.
In March 1998, the Company entered into two sponsored research
agreements with Duke University pursuant to which the Company has agreed to pay
Duke University for all direct and indirect costs incurred in the performance of
the research contemplated under such agreements not to exceed $625,062 and Duke
University has agreed to grant to the Company an option (the "Option") to
acquire an exclusive, worldwide, royalty bearing license of Duke University's
rights to any invention, development, or discovery resulting from the subject
research. The Company paid all sums invoiced by Duke for research work through
February 1999 under the agreements. However, Duke and the Company have been
conducting discussions for the purpose of revising the research agreements, and
expect to conclude new arrangements by the beginning of August, 1999, pending
which the prior research activities have been temporarily suspended.
Uncertain Availability of Health Care Reimbursement
The Company's ability to commercialize thermotherapy products
successfully will depend in part on the extent to which reimbursement for the
costs of such products and related treatments will be available from government
health administration authorities, private health insurers and other third-party
payors. Significant uncertainty exists as to the reimbursement status of
newly-approved medical products. There can be no assurance that adequate
third-party insurance coverage will be available for the Company to establish
and maintain price levels sufficient for realization of an appropriate return on
its investment in developing new therapies. Government, private health insurers,
and other third-party payors are increasingly attempting to contain health care
costs by limiting both coverage and the level of reimbursement for new
therapeutic products approved for marketing by the FDA. If adequate coverage and
reimbursement levels are not provided by government, private health insurers,
and third-party payors for uses of the Company's products, the market acceptance
of these products would be adversely affected.
Uncertainty Related to Health Care Reform Measures
There have been a number of federal and state proposals during the
last few years to subject the pricing of health care goods and services to
government control and to make other changes to the health care system of the
United States. It is uncertain what legislative proposals will be adopted or
what actions federal, state, or private payors for health care goods and
services may take in response to any health care reform proposals or
legislation. The Company cannot predict the effect health care reforms may have
on its business, and no assurance can be given that any such reforms will not
have a material adverse effect on the Company.
Applicability and Adequacy of Product Liability Insurance Coverage
The Company's business exposes it to potential product liability risks
which are inherent in the testing, manufacturing, and marketing of human
therapeutic products. Recently, the Company has secured product liability
insurance in the amount of $5,000,000 and directors and officers insurance in
the amount of $3,000,000. There is no assurance, however, that claims will be
covered by such insurance and will not exceed such insurance coverage limits.
Limited Manufacturing Experience
The Company has only limited experience in producing its current
products (approximately 84 BPH systems and 31 cancer systems worldwide) and has
not produced any products utilizing the new technology. The Company's facilities
comply with FDA's Good Manufacturing Practices ("GMP"). The facilities of
certain of its contract manufacturers will need to comply with applicable
regulations including the GMP regulation and other regulations. Failure to
comply with applicable requirements and regulations by the Company's contract
manufacturers could delay or prohibit manufacturing of the new products system,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. Any increase in production rates in
response to demand for the Company's products could adversely impact the ability
of the Company or its contract manufacturers to comply with such requirements.
23
Contract Manufacturing; Dependence Upon Key Suppliers
The Company is not currently manufacturing any products but is using
its facilities to assemble prototypes of its new equipment for research and
development purposes. Certain specialized microwave and thermometry components
and applicator materials, and the catheter unit used for the Company's BPH
equipment, are now purchased only from single or limited source suppliers
because of the small quantities involved, but such supply sources could be
duplicated or replaced if necessary. While the Company has not experienced any
significant difficulties in obtaining such components, the loss of an important
current supplier could require the Company to obtain a replacement supplier,
which might result in delays and additional expense in being able to make
prototype equipment available for clinical trials and other research purposes.
Possible Volatility of Share Price
Market prices for securities of medical and high technology companies
have been volatile. Factors such as announcements of technological innovations
or new products by the Company or its competitors, government regulatory action,
litigation, patent or proprietary rights developments, and market conditions for
medical and high technology stocks in general could have a significant impact on
any future market for the Common Stock. The volatility of the Company's stock
may also be affected by the lack of stock analyst coverage of the Company and
the factors described at "-- NASDAQ Listing Requirements; Risks of Low-Priced
Stocks" below.
NASDAQ Listing Requirements; Risks of Low-Priced Stocks
The Company's Common Stock is currently traded through the OTC
Electronic Bulletin Board. In the future, when it anticipates that it would be
able to meet listing requirements, the Company intends to apply have its Common
Stock listed on the NASDAQ SmallCap Market. At the present time, such a listing
application would require, among other criteria, net tangible assets of at least
$4 million, a market capitalization of at least $50 million, or net income of at
least $750,000, while the Company had, as of September 30, 1998, a net tangible
deficit of $(1,851,067), market capitalization of only approximately $12
million, and a net loss of $(4,200,488). Accordingly, absent a substantial
change in the Company's financial condition, such as a large infusion of equity
capital, there is little liklihood that the Company will be able to meet such
listing requirements in the near future. If the Company is unable to satisfy
NASDAQ's initial listing criteria in the future, its securities will continue to
be traded through the Electronic Bulletin Board or the Pink Sheets.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure in connection with trades in any stock defined as a penny
stock. Regulations generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
Such exceptions include any equity security listed on NASDAQ and any equity
security issued by an issuer that has (i) net tangible assets of at least
$2,000,000, if such issuer has been in continuous operation for three years,
(ii) net tangible assets of at least $5,000,000, if such issuer has been in
continuous operation for less than three years, or (iii) average annual revenue
of at least $6,000,000, if such issuer has been in continuous operation for less
than three years.
If the Company's securities are not quoted on NASDAQ, or the Company
does not have $2,000,000 in net tangible assets, trading in the Company's
securities will continue to be covered by Rules 15g-1 through 15g-6 promulgated
under the Exchange Act for non-NASDAQ and non-exchange listed securities. Under
such rules, broker-dealers who recommend such securities to persons (other than
established customers and accredited investors) must make a special written
suitability determination that the penny stock is a suitable investment for the
purchaser and must receive other information from the purchaser.
Market Overhang from Warrants and Outstanding Options; Registration Rights
As of September 30, 1998, the Company had outstanding commitments to
issue shares to management, and outstanding options and warrants to purchase
shares in, an aggregate amount of approximately 13,053,983 shares of Common
Stock, a significant portion of which are exercisable at exercise prices
substantially below the current market price. In addition, this number does not
reflect additional shares that may be issued pursuant to anti-dilution
provisions. To the extent that such shares are issued, or such warrants or
options are exercised, dilution to the interests of the Company's stockholders
may occur. In the event that the market value of the Common Stock decreases
significantly, the offering price in the Company's private placements or public
offerings may be similarly affected. If this occurs, the number of shares
issuable on exercise of certain options or warrants may significantly increase,
thereby increasing the dilutive effect on other shareholders. Exercise of these
options or warrants or even the potential of their exercise may have an adverse
effect on the trading price and market for the Company's Common Stock. The
holders of the options or warrants are likely to exercise them at times when the
market price of the shares of Common Stock exceeds the exercise price of the
options or warrants. Accordingly, the issuance of shares of Common Stock upon
exercise of the options or warrants may result in dilution of the equity
represented by the then-outstanding shares of Common Stock held by other
stockholders. Holders of the options or warrants can be expected to exercise
them at a time when the Company would in all likelihood be able to obtain any
needed capital on terms which are more favorable to the Company than the
exercise terms provided by such options or warrants.
24
Common Stock issued or to be issued pursuant to a substantial number
of the warrants and options have demand and/or piggyback registration rights.
Pursuant thereto, the Company was required to use good faith efforts to effect
the registration of such securities on or before July 10, 1998, although such
registration has not yet been effected. If such registration rights are
exercised on a substantial portion of the Common Stock, the trading price and
market for the Company's registered Common Stock may be adversely affected. Year
2000 Compliance
The Company is evaluating the potential impact of what is commonly
referred to as Year 2000 or Y2K issues, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company believes that all of its current medical systems
are year 2000 compliant. In addition, the Company's older medical systems,
which, with one exception, are no longer under warranty and are no longer being
serviced by the Company, have been tested and are expected to function properly
beginning January 1, 2000, for two reasons. First, the older systems' software,
operations, and control systems are not date-driven, and second, the older
systems are "stand alone" systems and, therefore, are not linked to any other
computer systems. Accordingly, in the Company's view, this equipment can
continue to function beyond January 1, 2000. The record and storage programs
used by such systems are, however, date driven, and, although not required to do
so, the Company is currently testing the record storage programs to determine
the most effective method for permitting such programs to properly record
treatment information after January 1, 2000.
The Company has installed accounting software that is Y2K compliant.
The Company is currently evaluating its other computerized systems. The
aggregate costs to upgrade such other systems for Y2K compliance are estimated
to be below $8,000.
Finally, the Company is uses various vendors and subcontractors to
provide parts and components. The Company is surveying these vendors and
subcontractors concerning Y2K issues, but has not yet determined the extent of
Y2K readiness of these entities. The Company expects to complete a written
survey of its vendors by September 30, 1999, and the Company continues to
monitor the Y2K progress of its vendors to determine the potential impact to the
Company of their Y2K readiness or lack thereof. In addition, the Company has
multiple suppliers for most of the parts used in its APA-improved Microfocus
equipment, and has been seeking alternate sources for those items now being
purchased from single sources. To date, management does not anticipate that its
Y2K readiness plans will result in any material costs to the Company, and the
Company does not view the going concern reservation set forth in its Financial
Statements as having an impact on the Company's ability to be Y2K compliant.
As a standard precautionary step, software data generated at the
Company, by the Company, is backed- up on a daily basis. The worst case scenario
if the Company experienced computer equipment failure due to Y2K would be that
once the failed equipment was fixed, the backed-up data would have to be
reinstalled onto any fixed system. Concerning the actual operation of the
machinery, the worst case scenario would be distorted patient data recorded on
the machinery's storage unit. Nevertheless, the machine will continue to operate
properly with distorted patient records, but will require the operator of the
machinery to re-enter corrected patient information.
Although the Company does not anticipate that Y2K will have a material
impact on the Company's financial condition or its ability to operate at current
levels, it cannot guarantee that the steps taken in preparation for the year
2000 will be sufficient to avoid any adverse impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, supplementary data and report of independent
public accountants are filed as part of this report on pages F-1 through F-15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No change of accountants and/or disagreements on any matter of
accounting principles or financial statement disclosures have occurred within
the last two years.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names and ages of the members of
the Company's Board of Directors and its executive officers, and sets forth the
position with the Company held by each:
Name Age Position
- ---- --- --------
Augustine Y. Cheung+ 51 Chairman of the Board of Directors, Chief
Scientific Officer
Spencer J. Volk+ 64 President, Chief Executive Officer and Director
John Mon* 46 Secretary, Treasurer, General Manager and
Director
Max E. Link+ 57 Director
Walter B. Herbst** 60 Director
Peter Gombrich ** (1) 59 Director
* Term as director expires in 1999
** Term as director expires in 2000
+ Term as director expires in 2001
(1) Mr. Gombrich resigned as a member of the Board of Directors of the
Company on December 8, 1998.
The Board of Directors presently maintains an Audit Committee, a
Compensation Committee, and a Research and Development Oversight Committee.
Messrs. Warren C. Stearns and Mel D. Soule comprised the Audit Committee prior
to their resignation as a members of the Board of Directors of the Company in
July 1998. Mr. Peter Gombrich was appointed as a member of the Board of
Directors to replace Mr. Soule, but subsequently resigned. The vacancies in the
Board of Directors of the Company created by Messrs. Stearns' and Gombrich's
resignations had not been filled as of January 13, 1999. The Audit Committee
held no meetings during fiscal year 1997 and three meetings to date in the
fiscal year ended September 30, 1998 ("fiscal year 1998"). Messrs. Volk and
Herbst comprise the current Compensation Committee. The Compensation Committee
held two meetings during fiscal year 1997 and four meetings in fiscal year 1998.
Messrs. Cheung and Herbst comprise the Research and Development Oversight
Committee. The Research and Development Oversight Committee was created in
January 1998 and held a number of informal meetings during fiscal year 1998.
Augustine Y. Cheung. Dr. Cheung has served as the Chairman of the
Board of Directors of the Company since 1982. Dr. Cheung was the founder of the
Company, was President of the Company from 1982 to 1986 and Chief Executive
Officer from 1982 to 1996. From 1982 to 1985, Dr. Cheung was a Research
Associate Professor of the Department of Electrical Engineering and Computer
Science at George Washington University and from 1975 to 1981 was a Research
Associate Professor and Assistant Professor at the Institute for Physical
Science and Technology and the Department of Radiation Therapy at the University
of Maryland. Dr. Cheung holds a Ph.D. and Masters degree from the University of
Maryland. Dr. Cheung is the brother-in-law of John Mon.
Spencer J. Volk. Mr. Volk has been a director, President, and Chief
Executive Officer of the Company since May 22, 1997. From 1994 to 1996, Mr. Volk
was President and Chief Operating Officer of Sunbeam International. From 1991 to
1993, Mr. Volk was the President and Chief Executive Officer of the Liggett
Group, Inc. From 1989 to 1991, he was the President and Chief Operating Officer
of Church and Dwight (Arm and Hammer), and from 1984 to 1986, he was the
President and Chief Executive Officer of Tropicana Products, Inc. Prior to that,
he spent thirteen years at Pepsico, ultimately as Senior Vice President for the
Western Hemisphere. Mr. Volk holds an Honors BA in Economics and Math from
Queens University in Ontario, Canada and a BA in Economics from Royal Military
College in Ontario, Canada.
Max E. Link. Dr. Link has been a director of the Company since
September 23, 1997. Dr. Link currently provides consulting and advisory services
to a number of pharmaceutical and biotechnology companies. From 1993 to 1994,
Dr. Link served as Chief Executive Officer of Corange, Ltd., a medical
diagnostics company acquired by Hoffman-LaRoche. From 1971 to 1993, Dr. Link
served in numerous positions with Sandoz Pharma AG culminating in his
appointment as Chairman of the Board of Directors in 1992. Dr. Link serves on
the Board of Directors of the following publicly held companies: Human Genome
Sciences; Alexion Pharmaceuticals; Cell Therapeutics; Access Pharmaceuticals;
Protein Design Laboratories; Osiris Therapeutics; Procept, Inc.; Discovery
Laboratories Inc. and Cytrx Corp. Dr. Link holds a Ph.D. in economics from the
University of St. Galen (Switzerland).
26
Walter B. Herbst. Mr. Herbst has been a director of the Company since
May 28, 1997. Mr. Herbst has been and currently is the Chairman of Herbst Lazar
Bell, Inc. ("HLB"), the engineering firm he founded in 1962. Mr. Herbst also
serves as a faculty fellow in industrial design at the Northwestern University
McCormick School of Engineering and Applied Sciences teaching materials and
process. Additionally, he serves on the faculty at Northwestern University's
Kellogg Graduate School teaching a course in product development. Mr. Herbst
holds a BFA in Industrial Design from the University of Illinois and a Master of
Management from the Kellogg Graduate School of Northwestern University.
Peter Gombrich. Mr. Gombrich served as a director of the Company from
September 14 to December 8, 1998. Mr. Gombrich was the founder of InPath, LLC
and has over 30 years experience in the healthcare industry. In 1994, Mr.
Gombrich founded AccuMed International, Inc, and served as Chairman, President
and Chief Executive Officer until 1998. He was also the founder and Chief
Executive Officer of Clinicom, a bedside clinical information system company. In
1976, Mr. Gombrich co-founded St. Jude Medical, Inc., a world renowned life
support medical device company. He was also the Senior Vice President of
Medtronic, Inc. Mr. Gombrich has a B.S. in Electrical Engineering from the
University of Colorado and an M.B.A. from the University of Denver.
John Mon. Mr. Mon has served as Treasurer/General Manager of the
Company since 1989, and Secretary and a director since June 1997. From 1986 to
1988, Mr. Mon was responsible for the FDA regulatory approval process for the
Microfocus 1000. From 1983 to 1986, he was an economist with the U.S. Department
of Commerce in charge of forecasting business sales, inventory and prices for
all business sectors in the estimation of Gross National Product. Mr. Mon holds
a B.S. degree from the University of Maryland. Mr. Mon is the brother-in-law of
Dr. Cheung.
The Board of Directors conducted 9 meetings during the year ended
September 30, 1998. All members, except Mr. Gombrich, attended at least 75% of
the Board of Directors meetings held during their tenure in 1998. Mr. Gombrich
attended one of the two meetings of the Board of Directors held during his
tenure. Additional actions were taken by unanimous consent resolutions.
Scientific Advisory Board
The Company currently has a scientific advisory board ("SAB")
comprised of individuals listed below. The purpose of the SAB is to assist
management of the Company in identifying and developing technology trends and
business opportunities within the Company's industry. The SAB members operate as
consultants and not as officers or directors of the Company. The following
persons serve on the SAB:
Robert Barnett, M.D. Dr. Barnett currently the Surveyor for the
American College of Surgeons and is the former President of the Maryland chapter
of the American Cancer Society. Dr. Barnett consults with the Company on issues
relating to oncological surgeons.
Donald Beard. Mr. Beard is a retired businessman and is the former
senior program manager for the United States Department of Energy. Mr. Beard
consults with the Company in connection with technology and business development
matters.
Augustine Cheung, Ph.D. Dr. Cheung serves as the chairman of the SAB
and as the Company's Chief Scientific Officer. Dr. Cheung's background is set
forth above.
Michael Davidson, M.D. Dr. Davidson currently practices medicine and
is the Chief Executive Officer of The Chicago Center for Clinical Trials. Dr.
Davidson specializes in designing and implementing clinical trials. Dr. Davidson
consults with the Company in connection with establishing clinical trials and on
FDA regulatory matters.
Mark Dewhirst, Ph.D. Dr. Dewhirst currently serves as a Professor of
Radiology and Oncology and the Director of the Tumor Microcirculation
Laboratories in the Department of Radiation & Oncology at Duke University. Dr.
Dewhirst consults with the Company in connection with research on temperature
sensitive liposomes.
Donald Kapp, M.D., Ph.D. Dr. Kapp currently serves as Professor of
Radiation Oncology at Stanford University. Dr. Kapp consults with the Company in
connection with conducting clinical studies.
Gloria Li, Ph.D. Dr. Li currently serves as the Director of the
Radiation Biology Laboratory at Memorial Sloan-Kettering Hospital. Dr. Li
consults with the Company on heat shock and gene therapy.
27
Arnold Melman, M.D. Dr. Melman currently serves as the Chairman of the
Department of Urology at Albert Einstein College of Medicine. Dr. Melman
consults with the Company on clinical studies in urology and is the Company's
primary investigator on BPH.
David Needham, Ph.D. Dr. Needham currently serves as the Director of
Cell and Micro-carrier Research and an Associate Professor in the Duke
University Department of Mechanical Engineering and Materials Science. Dr.
Needham consults with the Company in connection with research on temperature
sensitive liposomes.
Thomas Ripley, Ph.D. Dr. Ripley currently serves as Director of
Operations, Grace Biomedical at W.R. Grace & Co. Dr. Ripley consults with the
Company on technology and business development.
Mel Soule. Mr. Soule serves as Co-Chairman of the SAB. From 1994
through 1997, Mr. Soule was the president and chief executive officer of Grace
Biomedical Division, a subsidiary of the W.R. Grace & Co. From 1993 through
1994, Mr. Soule was the director of commercial planning for the Washington
Research Center of W.R. Grace & Co. From 1992 to 1993, Mr. Soule was a senior
development manager for W.R. Grace & Co. Mr. Soule is currently a consultant to
several biomedical companies.
Mays Swicord, Ph.D. Dr. Swicord currently serves as Director of
Research at Motorola Corporation. Dr. Swicord consults with the Company on the
biological effects of microwave technology.
Claude Tihon, Ph.D. Dr. Tihon currently serves as the Chief Executive
Officer of Conti-Med, Inc. Dr. Tihon consults with the Company in connection
with urological devices and regulation.
All members of the SAB serve at the discretion of the Board of
Directors. Each member of the SAB, other than Dr. Cheung and Dr. Swicord,
received an option to purchase 5,000 shares of the Common Stock of the Company
at the time they were appointed. The options are exercisable for a five-year
term at $.50 per share. In addition, each member of the SAB will receive an
option exercisable over a five-year term to purchase 3,000 shares of the Common
Stock of the Company for each 12 months served by such member on the SAB,
exercisable at the market price of the Common Stock on the date of grant. During
fiscal year 1998, each member of the SAB, other than Messrs. Cheung and Swicord,
received an option to purchase 3,000 shares of the Common Stock of the Company
at $1.25 per share. In addition, members of the SAB (except for Dr. Cheung) are
compensated at the rate of $125 per hour or a maximum of $1,000 per day,
together with expenses, on consulting matters undertaken by such member.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended,
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, 1997, and September 30, 1998,
and on representations that no other reports were required, the Company has
determined that during the last fiscal year all applicable 16(a) filing
requirements were met except as follows:
Spencer J. Volk is the Chief Executive Officer and a director
of the Company. Mr. Volk acquired 167,114 shares of Common Stock of
the Company on September 23, 1998 and 2,000 shares of Common Stock of
the Company on September 30, 1998. Mr. Volk filed a Form 4 on or about
October 29, 1998. The Form 4 should have been filed on or before
October 10, 1998.
Walter B. Herbst is a director of the Company. Herbst Lazar,
Bell, Inc., of which Mr Herbst is the Chairman and Chief Executive
Officer, acquired 833,334 shares of Common Stock of the Company on
September 23, 1998. Mr. Herbst filed a Form 4 on or about October 28,
1998. The Form 4 should have been filed on or before October 10, 1998.
Mr. Peter Gombrich was appointed to be a director of the
Company as of September 14, 1997, and thereby became subject to
Section 16(a) reporting requirements. Mr. Gombrich filed a Form 3 on
or about December 7, 1998. The Form 3 should have been filed on or
before September 24, 1998.
28
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the aggregate cash compensation paid
for services rendered to the Company in all capacities during the last three
fiscal years to the Company's Chief Executive Officer and to each of the
Company's other executive officers where annual salary and bonus for the most
recent fiscal year exceeded $100,000.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards
------
Name and Principal Fiscal Other Annual Restricted Stock Stock Options All Other
Position Year Salary ($) Bonus ($) Compensation($) Awards ($) (#) Compensation ($)
- --------------------------------------------------------------------------------------------------------------------------------
Augustine Y. 1998 $125,000 (1) $640 (2)
Cheung, Chairman
of the Board of
Directors
1997 $125,000 $2,120 (2)
1996 $125,000 $2,120 (2) 400,000 (3)
Spencer J. Volk, 1998 $240,000 (4) $700,640 (2)(5)
President and Chief
Executive Officer
1997 $96,923 (6) $281,995 (2)(5)
Verle D. Blaha, 1997 $177,100 (7) $1,182 (2)
Former President
and Chief
Executive Officer
1996 $81,000 $2,120 (2) 400,000 (8)
Warren C. Stearns, 1998 $195,297 (9) $961 (2)
Acting Chief
Financial Officer
1997 $266,666 (9) $1,461 (2)
1996 $66,753 (9)
29
(1) Dr. Cheung's annual salary is $125,000. Of the amount,
approximately $84,134 was paid in fiscal year 1998 and the
balance of Dr. Cheung's annual salary was accrued.
(2) In each of fiscal years 1996, 1997 and 1998, Dr. Cheung
received 2,000 shares of the Common Stock of the Company for
his services as a member of the Board of Directors of the
Company. Mr. Blaha received 2,000 shares of the Common Stock
of the Company for his service as a member of the Board of
Directors of the Company in fiscal year 1996 and 1,112 shares
for his services as a member of the Board of Directors of the
Company in fiscal year 1997. Mr. Volk received 701 shares of
the Common Stock of the Company for his service as a member of
the Board of Directors of the Company in fiscal year 1997 and
received 2,000 shares of the Common Stock of the Company for
his service as a member of the Board of Directors of the
Company in fiscal year 1998. Mr. Stearns received 1,375 shares
for his service as a member of the Board of Directors of the
Company in fiscal year 1997 and received 3,003 shares of the
Common Stock of the Company for his service as a member of the
Board of Directors of the Company in fiscal year 1998.
(3) In fiscal year 1996, Dr. Cheung received an option to purchase
400,000 shares of the Common Stock of the Company at $0.25 per
share as adjusted, exercisable on or before May 16, 2001.
(4) Mr. Volk's annual salary is $240,000. Of that amount,
approximately $87,692 was paid in fiscal year 1998 and the
balance of Mr. Volk's annual salary was accrued.
(5) Mr. Volk received 500,000 shares of Common Stock of the
Company in fiscal year 1997 pursuant to his employment
agreement and has the right to receive up to 1,400,000
additional shares of the Common Stock of the Company if the
Company meets certain financing goals during his tenure and if
he is employed by the Company after one year. As of September
30, 1998, Mr. Volk received 1,000,000 shares of such amount.
(6) Mr. Volk became President and Chief Executive Officer of the
Company on May 22, 1997.
(7) Mr. Blaha resigned as the President and Chief Executive
Officer of the Company on April 23, 1997.
(8) The Company granted an option to purchase 400,000 shares of
the Common Stock of the Company, with an exercise price of
$.41 per share as adjusted, to New Opportunities, Ltd., a
company affiliated with Mr. Blaha.
(9) Amounts listed as annual compensation in fiscal year 1996 and
fiscal year 1997 for Mr. Stearns consist of fees paid to
Stearns Management Company ("SMC"). In fiscal year 1998, SMC
was paid approximately $95,297 in fees and for reimbursement
expenses. In May 1997, Mr. Stearns resigned as the Acting
Chief Financial Officer of the Company. In July 1998, Mr.
Stearns resigned as a member of the Company's Board of
Directors. The Company and SMC have agreed that the remaining
fees and reimbursement for expenses the Company still owes to
SMC is $100,000. During fiscal year 1996, assignees of SMC
also received warrants with anti-dilution rights to purchase
4.6875% of the Common Stock of the Company.
During fiscal year 1998, there were no profit sharing plans for the
benefit of the Company's officers, directors, or employees. In fiscal year 1997,
the Company established a SARSEP pension plan for its employees. The Company
does not contribute any funds to the plan. In addition, the Company provides
health insurance coverage for its employees. At the annual meeting held on April
27, 1998, the stockholders approved an omnibus option plan. The Board of
Directors may recommend and adopt additional programs in the future for the
benefit of officers, directors, and employees.
Option Grants in Fiscal 1998 / Director Compensation
During fiscal 1998, no options were granted to the named executive
officers listed in the Summary Compensation Table. Each non-employee director
and each employee director receives a grant of 12,000 shares and 2,000 shares of
30
Common Stock of the Company respectively for the full year served or the pro
rata portion if less than one year. In addition, Mr. Herbst received an option
to purchase 50,000 shares of Common Stock of the Company at $0.50 per share
commencing October 1, 1998 through September 30, 2003 for his service on the
Board of Directors for the full fiscal 1998 year. Mr. Gombrich received an
option to purchase 50,000 shares of Common Stock of the Company at $0.50 per
share commencing October 1, 1998 through September 30, 2003 for becoming a
member of the Board of Directors. Mr. Link will receive an option to purchase
50,000 shares of Common Stock of the Company at $0.75 per share commencing
December 31, 1998 through December 30, 2003 for his service on the Board of
Directors for the full fiscal 1998 year.
Aggregated Option Exercises and Year-End Option Values in 1998
The following table summarizes for each of the named executive officers
of the Company the number of stock options, if any, exercised during 1998, the
aggregate dollar value realized upon exercise, the total number of unexercised
options held at September 30, 1998 and the aggregate dollar value of
in-the-money unexercised options, if any, held at September 30, 1998. Value
realized upon exercise is the difference between the fair market value of the
underlying stock on the exercise date and the exercise price of the option. The
value of unexercised, in-the-money options at September 30, 1998 is the
difference between its exercise price and the fair market value of the
underlying stock on September 30, 1998, which was $0.32 per share based on the
closing price of the Common Stock of the Company on September 30, 1998. The
underlying options have not been and may never be exercised; and actual gains,
if any, on exercise will depend on the value of the Common Stock of the Company
on the actual date of exercise. There can be no assurance that these values will
be realized.
Aggregated Option Exercises in Fiscal 1998 and Year-End Option Values
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
9/30/98 9/30/98
------- -------
Shares Acquired
Name on Exercise Value Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------------
Augustine Y. Cheung 0 $0 400,000 0 $28,000 $0
Spencer J. Volk 0 $0 0 0 $0 $0
John Mon 0 $0 600,000 0 $42,000 $0
Warren C. Stearns(1) 0 $0 0 0 $0 $0
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------
(1) Mr. Stearns holds no options. However, the status of warrants issued in 1996
to third parties, at the direction of Mr. Stearns, is being reviewed by the
Company and its attorneys. None of such warrants have been exercised.
Long-Term Incentive Plan Awards in Fiscal Year 1998
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. See "Stock Option Plans".
Future Benefits or Pension Plan Disclosure in Fiscal Year 1998
The Company provides a SAR-SEP saving plan to which eligible employees
may make pretax payroll contribution up to 15 % of compensation. The Company
does not make contributions to the plan. At the annual meeting held on April 27,
1998, the stockholders approved an omnibus stock option plan. See "Stock Option
Plans". The Board of Directors may recommend and adopt additional programs in
the future for the benefit of officers, directors, and employees.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
On May 22, 1997, Spencer J. Volk became the President and Chief
Executive Officer of the Company. The Company and Mr. Volk have entered into an
employment agreement, dated May 11, 1997, with an initial annual salary of
$240,000, which will increase to $360,000 per annum upon the successful raising
of $5,000,000 through public or private offerings. In addition, Mr. Volk was
awarded 500,000 shares of Common Stock of the Company upon execution of the
employment agreement and may earn up to an additional 1,400,000 shares based on
the Company's ability to raise additional capital and Mr. Volk's continued
employment. Mr. Volk, as of September 30, 1998, received 1,000,000 of such
shares.
31
Additionally, Mr. Warren C. Stearns, a former officer and director of
the Company, received compensation through Stearns Management Company, which had
an exclusive advisory services arrangement with the Company.
Other than as set forth above, there are no employment contracts,
termination of employment or change in control arrangements.
Stock Option Plans
At the annual meeting held on April 27, 1998, the stockholders approved
an omnibus stock option plan. The plan commits up to 2,000,000 shares for option
grants to directors, employees and consultants. 280,000 of such shares have been
granted at the direction of Spencer J. Volk. The Company has committed to allow
Mr. Volk to nominate the recipients of options for 1,720,000 shares under the
plan.
Report of the Compensation Committee on Executive Compensation
The Company formed a Compensation Committee in June 1997, consisting of
Spencer J. Volk, an employee director, and Walter Herbst, a non-employee
director. The Committee is responsible for establishing and administering the
compensation policies applicable to the Company's officers and key personnel.
The committee's responsibilities include, establishing general compensation
policy and, except as prohibited by applicable law, taking any and all action
that the Board could take relating to the compensation of employees, directors
and other parties. The Committee also evaluates the performance of and makes
compensation recommendations for senior management.
Executive Compensation Philosophy
---------------------------------
The Company attempts to design executive compensation to achieve two
principal objectives. First, the program is intended to be fully competitive so
that the Company may attract, motivate and retain talented executives. Second,
the program is intended to create an alignment of interests between the
Company's executives and stockholders such that a significant portion of each
executive's compensation varies with business performance.
The Committee's philosophy is to pay competitive annual salaries,
coupled with an incentive system that pays more than competitive total
compensation for superior performance reflected in increases in the Company's
stock price. The incentive system consists of annual compensation and stock
compensation. Based on assessments by the Board and the Committee, the Committee
believes that the Company's compensation program for the Named Executive
Officers has the following characteristics that serve to align executive
interests with long-term stockholder interests:
a. Emphasizes "at risk" pay such as options and grants
of restricted stock;
b. Emphasizes long-term compensation such as options
restricted stock awards; and rewards financial
results and promotion of Company objectives rather
than individual performance against individual
objectives.
Annual Salaries
---------------
Salary ranges and increases for executives, including the Chief
Executive Officer and the other named executive officers, are established
annually (unless subject to longer term contracts) based on competitive data.
Within those ranges, individual salaries vary based upon the individual's work
experience, performance, level of responsibility, impact on the business, tenure
and potential for advancement within the organization. Annual salaries for
newly-hired executives are determined at time of hire taking into account the
above factors other than tenure.
Long-Term Incentives
--------------------
The grant of restricted stock or options to key employees encourages equity
ownership and closely aligns management interests with the interests of
stockholders. The amount and nature of any option or restricted stock award is
determined by the Committee on a case by case basis, depending upon the
individual's perceived future benefit to the Company and the perceived need to
provide additional incentive to align performance with the objectives of the
shareholders.
32
Company Performance and Chief Executive Officer Compensation
------------------------------------------------------------
The compensation of Spencer Volk was established prior to organization
of the Compensation Committee. The Committee believes that Spencer Volk's
compensation package aligns his interests with those of the stockholders.
Stockholder Return Performance Graph
Federal regulation requires that inclusion of a line graph comparing
cumulative total shareholder return on Common Stock with the cumulative total
return of (1) NASDAQ Combined Index and (2) a published industry or
line-of-business index. The performance comparison appears below. The Board of
Directors recognizes that the market price of stock is influenced by many
factors, only one of which is Company performance. The stock performance shown
on the graph is not necessarily indicative of future price performance.
[GRAPHIC OMITTED]
Total Return Analysis
9/30/94 9/29/95 9/30/96 9/30/97 9/30/98
- ------------------------------------------------------------------------------------------------------------
The Company $ 100 $ 473 $ 300 $ 309 $ 93
- ------------------------------------------------------------------------------------------------------------
Nasdaq Health $ 100 $ 106 $ 139 $ 139 $ 94
- ------------------------------------------------------------------------------------------------------------
Nasdaq Composite (US) $ 100 $ 137 $ 161 $ 221 $ 222
- ------------------------------------------------------------------------------------------------------------
Source: Carl Thompson Associates www.ctaonline.com (800) 959-9677. Data from Bloomberg Financial Markets
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding shares of voting securities
of the Company beneficially owned as of September 30, 1998 by: (i) each person
known by the Company to beneficially own 5% or more of the outstanding voting
securities; (ii) by each director, (iii) by each current executive officer and
(iv) by all current directors and executive officers as a group. As of September
30, 1998, there were 39,945,826 shares of Common Stock outstanding.
33
Name and Addresses of Officers, Amount of Percentage of
Directors and Principal Shareholders Common Shares Voting Securities(1)
- ------------------------------------ ------------- --------------------
Augustine Y. Cheung (2)(3)
10220-I Old Columbia Road 6,673,408 16.3%
Columbia, MD 21046-1705
Spencer J. Volk (2)(4)
10220-I Old Columbia Road 1,913,717 4.7%
Columbia, MD 21046-1705
John Mon (2)(5)
10220-I Old Columbia Road 769,212 1.9%
Columbia, MD 21046-1705
Walter B. Herbst (2)(6)
355 North Canal Street 1,135,586 2.8%
Chicago, IL 60606
Max E. Link (2)(7) **
Tobelhofstr. 30 62,038
8044 Zurich
Switzerland
Peter Gombrich (2)(8) 50,493 **
920 N. Franklin Street Suite 304
Chicago, IL 60610
Bei-Lan Tan
Ning Yeung Terrace 3,340,000 8.2%
78 Bonham Rd., Mid Level
Hong Kong, China
Executive Officers and Directors as a
group (6 individuals) 10,604,454 26.2%
====================================================================================================================
* Assumes exercise of all options held by listed security holders which
can be exercised within 60 days from September 30, 1998.
** Less than 1%.
(1) Except as noted, the above table does not give effect to an aggregate
of approximately 13,030,822 shares of Common Stock underlying
outstanding stock options and warrants, obligations to issue shares or
warrants that are contingent on future offerings. Outstanding warrants
and options entitle the holders thereof to no voting rights.
(2) Director or Executive Officer. Mr. Gombrich resigned as a member of the
Board of Directors of the Company on December 8, 1998.
(3) Includes 400,000 shares underlying an option exercisable commencing May
16, 1995 through May 16, 2001 at $0.35 per share as adjusted.
(4) Includes 1,000,000 shares earned by Mr. Volk pursuant to his employment
agreement subsequent to the end of fiscal year 1997. Does not include
an additional 400,000 shares of Common Stock that have been committed
to and may be earned by Mr. Volk pursuant to his employment agreement
upon the occurrence of certain events.
(5) Includes 400,000 shares of Common Stock underlying an option to Mr. Mon
exercisable commencing May 16, 1996 through May 16, 2001 at $0.25 per
share as adjusted and 200,000 shares of Common Stock underlying an
option exercisable commencing April 1, 1997 through March 31, 2002 at
$0.25 per share as adjusted.
34
(6) Includes 35,000 shares of Common Stock underlying options exercisable
beginning June 16, 1997 and ending June 16, 2002 at a price of $.41 per
share, 15,000 shares of Common Stock underlying an option exercisable
commencing June 1, 1998 through August 31, 2003 at $.50 per share, and
50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share. Includes 20,000 shares of Common Stock underlying options to HLB
exercisable beginning October 31, 1997 and ending October 30, 2002 at a
price of $1.00 per share and 875,198 shares of Common Stock owned by
HLB. Mr. Herbst disclaims beneficial ownership of the stock option and
shares of Common Stock owned by HLB.
(7) Does not include 150,000 shares of Common Stock underlying an option
exercisable at $.75 per share which vest as to 50,000 shares of Common
Stock on December 31 of 1998, 1999 and 2000.
(8) Includes 50,000 shares of Common Stock underlying an option exercisable
commencing October 1, 1998 through September 30, 2003 at $.50 per
share.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The transactions described below were entered into with persons who
are, or who were at various times as discussed, directors, officers and
stockholders of the Company. The Board of Directors has reviewed such
transactions and has determined that they were entered into on terms which were
not less favorable to the Company than terms which would have been available
from a non-affiliated third party.
SMC Contract
On May 28, 1996, the Company entered into a consulting agreement with
Stearns Management Company ("SMC"). Warren C. Stearns, former Acting Chief
Financial Officer and a former member of the Board of Directors, is President of
SMC. Additionally, the George T. Horton Trust, which is a secured creditor of
the Company, is an equity owner of SMC. Pursuant to the Agreement, SMC had an
exclusive arrangement to render advisory services involving solicitation and
obtaining of outside capital, restructuring the Company, business plans,
marketing, selection of advisory personnel, adding additional directors, and
sale of stock by insiders.
In exchange for such services, during the fiscal year 1997, SMC was
paid approximately $266,666 in fees and $38,824 for reimbursement of expenses.
In fiscal year 1996, the Company granted to assignees of SMC warrants to
purchase, in the aggregate, a 4.6875% interest in the equity of the Company as
of the next registered public offering of Common Stock of the Company. The
warrants, all of which were initially exercisable at $0.41 per share, subject to
adjustment, contain anti-dilution provisions and are exercisable for five years
and renewable for an additional five years. Mr. Stearns was paid a per diem
expense of $1,500 per day or $190 per hour and reimbursement for expenses at
cost plus 20%. During fiscal year 1998, SMC was paid approximately $95,297 in
fees and for reimbursement expenses, the Company and SMC agreed that the
remaining fees and reimbursement for expenses that the Company owed to SMC is
$100,000.
Mr. Stearns resigned as the Company's Acting Chief Financial Officer in
May 1998 and as a member of the Board of Directors in July 1998. The Company
terminated its consulting agreement with Stearns Management Company effective
July 19, 1998. Mr. Stearns has made a demand, on behalf of the holders of the
warrants issued to SMC's designees, that the Company register for public sale
the shares of Common Stock underlying such warrants. The Company and its
attorneys have been reviewing the circumstances surrounding the issuance of the
above warrants and the services which were performed or purported to be
performed by Mr. Stearns and SMC, to make a determination as to what actions to
take with respect to such warrants and registration demand.
George T. Horton Trust Loan
The Company is obligated under a secured note to the George T. Horton
Trust in the original principal amount of $220,000, which bears interest at 1%
per month, and was payable December 15, 1997, and is secured by equipment and
software for APA technology. George T. Horton Trust is an equity owner of SMC,
the President of which, Warren C. Stearns, was also an officer and director of
the Company until his recent resignation. As of the date of this report, the
Company has paid $107,000 of the principal of this note and the note holder has
converted $100,000 of principal into Common Stock of the Company. The remaining
principal is $13,000 as of the date of this report. The remaining principal
accrues interest at the rate of 17% per annum or may be converted into Common
Stock of the Company at the rate of 200% of the loan balance.
35
Herbst Lazar Bell, Inc.
The Company has retained the engineering firm of Herbst LaZar Bell,
Inc., of Chicago to assist in the development of the commercial versions of its
future deep focused heat systems and BPH treatment system. Walter Herbst, a
director of the Company, is the founder and chief executive officer of HLB. HLB,
with a team of engineers specializing in systems engineering and industrial
design, will serve as the primary engineering resource for the Company. In
fiscal year 1998, HLB billed the Company $561,238 for the engineering and design
work it performed, HLB was paid $106,500 in cash and converted $250,000 owed to
it by the Company into 833,334 shares of the Common Stock of the Company.
Townhouse Lease
The Company leased from Augustine Cheung, Chairman of the Board, and
John Mon, an officer and director, on a month to month basis a townhouse near
its corporate offices in Columbia, Maryland for $900 per month, plus utilities.
The housing was used for visiting executives. The lease was terminated in May
1998.
Promissory Notes
From 1987 through 1998, the Company borrowed money from related
parties. The Company formalized such borrowing by executing promissory notes to
the following related parties:
An unsecured term note dated January 26, 1987 payable to Dr.
Augustine Cheung, accruing interest at the rate of twelve percent (12%)
per annum, in the principal amount of $78,750 due December 31, 1998.
An unsecured term note dated June 30, 1994 payable to Dr.
Augustine Cheung, accruing interest at the rate of ten percent (10%)
per annum, in the principal amount of $42,669 due December 31, 1998.
An unsecured term note dated June 23, 1998 payable to Spencer
J. Volk, accruing interest at the rate of eight percent (8%) per annum,
in the principal amount of $50,000 due September 30, 1998. Mr. Volk has
extended the maturity date of the unsecured term note dated June 23,
1998 issued by the Company to him in the principal amount of $50,000.00
from September 30, 1998 to December 31, 1998. As of September 30, 1998,
the outstanding principal balance of such note is $50,000.
A secured term note dated September 9, 1994 payable to Charles
C. Shelton, accruing interest at the rate of ten percent (10%) per
annum, in the principal amount of $50,000 payable as follows: beginning
October 1, 1994 and ending December 31, 1995 - interest only; beginning
January 1, 1996 and for 25 months thereafter - principal at the rate of
$2,000 per month, together with the monthly payment on interest on the
unpaid balance of the note until paid in full; provided, however, that
such interest shall not be payable in the event that the principal
amount of the note is repaid by the Company on or before September 30,
1999. The outstanding principal balance of such note as of the date of
this report is approximately $50,000.
On September 23, 1998, Dr. Cheung converted (I) the unpaid principal
and accrued interest on the unsecured term note dated June 30, 1994 issued by
the Company to him in the principal amount of $42,669.00 into 5,800 shares of
the Common Stock at $0.30 per share and (ii) the unpaid principal and accrued
interest on the unsecured term note dated January 26, 1987 issued by the Company
to him in the principal amount of $78,750.00 into 254,200 shares of the Common
Stock at $0.30 per share.
On December 10, 1998, Mr. Volk converted the principal of the unsecured
term note dated June 23, 1998 issued by the Company to him in the principal
amount of $50,000 into 200,000 shares of Common Stock of the Company, a warrant
to purchase 100,000 shares of the Company's Comon Stock at $0.50 per shares, and
a warrant to purchase 100,000 shares of the Company's Comon Stock at $1.00 per
shares.
In addition, on September 23, 1998, Mr. Volk converted $50,134 of
unpaid expense reimbursements owed to him by the Company into 167,114 shares of
the Common Stock at $0.30 per share.
Redemption Agreement
On February 16, 1995, Gao Yu Wen executed a subscription agreement with
the Company to purchase 20,000,000 shares of Common Stock at $0.50 per share or
$10,000,000. The price was paid by paying $2,000,000 cash and property, and
36
transferring to the Company 9.5% of the outstanding equity of Aestar Fine
Chemical Company ("Aestar"). On June 6, 1996 the Company and Gao entered into a
Redemption Agreement wherein the Company renounced any interest in Aestar and
Gao agreed that upon delivery by the Company of $2,200,000 to Gao, he would
return the 20,000,000 shares of the Company. The promise to pay $2,200,000 by
November 30, 1996, was secured by all 20,000,000 shares. On October 23, 1996,
the Company and Mr. Gao executed an Amendment by which the terms of the
Redemption Agreement were modified. Under the terms of the First Amendment, Mr.
Gao agreed to immediately convey to the Company certificates representing 16
million shares of Common Stock. The $2,200,000 payment was reduced to $2,160,000
and the timing was extended until December 31, 1996, with an additional three
months period at a penalty of 3/4% per month. On October 23, 1996, Mr. Gao
conveyed the 16 million shares to the Company. Such shares were subsequently
canceled. The Company had the right and might have had the obligation to
repurchase the remaining 4,000,000 shares of the Company for $2,160,000 on or
before November 30, 1997.
In a related transaction, on April 26, 1995, the Company entered into
an Investment Agreement with Gao whereby the Company transferred $700,000 to Gao
to invest as agent of the Company at the rate of no less than 17% per annum. Gao
repaid $190,000 by September 30, 1996. The remaining amount has been forgiven as
part of the Redemption Agreement.
Mr. Gao was the Deputy Director of the Economic Committee of the City
of Zhongshan of Guangdong Province in South China. The City of Zhongshan is a
rapidly expanding industrial areas in Guangdong Province, and one of the fastest
growing areas in China. In this position, Mr. Gao was responsible for strategic
planning and key decisions for approximately 120 manufacturing enterprises in
China, and he had also run a number of enterprises in Hong Kong and Macau.
Furthermore, in the course of its review of Aestar Fine Chemical Company, which
Mr. Gao controlled, the Company learned that Aestar had paid substantial
dividends to investors in the past.
No level of return was achieved. In reacquiring 16,000,000 of its
shares in exchange for the Aestar stock and without repaying any of the $2
million originally invested in the Company by Mr. Gao, the Company was required
to reimburse Mr. Gao for his start-up expenses in a cosmetics division which he
was to set up for the Company. These start-up costs totaled $471,000, which
amount was offset against the $510,000 balance of the $700,000 investment
remaining after Mr. Gao had repaid $190,000 of the original investment. The
difference of approximately $40,000 was deducted from the agreed price of $2.2
million which was to be paid Gao to repurchase the remaining 4,000,000 shares
out of the 20,000,000 originally purchased from the Company.
The 4,000,000 shares were not repurchased by the Company. The Company
received the full $2,000,000 purchase price in the initial transaction in 1995.
The "remaining amount" refers to the $470,000 which was offset against the
investment and reflected as "Loss on Cosmetics Division" in the 1996 Statement
of Operations.
Rescission of Ardex Acquisition
The Company originally contemplated acquiring a 51% equity interest in
Ardex Equipment, LLC ("Ardex") for $1.2 million, of which a portion was to be
paid to Ardex's principals for the purchase of a portion of their equity
interest and the balance was to be paid to Ardex for the issuance of additional
equity. The Company was only able to invest a total of $450,000, representing
37.5% of the originally contemplated amount, receiving a 19.25% interest for the
smaller investment. As in the originally contemplated transaction, a portion of
the reduced purchase price of $450,000, or $50,000, was paid to the principals
of Ardex directly, (including Mssrs. Shelton and Colino) and the balance of the
purchase price was paid to Ardex.
The limited guarantees which were supposed to be delivered in
connection with the obligations of Ardex and of Messrs. Shelton, Colino and
Kohlman were never delivered. The Company did not continue its efforts to obtain
the guarantees or to collect the amounts due on the separate obligations in 1997
because (i) it appeared to the Company that the obligors had limited assets and
ability to pay, (ii) the Company had very limited resources with which to pursue
enforcement of its claims, (iii) management needed to focus its efforts on the
development of its new products, and (iv) the Company had obligations to Mr.
Shelton and Mr. Kohlman, which it decided not to satisfy pending collection of
the Ardex amounts, including (1) an obligation to Mr. Shelton for prior legal
fees and expenses, asserted by him to total approximately $110,000, (2) an
accrued salary obligation of approximately $28,000 due to Mr. Kohlman, (3) a
commitment to issue to Mr. Shelton and his wife options to purchase a total of
420,000 shares of the Company's Common Stock at an exercise price of $0.35 per
share and (4) an obligation to issue 50,000 shares of Common Stock to Mr.
Kohlman pursuant to his earlier exercise of a stock option and payment of the
required exercise price.
In fiscal 1997, the Company determined that the Ardex obligations were
essentially uncollectible, and wrote off the receivable of $400,000 plus accrued
interest of $38,803.
37
In September 1998, the Company entered into a settlement arrangement,
pursuant to which (i) Mr. Shelton agreed to waive his rights to the claimed
$110,000 in fees and expenses, (ii) Mr. and Mrs. Shelton agreed to waive their
rights to the 420,000 options, and (iii) Mr. Kohlman agreed to waive his right
to $28,000 in accrued salary. In consideration of the settlement, the Company
agreed (i) to recognize Mr. Kohlman's earlier exercise of his stock option and
to deliver the 50,000 shares he had purchased thereunder, and (ii) to issue a
total of 50,000 shares of Common Stock to Mr. and Mrs. Shelton in satisfaction
of all of their earlier claims for compensation.
38
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements and Supplemental Schedules
Title of Documents Page
- ------------------ ----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Deficit F-5
Statements of Cash Flows F-6
NOTES TO FINANCIAL STATEMENTS F-8
(a)(2)
No schedules are provided because of the absence of conditions under which they
are required.
(b) Reports on Form 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of
its fiscal year ended September 30, 1998.
(c) Exhibits.
The following documents are included as exhibits to this report:
Exhibit Description
Number -----------
------
3.1 Articles of Incorporation of the Company as filed on May
19, 1982 with the State of Maryland Department of
Assignments and Taxation, incorporated herein by reference
to the exhibits to the Company's Registration Statement on
Form S-1, as amended, originally filed with the Securities
and Exchange Commission on October 17, 1984, Registration
No. 2- 93826-W.
3.1.1 Articles of Amendment and Restatement to the Articles of
Incorporation of the Company as filed on June 21, 1984 with
the State of Maryland Department of Assignments and
Taxation, incorporated herein by reference to Exhibit 3.1.1
to the Annual Report on Form 10-K of the Company for the
year ended September 30, 1996.
3.1.2 Articles of Amendment to the Articles of Incorporation of
the Company as filed on December 14, 1994 with the State of
Maryland Department of Assignments and Taxation,
incorporated herein by reference to Exhibit 3.1.2 to the
Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
3.1.3 Certificate of Amendment to Certificate of Incorporation as
filed on May 1, 1998 with the State of Maryland Department
of Assignment and Taxation, incorporated herein by
reference to Exhibit 3.1 to the Quarterly Report on Form
10-Q of the Company for the quarter ended March 30, 1998.
3.2 By-laws, incorporated herein by reference to Exhibit 3.2 to
the Annual Report on Form 10- K of the Company for the year
ended September 30, 1996.
39
Exhibit Description
Number -----------
-------
3.2.1 Amendment to the By-laws of the Company adopted December 9,
1994, incorporated herein by reference to Exhibit 3.2.1 to
the Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
3.2.2 Amendment to the By-laws of the Company adopted April 27,
1998, incorporated herein by reference to Exhibit 3.2 to
the Quarterly Report on Form 10-Q of the Company for the
quarter ended March 30, 1998.
10.1 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated June 1, 1996,
incorporated herein by reference to Exhibit 10.1 to the
Annual Report on Form 10-K of the Company for the year
ended September 30, 1996 (Confidential Treatment
Requested).
10.2 License Agreement between the Company and MMTC, Inc. dated
August 23, 1996, incorporated herein by reference to
Exhibit 10.2 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996 (Confidential
Treatment Requested).
10.3 Letter Agreement between the Company and H.B.C.I., Inc.,
dated September 17, 1996, incorporated herein by reference
to Exhibit 10.3 to the Annual Report on Form 10-K of the
Company for the year ended September 30, 1996.
10.4 Letter Agreement between the Company and Herbst, Lazar,
Bell, Inc. dated October 4, 1996, incorporated herein by
reference to Exhibit 10.4 to the Annual Report on Form 10-K
of the Company for the year ended September 30, 1996.
10.5 Sponsored Research Agreement dated March 17, 1998 between
the Company and Duke University and Sponsored Research
Agreement dated February 26, 1998 between the Company and
Duke University.
10.6 Engagement Letter dated August 6, 1998 between the Company
and Josephberg Grosz & Co., Inc.
10.7 Patent License Agreement between the Company and
Massachusetts Institute of Technology dated October 17,
1997 (Confidential Treatment Requested).+
10.8 Amendment dated November 25, 1997 to the License Agreement
between the Company and MMTC, Inc. dated August 23, 1996
(Confidential Treatment Requested).+
10.9 Omnibus Stock Option Plan, incorporated herein by reference
to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the
Company for the quarter ended March 30, 1998.
10.10 Letter of Intent between the Company and Mr. Sun Shou Yi,
representative of Mr. Gao Yu Wen, dated May 27, 1996 and
Redemption Agreement between the Company and Mr. Sun Shou
Yi., representative of Mr. Gao Yu Wen, dated June 6, 1996,
incorporated herein by reference to Exhibit 10.8 to the
Annual Report on Form 10-K of the Company for the year
ended September 30, 1996.
10.11 Amendment among the Company, Sun Shou Yi, Ou Yang An, Gao
Yu Wen, dated October 23, 1996, incorporated herein by
reference to Exhibit 10.9 to the Annual Report on Form 10-K
of the Company for the year ended September 30, 1996.
10.12 Unsecured Promissory Note, dated June 23, 1998, in the
amount of $50,000 and bearing interest at the rate of eight
percent, payable to Spencer J. Volk.
10.13 Form of Series 200 Warrant issued to certain employees,
directors, and consultants to Purchase Common Stock of the
Company.
10.14 Form of Series 250 Warrant Issued to DunnHughes Holding,
Inc. to Purchase Common Stock of the Company.
10.15 Form of Series 300 Warrant Issued to Nace Resources, Inc.
and George T. Horton Trust to Purchase Common Stock of the
Company.
10.16 Form of Series 400 Warrant Issued to Stearns Management
Company Assignees to Purchase Common Stock of the Company.
10.17 Form of Series 500 Warrant Issued to Certain Employees and
Directors on May 26, 1996 to Purchase Common Stock of the
Company.
10.18 Form of Series 600 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended.
10.19 Form of Series 650 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated January 6, 1997, as amended.
10.20 Form of Series 700 Warrant to Purchase Common Stock of the
Company pursuant to the Private Placement Memorandum of the
Company dated September 10, 1998, as amended.
10.21 Form of Registration Rights Agreement pursuant to the
Private Placement Memorandum of the Company dated January
6, 1997, as amended.
40
Exhibit Description
Number -----------
-------
10.22 Form of Registration Rights Agreement pursuant to the
Private Placement Memorandum of the Company dated September
10, 1998, as amended.
21.1 Subsidiaries of the Registrant, incorporated herein by
reference to Exhibit 21.1 to the Annual Report on Form 10-K
of the Company for the year ended September 30, 1996.
23.1 Updated Consent of Stegman & Company, independent public
accountants of the Company.+
27.1 Financial Data Schedule.
- ------------------
+ Denotes exhibits filed with this amendment
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to its
annual report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized.
CELSION CORPORATION
November 24, 1999 By: /s/ Spencer J. Volk
----------------------------------------
Spencer J. Volk
Chief Executive Officer & President
By: /s/ Jon Mon
----------------------------------------
Jon Mon
Chief Accounting Officer, General
Manager & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amendment to Registrant's annual report on Form 10-K has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
Signature Title Date
--------- ----- ----
/s/ Spencer J. Volk Chief Executive Officer, November 24, 1999
- --------------------------------------------
Spencer J. Volk President and Director
/s/ Jon Mon General Manager, Treasurer November 24, 1999
- --------------------------------------------
Jon Mon Director
/s/ Augustine Y. Cheung Chairman, Director November 24, 1999
- --------------------------------------------
Dr. Augustine Y. Cheung
/s/ Walter Herbst Director November 24, 1999
- --------------------------------------------
Walter Herbst
/s/ Max Link Director November 24, 1999
- --------------------------------------------
Max Link
42
CELSION CORPORATION
REPORT ON AUDITS OF
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 1998, 1997 AND 1996
TABLE OF CONTENTS
Title of Documents Page
- ------------------ ----
INDEPENDENT AUDITORS' REPORT F-1
FINANCIAL STATEMENTS
Balance Sheets F-2
Statements of Operations F-4
Statements of Changes in Stockholders' Deficit F-5
Statements of Cash Flows F-6
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 as of September 30, 1998 and 1997, and the related statements of
operations, changes in stockholders' deficit, and cash flows for each of the
three years in the period ended September 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of Celsion
Corporation as of September 30, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended September 30,
1998 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 of the financial statements, the Company has suffered recurring losses from
operations, which raise substantial doubt about its ability to continue as a
going concern. Management's plans regarding those matters are also described in
Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Stegman & Co.
/s/Stegman & Co.
- ----------------
Baltimore, Maryland
November 18, 1998
Except as to Note 5 which is dated
November 29, 1999
F-1
CELSION CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
ASSETS
1998 1997
-------- ---------
CURRENT ASSETS:
Cash $ 54,920 $267,353
Accounts receivable 1,812 5,891
Inventories 42,059 329,741
Prepaid expenses 76,944 8,207
Other current assets -- 26,755
-------- ---------
Total current assets 175,735 637,947
-------- ---------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 195,794 180,348
Laboratory and shop equipment 47,048 92,228
-------- ---------
242,842 272,576
Less accumulated depreciation 212,029 213,885
-------- ---------
Net value of property and equipment 30,813 58,691
-------- ---------
OTHER ASSETS:
Patent licenses (net of accumulated amortization
of $ 65,760 and $53,379 in 1998 and 1997,
respectively) 124,190 126,571
-------- ---------
TOTAL ASSETS $330,738 $823,209
======== ========
See accompanying notes.
F-2
LIABILITIES AND STOCKHOLDERS' DEFICIT
1997 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable - trade $1,034,767 $ 614,173
Notes payable - other 132,778 1,481,831
Notes payable - related parties 146,041 221,943
Accrued interest payable - related parties 150,020 245,784
Accrued interest payable - other 127,538 116,604
Accrued compensation 470,220 331,715
Accrued professional fees 100,000 256,301
Other accrued liabilities 13,639 15,504
Capital lease - current 1,083 -
------------ ------------
Total current liabilities 2,176,086 3,283,855
LONG-TERM LIABILITIES:
Capital lease - long-term 5,719 -
------------ ------------
Total liabilities 2,181,805 3,283,855
------------ ------------
STOCKHOLDERS' DEFICIT:
Capital stock - $.01 par value; 51,000,000 shares
authorized, 39,945,826 and 29,095,333 issued and
outstanding for 1998 and 1997, respectively 399,458 290,953
Additional paid-in capital 17,213,485 12,511,923
Accumulated deficit (19,464,010) (15,263,522)
------------ ------------
Total stockholders' deficit (1,851,067) (2,460,646)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
DEFICIT $ 330,738 $ 823,209
============ ============
See accompanying notes.
F-3
CELSION CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ------------ -------------
REVENUES:
Equipment sales and parts $ 174,182 $ 121,257 $ 134,006
Returns and allowances -- -- (60,000)
------------ ------------ ------------
Total revenues 174,182 121,257 74,006
COST OF SALES 136,500 46,734 64,406
------------ ------------ ------------
GROSS PROFIT 37,682 74,523 9,600
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 2,515,822 2,283,245 1,321,361
Research and development 1,534,872 185,974 94,012
------------ ------------ ------------
Total operating expenses 4,050,694 2,469,219 1,415,373
------------ ------------ ------------
LOSS FROM OPERATIONS (4,013,012) (2,394,696) (1,405,773)
LOSS ON COSMETICS DIVISION -- -- (471,000)
LOSS ON FUNDS HELD IN INVESTMENT
CONTRACT -- (40,000) --
LOSS ON WRITE-OFF OF ARDEX EQUIPMENT,
L.L.C. NOTES RECEIVABLE AND RELATED
ACCRUED INTEREST RECEIVABLE -- (438,803) --
OTHER INCOME 11,870 7,172 28,808
INTEREST EXPENSE (199,346) (185,562) (85,506)
------------ ------------ ------------
LOSS BEFORE INCOME TAXES (4,200,488) (3,051,889) (1,933,471)
INCOME TAXES -- -- --
------------ ------------ ------------
NET LOSS $ (4,200,488) $ (3,051,889) $ (1,933,471)
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (.12) $ (.11) $ (.05)
============ ============ ============
BASIC AND DILUTED WEIGHTED
AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 34,867,001 28,386,145 39,499,650
============ ============ ============
See accompanying notes.
F-4
CELSION CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Total
---------- ------------ ------------ ------------ ------------
Balances at October 1, 1995 39,207,664 $ 392,076 $ 18,014,854 $(10,278,162) $ 8,128,768
Sale of common stock 1,299,711 12,997 406,513 -- 419,510
Issuance of 698,985 shares of
common stock as payment of
indebtedness and expenses 698,985 6,990 134,077 -- 141,067
Net loss -- -- -- (1,933,471) (1,933,471)
---------- ------------ ------------ ------------ ------------
Balances at September 30, 1996 41,206,360 412,063 18,555,444 (12,211,633) 6,755,874
Sale of common stock 1,409,902 14,099 668,901 -- 683,000
Issuance of 2,479,071 shares
of common stock as payment
of indebtedness and expenses 2,479,071 24,791 1,127,578 -- 1,152,369
Retirement of shares (16,000,000) (160,000) (7,840,000) -- (8,000,000)
Net loss -- -- -- (3,051,889) (3,051,889)
---------- ------------ ------------ ------------ ------------
Balances at September 30, 1997 29,095,333 290,953 12,511,923 (15,263,522) (2,460,646)
Sale of common stock 4,315,000 43,150 1,981,850 -- 2,025,000
Issuance of 6,535,493 shares of
common stock as payment
of indebtedness and expenses 6,535,493 65,355 2,719,712 -- 2,785,067
Net loss -- -- -- (4,200,488) 4,200,488)
---------- ------------ ------------ ------------ ------------
Balance at September 30, 1998 39,945,826 $ 399,458 $ 17,213,485 $(19,464,010) $ (1,851,067)
============ ============ ============ ============ ============
See accompanying notes.
F-5
CELSION CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1998 1997 1996
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,200,488) $(3,051,889) $(1,933,471)
Noncash items included in net loss:
Funds held under investment contract used
for cosmetic division expenses -- 40,000 471,000
Depreciation and amortization 24,291 24,169 18,545
Bad debt expense -- 120,865 51,397
Loss on disposal of property and equipment 45,180 -- --
Gain on disposition of investment in Ardex
Equipment, L.L.C -- -- (17,009)
Write-off of obsolete inventory 287,682 -- --
Write-off of Ardex Equipment - note receivable
and accrued interest -- 438,803 --
Common stock issued for operating expenses 796,745 297,542 9,000
Net changes in:
Accounts receivable 4,079 (2,421) (68,631)
Inventories -- (58,789) 45,327
Accrued interest receivable - related parties -- (33,470) (5,333)
Prepaid expenses 5,430 (6,538) 6,000
Other current assets 10,085 -- (1,204)
Accounts payable and accrued interest payable 903,900 837,172 25,445
Accrued compensation 168,732 145,256 (166,039)
Accrued professional fees (156,300) 179,950 74,852
Other accrued liabilities (1,865) (85,401) 27,533
----------- ----------- -----------
Net cash used in operating activities (2,112,529) (1,154,751) (1,462,588)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Rescission of investment in Ardex Equipment, L.L.C -- -- 100,000
Purchases of patent licenses (10,000) -- (100,000)
Purchase of property and equipment (21,935) (3,807) (10,256)
Funds returned - investment contract -- -- 139,000
----------- ----------- -----------
Net cash (used) provided by investing activities (31,935) (3,807) 128,744
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 50,000 615,000 1,205,000
Payment on notes payable - related parties (63,240) (24,020) (48,973)
Payment on notes payable - other (79,254) (95,000) (2,000)
Payment on capital lease obligation (475) -- --
Proceeds of stock issuances 2,025,000 683,000 419,510
----------- ----------- -----------
Net cash provided by financing activities 1,932,031 1,178,980 1,573,537
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH (212,433) 20,422 239,693
CASH AT BEGINNING OF YEAR 267,353 246,931 7,238
----------- ----------- -----------
CASH AT END OF YEAR $ 54,920 $ 267,353 $ 246,931
=========== =========== ===========
See accompanying notes.
F-6
Celsion Corporation
Statements of Cash Flows (Continued)
For the Years Ended September 30, 1998, 1997 and 1996
1996 1998 1997
----------- ------------ ---------
Schedule of noncash investing and financing transactions:
Acquisition and rescission of a 9.5% interest
in the Aestar Fine Chemical Company in
exchange for 16,000,000 shares of
common stock $ -- $ (8,000,000) $ --
=========== ============ =========
Conversion of accounts payable, debt and accrued
interest payable through issuance of common stock $ 1,988,322 $ 854,826 $ 132,067
=========== ============ =========
Equipment repossessed for internal use $ -- $ 30,000 $ --
=========== ============ =========
Acquisition of equipment:
Cost of equipment $ 7,277 $ -- $ --
Capital lease payable (7,277) -- --
----------- ------------ ---------
Cash down payment for equipment $ -- $ -- $ --
=========== ============ =========
Payment on notes payable:
Decrease in notes payable $ 16,670 $ -- $ 25,223
Offset of accounts receivable (16,670) -- (25,223)
----------- ------------ ---------
Net cash paid $ -- $ -- $ --
=========== ============ =========
Rescission of investment in Ardex Equipment,
L.L.C. in exchange for notes receivable $ -- $ -- $ 400,000
=========== ============ =========
Cash paid during the year for:
Interest $ 103,470 $ -- $ 45,000
=========== ============ =========
Income taxes $ -- $ -- $ --
=========== ============ =========
See accompanying notes.
F-7
CELSION CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS
Celsion Corporation (the "Company") is in the business of developing
thermotherapy products for medical applications.
2. GOING CONCERN UNCERTAINTY
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company has
sustained substantial operating losses in recent years and has used substantial
amounts of working capital in its operations. Further, at September 30, 1998,
current liabilities exceed current assets by $2,000,351. The continued operation
of the Company is dependent upon its ability to obtain funding necessary to
complete clinical trials of its products. Management continues to attempt to
obtain funding through both private and public offerings. The realization of the
majority of the Company's assets is dependent upon the success of these
offerings.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
-------------------------
The Company classifies highly liquid investments with original
maturities of 90 days or less to be cash equivalents. Cash equivalents are
stated at cost, which approximates market value.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined using the average cost method.
Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is
provided over the estimated useful lives of the related assets of five years.
Major renewals and betterments are capitalized at cost and ordinary repairs and
maintenance are charged against operations as incurred.
Patent Licenses
---------------
The Company has purchased several licenses to use the rights to
patented technologies. Patent licenses are amortized straight-line over the
remaining patent life.
F-8
Revenue Recognition
-------------------
Revenue is recognized when systems, products or components are
shipped and when consulting services are rendered. Deferred revenue is recorded
for customer deposits received on contingent sale agreements.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Equipment and facilities acquired for research and development activities which
have alternative future uses are capitalized and charged to expense over their
estimated useful lives.
Net Loss Per Common Share
-------------------------
Basic and diluted net loss per common share was computed by
dividing net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.
Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Institutions
----------------------
For most financial instruments, including cash, accounts payable
and accruals, management believes that the carrying amount approximates fair
value, as the majority of these instruments are short-term in nature.
New Accounting Pronouncements
-----------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS No. 123), which was effective for the Company's year ended
September 30, 1997. SFAS No. 123 allows companies either to continue to account
for stock-based employee compensation plans under existing accounting standards
or to adopt a fair value based method of accounting as defined in the new
standard. The Company will follow the existing accounting standards for these
plans, and has provided pro forma disclosure of net income and earnings per
share as if the expense provisions of SFAS No. 123 had been adopted.
Implementation of SFAS No. 123 did not have a material impact on results of
operations or financial condition.
F-9
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
No. 128), which establishes new standards for computing and presenting earnings
per share. SFAS No. 128 is effective for the Company's September 30, 1998
financial statements, including restatement of interim periods; earlier
application was not permitted. The effect of the new standard did not have a
material impact on previously reported earnings per share.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income (SFAS No. 130), which establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 requires comprehensive
income and its components, as recognized under the accounting standards, to be
displayed in a financial statement with the same prominence as other financial
statements. The Company has adopted the standard, as required, in the fiscal
year ended September 30, 1998. The Company had no items of comprehensive income
for the three years ended September 30, 1998.
Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131), also
issued in June 1997, establishes new standards for reporting information about
operating segments in annul and interim financial statements. The standard also
requires descriptive information about the way the operating segments are
determined, the products and services provided by the segments, and the nature
of differences between reportable segment measurements and those used for the
consolidated enterprise. This standard is effective for years beginning after
December 15, 1997. Adoption in interim financial statements is not required
until the year after initial adoption, however, comparative prior period
information is required. The Company is evaluating the standard and plans
adoption as required in 1999; adoption of this disclosure requirement will not
have a material impact on the Company's results of operations or financial
position.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1998 1997
--------- --------
Trade receivables $ 1,812 $4,431
Related party receivables:
Microfocus - 1,460
--------- --------
$ 1,812 $ 5,891
========= ========
5. INVENTORIES
Inventories are comprised of the following at September 30:
1998 1997
--------- --------
Materials $ 5,059 $235,748
Work-in-process - 16,990
Finished products 37,000 77,003
--------- --------
$ 42,059 $329,741
========= ========
F-10
During the year ended September 30, 1998, management completed a
thorough review of all its components inventory. As a result of this review the
Company identified and wrote off approximately $287,000 of parts and components
inventory acquired in the course of developing older equipment now considered to
be obsolete. This includes approximately $175,000 of components and parts
acquired in the course of developing the Company's older equipment, which was
deemed unusable in the Company's newer models that incorporate advanced
microwave technology, and $112,000 of replacement parts inventory for older
equipment sold in prior years by the Company which was determined to have no
appreciable market value because of absence of demand. The write off of $175,000
is included in research and development expenses and the write off of $112,000
is included in operating expenses.
6. RELATED PARTY TRANSACTIONS
Notes Payable - Related Parties
-------------------------------
Notes payable to related parties as of September 30 are
comprised of the following:
1998 1997
-------- --------
Term note payable to an officer and stockholder of
the Company, accruing interest at 10% per annum $ -- $ 28,650
Term notes payable to an officer and stockholder of
the Company, accruing interest at 12% per annum -- 68,750
Demand note payable to relative of an officer and
stockholder of the Company, accruing interest at
12% per annum 36,041 36,041
Demand note payable to related party of remainder
of funds borrowed for discontinued project, note
bears interest at 12% per annum -- 28,502
Term notes payable to interested parties of the
Company accruing interest at 12% per annum 10,000 10,000
Term note payable to an officer and stockholder of
the Company accruing interest at 8% per annum 50,000 --
Term note payable to stockholder of the Company accruing interest at 10% per
annum payable in monthly payments of $2,000 for 25 months The note is secured
by all accounts receivable and
general intangibles of the Company 50,000 50,000
-------- --------
146,041 221,943
Less current portion 146,041 221,943
-------- --------
Long-term portion - due in 1998 $ -- $ --
======== ========
F-11
Accrued interest payable on these notes amounted to $150,020 and
$245,784 at September 30, 1998 and 1997, respectively.
Stock Based Compensation Plan
-----------------------------
As part of the Company's employment agreement with the current
chief executive officer (CEO), the Company has granted to the CEO 1,900,000
shares of the Company's capital stock which vests in certain milestones
throughout the term of employment. Ultimately all shares become fully vested,
provided that the CEO remains with the Company through the term of the contract.
The total amount charged to compensation expense for 1998 and 1997 under this
plan was $699,375 and $280,000, respectively.
7. NOTES PAYABLE - OTHER
Notes payable - other consist of the following as of September 30:
1997 1998
---------- ----------
Senior secured convertible notes, resulting from private placement
offerings in July 1996 and June 1997, accruing interest at 8% per annum
The notes are secured by the Company's common stock held by an executive
officer. The notes matured December 31,
1997. $ -- $1,169,800
Term note with interest accruing at 24% per annum,
compounded monthly. The note matured April 30, 1996 114,778 112,031
Term note with accrued interest payable each month
at 12% per annum. The note is secured by inventory
and property. The note matured December 18, 1997 18,000 200,000
---------- ----------
$ 132,778 $1,481,831
========== ==========
Accrued interest payable on these notes amounted to $127,538 and
$116,604 at September 30, 1998 and 1997, respectively.
8. RETIREMENT PLAN
The Company provides a SAR-SEP savings plan to which eligible
employees may make pretax payroll contributions up to 15% of compensation. The
Company does not make contributions to the plan.
9. INVESTMENT IN AESTAR FINE CHEMICAL COMPANY - AT COST
During 1995, the Company acquired a 9.5% equity interest in Aestar
Fine Chemical Company (Aestar) in exchange for 16,000,000 shares of its common
stock. The investment was carried at cost, as measured by the $.50 per share
F-12
fair market value of the 16,000,000 shares of the Company's common stock. The
Company has subsequently rescinded this investment during the year ended
September 30, 1997.
10. INVESTMENT IN ARDEX EQUIPMENT, L.L.C. - AT EQUITY
The Company purchased a 19.25% equity interest in Ardex Equipment,
L.L.C. (Ardex) in 1995. The investment was carried at cost, adjusted for the
Company's proportionate share of Ardex's loss from the purchase date through
September 30, 1995. During 1996, the Company rescinded its investment in Ardex,
the effects of which are reflected in these financial statements.
11. LOSS ON COSMETICS DIVISION
During 1995, the Company issued 20,000,000 shares of common stock to
an investor which enabled the investor to obtain a majority interest in the
Company by recapitalizing the Company through this investment of $2,000,000 in
cash and an $8,000,000 interest in a foreign corporation. In connection with
this recapitalization, the Company agreed to the initiation of the development
of a cosmetics division and to the investment of excess funds in an investment
contract. During the year ended September 30, 1996, this agreement was rescinded
and the Company recognized a loss on the cosmetics division in the amount of
$471,000. Additionally as a result of the rescission agreement, the balance of
the investment contract of $40,000 was written-off in the year ended September
30, 1997.
12. INCOME TAXES
A reconciliation of the Company's statutory tax rate to the
effective rate for the years ended September 30 is as follows:
1998 1997 1996
----- ----- -----
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, 1998, the Company had net operating loss
carryforwards of approximately $18,000,000 for federal income tax purposes that
are available to offset future taxable income through the year 2018.
F-13
The components of the Company's deferred tax asset for the years
ended September 30 is as follows:
1998 1997
---- ----
Net operating loss carryforwards $6,952,000 $5,330,000
Valuation allowance (6,952,000) (5,330,000)
----------- ------------
$ -- $ --
============ ============
The evaluation of the realizability of such deferred tax assets in future
periods is made based upon a variety of factors for generating future taxable
income, such as intent and ability to sell assets and historical and projected
operating performance. At this time, the Company has established a valuation
reserve for all of its deferred tax assets. Such tax assets are available to be
recognized and benefit future periods.
13. COMMON STOCK
During the year ended September 30, 1998, the Company issued
4,315,000 shares of common stock for $2,025,000, 5,274,961 shares were issued to
extinguish debt, and 1,260,532 shares were issued as payment for various
operating expenses.
During the year ended September 30, 1997, the Company issued
1,409,902 shares of common stock for $683,000, 1,317,143 shares were issued to
extinguish debt, and 1,161,828 shares were issued as payment for various
operating expenses. Additionally, the Company retired 16,000,000 shares of
common stock in connection with the rescission in its investment in Aestar.
During the year ended September 30, 1996, the Company issued
1,299,711 shares of common stock for $419,510, 689,985 shares were issued to
extinguish debt, and 9,000 shares were issued as payments for various operating
expenses.
14. STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees, directors,
vendors and debt holders. Options are granted at market value at the date of the
grant and are immediately exercisable.
A summary of the Company's stock option activity and related
information for the years ended September 30, 1998 and 1997 is as follows:
1998 1997
-------------------------- --------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Options Price Options Price
--------- --------- --------- ---------
Outstanding at beginning of year 3,565,000 $.38 3,050,000 $.34
Granted -- .00 515,000 .61
Exercised (125,000) .45 -- .00
Expired/canceled (695,000) .25 -- .00
--------- ---- --------- ----
Outstanding at end of year 2,745,000 $.41 3,565,000 $.38
========= ==== ========= ====
F-14
Additionally, the Company has issued warrants to purchase the
Company's stock as follows:
1998 1997
-------------------------- ------------------------
Weighted Weighted
Common Average Common Average
Stock Exercise Stock Exercise
Warrants Price Warrants Price
--------- --------- --------- ---------
Outstanding at beginning of year 3,276,818 $.35 2,218,035 $.29
Issued 4,582,165 .52 1,058,783 .48
--------- ---- --------- ----
Outstanding at end of year 7,858,983 $.45 3,276,818 $.35
========= ==== ========= ====
The following summarizes information about options and warrants at
September 30, 1998:
Options/
Options/Warrants Outstanding Warrants Exercisable
---------------------------- --------------------
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Prices Number Contractual Life Exercise Price Number Exercise Price
--------------- ------ ---------------- -------------- ------ --------------
$0.22 - $3.00 10,603,982 3.77 years $.44 7,060,731 $.41
The Company has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), but applies Accounting Principles Board Opinion No.
25 and related interpretations. No compensation expense related to the granting
of stock options was recorded during the three years ended September 30, 1998.
The fair value of these equity awards was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997: risk-free interest rate of 5.75% and 6.5% for
1998 and 1997, respectively; expected volatility of 50%; expected option life of
3 to 5 years from vesting and an expected dividend yield of 0.0%. If the Company
had elected to recognize cost based on the fair value at the grant dates
consistent with the method of prescribed by SFAS No. 123, net loss and loss per
share would have been changed to the pro forma amounts as follows:
1998 1997 1996
--------------- --------------- ---------------
Net loss $(5,272,699) $(3,476,159) $(2,708,362)
Net loss per common share - basic (.12) (.12) (.07)
15. COMMITMENTS AND CONTINGENCIES
Potential Liability and Insurance
---------------------------------
In the normal course of business, the Company may be subject to
warranty and product liability claims on its hyperthermia equipment. Currently,
the Company does not have a product liability insurance policy in effect
F-15
although management does anticipate obtaining such coverage when adequate
financial resources are available. The assertion of any product liability claim
against the Company, therefore, may have an adverse effect on its financial
condition. As of September 30, 1998, no product, warranty claims or other
liabilities against the Company have been asserted.
Warranty Reserve
----------------
The Company warrants its hyperthermia units to be free from
defects in material and workmanship under normal use and service for the period
of one year from the date of shipment. Claims have been confined to basic
repairs. Given the one year limitation of the warranty, management has elected
to not set up a warranty reserve but, instead, to expense repairs as costs are
incurred.
16. OTHER BUSINESS VENTURES - TERMINATION OF PURCHASE OPTION
On April 26, 1995, the Company entered into an agreement to purchase
a 50% interest in the United Aerosol and Home Products Company, LTD ("Unisol"),
located in Zhongshan, China. Unisol is a specialty chemical and fine chemical
aerosol packaging and bottle/can filling business. The purchase price was to be
20% of the appraised value of Unisol equipment, payable in the Company's common
stock at the close of business on April 26, 1996. This agreement was terminated
during the year ended September 30, 1997.
17. LEASE OBLIGATIONS
During the year ended September 30, 1997, the Company has entered
into a 3-year lease for their facilities in Columbia, Maryland. Future minimum
lease obligations are as follows:
1999 $ 69,131
2000 55,877
---------
$125,008
========
Total amounts charged to rent expense for 1998, 1997 and 1996 were
$75,018, $64,594 and $55,982, respectively.
F-16
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
and
CHEUNG LABORATORIES, INC.
PATENT LICENSE AGREEMENT
M.I.T.'S OFFER TO CHEUNG LABORATORIES, INC. TO
ENTER INTO THIS LICENSE AGREEMENT SHALL EXTEND UNTIL
NO LATER THAN OCTOBER 31, 1997
----------------
(EXCLUSIVE)
i
S.
11-7-94
Patent Exclusive
TABLE OF CONTENTS
-----------------
table of contents........................................................ii
WITNESSETH ...............................................................3
1 DEFINITIONS ........................................................4
2 GRANT.............................................................7
3 DUE DILIGENCE.....................................................9
4 ROYALTIES........................................................11
5 REPORTS AND RECORDS ...............................................13
6 PATENT PROSECUTION ................................................14
7 IINFRINGEMENT......................................................15
8 PRODUCT LIABILITY .................................................16
9 EXPORT CONTROLS ...................................................17
10 NON-USE OF NAMES ..................................................17
11 ASSIGNMENT.........................................................18
12 DISPUTE RESOLUTION ................................................18
13 TERMINATION........................................................18
14 PAYMENTS, NOTICES..................................................20
15 MISCELLANEOUS
PROVISIONS.........................................................20
APPENDIX A............................................................22
APPENDIX B............................................................23
APPENDIX C............................................................24
ADDENDUM A ...........................................................25
ATTACHMENT A .........................................................28
ii
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
and
CHEUNG LABORATORIES, INC.
PATENT LICENSE AGREEMENT
------------------------
This Agreement is made and entered into this 24th day of October 1997,
(the "EFFECTIVE DATE") by and between MASSACHUSETTS INSTITUTE OF TECHNOLOGY, a
corporation duly organized and existing under the laws of the Commonwealth of
Massachusetts and having its principal office at 77 Massachusetts Avenue,
Cambridge, Massachusetts 02139, U.S.A. (hereinafter referred to as "M.I.T."),
and CHEUNG LABORATORIES, INC., a corporation duly organized under the laws of
Maryland and having its principal office at 10220-I Old Columbia Road, Columbia,
MD 21046-1705 (hereinafter referred to as "LICENSEE"), and cancels, supersedes
and replaces a previous Agreement by and between M.I.T. and LICENSEE for M.I.T.
Case No.'s 5493L, 5672L, and 6512L dated June 12, 1996.
WITNESSETH
----------
WHEREAS, M.I.T. is the owner of certain PATENT RIGHTS (as later
defined herein) relating to M.I.T. Case No. 5493L, U.S. Patent No. 5,251,645,
"Adaptive Hyperthermia System," by Alan J. Fenn; M.I.T. Case No. 5672L,
"Non-Invasive Monopole Hyperthermia, Array for Brain Tumor Heating by Alan J.
Fenn; M.I.T. Case No. 6572L, U.S. Patent No. 5,540,737, "Minimally Invasive
Monopole Phased Array Hyperthermia Applicators for Treating Carcinoma," by Alan
J. Fenn; and M.I.T. Case No. 7615L, "Adaptive Nulling And Focusing Hyperthermia
Phased Arrays For Activating Thermosensitive Liposomes For Targeted Delivery Of
Drugs To Deep Human Tissues," by Alan J. Fenn and has the right to grant
licencses under said PATENT RIGHTS (as later defined herein), subject only to
royalty-free,nonexclusive license heretofore granted to the United States
Government;
WHEREAS, M.I.T. desires to have the PATENT RIGHTS developed and
commercialized to benefit the public and is willing to grant a license
thereunder,
WHEREAS, M.I.T. is the owner of certain rights, tite and interest in
the PROGRAM (as later defined herein) relating to M.I.T. Case No. 7299LS,
"NULLGSC," by Alan J. Fenn and M.I.T. Case No. 7298LS, "FOCUSGSC," by Alan J.
Fenn subject only to the royalty-free, nonexclusive license rights of the United
States Government pursuant to 48 CFR 52.227-14 (Civilian Agencies) and DFARS
252.227-7013 (Defense Agencies), and has the right to grant licenses thereunder;
WHEREAS, M.I.T. desires to have the PROGRAM developed and
commercialized to benefit the public and is willing to grant a license
thereunder;
1
WHEREAS, M.I.T. and LICENSEE had entered into a License Agreement for
M.I.T. Case No.'s 5493L, 5672L, 6512L, 7298LS and 7299LS dated June 12, 1996,
and now wish to terminate that Agreement and replace it with this Agreement; and
WHEREAS, LICENSEE has represented to M.I.T., to induce M.I.T. to enter
into this Agreement, that LICENSEE is experienced in the development,
production, manufacture, marketing and sale of products similar to the LICENSED
PRODUCT(s) (as later defined herein) and/or the use of the LICENSED PROCESS(es)
(as later defined herein) and that it shall commit itself to a thorough,
vigorous and diligent program of exploiting the PATENT RIGHTS, and to a
thorough, vigorous and diligent program of exploiting the PROGRAM, so that
public utilization shall result therefrom, all in the manner provided herein;
and
WHEREAS, LICENSEE desires to obtain a license under the PATENT RIGHTS
and also desires to obtain a license to the PROGRAM, upon the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and the mutual terms,
conditions and covenants contained herein, the parties hereto agree as follows
I - DEFINITIONS
---------------
For the purposes of this Agreement, the following words and phrases
shall have the following meanings:
1.1 "ADAPTATIONS" shall mean the PROGRAM as it maybe adapted by
LICENSEE for hardware other than the original M.I.T. Cray computer.
1.2 "COPYRIGHT" shall mean M.I.T.'s copyrights in the PROGRAM.
1.3 "DERIVATIVE WORKS" shall mean a program that uses the M.I.T'.
COPYRIGHTED PROGRAM and/or and ADAPTATION, but which has enhanced and new
features or fewer features. LICENSEE shall be entitled to establish all
proprietary rights for itself in the intellectual property represented by
LICENSEE-created enhancements and new features, whether in the nature of trade
secrets, copyrights or patent rights or other rights M.I.T. shall be entitled to
establish all proprietary rights for itself in the intellectual property
represented M.I.T.-created enhancements and new features, whether in the nature
of copyrights or patent rights or other rights.
1.4 "END USER" shall mean a customer licensed or otherwise authorized
by LICENSEE to use a single copy of the PROGRAM for internal purposes only and
not for further distribution.
1.5 On the EFFECTIVE DATE, "EXCLUSIVE FIELDS OF USE" shall mean FIELD
OF USE ONE, FIELD OF USE TWO, and FIELD OF USE THREE. This definition may be
modified according to paragraphs 3.6, 3.7 and 3.8.
1.6 "FIELD OF USE ONE" shall mean Breast Hyperthermia.
2
I
1.7 "FIELD OF USE TWO" shall mean Prostate Hyperthermia.
1.8 "FIELD OF USE THREE" shall mean all other medical applications.
1.9 "INTELLECTUAL PROPERTY RIGHTS" shall mean all of the PATENT RIGHTS
and COPYRIGHT.
1.10 "LICENSED PROCESS" shall mean any process which is covered in
whole or in part by an issued, unexpired claim or a pending claim contained in
the PATENT RIGHTS, or by the COPYRIGHT,
1.11 "LICENSED PRODUCT" shall mean LICENSEE's hyperthermia machine or
part thereof, and accessories, including, but not limited to disposable
accessories such as temperature probes and needles, which:
(a) is covered in whole or in part by an issued, unexpired
claim or a pending claim contained in the PATENT RIGHTS
in the country in which any such LICENSED PRODUCT or
part thereof is made, used or sold; or
(b) is manufactured by using a process or is employed to
practice a process which is covered in whole or in part
by an issued, unexpired claim or a pending claim
contained in the PATENT RIGHTS in the country in which
any LICENSED PROCESS is used or in which such product or
put thereof is used or sold.
(c) is covered in whole or in part by the COPYRIGHT.
1.12 "LICENSED SERVICE" shall mean any fee-bearing service performed
by LICENSEE or any SU13LICENSEE or any MEDICAL SERVICE PROVIDER which uses a
LICENSED PRODUCT or practices a LICENSED PROCESS.
1.13 "LICENSEE" shall mean Cheung Laboratories, Inc., and shall
include a related company of Cheung Laboratories, Inc., the voting stock of
which is directly or indirectly at least fifty percent (50%) owned or controlled
by Cheung Laboratories, Inc.
1.14. "MEDICAL SERVICE PROVIDER" shall mean a customer or user of a
LICENSED PRODUCT, at a clinical site, licensed or otherwise authorized to
practice a LICENSED PROCESS and/or perform a LICENSED SERVICE by LICENSEE, which
customer or user has explicitly' not been granted rights by LICENSEE to make,
sell, or lease LICENSED PRODUCTS.
1.15 "MILESTONE PAYMENT" shall mean a payment to LICENSEE from any
third party due upon achievement of an agreed upon technical, regulatory, or
business milestone related to LICENSED PRODUCTS, LICENSED PROCESSES, or LICENSED
SERVICES. Illustrative examples of such milestones include, but are not limited
to, achieving a technical result, obtaining FDA approval, and meeting sales
targets.
MILESTONE PAYMENTS shall not include (i) any payments to LICENSEE
which are subject to royalties under paragraphs 4.1 (h), (i) or (j), (ii) any
advances to LICENSEE pursuant to bank loans or other bona fide credit
arrangements, and (iii) any payments to LICENSEE to acquire LICENSEE's capital
stock at a price not exceeding the fair market value thereof.
3
1. 16 "NET SALES" shall mean the sum of the following:
a) LICENSEE's and its SUBLICENSEE'S billings for LICENSED PRODUCTS
(including, explicitly, the PROGRAM), LICENSED PROCESSES, and LICENSED SERVICES,
less the sum of the following items, providing that these items are payable by
LICENSEE (or by its SUBLICENSEE ) or deductible from LICENSEE's billings (or
from SUBLICENSEE'S billings) within sixty (60) days of receiving payments from
LICENSEE's (or SUBLICENSEE'S) customer(s):
i. discounts allowed in amounts customary in the trade for
quantity purchases, cash payments, prompt payments,
wholesalers and distributors;
ii. sales, tariff duties and/or use taxes directly imposed
and with reference to particular sales;
iii. outbound transportation prepaid or allowed;
iv. amounts allowed or credited on returns or refunds; and
V. allowance for bad debt, not to exceed Five Percent (5%)
of NET SALES per calendar year.
No other deductions shall be made for commissions paid to individual
whether they be with independent sales agencies or regularly employed by
LICENSEE and on its payroll, or for the cost of collections. LICENSED PRODUCTS,
LICENSED PROCESSES, or LICENSED SERVICES shall be considered, "sold" ninety (90)
days after billing, or invoicing, or upon receipt of payment, whichever comes
first, provided, however-that LICENSED PRODUCTS are actually shipped to
customers; plus
b) LICENSEE's gross receipts from MEDICAL SERVICE PROVIDERS,
other than gross receipts from MEDICAL SERVICE PROVIDERS, other than receipts
counted in paragraph 1. 16 (a) above.
1.17 "OTHER REVENUE" shall mean LICENSEE's gross revenues from the
sale of its own services for consulting, research and development, and training,
in connection with:
a. the sublicensing of the INTELLECTUAL PROPERTY RIGHTS;
and/or
b the use or sale, lease or other transfer of LICENSED
PRODUCTS, LICENSED PROCESSES and LICENSED SERVICES.
1.18 "PATENT RIGHTS" shall mean all of the following M.I.T.
intellectual property:
a. the United States patents listed in Appendix A;
b. the United States patent applications listed in Appendix
A, and divisionals, continuations and claims of
continuation-in-part applications which shall be directed
to subject matter specifically described in such patent
applications, and the resulting patents;'
c. any patents resulting from reissues or reexaminations of
the United States patents described in a. and b. above;
4
d. the Foreign patents listed in Appendix A;
e. the Foreign parent applications listed in Appendix A, and
divisionals, continuations and claims of
continuation-in-part applications which shall be directed
to subject matter specifically described in such Foreign
patent applications, and the resulting patents;
f. Foreign patent applications filed after the EFFECTIVE
DATE in the countries listed in Appendix B and
divisionals, continuations and claims of continuation
in-part applications which shall be directed to subject
matter specifically described in such patent
applications, and the resulting patents; and
9. any Foreign patents, resulting from equivalent Foreign
procedures to United States reissues and reexaminations
of the Foreign patents described in d., e. and f. above.
1.19 "PROGRAM" shall mean the computer program(s), "NULLGSC" and
"FOCUSGSC" and related documentation, if any described in Appendix C
(hereinafter the "M.I.T. COPYRIGHTED PROGRAM"), and shall also include
ADAPTATIONS, DERIVATIVE WORKS and TRANSLATIONS. PROGRAM may be protected by both
PATENT RIGHTS and COPYRIGHTS,
1.20 "SUBLICENSEE" shall mean an entity which has the right to i) make
or have made and sell LICENSED PRODUCTS or ii) make or have made and lease
LICENSED PRODUCTS.
1.21 "TRANSLATION" shall mean a translation of the PROGRAM into
another language.
2-GRANT
-------
2.1 M.I.T. hereby grants to LICENSEE the right and license for FIELD
OF USE ONE, FIELD OF USE TWO, and FIELD OF USE THREE to practice under the
PATENT RIGHTS and, to the extent not prohibited by. other patents, to make, Lave
made, use, lease, sell and import LICENSED PRODUCTS and to practice the LICENSED
PROCESSES, and to perform LICENSED SERVICES until the expiration of the last to
expire of the, PATENT RIGHTS, unless this Agreement shall be sooner terminated
according to the terms hereof.
2.2 M.I.T. hereby grants to LICENSEE the following rights and licenses
for FIELD OF USE ONE, FIELD OF USE TWO, and FIELD OF USE THREE to the end of the
term for which the COPYRIGHT shall be granted, unless this Agreement shall be
sooner terminated:
a. to use and reproduce the PROGRAM;
b. to create DERIVATIVE WORKS; and
c. to lease, transfer and sublicense the PROGRAM to
END-USERS through the normal channels of distribution;
and
2.3 In order to establish a period of exclusivity for LICENSEE, M.I.T.
hereby agrees that it shall not grant any other license to the PATENT RIGHTS for
5
the EXCLUSIVE FIELDS OF USE, and also that it shall not grant any other license
to the COPYRIGHT for the EXCLUSIVE FIELDS OF USE, subject only to Paragraphs 2.5
and 2.6 and to the royalty-free, nonexclusive license rights of the United
States Government pursuant to 48 CFR 52.227-14 (Civilian Agencies) and DFARS
252.227-7013 (Defense Agencies) during the period of time commencing with the
EFFECTIVE DATE and terminating with the first to occur of:
(a) the expiration of ten (10) years after the first
commercial sale of a LICENSED PRODUCT or first
commercial use of a LICENSED PROCESS or the first
commercial performance of a LICENSED SERVICE; or
(b) the expiration of twelve (12) years after the EFFECTIVE
DATE of this Agreement.
2.4 At the end of the exclusive period, the license granted hereunder
shall become nonexclusive and shall extend to the end of the term or terms for
which any PATENT RIGHTS or COPYRIGHT are granted, unless sooner terminated as
hereinafter provided. The period of exclusivity may be extended with the written
consent of M.I.T., on a field of use basis, which consent shall not unreasonably
be withheld, provided that LICENSEE is a licensee in good standing, owing no
fees, royalties or any other monies to M.I.T., and having met all the diligence
milestones pertaining to the particular field of use in which an extension of
the period of exclusivity is under consideration.
2.5 M.I.T, reserves the right to practice under the PATENT RIGHTS for
its own noncommercial research purposes.
2.6 M.I.T. reserves the right to use the PROGRAM, to use and create
DERIVATIVE WORKS of the PROGRAM and to distribute the PROGRAM and M.I.T.-created
DERIVATIVE WORKS to third parties for noncommercial research purposes.
2.7 LICENSEE agrees that LICENSED PRODUCTS leased or sold in the
United States shall be manufactured substantially in the United States.
2.8 In order to encourage and facilitate the development of LICENSED
PRODUCTS, LICENSED PROCESSES, and LICENSED SIERVICES M.I.T. agrees to perform
the work described in the Technology Transfer Agreement attached to this license
as ADDENDUM A.
2.9 LICENSEE shall have the right to enter into sublicensing
agreements for the rights, privileges and licenses granted hereunder only during
the exclusive period of this Agreement, and with the following restrictions:
a) Such sublicenses may extend past the expiration date of
the exclusive period of this Agreement, or upon the
termination of LICENSEE's exclusive rights in a
particular field of use, pursuant to paragraphs 3.6,
3.7, and 3.8, but any exclusivity of such sublicenses
shall expire upon the expiration of LICENSEE's
exclusivity,
b) Upon any termination of this Agreement, sublicensees'
rights shall also terminate, subject to Paragraph 13.6
hereof.
6
c) LICENSEE may not grant sublicenses which perrmit further
sublicensing of the INTELLECTUAL PROPERTY RIGHTS without
the express written permission of M.I.T.,
d) LICENSEE may not grant the rights to make, lease or sell
LICENSED PRODUCTS to MEDICAL SERVICES PROVIDERS.
2.10 LICENSEE agrees that any sublicenses granted by it shall provide
that the obligations to M.I.T. of Articles 2, 5, 7, 8, 9, 10, 12, 13, and 15 of
this Agreement shall be binding upon the sublicensee as if it were a party to
this Agreement. LICENSEE further agrees to attach copies of these Articles to
sublicense agreements.
2.11 LICENSEE agrees to forward to M.I.T. a copy of any and all
sublicense agreements promptly upon execution by the parties.
2.12 LICENSEE shall not receive from SUBLICENSEES anything of value in
lieu of cash payments in consideration for any sublicense under this Agreement,
without the express prior written permission of M.I.T.
2.13 The license granted hereunder shall not be construed to confer
any rights upon LICENSEE by implication, estoppel or otherwise as to any
technology not specifically set forth in Appendix A hereof
3 - DUE DILIGENCE
-----------------
3.1 LICENSEE shall use its best efforts to bring one or more LICENSED
PRODUCTS, LICENSED PROCESSES, or LICENSED SERVICES to market through a thorough,
vigorous and diligent program for exploitation of the INTELLECTUAL PROPERTY
RIGHTS and to continue active, diligent marketing efforts for one or more
LICENSED PRODUCTS, LICENSED PROCESSES or LICENSED SERVICES throughout the. life
of this Agreement.
3.2 LICENSEE shall raise a minimum of (Confidential Treatment
Requested) Dollars toward the development of LICENSED PRODUCTS, LICENSED
PROCESSES or LICENSED SERVICES according to the following schedule:
(a) (Confidential Treatment Requested) Dollars on or before
January 1, 1998.
(b) An additional(Confidential Treatment Requested) Dollars
on or before June 30, 1998.
(c) An additional(Confidential Treatment Requested) Dollars
on or before January 1, 2000.
3.3 (a) In addition, pertaining to FIELD OF USE ONE, LICENSEE shall
adhere to the following milestone:
As soon as possible, but in all events on or before
June 30, 1999 LICENSEE shall apply for FDA approval for
commercial sale of a LICENSED PRODUCT in FIELD OF USE
ONE, and/or for FDA approval for the commercial use of
7
a LICENSED PROCESS or commercial performance of a
LICENSED SERVICE in FIELD OF USE ONE.
(b) In addition, pertaining to FIELD OF USE TWO, LICENSEE
shall adhere to the following milestone:
As soon as possible, but in all events on or before June
30, 2001 LICENSEE shall apply for FDA approval for
commercial sale of a LICENSED PRODUCT in FIELD OF USE
TWO, and/or for FDA approval for the commercial use of a
LICENSED PROCESS or commercial performance of a LICENSED
SERVICE in FIELD OF USE TWO.
(c) In addition, pertaining to FIELD OF USE THREE, LICENSEE
shall adhere to the following milestone:
As soon as possible, but in all events on or before June
30, 2002 LICENSEE shall apply for FDA approval for
commercial sale of a LICENSED PRODUCT in FIELD OF USE
THREE, and/or for FDA approval for the commercial use of
a LICENSED PROCESS or commercial performance of a
LICENSED SERVICE in FIELD OF USE THREE.
3.4 LICENSEE shall make sales of LICENSED PRODUCTS in FIELD OF USE ONE
according to the following schedule:
1998 at least I unit
1999 at least 5 units
2000 at least (Confidential
Treatment Requested)
units
2001 and each year there after at least (Confidential
Treatment Requested)
units
3.5 Failure to comply with any of paragraphs 3.2 (a), (b) or (c) shall
be grounds for for M.I.T. to terminate this license pursuant to paragraph 13.3
hereof, M.I.T. to terminate this license pursuant to paragraph 13.3 hereof,
3.6 Failure to comply with paragraph 3.3 (a) or paragraph 3.4 shall be
grounds to remove FIELD OF USE ONE from the definition of "EXCLUSIVE FIELDS OF
USE", thereby terminating LICENSEE's exclusive rights to FIELD OF USE ONE. Under
these circumstances, LICENSEE explicitly retains non-exclusive rights to FIELD
OF USE ONE.
3.7 Failure to comply with paragraph 3.3 (b) shall be grounds to
remove FIELD OF USE TWO from the definition of "EXCLUSIVE FIELDS OF USE",
thereby terminating LICENSEE's exclusive rights to FIELD OF USE TWO. Under these
circumstances, LICENSEE explicitly retains non-exclusive rights to FIELD OF USE
TWO.
3.8 Failure to comply with paragraph 3.3 (c) shall be grounds to
remove FIELD OF USE THREE from the definition of "EXCLUSIVE FIELDS OF USE",
thereby terminating LICENSEE's exclusive rights to FIELD OF USE THREE. Under
these circumstances, LICENSEE explicitly retains non-exclusive rights to FIELD
OF USE THREE.
8
4 - ROYALTIES
-------------
4.1 For the rights, privileges and license granted hereunder, LICENSEE
shall pay royalties to M.I.T. in the manner hereinafter provided to
the end of the term of the PATENT RIGHTS or until this Agreement shall
be terminated:
(a) License Maintenance Fees of (Confidential Treatment
Requested) Dollars per year payable on January 1, 1998
and on January 1, 1999; provided, however, that Running
Royalties subsequently due on NET SALES for each said
year, if any, shall be creditable against the License
Maintenance Fee for said year. License Maintenance Fees
paid in excess of Running, Royalties shall not be
creditable to Running Royalties for future years.
(b) License Maintenance Fees of (Confidential Treatment
Requested) Dollars per year payable on January 1, 2000
and on January 1, 2001 provided, however, that Running
Royalties subsequently due on NET SALES for each said
year, if any, shall be creditable against the License
Maintenance Fee for said year, License Maintenance Fees
paid in excess of Running Royalties shall not be
creditable to Running Royalties for future years.
(c) License Maintenance Fees of (Confidential Treatment
Requested) Dollars per year payable on January 1, 2002
and on January 1 of each year thereafter; provided,
however," License Maintenance Fees may be credited to
Running Royalties subsequently due on NET SALES for each
said year, if any. License Maintenance Fees paid in
excess of Running Royalties shall not be creditable to
Running Royalties for future years.
(d) (i) Running Royalties in an amount equal to (Confidential
Treatment Requested) percent of NET SALES of the LICENSED
PRODUCTS, leased or sold by and/or for LICENSEE and/or
its SUBLICENSEES for LICENSED PRODUCTS which are either
made or leased or sold in a country in which there is a
valid, issued claim of a patent described in either
APPENDICES A or B.
(ii) Running Royalties in an amount equal to
(Confidential Treatment Requested) percent of NET SALES
of LICENSED SERVICES performed by and/or for LICENSEE
and/or its SUBLICENSEES and/or 'authorized MEDICAL
SERVICE PROVIDERS, utilizing LICENSED PRODUCTS which are
either made or leased or sold in a country in which there
is a valid, issued claim of. a patent described in either
APPENDICES A,or B.
(e) (i) Running Royalties in an amount equal to (Confidential
Treatment Requested) percent of NET SALES of the LICENSED
PRODUCTS, leased or sold by and/or for LICENSEE and/or
its SUBLICENSEES for LICENSED PRODUCTS which are neither
made nor leased nor sold in a country in which there is a
valid, issued claim of a patent described in either
APPENDICES A or B, but which utilize the COPYRIGHT and/or
practice or ran the PROGRAM, as described in APPENDIX C.
(ii) Running Royalties in an amount equal to
(Confidential Treatment Requested) percent of NET SALES
of LICENSED SERVICES performed by and/or for LICENSEE
and/or its SUBLICENSEES and/or authorized MEDICAL SERVICE
PROVIDERS, Utilizing LICENSED PRODUCTS which are neither
made nor leased nor sold in a country in which there is a
valid, issued claim of a patent described in either
APPENDICES A or B, but which utilize the COPYRIGHT and/or
practice or run the PROGRAM, as described in APPENDIX C.
9
(f) Running Royalties in an amount equal to (Confidential
Treatment Requested) percent of NET SALES of the PROGRAM
delivered to END-USERS if the PROGRAM is sold separately
from the LICENSED PRODUCTS.
(g) (Confidential Treatment Requested) Percent of MILESTONE
PAYMENTS received by LICENSEE.
(h) (Confidential Treatment Requested) Percent of lump sum
type payments received by LICENSEE from its SUBLICENSEES
in consideration for a grant by LICENSEE to a SUBLICENSEE
to practice under the INTELLECTUAL PROPERTY RIGHTS,
including, explicitly, the right to make, sell, and lease
LICENSED PRODUCTS, without a substantial and essentially
simultaneous grant by LICENSEE to the SUBLICENSEE of
LICENSEE-owned technology.
(i) (Confidential Treatment Requested) Percent of lump sum
type payments received by LICENSEE from its SUBLICENSEES
in consideration for a grant by LICENSEE to a SUBLICENSEE
to practice under the INTELLECTUAL PROPERTY RIGHTS,
including, explicitly, the right to make, sell, and lease
LICENSED PRODUCTS, with a substantial and essentially
simultaneous grant by LICENSEE to the SUBLICENSEE of
LICENSEE-owned technology.
(j) (Confidential Treatment Requested) Percent of lump sum
type payments received by LICENSEE from its MEDICAL
SERVICE PROVIDERS in consideration for a fully paid up
license and/or authorization to practice LICENSED
PROCESSES and perform LICENSED SERVICES, with no further
reporting required from the MEDICAL SERVICE PROVIDER to
LICENSEE concerning its practice of LICENSED PROCESSES or
performance of LICENSED SERVICES.
(k) If OTHER REVENUE is greater than NET SALES, then Running
Royalties in an amount equal to (Confidential Treatment
Requested) percent of OTHER REVENUE.
(l) If OTHER REVENUE is less than NET SALES, then Running
Royalties in an amount equal to (Confidential Treatment
Requested) percent of OTHER REVENUE.
4.2 All payments due hereunder shall be paid in full, without
deduction of taxes or other fees which may be imposed by any governrnent and
which shall be paid by LICENSEE.
4.3 No multiple royalties shall be payable because any LICENSED
PRODUCT, its manufacture, use, lease or sale are or shall be covered by more
than one PATENT RIGHTS patent application or COPYRIGHT or PATENT RIGHTS patent
licensed under this Agreement.
4.4 No multiple royalties shall be payable because any LICENSED
PROCESS of LICENSED SERVICE, its use, practice, or performance is covered by
more than one PATENT RIGHTS patent application or COPYRIGHT or PATENT RIGHTS
patent licensed under this Agreement.
4.5 Royalty payments shall be paid in United States dollars in
Cambridge, Massachusetts, or at such other place as M.I.T. may reasonably
designate consistent with the laws and regulations controlling in any foreign
country. If any currency conversion shall be required in connection with the
payment of royalties hereunder, such conversion shall be made by using the
10
I
exchange rate prevailing at the Chase Manhattan Bank (N.A.) on the last business
day of the calendar quarterly reporting period to which such royalty payments
relate.
5 - REPORTS AND RECORDS
-----------------------
5.1 LICENSEE shall keep full, true and accurate books of account
containing all particulars that may be necessary for the purpose of showing the
amounts payable to M.I.T. hereunder. Said books of account shall be kept at
LICENSEE's principal place of business or the principal place of business of
the appropriate division of LICENSEE to which this Agreement relates. Said books
and the supporting data shall be open at all reasonable times for five (5) years
following the end of the calendar year to which they pertain, to the inspection
of M.I.T. or its agents for the purpose of verifying LICENSEE's royalty
statement or compliance in other respects with this Agreement, Should such
inspection lead to the discovery of a greater than Ten Perceric (107o)
discrepancy in reporting to M.I.T.'s detriment, LICENSEE agrees to pay die
reasonable cost of such inspection.
5.2 LICENSEE shall deliver to M.I.T. true and accurate reports, giving
such particulars of the business conducted by LICENSEE and its sublicensees
under this Agreement as shall be pertinent to diligence under Article 3 and
royalty accounting hereunder.
a. before the first commercial sale of a LICENSED PRODUCT or
LICENSED SERVICE, annually, on January 31 of each year;
and
b. after the first commercial sale of a LICENSED PRODUCT or
LICENSED SERVICE, quarterly, within sixty (60) days after
March 31, June 30, September 30 and December 31, of each
year.
These reports shall include at least the following
a. money raised pursuant to paragraph 3.2.
b. number of LICENSED PRODUCTS manufactured, leased and sold
by and/or for LICENSEE and all SUBLICENSEES;
c accounting for all LICENSED SERVICES sold by and/or for
LICENSEE and all SUBLICENSEES and all MEDICAL SERVICE
PROVIDERS;
d accounting for NET SALES, noting the deductions and
credits applicable as provided in Paragraphs 1.16 and
6.3, accounting for OTHER REVENUE;
e Running Royalties due under Paragraph 4.1 (d), (e), and
(f);
f. payments on MILESTONE PAYMENTS due under Paragraph 4.1
(g);
g. Share of lump sum type payment received from SUBLICENSEES
and from MEDICAL SERVICE PROVIDERS due under Paragraph
4.1 (h), (i) and (j);
h payments on OTHER REVENUE due under paragraphs 4.1 (k)
and (1);
11
i. total royalties due; and
j. names and addresses of all SUBLICENSEES of LICENSEE and
of all authorized MEDICAL SERVICE PROVIDERS.
5.3 With each such report submitted, LICENSEE shall pay to M.I.T. the
royalties due and payable under this Agreement. If no royalties shall be due,
LICENSEE shall so report.
5.4 On or before the ninetieth (90th) day following the close of
LICENSEE's fiscal year, LICENSEE shall provide M.I.T. with LICENSEE's certified
financial statements for the preceding fiscal year including, at a minimum, a
Balance Sheet and an Operating Statement.
5.5 The royalty payments set forth in this Agreement and amounts due
under Article 6 shall, if overdue, bear interest until payment at a per annum
rate two percent (2%) above the prime rate in effect at the Chase Manhattan Bank
(N.A.) on the due date. The payment of such interest shall not foreclose M.I.T.
from exercising any other rights it may have as a consequence of the lateness of
any payment.
6 - PATENT PROSECUTION
----------------------
6.1 M.I.T. have the administrative responsibility to apply for, seek
prompt issuance of, and maintain during the term of this Agreement the PATENT
RIGHTS in the United States and in the foreign countries listed in Appendices A
and B hereto. Appendix B may be amended by verbal agreement of both parties,
such agreement to be confirmed in writing within ten (10) days. The prosecution,
filing and maintenance of all PATENT RIGHTS patents and applications shall be
the primary responsibility of M.I.T.; provided, however, LICENSEE shall have
reasonable opportunities to advise M.I.T. and shall cooperate with M.I.T. in
such prosecution, filing and maintenance. ng and maintenance.
6.2 Payment of all fees and costs relating to the filing, prosecution,
and maintenance of the PATENT RIGHTS incurred after the date of this Agreement
shall be the responsibility of LICENSEE. M.I.T. is not financially obliged to
maintain and prosecute patents.
6.3 M.I.T. agrees that LICENSEE may take a cumulative life of license
credit for expenditures on the PATENT RIGHTS, such credit not to exceed
(Confidential Treatment Requested) Dollars and to be taken according to the
following schedule:
a) LICENSEE may credit their above referenced patent
prosecution and maintenance expenditures incurred in a
given calendar year against up to one half of License
Maintenance Fees due the following January 1 under
paragraphs, 4.1 (a), (b), and (c).
b) In the event that Running Royalties exceed the License
Maintenance Fee for a given year, and LICENSEE owes
M.I.T. Running Royalties in addition to the License
Maintenance Fee already paid, then LICENSEE may use
their patent prosecution and maintenance credit against
up to one half of the Running Royalties due paragraphs
4.1 (d), (e) and (f).
12
7 - INFRINGEMENT
----------------
7.1 LICENSEE shall inform M.I.T. promptly in writing of any alleged
infringement of the INTELLECTUAL PROPERTY RIGHTS by a third party of which it
becomes aware and of any available evidence thereof. M.I.T. shall inform
LICENSEE promptly in writing of any alleged infringement of the INTELLECTUAL
PROPERTY RIGHTS by a third party of which it becomes aware and of any available
evidence thereof. Within ten (10) business days of such notice the parties shall
confer to determine how best to proceed.
7.2 During the term of this Agreement, M.I.T. shall have the right,
but shall not be obligated, to prosecute at its own expense all infringementsof
the INTTELLECTUAL PROPERTY RIGHTS and, in furtherance of such right, LICENSEE
hereby agrees that M.I.T. may include LICENSEE as a party plaintiff in any such
suit, without expense to LICENSEE. The total cost of any such infringement
action commenced or defended solely by M.I.T. shall be borne by M.I.T. and
M.I.T. shall keep any recovery or damages for past infringement derived
therefrom.
7.3 If within six (6) months after having been notified of any alleged
infringement, M.I.T. shall have been unsuccessful in persuading the alleged
infringer to desist and shall not have brought and shall not be diligently
prosecuting an infringement action, or if M.I.T. shall notify LICENSEE at any
time prior thereto of its intention not to bring suit against any alleged
infringer for the EXCLUSIVE FIELDS OF USE, then, and in those events only,
LICENSEE shall have the right, but shall not be obligated, to prosecute at its
own expense any infringement of the INTELLECTUAL PROPERTY RIGHTS for the
EXCLUSIVE FIELDS OF USE, and LICENSEE may, for such purposes, use the name of
M.I.T. as party plaintiff; provided, however, that such right to bring such an
infringement action shall remain in effect only for so long as the license
granted herein remains exclusive. No settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without the consent
of M.I.T., which consent shall not unreasonably be withheld. LICENSEE shall
indemnify M.I.T. against any order for costs that may be made against M.I.T. in
such proceedings.
7.4 In the event that LICENSEE shall undertake the enforcement and/or
defense of the INTELLECTUAL PROPERTY RIGHTS by litigation, LICENSEE may withhold
up to (Confidential Treatment Requested) percent of the payments otherwise
thereafter due M.I.T. under Article 4 hereunder and apply the same toward
reimbursement of up to half of LICENSEE's expenses, including reasonable
attorneys' fees, in connection therewith. Any recovery of damages by LICENSEE
for each such suit shall be applied first in satisfaction of any unreimbursed
expenses and legal fees of LICENSEE relating to such suit, and next toward
reimbursement of M.I.T. for any payments under Article 4 past due or withheld
and applied pursuant to this Article 7. The balance remaining from any such
recovery shall be divided so that the percentage of the recovery due M.I.T. is
calculated by creating a fraction,
13
the numerator of witch is the amount of royalties withheld, and denominator of
which is the cost of litigation paid by LICENSEE, but in no event shall such sum
be less than (Confidential Treatment Requested) Percent of the net recovery.
7.5 In the event that a declaratory judgment action alleging
invalidity or noninfringement of any of the INTELLECTUAL PROPERTY RIGHTS shall
be brought against LICENSEE, M.I.T., at its option, shall have the right, within
thirty (30) days after commencement of such action, to intervene and take over
the sole defense of the action at its own expense.
7.6 1n any infringement suit as either party may institute to enforce
the PATENT RIGHTS pursuant to this Agreement, the other party hereto shall, at
the request and expense of the party initiating, such suit, cooperate in all
respects and, to the extent possible, have its employees testify when requested
and make available relevant records, papers, information, samples, specimens,
and the like.
7.7 LICENSEE, during the exclusive period of this Agreement, shall
have the sole right in accordance with the terms and conditions herein to
sublicense any alleged infringer for the EXCLUSIVE FIELDS OF USE for future use
of the INTELLECTUAL PROPERTY RIGHTS. Any upfront fees as part of such a
sublicense shall be shared equally between LICENSEE and M.I.T.; other royalties
shall be treated per Article 4.
PRODUCT LIABILITY
-----------------
8.1 LICENSEE shall at all times during the term of this Agreement and
thereafter, indemnify, defend and hold M.I.T., its trustees, directors,
officers, employees and affiliates, harmless against all clairns, proceedings,
demands and abilities of any kind whatsoever, including legal expenses and
reasonable attoneys' fees, arising out of the death of or injury to any person
or persons or out of any damage to property, resulting from the production,
manufacture, sale, use, lease, consumption or advertisement of the LICENSED
PRODUCT(s) and/or LICENSED PROCESS (es) or arising from any obligation of
LICENSEE hereunder.
8.2 LICENSEE shall obtain and carry in full force and effect.
commercial general liability insurance which shall protect LICENSEE and M.I.T.
with respect to events covered by Paragraph 8.1 above. Such insurance shall be
written by a reputable insurance company authorized to do business in the
Commonwealth of Massachusetts, shall list M.I.T. as an additional named inssured
thereunder, shall be endorsed to include product liability coverage and shall
require thirty (30) days written notice to be given to M.I.T. prior to any
cancellation or al change thereof. The limits of such insurance shall not be
less than (Confidential Treatment Requested) Dollars per occurrence with an
aggregate of (Confidential Treatment Requested) Dollars for personal injury or
death, and (Confidential Treatment Requested) Dollars per occurrence with an
aggregate of (Confidential Treatment Requested) Dollars for property damage.
LICENSEE shall provide M.I.T. with Certificates of Insurance evidencing the
same.
14
8.3 EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, M.I.T.,
ITS TRUSTEES, DIRECTORS, OFFICERS, EMPLOYEES, AND AFFILIATES MAKE NO
REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE, VALIDITY OF PATENT RIGHTS CLAIMS, ISSUED OR PENDING, AND TO
THE COPYRIGHT AND THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE. NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS A REPRESENTATION
MADE OR WARRANTY GIVEN BY M.I.T. THAT THE PRACTICE BY LICENSEE OF THE LICENSE
GRANTED HEREUNDER SHALL NOT INFRINGE THE PATENT RIGHTS OR THE COPYRIGHT OF ANY
THIRD PARTY. IN NO EVENT SHALL M.I.T., ITS TRUSTEES, DIRECTORS, OFFICERS,
EMPLOYEES AND AFFILIATES BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OF
ANY KIND, INCLUDING ECONOMIC DAMAGE OR INJURY TO PROPERTY AND LOST PROFITS,
REGARDLESS OF WHETHER M.I.T. SHALL BE ADVISED, SHALL HAVE OTHER REASON TO KNOW,
OR IN FACT SHALL KNOW OF THE POSSIBILITY OF TIM FOREGOING.
9 - EXPORT CONTROL
------------------
LICENSEE acknowledges that it is subject to United States laws and
regulations controlling the export of technical data, computer software,
laboratory prototypes and other commodities (including the Arms Export Control
Act, as amended and the United States Department of Commerce Export
Administration Regulations). The transfer of such items may require a license
from the cognizant agency of the United States Government and/or written
assurances by LICENSEE that LICENSEE shall not export data or commodities to
certain foreign countries without prior approval of such agency. M.I.T. neither
represents that a license shall riot be required nor that, if required, it shall
be issued.
10 - NON-USE OF NAMES.
----------------------
LICENSEE shall not use the names or trademarks of the Massachusetts
Institute of Technology or Lincoln Laboratory, nor any adaptation thereof, nor
the names of any of their employees, in any advertising, promotional or sales
literature without prior written consent obtained from M.I.T., or said employee,
in each case, except that LICENSEE may state that it is licensed by M.I.T. under
one or more of the patents and/or applications comprising the PATENT RIGHTS, and
that is has a license to the COPYRIGHT.
15
11 - ASSIGNMENT
---------------
This Agreement is not assignable and any attempt to do so shall be
void.
12 - DISPUTE RESOLUTION
-----------------------
12.1 Except for the right of either party to apply to a court of
competent jurisdiction for a temporary restraining order, a preliminary
injunction, or other equitable relief to preserve the status quo or prevent
irreparable harm, any and all claims, disputes or controversies arising under,
out of, or in connection with the Agreement, including any dispute relating to
patent validity or infringement, which the parties shall be unable to resolve
within sixty (60) days shall be mediated in good faith. The party raising such
dispute shall promptly advise the other party of such claim, dispute or
controversy in a writing which describes in reasonable detail the nature of such
dispute. By not later than five (5) business days after the recipient has
received such notice of dispute, each party shall have selected for itself a
representative who shall have the authority to bind such party, and shall
additionally have advised the other party in writing of the name and title of
such representative. By not later than ten (10) business days after the date of
such notice of dispute, the parry against whom harm the dispute shall be
raised shall select a mediation firm in the Boston area and such representatives
shall schedule a date with such firm for a mediation hearing, The parties shall
enter into good faith mediation and shall share the costs equally. If the
representatives of the parties have not been able to resolve the dispute within
fifteen (15) business days after such mediation hearing, then any and all
claims, disputes or controversies arising, under, out of, or in connection with
this Agreement, including any dispute relating to patent validity or
infringement, shall be resolved by final and binding arbitration in Boston,
Massachusetts under the rules of the American Arbitration Association, or the
Patent Arbitration Rules if applicable, then obtaining. The arbitrators shall
have no power to add to, subtract from or modify any of the terms or conditions
of this Agreement, nor to award punitive damages. Any award rendered in such
arbitration may be enforced by either party in either the courts of the
Commonwealth of Massachusetts or in the United States District Court for the
District of Massachusetts, to whose jurisdiction for such purposes M.I.T. and
LICENSEE each hereby irrevocably consents and submits.
12.2 Notwithstanding the foregoing, nothing in this Article shall be
construed to waive any rights or timely performance of any obligations existing
under this Agreement.
13 - TERMINATION
----------------
13.1 If LICENSEE shall cease to carry on its business, this Agreement
shall terminate upon notice by M.I.T.
16
13.2 Should LICENSEE fail to make any payment whatsoever due and
payable to M.I.T. hereunder, M.I.T, shall have the right to terminate this
Agreement effective on thirty (30) days' notice, unless LICENSEE shall make all
such payments to M.I.T. within said thirty (30) day period. Upon the expiration
of the thirty (30) day period, if LICENSEE shall not have made all such payments
to M.I.T., the rights, privileges and license granted hereunder shall
automatically terminate.
13.3 Upon any material breach or default of this Agreement by LICENSEE
(including, but not limited to, breach or default under Paragraph 3.3), other
than those occurrences set out in Paragraphs 13.1 and 13.2 hereinabove, which
shall always take precedence in that order over any material breach or default
referred to in this Paragraph 13.3, M.I.T. shall have the right to terminate
this Agreement and the rights, privileges and license granted hereunder
effective on ninety (90) days' notice to LICENSEE. Such termination shall become
automatically effective unless LICENSEE shall have cured any such material
breach or default prior to the expiration of the ninety (90) day period.
13.4 LICENSEE shall have the right to terminate this Agreement at any
time on six (6) months' notice to M.I.T., and upon payment of all amounts due
M.I.T. through the effective date of the termination.
13.5 Upon termination of this Agreement for any reason, nothing herein
shall be construed to release either party from any obligation that matured
prior to the effective date of such termination; and Articles 1, 8, 9, 10, 12,
13.5, 13.6, and 15 shall survive any such termination. LICENSEE and any
SUBLICENSEE thereof may, however, after the effective date of such termination,
sell all LICENSED PRODUCTS, and complete LICENSED PRODUCTS in the process of
manufacture at the time of such termination and sell the same, provided that
LICENSEE shall make the payments to M.I.T. as required by Article 4 of this
Agreement and shall submit the reports required by Article 5 hereof.
13.6 Upon termination of this agreement for any reason:
a. LICENSEE shall provide M.I.T. with written assurance that
the original and all copies of the PROGRAM and
DERIVATIVE, WORKS in its possession or control have been
destroyed, except that, upon prior written authorization
from M.I.T., LICENSEE may retain a copy for archival
purposes; and
b. the rights of END-USERS to use the PROGRAM shall
continue, provided that any END-USER leasing or
sublicensing the PROGRAM and not then in default shall
obtain a lease or sublicense directly from M.I.T. under
reasonable terms and conditions, which shall, at a
minimum, include, indemnification of M.I.T. and proof of
adequate insurance.
13.7 Upon termination of this Agreement for any reason, any
SUBLICENSEE not then in default shall have the right to seek a license from
M.I.T. M.I.T. agrees to negotiate such licenses in good faith under reasonable
terms and conditions, which, shall, at a minimum, include indemnification of
M.I.T and proof of adequate insurance.
17
13.8 Upon termination of this Agreement for any reason, any MEDICAL
SERVICE PROVIDER shall have the right to seek a license from M.I.T. to continue
practicing the LICENSED PROCESSES and or performing the LICENSED SERVICES.
M.I.T. agrees to negotiate such licenses in good faith under reasonable terms
and conditions, which shall, at a minimum, include indemnification of M.I.T. and
proof of adequate insurance.
14 - PAYMENTS, NOTICES
----------------------
& OTHER COMMUNICATIONS
----------------------
Any payment, notice or other communication pursuant to this Agreement
shall be sufficiently made or given on the date of mailing if sent to such party
by certified first class mail, return receipt requested, postage prepaid,
addressed to it at its address below or as it shall designate, by written notice
given to the other party:
In the case of M.I.T.:
Director
Technology Licensing Office
Massachusetts Institute of Technology
Room E32-300
Cambridge, Massachusetts 02139
In the case of LICENSEE:
John Mon
General Manager
Cheung Laboratories
10220-1 Old Columbia Road
Columbia, NO 21046-1705
15-MISCELLANEOUS PROVISIONS
---------------------------
15.1 All disputes arising out of or related to this Agreement, or the
performance, enforcement, breach or termination hereof, and any remedies
relating thereato, shall be construed, governed, interpreted and applied in
accordance with the laws of the Commonwealth of Massachusetts,U.S.A., except
that questions affecting the construction and effect or any patent shall be
determined by the law of the country in which the patent shall have been
granted.
15.2 The parties hereto acknowledge that this Agreement sets forth the
entire Agreement, and understanding of the parties hereto as to the subject
matter hereof, and shall not be subject to any change or modification except by
the execution of a written instrument signed by the parties.
15.3 The provisions of this Agreement are severable, and in the event
that any provisions Of this Agreement shall be determined to be invalid or
unenforceable under any controlling body of the law, such invalidity or
unenforceability shall not in any way affect the validity or enforceability of
the remaining provisions hereof.
18
15.4 LICENSEE agrees to mark the LICENSED PRODUCTS sold in the United
States with all applicable United States patent numbers. All LICENSED PRODUCTS
shipped to or sold in other countries shall be marked in such a manner as to
conform with the parent laws and practice of the country of manufacture or sale.
15.5 The failure of either party to assert a right hereunder or to
insist upon compliance with any term or condition of this Agreement shall not
constitute a waiver of that right or excuse a similar subsequent failure to
perform any such term or condition by the other party.
IN WITNESS WHEREOF, the parties have duly executed this Agreement the
day and year Set forth below.
MASSACHUSETTS INSTITUTE OF CHEUNG LABORATORIES, INC.
TECHNOLOGY
By /s/Lita Nelsen By /s/Augustine Y. Cheung
---------------------------- ----------------------------
Name Lita L. Nelsen Name Augustine Y. Cheung
Title Director Technology Title Chairman
Licensing Office
Date October 17, 1997 Date October 24,1997
19
APPENDIX A
----------
PATENT RIGHTS ON THE EFFECTIVE DATE
- ------------------------------------
UNITED STATES PATENT RIGHTS
- ---------------------------
M.I.T. Case No. 5493L
U.S. Patent No. 5,251,645, Issued October 12, 1993
"Adaptive Nulling Hyperthermia Array"
By Alan Fenn
M.I.T. Case No. 5672L
U.S. Patent Number 5,441,532, Issued August 15, 1995
"Adaptive Focusing and Nulling Hyperthermia Annular and Monopole Phased Array
Applicators"
By Alan Fenn
M.I.T. Case No. 6512L
U.S.P.N. 5,540,737, Issued July 30, 1996
"Minimally Invasive Monopole Phased Array Hyperthemia Applicators For Treating
Breast Carcinomas"
By Alan Fenn
M.I.T. Case No. 7615L
"Adaptive Nulling And Focusing, Hyperthermia Phased Arrays
For Activating Thermosensitive, Liposomes For Targeted Delivery Of Drugs To Deep
Human Tissues"
by Alan J. Fenn
FOREIGN PATENT RIGHT5
- ---------------------
M.I.T. CaseNo. 7615L
Pending Applications in Great Britain, Germany and Canada
"Minimally Invasive Monopole Phased Array Hyperthermia Applicators For Treating
Breast Carcinomas
By Alan Fenn
20
APPENDIX C
----------
M.I.T. COPYRIGHTED SOFTWARE
- -------------------------
MIT. Case No. 7299LS
"NULLGSC"
By Alan Fenn
MIT. Case No. 7298LS
"FOCUSGSC"
By Alan Fenn
21
ADDENDUM A
----------
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
-------------------------------------
TECHNOLOGY TRANSFER AGREEMENT
-----------------------------
This Agreement is made and entered into this 24th day of October,
1997, (the "Effective Date") by and between CHEUNG LABORATORIES, INC., a
corporation duly organized under the laws of Maryland and having its principal
office at 10220-I Old Columbia Road, Columbia, MD 21046-1705 (hereinafter
referred to as "LICENSEE") and the MASSACHUSETTS INSTITUE OF TECHNOLOGY, a
corporation duly organized and existing under the laws of the Commonwealth of
Massachusetts and having its principal office at 77 Massachusetts Avenue,
Cambridge, Massachusetts 02139, U.S.A. (hereinafter referred to as "M.I.T."),
and relates to the transfer of existing technology in conjunction with a license
granted by M.I.T. to LICENSEE on the 24th day of October, 1997 for the Patent
Rights to M.I.T. Case No. 5493L, "Adaptive Hyperthermia System," by Alan J.
Penn, and M.I.T. Case No, 5672L, "Non-Invasive Monopole Hyperthermia Array for
Brain Tumor Heating," by Alan J. Fenn, and M.I.T. Case No. 6512L "Minimally
Invasive Monopole Phased Array Hyperthermia Applicators for Treating Carcinoma,"
by Alan J. Fenn and M.I.T. Case No. 7615L, "Adaptive Nulling And Focusing
Hyperthermia Phased Arrays For Activating Thermosensitive Liposomes For Targeted
Delivery Of Drugs To Deep Human Tissues," by Alan 1. Fenn (hereinafter the
"Rights Granted").
WHEREAS, M.I.T. and LICENSEE recognize that the effective development
of the licensed Rights Granted requires the INVENTOR (as later defined herein)
to provide technical assistance to the LICENSEE to facilitate the transfer of
existing licensed technology; and
WHEREAS, this Agreement defines the terms and conditions under which
Alan J. Fenn (hereinafter referred to as the "INVENTOR"), a researcher employed
by M.I.T. and the INVENTOR of M.I.T. Case Numbers 5493L, 5672L, 6512L, and
M.I.T. Case No. 7615L, shall provide technical assistance to LICENSEE relating
to said M.I.T. Cases (hereinafter referred to as the "TRANSFER PROGRAM").
NOW, THEREFORE, the parties hereto agree as follows:
1. FIELD AND SCOPE OF THE TRANSFER PROGRAM:
-------------------------------------------
The field of the TRANSFER PROGRAM is defined by the Work
Statement attached hereto as Attachment A. The TRANSFER
PROGRAM may include site visits to LICENSEE's facilities, and
consultation by telephone. M.I.T. agrees to use reasonable
efforts to make available to the LICENSEE technical
assistance by the INVENTOR.
22
2. DURATION
---------
The TRANSFER PROGRAM shall begin on the Effective Date and
terminate one (1) year later on _______ unless sooner
terminated at will by LICENSEE notifying M.I.T. in writing
Thirty (30) days before it wishes to terminate the TRANSFER
PROGRAM. M.I.T. may terminate the TRANSFER PROGRAM if
circumstances beyond M.I.T.'s control shall preclude
continuation. The TRANSFER PROGRAM may be extended by mutual
written consent. The scheduling of days shall be by mutual
agreement between LICENSEE and the INVENTOR with the schedule
designed to minimize impact on other Lincoln Laboratory
commitments. The total number of days shall be at LICENSEE's
request, within the limits for each INVENTOR listed below.
INVENTOR SCHEDULED TIME AVAILABLE
- -------- ------------------------
Alan Fenn Not more than Ten (10) days within Twelve (12) months from
the Effective Date.
3. REIMBURSEMENT:
--------------
The LICENSEE agrees to reimburse M.I.T. for:
(a) each work day or part thereof spent traveling to or from or
working on the TRANSFER PROGRAM either at M.I.T Lincoln
Laboratory or at LICENSEE's facilities, in accordance with
the following per them schedule:
INVENTOR PER DIEM THEREAFTER
-------- -------- ----------
Alan Fenn (Confidential Treatment Increased by amount of
Requested) all pay raises and
subject to change overhead increases.
(b) the traveling expense of the INVENTOR in accordance with
normal M.I.T. Lincoln Laboratory Travel rules; and
(c) an administrative fee of (Confidential Treatment Requested)
percent of the above reimbursable costs.
4, PAYMENT:
--------
Payments shall be made to M.I.T. within thirty (30) days of LICENSEE's
receipt of invoice.
5. NON-USE OF NAMES
----------------
LICENSEE shall not use the names or trademarks of the Massachusetts
Institute of Technology, nor any adaptation thereof, nor the names of
any of its employees, in any advertising, promotional or sales
literature without prior written consent obtained from M.I.T., and
said employee, in each case, except that LICENSE may state that it is
licensed by M.I.T. under one or more of the patents and/or
applications comprising the PATENT RIGHTS.
6. LIMITATION OF LIABILITY
-----------------------
LICENSEE AGREES THAT ALL TECHNICAL ASSISTANCE PROVIDED UNDER THE
TRANSFER PROGRAM IS MADE WITHOUT WARRANTY OF ANY KIND EXPRESS OR
IMPLIED. Neither M.I.T. nor any INVENTOR shall have any liability
whatsoever to LICENSEE or any third party in regard to the TRANSFER
PROGRAM, including, but not limited to, technical assistance, and
know- how, and LICENSEE shall indemnify M.I.T. for any and all
liability of any kind which M.I.T. may incur in regard thereto.
23
7. NOTICES:
--------
Any payment, notice or other communication pursuant to this Agreement
shall be sufficiently made or given on the date of mailing if sent to
such party by certified first class mail, postage prepaid, addressed
to it at its address below or as it shall designate by written notice
given to the other party:
In the case of M.I.T,:
Director
Technology Licensing Office
Massachusetts Institute of Technology
Room E32-300
Cambridge, Massachusetts 02139
In the case of LICENSEE: John Mon
Cheung Laboratories, Inc.
please advise 10220-1 Old Columbia Road
Columbia, ,41D 21046-1705
Agreed to for;
MASSACHUSETTS INSTITUTE CHEUNG LABORATORIES, INC.
OF TECHNOLOGY
By: /s/Lita L. Nelsen By: /s/Augustine Y. Cheung
--------------------------- ----------------------
Name: LITA L. NELSEN. DIRECTOR Name: Augustine Y. Cheung
Title: TECHNOLOGY LICENSING OFFICE Title: Chairman
Date: Oct. 17, 1997 Date: Oct. 24, 1997
24
ATTACHMENT A
------------
WORK STATEMENT
Alan Fenn will assist Cheung Laboratories with technical questions and assist in
any engineering aspects of clinical trials including visits to sites where
clinical trials are being conducted.
Agreed to for;
MASSACHUSETTS INSTITUTE CHEUNG LABORATORIES, INC.
OF TECHNOLOGY
By: /s/Lita L. Nelsen By: /s/Augustine Y. Cheung
----------------- ----------------------
Name: LITA L. NELSEN. DIRECTOR Name: Augustine Y. Cheung
Title: TECHNOLOGY LICENSING OFFICE Title: Chairman
Date: Oct. 17, 1997 Date: Oct. 24, 1997
25
November 25,1997
Dr. Fred Sterzer, President
MMTC, Inc.
12 Roszel Road, Suite A-203
Princeton, NJ 08540
RE: Amendment to the License Agreement between MMTC, Inc. ("MMTC ") and
Cheung Laboratories, Inc. ("CLI") dated August 23, 1996 as extended
April 11, 1997.
Dear Dr. Sterzer:
Based upon our conversations and prior negotiations, I understand that
MMTC has agreed to amend the above referenced License Agreement as follows:
a. The "Licensed Patents" listed an Appendix I shall include U.S.
Patent 5,149,198 dated September 22, 1992 (Sterzer -
Temperature-Measuring Microwave Radiometer Apparatus) and 5,688,050
dated November 17, 1997 (Sterzer - Temperarture-Measuring Microwave
Radiometer Apparatus) (the "New Patents"). The parties agree that any
CLI rights to the New Patents will be limited to the "Field", as
defined in the Agreement. In order to maintain rights to the New
Patents, CLI must fund research and development work by MMTC in an
amount of (Confidential Treatment Requested) per month commencing
December 1, 1997. Such research and development work will initially
consist of incorporating the radiometer technology into the balloon
catheter device. If such work is completed within a one year period,
then the funded research and develop work may be used, upon the mutual
agreement of MMTC and CLI, for additional phantom studies or animal
studies to demonstrate the validity of the technology. If CLI funds
such research and development activities for 12 months, its rights to
the New Patents shall be the same as its rights to other Licensed
Patents and its research and development funding obligation shall
cease.
b. Section 3.2 is amended to read as follows:
3.2 CLI shall meet the following development milestones by the specified date:
(i) to file Investigational Device Exemption(IDE) within 2 months
after completion of necessary animal safety data from the
animal study performed at Montefiore Medical Center, however
no later than June 30, 1998; or
(ii) to commence a clinical safety trial with not less than ten
(10) patients (or as required by FDA) within 60 days upon
receipt of IDE approval from the FDA and upon the
investigator receiving Internal Review Board (IRB) approval
as required by his medical facility, however no later than
July, 31, 1998; thereafter
(iii) to commence clinical efficacy trial within 60 days upon
receipt of further IDE approval to do such and approval by
the investigational site's IRB to do such, however no later
than October 31, 1998.
1
c. Section 9.2(iii) is replaced in the entirety and to read as
follows:
9.2(iii) CLI shall purchase product liability insurance for the
protection of MMTC, its directors, officers, agents and employees,
that, in the absolute and unreviewable discretion of MMTC, is
satisfactory to MMTC in the amount of not less than (Confidential
Treatment Requested) for product liability. CLI shall have said product
liability coverage in effect prior to the first human patient being
treated with the herein technology of this agreement. This
representation is a condition precedent to the effectiveness of this
Agreement. Liability should cover long-term complaits by patients after
the treatment and on other personnel involved directly or indirectly
with operations of the equipment, even if the agreement is no longer in
force.
d. Section 12.6 is replaced in the entirety and to read as follows:
Section 12.6 CLI shall raise by public/or private offering of its stock
(Confidential Treatment Requested) in funds by March 31,1998. If CLI
does not realize or obtain the (Confidential Treatment Requested) in
funds by said date, MMTC shall at its option, terminate this agreement
and shall be allowed to retain any and all funds received by MMTC from
CLI. The registration statements or prospectuses or any other papers
written in connection with such public/or private offering shall not
refer by name to MMTC or any of its directors, officers, agents, or
employees unless agreed to by MMTC.
The foregoing sets forth your understanding of the extensions and amendments to
the Agreement, please countersign this letter in the space provided below.
CHEUNG LABORATORIES, INC. MMTC, INC.
By /s/Spencer J. Volk By /s/Fred Sterzer
----------------------- -----------------
Spencer J. Volk, President Fred Sterzer, President
November 25, 1997
2
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in Form 10-KA for the fiscal year
ended September 30, 1998 of our report dated November 18, 1998 except for
footnote 5 which is dated November 29, 1999 relating to the financial statements
of Celsion Corporation.
/s/ Stegman & Co.
-----------------
Baltimore, Maryland
November 29, 1999