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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
or
[ ] 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 of (I.R.S. Employer Identification Number)
Incorporation or
Organization)
22026 20TH AVE. SE, BOTHELL, WASHINGTON 98021
(Address of Principal Executive Offices)
(425) 487-9500
(Registrant's Telephone Number, Including Area Code)
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 April 30, 1998
----- -----------------------------
Common Stock, $.001 par value 8,615,451
Page 1 of 13 Pages
Exhibit Index appears on Page 11
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SONUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Balance Sheets as of March 31, 1998 (unaudited) and December 31, 1997 ............... 3
Statements of Operations (unaudited) for the three months ended
March 31, 1998 and March 31, 1997 ............................................... 4
Statements of Cash Flow (unaudited) for the three months ended
March 31, 1998 and March 31, 1997 ............................................... 5
Notes to Financial Statements ....................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ................................. 10
Item 6. Exhibits and Reports on Form 8-K .................................................... 11
Items 2,3 and 5 are not applicable and therefore have been ommitted
SIGNATURES ............................................................................................ 12
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents ...................................... $ 5,154,194 $ 5,253,227
Marketable securities .......................................... 18,466,433 21,317,835
Other current assets ........................................... 544,749 599,303
------------ ------------
Total current assets ......................................... 24,165,376 27,170,365
Equipment, furniture and leasehold improvements, net of accumulated
depreciation of $1,938,173 and $1,738,269 ...................... 1,748,812 1,734,737
Other assets ...................................................... 40,667 40,667
------------ ------------
Total assets ...................................................... $ 25,954,855 $ 28,945,769
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ............................................ $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses .......................... 2,301,000 2,612,065
Accrued clinical trial expenses ................................ 1,802,088 1,743,208
Current portion of capital lease obligations ................... 130,483 146,762
------------ ------------
Total current liabilities .................................... 9,233,571 9,502,035
Long-term debt .................................................... 1,328,811 845,939
Capital lease obligations, less current portion ................... 75,217 93,178
Commitments
Stockholders' equity:
Preferred stock, $.001 par value:
5,000,000 authorized; no shares issued or outstanding ........ -- --
Common stock, $.001 par value:
20,000,000 shares authorized; 8,615,451 and 8,611,376
shares issued and outstanding in 1998 and 1997, respectively . 34,939,884 34,860,237
Accumulated deficit ............................................ (19,610,125) (16,338,949)
Deferred compensation .......................................... (12,503) (16,671)
------------ ------------
Total stockholders' equity ................................... 15,317,256 18,504,617
------------ ------------
Total liabilities and stockholders' equity ........................ $ 25,954,855 $ 28,945,769
============ ============
See accompanying notes.
3
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
1998 1997
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Revenues:
Collaborative agreements ............................... $ 1,700,000 $ 5,100,000
Operating expenses:
Research and development ............................... 3,550,056 2,583,986
General and administrative ............................. 1,656,574 1,187,610
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Total operating expenses ............................... 5,206,630 3,771,596
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Operating income (loss) ................................... (3,506,630) 1,328,404
Other income (expense):
Interest income ........................................ 294,051 249,971
Interest expense ....................................... (54,113) (32,188)
----------- -----------
Income (loss) before income taxes ......................... (3,266,692) 1,546,187
Income taxes .............................................. -- 190,000
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Net income (loss) ......................................... $(3,266,692) $ 1,356,187
=========== ===========
Net income (loss) per share:
Basic .................................................. $ (0.38) $ 0.16
Diluted ................................................ $ (0.38) $ 0.14
Shares used in computation of net income (loss) per share:
Basic .................................................. 8,612,923 8,531,352
Diluted ................................................ 8,612,923 9,497,082
See accompanying notes.
4
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net income (loss) ................................................... $ (3,266,692) $ 1,356,187
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 204,072 129,220
Amortization of discount on marketable securities ................ (10,903) (30,949)
Realized gain on marketable securities ........................... (6,533) (840)
Changes in operating assets and liabilities:
Other current assets ........................................... 54,554 81,321
Accounts payable and accrued expenses .......................... (311,065) (61,809)
Accrued clinical trial expenses ................................ 58,880 171,242
Deferred revenue ............................................... -- (1,000,000)
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Net cash provided by (used in) operating activities ................. (3,277,687) 644,372
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements ........ (213,979) (153,838)
Purchases of marketable securities .................................. (10,663,563) (8,005,737)
Proceeds from sale of marketable securities ......................... 13,041,869 2,000,000
Proceeds from maturities of marketable securities ................... 486,048 3,939,376
------------ ------------
Net cash provided by (used in) investing activities ................. 2,650,375 (2,220,199)
FINANCING ACTIVITIES:
Proceeds from bank line of credit ................................... 5,000,000 5,000,000
Repayment of bank line of credit .................................... (5,000,000) (5,000,000)
Proceeds from long-term debt ........................................ 482,872 --
Repayment of capitalized lease obligations .......................... (34,240) (46,476)
Proceeds from issuance of common stock and warrants ................. 79,647 38,339
------------ ------------
Net cash provided by (used in) financing activities ................. 528,279 (8,137)
------------ ------------
Change in cash and cash equivalents for the period .................. (99,033) (1,583,964)
Cash and cash equivalents at beginning of period .................... 5,253,227 7,236,615
------------ ------------
Cash and cash equivalents at end of period .......................... $ 5,154,194 $ 5,652,651
============ ============
Supplemental cash flow information:
Interest paid .................................................... $ 17,097 $ 32,188
Income taxes paid ................................................ $ 7,500 $ 40,000
See accompanying notes.
5
SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(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 items) 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 Form
10-K for the year ended December 31, 1997.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share ("EPS")" (SFAS 128). In accordance with
this statement, the Company has presented both basic and diluted EPS. Basic EPS
is based on the weighted average number of common shares outstanding. Diluted
EPS is based on the weighted average number of common shares and dilutive
potential common shares. Dilutive potential common shares are calculated under
the treasury stock method and consist of unexercised stock options and warrants.
Amounts previously reported have been restated to conform to the provisions of
SFAS 128.
During 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities, which are currently
reported in shareholders' equity, to be included in other comprehensive income.
SFAS 130 is effective for financial statements for fiscal years beginning after
December 15, 1997 and all interim periods thereafter. The total of other
comprehensive income for the periods ended March 31, 1998 and 1997 are
immaterial.
During 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 is effective for financial statements for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 131 is not expected to have a
material impact on the Company's results of operations, financial position or
cash flows.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company is primarily engaged in the research, development and
commercialization 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 ("IPO")
completed in October 1995. Clinical trials of the Company's principal product
under development, EchoGen(R) Emulsion, began in January 1994. The Company
currently has on file for EchoGen a New Drug Application ("NDA") with the U.S.
Food and Drug Administration ("FDA") and a Marketing Authorization Application
("MAA") with the European Medicines Evaluation Agency ("EMEA").
In February 1998, the Company received an action letter from the FDA
which indicated that the review of the EchoGen NDA was completed and the
application is inadequate for approval, citing certain deficiencies in the
application. The Company is in the process of preparing an amendment to the NDA
to address the deficiencies. The Company is exchanging information with the FDA
and, based on communications to date, believes an amendment can be prepared
that will be responsive to the issues raised in the FDA action letter. Once the
Company has filed the amendment with the FDA, the agency has up to 180 days to
review the amendment. Accordingly, once the FDA review is completed, the
Company expects that the agency will be in a position to issue another action
letter.
In March 1998, the Committee for Proprietary Medicinal Products
("CPMP") issued a positive opinion on EchoGen for use in patients with suspected
or established cardiovascular disease. The CPMP is the scientific review
committee of the EMEA and makes its recommendations to the EMEA. The next step
following the positive opinion is expected to be the issuance of a marketing
authorization by the European Commission, which covers the 15 member states of
the European Union, which are the United Kingdom, Ireland, France, Germany,
Italy, Spain, Portugal, Sweden, Finland, Denmark, Belgium, Luxembourg, the
Netherlands, Greece and Austria.
The Company will not be able to commence sales of EchoGen in the U.S.
or various international markets unless and until it receives the appropriate
regulatory approvals. Through March 31, 1998, all of the Company's revenues have
been derived from agreements with third parties for the collaborative
development of EchoGen worldwide.
In May 1996, the Company formed a strategic alliance with Abbott
Laboratories ("Abbott") for marketing and selling EchoGen in the U.S. Under the
agreement, Abbott agreed to pay the Company an aggregate of $31.0 million in
up-front, clinical support and milestone payments, of which $24.0 million has
been paid as of March 31, 1998. In addition, Abbott purchased in May 1996, for
$4.0 million, warrants to acquire 500,000 shares of common stock of the Company.
The warrants are exercisable over five years at $16.00 per share. In October
1996, the Company and Abbott entered into an agreement expanding Abbott's
territory to include Europe, Latin America, Canada, Middle East, Africa and
certain Asia/Pacific countries. Under the October 1996 agreement, Abbott has
agreed to pay the Company $34.6 million in license and milestone payments, a
portion of which will be credited against future royalties once EchoGen is
approved for commercial sale. As of March 31, 1998, $9.2 million has been paid
to the Company by Abbott under the October 1996 agreement of which $4.2 million
is creditable against future royalties.
The Company has granted Daiichi Pharmaceutical Co., Ltd. ("Daiichi"),
exclusive marketing and distribution rights to EchoGen in Japan and in certain
other countries in the Pacific Rim. As of March 31, 1998, Daiichi has paid the
Company option, license and milestone fees totaling $12.8 million.
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.
7
RESULTS OF OPERATIONS
Revenue from collaborative agreements decreased to $1.7 million for the
three months ended March 31, 1998 compared with $5.1 million for the three
months ended March 31, 1997. The revenue in the current period represents a
regular quarterly payment from Abbott of $1.0 million, as well as a milestone
payment from Abbott of $0.7 million. The revenue in the prior period represents
$4.7 million and $0.4 million of payments under the license agreements with
Abbott and Daiichi, respectively.
Research and development expenses increased to $3.6 million for the
three months ended March 31, 1998 compared with $2.6 million for the three
months ended March 31, 1997, primarily due to ongoing clinical trials
investigating additional indications for EchoGen, costs related to supporting
the regulatory approval process in the U.S. and Europe, and development of new
products, offset in part by $0.6 million of clinical development costs
reimbursed by Abbott.
General and administrative expenses increased to $1.7 million for the
three months ended March 31, 1998 compared with $1.2 million for the three
months ended March 31, 1997. The increase in 1998 reflected an increase in the
costs of filing, prosecuting and protecting patents and to a lesser extent,
increases in marketing and administrative personnel.
The Company anticipates total operating expenses will increase in
future quarters due to ongoing and planned clinical trials to study additional
indications for EchoGen and due to higher marketing and administrative expenses
as the Company continues to prepare for commercialization of EchoGen. The
Company may also incur significant expenses relating to legal matters - see
"Legal Proceedings." In addition, revenues in future quarters will be primarily
dependent upon the timing of certain regulatory milestones.
Interest income increased to $294,000 for the three months ended March
31, 1998 as compared to $250,000 for the three months ended March 31, 1997,
primarily reflecting a slightly higher rate of return on invested cash in the
first quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations with payments from
collaborative agreements, proceeds from equity financings and a bank line of
credit. At March 31, 1998, the Company had cash, cash equivalents and marketable
securities of $23.6 million, compared to $26.6 million at December 31, 1997. The
decrease was due primarily to the net loss reported in the first quarter.
In August 1997, the Company renewed a loan agreement with Silicon
Valley Bank which provides for a $5.0 million revolving line of credit facility,
which bears interest at the prime rate plus 1.0% per annum. At March 31, 1998
there was $5.0 million outstanding under the line of credit. The line of credit
expires in August 1998 and is secured by the tangible assets of the Company. The
Company is required to maintain certain minimum balances of cash and marketable
securities in order to borrow under the line of credit.
The Company expects that its cash needs will increase significantly in
future periods due to pending and planned clinical trials and higher
administrative and marketing expenses as the Company prepares for
commercialization of EchoGen. 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 time
and costs required to gain regulatory approvals, the progress of the Company's
research and development programs, clinical trials and 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.
8
YEAR 2000 COMPLIANCE
During 1997 the Company completed a comprehensive review of software
applications used in critical business processes. The Company has determined
that all of its critical business systems are year 2000 compliant. There is no
guarantee that the systems of the Company's collaborative partners or
significant vendors will be year 2000 compliant. If the Company's collaborative
partners or significant vendors are not year 2000 compliant, this could have an
adverse effect on the ability of collaborative partners or vendors to satisfy
their obligations to the Company or for the Company to electronically
communicate with such parties.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. Examples of these forward-looking statements include, but are not
limited to, (i) the progress and results of clinical trials, (ii) future
marketing approvals, (iii) the anticipated outcome or financial impact of
litigation, (iv) future product revenues and expenses, and (v) the future uses
of capital and financial needs of the Company. While these statements made by
the Company are based on management's current beliefs and judgment, they are
subject to risks and uncertainties that could cause actual results to vary.
In evaluating such statements, stockholders and investors should
specifically consider a number of factors and assumptions, including those
discussed in the text and the financial statements and their accompanying
footnotes in this Report and the risk factors detailed from time to time in the
Company's filings with the Securities and Exchange Commission. As discussed in
the Company's annual report on Form 10-K for the year ended December 31, 1997,
actual results could differ materially from those projected in the
forward-looking statements as a result of the following factors, among others:
uncertainty of governmental regulatory requirements; unproven safety and
efficacy; uncertainty of clinical trials; history of operating losses;
uncertainty of future financial results; uncertainty of market acceptance;
future capital requirements and uncertainty of additional funding; dependence on
third parties for funding, clinical development and distribution; dependence on
patents and proprietary rights; competition and risk of technological
obsolescence; limited manufacturing experience; dependence on limited contract
manufacturers and suppliers; lack of marketing and sales experience; and
limitations on third-party reimbursement.
9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On August 1, 1997, a lawsuit was filed in the U.S. District Court for
the District of Columbia by Molecular Biosystems, Inc. ("MBI") and Mallinckrodt,
Inc. against the Company, Nycomed Imaging A.S. ("Nycomed"), ImaRx Pharmaceutical
Corporation, DuPont Merck and Bracco International BV. The suit alleged that
certain of the Company's ultrasound contrast agent patents were invalid and that
the Company had made certain false public representations about MBI and a
proposed MBI product. On September 3, 1997, Nycomed filed a cross-claim against
the Company in the above action, alleging that a Nycomed patent was entitled to
priority over one of the SONUS patents and that the SONUS patent was invalid.
The Company along with several other co-defendants moved to dismiss the lawsuit,
and on January 5, 1998, the District Court of the District of Columbia dismissed
the lawsuit filed by MBI and the cross-claim filed by Nycomed.
On January 7, 1998, the Company announced that it had filed a patent
infringement action in the U.S. District Court in Seattle, Washington, against
MBI and Mallinckrodt, Inc. The suit alleges that one of MBI's ultrasound
contrast product agents infringes one or more of the Company's patents. MBI has
filed counterclaims alleging that the patents asserted by SONUS are invalid and
not infringed, and that SONUS has made false public statements and engaged in
other actions intended to damage MBI and one of its ultrasound contrast agents.
A trial date has been set for this lawsuit in August 1999.
In addition, the patents in this lawsuit are the subject of
re-examination by the U.S. Patent and Trademark Office. The outcome of the
re-examination may have an impact on the above patent infringement action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on April 30,
1998. At the Annual Meeting there were three 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 proposed submitted to a vote passed and
the voting outcome of each proposal is as follows:
1. Election of the following four (4) directors to serve until the next
annual meeting of stockholders or until their successors are elected
and have qualified:
Nominee For Abstain
------- --- -------
Steven C. Quay, M.D., Ph.D. 7,353,690 291,525
Dwight Winstead 7,353,920 291,295
Harry A. Shoff 7,353,878 291,337
George W. Dunbar, Jr. 7,353,840 291,375
2. 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 1,900,000:
For: 7,101,466 Against: 488,829 Abstain: 17,733
3. Ratification of Ernst & Young LLP as independent auditors of the
Company for the fiscal year ending December 31, 1998:
For: 7,624,530 Against: 7,510 Abstain: 13,175
10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description
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10.29 Commercial Supply Agreement, dated March 6, 1998
(portions omitted pursuant to Rule 24B-2).
11.1 Computation of net income (loss) per share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed the following report on Form 8-K during the
quarter ended March 31, 1998:
1. The Registrant filed a report on Form 8-K on March 13,
1998 in connection with the announcement of the FDA
requesting additional information regarding the EchoGen
NDA review and the announcement of the March meeting of
the Committee for Proprietary Medicine Products to review
the EchoGen Medical Marketing Application.
ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
11
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SONUS PHARMACEUTICALS, INC.
Date: May 7, 1998 By: /s/ Gregory Sessler
--------------------
Gregory Sessler
Chief Financial Officer (Principal
Financial and Accounting Officer)
and Assistant Secretary
12
EXHIBIT INDEX
Number Description
------ -----------
10.29 Commercial Supply Agreement, dated March 6, 1998
(portions omitted pursuant to Rule 24B-2).
11.1 Computation of net income (loss) per share
27.1 Financial Data Schedule