**UNITEDSTATES**

**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 thequarterly period ended March 31, 2008**

 

**or**

 
| o | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|---|------------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from          to          **

 

**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-L  Old Columbia Road, Columbia, Maryland****21046** |
|-------------------------------------------------------------|
|                                                        | (Address of Principal  Executive Offices) | (Zip Code) |

 

**(410)290-5390**

(Registrant’s telephonenumber, 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 “large accelerated filer,” “acceleratedfiler,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

 
| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

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 April 22, 2008 the Registrant had10,145,850 shares outstanding of Common Stock, $.01 par value per share.

 

 

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**TABLE OF CONTENTS**

 
| **PART I:** | **FINANCIAL  INFORMATION** | ** **                                                                                  |
|------------------|----------------------------|---------------------------------------------------------------------------------------------|
| ** **       | ** **                 | ** **                                                                                  |
| ** **       | **Item 1.**                | **Financial  Statements and Notes (Unaudited)**                                             | ** ** |
|             |                       | Balance Sheets                                                                              |   |
|             |                       | Statements of  Operations                                                                   |   |
|             |                       | 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)  |

 

----

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item1.     Financial Statements.**

 

Index to FinancialStatements

 
| ** **                                                                                     | ** ** | **Page** |
|------------------------------------------------------------------------------------------------|------------|----------|
| Balance Sheets as of  March 31, 2008 (Unaudited) and December 31, 2007               |       | 4 - 5    |
| Statements of  Operations (Unaudited) for the Three Months Ended March 31, 2008 and  2007 |       | 6        |
| Statements of  Cash Flows (Unaudited) for the Three Months Ended March 31, 2008 and  2007 |       | 7        |
| Notes to Financial Statements (Unaudited)                                                      |       | 8 - 16   |

 

3

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**CELSIONCORPORATION**

BALANCE SHEETS

March 31, 2008 and December 31, 2007

 
| ** **                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| ** **                                                                                                                    | ** ** | ** **         | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                    |       |               |       |                  |       |
| ** **                                                                                                                    |       |               |       |                  |       |
| **Current  assets**                                                                                                           |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                  | 1,543,125  |                  | $          | 2,937,373 |   |
| Short term  investments                                                                                                       |       | —             |       | 3,000,000             |       |
| Accounts  receivable - trade                                                                                                  |       | 169,721            |       | 183,043               |       |
| Other  receivables                                                                                                            |       | 40,554             |       | 47,110                |       |
| Due from Boston  Scientific Corporation                                                                                       |       | 15,000,000         |       | 15,000,000            |       |
| Prepaid expenses                                                                                                              |       | 247,715            |       | 256,874               |       |
| Total current  assets                                                                                                         |       | 17,001,115         |       | 21,424,400            |       |
|                                                                                                                          |       |               |       |                  |       |
| **Property  and equipment - at cost**                                                                                         |       |               |       |                  |       |
| Furniture and  office equipment                                                                                               |       | 194,257            |       | 194,200               |       |
| Computer  hardware and software                                                                                               |       | 344,144            |       | 338,349               |       |
| Laboratory and  shop equipment                                                                                                |       | 305,340            |       | 305,340               |       |
| Leasehold  improvements                                                                                                       |       | 132,148            |       | 132,148               |       |
|                                                                                                                          |       | 975,889            |       | 970,037               |       |
| Less:  Accumulated depreciation                                                                                               |       | 731,894            |       | 702,156               |       |
| Net value of  property and equipment                                                                                          |       | 243,995            |       | 267,881               |       |
|                                                                                                                          |       |               |       |                  |       |
| **Other  assets**                                                                                                             |       |               |       |                  |       |
| Advances under  Celsion (Canada), Ltd.                                                                                        |       |               |       |                  |       |
| Transition  Services Agreement (net of allowance of $451,556 and $442,225 respectively)                                       |       | —             |       | 200,000               |       |
| Note receivable  (net of discount of $147,154 and $168,473, respectively, and an allowance of  $664,978 and $0, respectively) |       | 537,868            |       | 1,181,527             |       |
| Due from Boston  Scientific Corporation - Non Current                                                                         |       | 15,000,000         |       | 15,000,000            |       |
| Deposits and  other assets                                                                                                    |       | 1,003,257          |       | 899,268               |       |
| Patent licensing  fees (net of accumulated amortization of $9,375 and $7,500, respectively)                                   |       | 63,750             |       | 65,625                |       |
| Total other  assets                                                                                                           |       | 16,604,875         |       | 17,346,420            |       |
|                                                                                                                          |       |               |       |                  |       |
| **Total  assets**                                                                                                             |       | $                  | 33,849,985 |                  | $          | 39,038,701 |   |

 

4

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| ** **                                                                                                                                                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                                                                 | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                                                       |       | **(Unaudited)**    |       |                  |       |
|                                                                                                                                                                                       |       |               |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                             |       |               |       |                  |       |
| **Current  liabilities**                                                                                                                                                                   |       |               |       |                  |       |
| Accounts payable  - trade                                                                                                                                                                  |       | $                  | 2,489,130  |                  | $          | 1,830,457 |   |
| Other accrued  liabilities                                                                                                                                                                 |       | 3,912,447          |       | 5,056,380             |       |
| Income taxes  payable                                                                                                                                                                      |       | —             |       | 546,000               |       |
| Accrued non-cash  compensation                                                                                                                                                             |       | 8,910              |       | 8,910                 |       |
| Note payable -  current portion                                                                                                                                                            |       | 687,029            |       | 676,859               |       |
| Total current  liabilities                                                                                                                                                                 |       | 6,897,516          |       | 8,118,606             |       |
|                                                                                                                                                                                       |       |               |       |                  |       |
| **Long-term  liabilities**                                                                                                                                                                 |       |               |       |                  |       |
| Note payable                                                                                                                                                                               |       | 59,124             |       | 234,742               |       |
| Other  liabilities                                                                                                                                                                         |       | 32,829             |       | 34,238                |       |
| Total long-term  liabilities                                                                                                                                                               |       | 91,953             |       | 268,980               |       |
|                                                                                                                                                                                       |       |               |       |                  |       |
| Total  liabilities                                                                                                                                                                         |       | 6,989,469          |       | 8,387,586             |       |
|                                                                                                                                                                                       |       |               |       |                  |       |
| **Stockholders’  equity**                                                                                                                                                             |       |               |       |                  |       |
| Common stock -  $0.01 par value per share (250,000,000 shares authorized; 10,145,850 and  10,124,184 shares outstanding at March 31, 2008 and December 31,  2007, respectively.) |       | 108,062            |       | 107,845               |       |
| Additional  paid-in capital                                                                                                                                                                |       | 88,611,005         |       | 88,319,979            |       |
| Accumulated  deficit                                                                                                                                                                       |       | (59,219,599        | )          | (55,137,757           | )          |
| Subtotal                                                                                                                                                                                   |       | 29,499,468         |       | 33,290,067            |       |
| Less: Treasury  stock - at cost                                                                                                                                                            |       | (2,638,952         | )          | (2,638,952            | )          |
| Total  stockholders’ equity                                                                                                                                                           |       | 26,860,516         |       | 30,651,115            |       |
|                                                                                                                                                                                       |       |               |       |                  |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                       |       | $                  | 33,849,985 |                  | $          | 39,038,701 |   |

 

See accompanyingnotes.

 

5

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**CELSIONCORPORATION**

STATEMENTS OF OPERATIONS

(Unaudited)

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Operating  expenses:                                                |       |                             |       |   |   |
| Research and  development                                           |       | $                                | 2,967,111  |   | $ | 1,770,812 |   |
| General and  administrative                                         |       | 1,175,977                        |       | 1,294,169 |   |
| Total operating  expenses                                           |       | 4,143,088                        |       | 3,064,981 |   |
|                                                                |       |                             |       |   |   |
| Loss from  operations                                               |       | (4,143,088                       | )          | (3,064,981 | ) |
|                                                                |       |                             |       |   |   |
| Other income  (expense):                                            |       |                             |       |   |   |
| Other income                                                        |       | 94                               |       | — |   |
| Interest income                                                     |       | 75,510                           |       | 180,779 |   |
| Interest expense                                                    |       | (14,358                          | )          | (348,263 | ) |
|                                                                |       |                             |       |   |   |
| Loss from  continuing operations                                    |       | (4,081,842                       | )          | (3,232,465 | ) |
|                                                                |       |                             |       |   |   |
| Discontinued  Operations (Note 10)                                  |       |                             |       |   |   |
| Income from discontinued  operations                                |       | —                           |       | 874,795 |   |
|                                                                |       |                             |       |   |   |
| Net loss                                                            |       | $                                | (4,081,842 | ) | $ | (2,357,670 | ) |
|                                                                |       |                             |       |   |   |
| Net loss from  continuing operations per common share - basic       |       | $                                | (0.40      | ) | $ | (0.30 | ) |
|                                                                |       |                             |       |   |   |
| Net loss from  continuing operations per common share - diluted     |       | $                                | (0.40      | ) | $ | (0.30 | ) |
|                                                                |       |                             |       |   |   |
| Net income from  discontinued operations per common share - basic   |       | $                                | —     |   | $ | 0.08 |   |
|                                                                |       |                             |       |   |   |
| Net income from  discontinued operations per common share - diluted |       | $                                | —     |   | $ | 0.08 |   |
|                                                                |       |                             |       |   |   |
| Net loss per  common share - basic                                  |       | $                                | (0.40      | ) | $ | (0.22 | ) |
|                                                                |       |                             |       |   |   |
| Net loss per  common share - diluted                                |       | $                                | (0.40      | ) | $ | (0.22 | ) |
|                                                                |       |                             |       |   |   |
| Weighted average  shares outstanding - basic                        |       | 10,143,442                       |       | 10,746,869 |   |
|                                                                |       |                             |       |   |   |
| Weighted average  shares outstanding - diluted (1)                  |       | 10,143,442                       |       | 10,750,869 |   |

 

----

(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.

 

See accompanying notes.

 

6

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**CELSIONCORPORATION**

STATEMENTS OF CASH FLOWS

(Unaudited)

 
| ** **                                                   | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities**                    |       |                             |       |   |   |
| Net loss for the  year                                       |       | $                                | (4,081,842 | ) | $ | (2,357,670 | ) |
| Non-cash items  included in net loss:                        |       |                             |       |   |   |
| Depreciation and  amortization                               |       | 31,818                           |       | 52,460 |   |
| Accretion of  discount on note receivable                    |       | (21,319                          | )          | (38,202 | ) |
| Stock based  compensation - Options                          |       | 251,679                          |       | 143,548 |   |
| Stock based  compensation - Restricted Stock                 |       | 39,514                           |       | 25,590 |   |
| Amortization of  deferred license fee                        |       | —                           |       | (142,857 | ) |
| Shares issued in  exchange for services                      |       | 50                               |       | 29,750 |   |
| Amortization of  patent license                              |       | 1,875                            |       | 25,063 |   |
| Allowance for  bad debts                                     |       | 680,360                          |       | — |   |
| Net changes in:                                              |       |                             |       |   |   |
| Accounts  receivable-trade                                   |       | 13,322                           |       | 769,327 |   |
| Other  receivables                                           |       | 551                              |       | (4,018 | ) |
| Inventories                                                  |       | —                           |       | (68,994 | ) |
| Prepaid expenses                                             |       | 9,159                            |       | 7,554 |   |
| Escrow  account-license fee                                  |       | —                           |       | 1,824,740 |   |
| Deposits and  other assets                                   |       | (103,989                         | )          | (133,772 | ) |
| Accounts payable  - trade and accrued interest               |       | 658,673                          |       | 343,660 |   |
| Income taxes  payable                                        |       | (546,000                         | )          | — |   |
| Other accrued  liabilities                                   |       | (1,145,342                       | )          | (323,881 | ) |
| **Net  cash (used) / provided by operating activities**      |       | (4,211,491                       | )          | 152,298 |   |
|                                                         |       |                             |       |   |   |
| **Cash  flows from investing activities**                    |       |                             |       |   |   |
| Sale of  short-term investments                              |       | 3,000,000                        |       | 1,000,000 |   |
| Advances under  Celsion Canada transition services agreement |       | (9,377                           | )          | (17,460 | ) |
| Payment of  licensing fee                                    |       | —                           |       | (1,600,000 | ) |
| Purchase of  property and equipment                          |       | (7,932                           | )          | (15,125 | ) |
| **Net  cash provided by / (used in) investing activities**   |       | 2,982,691                        |       | (632,585 | ) |
|                                                         |       |                             |       |   |   |
| **Cash  flows from financing activities**                    |       |                             |       |   |   |
| Payments on note  payable                                    |       | (165,448                         | )          | — |   |
| **Net  cash used by financing activities**                   |       | (165,448                         | )          | — |   |
|                                                         |       |                             |       |   |   |
| **Net  decrease in cash and cash equivalents**               |       | (1,394,248                       | )          | (480,287 | ) |
| **Cash  and cash equivalents at beginning of period**        |       | 2,937,373                        |       | 1,032,674 |   |
|                                                         |       |                             |       |   |   |
| **Cash  and cash equivalents at end of period**              |       | $                                | 1,543,125  |   | $ | 552,387 |   |
|                                                         |       |                             |       |   |   |
| **Cash  paid for:**                                          |       |                             |       |   |   |
| Interest                                                     |       | $                                | 12,807     |   | $ | — |   |
| Income taxes                                                 |       | $                                | 546,000    |   | $ | — |   |

 

# **Seeaccompanying notes.**

 

7

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# ** **

# **CELSIONCORPORATION**

# ** **

**NOTES TO FINANCIAL STATEMENTS (UNAUDITED)**

 

**For theThree Months Ended March 31, 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 required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of management, all adjustments, consistingonly of normal recurring accruals considered necessary for a fair presentation,have been included in the accompanying unaudited financial statements.Operating results for the three month period ended March 31, 2008 are notnecessarily indicative of the results that may be expected for any otherinterim period(s) or for any full year. For further information, refer tothe financial statements and notes thereto included in the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2007 filedwith the Securities and Exchange Commission on March 28, 2008.

 

**Note 2.   Common Stock Outstanding and Per ShareInformation**

 

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 quarters ended March 31,2008 and 2007, all options and warrants that were convertible into shares ofthe Company’s common stock were excluded from calculation of diluted earningsper share as their effect would have been anti-dilutive. The total number ofoutstanding warrants and options for the periods ended March 31, 2008 and2007 were 2,402,302 and 2,053,712, respectively.

 

Information relating to thecalculation of earnings per share is summarized as follows:

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **March 31,**               | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007** | ** ** |
|                                                                |       |                             |       |   |   |
| Net loss from  continuing operatons - basic and diluted             |       | $                                | (4,081,842 | ) | $ | (3,232,465 | ) |
| Net income from  discontinued operations - basic and diluted        |       | $                                | —     |   | $ | 874,795 |   |
| Net loss - basic  and diluted                                       |       | $                                | (4,081,842 | ) | $ | (2,357,670 | ) |
| Weighted average  shares outstanding - basic                        |       | 10,143,442                       |       | 10,746,869 |   |
| Dilutive  securities - options and warrants                         |       | —                           |       | 4,000 |   |
| Adjusted  weighted average shares outstanding - dilutive            |       | 10,143,442                       |       | 10,750,869 |   |
| Net loss from  continuing operations per common share - basic       |       | $                                | (0.40      | ) | $ | (0.30 | ) |
| Net loss from  continuing operations per common share - diluted     |       | $                                | (0.40      | ) | $ | (0.30 | ) |
| Net income from  discontinued operations per common share - basic   |       | $                                | —     |   | $ | 0.08 |   |
| Net income from  discontinued operations per common share - diluted |       | $                                | —     |   | $ | 0.08 |   |
| Net loss per  common share - basic                                  |       | $                                | (0.40      | ) | $ | (0.22 | ) |
| Net loss per  common share - diluted                                |       | $                                | (0.40      | ) | $ | (0.22 | ) |

 

8

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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 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 dates andreport unrealized gains and losses on items for which the fair value option hasbeen 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.

 

**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 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 three months ended March 31, 2008, no options were canceled orexpired. All of the 195,043 canceled and expired options under the 2001 Planbecome available for issue under the 2007 Plan.

 

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 three months ended March 31, 2008, no options were canceled orexpired. All of the 90,379 canceled and expired options under the 2004 Planbecome available for issue under the 2007 Plan.

 

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, and performanceawards, or in any combination of the foregoing. During the year ended December 31,2007, 103,500 options were issued. No options were canceled or expired underthe plan. During the three months ended March 31, 2008, 335,000 optionswere issued and no options were canceled or expired. Additionally, 5,000 sharesof stock were issued under the plan as a performance award during the quarterended March 31, 2008. On March 31, 2008, there were 556,500 sharesavailable out of 1,000,000 shares authorized and available under the 2007 Plan.All canceled and expired options under the 2001 Plan and the 2004 Plan becomeavailable for issue under the 2007 Plan.

 

9

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Options Issued toConsultants for Services

 

The Company entersinto agreements with consultants in which the consultants receive stock optionsin exchange for services. 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. There were nooptions granted to non-employees for the three months ended March 31,2008.

 

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  March 31, 2008    |       | 1,833,841                |       | $                                      | 6.04       |                                                                 | 7.6        |                                | $          | 1,701,435 |   |
| Exercisable at  March 31, 2008    |       | 992,049                  |       | $                                      | 7.35       |                                                                 | 6.3        |                                | $          | 674,957 |   |

 
| **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                   |       | —                    |       | —                                 |       |                                                                 |       |                                |       |
| Outstanding at March 31,  2008    |       | 568,461                   |       | $                                      | 15.59      |                                                                 | 0.7        |                                | $          | 80,925 |   |
| Exercisable at  March 31, 2008    |       | 568,461                   |       | $                                      | 15.59      |                                                                 | 0.7        |                                | $          | 80,925 |   |
|                                        |            |                           |            |                                        |            |                                                                      |            |                                     |            |  |  |  |

 

10

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The following isadditional information with respect to options outstanding at March 31,2008:

 
| ** **                     | ** ** | **Three Months Ended  March 31, 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 $291,193 during the three months ended March 31, 2008 and$169,138 during the three months ended March 31, 2007. Stock basedcompensation is recognized ratably over the requisite service period for allawards. Unrecognized stock based compensation expense related to stock optionstotaled $2,832,435 at March 31, 2008 while the unrecognized stock basedcompensation expense related to non-vested restricted stock awards was $96,503at March 31, 2008. These unrecognized expenses will be recognized in theincome statement at various rates up to the next four years.

 

**Note 5.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 $21,320 and $38,202 was recorded in the three monthsended March 31, 2008 and 2007, respectively.

 

Subsequent to thefirst quarter but before the filing of the Company’s Quarterly Report on Form 10-Qfor the quarter ended March 31, 2008, the borrower approached the Companyand requested that the terms of the note be extended and/or restructured. As ofthe filing of this Form 10-Q, an agreement between the parties had notbeen reached. As a result, the collectibility of the note receivable becamedoubtful. Accordingly, an allowance was placed against the note to reduce thebalance to the estimated net realizable value of the collateral underlying thenote. As noted above, 100,536 shares of Celsion common stock are pledged ascollateral to the note. The closing price of Celsion’s common stock on March 31,2008 was $5.35, which results in a total collateral value of $537,868.Therefore, the carrying value of the note was reduced to $537,868 as of March 31,2008.

 

11

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**Note6.  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 March 31,2008 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 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 5above, the Company has increased its allowance to $451,556 as of March 31,2008 and recorded the estimated net realizable value of the receivable as zero.

 

**Note 7. 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 of BPH in all territoriesother than China, Taiwan, Hong Kong, Macao, Mexico and Central and SouthAmerica. The agreement was terminated upon the sale of the Prolieve assets toBoston Scientific on June 21, 2007 (as more fully described in Note 10).The Distribution Agreement had a seven-year term commencing on February 21,2004. The parties previously shared gross sales (less costs and expenses)attributable to the product.

 

Celsion received a $4,000,000licensing 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 8. 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 to providea draw-down credit facility to the 

 

12

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Company (the “Credit Facility”).  The Company may request advances under theCredit Facility at a rate not to exceed $1.5 million per month, up to a maximumprincipal amount under the Credit Facility of $6.5 million.  Each advance is subject to, among othercustomary conditions, a determination by M&T in its good faith discretionthat the Company owns less than $0.5 million in cash and other property readilyconvertible into cash, excluding a $1.0 million cash collateral account to beheld at M&T.  Amounts borrowed by theCompany under the Credit Facility and repaid may not be re-advanced to theCompany.

 

The Credit Facility is secured by (i) the$1.0 million cash collateral account and (ii) substantially all of theCompany’s assets.  The Credit Facilitybears interest on the outstanding balance at a rate of the London InterbankOffered Rate plus 2.75%.  Accruedinterest on the outstanding balance is payable monthly.  The total outstanding principal and accruedinterest balance on the Credit Facility is due and payable on June 21,2008. As of March 31, 2008, the Company had not made any draws against theline of credit.

 

The Agreement specifies certainevents of default, pursuant to which M&T could require immediate repaymentby the Company of all outstanding amounts under the Credit Facility.  In addition to customary events of defaultrelating to changes in the operations and financial condition of the Company,in connection with payments due to the Company pursuant to the previouslyannounced sale by the Company of its Prolieve assets to Boston ScientificCorporation, the Agreement specifies certain events of default relating tochanges in the operations and financial condition of Boston ScientificCorporation.

 

**Note 9. 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 installments of $59,418 beginning on August 23, 2007.Interest accrues at a rate of 5.98% on outstanding balances.

 

**Note 10.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 TransactionAgreement effective January 20, 2003 (the “Transaction Agreement”). Aspart of the consideration in the Transaction Agreement, the Company grantedBoston Scientific an exclusive option to purchase the Prolieve assets for aprice equal to the greater of $60 million or a multiple of sales, exercisablefor a period of five years and expiring in February 2009. As previouslydisclosed, on 

 

13

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August 8, 2005,the Company and Boston Scientific entered into the First Amendment pursuant towhich Boston Scientific agreed to lend the Company up to $15 million to beevidenced by one or more convertible secured promissory notes (the “Notes”).The first installment of $6 million was disbursed on August 17, 2005, thesecond 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 $5,000,000. This estimate was consistent with thefair value of insurance premiums to cover the entire $15 million indemnity. On July 23,2007, the Company purchased an insurance policy to cover $10 million of theindemnity guarantee. The premium for this policy was $1,313,250 and was recordedas a reduction of the accrued liability. The Company will continue to evaluatethe accrued liability on a quarterly basis and reduce it as the risk of theindemnity decreases. As of March 31, 2008, the balance of this accruedliability was $2,633,394.

 

**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 31,2007 including, without limitation, unforeseen changes in the course ofresearch and development activities and in clinical trials; possible changes incost and timing of development and testing, capital structure, and otherfinancial items; changes in approaches to medical treatment; introduction ofnew products by others; possible acquisitions of other technologies, assets orbusinesses; and possible actions by customers, suppliers, competitors andregulatory authorities. These and other risks and uncertainties could causeactual results to differ materially from those indicated by suchforward-looking statements, including those set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—RiskFactors” contained in the Annual Report on Form 10-K for the fiscal yearended 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.*

 

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**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 our heat activated liposome, is in clinical studies for the treatment ofliver cancer and breast cancer.

 

In 1989, weobtained premarketing approval (“PMA”) from the FDA to use our microwave-basedMicrofocus 1000 heat therapy system on surface and subsurface tumors inconjunction with radiation therapy. We marketed this system until 1995. From1995 until early in 2004, we engaged in research and development of newtreatment systems. On January 16, 2006, we transferred all of our rightsto the Microfocus 1000, together will all associated technology, to Celsion(Canada) Ltd. and on the same day sold all the stock of Celsion (Canada) to ourfounder and former officer and director, Dr. Augustine Cheung.

 

On February 19,2004, we obtained a PMA for the Prolieve Thermodilatation System for thetreatment of Benign Prostatic Hyperplasia (“BPH”). From 2004 through June 2007,Prolieve was marketed and sold through our commercial distributor, BostonScientific.  On June 21, 2007, wesold all of our Prolieve assets to Boston Scientific.

 

**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 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. |
|                                                                                                                  |       |                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                  |       | 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 expect to  begin a Phase III study in 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.                                           |

 

From 1995 to 2004,we generated only minimal revenues and funded our operations primarily throughprivate placements of our equity securities. During 2004, following FDA premarketingapproval of the Prolieve Thermodilatation system, we received a one-timelicensing fee of $4 million under our agreement with Boston Scientific, theformer 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 makeinvestments in additional drug development and/or commercial opportunities,funding will be generated from sale of our equity securities.

 

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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 , 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 epidermalgrowth factor receptors (EGFR); and

 

·                  Corporate overhead.

 

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 will incorporate approximately 40clinical sites in North America, Italy, China, Taiwan, Hong Kong, and Korea andis planned to enroll a total of 600 patients. The Company expects to enroll the first patient in the study by thesecond quarter of 2008.

 

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 Recurrent Chest Wall cancer (“RCW”).The agency agreed with the patient population as defined by Celsion, anobjective response endpoint, and confirmed that depending on the final dataobtained, that this study could be used to support a New Drug Application (“NDA”)submission. In light of this positive response from the FDA, Celsion isplanning and working diligently to enable this Phase II study to commence assoon as a safe dose for multiple ThermoDox treatments per patient, in thispatient population, is determined from the Phase I study. Celsion anticipatesthat this Phase II study will commence enrollment late in 2008 and will becompleted 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. The Company’s common stock nowtrades on NASDAQ under the symbol CLN.

 

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## ** **

## **Results of Operations**

## ** **

*Comparison of Three Months Ended March 31,2008 and 2007.*

* *
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Operating  expenses:                 |       |                             |       |       |       |        |       |   |   |
| Research and  development            |       | $                                | 2,967,111  |       | $          | 1,770,812   |       | $ | 1,196,299 |   | 68 | % |
| General and  administrative          |       | 1,175,977                        |       | 1,294,169  |       | (118,192    | )          | -9 | % |
| Total operating  expenses            |       | 4,143,088                        |       | 3,064,981  |       | 1,078,107   |       | 35 | % |
| ** **                           | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Interest income  / (expense), net    |       | 61,152                           |       | (167,484   | )          | 228,636     |       | -137 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Other income                         |       | 94                               |       | —     |       | 94          |       | 0 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Loss from  continuing operations     |       | (4,081,842                       | )          | (3,232,465 | )          | (849,377    | )          | 26 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Discontinued  Operations (Note 9)    |       |                             |       |       |       |        |       |   |   |
| Income from  discontinued operations |       | —                           |       | 874,795    |       | (874,795    | )          | -100 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Net loss                             |       | $                                | (4,081,842 | )          | $          | (2,357,670  | )          | $ | (1,724,172 | ) | 73 | % |

 

The increase of $1,196,299, or 68%, in research and development expenseduring the first quarter of 2008 in comparison to the first quarter of 2007 wasdue to:

 
| ** ** | ** **                                                                                                                     | ** ** | **$**    | ** ** |
|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| **·** | Increase in clinical costs due to start-up of the  Phase III Primary Liver Cancer study                                        |       | 711,000  |       |
| ·     | Increase in drug development and manufacturing costs  due to increase in supplies of ThermoDox® for clinical trials       |       | 400,000  |       |
| ·     | Increase stock option expense related to grants made  to clinical group employees                                              |       | 74,000   |       |
| ·     | Increase in pharmacokinetic costs associated with  the evaluation of patients in the Phase I trials                            |       | 72,000   |       |
| ·     | Increase in salaries, benefits and relocation costs  due to additional clinical staff                                          |       | 63,000   |       |
| ·     | Increase in bonuses accrued & paid to  clinical group employees                                                       |       | 61,000   |       |
| ·     | Increase in drug distribution costs as a result of  providing the clinical supplies of ThermoDox® to the study sites      |       | 55,000   |       |
| ·     | Increase in travel expenses due to site initiation  visits related to the start up of the Phase III Primary Liver Cancer trial |       | 15,000   |       |
| ·     | Decrease in non-recurrence of patent and trademark  costs                                                                      |       | (81,000  | )          |
| ·     | Decrease in professional fees related to regulatory  compliance                                                                |       | (174,000 | )          |

 

The $118,192, or 9%, decreasein general and administrative expense during the quarter ended March 31,2008 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 10 to the  Financial Statements)                                                             |       | (527,000 | )          |
| ·     | Decrease in salaries,  benefits, and relocation costs due to head count reductions and the  non-recurrence of recruiting and relocation costs incurred in the first  quarter of 2007 |       | (340,000 | )          |

 

17

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| · | 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 |   | (100,000 | )      |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
| · | Decrease in corporate  insurances due to the elimination of the product liability insurance upon the  sale of the Prolieve assets                                      |   | (28,000  | )      |
| · | Decrease in stockholder  costs due to the non-recurrence of proxy solicitation costs in the first  quarter of 2007                                                     |   | (27,000  | )      |
| · | Decrease in legal fees due  to the non-recurrence of the fees associated with the American Medical  Systems lawsuit                                                    |   | (11,000  | )      |
| · | Increase in travel costs  related to investor/public relations                                                                                                         |   | 4,000    |   |
| · | Increase in occupancy costs  due to higher taxes and utilities                                                                                                         |   | 9,000    |   |
| · | Increase in investor/public  relation costs                                                                                                                            |   | 20,000   |   |
| · | Increase in State of  Delaware franchise taxes due to the increase in authorized shares in 2006  (increase impact began 2Q07)                                          |   | 31,000   |   |
| · | Increase in audit and tax  preparation costs due to tax research issues related to the sale of the  Prolieve assets                                                    |   | 38,000   |   |
| · | Increase in costs related  to redesign of the Company’s website                                                                                                   |   | 44,000   |   |
| · | Increase in Board of  Director costs, including travel and stock based compensation expense                                                                            |   | 88,000   |   |
| · | Increase in bad debt  expense due to the reserves placed against the Celsion Canada receivables and  Note Receivable (see Note 5)                                      |   | 680,000  |   |

 

Net interest income forthe quarter ended March 31, 2008 was $61,152, compared to a net expense of$167,483 for the quarter ended March 31, 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 10 to the financialstatements for further detail on the discontinued operations.

 

*Comparison of Discontinued Operations for the threemonths ended March 31, 2008 and 2007.*

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **March 31,**               | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues                                 |       |                             |       |       |       |        |       |   |   |
| Net sales of  equipment and parts        |       | $                                | —     |       | $          | 2,922,965   |       | $ | (2,922,965 | ) | -100 | % |
| Cost of Sales                            |       | —                           |       | 1,536,399  |       | (1,536,399  | )          | -100 | % |
| Gross Profit                             |       | —                           |       | 1,386,566  |       | (1,386,566  | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Operating  expenses:                     |       |                             |       |       |       |        |       |   |   |
| Research and  development                |       | —                           |       | 654,628    |       | (654,628    | )          | -100 | % |
| Total operating  expenses                |       | —                           |       | 654,628    |       | (654,628    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income from  operations                  |       | —                           |       | 731,938    |       | (731,938    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Other income,  net                       |       | —                           |       | 142,857    |       | (142,857    | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income  before taxes                 |       | $                                | —     |       | $          | 874,795     |       | $ | (874,795 | ) | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income tax  expense                      |       | —                           |       | —     |       | —      |       | 0 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income from  discontinued operations |       | $                                | —     |       | $          | 874,795     |       | $ | (874,795 | ) | -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.

 

18

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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$59,219,599 at March 31,2008. We have incurred negative cash flows from operations since our inceptionand have funded our operations primarily through the sale of equity securitiesand more recently through the sale of our Prolieve assets. As of March 31,2008, we had total current assets of $17,001,115, including cash and short terminvestments of $1,543,125, compared with current liabilities of $6,897,516,resulting in a working capital surplus of $10,103,599. At December 31,2007, we had total current assets of $21,424,400 (including cash and short terminvestments of $5,937,373) and current liabilities of $8,118,606, resulting ina working capital surplus of $13,305,794.

 

Net cash used inthe Company’s operating activities for the three months ended March 31,2008 was $4,211,491 compared to net cash provided of $152,298 for the threemonths ending March 31, 2007. The increase of net cash used of $4,363,789is primarily due to:

 

·                  An increase in the net loss in the first quarter of2008 of $1,724,172 (as described above);

·                  An increase in other accrued liabilities of $821,461,largely due to the indemnity reserve to Boston Scientific (see footnote 10 tothe Financial Statements);

·                  Income taxes payable related to Alternative Minimumtaxes due on the sale of the Prolieve assets of $546,000;

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

·                  Offset by the non-recurrence of the amortization ofthe deferred licensing fee of $142,857.

 

In the three months ended March 31, 2008, totalassets and total liabilities and stockholders’ equity decreased by $5,188,716to $33,849,985 compared to $39,038,701 as of December 31, 2007.

 

The decrease in total assets was primarily due to adecrease in cash, cash equivalents and short term investments of $4,394,248 asdetailed in the statement of cash flows and the allowances placed against theCelsion Canada receivable and note receivable of $664,978 (see Note 5 to thefinancial statements).

 

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

 

·                  An increase inaccounts payable of $658,673 due to the start up of the Phase III primary livercancer study.

 

The increases in total liabilities and equity wereoffset by:

 

·                  A decrease inother accrued liabilities of $1,145,342 mainly due to the reduction of theindemnity reserve related to the sale of Prolieve and a reduction in accruedseverance costs which were paid in the first quarter of 2008;

·                  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;

·                  The net loss forthe quarter of $4,081,842 (as described above).

 

For the balance of fiscal year 2008, we expect toexpend approximately $12,900,000 for clinical testing of liver cancer andbreast cancer treatment systems as well as corporate overhead, all of which weexpect to fund from cash on hand and from the collection of the $15,000,000 duefrom Boston Scientific. The foregoing is an estimate, based upon assumptions asto the scheduling of institutional clinical research and testing personnel, thetiming of clinical trials and other factors, not all of which are fully predictable.

 

19

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**Item 3.    Quantitative and Qualitative DisclosureAbout 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.    Controlsand 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 March 31, 2008, which is the end ofthe period covered by this report, our disclosure controls and procedures areeffective.

 

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 March 31,2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

20

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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 of Equity Securities andUse of Proceeds.**

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

**Item 4.    Submission of Matters to a Vote of SecurityHolders.**

 

**None.**

** **

**Item 5.    Other Information**

** **

**None.**

** **

**21**

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** **

**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.

 

May 9, 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                         |
|   |   |   Interim  Chief Accounting Officer      |
|   |   |   Principal  Financial Officer           |

 

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