Tableof Contents

 

 

 

**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark  One)**                                                                                                 |
|-----------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                           | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                            |
| **For the quarterly period ended  September 30, 2008**                                                     |
|                                                                                                            |
| **or**                                                                                                          |
|                                                                                                            |
| **o**                                                                                                           | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                            |
| **For the transition period from               to** |

 

**Commission file number 000-14242**

 

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**CELSIONCORPORATION**

(ExactName of Registrant as Specified in its Charter)

 

| **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  telephone number, including area code)                                                                                     |

 

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

 

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

 

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

 

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

 

As of November 1,2008 the Registrant had 10,149,850 shares outstanding of Common Stock, $.01 parvalue per share.

 

 

 

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Table ofContents

 

# **TABLE OF CONTENTS**

 
| **PART I:** | **FINANCIAL INFORMATION** | ** **                                                                                                                                                                            |
|------------------|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **       | ** **                | ** **                                                                                                                                                                            | ** ** |
| ** **       | **Item 1.**               | **Financial Statements and Notes (Unaudited)**                                                                                                                                        | ** ** |
|             | ** **                |                                                                                                                                                                                  | Balance Sheets |   |
|             |                      |                                                                                                                                                                                  | Statements of  Operations |   |
|             |                      |                                                                                                                                                                                  | Statement of Changes in Stockholders’ Equity |   |
|             |                      |                                                                                                                                                                                  | Statements  of Cash Flows |   |
|             |                      |                                                                                                                                                                                  | Notes to Financial Statements |   |
|             |                      |                                                                                                                                                                                  |   |
|             | Item 2.                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                                           |   |
|             |                      |                                                                                                                                                                                  |   |
|             | Item 3.                   | Quantitative  and Qualitative Disclosures about Market Risk                                                                                                                           |   |
|             |                      |                                                                                                                                                                                  |   |
|             | Item 4.                   | Controls and  Procedures                                                                                                                                                              |   |
|             |                      |                                                                                                                                                                                  |   |
| PART II:    | OTHER INFORMATION         |                                                                                                                                                                                  |
|             |                      |                                                                                                                                                                                  |   |
|             | Item 1.                   | Legal Proceedings                                                                                                                                                                     |   |
|             | Item 1A.                  | Risk Factors                                                                                                                                                                          |   |
|             | Item 2.                   | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                                                          |   |
|             | Item 3.                   | Defaults Upon  Senior Securities                                                                                                                                                      |   |
|             | Item 4.                   | Submission of  Matters to a vote of Security Holders                                                                                                                                  |   |
|             | Item 5.                   | Other Information                                                                                                                                                                     |   |
|             | Item 6.                   | Exhibits                                                                                                                                                                              |   |
|             |                      |                                                                                                                                                                                  |
| ** **       | **SIGNATURES**            | ** **                                                                                                                                                                            |
| ** **       | ** **                | ** **                                                                                                                                                                            |
|             | EXHIBITS                  |                                                                                                                                                                                  |
|             |                      |                                                                                                                                                                                  |
|             | 11                        | Statement Re: Computation of Earnings Per Share.  (Filed herewith)                                                                                                                    |   |
|             |                      |                                                                                                                                                                                  |   |
|             | 31.1                      | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. (Filed herewith)     |   |
|             |                      |                                                                                                                                                                                  |   |
|             | 31.2                      | Certification of Principal Financial Officer  pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. (Filed herewith) |   |
|             |                      |                                                                                                                                                                                  |   |
|             | 32.1                      | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. (Furnished herewith)   |   |
|             |                      |                                                                                                                                                                                  |   |
|             | 32.2                      | Certification of Principal Financial Officer  pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. (Furnished herewith)  |   |
|                  |                           |                                                                                                                                                                                       |  |  |  |

 

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Tableof Contents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.     Financial Statements.**

 

Index to FinancialStatements

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

 

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**CELSIONCORPORATION**

BALANCESHEETS

September 30,2008 and December 31, 2007

 
| ** **                                                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                    | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                    |       |                   |       |                  |       |
| ** **                                                                                                                    |       |                   |       |                  |       |
| **Current  assets**                                                                                                           |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                    |       | $                      | 818,256    |                  | $          | 2,937,373 |   |
| Short term  investments available for sale, at fair value                                                                     |       | 8,151,090              |       | 3,000,000             |       |
| Accounts  receivable - trade                                                                                                  |       | 13,182                 |       | 183,043               |       |
| Other  receivables                                                                                                            |       | 54,657                 |       | 47,110                |       |
| Due from Boston  Scientific Corporation                                                                                       |       | 15,000,000             |       | 15,000,000            |       |
| Prepaid expenses                                                                                                              |       | 141,069                |       | 256,874               |       |
| Total current  assets                                                                                                         |       | 24,178,254             |       | 21,424,400            |       |
|                                                                                                                          |       |                   |       |                  |       |
| **Property  and equipment - at cost**                                                                                         |       |                   |       |                  |       |
| Furniture and  office equipment                                                                                               |       | 198,434                |       | 194,200               |       |
| Computer  hardware and software                                                                                               |       | 314,096                |       | 338,349               |       |
| Laboratory and  shop equipment                                                                                                |       | 324,501                |       | 305,340               |       |
| Leasehold  improvements                                                                                                       |       | 132,148                |       | 132,148               |       |
|                                                                                                                          |       | 969,179                |       | 970,037               |       |
| Less:  Accumulated depreciation                                                                                               |       | 744,324                |       | 702,156               |       |
| Net value of  property and equipment                                                                                          |       | 224,855                |       | 267,881               |       |
|                                                                                                                          |       |                   |       |                  |       |
| **Other  assets**                                                                                                             |       |                   |       |                  |       |
| Advances under  Celsion (Canada), Ltd.                                                                                        |       |                   |       |                  |       |
| Transition  Services Agreement (net of allowance of $649,891 and $442,225 respectively)                                       |       | —                 |       | 200,000               |       |
| Note receivable  (net of discount of $147,154 and $168,473, respectively, and an allowance of  $882,136 and $0, respectively) |       | 320,710                |       | 1,181,527             |       |
| Due from Boston  Scientific Corporation - Non Current                                                                         |       | —                 |       | 15,000,000            |       |
| Deposits with  CROs and other assets                                                                                          |       | 1,118,402              |       | 899,268               |       |
| Patent licensing  fees (net of accumulated amortization of $15,000 and $9,375, respectively)                                  |       | 60,000                 |       | 65,625                |       |
| Total other  assets                                                                                                           |       | 1,499,112              |       | 17,346,420            |       |
|                                                                                                                          |       |                   |       |                  |       |
| **Total  assets**                                                                                                             |       | $                      | 25,902,221 |                  | $          | 39,038,701 |   |

 

4

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**CELSIONCORPORATION**

BALANCESHEETS (Continued)

September 30,2008 and December 31, 2007

 
| ** **                                                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                   | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                   | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                               | ** ** | ** **             | ** ** | ** **            | ** ** |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **Current  liabilities**                                                                                                                                                                     |       |                   |       |                  |       |
| Accounts payable  - trade                                                                                                                                                                    |       | $                      | 2,237,168  |                  | $          | 1,830,457 |   |
| Other accrued  liabilities                                                                                                                                                                   |       | 2,745,848              |       | 5,056,380             |       |
| Income taxes  payable                                                                                                                                                                        |       | —                 |       | 546,000               |       |
| Accrued non-cash  compensation                                                                                                                                                               |       | 8,910                  |       | 8,910                 |       |
| Note payable -  current portion                                                                                                                                                              |       | 407,761                |       | 676,859               |       |
| Total current  liabilities                                                                                                                                                                   |       | 5,399,687              |       | 8,118,606             |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **Long-term  liabilities**                                                                                                                                                                   |       |                   |       |                  |       |
| Note payable                                                                                                                                                                                 |       | —                 |       | 234,742               |       |
| Other  liabilities                                                                                                                                                                           |       | 30,051                 |       | 34,238                |       |
| Total long-term  liabilities                                                                                                                                                                 |       | 30,051                 |       | 268,980               |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                                                           |       | 5,429,738              |       | 8,387,586             |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **Stockholders’  equity**                                                                                                                                                               |       |                   |       |                  |       |
| Common stock -  $0.01 par value per share (250,000,000 shares authorized; 10,809,588 and  10,783,922 shares issued as of September 30, 2008 and December 31,  2007, respectively.) |       | 108,096                |       | 107,839               |       |
| Additional  paid-in capital                                                                                                                                                                  |       | 89,014,495             |       | 88,319,985            |       |
| Accumulated  other comprehensive loss                                                                                                                                                        |       | (21,322                | )          | —                |       |
| Accumulated  deficit                                                                                                                                                                         |       | (65,989,834            | )          | (55,137,757           | )          |
| Subtotal                                                                                                                                                                                     |       | 23,111,435             |       | 33,290,067            |       |
| Less: 659,738  shares of treasury stock - at cost                                                                                                                                            |       | (2,638,952             | )          | (2,638,952            | )          |
| Total  stockholders’ equity                                                                                                                                                             |       | 20,472,483             |       | 30,651,115            |       |
|                                                                                                                                                                                         |       |                   |       |                  |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                         |       | $                      | 25,902,221 |                  | $          | 39,038,701 |   |

 

See accompanying notes.

 

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**CELSION CORPORATION**

STATEMENTSOF OPERATIONS

(Unaudited)

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Operating  expenses:                                                |       |                             |       |                            |       |   |   |   |   |
| Research and  development                                           |       | $                                | 3,839,951  |                            | $          | 1,958,671 |   | $ | 8,422,143 |   | $ | 6,078,520 |   |
| General and  administrative                                         |       | 509,794                          |       | 1,860,531                       |       | 1,586,322 |   | 4,826,087 |   |
| Total operating  expenses                                           |       | 4,349,745                        |       | 3,819,202                       |       | 10,008,465 |   | 10,904,607 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Loss from  operations                                               |       | (4,349,745                       | )          | (3,819,202                      | )          | (10,008,465 | ) | (10,904,607 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Other (expense)  / income:                                          |       |                             |       |                            |       |   |   |   |   |
| Other expense                                                       |       | (57,287                          | )          | (23,754                         | )          | (896,377 | ) | (439,211 | ) |
| Interest income                                                     |       | 81,419                           |       | 204,143                         |       | 185,543 |   | 505,174 |   |
| Interest expense                                                    |       | (14,457                          | )          | (11,899                         | )          | (132,778 | ) | (677,324 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Loss from  continuing operations                                    |       | $                                | (4,340,070 | )                               | $          | (3,650,712 | ) | $ | (10,852,077 | ) | $ | (11,515,968 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Discontinued  Operations (Note 12)                                  |       |                             |       |                            |       |   |   |   |   |
| Income from  discontinued operations                                |       | —                           |       | 33,054                          |       | — |   | 50,029,211 |   |
| Income tax  expense                                                 |       | —                           |       | —                          |       | — |   | (274,000 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Income from  discontinued operations                                |       | —                           |       | 33,054                          |       | — |   | 49,755,211 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net (loss) /  income                                                |       | $                                | (4,340,070 | )                               | $          | (3,617,658 | ) | $ | (10,852,077 | ) | $ | 38,239,243 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net loss from  continuing operations per common share - basic       |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | (1.07 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net loss from  continuing operations per common share - diluted     |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | (1.07 | ) |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income from  discontinued operations per common share - basic   |       | $                                | —     |                            | $          | 0.00 |   | $ | — |   | $ | 4.62 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net income from  discontinued operations per common share - diluted |       | $                                | —     |                            | $          | 0.00 |   | $ | — |   | $ | 4.32 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net (loss) /  income per common share - basic                       |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | 3.55 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net (loss) /  income per common share - diluted                     |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | 3.32 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding - basic                        |       | 10,149,055                       |       | 10,774,497                      |       | 10,146,339 |   | 10,764,878 |   |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Weighted average  shares outstanding - diluted (1)                  |       | 10,149,055                       |       | 10,774,497                      |       | 10,146,339 |   | 11,526,717 |   |

 

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

 

See accompanying notes.

 

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**CELSION CORPORATION**

STATEMENTSOF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THENINE MONTHS ENDED SEPTEMBER 30, 2008

(Unaudited)

 
| ** **                                                          | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                          | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | ** **                                                        | ** ** | ** ** | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** | **Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Common Stock**                                             | ** ** | **Paid-in** | ** ** | **Treasury Stock** | ** ** | **Comprehensive** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                          | ** ** | **Shares**                                                        | ** ** | **Total** | ** ** | **Capital** | ** ** | **Shares** | ** ** | **Total** | ** ** | **Loss** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                                                |       |                                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance at  January 1, 2008                                    |       | 10,783,922                                                        |       | $ | 107,839 |   | $ | 88,319,985 |   | 659,738 |   | $ | (2,638,952 | ) | $ | — |   | $ | (55,137,757 | ) | $ | 30,651,115 |   |
| Stock-based  compensation expense related to employee stock options |       | —                                                            |       | — |   | 612,930 |   | — |   | — |   | — |   | — |   | 612,930 |   |
| Stock based  compensation - restricted stock                        |       | —                                                            |       | — |   | 39,217 |   | — |   | — |   | — |   | — |   | 39,217 |   |
| Issuance of  restricted stock upon vesting                          |       | 16,666                                                            |       | 167 |   | (167 | ) | — |   | — |   | — |   | — |   | — |   |
| Shares issued to  employees                                         |       | 9,000                                                             |       | 90 |   | 42,130 |   | — |   | — |   | — |   | — |   | 42,220 |   |
| Extension of  warrants                                              |       | —                                                            |       | — |   | 400 |   | — |   | — |   | — |   | — |   | 400 |   |
| Change in fair  value of investments                                |       | —                                                            |       | — |   | — |   | — |   | — |   | (21,322 | ) | — |   | (21,322 | ) |
| Net loss                                                            |       | —                                                            |       | — |   | — |   | — |   | — |   | — |   | (10,852,077 | ) | (10,852,077 | ) |
| Balance at  September 30, 2008                                 |       | 10,809,588                                                        |       | $ | 108,096 |   | $ | 89,014,495 |   | 659,738 |   | $ | (2,638,952 | ) | $ | (21,322 | ) | $ | (65,989,834 | ) | $ | 20,472,483 |   |

 

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**CELSION CORPORATION**

STATEMENTSOF CASH FLOWS

(Unaudited)

 
| ** **                                                   | ** ** | **Nine Months Ended** | ** **  |
|--------------------------------------------------------------|------------|---------------------------------|-------------|
| ** **                                                   | ** ** | **September 30,**          | ** **  |
| ** **                                                   | ** ** | **2008**                        | ** **  | **2007** | ** ** |
| **Cash  flows from operating activities**                    |       |                            |        |   |   |
| Net (loss) /  income for the year                            |       | $                               | (10,852,077 | ) | $ | 38,239,243 |   |
| Non-cash items  included in net loss:                        |       |                            |        |   |   |
| Depreciation and  amortization                               |       | 90,038                          |        | 136,463 |   |
| Accretion of  discount on note receivable                    |       | (21,319                         | )           | (78,979 | ) |
| Gain on the sale  of Prolieve                                |       | —                          |        | (48,029,793 | ) |
| Loss on disposal  of fixed assets                            |       | 523                             |        | 10,488 |   |
| Stock based  compensation - Options                          |       | 612,930                         |        | 714,053 |   |
| Stock based  compensation - Stock grants                     |       | 66,717                          |        | 58,560 |   |
| Amortization of  deferred license fee                        |       | —                          |        | (269,840 | ) |
| Exercise of  common stock options                            |       | —                          |        | 2,718 |   |
| Shares issued in  exchange for services                      |       | 14,720                          |        | 56,255 |   |
| Amortization of  patent license                              |       | 5,625                           |        | 59,731 |   |
| Allowance for  bad debts                                     |       | 895,854                         |        | 428,722 |   |
| Net changes in:                                              |       |                            |        |   |   |
| Accounts  receivable-trade                                   |       | 169,861                         |        | 1,653,023 |   |
| Other  receivables                                           |       | (13,599                         | )           | 17,873 |   |
| Due from Boston  Scientific Corporation                      |       | 15,000,000                      |        | — |   |
| Inventories                                                  |       | —                          |        | 5,792 |   |
| Prepaid expenses                                             |       | 115,805                         |        | 170,351 |   |
| Escrow  account-license fee                                  |       | —                          |        | 1,824,740 |   |
| Deposits and  other assets                                   |       | (219,134                        | )           | (607,586 | ) |
| Accounts payable  - trade and accrued interest               |       | 606,711                         |        | (295,846 | ) |
| Income taxes  payable                                        |       | (546,000                        | )           | 68,500 |   |
| Other accrued  liabilities                                   |       | (2,314,719                      | )           | (1,212,541 | ) |
| **Net  cash provided by / (used in) operating activities**   |       | 3,611,936                       |        | (7,048,073 | ) |
|                                                         |       |                            |        |   |   |
| **Cash  flows from investing activities**                    |       |                            |        |   |   |
| Purchase of  short term investments                          |       | (11,640,470                     | )           | (5,000,000 | ) |
| Sale of  short-term investments                              |       | 6,507,355                       |        | 4,100,000 |   |
| Proceeds from  the sale of the Prolieve assets               |       | —                          |        | 9,958,615 |   |
| Advances under  Celsion Canada transition services agreement |       | (7,666                          | )           | (45,400 | ) |
| Amortization of  premium on investments                      |       | 7,871                           |        | — |   |
| Accretion of  discount on investments                        |       | (12,499                         | )           | — |   |
| Accrued interest  on investments                             |       | (34,669                         | )           | — |   |
| Payment of  licensing fee                                    |       | —                          |        | (1,600,000 | ) |
| Purchase of  property and equipment                          |       | (47,535                         | )           | (87,043 | ) |
| **Net  cash (used in) / provided by investing activities**   |       | (5,227,613                      | )           | 7,326,172 |   |
|                                                         |       |                            |        |   |   |
| **Cash  flows from financing activities**                    |       |                            |        |   |   |
| Extension of  warrants                                       |       | 400                             |        | — |   |
| Draws on line of  credit                                     |       | 3,000,000                       |        | — |   |
| Repayment of  line of credit                                 |       | (3,000,000                      | )           | — |   |
| Proceeds from  note payable                                  |       | —                          |        | 1,181,925 |   |
| Payments on note  payable                                    |       | (503,840                        | )           | (107,324 | ) |
| **Net cash  (used in) / provided by financing activities**   |       | (503,440                        | )           | 1,074,601 |   |
|                                                         |       |                            |        |   |   |
| **Net  (decrease) / increase in cash and cash equivalents**  |       | (2,119,117                      | )           | 1,352,700 |   |
| **Cash  and cash equivalents at beginning of period**        |       | 2,937,373                       |        | 1,032,674 |   |
|                                                         |       |                            |        |   |   |
| **Cash  and cash equivalents at end of period**              |       | $                               | 818,256     |   | $ | 2,385,374 |   |
|                                                         |       |                            |        |   |   |
| **Cash  paid for:**                                          |       |                            |        |   |   |
| Interest                                                     |       | $                               | 45,882      |   | $ | 13,637 |   |
| Income taxes                                                 |       | $                               | 546,000     |   | $ | 205,500 |   |

 

# **Seeaccompanying notes.**

 

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# **CELSIONCORPORATION**

 

**NOTES TOFINANCIAL STATEMENTS (UNAUDITED)**

 

**For the Three and Nine MonthPeriods Ended September 30, 2008 and 2007**

 

**Note 1.   Basisof Presentation**

 

The accompanyingunaudited financial statements of Celsion Corporation (which we sometimes referto as “Celsion”, the “Company”, “we” or “us”) have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do not include all ofthe information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments, consisting only of normal recurringaccruals considered necessary for a fair presentation, have been included inthe accompanying unaudited financial statements. Operating results for thethree and nine month periods ended September 30, 2008 are not necessarilyindicative of the results that may be expected for any other interim period(s) orfor any full year. For further information, refer to the financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K forthe fiscal year ended December 31, 2007 filed with the Securities andExchange Commission on March 28, 2008.

 

**Note 2.   Common Stock Outstandingand Per Share Information**

 

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

 

For the quarter ended September 30, 2008, the 2,097,913 options andwarrants that were convertible into shares of the Company’s common stock wereexcluded from the calculation of diluted earnings per share as their effectwould have been anti-dilutive. For the quarter ended September 30, 2007,844,791 options and warrants that were convertible into shares of the Company’scommon stock were excluded from the calculation of diluted earnings per shareas their effect would have been anti-dilutive. The total number of outstandingwarrants and options for the periods ended September 30, 2008 and 2007 were2,057,080 and 2,062,467 respectively. Additionally, shares of unvestedrestricted stock were excluded from the calculation. The total number of sharesof unvested stock as of September 30, 2008 and 2007 was 40,833 and 56,400,respectively.

 

Information relating to the calculation of earnings per share issummarized as follows:

 
| ** **                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                          | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                |       |                             |       |                            |       |   |   |   |   |
| Net loss from  continuing operatons - basic and diluted             |       | $                                | (4,340,070 | )                               | $          | (3,650,712 | ) | $ | (10,852,077 | ) | $ | (11,515,968 | ) |
| Net income from  discontinued operations - basic and diluted        |       | $                                | —     |                            | $          | 33,054 |   | $ | — |   | $ | 49,755,211 |   |
| Net (loss) /  income - basic and diluted                            |       | $                                | (4,340,070 | )                               | $          | (3,617,658 | ) | $ | (10,852,077 | ) | $ | 38,239,243 |   |
| Weighted average  shares outstanding - basic                        |       | 10,149,055                       |       | 10,774,497                      |       | 10,146,399 |   | 10,764,878 |   |
| Dilutive  securities - options and warrants                         |       | —                           |       | —                          |       | — |   | 761,839 |   |
| Adjusted  weighted average shares outstanding - dilutive            |       | 10,149,055                       |       | 10,774,497                      |       | 10,146,399 |   | 11,526,717 |   |
| Net loss from  continuing operations per common share - basic       |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | (1.07 | ) |
| Net loss from  continuing operations per common share - diluted     |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | (1.07 | ) |
| Net income from  discontinued operations per common share - basic   |       | $                                | —     |                            | $          | 0.00 |   | $ | — |   | $ | 4.62 |   |
| Net income from  discontinued operations per common share - diluted |       | $                                | —     |                            | $          | 0.00 |   | $ | — |   | $ | 4.32 |   |
| Net (loss) /  income per common share - basic                       |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | 3.55 |   |
| Net (loss) /  income per common share - diluted                     |       | $                                | (0.43      | )                               | $          | (0.34 | ) | $ | (1.07 | ) | $ | 3.32 |   |

 

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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 accounting principles,and expands disclosures about fair value measurements. SFAS No. 157 becameeffective for the Company on January 1, 2008 and did not have an impact onthe Company’s financial statements.

 

In November 2007, the Emerging Issues Task Force (“EITF”) issuedIssue No. 07-1 (“EITF 07-1”), Accounting for Collaborative ArrangementsRelated to the Development and Commercialization of Intellectual Property.Companies may enter into arrangements with other companies to jointly develop,manufacture, distribute, and market a product. Often the activities associatedwith these arrangements are conducted by the collaborators without the creationof a separate legal entity (that is, the arrangement is operated as a “virtualjoint venture”). The arrangements generally provide that the collaborators willshare, based on contractually defined calculations, the profits or losses fromthe associated activities. Periodically, the collaborators share financialinformation related to product revenues generated (if any) and costs incurredthat may trigger a sharing payment for the combined profits or losses. EITF07-1 requires collaborators in such an arrangement to present the result ofactivities for which they act as the principal on a gross basis and report anypayments received from (made to) other collaborators based on other applicableGAAP or, in the absence of other applicable GAAP, based on analogy toauthoritative accounting literature or a reasonable, rational, and consistentlyapplied accounting policy election. EITF 07-1 is effective for collaborativearrangements in place at the beginning of the annual period beginning after December 15,2008. The Company does not currently expect the adoption of EITF 07-1 tohave a material impact on its financial statements.

 

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

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities –an amendment of FASBStatement No. 133” (“SFAS 161”), which requires enhanced disclosuresabout an entity’s derivative and hedging activities and thereby improves thetransparency of financial reporting. SFAS 161 is effective for fiscal yearsbeginning after November 15, 2008. The Company does not expect that theadoption of SFAS 160 will have a significant impact on its financialstatements.

 

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

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy ofGenerally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 is intended toimprove financial reporting by identifying a consistent framework, orhierarchy, for selecting accounting principles to be used in preparingfinancial statements in conformity with GAAP for nongovernmental entities. Thestatement establishes that the GAAP hierarchy should be directed to entitiesbecause it is the entity (not its auditor) that is responsible for selectingaccounting principles for financial statements that are presented in conformitywith GAAP.  This statement is effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board’s amendments to AU Section 411,The *Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles*.  The Company does notbelieve implementation of SFAS 162 will have a material impact on its financialstatements.

 

In June 2008, the FASB issued FASB Staff Position EITF No. 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities” (“FSP EITF No. 03-6-1”).  Under FSP EITF No. 03-6-1,unvested share-based payment awards that contain rights to receivenon-forfeitable dividends (whether paid or unpaid) are participatingsecurities, and should be included in the two-class method of computingearnings per share (“EPS”). FSP EITF No. 03-6-1 is

 

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effective for fiscal years beginning after December 15, 2008, andthe Company does not expect it to have a material impact on the Company’sfinancial statements.

 

**Note 4.   Stock Based Compensation**

 

Employee Stock Options

 

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

 

2001 Stock Option Plan

 

The purpose of the 2001Plan is to promote the long-term growth and profitability of Celsion byproviding key associates with incentives to improve stockholder value and tocontribute to the growth and financial success of Celsion and to enable theCompany to attract, retain and reward the best available persons for positionsof substantial responsibility. The 2001 Plan permitted the granting of stockoptions (including nonqualified stock options and incentive stock optionsqualifying under Section 422 of the Internal Revenue Code) and stockappreciation rights or any combination of the foregoing. During the year thatended December 31, 2007, 195,043 options were canceled or expired. Duringthe nine months ended September 30, 2008, 13,333 options expired.  All of the 208,376 canceled and expiredoptions under the 2001 Plan became available for issue under the 2007 Plan.

 

2004 Stock Incentive Plan

 

The purpose of the 2004Plan is to promote the long-term growth and financial success of the Companyand enable the Company to attract, retain and reward the best available personsfor positions of substantial responsibility. The 2004 Plan permits the grantingof awards in the form of incentive stock options, restricted stock, restrictedstock units, stock appreciation rights, phantom stock, and performance awards,or in any combination of the foregoing. During the year that ended December 31,2007, 90,379 options were canceled or expired. During the nine months ended September 30,2008,  24,333 options were canceled orexpired. All of the 114,712 canceled and expired options under the 2004 Planbecame available for issue under the 2007 Plan.

 

2007 Stock Incentive Plan

 

The purpose of the 2007Plan is to promote the long-term growth and profitability of the Company by providingincentives to improve stockholder value and enable the Company to attract,retain and reward the best available persons for positions of substantialresponsibility. The 2007 Plan permitted the granting of awards in the form ofincentive stock options, nonqualified stock options, restricted stock,restricted stock units, stock appreciation rights, phantom stock, andperformance awards, or in any combination of the foregoing. During the yearended December 31, 2007, 103,500 options were issued. No options were canceled or expired under the planfor the year ended December 31, 2007. During the nine months ended September 30,2008, 345,000 options were issued and 24,000 options were canceled.Additionally, 9,000 shares of stock were issued under the plan as performanceawards during the quarter ended September 30, 2008. On September 30,2008, there were 566,500 shares available out of 1,000,000 shares authorizedand available under the 2007 Plan. All canceled and expired options under the2001 Plan and the 2004 Plan became available for issue under the 2007 Plan.

 

Options and RestrictedStock Issued to Consultants for Services

 

The Company enters intoagreements with consultants in which the consultants receive restricted stockand stock options in exchange for services. Generally, the terms of these plansrequire that the exercise price of the options may not be less than the fairmarket value of Celsion’s Common Stock on the date the options are granted.Options and restricted stock generally vest over various time frames or uponmilestone accomplishments. Some vest immediately. Others vest over a periodbetween one and five years. The Company’s options generally expire ten yearsfrom the date of the grant. During the nine months ended September 30, 2008,5,000 shares of restricted stock were issued to a consultant as part of aconsulting agreement. There were no options granted to non-employees for thenine months ended September 30, 2008.

 

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A summary of the Company’s Common Stock option andwarrant 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                                 |       | 345,000                  |       | 5.44                                   |       |                                                                 |       |                                |       |
| Exercised                               |       | —                   |       | —                                 |       |                                                                 |       |                                |       |
| Canceled or  expired                    |       | (61,667                  | )          | (7.72                                  | )          |                                                                 |       |                                |       |
| Outstanding at  September 30, 2008 |       | 1,782,174                |       | $                                      | 5.97       |                                                                 | 7.2        |                                | $          | 336,625 |   |
| Exercisable at  September 30, 2008 |       | 998,550                  |       | $                                      | 7.21       |                                                                 | 5.9        |                                | $          | 87,167 |   |

 
| **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                    |       | (293,555                  | )          | (14.17                                 | )          |                                                                 |       |                                |       |
| Outstanding at  September 30, 2008 |       | 274,906                   |       | $                                      | 17.12      |                                                                 | 0.6        |                                | $          | — |   |
| Exercisable at  September 30, 2008 |       | 274,906                   |       | $                                      | 17.12      |                                                                 | 0.6        |                                | $          | — |   |

 

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

 
| **Restricted Stock**                           | ** ** | **Outstanding** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|-----------------------------------------------------|------------|-----------------|------------|--------------------------------------------|------------|
|                                                |       |            |       |                                       |       |
| Non-vested stock  awards at December 31, 2007  |       | 50,000          |       | $                                          | 2.42       |   |
| Granted                                             |       | 7,500           |       | 4.89                                       |       |
| Vested                                              |       | (16,667         | )          | 2.42                                       |       |
| Forfeited                                           |       | —          |       | —                                     |       |
| Non-vested stock  awards at September 30, 2008 |       | 40,833          |       | $                                          | 2.87       |   |

 

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The following is additional information with respectto options granted during the nine months ended September 30, 2008:

 

| ** **                     | ** ** | **Nine Months Ended  September 30, 2008** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|
| Risk-free  interest rate       |       | 2.18% to 3.54%                                                |       |
| Dividend Yield                 |       | 0.0%                                                          |       |
| Expected  volatility           |       | 77.28% to 79.24%                                              |       |
| Expected option  life in years |       | 6.0                                                           |       |

 

For all of the Company’s stock-based compensation plans, the fair valueof each grant was estimated at the date of grant using the Black-Scholes optionpricing model.  Black-Scholes utilizesassumptions related to volatility, the risk-free interest rate, the dividendyield and employee exercise behavior. Expected volatilities utilized in the model are based on historicalvolatility of the Company’s stock price. The risk free interest rate is derived from values assigned to U.S.Treasury strips as published in the Wall Street Journal in effect at the timeof grant.  The model incorporatesexercise, pre-vesting and post-vesting forfeiture assumptions based on analysisof historical data.  The expected life ofthe fiscal 2008 grants was generated using the simplified method as allowedunder Securities and Exchange Commission Staff Accounting Bulletin No. 107.

 

Stock based compensation expense totaled $148,240 and $694,276 duringthe three and nine months ended September 30, 2008 and $345,326 and$772,613 during the three and nine months ended September 30, 2007. Stockbased compensation is recognized ratably over the requisite service period forall awards. Unrecognized stock based compensation expense related to stockoptions totaled $1,799,674 at September 30, 2008 while the unrecognizedstock based compensation expense related to non-vested restricted stock awardswas $78,150 at September 30, 2008. These unrecognized expenses will berecognized in the income statement at various rates up to the next four years.

 

**Note 5.   ShortTerm Investments Available for Sale**

 

Short term investments available for sale of$8,151,090 as of September 30, 2008 and $3,000,000 as of December 31,2007 consist of money market funds, commercial paper, corporate debtsecurities, and government agency debt securities. They are valued at estimatedfair value, with unrealized gains and losses reported as a separate componentof stockholders’ equity in Accumulated Other Comprehensive Loss.

 

Securities available for sale are evaluatedperiodically to determine whether a decline in their value is other thantemporary.  The term “other thantemporary” is not intended to indicate a permanent decline in value.  Rather, it means that the prospects for nearterm recovery of value are not necessarily favorable, or that there is a lackof evidence to support fair values equal to, or greater than, the carryingvalue of the security.  Managementreviews criteria such as the magnitude and duration of the decline, as well asthe reasons for the decline, to predict whether the loss in value is other thantemporary.  Once a decline in value isdetermined to be other than temporary, the value of the security is reduced anda corresponding charge to earnings is recognized.

 
| ** **                                                               | ** ** | **September 30** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Short term investments - at fair value** | ** ** | **2008**              | ** ** | **2007**              | ** ** |
|                                                                     |       |                  |       |                  |       |
| Money market funds  and commercial paper                                 |       | $                     | 3,441,082  |                  | $          | 3,000,000 |   |
| Bonds -  government agencies                                             |       | 2,423,707             |       | —                |       |
| Bonds -  corporate issuances                                             |       | 2,286,301             |       | —                |       |
| Total                                                                    |       | $                     | 8,151,090  |                  | $          | 3,000,000 |   |

 

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**Note 6.   FairValues of Financial Instruments**

 

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

 

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

 

Level 2: Significantother observable inputs other than Level 1 prices such as quoted prices forsimilar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata.

 

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

 

The fair values of securities available for sale aredetermined by obtaining quoted prices on nationally recognized exchanges (Level1 inputs) or matrix pricing, which is a mathematical technique widely used inthe industry to value debt securities without relying exclusively on quotedprices for the specific securities but rather by relying on the securities’relationship to other benchmark quoted securities (Level 2 inputs).

 

Assets measured at fair value on a recurring basis aresummarized below:

 
| ** **                                 | ** ** | **Fair value measurements at September 30, 2008 using** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                 | ** ** | ** **                                                                                 | ** ** | **Quoted prices in** | ** ** | **other** | ** ** | **Significant** | ** ** |
| ** **                                 | ** ** | ** **                                                                                 | ** ** | **active markets for** | ** ** | **observable** | ** ** | **unobservable** | ** ** |
| ** **                                 | ** ** | ** **                                                                                 | ** ** | **identical assets** | ** ** | **inputs** | ** ** | **inputs** | ** ** |
| ** **                                 | ** ** | **September 30, 2008**                                                           | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                       |       |                                                                                       |       |   |   |   |   |   |   |
| Short term  investments available for sale |       | $                                                                                          | 8,151,090  |   | $ | — |   | $ | 8,151,090 |   | $ | — |   |
|                                            |            |                                                                                            |            |  |  |  |  |  |  |  |  |  |  |

 

**Note 7.   NoteReceivable**

 

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

 

Under the Stock PurchaseAgreement, 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 the notereceivable only specify an interest charge in the event that scheduled paymentsare in arrears.  The $1,500,000 note wastherefore discounted at the prime rate in effect January 16, 2006 (7.25%)plus 1.0%, or 8.25%, and the balance, net of discount, of $1,146,428 wasrecorded in the financial statements above. Interest income of $21,319 and $60,624 was recorded in the nine monthsended September 30, 2008 and 2007, respectively.

 

During the month of May 2008,the borrower approached the Company and requested that the terms of the note beextended and/or restructured. As of the filing of this Form 10-Q, anagreement between the parties had not been reached. As a result, thecollectibility of the note receivable became doubtful. Accordingly, anallowance was placed against the note to reduce the balance to the estimatednet realizable value of the collateral underlying the note. As noted above,100,536 shares of Celsion common stock are pledged as collateral to the note.The closing price of Celsion’s common stock on September 30, 2008 was$3.19, which results in a total collateral value of $320,710. Therefore, thecarrying value of the note was reduced to $320,710 as of September 30,2008.

 

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**Note 8.  Advances under Celsion (Canada) LimitedTransition Services Agreement**

 

In conjunction with thesale of Canada, a Transition Services Agreement was entered into whereby (i) Celsionsublet space in the Company’s offices for use by Canada to carry on itsbusiness, for a period of up to six (6) months from the date of theagreement; (ii) Celsion provided administrative support services as neededin the operation of Canada’s business for the period of the sublease; and (iii) Celsionadvanced funds to pay salary and health and dental insurance of each of certainemployees of Canada and the expenses reasonably incurred in connection with theoperation of Canada’s business up to $100,000 for the shorter of the periodending June 30, 2006 or the date of closing by Canada of a transactioninvolving the merger of Canada into a newly created Canadian Capital PoolCompany and a simultaneous funding through a private placement of shares underterms approved by the Toronto Stock Exchange (the “Canada Transaction”). Withinten days after the closing of the Canada Transaction, Canada is obligated topay the Company all amounts due under the Transition Services Agreement.

 

The Transition ServicesAgreement was amended on March 28, 2006 to advance Canada an additional$200,000 to fund reasonable operating expenses. This additional advance isrepayable under the same terms as the Transition Services Agreement.  The cumulative balance advanced under theTransition Services Agreement, as amended, at September 30, 2008 was$649,891.

 

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 7above, the Company has increased its allowance to $649,891 as of September 30,2008 and recorded the estimated net realizable value of the receivable as zero.

 

**Note 9. Licensing Agreement**

 

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

 

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

 

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

 

**Note 10. Secured Line of Credit**

 

OnNovember 9, 2007, the Company entered into a Loan and Security Agreement(the “Agreement”) with Manufacturers and Traders Trust Company (“M&T”)pursuant to which M&T agreed to provide a draw-down credit facility to theCompany (the “Credit Facility”).  TheCompany was able to request advances under the Credit Facility at a rate not toexceed $1.5 million per month, up to a maximum principal amount under theCredit Facility of $6.5 million.  Each 

 

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advancewas subject to, among other customary conditions, a determination by M&T inits good faith discretion that the Company owned less than $0.5 million in cashand other property readily convertible into cash, excluding a $1.0 million cashcollateral account held at M&T. Amounts borrowed by the Company under the Credit Facility and repaidcould not be re-advanced to the Company.

 

TheCredit Facility was secured by (i) the $1.0 million cash collateralaccount and (ii) substantially all of the Company’s assets.  The Credit Facility bore interest on theoutstanding balance at a rate of the London Interbank Offered Rate plus2.75%.  Accrued interest on theoutstanding balance was payable monthly. The total outstanding principal and accrued interest balance on theCredit Facility was fully repaid on June 6, 2008.

 

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

 

**Note 11. Note Payable**

 

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

 

**Note 12.Discontinued Operations**

 

On April 17, 2007, the Company and Boston Scientific entered intoan asset purchase agreement to reflect the exercise by Boston Scientific of itsoption to purchase all of the Prolieve assets of the Company (the “AssetPurchase Agreement”). The Board of Directors of the Company approved the AssetPurchase Agreement 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 the sale of Prolieve was calculated as follows:

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

 

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

 

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

 

In addition to the other indemnification provisions, such asindemnification for breaches of representations, warranties and covenantscontained in the Asset Purchase Agreement, the Company has agreed to indemnifyBoston Scientific for a period of two years from the closing, in an amount upto $15 million of incurred costs, in the event of unforeseen intellectualproperty claims related to the Prolieve assets. In accordance with FASB interpretation No. 45 (“FIN 45”), *Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others an interpretation of FASBStatements No. 5, 57, and 107 and rescission of FASB interpretation No. 34,*the Company recorded an estimate for the fair value of standing ready toperform under the indemnification guarantee of $5,000,000. This estimate wasconsistent with the fair value of insurance premiums to cover the entire $15million indemnity. On July 23, 2007, the Company purchased an insurancepolicy to cover $10 million of the indemnity guarantee. The premium for thispolicy was $1,313,250 and was recorded as a reduction of the accrued liability.The Company will continue to evaluate the accrued liability on a quarterlybasis and reduce it as the risk of the indemnity decreases. As of September 30,2008, the balance of this accrued liability was $1,580,037.

 

**Item 2.    Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

**Forward-Looking Statements**

 

*Statements and terms such as “expect”, “anticipate”, “estimate”, “plan”,“believe” and words of similar import regarding the Company’s expectations asto the development and effectiveness of its technologies, the potential demandfor our products, and other aspects of our present and future businessoperations, constitute forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Although we believe that ourexpectations are based on reasonable assumptions within the bounds of ourknowledge of our industry, business and operations, we cannot guarantee thatactual results will not differ materially f**rom our expectations. Inevaluating such forward-looking statements, readers should specificallyconsider the various factors contained in the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007 including, without limitation,unforeseen changes in the course of research and development activities and inclinical trials; possible changes in cost and timing of development andtesting, capital structure, and other financial items; changes in approaches tomedical treatment; introduction of new products by others; possibleacquisitions of other technologies, assets or businesses; and possible actionsby customers, suppliers, competitors and regulatory authorities. These andother risks and uncertainties could cause actual results to differ materiallyfrom those indicated by such forward-looking statements, including those setforth in “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Risk Factors” contained in the Annual Report on Form 10-Kfor the fiscal year ended December 31, 2007.*

 

*The discussion of risks and uncertainties set forth in this QuarterlyReport on Form 10-Q and in our most recent Annual Report on Form 10-Kas well as in other filings with the SEC, is not necessarily a complete orexhaustive list of all risks facing the Company at any particular point intime. We operate in a highly competitive, highly regulated and rapidly changingenvironment and our business is in a state of evolution. Therefore, it islikely that new risks will emerge, and that the nature and elements of existingrisks will change, over time. It is not possible for management to predict allsuch risk factors or changes therein, or to assess either the impact of allsuch risk factors on our business or the extent to which any individual riskfactor, combination of factors, or new or altered f**actors, may cause results todiffer materially from those contained in any forward-looking statement. Wedisclaim any obligation to revise or update any forward-looking statement thatmay be made from time to time by us or on our behalf.*

 

**Overview**

 

Celsion is abiotechnology company dedicated to furthering the development andcommercialization of oncology drugs including tumor-targeting treatments usingfocused heat energy in combination with heat activated drug delivery. We are 

 

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currently engaged in thedevelopment of treatment systems using a combination of heat and drugsdeveloped on our proprietary heat activated liposomal technology platform.  Our first drug, ThermoDox®, an encapsulationof doxorubicin, a common oncology drug, in our heat activated liposome, is inclinical studies for the treatment of liver cancer and breast cancer.

 

From 1995 until early in2004, we engaged in research and development of new treatment systems. On January 16,2006, we transferred all of our rights to the Microfocus 1000, together willall associated technology, to Celsion (Canada) Ltd. and on the same day soldall the stock of Celsion (Canada) to our founder and former officer anddirector, Dr. Augustine Cheung.

 

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

 

**Developmentpipeline**

 

Our pipeline presently consists of the followingproduct, in the indicated stage of development:

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

 

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

 

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

 

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

 

In addition toThermoDox®, the Company is currently exploring alternative drugs that may beused in conjunction with its heat sensitive liposomal technology. Feasibilitystudies are being conducted on a liposomal Docetaxel and a liposomalCarboplatin. The Company is also exploring the use of its ThermoDox® drugenhanced with a ligand that targets epidermal growth factor receptors.

 

From 1995 to 2004, wegenerated only minimal revenues and funded our operations primarily throughprivate placements of our equity securities. During 2004, following FDApremarketing approval of the Prolieve Thermodilatation System, we received aone-time licensing fee of $4 million under our agreement with BostonScientific, the former distributor of our Prolieve system. From 2004 through June 2007,sales of Prolieve products generated revenues of approximately $29 million. Theproceeds from the sale of the Prolieve assets to BSC, along with raising additionalequity, is anticipated to 

 

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generate sufficientfunding until such time as we are able to complete development and testing of,and gain necessary regulatory approvals for, one or more of our products.

 

While the Company iscurrently 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 the sale of our equity securities.

 

Our principal costs consist 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 epidermal growthfactor receptors (EGFR); and

 

·                  Corporate overhead.

 

Our research and development activities, preclinical tests and clinicaltrials, and the manufacturing, marketing and labeling of each of our products,are subject to extensive regulation by the FDA. We may not bring to market anyproduct in the U.S. without a premarketing approval from the FDA. We arecurrently conducting basic research and development activities, pursuingprototype products through clinical testing and regulatory approval. Ourultimate objective is to commercialize those products to generate a return oninvestment for our stockholders through one of several means including: (a) sellingproducts directly to end users; (b) selling products through adistributor; or (c) licensing the technology to third parties and generatingincome through royalties and milestone payments.

 

**Recent Events**

 

In January 2008, the FDA provided written agreement with theCompany’s application for a Special Protocol Assessment for its Pivotal PhaseIII Primary Liver Cancer Trial.  Thestudy is designed to demonstrate the efficacy of ThermoDox® in combination withRFA.  The study incorporatesapproximately 40 clinical sites in North America, Italy, China, Taiwan, HongKong, and Korea and is planned to enroll a total of 600 patients.  The Company enrolled the first patient in thestudy during the second quarter of 2008. Currently, 21 patients have beguntreatments under the study.

 

On January 15, 2008, the FDA provided a favorable written responseto Celsion on its proposed Open Label, Single Arm Phase II study in patientswith RCW. The agency agreed with the patient population as defined by Celsion,an objective response endpoint, and confirmed, that depending on the final dataobtained, 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 believes thatthis Phase II study will commence enrollment late in 2008 and will be completedin 2009.

 

On February 8, 2008, the Company voluntarily moved the listing ofits Common Stock from the American Stock Exchange to The NASDAQ Stock Market,LLC.  On June 30, 2008, the Companychanged its NASDAQ ticker symbol from CLN to CLSN.

 

On August 18, 2008, the Company executed a letter of intent withYakult Honsha Co., Ltd. relating to the commercialization of ThermoDox® for theJapanese markets, which is subject to the execution of definitive agreements.Under the terms of the pending agreement, Yakult would commence pre-clinicaland clinical studies of ThermoDox® to support requirements for drugregistration in Japan. As of the filing of this 10-Q, the final definitiveagreements had not yet been executed.

 

On October 16, 2008, the Company and Royal Philips Electronicsentered into a joint research agreement focusing on a new cancer treatment thatcombines Philips’ ultrasound technology with the Company’s drug deliveryplatform to target 

 

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tumors with high concentrations of a cancer-fighting drug. Under the terms of the agreement, Philips andCelsion will collaborate to explore the potential for using Philips’investigational magnetic resonance imaging (MRI)-guided high intensity focusedultrasound (HIFU) system in combination with Celsion’s leading drug candidate,ThermoDox®, to treat a broad range of cancers. The research uses the HIFUsystem to position doxorubicin, an approved and frequently used anti-cancerdrug, and to create a mild hyperthermia that releases the drug directly intothe tumor. The result would be the ability to treat tumors that would otherwisebe inaccessible.

 

**Results of Operations**

 

*Comparison of the Three MonthsEnded September 30, 2008 and 2007.*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **Change** | ** ** |
| ** **                           | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Operating  expenses:                 |       |                             |       |       |       |        |       |   |   |
| Research and  development            |       | $                                | 3,839,951  |       | $          | 1,958,671   |       | $ | 1,881,280 |   | 96 | % |
| General and  administrative          |       | 509,794                          |       | 1,860,531  |       | (1,350,737  | )          | -73 | % |
| Total operating  expenses            |       | 4,349,745                        |       | 3,819,202  |       | 530,543     |       | 14 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Interest income,  net                |       | 66,962                           |       | 192,244    |       | (125,282    | )          | -65 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Other expense,  net                  |       | (57,287                          | )          | (23,754    | )          | (33,533     | )          | 141 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Loss from  continuing operations     |       | (4,340,070                       | )          | (3,650,712 | )          | (689,358    | )          | 19 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Discontinued  Operations (Note 12)   |       |                             |       |       |       |        |       |   |   |
| Income from  discontinued operations |       | —                           |       | 33,054     |       | (33,054     | )          | -100 | % |
|                                 |       |                             |       |       |       |        |       |   |   |
| Net loss                             |       | $                                | (4,340,070 | )          | $          | (3,617,658  | )          | $ | (722,412 | ) | 20 | % |

 

The increase of $1,881,280,or 96%, increase in research and development expense during the third quarterof 2008 in comparison to the third quarter of 2007 was primarily due to:

 
| · |   | Increase in CRO and clinical costs related to the  Phase III HCC study Progressing and Phase II RCW start up costs |   | $        | 1,642,000 |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|--------|
| · |   | Increase in drug manufacturing costs to support  clinical trials and additional formulation studies                |   | 118,000  |      |
| · |   | Increase in travel costs due to visits to clinical  sites and site initiations                                     |   | 79,000   |      |
| · |   | Increase in recruiting and relocation costs related  to clinical positions                                         |   | 75,000   |      |
| · |   | Increase in salaries due to clinical staff additions                                                               |   | 41,000   |      |
| · |   | Increase in marketing/advertising costs related to  patient recruitment                                            |   | 35,000   |      |
| · |   | Decrease in consulting fees                                                                                        |   | (143,000 | )         |

 

The $1,350,737, or 73%, decrease in general and administrative expenseduring the quarter ended September 30, 2008 as compared to the same periodof 2007 was primarily attributable to:

 
| · |   | Decrease in salaries, benefits, and relocation costs due to head count  reductions                                                     |   | $        | (693,000 | ) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|---|
| · |   | Decrease in the indemnity reserve related to the sale of the Prolieve Assets  (see Note 12 to the Financial Statements)                |   | (527,000 | )        |
| · |   | Decrease in consulting fees due to the termination of certain  strategic business advisors                                             |   | (115,000 | )        |
| · |   | Decrease in board of directors fees and related expenses                                                                               |   | (63,000  | )        |
| · |   | Decrease in corporate insurances due to the elimination of the product  liability insurance related to the sale of the Prolieve assets |   | (20,000  | )        |
| · |   | Increase in Public Relations/Investor Relations costs                                                                                  |   | 45,000   |     |

 

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Net interest income forthe quarter ended September 30, 2008 was $66,962, compared to $192,244 forthe quarter ended September 30, 2007. The decrease was due to the higher average cash and short terminvestment balances in 2007 than in 2008.

 

The discontinuedoperations reflect the income and expense of the former Prolieve division.These assets were sold to Boston Scientific Corporation on June 21, 2007for $60 million. See Note 12 to the financial statements for further detail onthe discontinued operations.

 

*Comparison of the Nine MonthsEnded September 30, 2008 and 2007.*

 
| ** **                               | ** ** | **Nine Months Ended** | ** **  | ** **  | ** ** | ** **  | ** ** |
|------------------------------------------|------------|---------------------------------|-------------|-------------|------------|-------------|------------|
| ** **                               | ** ** | **September 30,**          | ** **  | **Change**  | ** ** |
| ** **                               | ** ** | **2008**                        | ** **  | **2007**    | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Operating  expenses:                     |       |                            |        |        |       |        |       |   |   |
| Research and  development                |       | $                               | 8,422,143   |        | $          | 6,078,520   |       | $ | 2,343,623 |   | 39 | % |
| General and  administrative              |       | 1,586,322                       |        | 4,826,087   |       | (3,239,765  | )          | -67 | % |
| Total operating  expenses                |       | 10,008,465                      |        | 10,904,607  |       | (896,142    | )          | -8 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Interest income  / (expense), net        |       | 52,765                          |        | (172,150    | )          | 224,915     |       | -131 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Other expense,  net                      |       | (896,377                        | )           | (439,211    | )          | (457,166    | )          | 104 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Loss from continuing  operations         |       | (10,852,077                     | )           | (11,515,968 | )          | 663,891     |       | -6 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Discontinued  Operations (Note 12)       |       |                            |        |        |       |        |       |   |   |
| Income from  discontinued operations     |       |                            |        |        |       |        |       |   |   |
| (including gain  on sale of $48,029,793) |       | —                          |        | 50,029,211  |       | (50,029,211 | )          | -100 | % |
| Income tax  expense                      |       | —                          |        | (274,000    | )          | 274,000     |       | -100 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Income from  discontinued operations     |       | —                          |        | 49,755,211  |       | (49,755,211 | )          | -100 | % |
|                                     |       |                            |        |        |       |        |       |   |   |
| Net (loss) /  income                     |       | $                               | (10,852,077 | )           | $          | 38,239,243  |       | $ | (49,091,320 | ) | -128 | % |

 

The increase of $2,343,623,or 39%, in research and development expense during the nine months ended September 30,2008 in comparison to 2007 was primarily due to:

 
| · |   | Increase in CRO and clinical costs related to the  Phase III HCC study                                                   |   | $        | 2,242,000 |   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|--------|
| · |   | Increase in drug development and manufacturing costs  due to increase in supplies of ThermoDox® for clinical trials |   | 246,000  |      |
| · |   | Increase in travel expenses due to site visits  related to the Phase III Primary Liver Cancer trial                      |   | 122,000  |      |
| · |   | Increase in salaries and benefits due to clinical  staff additions                                                       |   | 109,000  |      |
| · |   | Decrease in legal fees due to the non-recurrence of  patent and trademark costs                                          |   | (149,000 | )         |
| · |   | Decrease in consulting fees                                                                                              |   | (307,000 | )         |

 

The $3,239,765, or 67%, decrease in general and administrative expenseduring the quarter ended September 30, 2008 as compared to the same periodof 2007 was primarily attributable to:

 
| · |   | Decrease in the indemnity reserve related to the sale of the Prolieve Assets  (see Note 12 to the Financial Statements) |   | $          | (1,576,000 | ) |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|---|
| · |   | Decrease in salaries, benefits, and relocation costs due to head count  reductions                                      |   | (1,196,000 | )          |

 

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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  and the termination of certain strategic business advisors |   | (361,000 | )      |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|
| · |   | Decrease in legal fees due to the non-recurrence of the fees  associated with the American Medical Systems lawsuit                                                                                                                |   | (124,000 | )      |
| · |   | Decrease in stockholder costs due to the non-recurrence of proxy solicitation  costs in 2007                                                                                                                                      |   | (114,000 | )      |
| · |   | Decrease in corporate insurances due to the elimination of the product  liability insurance related to the sale of the Prolieve assets                                                                                            |   | (82,000  | )      |
| · |   | Increase in investor/public relation costs                                                                                                                                                                                        |   | 110,000  |   |
| · |   | Increase in occupancy costs due to higher taxes and utilities                                                                                                                                                                     |   | 19,000   |   |

 

Net interest income forthe nine months ended September 30, 2008 was $52,765, compared to a netexpense of $172,150 for the nine months ended September 30, 2007.  This change was due to the repayment of theloan to Boston Scientific Corporation during the quarter ended June 30,2007.

 

The discontinuedoperations reflect the income and expense of the former Prolieve division.These assets were sold to Boston Scientific Corporation on June 21, 2007for $60 million. See Note 12 to the financial statements for further detail onthe discontinued operations.

 

*Comparison of DiscontinuedOperations for the three months ended September 30, 2008 and  2007.*

 
| ** **                               | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2008**                         | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues                                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net sales of  equipment and parts        |       | $                                | —     |       | $          | —      |       | $ | — |   | 0 | % |
| Cost of Sales                            |       | —                           |       | —     |       | —      |       | 0 | % |
| Gross Profit                             |       | —                           |       | —     |       | —      |       | 0 | % |
| ** **                               | ** ** | ** **                       | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Operating  expenses:                     |       |                             |       |       |       |        |       |   |   |
| Research and  development                |       | —                           |       | (33,054    | )          | 33,054      |       | -100 | % |
| Total operating  expenses                |       | —                           |       | (33,054    | )          | 33,054      |       | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income from  operations                  |       | —                           |       | 33,054     |       | (33,054     | )          | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Gain on sale of  Prolieve assets         |       |                             |       | —     |       |        |       |   |   |
| Other income, net                        |       | —                           |       | —     |       | —      |       | 0 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income  before taxes                 |       | $                                | —     |       | $          | 33,054      |       | $ | (33,054 | ) | -100 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Income tax  expense                      |       | —                           |       | —     |       | —      |       | 0 | % |
|                                     |       |                             |       |       |       |        |       |   |   |
| Net income from  discontinued operations |       | $                                | —     |       | $          | 33,054      |       | $ | (33,054 | ) | -100 | % |

 

The Prolieve assets weresold to Boston Scientific Corporation on June 21, 2007. There were noongoing activities related to the Prolieve business during 2008. The negativeresearch and development costs of $33,054 for the quarter ended September 30,2007 represent the expense reimbursements from Boston Scientific Corporationunder the transition services agreement.

 

*Comparison of DiscontinuedOperations for the nine months ended September 30, 2008 and  2007.*

 

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| ** **                               | ** ** | **Nine Months Ended** | ** ** | ** ** | ** ** | ** **  | ** ** |
|------------------------------------------|------------|---------------------------------|------------|------------|------------|-------------|------------|
| ** **                               | ** ** | **September 30,**          | ** ** | **Change** | ** ** |
| ** **                               | ** ** | **2008**                        | ** ** | **2007**   | ** ** | **Dollars** | ** ** | **Percent** | ** ** |
| Revenues                                 | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Net sales of  equipment and parts        |       | $                               | —     |       | $          | 5,995,821   |       | $ | (5,995,821 | ) | -100 | % |
| Cost of Sales                            |       | —                          |       | 3,018,765  |       | (3,018,765  | )          | -100 | % |
| Gross Profit                             |       | —                          |       | 2,977,056  |       | (2,977,056  | )          | -100 | % |
| ** **                               | ** ** | ** **                      | ** ** | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** |
| Operating  expenses:                     |       |                            |       |       |       |        |       |   |   |
| Research and  development                |       | —                          |       | 1,247,479  |       | (1,247,479  | )          | -100 | % |
| Total operating  expenses                |       | —                          |       | 1,247,479  |       | (1,247,479  | )          | -100 | % |
|                                     |       |                            |       |       |       |        |       |   |   |
| Income from  operations                  |       | —                          |       | 1,729,577  |       | (1,729,577  | )          | 100 | % |
|                                     |       |                            |       |       |       |        |       |   |   |
| Gain on sale of  Prolieve assets         |       | —                          |       | 48,029,793 |       | (48,029,793 | )          | 100 | % |
| Other income,  net                       |       | —                          |       | 269,841    |       | (269,841    | )          | -100 | % |
|                                     |       |                            |       |       |       |        |       |   |   |
| Net income  before taxes                 |       | —                          |       | 50,029,211 |       | (50,029,211 | )          | 100 | % |
|                                     |       |                            |       |       |       |        |       |   |   |
| Income tax  expense                      |       | —                          |       | 274,000    |       | (274,000    | )          | 100 | % |
|                                     |       |                            |       |       |       |        |       |   |   |
| Net income from  discontinued operations |       | $                               | —     |       | $          | 49,755,211  |       | $ | (49,755,211 | ) | 100 | % |

 

The Prolieve assets weresold to Boston Scientific Corporation on June 21, 2007. There were noongoing activities related to the Prolieve business during 2008.

 

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

## ** **

Celsion’s core businessactivity is the development of products to treat cancer and other diseases andto commercialize those products to generate a return on investment for itsstockholders through one of several means including: (a) selling productsdirectly to end users; (b) selling products through a distributor; or (c) licensingits technology to third parties and generating income through royalties andmilestone payments. This business model will generate uneven cash flows,inasmuch as continuing development expenditures will not necessarily be matchedby revenues from one of the above sources. In the event that annual developmentexpenditures are not covered by current revenues, funding will be provided fromother sources including any cash on hand, revenues provided as above, incomegenerated from licensing agreements and debt or equity funding raised in thecapital markets.

 

***Working Capital***

 
| ** **                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Working Capital**         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|                             |       |                   |       |                  |       |
| Cash and short  term investments |       | $                      | 8,969,346  |                  | $          | 5,937,373 |   |
| Total current  assets            |       | 24,178,254             |       | 21,424,400            |       |
| Total current  liabilities       |       | 5,399,687              |       | 8,118,606             |       |
| Working capital                  |       | 18,778,567             |       | 13,305,794            |       |
|                                  |            |                        |            |                       |            |  |  |

 

The increase in cash and short term investments during the nine monthsended September 30, 2008 is due to the collection of the $15 million receivablefrom Boston Scientific, less amounts used in the Company’s operations. Thedecrease in current liabilities is primarily the result of the decrease in theindemnity reserve (see Note 12) and the payment of accrued income taxes.

 

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***CashFlow***

 

Since inception, our expenses have significantly exceeded our revenues,resulting in an accumulated deficit of $65,989,834 at September 30, 2008.We have incurred negative cash flows from operations since our inception andhave funded our operations primarily through the sale of equity securities andmore recently through the sale of our Prolieve assets.

 
| ** **                                             | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                             | ** ** | **September 30,**          | ** ** |
| **Cash Flows**                                    | ** ** | **2008**                        | ** ** | **2007** | ** ** |
|                                                   |       |                            |       |   |   |
| Cash provided by  / (used in) operating activites      |       | $                               | 3,611,936  |   | $ | (7,048,073 | ) |
| Cash flow (used  in) / provided by investing activites |       | (5,227,613                      | )          | 7,326,172 |   |
| Cash flow (used  in) / provided by financing activites |       | (503,440                        | )          | 1,074,601 |   |
|                                                        |            |                                 |            |  |  |  |  |

 

The net cash provided bythe Company’s operating activities for the nine months ended September 30,2008 was largely attributable to the collection of the $15,000,000 receivablefrom Boston Scientific offset by the loss for the period of $10,852,077. Forthe nine months ended September 30, 2007, the cash used in operatingactivities was the result of the loss from continuing operations of $11,515,968offset by net collections on accounts receivable of $1,653,023 and thereduction of an escrow account liability of $1,824,740.

 

The net cash used in theCompany’s investing activities for the nine months ended September 30,2008 was primarily due to the net purchases of short term investments of$5,133,115. For the nine months ended September 30, 2007, the cashprovided by investing activities was the result of the $9,958,615 in proceedsfrom the sale of the Prolieve Assets less the payment of a licensing fee in theamount of $1,600,000 and the net purchase of short term investments in theamount of $900,000.

 

The net cash used infinancing activities for the nine months ended September 30, 2008 wasprimarily the result of payments on the note payable of $503,840. For the sameperiod in 2007, the cash provided by financing activities were the result ofthe proceeds on the note payable of $1,181,925, less payments on the note of$107,324.

 

For the balance offiscal year 2008, we expect to expend approximately $3,000,000 for clinicaltesting of liver cancer and breast cancer treatment systems as well ascorporate overhead, all of which we expect to fund from cash on hand. Theforegoing is an estimate, based upon assumptions as to the scheduling ofinstitutional clinical research and testing personnel, the timing of clinicaltrials and other factors, not all of which are fully predictable.

 

**Item 3.    Quantitativeand Qualitative Disclosure About Market Risk**.

 

We are exposed to interest rate risk on investments of our excess cash.The primary objective of our investment activities is to preserve capital. Toachieve this objective and minimize the exposure due to adverse shifts ininterest rates, we invest in high quality short-term maturity commercial paper,municipal bonds, and money market funds operated by reputable financialinstitutions in the United States. Due to the nature of our investments, webelieve that we do not have a material interest rate risk exposure.

 

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

## ** **

We have carried out an evaluation, under the supervision and with theparticipation of management, including our principal executive officer andprincipal financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures, as that term is defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934, as amended.  Based on that evaluation, our principalexecutive officer and principal financial officer concluded that as of September 30,2008, which is the end of the period covered by this report, our disclosurecontrols and procedures are effective.

 

There has been no change in our internal control over financialreporting identified in connection with the evaluation required by paragraph (d) ofRule 13a-15of the Securities Exchange Act of 1934, as amended thatoccurred during the 

 

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quarter ended September 30, 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

**PART IIOTHER INFORMATION**

 

**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 and Use of Proceeds.**

 

None.

 

**Item 3.    Defaults Upon Senior Securities**

 

None.

 

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

 

None.

 

**Item 5.    OtherInformation**

** **

**None.**

** **

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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.

 

November 14, 2008

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

 

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