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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, 2008
or
o	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)

 

 

10220-L Old Columbia Road, Columbia, Maryland 21046

(Address of Principal Executive Offices)             (Zip Code)

 

(410) 290-5390

(Registrant’s telephone number, including area code)

 

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   o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer  o    Accelerated Filer  o    Non-accelerated Filer  o    Smaller Reporting Company x

 

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o     No  x

 

As of August 1, 2008 the Registrant had 10,145,850 shares outstanding of Common Stock, $.01 par value per share.

 

 

Table of Contents

 

TABLE OF CONTENTS

 

PART I:	FINANCIAL INFORMATION
	Item 1.	Financial Statements and Notes (Unaudited)
		Balance Sheets
		Statements of Operations
		Statement of Changes in Stockholders’ Equity
		Statements of Cash Flows
		Notes to Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II:	OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
	SIGNATURES

 

	EXHIBITS
	11	Statement Re: Computation of Earnings Per Share. (Filed herewith)
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
	31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith)
	32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished herewith)

 

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PART I

FINANCIAL INFORMATION

 

Item 1.     Financial Statements.

 

Index to Financial Statements

 

	Page
Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007	4 - 5
Statements of Operations (Unaudited) for the Three and Six Month Periods Ended June 30, 2008 and 2007	6
Statement of Changes in Stockholders’ Equity (Unaudited) for the Six Months Ended June 30, 2008	7
Statements of Cash Flows (Unaudited) for the Six Month Periods Ended June 30, 2008 and 2007	8
Notes to Financial Statements (Unaudited)	9 - 16

 

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CELSION CORPORATION

BALANCE SHEETS

June 30, 2008 and December 31, 2007

 

		June 30,			December 31,
		2008			2007
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	1,038,602		$	2,937,373
Short term investments available for sale, at fair value		11,603,433			3,000,000
Accounts receivable - trade		13,182			183,043
Other receivables		60,403			47,110
Due from Boston Scientific Corporation		15,000,000			15,000,000
Prepaid expenses		225,786			256,874
Total current assets		27,941,406			21,424,400
Property and equipment - at cost
Furniture and office equipment		194,257			194,200
Computer hardware and software		302,148			338,349
Laboratory and shop equipment		300,686			305,340
Leasehold improvements		132,148			132,148
		929,239			970,037
Less: Accumulated depreciation		717,131			702,156
Net value of property and equipment		212,108			267,881
Other assets
Advances under Celsion (Canada), Ltd.
Transition Services Agreement (net of allowance of $449,891 and $442,225 respectively)		—			200,000
Note receivable (net of discount of $147,154 and $168,473, respectively, and an allowance of $824,831 and $0, respectively)		378,015			1,181,527
Due from Boston Scientific Corporation - Non Current		—			15,000,000
Deposits with CROs and other assets		1,397,889			899,268
Patent licensing fees (net of accumulated amortization of $13,125 and $7,500, respectively)		61,875			65,625
Total other assets		1,837,779			17,346,420
Total assets		$	29,991,293		$	39,038,701

 

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CELSION CORPORATION

BALANCE SHEETS (Continued)

June 30, 2008 and December 31, 2007

 

		June 30,			December 31,
		2008			2007
		(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable - trade		$	1,309,592		$	1,830,457
Other accrued liabilities		3,384,948			5,056,380
Income taxes payable		—			546,000
Accrued non-cash compensation		8,910			8,910
Note payable - current portion		578,218			676,859
Total current liabilities		5,281,668			8,118,606
Long-term liabilities
Note payable		—			234,742
Other liabilities		31,440			34,238
Total long-term liabilities		31,440			268,980
Total liabilities		5,313,108			8,387,586
Stockholders’ equity
Common stock - $0.01 par value per share (250,000,000 shares authorized; 10,805,558 and 10,783,922 shares issued as of June 30, 2008 and December 31, 2007, respectively.)		108,056			107,839
Additional paid-in capital		88,866,254			88,319,985
Accumulated other comprehensive loss		(7,408		)	—
Accumulated deficit		(61,649,765		)	(55,137,757		)
Subtotal		27,317,137			33,290,067
Less: 659,738 shares of treasury stock - at cost		(2,638,952		)	(2,638,952		)
Total stockholders’ equity		24,678,185			30,651,115
Total liabilities and stockholders’ equity		$	29,991,293		$	39,038,701

 

See accompanying notes.

 

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CELSION CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2008			2007			2008			2007
Operating expenses:
Research and development		$	1,615,082		$	2,349,036		$	4,582,192		$	4,119,849
General and administrative		580,910			1,671,388			1,076,528			2,965,556
Total operating expenses		2,195,992			4,020,424			5,658,720			7,085,405
Loss from operations		(2,195,992		)	(4,020,424		)	(5,658,720		)	(7,085,405		)
Other income (expense):
Other expense		(158,825		)	(415,457		)	(839,091		)	(415,457		)
Interest income		28,614			120,253			104,124			301,032
Interest expense		(103,963		)	(317,162		)	(118,321		)	(665,425		)
Loss from continuing operations		$	(2,430,166	)	$	(4,632,790	)	$	(6,512,008	)	$	(7,865,255	)
Discontinued Operations (Note 12)
Income from discontinued operations		—			49,121,362			—			49,996,156
Income tax expense		—			(274,000		)	—			(274,000		)
Income from discontinued operations		—			48,847,362			—			49,722,156
Net (loss) / income		$	(2,430,166	)	$	44,214,572		$	(6,512,008	)	$	41,856,901
Net loss from continuing operations per common share - basic		$	(0.24	)	$	(0.43	)	$	(0.64	)	$	(0.73	)
Net loss from continuing operations per common share - diluted		$	(0.24	)	$	(0.43	)	$	(0.64	)	$	(0.73	)
Net income from discontinued operations per common share - basic		$	—		$	4.53		$	—		$	4.62
Net income from discontinued operations per common share - diluted		$	—		$	4.20		$	—		$	4.33
Net loss per common share - basic		$	(0.24	)	$	4.10		$	(0.64	)	$	3.89
Net loss per common share - diluted		$	(0.24	)	$	3.80		$	(0.64	)	$	3.64
Weighted average shares outstanding - basic		10,146,446			10,773,023			10,144,944			10,760,019
Weighted average shares outstanding - diluted (1)		10,146,446			11,628,480			10,144,944			11,493,854

 

(1) Potentially dilutive securities are excluded from the computation of earnings per share for periods in which there is a loss as their effect would be anti-dilutive.

 

See accompanying notes.

 

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CELSION CORPORATION

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2008

(Unaudited)

 

		Six Months Ended June 30, 2008
															Accumulated
							Additional								Other
		Common Stock					Paid-in			Treasury Stock					Comprehensive			Accumulated
		Shares		Total			Capital			Shares		Total			Loss			Deficit			Total
Balance at January 1, 2008		10,783,922		$	107,839		$	88,319,985		659,738		$	(2,638,952	)	$	—		$	(55,137,757	)	$	30,651,115
Stock-based compensation expense related to employee stock options		—		—			493,401			—		—			—			—			493,401
Stock based compensation - restricted stock		—		—			25,185			—		—			—			—			25,185
Issuance of restricted stock upon vesting		16,666		167			(167		)	—		—			—			—			—
Shares issued to employees		5,000		50			27,450			—		—			—			—			27,500
Extension of warrants		—		—			400			—		—			—			—			400
Change in fair value of investments		—		—			—			—		—			(7,408		)	—			(7,408		)
Net loss		—		—			—			—		—			—			(6,512,008		)	(6,512,008		)
Balance at June 30, 2008		10,805,588		$	108,056		$	88,866,254		659,738		$	(2,638,952	)	$	(7,408	)	$	(61,649,765	)	$	24,678,185

 

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CELSION CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Six Months Ended
		June 30,
		2008			2007
Cash flows from operating activities
Net (loss) / income for the year		$	(6,512,008	)	$	41,856,901
Non-cash items included in net loss:
Depreciation and amortization		62,695			103,069
Accretion of discount on note receivable		(21,319		)	(58,408		)
Gain on the sale of Prolieve		—			(48,029,793		)
Loss on disposal of fixed assets		1,009			—
Stock based compensation - Options		493,401			368,727
Stock based compensation - Stock grants		52,685			40,039
Amortization of deferred license fee		—			(269,840		)
Exercise of common stock options		—			2,718
Shares issued in exchange for services		—			39,125
Amortization of patent license		3,750			57,856
Allowance for bad debts		840,213			415,457
Net changes in:
Accounts receivable-trade		169,861			854,267
Other receivables		(19,298		)	17,567
Due from Boston Scientific Corporation		15,000,000			(994		)
Inventories		—			5,792
Prepaid expenses		31,088			98,689
Escrow account-license fee		—			1,824,740
Deposits and other assets		(498,621		)	(307,879		)
Accounts payable - trade and accrued interest		(320,865		)	1,089,923
Income taxes payable		(546,000		)	274,000
Other accrued liabilities		(1,674,230		)	(308,967		)
Net cash provided by / (used in) operating activities		7,062,361			(1,927,011		)
Cash flows from investing activities
Purchase of short term investments		(11,593,541		)	(5,000,000		)
Sale of short-term investments		3,001,597			—
Proceeds from the sale of the Prolieve assets		—			9,958,615
Advances under Celsion Canada transition services agreement		(9,377		)	(32,134		)
Amortization of premium on investments		823			—
Accretion of discount on investments		(923		)	—
Accrued interest on investments		(18,797		)	—
Payment of licensing fee		—			(1,600,000		)
Purchase of property and equipment		(7,931		)	(68,181		)
Net cash (used in) / provided by investing activities		(8,628,149		)	3,258,300
Cash flows from financing activities
Extension of warrants		400			—
Draws on line of credit		3,000,000			—
Repayment of line of credit		(3,000,000		)	—
Payments on note payable		(333,383		)	—
Net cash used in financing activities		(332,983		)	—
Net (decrease) / increase in cash and cash equivalents		(1,898,771		)	1,331,289
Cash and cash equivalents at beginning of period		2,937,373			1,032,674
Cash and cash equivalents at end of period		$	1,038,602		$	2,363,963
Cash paid for:
Interest		$	36,349		$	—
Income taxes		$	546,000		$	—

 

See accompanying notes.

 

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CELSION CORPORATION

 

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Six Month Periods Ended June 30, 2008 and 2007

 

Note 1.     Basis of Presentation

 

The accompanying unaudited financial statements of Celsion Corporation (which we sometimes refer to as “Celsion”, the “Company”, “we” or “us”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals considered necessary for a fair presentation, have been included in the accompanying unaudited financial statements. Operating results for the three and six month periods ended June 30, 2008 are not necessarily indicative of the results that may be expected for any other interim period(s) or for any full year. For further information, refer to the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission on March 28, 2008.

 

Note 2. Common Stock Outstanding and Per Share Information

 

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share is computed after adjusting the denominator of the basic earnings per share computation for the effects of all dilutive potential common shares outstanding during the period. The dilutive effects of options, warrants and their equivalents are computed using the treasury stock method.

 

For the quarter ended June 30, 2008, all options and warrants that were convertible into shares of the Company’s common stock were excluded from calculation of diluted earnings per share as their effect would have been anti-dilutive. The total number of outstanding warrants and options for the periods ended June 30, 2008 and 2007 were 2,355,635 and 2,011,986, respectively. Additionally, shares unvested restricted stock were excluded from the calculation. Additionally, shares of unvested restricted stock were excluded from the calculation. The total number of shares of unvested restricted stock as of June 30, 2008 and 2007 was 38,333 and 58,100, respectively. Information relating to the calculation of earnings per share is summarized as follows:

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2008			2007			2008			2007
Net loss from continuing operatons - basic and diluted		$	(2,430,166	)	$	(4,632,790	)	$	(6,512,008	)	$	(7,865,255	)
Net income from discontinued operations - basic and diluted		$	—		$	48,847,362		$	—		$	49,722,156
Net loss - basic and diluted		$	(2,430,166	)	$	44,214,572		$	(6,512,008	)	$	41,856,901
Weighted average shares outstanding - basic		10,146,446			10,773,023			10,144,944			10,760,019
Dilutive securities - options and warrants		—			855,457			—			733,835
Adjusted weighted average shares outstanding - dilutive		10,146,446			11,628,480			10,144,944			11,493,854
Net loss from continuing operations per common share - basic		$	(0.24	)	$	(0.43	)	$	(0.64	)	$	(0.73	)
Net loss from continuing operations per common share - diluted		$	(0.24	)	$	(0.43	)	$	(0.64	)	$	(0.73	)
Net income from discontinued operations per common share - basic		$	—		$	4.53		$	—		$	4.62
Net income from discontinued operations per common share - diluted		$	—		$	4.20		$	—		$	4.33
Net (loss) / income per common share - basic		$	(0.24	)	$	4.10		$	(0.64	)	$	3.89
Net (loss) / income per common share - diluted		$	(0.24	)	$	3.80		$	(0.64	)	$	3.64

 

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Note 3.  New Accounting Pronouncements

 

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157 “Fair Value Measurements”, which defines fair value, establishes a framework for consistently measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 became effective for the Company on January 1, 2008 and did not have an impact on the Company’s financial statements.

 

In November 2007, the EITF issued Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative Arrangements Related to the Development and Commercialization of Intellectual Property. Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a “virtual joint venture”). The arrangements generally provide that the collaborators will share, based on contractually defined calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined profits or losses. EITF 07-1 requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF 07-1 is effective for collaborative arrangements in place at the beginning of the annual period beginning after December 15, 2008. The Company does not currently expect the adoption of EITF 07-1 to have a material impact on its financial statements.

 

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115”. SFAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. SFAS No. 159 became effective for the Company on January 1, 2008 and did not have an impact on the Company’s financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”), which requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. SFAS 161 is effective for fiscal years beginning after November 15, 2008. The Company does not expect that the adoption of SFAS 160 will have a significant impact on its financial statements.

 

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”) to improve the consistency between the useful life of a recognized intangible asset (under SFAS No. 142) and the period of expected cash flows used to measure the fair value of the intangible asset (under SFAS No. 141(R)). FSP No. 142-3 amends the factors to be considered when developing renewal or extension assumptions that are used to estimate an intangible asset’s useful life under SFAS No. 142. The guidance in the new staff position is to be applied prospectively to intangible assets acquired after December 31, 2008. In addition, FSP No. 142-3 increases the disclosure requirements related

 

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to renewal or extension assumptions. The Company is currently assessing the impact of the adoption of FSP No. 142-3 on its financial statements.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements in conformity with U.S. generally accepted accounting principles (GAAP) for nongovernmental entities.  The statement establishes that the GAAP hierarchy should be directed to entities because it is the entity (not its auditor) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP.  This statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.  The Company does not believe implementation of SFAS 162 will have a material impact on its financial statements.

 

In June 2008, the FASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008, and the Company does not expect it to have a material impact on the Company’s financial statements.

 

Note 4. Stock Based Compensation

 

Employee Stock Options

 

The Company has long-term compensation plans that permit the granting of incentive awards in the form of stock options. Generally, the terms of these plans require that the exercise price of the options may not be less than the fair market value of Celsion’s Common Stock on the date the options are granted. Options generally vest over various time frames or upon milestone accomplishments. Some vest immediately. Others vest over a period between one and five years. The Company’s options generally expire ten years from the date of the grant.

 

2001 Stock Option Plan

 

The purpose of the 2001 Plan is to promote the long-term growth and profitability of Celsion by providing key associates with incentives to improve stockholder value and to contribute to the growth and financial success of Celsion and to enable the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The 2001 Plan permitted the granting of stock options (including nonqualified stock options and incentive stock options qualifying under Section 422 of the Internal Revenue Code) and stock appreciation rights or any combination of the foregoing. During the year that ended December 31, 2007, 195,043 options were canceled or expired. During the six months ended June 30, 2008, no options were canceled or expired.  All of the 195,043 canceled and expired options under the 2001 Plan became available for issue under the 2007 Plan.

 

2004 Stock Incentive Plan

 

The purpose of the 2004 Plan is to promote the long-term growth and financial success of the Company and enable the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The 2004 Plan permits the granting of awards in the form of incentive stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, and performance awards, or in any combination of the foregoing. During the year that ended December 31, 2007, 90,379 options were canceled or expired. During the six months ended June 30, 2008,  no options were canceled or expired. All of the 90,379 canceled and expired options under the 2004 Plan became available for issue under the 2007 Plan.

 

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2007 Stock Incentive Plan

 

The purpose of the 2007 Plan is to promote the long-term growth and profitability of the Company by providing incentives to improve stockholder value and enable the Company to attract, retain and reward the best available persons for positions of substantial responsibility. The 2007 Plan permits the granting of awards in the form of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, phantom stock, and performance awards, or in any combination of the foregoing. During the year ended December 31, 2007, 103,500  options were issued. No options were canceled or expired under the plan for the year ended December 31, 2007. During the six months ended June 30, 2008, 335,000 options were issued and no options were canceled or expired. Additionally, 5,000 shares of stock were issued under the plan as a performance award and 5,000 shares of restricted stock were issued pursuant to a consulting agreement during the quarter ended June 30, 2008. On June 30, 2008, there were 556,500 shares available out of 1,000,000 shares authorized and available under the 2007 Plan. All canceled and expired options under the 2001 Plan and the 2004 Plan become available for issue under the 2007 Plan.

 

Options and Restricted Stock Issued to Consultants for Services

 

The Company enters into agreements with consultants in which the consultants receive restricted stock and stock options in exchange for services. Generally, the terms of these plans require that the exercise price of the options may not be less than the fair market value of Celsion’s Common Stock on the date the options are granted. Options and restricted stock generally vest over various time frames or upon milestone accomplishments. Some vest immediately. Others vest over a period between one and five years. The Company’s options generally expire ten years from the date of the grant. During the six months ended June 30, 2008, 5,000 shares of restricted stock were issued to a consultant as part of a consulting agreement. There were no options granted to non-employees for the six months ended June 30, 2008.

 

A summary of the Company’s Common Stock option and warrant activity and related information is as follows:

 

Stock Options		Options Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2007		1,498,841		$	6.17
Granted		335,000		5.49
Exercised		—		—
Canceled or expired		—		—
Outstanding at June 30, 2008		1,833,841		$	6.04		7.4		$	683,803
Exercisable at June 30, 2008		996,549		$	7.34		6.1		$	177,595

 

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Warrants		Warrants Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at December 31, 2007		568,461		$	15.59
Granted		—		—
Exercised		—		—
Canceled or expired		(46,667	)	6.60
Outstanding at June 30, 2008		521,794		$	16.40		0.4		$	54,015
Exercisable at June 30, 2008		521,794		$	16.40		0.4		$	54,015

 

A summary of the Company’s Restricted Stock activity and related information is as follows:

 

Restricted Stock		Outstanding		Weighted Average Exercise Price
Non-vested stock awards at January 1, 2008		50,000		$	2.42
Granted		5,000		5.50
Vested		(16,667	)	2.42
Forfeited		—		—
Non-vested stock awards at June 30, 2008		38,333		$		2.82

 

The following is additional information with respect to options granted during the six months ended June 30, 2008:

 

 

For all of the Company’s stock-based compensation plans, the fair value of each grant was estimated at the date of grant using the Black-Scholes option pricing model.  Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield and employee exercise behavior.  Expected volatilities utilized in the model are based on historical volatility of the Company’s stock price.  The risk free interest rate is derived from values assigned to U.S. Treasury strips as published in the Wall Street Journal in effect at the time of grant.  The model incorporates exercise, pre-vesting and post-vesting forfeiture assumptions based on analysis of historical data.  The expected life of the fiscal 2008 grants was generated using the simplified method as allowed under Securities and Exchange Commission Staff Accounting Bulletin No. 107.

 

Stock based compensation expense totaled $255,243 and $518,586 during the three and six months ended June 30, 2008 and $239,629 and $408,767 during the three months ended June 30, 2007. Stock based compensation is recognized

 

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ratably over the requisite service period for all awards. Unrecognized stock based compensation expense related to stock options totaled $2,832,435 at June 30, 2008 while the unrecognized stock based compensation expense related to non-vested restricted stock awards was $96,503 at June 30, 2008. These unrecognized expenses will be recognized in the income statement at various rates up to the next four years.

 

Note 5. Short Term Investments Available for Sale

 

Short term investments available for sale of $11,603,433 as of June 30, 2008 and $3,000,000 as of December 31, 2007 consist of cash and cash equivalents, corporate debt securities, and government agency debt securities. They are valued at estimated fair value, with unrealized gains and losses reported as a separate component of stockholders’ equity in Accumulated Other Comprehensive Income.

 

Securities available for sale are evaluated periodically to determine whether a decline in their value is other than temporary.  The term “other than temporary” is not intended to indicate a permanent decline in value.  Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.  Management reviews criteria such as the magnitude and duration of the decline, as well as the reasons for the decline, to predict whether the loss in value is other than temporary.  Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

 

		June 30,			December 31,
Short term investments - at fair value		2008			2007
Cash and cash equivalents		$	6,498,154		$	3,000,000
Bonds - government agencies		3,199,027			—
Bonds - corporate issuances		1,906,252			—
Total		$	11,603,433		$	3,000,000

 

Note 6. Fair Values of Financial Instruments

 

FASB Statement No. 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) or identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions that market participants would use in pricing an asset or liability.

 

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

 

Assets measured at fair value on a recurring basis are summarized below:

 

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Fair value measurements at June 30, 2008 using

Significant

Quoted prices in

other

Significant

active markets for

observable

unobservable

identical assets

inputs

inputs

June 30, 2008

(Level 1)

(Level 2)

(Level 3)

Short term investments available for sale

$

11,603,433

$

—

$

11,603,433

$

—

 

Note 7. Note Receivable

 

On January 16, 2006, Celsion contributed to its wholly-owned subsidiary, Celsion (Canada) Limited (“Canada”), all of the Company’s assets relating to its Adaptive Phased Array (“APA”) technology for the treatment of breast cancer. Also on that date, the Company entered into a Stock Purchase Agreement with the Company’s founder and former officer and director, Dr. Augustine Y. Cheung, whereby the Company sold to Dr. Cheung all of the issued and outstanding shares of capital stock of Canada. The Company also agreed to provide certain services to Canada pursuant to a Transition Services Agreement between the Company and Canada.

 

Under the Stock Purchase Agreement, all of the capital stock of Canada was transferred to Dr. Cheung in exchange for a promissory note made by Dr. Cheung in favor of the Company in the principal amount of $1,500,000 to be paid over a period of up to 78 months and secured by a pledge of 100,536 shares of Celsion common stock owned by Dr. Cheung and his wife and the commitment of Canada to pay a 5 % royalty on the net sales of certain products sold by, and patent royalties received by, Canada and its successors and assigns, of up to $18,500,000.

 

The terms of the note receivable only specify an interest charge in the event that scheduled payments are in arrears.  The $1,500,000 note was therefore discounted at the prime rate in effect January 16, 2006 (7.25%) plus 1.0%, or 8.25%, and the balance, net of discount, of $1,146,428 was recorded in the financial statements above.  Interest income of $21,319 and $40,045 was recorded in the six months ended June 30, 2008 and 2007, respectively.

 

During the month of May 2008, the borrower approached the Company and requested that the terms of the note be extended and/or restructured. As of the filing of this Form 10-Q, an agreement between the parties had not been reached. As a result, the collectibility of the note receivable became doubtful. Accordingly, an allowance was placed against the note to reduce the balance to the estimated net realizable value of the collateral underlying the note. As noted above, 100,536 shares of Celsion common stock are pledged as collateral to the note. The closing price of Celsion’s common stock on June 30, 2008 was $3.76, which results in a total collateral value of $378,015. Therefore, the carrying value of the note was reduced to $378,015 as of June 30, 2008.

 

Note 8.  Advances under Celsion (Canada) Limited Transition Services Agreement

 

In conjunction with the sale of Canada, a Transition Services Agreement was entered into whereby (i) Celsion sublet space in the Company’s offices for use by Canada to carry on its business, for a period of up to six (6) months from the date of the agreement; (ii) Celsion provided administrative support services as needed in the operation of Canada’s business for the period of the sublease, and (iii) Celsion advanced funds to pay salary and health and dental insurance of each of certain employees of Canada and the expenses reasonably incurred in connection with the operation of Canada’s business up to $100,000 for the shorter of the period ending June 30, 2006 or the date of closing by Canada of a transaction involving the merger of Canada into a newly created Canadian Capital Pool Company and a simultaneous funding through a private placement of shares under terms approved by the Toronto Stock Exchange (the “Canada Transaction”). Within ten days after the closing of the Canada Transaction, Canada is obligated to pay the Company all amounts due under the Transition Services Agreement.

 

The Transition Services Agreement was amended on March 28, 2006 to advance Canada an additional $200,000 to fund reasonable operating expenses. This additional advance is repayable under the same terms as the Transition Services Agreement.  The cumulative balance advanced under the Transition Services Agreement, as amended, at June 30, 2008 was $651,556.

 

When the Canada Transaction did not close by December 31, 2006, Celsion management established, based on discussions with Canada management, that diligent efforts were being made by Canada management to close the Canada

 

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Transaction on a timely basis and agreed to extend the due date for repayment of the loan to the earlier of the closing of the Canada Transaction or June 30, 2007. Canada did not close the transaction nor had it paid the amounts due as of the June 30, 2007 due date. Accordingly, during the quarter ended June 30, 2007, the Company placed an allowance against this receivable and recorded the estimated net realizable value of the receivable as $200,000, which was guaranteed by Dr. Cheung. Given the collectibility concern of Dr. Cheung’s note described in Note 7 above, the Company has increased its allowance to $449,891 as of June 30, 2008 and recorded the estimated net realizable value of the receivable as zero.

 

Note 9. Licensing Agreement

 

Celsion entered into a Distribution Agreement with Boston Scientific Corporation (“Boston Scientific” or “BSC”) on January 20, 2003 pursuant to which the Company granted Boston Scientific exclusive rights to market and distribute the Prolieve Thermodilatation^® system and its component parts for the treatment of BPH in all territories other than China, Taiwan, Hong Kong, Macao, Mexico and Central and South America. The agreement was terminated upon the sale of the Prolieve assets to Boston Scientific on June 21, 2007 (as more fully described in Note 12). The Distribution Agreement had a seven-year term commencing on February 21, 2004. The parties previously shared gross sales (less costs and expenses) attributable to the product.

 

Celsion received a $4,000,000 licensing fee under the Distribution Agreement, $2,000,000 of which was placed in an interest bearing escrow account for a period of 36 months ending February 21, 2007 for payment of any legal expenses, settlements, license fees, royalties, damages or judgments incurred by Celsion or Boston Scientific in connection with any patent litigation related to alleged infringement of third party patents.   Interest on the funds was retained in the escrow account and accrued to the benefit of Celsion. The balance remaining in the escrow was released to Celsion on February 20, 2007 and applied to settlement of a patent infringement lawsuit with American Medical Systems, Inc. and AMS Research Corporation (together referred to as “AMS”).

 

The Company recognized the licensing fee at a rate of $47,619 per month over the seven-year term of the Distribution Agreement which began February 21, 2004. Upon the sale of the Prolieve assets on June 21, 2007, the remaining balance of the fee was recorded as income and included in the gain on the sale of the Prolieve assets during the quarter ended June 30, 2007.

 

Note 10. Secured Line of Credit

 

On November 9, 2007, the Company entered into a Loan and Security Agreement (the “Agreement”) with Manufacturers and Traders Trust Company (“M&T”) pursuant to which M&T agreed to provide a draw-down credit facility to the Company (the “Credit Facility”).  The Company was able to request advances under the Credit Facility at a rate not to exceed $1.5 million per month, up to a maximum principal amount under the Credit Facility of $6.5 million.  Each advance was subject to, among other customary conditions, a determination by M&T in its good faith discretion that the Company owned less than $0.5 million in cash and other property readily convertible into cash, excluding a $1.0 million cash collateral account held at M&T.  Amounts borrowed by the Company under the Credit Facility and repaid could not be re-advanced to the Company.

 

The Credit Facility was secured by (i) the $1.0 million cash collateral account and (ii) substantially all of the Company’s assets.  The Credit Facility bore interest on the outstanding balance at a rate of the London Interbank Offered Rate plus 2.75%.  Accrued interest on the outstanding balance was payable monthly.  The total outstanding principal and accrued interest balance on the Credit Facility was fully repaid on June 6, 2008.

 

The Agreement specified certain events of default, pursuant to which M&T could have required immediate repayment by the Company of all outstanding amounts under the Credit Facility.  In addition to customary events of default relating to changes in the operations and financial condition of the Company, in connection with payments due to the Company pursuant to the previously announced sale by the Company of its Prolieve assets to Boston Scientific Corporation, the Agreement specified certain events of default relating to changes in the operations and financial condition of Boston Scientific Corporation.

 

Upon receipt of the second $15 million installment due from Boston Scientific under the Asset Purchase Agreement (disussed below in Note 12) on June 6, 2008, the credit facility was closed.

 

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Note 11. Note Payable

 

On July 23, 2007, the Company entered into a Premium Finance Agreement with Flatiron Capital Corporation (“Flatiron”) whereby Flatiron funded certain insurance premiums in the amount of $1,313,250 on behalf of the Company. In exchange, the Company will make 21 monthly installments of $59,418 beginning on August 23, 2007. Interest accrues at a rate of 5.98% on outstanding balances.

 

Note 12. Discontinued Operations

 

On April 17, 2007, the Company and Boston Scientific entered into an asset purchase agreement to reflect the exercise by Boston Scientific of its option to purchase all of the Prolieve assets of the Company (the “Asset Purchase Agreement”). The Board of Directors of the Company approved the Asset Purchase Agreement and the transactions contemplated thereby, and the Company’s stockholders ratified the sale at the annual meeting on June 13, 2007.  Pursuant to the Asset Purchase Agreement, Boston Scientific purchased the Prolieve assets for an aggregate purchase price of $60 million, subject to reduction in accordance with the terms and conditions of the Asset Purchase Agreement. The transaction closed on June 21, 2007, and the Company recorded a gain on the sale in the amount of $48 million.

 

The gain on the sale of Prolieve was calculated as follows:

 

Sales Price		$	60,000,000
Transaction fees and legal costs		(1,460,165		)
Indemnity guarantee costs		(5,000,000		)
Licensing fee		(3,100,000		)
Adjusted Sales Price		50,439,835
Net assets sold
Inventories		(2,824,757		)
Laboratory and shop equipment		(150,503		)
AMS License Fee		(1,545,893		)
Liabilities Transferred
Amortization of License Fee		2,111,111
Gain on Sale		$	48,029,793

 

As previously disclosed, the Company and Boston Scientific entered into a Transaction Agreement effective January 20, 2003 (the “Transaction Agreement”). As part of the consideration in the Transaction Agreement, the Company granted Boston Scientific an exclusive option to purchase the Prolieve assets for a price equal to the greater of $60 million or a multiple of sales, exercisable for a period of five years and expiring in February 2009. As previously disclosed, on August 8, 2005, the Company and Boston Scientific entered into the First Amendment pursuant to which Boston Scientific agreed to lend the Company up to $15 million to be evidenced by one or more convertible secured promissory notes (the “Notes”). The first installment of $6 million was disbursed on August 17, 2005, the second and third installments, each of $4.5 million, were disbursed on February 2, 2006, and July 28, 2006, respectively. The First Amendment also fixed the purchase option price at $60 million (eliminating the multiple of sales).

 

The Asset Purchase Agreement reflects the agreement by the Company and Boston Scientific to further modify the terms of the purchase option granted to Boston Scientific on January 20, 2003 and amended on August 8, 2005. The revised terms provided for the aggregate purchase price of $60 million to be paid in three installments consisting of $30 million at closing on June 20, 2007 and $15 million on each of the first and second anniversaries of the closing. The revised terms also provided that the $30 million first installment was reduced at closing by approximately $17 million, representing the principal and accrued interest due on the Notes.

 

In addition to the other indemnification provisions, such as indemnification for breaches of representations, warranties and covenants contained in the Asset Purchase Agreement, the Company has agreed to indemnify Boston Scientific for a period of two years from the closing, in an amount up to $15 million of incurred costs, in the event of unforeseen intellectual property claims related to the Prolieve assets.  In accordance with FASB interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB interpretation No. 34, the Company recorded an estimate for the fair value of standing ready to perform under the indemnification guarantee of

 

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