U.S. SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] 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 0-26866
SONUS PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4343413
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
22026 20th Ave. S.E., Suite 102
Bothell, Washington 98021
(Address of Principal Executive Offices)
(206) 487-9500
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ________
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class Outstanding at August 1, 1996
----- ------------------------------
Common Stock, $.001 par value 8,475,901
Page 1 of ___ Pages
Exhibit Index is on Page 11
SONUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Balance Sheets as of June 30, 1996 (unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . 3
Unaudited Statements of Operations for the three months and six months ended
June 30, 1996 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Unaudited Statements of Cash Flow for the six months ended June 30, 1996 and June
30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Managements' Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 7
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED)
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 9,369,685 $ 5,656,620
Marketable securities . . . . . . . . . . . . . . . . . . . . 9,691,051 12,564,513
Prepaid expenses and other current assets . . . . . . . . . . 141,366 137,153
----------------- ---------------
Total current assets . . . . . . . . . . . . . . . . . . . . 19,202,102 18,358,286
Equipment, furniture, and leasehold improvements net of accumulated
depreciation of $993,679 and $794,364 . . . . . . . . . . . . 1,192,381 1,123,089
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 64,878 164,755
----------------- ---------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,459,361 $ 19,646,130
================= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit . . . . . . . . . . . . . . . . . . . . . $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses . . . . . . . . . . . . 1,086,302 1,454,607
Accrued clinical trials expenses . . . . . . . . . . . . . . . 2,477,403 1,568,992
Current portion of capitalized lease obligations . . . . . . . 184,593 207,247
----------------- ---------------
Total current liabilities . . . . . . . . . . . . . . . . . 8,748,298 8,230,846
Capitalized lease obligations, less current portion . . . . . . . 372,010 467,989
Commitments
Stockholders' equity:
Preferred stock, $.001 par value: 5,000,000 authorized; no shares
outstanding
Common stock, $.001 par value: 20,000,000 shares authorized;
8,474,820 and 8,448,082 shares outstanding in 1996 and 1995,
respectively . . . . . . . . . . . . . . . . . . . . . . . . 34,216,014 30,106,638
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . (22,809,611) (19,066,414)
Deferred compensation . . . . . . . . . . . . . . . . . . . . (67,350) (92,929)
----------------- ----------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . 11,339,053 10,947,295
----------------- ---------------
Total liabilities and stockholders' equity . . . . . . . . . . . $ 20,459,361 $ 19,646,130
================= ===============
See accompanying notes.
3
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- -----------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues:
Collaborative agreements . . . . . . . $ 4,400,000 $ 400,000 $ 4,800,000 $ 3,700,000
Operating Expenses:
Research and development . . . . . . . 2,666,119 1,264,044 6,884,399 2,688,467
General and administrative . . . . . . 809,233 534,162 1,735,745 1,127,078
----------- ----------- ----------- -----------
3,475,352 1,798,206 8,620,144 3,815,545
----------- ----------- ----------- -----------
Operating income (loss) . . . . . . . . . 924,648 (1,398,206) (3,820,144) (115,545)
Other income (expense):
Interest income . . . . . . . . . . . . 169,486 31,882 302,057 53,368
Interest expense . . . . . . . . . . . (73,212) (217,787) (128,695) (378,006)
----------- ----------- ----------- -----------
Income (loss before income taxes) . . . . 1,020,922 (1,584,111) (3,646,782) (440,183)
Income tax expense . . . . . . . . . . . 40,000 40,000 80,000 450,800
----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . $ 980,922 $(1,624,111) $(3,726,782) $ (890,983)
=========== =========== =========== ===========
Net income (loss) per share . . . . . . . $ 0.11 $ (0.79) $ (0.44) $ (0.27)
=========== =========== =========== ===========
Shares used in computation of net income
(loss) per share . . . . . . . . . . . 9,090,945 2,050,032 8,455,550 3,330,301
=========== =========== =========== ===========
Pro forma, assuming conversions into
common stock:
Net income (loss) per share . . . . . . $ 0.11 $ (0.30) $ (0.44) $ (0.14)
=========== =========== =========== ===========
Shares used in computation of net income
per share . . . . . . . . . . . . . . . 9,090,945 5,374,442 8,455,550 5,417,929
=========== =========== =========== ===========
See accompanying notes.
4
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------------------------------
1996 1995
-------------------- -------------------
OPERATING ACTIVITIES
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,726,782) $ (890,983)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 199,315 164,941
Amortization of premium (discount) on marketable securities . . (36,186) 13,131
Amortization of deferred compensation . . . . . . . . . . . . . 25,579 42,111
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
-
Changes in operating assets and liabilities:
Prepaid expenses and other assets . . . . . . . . . . . . . . 95,665 (6,067)
Accounts payable and accrued expenses . . . . . . . . . . . . (364,946) 821,517
Change in accrued clinical trials expenses . . . . . . . . . . 908,412 110,913
Accrued relocation expenses . . . . . . . . . . . . . . . . . (3,361) (338,680)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . - (400,000)
------------------ ---------------------
Net cash used in operating activities . . . . . . . . . . . . . . . (2,902,304) (283,117)
INVESTING ACTIVITIES
Purchases of equipment, furniture, and leasehold improvements . . . (268,608) (141,783)
Purchases of marketable securities . . . . . . . . . . . . . . . . (34,462,353) (7,845,890)
Proceeds from sale of marketable securities . . . . . . . . . . . . 36,382,879 7,860,041
Proceeds from maturities of marketable securities . . . . . . . . . 972,707 493,087
------------------- -------------------
Net cash provided by investing activities . . . . . . . . . . . . . 2,624,625 365,455
FINANCING ACTIVITIES
Proceeds from line of credit . . . . . . . . . . . . . . . . . . . 11,400,000 -
Repayment of line of credit . . . . . . . . . . . . . . . . . . . . (11,400,000) -
Proceeds from capitalized lease obligations . . . . . . . . . . . . - 117,171
Repayment of capitalized lease obligations . . . . . . . . . . . . (118,633) (132,363)
Proceeds from issuance (repurchase) of common stock and warrants . 4,109,377 (25,505)
------------------- -------------------
Net cash provided by (used in) financing activities . . . . . . . . 3,990,744 (40,697)
Increase (decrease) in cash and cash equivalents for the period . . 3,713,065 41,641
Cash and cash equivalents at beginning of period . . . . . . . . . 5,656,620 34,719
------------------- -------------------
Cash and cash equivalents at end of period . . . . . . . . . . . . $ 9,369,685 $ 76,360
=================== ===================
Supplemental cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,322 $ 53,454
=================== ===================
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000 $ 250,800
=================== ===================
See accompanying notes.
5
SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED)
(1) BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q. Accordingly, they do not include all
of the information and footnotes required to be presented for complete
financial statements. The accompanying financial statements reflect all
adjustments (consisting only of normal recurring accruals) which are, in the
opinion of management, necessary for a fair presentation of the results for the
interim periods presented.
The financial statements and related disclosures have been prepared
with the assumption that users of the interim financial information have read
or have access to the audited financial statements for the preceding fiscal
year. Accordingly, these financial statements should be read in conjunction
with the audited financial statements and the related notes thereto included in
the 1995 Annual Report and incorporated by reference in Form 10-K for the year
ended December 31, 1995.
(2) COLLABORATIVE AGREEMENTS
In May 1996, the Company formed a strategic alliance with Abbott
Laboratories for the marketing and sale of EchoGen in the United States. SONUS
has primary responsibility for clinical development, regulatory affairs, and
medical and technical marketing support of EchoGen, and Abbott has primary
responsibility for United States marketing and sales. SONUS has retained
certain co-promotion rights to EchoGen in the United States. Under the
agreement, Abbott paid $4.0 million upon execution of the agreement and has
agreed to pay an additional $27.0 million consisting of $7.0 million in the
form of quarterly payments over the next 7 quarters and $20 million in the form
of milestone payments conditioned on the achievement of certain regulatory and
commercialization milestones. After the United States Food and Drug
Administration ("FDA") has approved the marketing of EchoGen, for which there
can be no assurance, SONUS will receive 47 percent of net EchoGen revenues in
the United States -- a portion of which SONUS must use to fund its
responsibilities under the agreement. The agreement spans the life of the
patents relating to EchoGen. Abbott can acquire the rights to additional
indications for EchoGen by making additional clinical support payments. In
addition, Abbott purchased for $4.0 million, five year warrants to acquire
500,000 shares of the Company's common stock at an exercise price of $16.00 per
share.
6
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in October 1991, the Company has engaged in the
research and development of proprietary contrast agents for use in ultrasound
imaging. The Company has financed its research and development and clinical
trials through payments received under agreements with its collaborative
partners, private equity and debt financings, and an initial public offering
completed in 1995. Clinical trials of the Company's principal product under
development, EchoGen(R) Emulsion, began in January 1994 pursuant to an
Investigational New Drug application ("IND") filed with the FDA in September
1993. The Company has completed various Phase 1, 2 and Phase 3 clinical trials
of EchoGen since 1994 and expects to submit a new drug application ("NDA") with
the FDA in the third quarter of 1996. As of June 30, 1996, the Company had
accumulated net losses of approximately $22.8 million since its inception and
expects continuing net losses for the foreseeable future.
The Company will not be able to commence U.S. sales of EchoGen unless
and until it receives FDA approval. To date, all of the Company's revenues
have been derived from option and license payments that have been received
under agreements with Abbott Laboratories, Inc. ("Abbott"), Daiichi
Pharmaceutical Co. Ltd. ("Daiichi"), and Guerbet S.A. ("Guerbet") for the
collaborative development of EchoGen within the United States and in certain
foreign territories. In May 1996, the Company formed a strategic alliance with
Abbott Laboratories for the marketing and sale of EchoGen in the United States.
Under the agreement, Abbott has agreed to pay SONUS $30.0 million in upfront,
clinical support and milestone payments, of which $4.0 million was paid upon
execution. In addition, Abbott has purchased, for $4.0 million, warrants to
acquire 500,000 shares of SONUS common stock, equal to about six percent (6%)
of the company's outstanding common stock. The warrants are exercisable over
five years at $16.00 per share. In April 1993, the Company granted Daiichi an
option to acquire exclusive marketing and distribution rights to EchoGen in the
Pacific Rim. In March 1995, Daiichi exercised the option and entered into a
license agreement with the Company. Under the option and license agreements,
Daiichi has paid the Company option and license fees totaling $8.6 million and
has agreed to pay an additional $23.4 million, consisting of $1.2 million in
the form of quarterly payments over the next three quarters and $22.2 million
in the form of milestone payments conditioned on the achievement of certain
clinical development, regulatory and commercialization milestones. In addition
to the option and license agreements, Daiichi entered into a convertible
subordinated debenture purchase agreement with the Company in November 1993
under which the Company issued a convertible subordinated debenture to Daiichi
in the principal amount of $3.0 million, which was converted into 462,857
shares of common stock concurrently with the closing of the Company's initial
public offering. In October 1994, the Company granted Guerbet an option, which
expires September 30, 1996, to acquire exclusive marketing and distribution
rights to EchoGen in Europe. In exchange for such option, the Company received
payments totaling approximately $4.7 million, of which $3.6 million, plus
accrued interest ($245,875 at the time of conversion), was converted into
549,410 shares of common stock of the Company concurrently with the closing of
the Company's initial public offering. The remaining $1.1 million was
recognized as revenue in 1994.
The Company's results of operations have varied and will continue to
vary significantly from quarter to quarter and depend on, among other factors,
the timing of fees and milestone payments made by collaborative partners, the
entering into product license agreements by the Company and the timing and
costs of the clinical trials conducted by the Company. The Company's current
collaborative partners can terminate their agreements on short notice, and
there can be no assurance that the Company will receive any additional funding
or milestone payments.
RESULTS OF OPERATIONS
Revenue from collaborative agreements increased to $4.4 million for
the three months ended June 30, 1996 as compared to $400,000 for the three
months ended June 30, 1995. The revenue in the current period represented the
initial payment from Abbott as well as the regular quarterly payment from
Daiichi. Revenue from collaborative agreements increased to $4.8 million for
the six months ended June 30, 1996 as compared to $3.7 million for the six
months ended June 30, 1995. The prior period revenue represented recognition
of fees earned upon signing of the license agreement with Daiichi as well as a
subsequent regular quarterly payment under the same agreement.
Research and development expenses increased to $2.7 million for the
three months ended June 30, 1996 from $1.3 million for the three months ended
June 30, 1995 and to $6.9 million for the six months ended June 30, 1996 from
$2.7
7
million for the six months ended June 30, 1995. The increases in the current
year periods were primarily due to expenses relating to two Phase 3 clinical
trials of EchoGen as well as costs incurred in preparing a NDA.
General and administrative expenses increased to $809,000 for the
three months ended June 30, 1996 from $534,000 for the three months ended June
30, 1995 and to $1.7 million for the six months ended June 30, 1996 as compared
to $1.1 million for the six months ended June 30, 1995. The increases in the
current year periods reflected increased costs of filing and prosecuting patent
and trademark applications, the implementation of market research programs,
legal fees related to corporate alliances, as well as investor related expenses
resulting from being a public company.
Interest income increased to $169,000 and $302,000 for the three and
six months ended June 30, 1996 as compared to $32,000 and $53,000 for the three
and six months ended June 30, 1995, respectively, as a result of larger average
invested cash balances resulting from the initial public offering and the
Abbott strategic alliance. Interest expense decreased by $145,000 and $250,000
for the three and six months periods ended June 30, 1996, respectively,
primarily due to the repayment of notes to stockholders and the conversion of
debts into common stock upon completion of the initial public offering.
Income taxes of $40,000 for the three months ended June 30, 1996 and
1995, and income taxes of $80,000 and $451,000 for the six months ended June
30, 1996 and 1995, respectively, were primarily attributable to withholding
taxes paid to Japan relating to the collaborative payments received from
Daiichi.
LIQUIDITY AND CAPITAL RESOURCES
Through June 30, 1996, the Company has financed its operations with
payments from Abbott, Daiichi and Guerbet of $20.3 million, proceeds of $4.0
million for the issuance of warrants, proceeds from the issuance of
convertible, redeemable preferred stock of $4.0 million (which converted into
common stock at the closing of the Company's initial public offering), proceeds
from a line of credit of $5.0 million and net proceeds of $19.0 million from
the initial public offering. At June 30, 1996, the Company had cash, cash
equivalents and marketable securities of $19.1 million, compared to $18.2
million at December 31, 1995. Cash used in operations for the six months ended
June 30, 1996 increased to $2.9 million as compared to $288,000 for the six
months ended June 30, 1995.
In August 1995, the Company entered into a loan agreement with Silicon
Valley Bank which provides for a $5.0 million revolving line of credit
facility, which is secured by the tangible assets of the Company. At June 30,
1996, there was $5.0 million outstanding under the line of credit. The line of
credit bears interest at the prime rate plus 1.5% per annum and the Company is
required to maintain certain minimum balances of cash, cash equivalents and
marketable securities. In August 1996, the Company received a commitment letter
from Silicon Valley Bank to renew the line of credit through August 1997.
The Company's cash needs may increase in future periods due to its
pending and planned research and clinical development programs. The Company
estimates that existing cash, cash equivalents and marketable securities will
be sufficient to meet the Company's capital requirements for at least the next
12 months. The Company's future capital requirements will, however, depend on
many factors, including the progress of the Company's research and development
programs, clinical trials, the time and costs required to gain regulatory
approvals, the ability of the Company to obtain and retain continued funding
from third parties under collaborative agreements, the costs of filing,
prosecuting and enforcing patents, patent applications, patent claims and
trademarks, the costs of marketing and distribution, the status of competing
products and the market acceptance of the Company's products, if and when
approved. The Company may have to raise substantial additional funds to
complete development of any product or to commercialize any products if and
when approved by the FDA. There can be no assurance that additional financing
will be available on acceptable terms, if at all.
FORWARD-LOOKING STATEMENTS
This 10-Q report contains certain forward-looking statements that
involve risk and uncertainties. As discussed in the Company's 1995 annual
report on Form 10-K, the Company's future operating results are uncertain and
may be impacted by the following factors, among others: uncertainty of clinical
trials for EchoGen, FDA and foreign regulatory requirements, lengthy regulatory
approval process, future capital requirements and uncertainty of additional
funding, dependence on third parties for funding, clinical development and
distribution and uncertainty of market acceptance.
8
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's Annual Meeting of Stockholders was held on May 22, 1996. At the
Annual Meeting there were four matters submitted to a vote of security holders.
Proxies were solicited pursuant to Section 14(a) of the Securities and Exchange
Commission adopted pursuant thereto. There was no solicitation in opposition
to management's nominees as listed in the proxy statement. Each director
nominated and proposal submitted to a vote passed and the voting outcome of
each proposal is as follows:
1. Election of the following five (5) directors to serve until the next
annual meeting of stockholders or until their successors are elected
and have qualified (the following votes reflect cumulative voting):
Nominee For
------- ---
Steven C. Quay, M.D., Ph.D. 8,160,511
Donald Milder 6,397,643
Andrew Senyei, M.D. 8,160,511
Harry Shoff 8,160,511
Dwight Winstead 8,160,511
2. Approval of an amendment to the Company's 1995 Stock Option Plan for
Directors to increase the annual grant to directors thereunder to
5,000 shares:
For: 7,335,082 Against: 164,807 Abstain: 3,880
Broker Non-votes: 312,869
3. Approval of an amendment to the Company's Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan -- 1991
to increase the number of shares subject thereto to a total of
1,200,000 and restrict the grants to any individual in any one year to
not more than 500,000 shares:
For: 5,931,758 Against: 73,771 Abstain: 43,210
Broker Non-votes: 1,767,899
4. Ratification of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending December 31, 1996:
For: 7,766,582 Against: 2,800 Abstain: 1,756
Broker Non-votes: 45,500
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Number Description
------ -----------
10.26 Third Amended and Restated Registration Rights Agreement dated as of May 15, 1996
10.27 Amendment to Letter Agreement dated June 28, 1996 by and between the Company and Guerbet S.A.
11.1 Computation of net income (loss) per share.
11.2 Computation of pro forma net income (loss) per share.
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K
during the quarter ended June 30, 1996:
1. The Registrant filed a report on Form 8-K on June
18, 1996 in connection with the strategic alliance
agreement with Abbott Laboratories, Inc. dated May
15, 1996.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SONUS PHARMACEUTICALS, INC.
Date: August __, 1996 By: /s/ Gregory Sessler
----------------------------------
Gregory Sessler
Chief Financial Officer and
Assistant Secretary (Principal
Financial Officer and Duly
Authorized Officer)
10
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.26 Third Amended and Restated Registration Rights Agreement dated as of May 15, 1996
10.27 Amendment to Letter Agreement dated June 28, 1996 by and between the Company
and Guerbet S.A.
11.1 Computation of net income (loss) per share
11.2 Computation of pro forma net income (loss) per share
27 Financial Data Schedule
11