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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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, 2001
----------------------------- -----------------------------
Common Stock, $.001 par value 9,608,502
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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, 2001 (unaudited) and December 31, 2000 ......... 3
Statements of Operations (unaudited) for the three months ended
March 31, 2001 and March 31, 2000 ............................................. 4
Statements of Cash Flows (unaudited) for the three months ended
March 31, 2001 and March 31, 2000 ............................................. 5
Notes to Financial Statements ................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................... 7
Item 3. Market Risk ................................................................... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 11
Item 4. Submission of Matters to a Vote of Security Holders ........................... 12
Items 2, 3, 5 and 6 are not applicable and therefore have been omitted.
SIGNATURES .................................................................................... 13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 2,142,307 $ 1,696,610
Short-term investments ........................................... 5,772,060 6,765,854
Compensating cash balance under bank line of credit .............. 5,000,000 5,000,000
Other current assets ............................................. 373,849 345,696
------------ ------------
Total current assets .......................................... 13,288,216 13,808,160
Equipment, furniture and leasehold improvements, net of
accumulated depreciation of $3,518,795 and $3,474,027 ............ 440,799 501,660
------------ ------------
Total assets ........................................................ $ 13,729,015 $ 14,309,820
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit .............................................. $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses ............................ 925,274 800,343
------------ ------------
Total current liabilities ..................................... 5,925,274 5,800,343
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value;
5,000,000 authorized; no shares issued or outstanding ......... - -
Common stock; $.001 par value;
30,000,000 shares authorized; 9,606,627 and 9,603,520 shares
issued and outstanding at March 31, 2001 and
December 31, 2000, respectively ............................... 38,096,509 38,077,469
Notes receivable from officers ................................... (350,000) (350,000)
Accumulated deficit .............................................. (29,951,801) (29,219,041)
Accumulated other comprehensive income ........................... 9,033 1,049
------------ ------------
Total stockholders' equity .................................... 7,803,741 8,509,477
------------ ------------
Total liabilities and stockholders' equity .......................... $ 13,729,015 $ 14,309,820
============ ============
See accompanying notes.
3
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2001 2000
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Revenues:
Collaborative agreements ............... $ 1,000,000 $ -
Royalties .............................. 95,528 -
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Total revenues ............................ 1,095,528 -
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Operating expenses:
Research and development ............... 1,168,062 1,090,570
General and administrative ............. 696,715 1,385,180
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Total operating expenses .................. 1,864,777 2,475,750
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Operating loss ............................ (769,249) (2,475,750)
Other income (expense):
Interest income ........................ 141,884 155,706
Interest expense ....................... (10,208) (6,597)
----------- -----------
Total other income, net ................... 131,676 149,109
----------- -----------
Loss before income taxes .................. (637,573) (2,326,641)
Income taxes .............................. 100,000 (176,939)
----------- -----------
Net loss .................................. $ (737,573) $(2,149,702)
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Basic and diluted net loss per share ...... $ (0.08) $ (0.24)
Shares used in computation of basic and
diluted net loss per share ............. 9,202,917 9,069,677
See accompanying notes.
4
SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-------------------------------
2001 2000
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OPERATING ACTIVITIES:
Net loss ....................................................... $ (737,573) $ (2,149,702)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................... 80,767 115,702
Amortization of discount on short-term investments .......... (8,550) (3,828)
Changes in operating assets and liabilities:
Other current assets ..................................... (28,153) 121,140
Accounts payable and accrued expenses .................... 124,933 (198,079)
------------ ------------
Net cash used in operating activities .......................... (568,576) (2,114,767)
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements ... (18,906) (5,173)
Purchases of short-term investments ............................ (2,698,258) (1,476,106)
Proceeds from sale of short-term investments ................... 242,095 499,995
Proceeds from maturities of short-term investments ............. 3,470,303 3,972,725
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Net cash provided by investing activities ...................... 995,234 2,991,441
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 issuance of common stock ......................... 19,040 570,689
------------ ------------
Net cash provided by financing activities ...................... 19,040 570,689
------------ ------------
Increase in cash and cash equivalents for the period ........... 445,698 1,447,363
Cash and cash equivalents at beginning of period ............... 1,696,609 894,194
------------ ------------
Cash and cash equivalents at end of period ..................... 2,142,307 2,341,557
Short-term investments at end of period ........................ 5,772,060 7,923,656
------------ ------------
Total cash, cash equivalents and short-term investments ........ $ 7,914,367 $ 10,265,213
============ ============
Supplemental cash flow information:
Interest paid ............................................... $ 10,208 $ 6,597
Income taxes paid ........................................... $ 100,000 $ -
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, 2000 and filed with the Securities and
Exchange Commission on March 7, 2001.
2. CONTINGENCIES
The Company is party to certain litigation related to its business. See
"Part II. Other Information; Item 1. Legal Proceedings."
3. PATENT LICENSE AGREEMENT
In January 2001, the Company entered into a patent licensing agreement
with Chugai Pharmaceutical, Co., Ltd. (Chugai) and Molecular Biosystems, Inc.,
(MBI). The agreement gives Chugai and MBI non-exclusive rights under certain
Sonus ultrasound contrast patents in Japan, South Korea, and Taiwan.
The Company received an initial non-refundable license fee of $1.0
million in January 2001 and will receive a second $1.0 million payment in June
2001. The second $1.0 million payment will be non-refundable if any claims of a
Sonus Japanese patent application are allowed within a period of two years from
the signing of the agreement. If no claims are allowed on the Sonus Japanese
patent application within this two-year period, the Company will repay the
second $1.0 million payment without interest. In addition to the $2.0 million
license fee payments, Chugai will pay royalties to the Company if and when a
product is approved for marketing in the territories covered under the patent
license agreement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 we intend 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:
- Market acceptance of our products and the potential size of these markets;
- Our anticipated future capital requirements and the terms of any capital
financing;
- The progress and results of clinical trials;
- The timing and amount of future contractual payments, product revenues and
operating expenses; and
- The anticipated outcome or financial impact of legal matters.
While these forward-looking statements made by us are based on our current
beliefs and judgement, they are subject to risks and uncertainties that could
cause actual results to vary from the projections in the forward-looking
statements. You should consider the risks below carefully in addition to other
information contained in this report before purchasing shares of our common
stock. If any of the risks listed below occur, they could seriously harm our
business, financial condition or results of operations. In such case, the
trading price of our common stock could decline, and you may lose all or part of
your investment.
The discussion and analysis set forth in this document contains trend analysis,
discussions of regulatory status and other forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statement as a result of the following factors, among others:
- Dependence on the development and commercialization of products;
- History of operating losses and uncertainty of future financial results;
- Future capital requirements and uncertainty of additional funding;
- Dependence on third parties for funding, clinical development and
distribution;
- Uncertainty of governmental regulatory requirements and lengthy approval
process;
- Uncertainty of U.S. or international legislative or administrative actions;
- Competition and risk of technological obsolescence;
- Limited manufacturing experience and dependence on a limited number of
contract manufacturers and suppliers;
- Dependence on patents and proprietary rights;
- Limitations on third-party reimbursement for medical and pharmaceutical
products;
- Continued listing on the Nasdaq National Market; and
- Dependence on key employees.
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MD&A OVERVIEW
In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for our company, including:
- An overview of our business;
- Results of operations and why those results are different from the prior
periods;
- The capital resources we currently have and possible sources of additional
funding for future capital requirements; and
- Certain factors that may affect our business and future results.
BUSINESS OVERVIEW
We are engaged in the research and development of therapeutic drug
delivery and blood substitute products utilizing our core technology in emulsion
formulations and surfactant chemistry. Based on this proprietary core
technology, we have developed the TOCOSOL(TM) drug delivery system to solubilize
therapeutic drugs that are poorly soluble in water. We are developing a cancer
therapy product, S-8184, and a cardiovascular therapy product, S-2646, using the
TOCOSOL technology. We are also developing a blood substitute product, S-9156,
based on our core emulsion formulation technology that utilizes stabilized
fluorocarbon gas microbubbles to more efficiently transport oxygen to body
tissues.
S-8184 - Cancer Therapy
The first application of our TOCOSOL drug delivery technology is an
injectable paclitaxel emulsion formulation, S-8184. Paclitaxel is the active
ingredient in a highly successful cancer treatment currently on the market for
the treatment of breast, ovarian and non-small cell lung cancer. We filed an
Investigational New Drug Application, or IND, with the U.S. Food and Drug
Administration in late 2000 and initiated our Phase 1 human clinical study in
December 2000. To date, we have enrolled patients with lung, breast, ovarian and
colon cancers and are encouraged by indications that our formulation may provide
significant advantages for both patients and physicians including a reduction in
side effects, a reduction or elimination of premedications and a reduction in
the administration time using a single, quick injection in a matter of minutes
compared to the hours of infusion with existing formulations of paclitaxel. We
expect to complete patient enrollment in the S-8184 Phase 1 study in the second
half of 2001.
S-2646 - Cardiovascular Treatment
Consistent with our strategy to apply our TOCOSOL drug delivery
technology to intravenous marketed drugs that are generic and/or have patents
expiring, S-2646 is a reformulation of an intravenous cardiac drug, amiodarone,
that is marketed for the treatment of the life threatening cardiac rhythm
disturbances, ventricular fibrillation and unstable ventricular tachycardia. The
currently marketed form of the drug has side effects, namely hypotension (low
blood pressure) and venous irritation, that may limit the drug's effectiveness
when administered in emergency situations outside the hospital. S-2646 is being
tested to determine whether the application of our TOCOSOL drug delivery system
will lower the toxicity of the currently marketed intravenous formulation, which
could allow faster administration of the drug resulting in faster onset of
therapeutic benefits for the patient and may also allow for repeat dosing
through the use of a conventional intravenous line in the arm. We expect to
complete preclinical studies with S-2646 and file an IND with the U.S. Food and
Drug Administration by the end of 2001.
8
S-9156 - Blood Substitute
We are also developing a blood substitute product, S-9156, for use in
therapeutic applications. This product utilizes stabilized gas microbubbles,
formed from our fluorocarbon emulsion technology, for transporting oxygen to the
body's tissues. In pre-clinical studies, S-9156 was shown to carry large volumes
of oxygen adequate to sustain life at doses that are many times lower than
liquid fluorocarbon products that are currently under development by others.
This may present important clinical advantages because many of the side effects
associated with administration of large volumes of liquid fluorocarbons could be
minimized with S-9156. Potential applications for S-9156 include use in trauma
situations to provide immediate tissue oxygenation when there is no availability
or time for typing and cross-matching blood for transfusion or for oxygenation
of solid tumors to increase the effectiveness of radiotherapy. We expect to
complete preclinical studies with S-9156 and file an IND with the U.S. Food and
Drug Administration by the end of 2001.
RESULTS OF OPERATIONS
Our results of operations have varied and will continue to vary
significantly and depend on, among other factors:
- Timing of payments under contractual and license agreements with
third-parties;
- Entering into additional contractual agreements;
- Timing and costs of product development, clinical trials and patent
prosecution; and
- Timing of regulatory approvals.
To date, our reported revenues have been derived from payments received
under contractual and license agreements with third parties. Revenues were $1.1
million for the first quarter of 2001 and consisted of a $1.0 million
non-refundable license fee payment received under our ultrasound contrast patent
license agreement with Chugai and $0.1 million in royalty income under a
separate ultrasound contrast patent license agreement with Nycomed Amersham plc.
We reported no revenue in the first quarter of 2000.
Total operating expenses were $1.9 million for the first quarter of 2001
compared with $2.5 million for the first quarter of 2000. The decrease in
operating expenses from the prior year was primarily due to lower general and
administrative expenses ($0.7 million the first quarter of 2001 compared to $1.4
million in the first quarter of 2000) resulting from the cost-reduction measures
announced and implemented in October 2000. Research and development expenses in
the first quarter of 2001 were slightly higher than the prior year ($1.2 million
in the first quarter of 2001 compared to $1.1 million in the first quarter of
2000) reflecting the continued investment in our product research and clinical
trial programs.
We anticipate total operating expenses for the next several quarters
will be consistent with or slightly higher than the first quarter of 2001 as we
continue to invest in current and future product development activities.
Interest income, net of interest expense of $10,000, was $132,000 for
the first quarter of 2001 compared with $149,000, net of interest expense of
$7,000, for the same period of the prior year. The decrease in net interest
income was primarily due to lower levels of invested cash in the current year.
9
In the first quarter of 2001, we incurred Japanese withholding taxes of
$100,000, representing 10% of the $1.0 million license fee paid by Chugai in
January 2001.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations with payments from contractual
agreements with third parties, proceeds from equity financings and a bank line
of credit. At March 31, 2001, we had cash, cash equivalents and short-term
investments of $12.9 million compared to $13.5 million at December 31, 2000. The
decrease was primarily due to cash used in operations during the quarter ended
March 31, 2001 of $0.6 million. In June 2001, we expect to receive a $1.0
million payment under our patent licensing agreement with Chugai. This payment
will be non-refundable if any claims of a Sonus Japanese patent application
related to the technology licensed to Chugai are allowed within two years from
signing our agreement with Chugai.
We have a bank loan agreement which provides for a $5.0 million
revolving line of credit facility and bears interest at the prime rate plus 1.0%
per annum. At March 31, 2001 and December 31, 2000, we had borrowings of $5.0
million outstanding under the line of credit. The line of credit expires in
August 2001 and is secured by tangible assets. We are required to maintain a
minimum of $5.0 million of cash in order to borrow under the line of credit, and
the borrowed funds are required to be held at the bank. We cannot give assurance
that we will be able to maintain the minimum balances necessary to borrow under
the line of credit.
We expect that our cash needs will increase in future periods due to
planned clinical trials and other product development costs associated with our
drug delivery and blood substitute products. Based on our current operating plan
for 2001, including planned clinical trials and other product development costs,
we estimate that existing cash and short-term investments will be sufficient to
meet our cash requirements through at least 2001. However, we intend to seek
additional funding through available means, which may include debt and/or equity
financing or funding under additional third party agreements. Our future capital
requirements depend on many factors including:
- The ability to attract and retain new collaborative agreement partners;
- The ability to obtain funding under contractual and licensing agreements;
- The progress of our research and development programs and clinical trials;
- The time and costs required to gain regulatory approvals;
- The costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks; and
- The cost of defending, and any damages or settlement payments that may be
paid pursuant to existing legal proceedings.
We cannot give assurance that additional financing will be available on
acceptable terms, if at all. Any equity financing would likely result in
substantial dilution to our existing stockholders and debt financing, if
available, may include restrictive covenants. If we are unable to raise
additional financing, we may be required to curtail or delay the development of
our products and new product research and development, which could seriously
harm our business.
ITEM 3. MARKET RISK
The market risk inherent in our short-term investment portfolio
represents the potential loss that
10
could arise from adverse changes in interest rates. If market rates
hypothetically increase immediately and uniformly by 100 basis points from
levels at March 31, 2001, the decline in the fair value of the investment
portfolio would not be material. Because we have the ability to hold our fixed
income investments until maturity, we do not expect our operating results or
cash flows to be affected to any significant degree by a sudden change in market
interest rates.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1998, various class action complaints were filed in the Superior
Court of Washington (the "State Action") and in the U.S. District Court for the
Western District of Washington (the "Federal Action") against us and certain of
our officers and directors, alleging violations of Washington State and U.S.
securities laws. In October 1998, we and the individual defendants moved to
dismiss and stay the State Action. The state law claims in the State Action were
subsequently re-filed in the Federal Action. In February 1999, plaintiffs filed
a consolidated and amended complaint in the Federal Action, alleging violations
of Washington State and U.S. securities laws. In March 1999, we and the
individual defendants filed a motion to dismiss the consolidated amended
complaint in the Federal Action. In July 1999, the Court entered an order
denying in part and granting in part the motion to dismiss the complaint in the
Federal Action. In November 1999, we filed motions for summary judgment and to
stay discovery.
In July 2000, with the consent of our insurance carrier, we entered into
a Memorandum of Understanding with the plaintiffs to settle the action for $4.0
million, an amount within our insurance policy limits, conditioned upon approval
of the Court. As part of the settlement agreement, our insurance carrier agreed
to pay the settlement directly to plaintiffs through an escrow account funded by
the insurance company in 2000. In February 2001, the Court approved the
settlement and entered an order dismissing with prejudice all claims against us
and certain officers and directors.
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on April 25, 2001. At the
Annual Meeting there were two matters submitted to a vote of security holders.
Proxies were solicited pursuant to Regulation 14A of the Securities Exchange Act
of 1934. There was no solicitation in opposition to management's nominees as
listed in the proxy statement. Each director nominated and all other proposals
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
to serve as directors:
Nominee For Abstain
------- --- -------
Michael A. Martino 8,106,603 58,226
George W. Dunbar, Jr 8,108,747 56,082
Christopher S. Henney, Ph.D., D.Sc 8,109,293 55,536
Robert E. Ivy 8,109,806 55,023
Dwight Winstead 8,109,494 55,335
2. Ratification of Ernst & Young, LLP as independent auditors of the Company for
the fiscal year ending December 31, 2001:
For: 8,095,199 Against: 38,022 Abstain: 31,608
ITEMS 2, 3, 5 AND 6 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
12
SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SONUS PHARMACEUTICALS, INC.
Date: September 28, 2001 By: /s/ Richard J. Klein
--------------------------------------------
Richard J. Klein
Vice President of Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
13