Table of Contents

 

 

 

**UNITED STATES**

**SECURITIESAND 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 thetransition period from             to             **

 

**Commissionfile number 000-14242**

 

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**CELSIONCORPORATION**

(Exact Name of Registrant as Specified in itsCharter)

 

| **Delaware**                     | ** ** | **52-1256615**       |
|----------------------------------|------------|----------------------|
| (State or Other  Jurisdiction of |       | (I.R.S. employer     |
| Incorporation or  Organization)  |       | identification  no.) |

 

**10220-LOld Columbia Road, Columbia, Maryland****21046**

(Address ofPrincipal Executive Offices)             (ZipCode)

 

**(410) 290-5390**

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.    Yes   x  No  o

 

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

 

Large Accelerated Filer  o    AcceleratedFiler  o    Non-acceleratedFiler  o    SmallerReporting Company x

 

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

 

As of August 1, 2008 the Registrant had10,145,850 shares outstanding of Common Stock, $.01 par value per share.

 

 

 

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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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Table of Contents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item1.     Financial Statements.**

 

Index to FinancialStatements

 
| ** **                                                                                                   | **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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Table of Contents

 

**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 |   |

 

4

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Tableof Contents

 

**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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**CELSIONCORPORATION**

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 |   |

 

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

 

Seeaccompanying notes.

 

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**CELSIONCORPORATION**

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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**CELSIONCORPORATION**

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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# **CELSIONCORPORATION**

# ** **

**NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

 

**For theThree and Six Month Periods Ended June 30, 2008 and 2007**

 

**Note 1.     Basis of Presentation**

 

The accompanying unaudited financial statements of CelsionCorporation (which we sometimes refer to as “Celsion”, the “Company”, “we” or “us”)have been prepared in accordance with accounting principles generally acceptedin the United States of America for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments,consisting only of normal recurring accruals considered necessary for a fairpresentation, have been included in the accompanying unaudited financialstatements. 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 anyother interim period(s) or for any full year. For further information,refer to the financial statements and notes thereto included in the Company’sAnnual 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 Outstandingand Per Share Information**

 

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

 

For the quarter ended June 30,2008, all options and warrants that were convertible into shares of the Company’scommon stock were excluded from calculation of diluted earnings per share astheir effect would have been anti-dilutive. The total number of outstandingwarrants and options for the periods ended June 30, 2008 and 2007 were2,355,635 and 2,011,986, respectively. Additionally, shares unvested restrictedstock were excluded from the calculation. Additionally, shares of unvestedrestricted stock were excluded from the calculation. The total number of sharesof unvested restricted stock as of June 30, 2008 and 2007 was 38,333 and58,100, respectively. Information relating to the calculation of earnings pershare 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 ValueMeasurements”, which defines fair value, establishes a framework forconsistently measuring fair value under generally accepted accountingprinciples, and expands disclosures about fair value measurements. SFAS No. 157became effective for the Company on January 1, 2008 and did not have animpact on the Company’s financial statements.

 

In November 2007,the EITF issued Issue No. 07-1 (“EITF 07-1”), Accounting for CollaborativeArrangements Related to the Development and Commercialization of IntellectualProperty. Companies may enter into arrangements with other companies to jointlydevelop, manufacture, distribute, and market a product. Often the activitiesassociated with these arrangements are conducted by the collaborators withoutthe creation of a separate legal entity (that is, the arrangement is operatedas a “virtual joint venture”). The arrangements generally provide that thecollaborators will share, based on contractually defined calculations, theprofits or losses from the associated activities. Periodically, thecollaborators share financial information related to product revenues generated(if any) and costs incurred that may trigger a sharing payment for the combinedprofits or losses. EITF 07-1 requires collaborators in such an arrangement topresent the result of activities for which they act as the principal on a grossbasis and report any payments received from (made to) other collaborators basedon other applicable GAAP or, in the absence of other applicable GAAP, based onanalogy to authoritative accounting literature or a reasonable, rational, andconsistently applied accounting policy election. EITF 07-1 is effective forcollaborative arrangements in place at the beginning of the annual periodbeginning after December 15, 2008. The Company does not currently expectthe adoption of EITF 07-1 to have a material impact on its financialstatements.

 

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

 

In March 2008, theFASB issued SFAS No. 161, “Disclosures about Derivative Instruments andHedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”),which requires enhanced disclosures about an entity’s derivative and hedgingactivities and thereby improves the transparency of financial reporting. SFAS161 is effective for fiscal years beginning after November 15, 2008. TheCompany does not expect that the adoption of SFAS 160 will have a significantimpact on its financial statements.

 

In April 2008, theFASB issued FASB Staff Position No. 142-3, “Determination of the UsefulLife of Intangible Assets” (“FSP No. 142-3”) to improve the consistencybetween 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 theintangible asset (under SFAS No. 141(R)). FSP No. 142-3 amends thefactors to be considered when developing renewal or extension assumptions thatare 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 tointangible assets acquired after December 31, 2008. In addition, FSP No. 142-3increases the disclosure requirements related 

 

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

 

In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (“SFAS 162”). SFAS 162 is intended to improve financial reportingby identifying a consistent framework, or hierarchy, for selecting accountingprinciples 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 toentities because it is the entity (not its auditor) that is responsible forselecting accounting principles for financial statements that are presented inconformity with GAAP.  This statement is effective 60 days following theSEC’s approval of the Public Company Accounting Oversight Board amendments toAU Section 411, The *Meaning of Present Fairlyin Conformity with Generally Accepted Accounting Principles*. The Company does not believe implementation of SFAS 162 will have amaterial impact on its financial statements.

 

In June 2008, theFASB issued FASB Staff Position Emerging Issues Task Force (EITF) No. 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment TransactionsAre Participating Securities” (“FSP EITF No. 03-6-1”).  Under FSPEITF No. 03-6-1, unvested share-based payment awards that contain rightsto receive non-forfeitable dividends (whether paid or unpaid) are participatingsecurities, 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 theCompany’s financial statements.

 

**Note 4. Stock Based Compensation**

 

Employee Stock Options

 

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

 

2001 Stock Option Plan

 

The purpose of the2001 Plan is to promote the long-term growth and profitability of Celsion byproviding key associates with incentives to improve stockholder value and tocontribute to the growth and financial success of Celsion and to enable theCompany to attract, retain and reward the best available persons for positionsof substantial responsibility. The 2001 Plan permitted the granting of stockoptions (including nonqualified stock options and incentive stock optionsqualifying under Section 422 of the Internal Revenue Code) and stockappreciation rights or any combination of the foregoing. During the year thatended December 31, 2007, 195,043 options were canceled or expired. Duringthe six months ended June 30, 2008, no options were canceled orexpired.  All of the 195,043 canceled andexpired options under the 2001 Plan became available for issue under the 2007Plan.

 

2004 Stock Incentive Plan

 

The purpose of the2004 Plan is to promote the long-term growth and financial success of theCompany and enable the Company to attract, retain and reward the best availablepersons for positions of substantial responsibility. The 2004 Plan permits thegranting of awards in the form of incentive stock options, restricted stock,restricted stock units, stock appreciation rights, phantom stock, andperformance awards, or in any combination of the foregoing. During the yearthat 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 andexpired options under the 2004 Plan became available for issue under the 2007Plan.

 

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2007 Stock Incentive Plan

 

The purpose of the2007 Plan is to promote the long-term growth and profitability of the Companyby providing incentives to improve stockholder value and enable the Company toattract, retain and reward the best available persons for positions ofsubstantial responsibility. The 2007 Plan permits the granting of awards in theform of incentive stock options, nonqualified stock options, restricted stock,restricted stock units, stock appreciation rights, phantom stock, andperformance awards, or in any combination of the foregoing. During the yearended December 31, 2007, 103,500 options were issued. No options were canceled or expired under the planfor 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 performanceaward and 5,000 shares of restricted stock were issued pursuant to a consultingagreement during the quarter ended June 30, 2008. On June 30, 2008,there were 556,500 shares available out of 1,000,000 shares authorized andavailable under the 2007 Plan. All canceled and expired options under the 2001Plan and the 2004 Plan become available for issue under the 2007 Plan.

 

Options and RestrictedStock Issued to Consultants for Services

 

The Company entersinto agreements with consultants in which the consultants receive restrictedstock and stock options in exchange for services. Generally, the terms of theseplans require that the exercise price of the options may not be less than thefair market value of Celsion’s Common Stock on the date the options aregranted. Options and restricted stock generally vest over various time framesor upon milestone accomplishments. Some vest immediately. Others vest over aperiod between one and five years. The Company’s options generally expire tenyears 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 aconsulting agreement. There were no options granted to non-employees for thesix months ended June 30, 2008.

 

A summary of the Company’sCommon 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’sRestricted 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 isadditional information with respect to options granted during the six monthsended June 30, 2008:

 

| ** **                     | ** ** | **Six Months Ended  June 30, 2008** | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|
| Risk-free  interest rate       |       | 2.18% to 2.81%                                          |       |
| Dividend Yield                 |       | 0.0%                                                    |       |
| Expected  volatility           |       | 281.83% to 282.51%                                      |       |
| Expected option  life in years |       | 6.0                                                     |       |

 

For all of the Company’sstock-based compensation plans, the fair value of each grant was estimated atthe date of grant using the Black-Scholes option pricing model.  Black-Scholes utilizes assumptions related tovolatility, the risk-free interest rate, the dividend yield and employeeexercise behavior.  Expected volatilitiesutilized in the model are based on historical volatility of the Company’s stockprice.  The risk free interest rate isderived from values assigned to U.S. Treasury strips as published in the WallStreet Journal in effect at the time of grant. The model incorporates exercise, pre-vesting and post-vesting forfeitureassumptions based on analysis of historical data.  The expected life of the fiscal 2008 grantswas generated using the simplified method as allowed under Securities andExchange Commission Staff Accounting Bulletin No. 107.

 

Stock based compensationexpense 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 requisiteservice period for all awards. Unrecognized stock based compensation expenserelated to stock options totaled $2,832,435 at June 30, 2008 while theunrecognized stock based compensation expense related to non-vested restrictedstock awards was $96,503 at June 30, 2008. These unrecognized expenseswill be recognized in the income statement at various rates up to the next fouryears.

 

**Note 5.Short Term Investments Available for Sale**

 

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

 

Securities available forsale are evaluated periodically to determine whether a decline in their valueis other than temporary.  The term “otherthan temporary” is not intended to indicate a permanent decline in value.  Rather, it means that the prospects for nearterm recovery of value are not necessarily favorable, or that there is a lackof evidence to support fair values equal to, or greater than, the carryingvalue of the security.  Managementreviews criteria such as the magnitude and duration of the decline, as well asthe reasons for the decline, to predict whether the loss in value is other thantemporary.  Once a decline in value isdetermined to be other than temporary, the value of the security is reduced anda 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. 157establishes a fair value hierarchy which requires an entity to maximize the useof observable inputs and minimize the use of unobservable inputs when measuringfair value. The standard describes three levels of inputs that may be used tomeasure fair value:

 

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

 

Level 2:Significant other observable inputs other than Level 1 prices such as quotedprices for similar assets or liabilities; quoted prices in markets that are notactive; or other inputs that are observable or can be corroborated byobservable market data.

 

Level 3:Significant unobservable inputs that reflect a reporting entity’s ownassumptions that market participants would use in pricing an asset orliability.

 

The fair values ofsecurities available for sale are determined by obtaining quoted prices onnationally recognized exchanges (Level 1 inputs) or matrix pricing, which is amathematical technique widely used in the industry to value debt securitieswithout relying exclusively on quoted prices for the specific securities butrather by relying on the securities’ relationship to other benchmark quotedsecurities (Level 2 inputs).

 

Assets measured at fairvalue 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 PhasedArray (“APA”) technology for the treatment of breast cancer. Also on that date,the Company entered into a Stock Purchase Agreement with the Company’s founderand former officer and director, Dr. Augustine Y. Cheung, whereby theCompany sold to Dr. Cheung all of the issued and outstanding shares ofcapital stock of Canada. The Company also agreed to provide certain services toCanada pursuant to a Transition Services Agreement between the Company andCanada.

 

Under the StockPurchase Agreement, all of the capital stock of Canada was transferred to Dr. Cheungin exchange for a promissory note made by Dr. Cheung in favor of theCompany in the principal amount of $1,500,000 to be paid over a period of up to78 months and secured by a pledge of 100,536 shares of Celsion commonstock owned by Dr. Cheung and his wife and the commitment of Canada to paya 5 % royalty on the net sales of certain products sold by, and patentroyalties received by, Canada and its successors and assigns, of up to$18,500,000.

 

The terms of thenote receivable only specify an interest charge in the event that scheduledpayments are in arrears.  The $1,500,000note 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 $1,146,428was recorded in the financial statements above. Interest income of $21,319 and $40,045 was recorded in the six monthsended June 30, 2008 and 2007, respectively.

 

During the monthof May 2008, the borrower approached the Company and requested that theterms 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, thecollectibility of the note receivable became doubtful. Accordingly, anallowance was placed against the note to reduce the balance to the estimatednet 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 carryingvalue of the note was reduced to $378,015 as of June 30, 2008.

 

**Note8.  Advances under Celsion (Canada)Limited Transition Services Agreement**

 

In conjunctionwith the sale of Canada, a Transition Services Agreement was entered intowhereby (i) Celsion sublet space in the Company’s offices for use byCanada to carry on its business, for a period of up to six (6) months fromthe date of the agreement; (ii) Celsion provided administrative supportservices as needed in the operation of Canada’s business for the period of thesublease, and (iii) Celsion advanced funds to pay salary and health anddental insurance of each of certain employees of Canada and the expensesreasonably 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 ofclosing by Canada of a transaction involving the merger of Canada into a newlycreated Canadian Capital Pool Company and a simultaneous funding through aprivate placement of shares under terms approved by the Toronto Stock Exchange(the “Canada Transaction”). Within ten days after the closing of the CanadaTransaction, Canada is obligated to pay the Company all amounts due under theTransition Services Agreement.

 

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

 

When the CanadaTransaction did not close by December 31, 2006, Celsion managementestablished, based on discussions with Canada management, that diligent effortswere being made by Canada management to close the Canada 

 

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Transaction on atimely basis and agreed to extend the due date for repayment of the loan to theearlier of the closing of the Canada Transaction or June 30, 2007. Canadadid 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, theCompany placed an allowance against this receivable and recorded the estimatednet 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 7above, 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 DistributionAgreement with Boston Scientific Corporation (“Boston Scientific” or “BSC”) on January 20,2003 pursuant to which the Company granted Boston Scientific exclusive rightsto market and distribute the Prolieve Thermodilatation® system and its component parts for the treatment ofBPH in all territories other than China, Taiwan, Hong Kong, Macao, Mexico andCentral and South America. The agreement was terminated upon the sale of theProlieve assets to Boston Scientific on June 21, 2007 (as more fullydescribed in Note 12). The Distribution Agreement had a seven-year termcommencing on February 21, 2004. The parties previously shared gross sales(less costs and expenses) attributable to the product.

 

Celsion received a $4,000,000licensing fee under the Distribution Agreement, $2,000,000 of which was placedin 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 connectionwith any patent litigation related to alleged infringement of third partypatents.   Interest on the funds wasretained in the escrow account and accrued to the benefit of Celsion. Thebalance remaining in the escrow was released to Celsion on February 20,2007 and applied to settlement of a patent infringement lawsuit with AmericanMedical Systems, Inc. and AMS Research Corporation (together referred toas “AMS”).

 

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

 

**Note 10. Secured Line of Credit**

 

On November 9, 2007, the Companyentered into a Loan and Security Agreement (the “Agreement”) with Manufacturersand Traders Trust Company (“M&T”) pursuant to which M&T agreed toprovide a draw-down credit facility to the Company (the “Credit Facility”).  The Company was able to request advancesunder the Credit Facility at a rate not to exceed $1.5 million per month, up toa maximum principal amount under the Credit Facility of $6.5 million.  Each advance was subject to, among othercustomary conditions, a determination by M&T in its good faith discretionthat the Company owned less than $0.5 million in cash and other propertyreadily convertible into cash, excluding a $1.0 million cash collateral accountheld at M&T.  Amounts borrowed by theCompany under the Credit Facility and repaid could not be re-advanced to theCompany.

 

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

 

The Agreement specified certainevents of default, pursuant to which M&T could have required immediaterepayment by the Company of all outstanding amounts under the CreditFacility.  In addition to customaryevents of default relating to changes in the operations and financial conditionof the Company, in connection with payments due to the Company pursuant to thepreviously announced sale by the Company of its Prolieve assets to BostonScientific Corporation, the Agreement specified certain events of defaultrelating to changes in the operations and financial condition of BostonScientific Corporation.

 

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

 

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**Note 11. Note Payable**

 

On July 23, 2007,the Company entered into a Premium Finance Agreement with Flatiron CapitalCorporation (“Flatiron”) whereby Flatiron funded certain insurance premiums inthe amount of $1,313,250 on behalf of the Company. In exchange, the Companywill 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 purchaseagreement to reflect the exercise by Boston Scientific of its option topurchase all of the Prolieve assets of the Company (the “Asset PurchaseAgreement”). The Board of Directors of the Company approved the Asset PurchaseAgreement and the transactions contemplated thereby, and the Company’sstockholders ratified the sale at the annual meeting on June 13,2007.  Pursuant to the Asset PurchaseAgreement, Boston Scientific purchased the Prolieve assets for an aggregatepurchase price of $60 million, subject to reduction in accordance with theterms and conditions of the Asset Purchase Agreement. The transaction closed onJune 21, 2007, and the Company recorded a gain on the sale in the amountof $48 million.

 

The gain on thesale 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 previouslydisclosed, the Company and Boston Scientific entered into a Transaction Agreementeffective January 20, 2003 (the “Transaction Agreement”). As part of theconsideration in the Transaction Agreement, the Company granted BostonScientific an exclusive option to purchase the Prolieve assets for a priceequal to the greater of $60 million or a multiple of sales, exercisable for aperiod of five years and expiring in February 2009. As previouslydisclosed, on August 8, 2005, the Company and Boston Scientific enteredinto the First Amendment pursuant to which Boston Scientific agreed to lend theCompany up to $15 million to be evidenced by one or more convertible securedpromissory notes (the “Notes”). The first installment of $6 million wasdisbursed 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 $60million (eliminating the multiple of sales).

 

The Asset PurchaseAgreement reflects the agreement by the Company and Boston Scientific tofurther modify the terms of the purchase option granted to Boston Scientific onJanuary 20, 2003 and amended on August 8, 2005. The revised termsprovided for the aggregate purchase price of $60 million to be paid in threeinstallments consisting of $30 million at closing on June 20, 2007 and $15million on each of the first and second anniversaries of the closing. Therevised terms also provided that the $30 million first installment was reducedat closing by approximately $17 million, representing the principal andaccrued interest due on the Notes.

 

In addition to theother indemnification provisions, such as indemnification for breaches ofrepresentations, warranties and covenants contained in the Asset PurchaseAgreement, the Company has agreed to indemnify Boston Scientific for a periodof two years from the closing, in an amount up to $15 million of incurredcosts, in the event of unforeseen intellectual property claims related to theProlieve assets.  In accordance with FASBinterpretation No. 45 (“FIN 45”), *Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others an interpretation of FASB Statements No. 5, 57, and107 and rescission of FASB interpretation No. 34,* the Companyrecorded an estimate for the fair value of standing ready to perform under theindemnification guarantee of 

 

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$5,000,000. Thisestimate was consistent with the fair value of insurance premiums to cover theentire $15 million indemnity. On July 23, 2007, the Company purchased aninsurance policy to cover $10 million of the indemnity guarantee. The premiumfor this policy was $1,313,250 and was recorded as a reduction of the accruedliability. The Company will continue to evaluate the accrued liability on aquarterly basis and reduce it as the risk of the indemnity decreases. As of June 30,2008, the balance of this accrued liability was $2,106,716.

 

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

 

**Forward-Looking Statements**

 

*Statements and terms such as “expect”,“anticipate”, “estimate”, “plan”, “believe” and words of similar importregarding the Company’s expectations as to the development and effectiveness ofits technologies, the potential demand for our products, and other aspects ofour present and future business operations, constitute forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995. Although we believe that our expectations are based on reasonableassumptions within the bounds of our knowledge of our industry, business andoperations, we cannot guarantee that actual results will not differ materiallyfrom our expectations. In evaluating such forward-looking statements, readersshould specifically consider the various factors contained in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31, 2007including, without limitation, unforeseen changes in the course of research anddevelopment activities and in clinical trials; possible changes in cost andtiming of development and testing, capital structure, and other financialitems; changes in approaches to medical treatment; introduction of new productsby others; possible acquisitions of other technologies, assets or businesses;and possible actions by customers, suppliers, competitors and regulatoryauthorities. These and other risks and uncertainties could cause actual resultsto differ materially from those indicated by such forward-looking statements,including those set forth in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Risk Factors” contained in the AnnualReport on Form 10-K for the fiscal year ended December 31, 2007.*

 

*The discussion of risks anduncertainties set forth in this Quarterly Report on Form 10-Q and in ourmost recent Annual Report on Form 10-K as well as in other filings withthe SEC, is not necessarily a complete or exhaustive list of all risks facingthe Company at any particular point in time. We operate in a highlycompetitive, highly regulated and rapidly changing environment and our businessis in a state of evolution. Therefore, it is likely that new risks will emerge,and that the nature and elements of existing risks will change, over time. Itis not possible for management to predict all such risk factors or changestherein, or to assess either the impact of all such risk factors on ourbusiness or the extent to which any individual risk factor, combination offactors, or new or altered factors, may cause results to differ materially fromthose contained in any forward-looking statement. We disclaim any obligation torevise or update any forward-looking statement that may be made from time totime by us or on our behalf.*

 

**Overview**

 

Celsion is abiotechnology company dedicated to furthering the development andcommercialization of oncology drugs including tumor-targeting treatments usingfocused heat energy in combination with heat activated drug delivery. We arecurrently engaged in the development of treatment systems using a combinationof heat and drugs developed on our proprietary heat activated liposomaltechnology platform.  Our first drug,ThermoDox®, an encapsulation of doxorubicin, a common oncology drug, in ourheat activated liposome, is in clinical studies for the treatment of livercancer and breast cancer.

 

From 1995 untilearly in 2004, we engaged in research and development of new treatment systems.On January 16, 2006, we transferred all of our rights to the Microfocus1000, together will all associated technology, to Celsion (Canada) Ltd. and onthe same day sold all the stock of Celsion (Canada) to our founder and formerofficer and director, Dr. Augustine Cheung.

 

On February 19,2004, we obtained pre-marketing approval (“PMA”) for the ProlieveThermodilatation System from the Food and Drug Administration (the “FDA”) forthe treatment of Benign Prostatic Hyperplasia (“BPH”). From 2004 through June 2007,Prolieve was marketed and sold through our commercial distributor, BostonScientific Corporation (“BSC” or “Boston Scientific”).  On June 21, 2007, we sold all of ourProlieve assets to Boston Scientific.

 

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**Developmentpipeline**

 

Our pipeline presentlyconsists of the following product, in the indicated stage of development:

 
| **Product**                                                                                                       | ** ** | **Status**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ThermoDox®  (doxorubicin encapsulated in our heat activated liposome) plus heat for the  treatment of cancer |       | We began a Phase  III study during the second quarter of 2008 to determine the efficacy of  ThermoDox® in combination with RFA in the treatment of primary liver cancer.  The study will incorporate approximately 40 clinical sites in North America,  Italy, China, Taiwan, Hong Kong, and Korea and is planned to enroll a total  of 600 patients.

 

We expect to  commence an Open Label, Single Arm Phase II study in patients with Recurrent  Chest Wall cancer (“RCW”) during the 4th quarter of 2008. The study will test  the efficacy of ThermoDox® in combination with hyperthermia.

 

We are currently  conducting a confirmatory Phase I clinical study for our single vial  formulation of ThermoDox® used in conjunction with RFA in the treatment of  liver cancer. This study is being performed at the North Shore Long Island  Jewish Health System.

 

We have recently  completed a Phase I clinical study to establish the maximum tolerable dose,  the safety, and the pharmacokinetics of ThermoDox® used in conjunction with  radio frequency ablation (“RFA”) in the treatment of liver cancer. The study  was conducted at the National Cancer Institute of the National Institutes of  Health and Queen Mary’s Hospital in Hong Kong. |

 

From 1995 to 2004,we generated only minimal revenues and funded our operations primarily throughprivate placements of our equity securities. During 2004, following FDApremarketing approval of the Prolieve Thermodilatation System, we received aone-time licensing fee of $4 million under our agreement with BostonScientific, the former distributor of our Prolieve system. From 2004 through June 2007,sales of Prolieve products generated revenues of approximately $29 million. Theproceeds from the sale of the Prolieve assets to BSC, along with raisingadditional equity, is anticipated to generate sufficient funding until suchtime as we are able to complete development and testing of, and gain necessaryregulatory approvals for, one or more of our products.

 

While the Companyis currently funded from the available cash resources and amounts due from thesale of the Prolieve assets, we anticipate that in the longer term revenueswill be generated from licensing fees paid for our technologies bypharmaceutical manufacturers and royalties generated from eventual productsales to major institutional health care providers. In the event that suchlicensing fees are not forthcoming and/or the Company elects to make investmentsin additional drug development and/or commercial opportunities, funding will begenerated from sale of our equity securities.

 

Our principal costsconsist of:

 

·                  Research and development costs, including licensingfees due in connection with various of our technologies, the costs of sponsoredresearch and pre-clinical and clinical trials for ThermoDox®, and the costs ofdevelopment and design of other products;

 

·                  Research and development costs, including payments toinvestigators, acquisition of materials, and preclinical work associated withthe feasibility analysis of three new heat sensitive liposomal anticancerformulations including Liposomal Docetaxel, Liposomal Carboplatin, andThermoDox® enhanced with a ligand having an affinity for epidermal growthfactor receptors (EGFR); and

 

·                  Corporate overhead.

 

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Our research anddevelopment activities, preclinical tests and clinical trials, and themanufacturing, marketing and labeling of each of our products, are subject toextensive regulation by the FDA. We may not bring to market any product in theU.S. without a premarketing approval from the FDA. We are currently conductingbasic research and development activities, pursuing prototype products throughclinical testing and regulatory approval. Our ultimate objective is tocommercialize those products to generate a return on investment for ourstockholders through one of several means including: (a) selling productsdirectly to end users; (b) selling products through a distributor; or (c) licensingthe technology to third parties and generating income through royalties andmilestone payments.

 

**Recent Events**

 

In January 2008, theFDA provided written agreement with the Company’s application for a SpecialProtocol Assessment for its Pivotal Phase III Primary Liver Cancer Trial.  The study is designed to demonstrate theefficacy of ThermoDox® in combination with RFA. The study incorporates approximately 40 clinical sites in North America,Italy, China, Taiwan, Hong Kong, and Korea and is planned to enroll a total of600 patients.  The Company enrolled thefirst patient in the study during the second quarter of 2008. As of June 30,2008, 2 patients have begun treatments under the study.

 

On January 15, 2008,the FDA provided a favorable written response to Celsion on its proposed OpenLabel, Single Arm Phase II study in patients with RCW. The agency agreed withthe patient population as defined by Celsion, an objective response endpoint,and confirmed that depending on the final data obtained, that this study couldbe used to support a New Drug Application (“NDA”) submission. In light of thispositive response from the FDA, Celsion is planning and working diligently toenable this Phase II study to commence as soon as a safe dose for multipleThermoDox® treatments per patient, in this patient population, is determinedfrom the Phase I study. Celsion believes that this Phase II study will commenceenrollment late in 2008 and will be completed in 2009.

 

On February 8, 2008,the Company voluntarily moved the listing of its Common Stock from the AmericanStock Exchange to The NASDAQ Stock Market, LLC. On June 30, 2008, the Company changed its NASDAQ ticker symbol fromCLN to CLSN.

 

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## **Results of Operations**

## ** **

*Comparison of the Three Months Ended June 30,2008 and 2007.*

* *
| ** **                                                                   | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                                                                   | ** ** | **June 30,**                | ** ** | **Change** | ** ** |
| ** **                                                                   | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Operating  expenses:                                                         |       |                             |       |       |       |        |       |   |   |
| Research and  development                                                    |       | $                                | 1,615,082  |       | $          | 2,349,036   |       | $ | (733,954 | ) | -31 | % |
| General and  administrative                                                  |       | 580,910                          |       | 1,671,388  |       | (1,090,478  | )          | -65 | % |
| Total operating  expenses                                                    |       | 2,195,992                        |       | 4,020,424  |       | (1,824,432  | )          | -45 | % |
| ** **                                                                   | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Interest  expense, net                                                       |       | (75,349                          | )          | (196,909   | )          | 121,560     |       | -62 | % |
|                                                                         |       |                             |       |       |       |        |       |   |   |
| Other expense,  net                                                          |       | (158,825                         | )          | (415,457   | )          | 256,632     |       | -62 | % |
|                                                                         |       |                             |       |       |       |        |       |   |   |
| Loss from  continuing operations                                             |       | (2,430,166                       | )          | (4,632,790 | )          | 2,202,624   |       | -48 | % |
|                                                                         |       |                             |       |       |       |        |       |   |   |
| Discontinued  Operations (Note 12)                                           |       |                             |       |       |       |        |       |   |   |
| Income from  discontinued operations (including gain on sale of $48,029,793) |       | —                           |       | 49,121,362 |       | (49,121,362 | )          | -100 | % |
| Income from  discontinued operations                                         |       | —                           |       | (274,000   | )          | 274,000     |       | -100 | % |
|                                                                         |       |                             |       |       |       |        |       |   |   |
| Net (loss) /  income                                                         |       | $                                | (2,430,166 | )          | $          | 44,214,572  |       | $ | (46,644,738 | ) | -105 | % |

 

The decrease of $733,954, or 31%, in research and development expenseduring the second quarter of 2008 in comparison to the second quarter of 2007was due to:

 

| ** **                                                                                                                                                                                                                                                     | ** ** | **$**    | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ·                  Decrease in drug development and  manufacturing costs due to the non-recurrence of start up and manufacturing  testing costs                      |       | (298,000 | )          |
| ·                  Decrease in clinical costs due to  the Phase I Liver Cancer study nearing completion in 2008                                                      |       | (167,000 | )          |
| ·                  Decrease in marketing expenses due  to the non-recurrence of costs associated with the assessment of the  marketing landscape for ThermoDox® |       | (133,000 | )          |
| ·                  Decrease in legal costs due to a  change in attorneys and the non-recurrence of patent costs                                                      |       | (90,000  | )          |
| ·                  Decrease in recruiting and  relocation costs as staff positions were filled                                                                       |       | (60,000  | )          |

 

The $1,090,478, or 65%,decrease in general and administrative expense during the quarter ended June 30,2008 as compared to the same period of 2007 was attributable to:

 

| ** **                                                                                                                                                                                                                                     | ** ** | **$**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ·                 Decrease in the indemnity reserve related to  the sale of the Prolieve  Assets (see Note 12 to the Financial  Statements)          |       | (526,000 | )          |
| ·                 Decrease in salaries, benefits, and  relocation costs due to  head count reductions                                                |       | (171,000 | )          |
| ·                 Decrease in consulting fees due to the  termination of certain strategic  business advisors                                        |       | (146,000 | )          |
| ·                 Decrease in legal fees due to the  non-recurrence of the fees associatedwith the American Medical Systems lawsuit                       |       | (117,000 | )          |
| ·                 Decrease in stockholder costs due to the  non-recurrence of proxy  solicitation costs incurred in 2007                             |       | (55,000  | )          |
| ·                 Decrease in corporate insurances due to the  elimination of the  product liability insurance upon the sale of  the Prolieve assets |       | (34,000  | )          |
| ·                  Increase in accounting and audit costs                                                                                            |       | 14,000   |       |

 

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Net interest expense forthe quarter ended June 30, 2008 was $75,349, compared to a net expense of$196,909 for the quarter ended June 30, 2007.  This change was due to the repayment of theloan to Boston Scientific Corporation during the quarter ended June 30,2007.

 

The discontinued operations reflect the income and expense of theformer Prolieve division. These assets were sold to Boston ScientificCorporation on June 21, 2007 for $60 million. See Note 12 to the financialstatements for further detail on the discontinued operations.

 

*Comparison of the Six Months Ended June 30,2008 and 2007.*

* *
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                                                                   | ** ** | **June 30,**              | ** ** | **Change** | ** ** |
| ** **                                                                   | ** ** | **2008**                       | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Operating  expenses:                                                         |       |                           |       |       |       |        |       |   |   |
| Research and  development                                                    |       | $                              | 4,582,192  |       | $          | 4,119,849   |       | $ | 462,343 |   | 11 | % |
| General and  administrative                                                  |       | 1,076,528                      |       | 2,965,556  |       | (1,889,028  | )          | -64 | % |
| Total operating  expenses                                                    |       | 5,658,720                      |       | 7,085,405  |       | (1,426,685  | )          | -20 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Interest  expense, net                                                       |       | (14,197                        | )          | (364,393   | )          | 350,196     |       | -96 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Other expense,  net                                                          |       | (839,091                       | )          | (415,457   | )          | (423,634    | )          | 102 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Loss from  continuing operations                                             |       | (6,512,008                     | )          | (7,865,255 | )          | 1,353,247   |       | -17 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Discontinued  Operations (Note 12)                                           |       |                           |       |       |       |        |       |   |   |
| Income from  discontinued operations (including gain on sale of $48,029,793) |       | —                         |       | 49,996,156 |       | (49,996,156 | )          | -100 | % |
| Income tax  expense                                                          |       | —                         |       | (274,000   | )          | 274,000     |       | -100 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Income from  discontinued operations                                         |       | —                         |       | 49,722,156 |       | (49,722,156 | )          | -100 | % |
|                                                                         |       |                           |       |       |       |        |       |   |   |
| Net (loss) /  income                                                         |       | $                              | (6,512,008 | )          | $          | 41,856,901  |       | $ | (48,368,909 | ) | -116 | % |

 

The increase of $462,343, or 11%, in research and development expenseduring the six months ended June 30, 2008 in comparison to 2007 was primarilydue to:

 

| ** **                                                                                                                                                                                                                                                        | ** ** | **$**    | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| ·                  Increase in clinical costs due to  start-up of the Phase III Primary Liver Cancer study                                                         |       | 630,000  |       |
| ·                  Increase in drug development and  manufacturing costs due to  increase  in supplies of ThermoDox® for clinical trials                      |       | 128,000  |       |
| ·                  Increase in travel expenses due to  site initiation visits related to the  start  up of the Phase III Primary Liver Cancer trial                |       | 42,000   |       |
| ·                  Increase in consultants to support  the Phase III Primary Liver Cancer Study                                                                         |       | 17,000   |       |
| ·                  Decrease in non-recurrence of  patent and trademark costs                                                                                            |       | (171,000 | )          |
| ·                  Decrease in marketing costs due to  the non-recurrence of costs  associated  with the assessment of the marketing landscape for ThermoDox® |       | (130,000 | )          |
| ·                  Decrease in preclinical costs due  to the non-recurrence of certain animal testing                                                                   |       | (27,000  | )          |

 

The $1,889,028, or 64%,decrease in general and administrative expense during the quarter ended June 30,2008 as compared to the same period of 2007 was primarily attributable to:

 

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| ** **                                                                                                                                                                                                                                                                                                                                      | ** ** | **$**      | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ·                 Decrease in the indemnity reserve related to  the sale of the Prolieve  Assets (see Note 12 to the Financial  Statements)                                                                                                           |       | (1,052,000 | )          |
| ·                 Decrease in salaries, benefits, and  relocation costs due to  head count reductions                                                                                                                                                 |       | (503,000   | )          |
| ·                 Decrease in consulting fees due to the  non-recurrence of financial  consultants used in the first quarter of  2007 as a result of the then controller’s departure and the termination of  certain strategic business advisors |       | (246,000   | )          |
| ·                 Decrease in legal fees due to the non-recurrence  of the fees associated  with the American Medical Systems lawsuit                                                                                                                 |       | (128,000   | )          |
| ·                 Decrease in stockholder costs due to the  non-recurrence of proxy  solicitation costs in the first quarter of  2007                                                                                                                 |       | (83,000    | )          |
| ·                 Decrease in corporate insurances due to the  elimination of the  product liability insurance upon the sale of  the Prolieve assets                                                                                                  |       | (63,000    | )          |
| ·                 Increase in occupancy costs due to higher  taxes and utilities                                                                                                                                                                           |       | 16,000     |       |
| ·                 Increase in investor/public relation costs                                                                                                                                                                                               |       | 19,000     |       |
| ·                 Increase in State of Delaware franchise  taxes due to the increase in  authorized shares in 2006 (increase impact  began 2Q07)                                                                                                      |       | 32,000     |       |
| ·                 Increase in Board of Director costs,  including travel and stock based  compensation expense                                                                                                                                        |       | 32,000     |       |
| ·                 Increase in costs related to redesign of the  Company’s website                                                                                                                                                                     |       | 46,000     |       |
| ·                 Increase in audit and tax preparation costs  due to tax research issues related to the sale of the Prolieve assets                                                                                                                       |       | 52,000     |       |

 

Net interest expense forthe six months ended June 30, 2008 was $14,197, compared to a net expenseof $364,393 for the six months ended June 30, 2007.  This change was due to the repayment of theloan to Boston Scientific Corporation during the quarter ended June 30,2007.

 

The discontinued operations reflect the income and expense of theformer Prolieve division. These assets were sold to Boston ScientificCorporation on June 21, 2007 for $60 million. See Note 12 to the financialstatements for further detail on the discontinued operations.

 

*Comparison of Discontinued Operations for the threemonths ended June 30, 2008 and 2007.*

 

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| ** **                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues                                 |       |                             |       |       |       |        |       |   |   |
| Net sales of  equipment and parts        |       | $                                | —     |       | $          | 2,893,330   |       | $ | (2,893,330 | ) | -100 | % |
| Cost of Sales                            |       | —                           |       | 1,482,365  |       | (1,482,365  | )          | -100 | % |
| Gross Profit                             |       | —                           |       | 1,410,965  |       | (1,410,965  | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Operating  expenses:                     |       |                             |       |       |       |        |       |   |   |
| Research and  development                |       | —                           |       | 446,380    |       | (446,380    | )          | -100 | % |
| Total operating  expenses                |       | —                           |       | 446,380    |       | (446,380    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income from  operations                  |       | —                           |       | 964,585    |       | (964,585    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Gain on sale of  Prolieve                |       |                             |       | 48,029,793 |       |        |       |   |   |
| Other income,  net                       |       | —                           |       | 126,984    |       | (126,984    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income  before taxes                 |       | $                                | —     |       | $          | 49,121,362  |       | $ | (49,121,362 | ) | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income tax  expense                      |       | —                           |       | (274,000   | )          | 274,000     |       | 0 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income from  discontinued operations |       | $                                | —     |       | $          | 48,847,362  |       | $ | (48,847,362 | ) | -100 | % |

 

The Prolieve assets were sold to Boston Scientific Corporation on June 21,2007. There were no ongoing activities related to the Prolieve business duringthe first quarter of 2008.

 

*Comparison of Discontinued Operations for the sixmonths ended June 30, 2008 and 2007.*

 
| ** **                               | ** ** | **Six Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|--------------------------------|------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **June 30,**              | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2008**                       | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues                                 |       |                           |       |       |       |        |       |   |   |
| Net sales of  equipment and parts        |       | $                              | —     |       | $          | 5,816,295   |       | $ | (5,816,295 | ) | -100 | % |
| Cost of Sales                            |       | —                         |       | 3,018,765  |       | (3,018,765  | )          | -100 | % |
| Gross Profit                             |       | —                         |       | 2,797,530  |       | (2,797,530  | )          | -100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Operating  expenses:                     |       |                           |       |       |       |        |       |   |   |
| Research and  development                |       | —                         |       | 1,101,008  |       | (1,101,008  | )          | -100 | % |
| Total operating  expenses                |       | —                         |       | 1,101,008  |       | (1,101,008  | )          | -100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Income from  operations                  |       | —                         |       | 1,696,522  |       | (1,696,522  | )          | 100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Gain on sale of  Prolieve                |       | —                         |       | 48,029,793 |       | (48,029,793 | )          | 100 | % |
| Other income,  net                       |       | —                         |       | 269,841    |       | (269,841    | )          | -100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Net income  before taxes                 |       | —                         |       | 49,996,156 |       | (49,996,156 | )          | 100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Income tax  expense                      |       | —                         |       | 274,000    |       | (274,000    | )          | 100 | % |
|                                     |       |                           |       |       |       |        |       |   |   |
| Net income from  discontinued operations |       | $                              | —     |       | $          | 49,722,156  |       | $ | (49,722,156 | ) | 100 | % |

 

The Prolieve assets were sold to Boston Scientific Corporation on June 21,2007. There were no ongoing activities related to the Prolieve business duringthe first half of 2008.

 

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## **Financial Condition, Liquidity and Capital Resources**

## ** **

Celsion’s corebusiness activity is the development of products to treat cancer and otherdiseases and to commercialize those products to generate a return on investmentfor its stockholders through one of several means including: (a) sellingproducts directly to end users; (b) selling products through adistributor; or (c) licensing its technology to third parties andgenerating income through royalties and milestone payments. This business modelwill generate uneven cash flows, inasmuch as continuing developmentexpenditures will not necessarily be matched by revenues from one of the abovesources. In the event that annual development expenditures are not covered bycurrent revenues, funding will be provided from other sources including anycash on hand, revenues provided as above, income generated from licensingagreements and debt or equity funding raised in the capital markets.

 

Since inception, our expenseshave significantly exceeded our revenues, resulting in an accumulated deficitof $61,649,765 at June 30, 2008. We have incurred negative cash flows fromoperations since our inception and have funded our operations primarily throughthe sale of equity securities and more recently through the sale of ourProlieve assets. As of June 30, 2008, we had total current assets of$27,941,406, including cash and short term investments of $12,642,035, comparedwith current liabilities of $5,281,668, resulting in a working capital surplusof $22,659,738. At December 31, 2007, we had total current assets of$21,424,400 (including cash and short term investments of $5,937,373) andcurrent liabilities of $8,118,606, resulting in a working capital surplus of$13,305,794.

 

Net cash providedby the Company’s operating activities for the six months ended June 30,2008 was $7,062,761 compared to net cash used of $1,927,011 for the six monthsending June 30, 2007. The increase of net cash provided of $8,989,772 isprimarily due to:

 

·                  The collection of the $15,000,000 receivable fromBoston Scientific;

·                  The non-recurrence of the gain on the sale of theProlieve assets of $48,029,073;

·                  The non-recurrence of the amortization of the deferredlicense and patent fees of $212,034;

·                  An increase in stock based compensation expense of$137,670; and

·                  An increase in the allowance for bad debts of $424,756.

 

The sources of cash were offset by uses of:

 

·                  A decrease in net income of $48,368,909;

·                  An increase in deposits and other assets due toprepayments to CROs of $190,742;

·                  A decrease in accounts receivable due to the sale ofthe Prolieve assets in 2007 of $684,406;

·                  A decrease in accounts payable of $1,410,788 due tothe sale of the Prolieve assets in 2007 and the related reduction in payables;

·                  A decrease in other accrued liabilities of $1,365,263,largely due to the reduction of the indemnity reserve to Boston Scientific (seefootnote 12 to the Financial Statements);

·                  A decrease in income taxes payable related toAlternative Minimum taxes due on the sale of the Prolieve assets of $820,000;and

·                  The non-recurrence of the escrow funds received in thefirst quarter of 2007 of $1,824,740.

 

In the six months ended June 30, 2008, totalassets and total liabilities and stockholders’ equity decreased by $9,047,408to $29,991,293 compared to $39,038,701 as of December 31, 2007.

 

The decrease in total assets was primarily due to:

 

·                  The allowancesplaced against the Celsion Canada receivable and note receivable of $1,003,512(see Note 7 to the financial statements);

·                  The collectionof the $15,000,000 receivable from Boston Scientific; and was

·                  Offset by theincrease in cash and the purchase of short term investments of $6,704,662.

 

The decrease in total liabilities and equity was dueto a number of factors, including:

 

·                  A decrease inaccounts payable and other accrued liabilities of $2,192,297 mainly due to thereduction of the indemnity reserve related to the sale of the Prolieve assets;

·                  A decrease inincome taxes payable of $546,000 which represents the alternative minimum taxpaid on the gain realized on the sale of the Prolieve assets;

·                  Payments on notepayable of $333.383; and

·                  The net loss forthe six months ended June 30, 2008 of $6,512,008 (as described above).

 

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For the balance of fiscal year 2008, we expect toexpend approximately $9,000,000 for clinical testing of liver cancer and breastcancer treatment systems as well as corporate overhead, all of which we expectto fund from cash on hand. The foregoing is an estimate, based upon assumptionsas to the scheduling of institutional clinical research and testing personnel,the timing of clinical trials and other factors, not all of which are fullypredictable.

 

**Item 3.****           Quantitative andQualitative Disclosure About Market Risk**.

 

We are exposed tointerest rate risk on investments of our excess cash. The primary objective ofour investment activities is to preserve capital. To achieve this objective andminimize the exposure due to adverse shifts in interest rates, we invest inhigh quality short-term maturity commercial paper, municipal bonds, and moneymarket funds operated by reputable financial institutions in the United States.Due to the nature of our investments, we believe that we do not have a materialinterest rate risk exposure.

 

## **Item 4.**           Controls and Procedures

## ** **

We have carried out anevaluation, under the supervision and with the participation of management,including our principal executive officer and principal financial officer, ofthe effectiveness of the design and operation of our disclosure controls andprocedures, as that term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934, as amended. Based on that evaluation, our principal executive officer and principalfinancial officer concluded that as of June 30, 2008, which is the end ofthe period covered by this report, our disclosure controls and procedures are effective.

 

There has been no change inour internal control over financial reporting identified in connection with theevaluation required by paragraph (d) of Rule 13a-15of the SecuritiesExchange Act of 1934, as amended that occurred during the quarter ended June 30,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II**

**OTHERINFORMATION**

 

**Item 1. Legal Proceedings**

 

None.

 

**Item 1A. Risk Factors.**

 

In addition to the other information set forth in this report, youshould carefully consider the factors discussed in Part I, “Item 1A. RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2007, which could materially affect our business, financial condition or futureresults. The risks described in our Annual Report on Form 10-K are not theonly risks facing the Company. Additional risks and uncertainties not currentlyknown to us or that we currently deem to be immaterial also may materiallyadversely affect our business, financial condition and/or operating results.

 

**Item 2.****           Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

None.

 

**Item 3.Defaults Upon Senior Securities**

 

None.

 

**Item 4.****           Submissionof Matters to a Vote of Security Holders.**

 

**On May 21, 2008, the Companyheld its Annual Meeting of Stockholders (“Annual Meeting”).  At the Annual Meeting, the stockholders votedto elect Dr. Augustine Chow and Gregory Weaver to the Board of Directors,to serve as Class I directors, for a term of three years, until theCompany’s annual meeting of stockholders in 2011 and until their successors areelected and shall have qualified.  Theresults of the voting on this matter were as follows:**

** **

| **Nominee**              | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|--------------------------|------------|-----------|------------|--------------|------------|
|                     |       |      |       |         |       |
| Dr. Augustine  Chow |       | 7,036,787 |       | 279,827      |       |
| Gregory Weaver           |       | 7,020,275 |       | 287,339      |       |

 

The terms of the Class IIdirector, Mr. Gary Pace, will expire with the election and qualificationof directors at the annual meeting of the stockholders in 2009. The terms ofthe Class III directors, Dr. Max Link and Mr. Michael Tardugno,will expire with the election and qualification of directors at the annual meetingof the stockholders in 2010.

 

The stockholdersvoted to ratify the appointment of Stegman & Company as the Company’sIndependent Public Accounting Firm for the fiscal year ending December 31,2008. The results of the voting on this matter were as follows:

 
| Votes For                  |   | 7,162,980 |   |
|----------------------------|--------|-----------|--------|
| Votes Against              |   | 98,430    |   |
| Abstentions and  Non-Votes |   | 55,204    |   |

 

**Item 5. Other Information**

** **

**None.**

** **

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**Table of Contents**

** **

**Item 6.**           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 Interim Chief Accounting 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 Interim Chief Accounting Officer  pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. (Furnished herewith)  |

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

August 14, 2008

 
|   |   | CELSION  CORPORATION                               |
|--------|--------|----------------------------------------------------|
|   |   | Registrant                                         |
|   |   |                                               |
|   | By:    | /s/ *Michael H. Tardugno*                          |
|   |   |   Michael H.  Tardugno                   |
|   |   |   President  and Chief Executive Officer |
|   |   |                                               |
|   |   |                                               |
|   | By:    | */s/ Paul B. Susie*                                |
|   |   |   Paul B.  Susie                         |
|   |   |   Chief  Accounting Officer              |
|   |   |   Principal  Financial Officer           |

 

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