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 June 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________to _________
Commission file number 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 June 30,1997, the Registrant had outstanding 27,153,163 shares of
Common Stock, $.01 par value.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
CHEUNG LABORATORIES, INC.
BALANCE SHEETS
June 30, 1997 and September 30, 1996
ASSETS
6/30/1997 9/30/1996
Current assets:
Cash and cash equivalents $120,549 $246,931
Accounts receivable (net of an allowance for
doubtful accounts of $21,939 and $20,770 on
6/30/1997 and 9/30/1996 respectively) 169,212 154,335
Interest receivable - Ardex 30,143 5,333
Inventories 307,549 270,952
Prepaid expenses 2,718 1,669
Other current asset 26,755 26,755
------- ------
Total current assets 656,925 705,975
------- -------
Property and equipment - at cost:
--------------------------------
Furniture and office equipment 180,348 176,541
Laboratory and shop equipment 62,228 62,228
------- -------
242,575 238,769
Less accumulated depreciation 212,264 205,766
------- -------
Net value of property and equipment 30,312 33,003
------ ------
Other assets:
Investment in Aestar Fine Chemical Company-
at cost - 8,000,000
Funds held under investment contract - 40,000
Notes receivable - Ardex Equipment, L.L.C. 400,000 400,000
Patent licenses (net of accumulated
amortization of $49,279 and $37,328 on
6/30/1997 and 9/30/1996, respectively) 130,671 142,622
------- -------
Total other assets 530,671 8,582,622
------- ---------
Total assets $1,217,908 $9,321,600
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
6/30/1997 9/30/1996
Current liabilities:
- -------------------
Accounts payable - trade $660,050 $197,190
Notes payable-related parties, current portion 457,962 331,712
Accrued interest payable - related parties 255,422 339,660
Accrued interest payable - other 57,230 8,417
Accrued compensation 320,443 186,459
Accrued professional fees 218,352 76,352
Other accrued liabilities 16,765 100,905
Deferred revenues 112,031 115,531
------- -------
Total current liabilities 2,098,255 1,352,726
--------- ---------
Long term liabilities:
Note payable-related party,due after one year 8,000 8,000
Notes payable - private placement 1,361,750 1,205,000
--------- ---------
Total long-term liabilities 1,369,750 1,213,000
--------- ---------
Total liabilities 3,468,005 2,565,726
--------- ---------
Stockholders' equity:
- --------------------
Capital stock - $.01 par value; 51,000,000
shares authorized, 27,153,163 and
41,206,360 issued and outstanding for
6/30/1997 and 9/30/1996, respectively. 271,532 412,063
Additional paid-in capital 11,600,896 18,555,444
Accumulated deficit (14,122,525) (12,211,633)
---------- ----------
Total stockholders' equity (deficit) (2,250,097) 6,755,874
--------- ---------
Total liabilities and shareholders' equity $1,217,908 $9,321,600
========== ==========
See accompanying notes.
CHEUNG LABORATORIES, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Nine Months Ended June 30
1997 1996 1997 1996
Revenue:
- -------
Hyperthermia sales and parts $3,675 $31,277 $116,968 $121,589
Consulting service and repairs - - - 8,750
Returns and allowance - (60,000) - (60,000)
------ ------- ------- ------
Total revenue 3,675 (28,723) 116,968 70,339
Cost of sales 2,029 - 46,141 25,887
----- ------ ------ ------
Gross profit (loss) 1,646 (28,723) 70,828 44,452
----- ------ ------ ------
Operating expenses:
Selling, general and administrative 732,784* 280,009 1,709,454 763,506
Research and development 102,843 - 144,945 7,610
------- ------- --------- -------
Total operating expenses 835,627 280,009 1,854,399 771,116
------- ------- --------- -------
(Loss) Income from operations (833,981) (308,732) (1,783,572) (726,664)
Loss in investment fund - - (40,000) -
Other(expense) income 8,448 17 33,313 1,767
Interest expense (41,752) (21,388) (120,633) (64,767)
------- ------- --------- -------
(Loss) Income before income taxes (867,285) (330,103) (1,910,892) (789,664)
Income taxes - - - -
------- ------- --------- -------
Net (loss) income (867,285) (330,103) (1,910,892) (789,664)
======= ======= ========= =======
Net (loss) income per common share ($0.033) ($0.014) ($0.073) ($0.033)
Weighted average shares outstanding 26,495,072 24,221,487 26,007,435 23,930,090
(1) This amount includes $280,000 in compensation expense recorded for the
500,000 shares of common stock issued to Spencer Volk.
See accompanying notes.
CHEUNG LABORATORIES, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended June 30,
1997 1996
Cash flows from operating activities:
Net (loss) income $(1,910,892) $(789,665)
Noncash items included in net (loss) income:
Loss in investment fund - -
Depreciation and amortization 17,269 9,606
Bad debt expense 1,170 (254)
Net changes in:
Accounts receivable (14,877) (33,900)
Inventories (36,597) 24,679
Accrued interest receivable (24,810) -
Prepaid expenses (1,049) (15,965)
Accounts payable-trade 462,860 4,614
Accrued interest payable - related parties (84,238) 126,420
Accrued interest payable - other 48,813 1,891
Accrued compensation 133,984 73,994
Accrued professional fees 142,000 87,766
Other accrued liabilities (84,129) 84,812
--------- -------
Net cash (used) provided by operating
activities (1,350,496) (426,002)
--------- -------
Cash flows from investing activities:
Purchase of property and equipment (3,806) (150)
Funds returned - investment contract 40,000 139,000
--------- -------
Net cash provided (used) by investing
activities 36,194 138,850
--------- -------
Cash flows from financing activities:
Payment on notes payable (net) 283,000 24,000
Proceeds of stock issuances 904,920 295,221
--------- -------
Net cash provided by financing
activities 1,187,290 319,221
--------- -------
Net increase (decrease) in cash (126,382) 32,069
Cash at beginning of period 246,931 7,238
------- ------
Cash at end of the period 120,549 39,307
======= ======
See accompanying notes.
CHEUNG LABORATORIES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The information presented for the nine month periods ended June 30, 1996
and June 30, 1997 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 annual 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. Outstanding warrants, options,
notes which can be converted into Common Stock, and the 16,000,000 shares
retired in October 1996 are not included in the calculation of the per share
data.
Note 3. Inventories
Inventories are carried at the lower of actual cost or market and cost is
determined using the average cost method. The components of inventories on
6/30/97 and 9/30/1996 are as follows:
6/30/1997 9/30/1996
Finished products $62,586 $55,138
Work in process 52,283 46,062
Materials 192,680 169,752
------- -------
$307,549 $270,952
======== ========
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 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 intends to concentrate its business on the development of two
recently acquired technologies: (I) adaptive phase array ("APA") targeting of
microwave energy, which the Company believes will have broad potential
medical applications, and (ii) balloon catheter technology for enhanced
thermotherapy of BPH and other genitourinary tract conditions. While the
balloon catheter technology is related to the Company's previous BPH
thermotherapy devices, the Company believes the APA technology has the
potential to serve as the core technology for a broad array of medical
devices, and accordingly the Company will devote most of its resources to the
exploitation of the APA technology.
The Company acquired an exclusive license to use three patents involving a
technology known as Adaptive Phased Array ("APA") from the Massachusetts
Institute of Technology ("MIT"). The APA technology was originally developed
for use in microwave radar systems for the U.S. Department of Defense to
track missiles and to nullify the energy beam from enemy jamming equipment.
The significance of the APA technology is its ability to deliver and focus
heat to tumor sites in the human body without burning the skin and the
surrounding healthy tissues. Medical benefits of selectively heating tissue
have been demonstrated for years. Delivering the necessary heat within the
body without damaging surrounding tissue has been a major impediment to the
use of thermotherapy for deep seated disease. The APA technology concentrates
the microwave energy and resulting heating on a well defined target area and
nullifies energy in surrounding tissue. The Company will attempt to develop
applications of the APA technology in the following areas:
Cancer Treatment -- Deep-seated malignant tumors, including tumors of the
breast, colon, pancreas, lung, prostrate, liver and cervix, are some of the
most difficult cancers to treat conventionally. When medical devices based on
the Company's APA technology are completed, oncologists will be able to
utilize thermotherapy for these cancers in conjunction with radiation or
chemotherapy. The first system intended for commercialization by the Company
using the APA technology will be a breast cancer thermotherapy system for the
purpose of heating solid tumors in intact breast.
Targeted Drug Delivery -- Research suggests that focused heat can provide
the means to melt heat sensitive liposomes (micro-carriers) which encapsulate
toxic drugs and to target specific tissue or organ sites to allow localized
drug release at focus and further suggests that additional controlled heating
will enhance intracellular drug absorption. By combining the heat sensitive
liposomes with the Company's APA technology, the Company believes a drug
delivery system can be developed which can concentrate and release the
medication only at the tumor site.
Targeted Gene Therapy -- Laboratory testing indicates that artificial gene
molecules can be delivered by heat sensitive liposomes to the desired gene
site where they can then be released using focused heat. It further appears
that focused heat will target the replacement gene to the chromosome site and
trigger the gene repair to occur.
The Company is required to seek an investigational device exemption
("IDE") from the Food and Drug Administration ( FDA ) to begin patient
studies in the United States. Data from such studies will be used to seek
Premarketing Approval ( PMA ) which must be received prior to commercial
distribution of the Company s new medical devices in the United States. On
March 5, 1997, the Company delivered its new breast cancer treatment system
to Massachusetts General Hospital (MGH) under a collaborative research
arrangement to evaluate the APA technology in vivo studies using animal tumor
models in its ability to focus heat to the tumor models. The study was
completed recently and it confirmed that the APA technologies can indeed
focus heat deep within the body without heating surrounding tissue or the
skin.
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 a patented balloon catheter technology
from MMTC, Inc., 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
("angioplasty") mechanism which expands to compress the walls of the urethra
as the prostate is heated. The combined use of balloon angioplasty and
microwave heating provides a dual modality treatment approach which it is
believed will provide significantly improved treatment benefits over the
"heat alone" systems currently available commercially. First, the heat and
compression create a natural stent in the wall of the urethra thus permitting
immediate relief. Second, the system's relatively low temperature (43 to
44 degree Celsius) are sufficient to kill prostatic cells outside the
urethra but are not high enough to cause swelling in the urethra as is often
associated with competitive treatments using high temperatures and no
compression. 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. On March 26,1997 the Company delivered its new BPH treatment system
to the Albert Einstein College of Medicine in New York City for preclinical
evaluations. The data resulting from the animal test will be used in
obtaining approval from the Food and Drug Administration to begin clinical
test.
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 has ceased active sales of its current equipment and
is focusing on the development of the new technologies 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)
continue research & development on the use of the Company's technology
platform to include targeted drug delivery and targeted gene therapy, (iv)
develop new marketing strategies and relationships based upon selling services
and sharing treatment revenue, (v) establish strategic partnerships with
research, engineering and business entities, (vi) maintain technological
leadership and protect technology advantages through patents, (vii) seek
early regulatory approvals in target markets, and (viii) develop a marketing
plan allowing the Company to participate in the revenue stream generated by
treatments administered utilizing the Company's products.
Results of Operations
Nine Months Ended June 30, 1996 and 1997
Revenue increased to $116,968 in the nine months ended June 30, 1997 from
$70,339 in the same period in the prior fiscal year. The Company has ceased
active sales of its current equipment and is focusing on the development of
the new technologies recently it acquired to significantly expand the
capabilities and market for its products. Accordingly, gross sales for the
quarter ended June 30, 1997 was $3,675 compared with $31,277 for the same
quarter in the previous fiscal year. With the focus on the development and
marketing of the new thermotherapy systems utilizing the patented technologies,
the Company anticipates that most of its future revenue will be generated by
treatments administered utilizing its thermotherapy systems and the sales of
disposable kits. Revenue from the new technologies is not expected until the
new technologies are developed and approved for sale by governmental
regulatory agencies.
Cost of sales increased to $46,141 in the nine months ended June 30, 1997
from $25,887 in the nine months ended June, 1996 due to increased sales
volume.
Research and development expense increased to $144,945 in the nine months
ended June 30, 1997 from $7,610 in the nine months ended June 30, 1996 due to
increased emphasis on technology enhancements. The Company expects to
significantly increase its expenditures for research and development to fund
the development or enhancement of products by incorporating the APA
technology and the MMTC technology.
Selling, general and administrative expenses increased in amount to
$1,709,454 in the nine months ended June 30, 1997 from $763,506 in the nine
months ended June 30, 1996. The higher expenses were primarily due to the
increase in consulting and legal expenses, compensation expenses, including
$280,000 in compensation expense recorded for the 500,000 shares of common
stock issued to Spencer Volk, and activities related to the 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 new thermotherapy systems.
Interest expense increased to $120,634 in the nine months ended June 30,
1997 from $64,767 in the nine months ended June 30, 1996. The increase was
primarily due to the accrued interest on the $1,505,000 8% convertible notes.
Liquidity and Capital Resources
Since inception, the Company's expenses have significantly exceeded its
revenues, resulting in an accumulated deficit of $14,122,525 and a
shareholders deficit of $2,250,097 at June 30, 1997. The Company has funded
its operations primarily through the sale of equity securities. At June 30,
1997, the Company had cash, cash equivalents and short-term investments
aggregating approximately $120,549. Net cash used in the Company's operating
activities was $1,350,496 for the nine months ended June 30, 1997.
The Company has incurred negative cash flows from operations since its
inception, and has expended, and expects to continue to expend in the future,
substantial funds to complete its planned product development efforts,
including seeking FDA approval for the domestic sale of the Company's
products, expand its sales and marketing activities. The Company expects that
its existing capital resources will not be adequate to fund the Company's
operations through the next twelve months. The Company is dependent on
raising additional capital to fund its development of technology and to
implement its business plan. Such dependence will continue at least until
the Company begins marketing its new technologies.
The Company's future capital requirements and the adequacy of available
funds will depend on numerous factors, including: the successful
commercialization of the thermotherapy systems; progress in its product
development efforts; the magnitude and scope of such efforts; progress with
preclinical studies and clinical trials; the cost and timing of manufacturing
scale-up; the development of effective sales and marketing activities; the
cost of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; the emerging of competing technological and
market developments; and the development of strategic alliances for the
marketing of the Company s products. To the extent that funds generated from
the Company's operations are insufficient to meet current or planned
operating requirements, the Company will be required to obtain additional
funds through equity or debt financing, strategic alliances with corporate
partners and others, or through other sources. The Company does not have any
committed sources of additional financing, and there can be no assurance that
additional funding, if necessary, will be available on acceptable terms, if
at all. If adequate funds are not available, the Company may be required to
delay, scale-back or eliminate certain aspects of its operations or attempt
to obtain funds through arrangements with collaborative partners or others
that may require the Company to relinquish rights to certain of its
technologies, product candidates, products or potential markets. If adequate
funds are not available, the Company's business, financial condition and
results of operations will be materially and adversely effected.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been 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. In the lawsuit, Eastwell is seeking damages
in the amount of $125,000, plus interest for an alleged breach of a loan
agreement between the Company and Eastwell. The Company denies that any
funds are due to Eastwell and has filed an Answer and Counterclaim seeking
damages from Eastwell for breach of related agreements.
Item 2. Change in Securities
The securities sold by the Company without registration under the Securities
Act of 1933 (the "33 Act") in the Quarter ended June 30, 1997 are summarized
in the following table. These securities were sold without registration
pursuant to an exemption in Section 4(2) of the 33 Act.
Date Title Name Amount
4/1/97 8% Senior Convertible Note Charles & Barbara Young $10,000
4/18/97 8% Senior Convertible Note Ryan, Lee & Co. $20,000
5/21/97 8% Senior Convertible Note Ryan, Lee & Co. $13,000
5/6/97 8% Senior Convertible Note Ryan, Lee & Co. $10,000
6/16/97 8% Senior Convertible Note Ryan, Lee & Co. $12,000
6/17/97 8% Senior Convertible Note Ryan, Lee & Co. $11,000
6/18/97 8% Senior Convertible Note Ryan, Lee & Co. $36,700
4/24/97 8% Senior Convertible Note Sidney&Carolyn Markowitz $10,000
5/10/97 8% Senior Convertible Note Donald Beard $20,000
5/23/97 8% Senior Convertible Note Stearns Management $16,750
6/16/97 8% Senior Convertible Note Sivertsen & Associates $10,000
6/18/97 8% Senior Convertible Note Mette Larsen $42,000
6/18/97 8% Senior Convertible Note Ole Larsen $10,000
6/18/97 8% Senior Convertible Note Michael Slattery $10,000
6/18/97 8% Senior Convertible Note Philip Felice $41,000
6/23/97 8% Senior Convertible Note Nisha Sethi $10,000
6/24/97 8% Senior Convertible Note Dennis Farrell $12,500
6/25/97 8% Senior Convertible Note Howard Conyack $10,250
6/25/97 8% Senior Convertible Note Barbara Friedman $15,000
6/26/97 8% Senior Convertible Note Alex Nazarenko $20,000
5/22/97 12% Note Horton Trust $220,000
6/3/97 Common Stock Spencer Volk $100,000
Note: In the quarter ended June 30, 1997, the Company issued 500,000 shares
to Spencer Volk as part of the compensation outlined in the Employment
Agreement between Mr. Volk and the Company.
Item 3. Defaults upon Senior Securities
none.
Item 4. Submission of Matters to a Vote of Securities Holders
none.
Item 5. Other Information
On May 28, 1997, the Company elected Mel Soule and Walter Herbst as
Directors of the Board, replacing Richard Jackson and Robert Schiffmann, who
resigned. 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 1992-1993, Mr. Soule was a senior development manager for W.R. Grace &
Co. Mr. Soule holds an MBA degree from Wilmington College and a BA from the
University of Massachusetts. Mr. Herbst has been and currently is chief
executive officer of Herbst Lazar Bell, Inc., 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. Mr. Herbst holds a B.S.A. in Industrial Design from the University
of Illinois and a Master of Management from the Kellogg Graduate School of
Northwestern University.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit.
11. Computation of per share earnings.
27. Financial Data Schedule
(b) Reports on Form 8-K
One report on Form 8-K was filed during the period reported pertaining to
the appointment of Spencer Volk as the President and Chief Executive Officer
on May 11, 1997.
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: August 19, 1997 Cheung Laboratories, Inc.
---------------------- -------------------------
(Registrant)
/s/ Spencer J. Volk
-------------------
Spencer J. Volk
President
/s/John Mon
-----------
John Mon
Treasurer
EXHIBIT 11
CHEUNG LABORATORIES, INC.
COMPUTATION OF EARNING (LOSS) PER SHARE
Three Months Ended Nine Months Ended
June 30 June 30
1997 1996 1997 1996
Net (loss) income ($867,285) ($330,103) ($1,910,892) ($789,664)
Weighted average shares
outstanding 26,495,072 24,221,487 26,007,435 23,930,090
Net (loss)income per
common share ($0.033) ($0.014) ($0.073) ($0.033)
* Outstanding warrants, options, notes which can be converted into Common
Stock, and the 16,000,000 shares retired in October 1996 are not included
in the calculation of the per share data.
5
9-MOS
SEP-30-1997
OCT-1-1996
JUN-30-1997
120,549
0
199,355
21,939
307,549
656,925
242,575
212,264
1,217,908
2,098,255
0
0
0
(2,250,107)
0
1,217,908
116,968
116,968
46,141
46,141
1,783,572
0
120,633
(1,910,892)
0
0
0
0
0
(1,910,892)
(.073)
0
