UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended December 31, 1996
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 2-93826-W
CHEUNG LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 52-1256615
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
10220-I Old Columbia Road
Columbia, Maryland 21046-1705
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (410) 290-5390
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes ___X___ No _______
As of December 31, 1996, the Registrant had outstanding 25,258,360 shares
of Common Stock, $.01 par value.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
December 31, 1996(unaudited) and September 30, 1996(audited)
ASSETS
12/31/1996 9/30/1996
---------- ---------
CURRENT ASSETS:
Cash $9,807 $246,931
Accounts receivable (net of an allowance for
doubtful accounts of $21,710 and $20,770 on
12/31/1996 and 9/30/1996 respectively) 186,395 154,335
Interest receivable - Ardex 13,440 5,333
Inventories 313,142 270,952
Prepaid expenses 1,669 1,669
Other current asset 26,755 26,755
------- -------
Total current assets 551,208 705,975
------- -------
PROPERTY AND EQUIPMENT - at cost:
Furniture and office equipment 176,541 176,541
Laboratory and shop equipment 62,228 62,228
------- -------
238,769 238,769
Less accumulated depreciation 207,819 205,766
------- -------
Net value of property and equipment 30,950 33,003
------- -------
OTHER ASSETS:
Investment in Aestar Fine Chemical Company -
at cost 0 8,000,000
Funds held under investment contract 0 40,000
Notes receivable - Ardex Equipment, L.L.C. 400,000 400,000
Patent licenses (net of accumulated
amortization of $41,077 and $37,328 on
12/31/1996 and 9/30/1996, respectively) 138,873 142,622
------- -------
Total other assets 538,873 8,582,622
------- ---------
TOTAL ASSETS $1,121,031 $9,321,600
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
12/31/1996 9/30/1996
---------- ---------
CURRENT LIABILITIES:
Accounts payable - trade $307,935 $197,190
Notes payable - related parties, current
portion 331,712 331,712
Accrued interest payable - related parties 244,166 339,660
Accrued interest payable - other 32,517 8,417
Accrued compensation 235,867 186,459
Accrued professional fees 76,352 76,352
Other accrued liabilities 221,152 100,905
Deferred revenues 112,031 115,531
------- -------
Total current liabilities 1,561,732 1,352,726
--------- ---------
LONG-TERM LIABILITIES:
Note payable - related party, due after
one year 8,000 8,000
Notes payable - private placement 1,205,000 1,205,000
--------- ---------
Total long-term liabilities 1,213,000 1,213,000
--------- ---------
Total liabilities 2,774,732 2,565,726
--------- ---------
STOCKHOLDERS' EQUITY:
Capital stock - $.01 par value; 51,000,000
shares authorized, 25,258,360 and 41,206,360
issued and outstanding for 12/31/1996 and
9/30/1996, respectively 252,583 412,063
Additional paid-in capital 10,743,607 18,555,444
Accumulated deficit (12,649,890) (12,211,633)
------------ ------------
Total stockholders' equity (1,653,701) 6,755,874
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,121,031 $9,321,600
========== ==========
See accompanying notes.
CHEUNG LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended December 31,
1996 1995
REVENUES:
Hyperthermia sales and parts $94,040 $1,000
------- ------
Total revenue 94,040 1,000
COST OF SALES 31,863 445
------ ---
GROSS PROFIT 62,177 555
------ ---
OPERATING EXPENSES:
Selling, general and administrative 396,276 226,054
Research and development 42,234 7,610
------- -------
Total operating expenses 438,510 233,664
------- -------
(LOSS) INCOME FROM OPERATIONS (376,333) (233,109)
LOSS IN INVESTMENT FUND (40,000) 0
OTHER (EXPENSE) INCOME 16,578 1,556
INTEREST EXPENSE (38,501) (21,647)
-------- --------
LOSS BEFORE INCOME TAXES (438,257) (253,200)
INCOME TAXES 0 0
---------- ----------
NET (LOSS) INCOME $(438,257) $(253,200)
========== ==========
NET LOSS PER COMMON SHARE (0.017) (0.006)
WEIGHTED AVERAGE SHARES OUTSTANDING 25,237,249 39,328,404
See accompanying notes.
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended December 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income (438,257) ($253,200)
Noncash items included in net (loss) income:
Loss in investment fund 40,000 40,000
Depreciation and amortization 3,133 661
Bad debt expense 0 10
Net changes in:
Accounts receivable (32,060) (11,228)
Inventories (42,190) (6,466)
Accrued interest receivable (8,107) 0
Prepaid expenses 0 (500)
Accounts payable-trade 110,745 2,798
Accrued interest payable - related parties (95,494) (17,861)
Accrued interest payable - other 24,100 1,892
Accrued compensation 49,408 19,683
Accrued professional fees 0 1,500
Other accrued liabilities 120,247 2,249
------- -----
Net cash (used) provided by
operating activities (268,475) ($199,210)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment 0 (150)
Funds returned - investment contract 0 119,000
Net cash provided (used) by investing
activities 0 118,850
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable 0 (16,000)
Proceeds of stock issuances 31,351 113,677
------ --------
Net cash provided by financing activities 31,351 97,677
NET INCREASE (DECREASE) IN CASH (237,124) 17,317
CASH AT BEGINNING OF PERIOD 246,931 7,238
------- -----
CASH AT END OF PERIOD $9,807 $24,555
====== =======
Noncash transaction
Redemption of 16,000,000 shares
by rescinding 9.5% interest in Aestar
Fine Chemical Company ($8,000,000) 0
See accompanying notes.
CHEUNG LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The information presented for the three month periods ended December 31,
1995 and December 31, 1996 is unaudited, but includes all adjustments
(consisting only of normal recurring accruals) that Cheung Laboratories,
Inc.'s (the "Company") management believes to be necessary for the fair
presentation of results for the periods presented. The September 30, 1996
balance sheet was derived from audited financial statements. These financial
statements should be read in conjunction with the Company's audited
financial statements for the year ended September 30, 1996, which were
included as part of the Company's Report on Form 10-K.
Note 2. Common Stock Outstanding and Per Share Information
Per share data is based on the weighted average number of shares of
Common Stock outstanding during each of the periods. The weighted average
shares outstanding decreased to 25,237,249 shares from 39,328,404 for the
three months ended December 31, 1996 and December 31, 1995, respectively.
The decrease was due to the retirement of the 16,000,000 shares the Company
redeemed from an investor. On February 16, 1995, Gao Yu Wen executed a
subscription agreement with the Company to purchase 20,000,000 shares of
Common Stock at $.50 per share or $10,000,000. The price was paid by
paying $2,000,000 cash and property transferring to the Company 9.5% of the
outstanding equity of Aestar Fine Chemical Company ("Aestar"). On October
23, 1996, the Company redeemed 16,000,000 shares of its common stock from Mr.
Gao by rescinding its equity interest in Aestar. The 16,000,000 shares were
subsequently retired. The 16,000,000 shares and the unexercised warrants
and options are not included in the calculation of the per share data.
Note 3. Inventories
Inventories are carried at the lower of actual cost or market and cost
is determined using the average cost matter. The components of inventories at
September 30 and December 31, 1996 are as follows:
12/31/1996 9/30/1996
Finished products $63,723 $55,138
Work in process 53,234 46,062
Materials 196,185 169,752
-------- --------
$313,142 $270,952
======== ========
Note 4. Subsequent Event
On January 7, 1997, the Company offered the following: (i) up to an
aggregate of $300,000 of its 8% Senior Secured Convertible Promissory Notes
(the "Offering Notes") for sale (the "Offering") and warrants to purchase
Common Stock of the Company ("Warrants") to accredited investors; and (ii) to
rescind its 1996 sale of 8% Senior Secured Convertible Promissory Notes
("Rescission Notes") and underlying warrants (Rescission Warrants") for an
aggregate amount of $1,205,000 (the Rescission Offer"). As of February 13,
1997, the status of the transaction is as follows: Rescission for $1,090,000
has been rejected and remains as an investment under the new terms, amount
for $115,000 has been rescinded and will be refunded.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements in this report that relate to future plans, events or
performance are forward-looking statements. Actual results, events or
performance may differ materially due to a variety of factors, including the
factors described on the Form 10-K for the year ended September 30, 1996.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Overview
Cheung Laboratories, Inc. is engaged in developing, licensing and
marketing minimally invasive medical devices and systems utilized in the
treatment of cancer and genitourinary diseases associated with benign
growth of the prostate in older males, the most common being benign prostatic
hyperplasia ("BPH"). The Company has recently acquired the right to use
technologies which the Company believes have the potential to significantly
enhance the capabilities of both its cancer and BPH treatment systems.
The Company's current cancer treatment system is the Microfocus 1000,
which is designed to increase the efficacy of existing cancer treatment
modalities, including external beam radiation, interstitial radiation,
brachytherapy and chemotherapy. The Microfocus 1000 has Food and Drug
Administration ("FDA") pre-market approval ("PMA") and has been marketed by
the Company since 1989.
The Company recently acquired an exclusive license to use three patents
involving a technology known as Adaptive Phased Array ("APA") from the
Massachusetts Institute of Technology ("MIT"). APA technology was originally
developed for use in microwave radar systems for the U.S. Department of
Defense to track targets and to nullify the energy beam from enemy jamming
equipment. The Company is incorporating the APA technology into a device
based on the current Microfocus 1000 which is currently designated as the
Microfocus APA (the "Microfocus APA"). Based upon information currently
available, the Company believes the Microfocus APA will allow focusing
microwave heat on target tumors inside the body and will nullify undesired
heat induced in healthy tissue. The Company is in the engineering stage to
develop the commercial applications of the APA technology. The Company is
required to seek an investigational device exemption ("IDE") from the FDA to
begin patient studies in the United States. Data from such studies will be
used to seek PMA which must be received prior to commercial distribution of
the Microfocus APA in the United States.
The Company's current BPH system is the Microfocus 800(Microfocus 800)
which utilizes a non-surgical catheter-based therapy that incorporates
proprietary microwave technology and is designed to preferentially heat
diseased areas of the prostate to a temperature sufficient to cause cell
death in those areas. The Company does not have an IDE or PMA on its current
BPH system and it is therefore not currently available for commercial
distribution in the United States. The Microfocus 800 is manufactured
in Canada and is approved for export from Canada.
The Company has recently acquired by license patented compression
technology from MMTC, Inc. ("MMTC") which is being incorporated into the
current Microfocus 800. The new device consists of a microwave antenna
combined with a balloon mechanism which expands to compress the walls of the
urethra as the prostate is heated. The Company believes the compression
technology will provide the following advantages: Immediate relief, no
drainage catheter required, more efficient therapeutic temperatures, minimum
discomfort, allows use of lower temperatures and minimizes urethral damage.
The Company is in the engineering stage to develop a commercial application
of the technology. The device will also require the Company to seek an IDE
and PMA from the FDA prior to any commercial sales of the device in the
United States. The Company has conducted preclinical evaluations on its new
device and is now waiting for protocol from its principal investigator to
obtain data for the filing of an IDE with the FDA to allow restricted sales
of systems to hospitals in the United States.
The Company's objective is to establish itself as a leader in the design,
development, and marketing of clinically effective minimally-invasive
thermotherapy solutions for the treatment of cancer and for urological
disorders. The Company's focus is to integrate new technology recently
acquired by the Company to significantly expand the capabilities and market
for its products and increase efforts for FDA approval of all products. Key
elements to achieve the broadened strategy are to (i) develop products for
the oncology market, (ii) focus on the large and growing urology market,
(iii) develop new marketing strategies and relationships based upon selling
services and sharing treatment revenue, (iv) establish strategic
partnerships, (v) maintain technological leadership and protect technology
advantages through patents and (vi) seek early regulatory approvals in target
markets.
Results of Operations
Three Month Ended December 31, 1995 and 1996
Revenue increased to $94,040 in the three months ended December 31, 1996
from $1,000 in the same period in the prior fiscal year. The increase was due
primarily to increased sales of Microfocus products. With the renewed focus
on the development and sale of the Microfocus products, the Company anticipates
that sales of its thermotherapy systems will account for all sales in the
foreseeable future. The Company will focus on developing its new products.
Increased sales of products are not expected until the new technologies are
developed and approved for sale by governmental regulatory agencies.
Cost of product sales increased to $31,863 in the three months ended
December 31, 1996 from $445 in the three months ended December 31, 1995 due to
increased sales volume.
Research and development expense increased to $42,234 in the three months
ended December 31, 1996 from $7,610 in the three months ended December 31,
1995 due to increased emphasis on technology enhancements. The Company
expects to significantly increase its expenditures for research and
development to fund the development or enhancement of products by
incorporating the APA technology and the MMTC technology.
Selling, general and administrative expenses increased in amount to
$396,276 in the three months ended December 31, 1996 from $226,054 in the
three months ended December 31, 1995. The increase was primarily due to
activities relate to restructuring of the Company. The Company expects
selling and marketing expense to increase substantially as it expands its
advertising and promotional activities and increases its marketing and sales
force, principally for the commercialization of its thermotherapy systems.
Interest expense increased to $38,501 in the three months ended December
31, 1996 from $21,647 in the three months ended December 31, 1995.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $12,649,890 at December 31,
1996. The Company has funded its operations primarily through the sale of
equity securities. At December 31, 1996, the Company had cash, cash
equivalents and short-term investments aggregating approximately $9,807. Net
cash used in the Company's operating activities was $268,475 for the three
months ended December 31, 1996.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts,
including seeking FDA approval for the domestic sale of the Company's
products, expand its sales and marketing activities. The Company expects that
its existing capital resources will not be adequate to fund the Company's
operations through the next twelve months. The Company is dependent on
raising additional capital to fund its development of technology and to
implement its business plan. Such dependence will continue at least until
the Company begins marketing its new technologies. The Company's future
capital requirements and the adequacy of available funds will depend on
numerous factors, including the successful commercialization of the
thermotherapy systems progress in its product development efforts, the
magnitude and scope of such efforts, progress with preclinical studies and
clinical trials, the cost and timing of manufacturing scale-up, the
development of effective sales and marketing activities, the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights, competing technological and market developments, and the
development of strategic alliances for the marketing of its products. To the
extent that funds generated from the Company's operations are insufficient to
meet current or planned operating requirements, the Company will be required
to obtain additional funds through equity or debt financing, strategic
alliances with corporate partners and others, or through other sources. The
Company does not have any committed sources of additional financing, and
there can be no assurance that additional funding, if necessary, will be
available on acceptable terms, if at all. If adequate funds are not
available, the Company may be required to delay, scale-back or eliminate
certain aspects of its operations or attempt to obtain funds through
arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product
candidates, products or potential markets. If adequate funds are not
available, the Company's business, financial condition and results of
operations will be materially and adversely effected.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
none.
Item 2. Change in Securities
On February 16, 1995, Gao Yu Wen executed a subscription agreement with the
Company to purchase 20,000,000 shares of Common Stock at $.50 per share or
$10,000,000. The price was paid by paying $2,000,000 cash and property
transferring to the Company 9.5% of the outstanding equity of Aestar Fine
Chemical Company ("Aestar"). On October 23, 1996, the Company redeemed
16,000,000 shares of its common stock from Mr. Gao by rescinding its equity
interest in Aester. The 16,000,000 shares were retired. This transaction was
reported on the Form 10-K for the year ended September 30, 1996. In the
three months ended December 31, 1996, the Company issued 52,000 shares of
commons stocks. The Company also issued warrants to purchase 56,340 common
shares in the same period.
Item 3. Defaults upon Senior Securities
none.
Item 4. Submission of Matters to a Vote of Securities Holders
none.
Item 5. Other Information
none
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
none
(b) Reports on From 8-K
As of February 13, 1997, two reports on Form 8-K have been filed since
October 1, 1996.
On November 7, 1996, a report on Form 8-K was filed pertaining the
redemption and cancellation of 16,000,000 shares of the Registrant's Common
Stock. On January 27, 1997, a report on Form 8-K was filed pertaining the
resignation of Charles C, Shelton as a Board Director of the Registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: February 8, 1997 Cheung Laboratories, Inc.
---------------------- -------------------------
(Resgitrant)
/s/ Verle D. Blaha
---------------------------
Verle D. Blaha
President and Chief
Executive Officer
(Duly Authorized Officer)
/s/ John Mon
---------------------------
John Mon
Treasurer
(Principal Financial Officer)
