UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington D.C.
20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2008
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or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
TO .
Commission
file number 000-21243
Sonus
Pharmaceuticals, Inc.
(Exact Name of
Registrant as Specified in Its Charter)
Delaware
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95-4343413
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(State or Other
Jurisdiction of
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(I.R.S. Employer
Identification Number)
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Incorporation or
Organization)
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1522
217
th
Place SE, Suite 100, Bothell, Washington 98021
(Address of
Principal Executive Offices)
(425) 487-9500
(Registrants telephone number, including area
code)
Indicate by check whether
the registrant (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
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
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Smaller reporting
company
o
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(Do not check if a
smaller reporting company)
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Indicate by check mark
whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes
o
No
x
Indicate the
number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
Class
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Outstanding at April 30, 2008
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Common Stock,
$0.001 par value
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37,062,049
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Sonus
Pharmaceuticals, Inc.
Index to Form 10-Q
2
Part I.
Financial
Information
Item
1.
Financial Statements
Sonus Pharmaceuticals, Inc.
Balance
Sheets
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March 31,
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December 31,
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2008
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2007
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(unaudited)
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Assets
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Current assets:
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Cash and cash
equivalents
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$
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17,597,297
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$
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6,535,272
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Marketable
securities
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11,215,107
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27,663,554
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Interest receivable
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181,591
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456,149
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Other current
assets
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615,984
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576,905
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Total current assets
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29,609,979
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35,231,880
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Equipment,
furniture and leasehold improvements, net
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9,279,364
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9,577,567
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Other assets
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497,327
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439,822
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Total assets
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$
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39,386,670
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$
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45,249,269
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Liabilities
and Stockholders Equity
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Current
liabilities:
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Accounts payable
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$
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1,429,065
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$
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1,462,444
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Accrued expenses
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2,241,413
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4,141,273
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Current portion
of deferred rent
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762,915
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765,005
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Total current
liabilities
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4,433,393
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6,368,722
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Deferred rent,
less current portion
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6,852,292
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6,976,130
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Commitments and
contingencies
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Stockholders
equity:
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Preferred stock;
$.001 par value;
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5,000,000
authorized; no shares issued or outstanding
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Common stock;
$.001 par value; 75,000,000 shares authorized;
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37,062,049 and
37,048,335 shares issued and outstanding at March 31, 2008 and
December 31, 2007, respectively
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157,014,818
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156,704,899
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Accumulated
deficit
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(128,917,030
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)
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(124,801,837
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)
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Accumulated
other comprehensive loss
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3,197
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1,355
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Total
stockholders equity
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28,100,985
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31,904,417
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Total
liabilities and stockholders equity
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$
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39,386,670
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$
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45,249,269
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See accompanying
notes.
3
Sonus Pharmaceuticals, Inc.
Statements
of Operations
(Unaudited)
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Three Months Ended March 31,
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2008
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2007
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Revenue:
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Collaboration
revenue from Bayer Schering
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$
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$
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5,051,035
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Operating
expenses:
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Research and
development
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2,269,034
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6,939,399
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General and
administrative
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2,101,409
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1,975,600
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Total operating
expenses
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4,370,443
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8,914,999
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Operating loss
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(4,370,443
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)
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(3,863,964
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)
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Other income
(expense):
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Other expense
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(44,378
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)
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(34,953
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)
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Interest income
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299,628
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673,873
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Interest expense
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(309
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)
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Total other
income, net
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255,250
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638,611
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Net loss
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$
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(4,115,193
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)
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$
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(3,225,353
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)
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Basic and
diluted net loss per share
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$
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(0.11
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)
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$
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(0.09
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)
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Shares used in
computation of basic and diluted net loss per share
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37,052,022
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36,854,037
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See accompanying
notes.
4
Sonus Pharmaceuticals, Inc.
Statements
of Cash Flows
(Unaudited)
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Three Months Ended March 31,
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2008
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2007
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Operating
activities:
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Net loss
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$
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(4,115,193
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)
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$
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(3,225,353
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)
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Adjustments to
reconcile net loss to net cash used in operating activities:
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Depreciation
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345,486
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154,176
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Non-cash
stock-based compensation
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304,607
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495,149
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Accretion of investments
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(6,089
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)
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(207,332
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)
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Changes in
operating assets and liabilities:
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Accounts
receivable from related party
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(127,774
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)
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Interest
receivable
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274,558
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(189,309
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)
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Other current
assets
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(39,079
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)
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(535,245
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)
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Other long term
assets
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(57,505
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)
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7,836
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Accounts payable
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(33,379
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)
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(655,020
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)
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Accounts payable
to related party
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130,650
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Accrued expenses
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(1,899,860
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)
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(3,881,002
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)
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Deferred rent
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(125,928
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)
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Other current
liabilities
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(25,008
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)
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Deferred revenue
from related party
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(1,386,479
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)
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Net cash used in
operating activities
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(5,352,382
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)
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(9,444,711
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)
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Investing
activities:
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Purchases of
capital equipment and leasehold improvements
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(47,283
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)
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(64,456
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)
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Purchases of
marketable securities
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(7,006,432
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)
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(22,622,304
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)
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Proceeds from
sales of marketable securities
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23,215,000
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12,035,014
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Proceeds from
maturities of marketable securities
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247,810
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60,220
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Net cash
provided by (used in) investing activities
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16,409,095
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(10,591,526
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)
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Financing
activities:
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Proceeds from
issuance of common stock under employee benefit plans
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5,312
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28,399
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Payments on
lease obligations
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(7,290
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)
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Net cash
provided by investing activities
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5,312
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21,109
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Increase
(Decrease) in cash and cash equivalents for the period
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11,062,025
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(20,015,128
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)
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Cash and cash
equivalents at beginning of period
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6,535,272
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35,771,784
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Total cash and
cash equivalents
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$
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17,597,297
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$
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15,756,656
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Supplemental
cash flow information:
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Interest paid
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$
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$
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309
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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 accompanying Balance Sheet
at December 31, 2007 has been derived from the audited financial
statements included in the Companys Annual Report on Form 10-K for the
year then ended. 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 Annual Report on Form 10-K for the year ended December 31,
2007 and filed with the Securities and Exchange Commission on March 14,
2008.
The Company
adopted SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) effective January 1, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. The Company did not have a transition
adjustment to beginning retained earnings as a result of adopting this
standard. SFAS No. 157 applies to all financial instruments that are
measured and reported on a fair value basis. This includes those items reported
in marketable securities on the balance sheets. See Note 4 for additional
information.
In
conjunction with the adoption of SFAS No. 157, the Company also adopted
SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of SFAS No. 115 (SFAS No. 159) as of January 1,
2008. SFAS No. 159 provides companies the option to report select
financial assets and liabilities at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types of assets and liabilities. After the initial adoption, the election is
made at the acquisition of a financial asset or financial liability and it may
not be revoked. We did not apply the fair value option to any of our
outstanding instruments; therefore, there has been no impact on our financial
statements.
Effective January 1,
2008, the Company adopted the provisions of FASB Emerging Issues Task Force,
Issue 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities, or
EITF 07-3. In accordance with EITF 07-3, nonrefundable contractual
prepayments related to future R&D activities are deferred and recognized as
an expense in the period that the related goods are delivered or services are
performed. Our adoption of this standard has not had a material impact on our
financial statements.
2.
Related
Party
The Company has
engaged in significant transactions with Bayer Schering Pharma AG, Germany (Bayer
Schering). Bayer Schering is a related party due to their ownership interest
in the Company (approximately 10.6% fully diluted) and has been appropriately
identified as such on the face of the financial statements. All amounts
disclosed on the face of the financial statements with related parties are
6
attributable to Bayer
Schering. Please see Note 3 Collaboration and License Agreement with Bayer
Schering Pharma AG for additional details.
3.
Collaboration
and License Agreement with Bayer Schering Pharma AG
In October 2005, the Company entered into a Collaboration and License
Agreement with Bayer Schering, a German corporation, pursuant to which, among
other things, the Company granted Bayer Schering an exclusive, worldwide
license to TOCOSOL Paclitaxel, its anti-cancer product candidate (the Product).
With respect to the Product, Bayer Schering paid Sonus an upfront license fee
of $20 million and paid Sonus for research and development services performed
equal to 50% of eligible product research and development costs (in certain
cases the reimbursement rate was 100%). In connection with the Collaboration
and Licensing Agreement, the Company and an affiliate of Bayer Schering entered
into a Securities Purchase Agreement whereby the Company sold 3,900,000 shares
of common stock for an aggregate of $15.7 million and warrants to purchase
975,000 shares of common stock for an aggregate purchase price of $122,000.
In October 2007, Sonus received notification
from Bayer Schering of its decision to terminate the Collaboration and License
Agreement in accordance with its terms because the Phase 3 pivotal trial did
not meet its primary endpoint. The termination was effective on November 2,
2007. In accordance with the terms of the Agreement, all rights to TOCOSOL
Paclitaxel have reverted back to Sonus. The Company has discontinued
development of TOCOSOL Paclitaxel due to results of the Phase 3 study. These
closure activities were substantially complete by December 31, 2007.
During the three month period ended March 31, 2007, the Company
recognized revenue of $1.4 million as amortization of the upfront license fee
and an additional $3.7 million related to research and development services
performed by Sonus primarily for the Phase 3 trial for TOCOSOL Paclitaxel and
related drug supply and manufacturing costs.
The Company does not expect to earn revenue or incur
expense related to the Agreement with Bayer Schering beyond 2007. The final net
billing between the Company and Bayer Schering was completed during the fourth
quarter of 2007. Settlement of the final amount outstanding was received from
Bayer Schering in December 2007. There were no receivables from, or
payables to, Bayer Schering outstanding at March 31, 2008 or at December 31,
2007.
4.
Marketable
Securities
With the adoption of SFAS No. 157, beginning January 1,
2008, assets and liabilities recorded at fair value in the balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. SFAS No. 157 specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation techniques are
observable or unobservable. In accordance with SFAS No. 157, these inputs
are summarized in the three broad levels listed below:
·
Level 1 Quoted prices in active markets for
identical securities;
·
Level 2 Other significant observable inputs
that are observable through corroboration with market date (including quoted
prices in active markets for similar securities);
·
Level 3 Significant unobservable inputs
that reflect managements best estimate of what market participants would use
in pricing the asset or liability.
7
In determining the appropriate levels, the Company
performed a detailed analysis of the assets and liabilities that are subject to
SFAS No. 157. The following table presents information about our assets
and liabilities that are measured at fair value on a recurring basis as of March 31,
2008, and indicates the fair value hierarchy of the valuation techniques we
utilized to determine such fair value:
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Level 1
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Level 2
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Level 3
|
|
2007
|
|
Corporate debt securities
|
|
$
|
378,657
|
|
$
|
6,241,761
|
|
$
|
|
|
$
|
6,620,418
|
|
Government debt securities
|
|
|
|
4,543,267
|
|
|
|
4,543,267
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|
Asset-backed securities
|
|
|
|
51,422
|
|
|
|
51,422
|
|
|
|
$
|
378,657
|
|
$
|
10,836,450
|
|
$
|
|
|
$
|
11,215,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
Accrued Expenses
Accrued expenses consist
of the following:
|
|
March 31,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Clinical trials
|
|
$
|
680,100
|
|
$
|
2,627,765
|
|
Severance
|
|
1,092,074
|
|
908,496
|
|
Compensation
|
|
169,158
|
|
227,044
|
|
Other
|
|
300,081
|
|
377,968
|
|
|
|
$
|
2,241,413
|
|
$
|
4,141,273
|
|
6.
Reduction of Workforce
On March 19, 2008, the
Company implemented a reduction of workforce (Reduction of Workforce)
pursuant to which the Companys workforce was reduced by approximately 37%. The
effective date of the Reduction of Workforce was March 31, 2008. The
Company implemented the Reduction of Workforce in order to conserve cash and
align its workforce with its anticipated staffing needs. The total cost of the
Reduction of Workforce was approximately $1.0 million, which consisted of
severance costs and medical insurance and was recognized as expense in the
first quarter of 2008. Severance expense of approximately $656,000 and $393,000
was recognized in research and development expense and general and
administrative expense, respectively, in the first quarter of 2008. The
following table summarizes the severance expense activity, including payments
of severance amounts accrued as of December 31, 2007:
Accrued severance as of December 31, 2007
|
|
$
|
908,496
|
|
Cash payments made in the first quarter of 2008
|
|
(865,617
|
)
|
Severance expense recorded in the first quarter of
2008
|
|
1,049,195
|
|
Accrued
severance as of March 31, 2008
|
|
$
|
1,092,074
|
|
The accrued severance as of March 31,
2008 is expected to be paid in the second quarter of 2008.
7.
Refund from Return of Recalled Taxol
In March 2007,
Bristol-Myers Squibb Pharmaceuticals recalled certain batches of Taxol due to
potential lack of sterility assurance. Sonus had some of these batches at
clinical sites which were being used in the reference arm of the Phase 3
TOCOSOL Paclitaxel pivotal study. The Company has returned all of the recalled
material to its suppliers in accordance with the recall notice. On March 12,
2008, the Company received an initial refund from its suppliers of $848,408 for
returned material which was recorded as a
8
reduction of research and development expense in the
first quarter of 2008. We are not reasonably able to estimate an amount for any
additional refund that we may receive in future periods. Accordingly, there are
no receivables recorded for any potential future refunds.
8.
Comprehensive Income
(Loss)
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Net loss
|
|
$
|
(4,115,193
|
)
|
$
|
(3,225,353
|
)
|
Unrealized gain
(loss) on cash equivalents and marketable securities
|
|
3,197
|
|
(8,797
|
)
|
Comprehensive loss
|
|
$
|
(4,111,996
|
)
|
$
|
(3,234,150
|
)
|
9.
Stockholders Equity
Employee Stock Plans
Employee stock options
vest over a period of time determined by the Board of Directors, generally four
years, and director stock options are generally fully vested on the date of
grant. Stock options generally are granted at the fair market value on the date
of grant and expire ten years from the date of grant.
In the first quarter of 2008,
the Company granted stock options to employees for 1,415,000 shares of common
stock. These options fully vest two years from the date of grant.
The Company has an
employee stock purchase plan whereby employees may contribute up to 15% of
their compensation to purchase shares of the Companys common stock at 85% of
the stocks fair market value at the lower of the beginning or end of each
six-month offering period. At March 31, 2008, a total of 39,551 shares
remain available for purchase by employees under the plan.
The Company has a 401(k) plan for
all employees under which it provides a specified percentage match on employee
contributions. Currently, the Company match is made in shares of the Companys
common stock.
The Company recognized compensation
expense related to this plan for the three month period ended March 31,
2008 of $5,312.
At March 31,
2008, there are no shares available for future issuances as matching
contributions under the plan.
Stock-Based Compensation
During the three month periods ended March 31, 2008 and 2007,
respectively, the Company recorded stock-based compensation cost under the
provisions of Statement of Accounting Standard 123 (revised 2004), Share Based
Payment, or SFAS 123R. The following table summarizes the income statement
classification of stock-based compensation:
|
|
Three months ended March 31,
|
|
|
|
2008
|
|
2007
|
|
Stock-based compensation expense:
|
|
|
|
|
|
General &
administrative
|
|
$
|
166,558
|
|
$
|
286,161
|
|
Research &
development
|
|
138,049
|
|
208,988
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
304,607
|
|
$
|
495,149
|
|
9
The Company changed its estimated
forfeiture rate based on personnel reductions in the first quarter of 2008. The
impact in stock compensation expense as a result of the change in estimated
forfeiture rate was not significant. The fair value of each stock option used
in the calculations under SFAS 123R is estimated using the Black-Scholes-Merton
option pricing model. The assumptions used in this model include (1) the
stock price at grant date, (2) the exercise price, (3) an estimated
option life of four years as of March 31, 2008 and 2007, (4) no
expected dividends for each period presented, (5) stock price volatility
factor of 106.08% and 60.2% as of March 31, 2008 and 2007, respectively,
and (6) a risk-free interest rate of 2.75%
and
4.65% as of March 31, 2008 and 2007, respectively.
Stock Option Activity
The
following is a summary of option activity for the first quarter of 2008:
|
|
|
|
Options
Outstanding
|
|
|
|
Shares
Available for
Grant
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
5,271,101
|
|
4,278,960
|
|
$
|
4.82
|
|
Grants
|
|
(1,415,000
|
)
|
1,415,000
|
|
$
|
0.37
|
|
Exercises
|
|
|
|
|
|
|
|
Cancellations and expirations
|
|
958,612
|
|
(961,612
|
)
|
$
|
4.53
|
|
March 31, 2008
|
|
4,814,713
|
|
4,732,348
|
|
$
|
3.55
|
|
10.
Subsequent Events
In
April 2008, we began evaluating our space needs and various options that
we believe will result in the consolidation of our operations into a smaller
portion of our current facility. As we have not yet finalized the course of
action for implementation of a facilities plan, including potential sublease of
certain space, we cannot currently estimate the type of costs that will be
associated with a plan, the total charge that will result from the
implementation of a plan, or any charges associated with the plan that will
result in future cash expenditures. Also, the cease use date of a portion of
our facilities did not occur until the second quarter of 2008 after our reduction
of workforce.
10
Item 2. MANAGEMENTS 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:
·
timing and amount of future contractual
payments, product revenue and operating expenses;
·
progress and preliminary results of clinical
trials;
·
our anticipated future capital requirements
and the terms of any capital financing agreements;
·
anticipated regulatory filings, requirements
and future clinical trials; and
·
market acceptance of our products and the
estimated potential size of these markets.
While these forward-looking statements made by
us are based on our current beliefs and judgments, 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
engaging in any transaction involving shares of our common stock. If any of
these risks 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:
·
future
capital requirements and uncertainty of obtaining additional funding through
corporate partnerships, debt or equity financings;
·
ability
to integrate and realize benefits from strategic opportunities, including
mergers and acquisitions;
·
continued
listing on the NASDAQ Global Market (formerly NASDAQ National Market);
·
results
of research and preclinical studies may not be indicative of results in humans;
·
ability
to build out our product candidate pipeline through product in-licensing or
acquisition activities;
·
proper
management of our operations will be critical to the success of the company;
·
history
of operating losses and uncertainty of future financial results;
·
volatility
in the value of our common stock;
·
dependence
on the development and commercialization of products;
·
uncertainty
of governmental regulatory requirements and lengthy approval process;
·
dependence
on third parties for funding, clinical development, regulatory approvals,
manufacturing and distribution;
·
dependence
on key employees;
·
uncertainty
of U.S. or international legislative or administrative actions;
·
competition
and risk of competitive new products;
·
limited
manufacturing experience and dependence on a limited number of contract
manufacturers and suppliers;
·
ability
to obtain and defend patents, protect trade secrets and avoid infringing
patents held by third parties;
·
limitations
on third-party reimbursement for medical and pharmaceutical products;
·
acceptance
of our products by the medical community;
·
potential
for product liability issues and related litigation;
11
·
potential
for claims arising from the use of hazardous materials in our business;
·
fluctuations
in our operating results;
·
uncertainty
relating to the timing and results of clinical trials; and
·
other factors set forth under Risk Factors
contained in our Annual Report on Form 10-K for the fiscal year ended December 31,
2007 filed on March 14, 2008
and in this
Quarterly Report on Form 10-Q.
MD&A
Overview
In Managements Discussion and Analysis of
Financial Condition and Results of Operations 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 year; and
·
capital
resources we currently have and possible sources of additional funding for
future capital requirements.
Business
Overview
Sonus Pharmaceuticals is
developing novel small molecule drugs for the treatment of patients with
cancer. Our objective is to identify opportunities where there is the
possibility for major improvements in patient treatments and where we believe
we can mitigate development risk. We currently have one drug in clinical
development. Our plan is to continue to develop our internal pipeline of
clinical compound opportunities and to evaluate possible strategic
alternatives, including in-licensing and merger and acquisition opportunities,
as a means of achieving our business strategies and enhancing stockholder
value. In the fourth quarter of 2007, we engaged Ferghana Partners Inc. to
assist us with these strategic alternatives.
Product
Candidates
SN2310
SN2310 Injectable Emulsion (SN2310)
is a novel camptothecin derivative. Camptothecins are an important class of
anti-cancer drugs, however, the marketed camptothecin analogs, irinotecan
(Camptosar®) and topotecan (Hycamtin®), have demonstrated limitations that may
reduce their clinical utility. Irinotecan and topotecan are used in the
treatment of colorectal, lung, and ovarian cancers. SN2310 is a prodrug of
SN-38. SN-38 is also the active moiety of irinotecan. Our objective with SN2310
is to provide a product that has enhanced anti-tumor activity and improved tolerability
compared with the approved camptothecin-based products. An Investigational New
Drug Application (IND) was submitted to the U.S. Food and Drug Administration
(FDA) for SN2310 in June 2006 and Phase 1 clinical testing was initiated
in September 2006. We expect to close enrollment in this study in 2008 and
initiate a Phase 2 clinical trial soon thereafter if warranted based on results
of the Phase 1 trial. As this product candidate is early in clinical
development, we cannot give any assurance that this compound will be clinically
successful.
TOCOSOL® Paclitaxel
TOCOSOL Paclitaxel is a
novel formulation of paclitaxel manufactured in a ready-to-use, injectable
vitamin E-based emulsion formulation. In September 2007 we announced that
TOCOSOL Paclitaxel failed to meet the primary endpoint in Phase 3 clinical
testing. We have discontinued development of TOCOSOL Paclitaxel due to results
of the Phase 3 study, and the time and cost that would be required to conduct
the necessary clinical studies to continue development, which at a minimum,
would include another Phase 3 pivotal trial. These closure activities were
substantially complete by December 31, 2007, although limited closure
activities continue in the first and second quarters of 2008.
12
Research and Development
Following the Reduction of
Workforce in March 2008, we have substantially reduced our internal drug
discovery capabilities. Our current strategy for broadening our product
candidate pipeline will be primarily through in-licensing of novel compounds or
other strategic activities. Our primary product focus will remain oncology and
supportive care.
Collaboration and License Agreement with Bayer Schering Pharma AG
In October 2005, the Company entered into a
Collaboration and License Agreement with Bayer Schering, a German corporation,
pursuant to which, among other things, the Company granted Bayer Schering an
exclusive, worldwide license to TOCOSOL Paclitaxel, its anti-cancer product
candidate (the Product). With respect to the Product, Bayer Schering paid
Sonus an upfront license fee of $20 million and paid Sonus for research and
development services performed equal to 50% of eligible product research and
development costs. In connection with the Collaboration and Licensing
Agreement, the Company and an affiliate of Bayer Schering entered into a
Securities Purchase Agreement whereby the Company sold 3,900,000 shares of
common stock for an aggregate of $15.7 million and warrants to purchase 975,000
shares of common stock for an aggregate purchase price of $122,000.
In October 2007, Sonus received notification
from Bayer Schering of its decision to terminate the Collaboration and License
Agreement in accordance with its terms because the Phase 3 pivotal trial did
not meet its primary endpoint. The termination was effective on November 2,
2007. In accordance with the terms of the Agreement, all rights to TOCOSOL
Paclitaxel have reverted back to Sonus. The Company has discontinued
development of TOCOSOL Paclitaxel due to results of the Phase 3 study. These
closure activities were substantially complete by December 31, 2007,
although limited closure activities continue in the first and second quarters
of 2008.
The Company does not expect to earn revenue or incur
expense related to the Agreement with Bayer Schering beyond 2007. The final net
billing between the Company and Bayer Schering was completed during the fourth
quarter of 2007. Settlement of the final amount outstanding was received from Bayer
Schering in December 2007. There were no receivables from, or payables to,
Bayer Schering outstanding at March 31, 2008 or at December 31, 2007.
Reduction of Workforce
On March 19, 2008, the Company implemented a
reduction of workforce (Reduction of Workforce) pursuant to which the Companys
workforce was reduced by approximately 37%. The effective date of the Reduction
of Workforce was March 31, 2008. The Company implemented the Reduction of
Workforce in order to conserve cash and align its workforce with its
anticipated staffing needs. The total cost of the Reduction of Workforce was
approximately $1.0 million, which consisted of severance costs and medical
insurance and was recognized as expense in the first quarter of 2008.
Results of Operations
As of March 31, 2008, our accumulated deficit was approximately
$128.9 million. We expect to incur substantial additional operating losses over
the next several years. Such losses have been and will continue to principally
be the result of various costs associated with our research and development
programs. Substantially all of our working capital in recent years has resulted
from equity financings and payments received under corporate partnership
agreements. Our ability to achieve a consistent, profitable level of operations
depends in large part on obtaining regulatory approval for future product
13
candidates in addition to successfully manufacturing and marketing
those products if they are approved. Even if we are successful in the
aforementioned activities our operations may not be profitable.
The company recognized no revenue for the three
months ended March 31, 2008 as compared with $5.1 million for the same
period in 2007. All revenue recognized in the first quarter of 2007 was fully
attributable to the Agreement with Bayer Schering. This agreement was
terminated in the fourth quarter of 2007. The revenue recognized in the three
month period ended March 31, 2007 included $1.4 million in amortization of
an upfront license fee and an additional $3.7 million in research and
development reimbursements.
Our research and development (R&D)
expenses were $2.3 million for the three months ended March 31, 2008
compared with $6.9 million for the same period in 2007. The decrease was
primarily the result of lower spending on clinical trials and drug supply and
manufacturing costs due to the termination of the Phase 3 trial for TOCOSOL
Paclitaxel in the fourth quarter of 2007. Research and development expenses in
the first quarter of 2008 are also lower as a result of recognition of a refund
of approximately $850,000 for recalled material which had been returned to
suppliers. This refund was recorded as a reduction of research and development
expense in the first quarter of 2008. Although research and development
personnel costs were reduced in the three months ended March 31, 2008 as
compared to the same period in 2007 due to a reduction in workforce effective
in November 2007, this reduction was offset by the recognition of
approximately $656,000 of severance expenses recorded in connection with an
additional reduction in workforce effective March 31, 2008. We expect
R&D expenses in 2008 to be significantly lower than levels experienced in
2007, absent any strategic transaction which could affect R&D expenses.
Our general and administrative (G&A)
expenses were $2.1 million for the three months ended March 31, 2008
compared with $2.0 million for the same period in 2007. The G&A expenses
for the first quarter of 2008 included approximately $393,000 of expenses from
severance benefits due to a reduction of workforce effective in March 2008.
We expect G&A expenses for the remainder of 2008 to be lower than levels
experienced in 2007, absent any strategic transaction which could affect
G&A expenses.
Our total operating expenses in 2008 are
expected to decrease from 2007 levels due to the termination of research and
development activities for TOCOSOL Paclitaxel and the two reductions of
workforce which occurred in November 2007 and March 2008. We estimate
that R&D spending will comprise more than 50% of the anticipated spending
in 2008. A significant portion of the R&D spending will be devoted to
development activities for SN2310. These estimates and actual expenses are
subject to change depending on many factors.
Our other income, net, was $255,000 for the
three months ended March 31, 2008 compared with $639,000 for the same
period in 2007. The decrease was due primarily to lower levels of invested cash
in 2008 compared to the same periods in 2007.
The Company had no income tax expense for the
three periods ended March 31, 2008 or 2007 as it had incurred pretax
losses.
Liquidity and Capital Resources
We have historically financed operations with
proceeds from equity financings and payments under collaboration agreements
with third parties. At March 31, 2008, we had cash, cash equivalents and
marketable securities totaling $28.8 million compared to $34.2 million at December 31,
2007. The decrease was primarily due to the net loss for the three month period
ended March 31, 2008 of $4.1 million, in addition to timing of items
accrued in 2007 and paid in 2008.
14
Net cash used in operating activities for the three
months ended March 31, 2008 and 2007 was $5.4 million and $9.4 million,
respectively. We recognized no revenue for the three months ended March 31,
2008 as compared with $5.1 million for the same period in 2007. All revenue
recognized in the first quarter of 2007 was fully attributable to the Agreement
with Bayer Schering. This agreement was terminated in the fourth quarter of
2007 and no additional revenue from this agreement is expected to be received. Expenditures
in all periods were a result of R&D expenses, including clinical trial
costs, and G&A expenses in support of our operations. Product development
activities were primarily related to SN2310 and pipeline development activities
in the first quarter of 2008, whereas product development activities in the
first quarter of 2007 consisted primarily of expenditures related to TOCOSOL
Paclitaxel and to a lesser extent other potential product candidates. The
decrease in net cash used in operating activities for the three months ended March 31,
2008 compared to the same period in 2007 was primarily due to the reduction of
expenditures for TOCOSOL Paclitaxel.
Net
cash provided by (used in) investing activities for the three months ended March 31,
2008 and 2007 was $16.4 million and ($10.6) million, respectively. The net cash
provided by and used in investing activities was primarily due to transactions
involving marketable securities in the normal course of business. The related
maturities and sales of those investments provide us with working capital on an
as-needed basis. We initiate shifts between cash equivalent securities and
marketable securities based on our cash needs and the prevailing interest rate
environment. The cash provided by investing activities for the three months
ended March 31, 2008 primarily related to proceeds from sales of
marketable securities. The cash used in investing activities for the same
period in 2007 primarily reflected purchases of marketable securities.
Net cash provided by financing activities for the
three months ended March 31, 2008 and 2007 was approximately $5,000 and
$21,000, respectively. The net cash provided by financing activities during
both of these periods was primarily due to the issuance of common stock under employee
benefit plans.
We
expect that our cash requirements will decrease in 2008 due to the termination
of development of TOCOSOL Paclitaxel and related staff reductions. Under our
current forecasted cash needs, which assume continued development of SN2310, we
believe that existing cash, cash equivalents and marketable securities will be
sufficient to fund expected operations through 2009. We will need additional
capital to support the continued development SN2310, other product candidates
and to fund continuing operations after 2009. Our future capital requirements
depend on many factors including:
·
our ability to obtain equity or debt
financings;
·
outcome related to strategic activities
currently being evaluated;
·
timing and costs of preclinical development,
clinical trials and regulatory approvals;
·
timing and cost of product development and in-licensing
activities;
·
entering into new collaborative or product
license agreements for products in our pipeline; and
·
costs related to obtaining, defending and
enforcing patents.
We have contractual obligations in the form of operating leases which expire
between 2010 and 2017. We signed a new facility lease in November 2006. The
new facility lease has a term of 10 years with a provision for two additional
five year renewals. The term commencement date for the new lease was January 1,
2008. The following table summarizes our contractual obligations under these
agreements as of March 31, 2008:
Contractual
Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations
|
|
$
|
21,173,536
|
|
$
|
1,943,226
|
|
$
|
3,996,616
|
|
$
|
4,203,234
|
|
$
|
11,030,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Material Changes in Financial Condition
|
|
March 31, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
39,386,670
|
|
$
|
45,249,269
|
|
Total liabilities
|
|
$
|
11,285,685
|
|
$
|
13,344,852
|
|
Shareholders equity
|
|
$
|
28,100,985
|
|
$
|
31,904,417
|
|
The decline in assets from December 31,
2007 primarily relates to declines in cash, cash equivalents and marketable
securities used to fund operations. The
decline in liabilities from December 31, 2007 relates primarily to
generally lower accrued liabilities on reduced clinical trial expense. The decline in shareholders equity is
primarily due to the net loss for the quarter.
Critical Accounting Policies and Estimates
We previously identified
certain policies and estimates as critical to our business operations and the
understanding of our past or present results of operations in our Annual Report
on Form 10-K for the year ended December 31, 2007 and filed with the
Securities and Exchange Commission on March 14, 2008. These policies and estimates are considered
critical because they had a material impact, or they have the potential to have
a material impact, on our financial statements and because they require
significant judgments, assumptions or estimates. Our preparation of financial statements
requires us to make estimates and assumptions that affect the reported amount
of assets and liabilities, disclosure of contingent assets and liabilities at
the date of our financial statements, and the reported amounts of revenue and
expenses during the reporting period.
The Company adopted SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) effective January 1,
2008. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. The
Company did not have a transition adjustment to beginning retained earnings as
a result of adopting this standard. SFAS No. 157 applies to all financial
instruments that are measured and reported on a fair value basis. This includes
those items reported in marketable securities on the balance sheets.
In conjunction with the
adoption of SFAS No. 157, the Company also adopted SFAS 159, The Fair
Value Option for Financial Assets and Financial Liabilities Including an
Amendment of SFAS No. 115 (SFAS No. 159) as of January 1,
2008. SFAS No. 159 provides companies the option to report select
financial assets and liabilities at fair value. This statement also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar
types of assets and liabilities. After the initial adoption, the election is
made at the acquisition of a financial asset or financial liability and it may
not be revoked. We did not apply the fair value option to any of our
outstanding instruments; therefore, there has been no impact on our financial
statements.
Effective January 1, 2008, the Company
adopted the provisions of FASB Emerging Issues Task Force, Issue 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services Received
for Use in Future Research and Development Activities, or EITF 07-3. In
accordance with EITF 07-3, nonrefundable contractual prepayments related
to future R&D activities are deferred and recognized as an expense in the period
that the related goods are delivered or services are performed. Our adoption of this standard has not had a
material impact on our financial statements.
16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Interest rate risk:
The market risk inherent in our marketable
securities portfolio represents the potential loss arising from adverse changes
in interest rates. If market rates hypothetically increase immediately and
uniformly by 100 basis points from levels at March 31, 2008, the decline
in the fair value of the investment portfolio would not be material. Given the
short-term nature of our investment portfolio, 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.
Foreign currency exchange risk:
We
are exposed to risks associated with foreign currency transactions on certain
contracts denominated in foreign currencies (primarily Euro and Pound Sterling
denominated contracts) and we have not hedged these amounts. As our unhedged
foreign currency transactions fluctuate, our earnings might be negatively
affected. Accordingly, changes in the value of the U.S. dollar relative to the
Euro/Pound Sterling might have an adverse effect on our reported results of
operations and financial condition, and fluctuations in exchange rates might
harm our reported results and accounts from period to period. The impact of foreign currency fluctuations
related to realized gains and losses during the three month periods ended March 31,
2008 and 2007, respectively, was not material.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
An evaluation as of the end of the period
covered by this report was carried out under the supervision and participation
of management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon the
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC
filings. A controls system, no matter
how well designed and operated, cannot provide absolute assurance that the
objectives of the controls are met, and no evaluation of controls can provide
absolute assurance that all controls and instances of fraud, if any, within a
company have been, or will be, detected.
Changes in internal control
over financial reporting
We have not made any changes to our internal control
over financial reporting (as defined in rule 13a-15(f) and 15d-15(f) under
the Exchange Act) during the fiscal quarter ended March 31, 2008 that have
materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Part II.
Other Information
Item
1A. Risk Factors
You should consider the risks below carefully in
addition to other information contained in this report before engaging in any
transaction involving shares of our common stock. Potential risks and uncertainties include,
among other things, those factors discussed in the sections entitled Business,
Risk Factors and Managements Discussion and Analysis of Financial Condition
and Results of Operations in our Annual Report on Form 10-K for the year
ended December 31, 2007, the section entitled Managements Discussion and
Analysis of Financial Condition and Results of Operations in this Quarterly
Report on Form 10-Q, and as set forth below in this Item 1A. Readers
should carefully review those risks, as well as additional risks described in
other documents we file from time to time with the Securities and Exchange Commission.
The following risk factors include material changes to the risk factors
previously disclosed in our Form 10-K for the year ended December 31,
2007, and are
17
not
a complete list of our risk factors. We undertake no obligation to publicly
release the results of any revisions to any forward-looking statements to
reflect anticipated or unanticipated events or circumstances occurring after
the date of such statements.
We will need additional capital in the future to support the continued
development of our product candidates and to fund continuing operations.
Although our cash requirements have decreased due to
the discontinuation of development of TOCOSOL Paclitaxel and reductions in
workforce, we will need additional capital to support the continued development
of SN2310, other product candidates and to fund continuing operations after
2009. We believe that existing cash, cash equivalents and marketable securities
will be sufficient to fund current operations through 2009. Our future capital
requirements depend on many factors including:
·
our ability to obtain debt or equity
financings;
·
timing and costs of preclinical
development, clinical trials and regulatory approvals;
·
timing and cost of research and
development;
·
entering into new collaborative or product
license agreements for products in our pipeline; and
·
costs related to obtaining, defending and
enforcing patents.
Failure to satisfy NASDAQ Global Market listing requirements may result
in our common stock being delisted from The NASDAQ Global Market.
Our common stock is currently listed on The NASDAQ
Global Market under the symbol SNUS. For continued inclusion on The NASDAQ
Global Market, we must maintain, among other requirements, stockholders equity
of at least $10.0 million, a minimum bid price of $1.00 per share and a market
value of our public float of at least $5.0 million; or market capitalization of
at least $50 million, a minimum bid price of $1.00 per share and a market value
of our public float of at least $15.0 million. The closing price of our common
stock, as reported on the NASDAQ Global Market as of May 5, 2008 was $0.39
per share. On November 5, 2007, we received notice from NASDAQ that we did
not comply with NASDAQs continued listing standards because the closing bid
price of our common stock had been below the required minimum bid price of
$1.00 for 30 consecutive business days. On May 6, 2008, we received a
staff determination letter indicating that we have failed to regain compliance
with the minimum bid price requirement prior to expiration of the grace period
to regain compliance, as permitted by NASDAQ. We intend to request a hearing to
appeal NASDAQs determination, which would stay delisting during the hearing process.
If NASDAQ does not grant our request for continued listing, our common stock
will be removed from listing on The NASDAQ Global Market. If our common stock
is delisted from The NASDAQ Global Market and we are unable to transfer to The
NASDAQ Capital Market, trading of our common stock, if any, may be conducted in
the over-the-counter market in the so-called pink sheets or, if available,
the OTC Bulletin Board. Consequently, broker-dealers may be less willing or
able to sell and/or make a market in our common stock. Additionally, an
investor would find it more difficult to dispose of, or to obtain accurate
quotations for the price of, our common stock. As a result of a delisting from
The NASDAQ Global Market, it may become more difficult for us to raise funds
through the sale of our securities.
We have a history of operating losses which we expect will continue and
we may never become profitable.
We have experienced significant accumulated losses
since our inception, and expect to incur net losses for the foreseeable future.
These losses have resulted primarily from expenses associated with our research
and development activities, including nonclinical and clinical trials, and
general and administrative expenses. As of March 31, 2008, our accumulated
deficit totaled $128.9 million. We
18
anticipate
that our operating losses will continue as we further invest in research and
development for our products. Our results of operations have varied and will continue
to vary significantly and depend on, among other factors:
·
our ability to obtain debt or equity
financings;
·
outcome related to strategic activities
currently being evaluated;
·
timing and costs of preclinical
development, clinical trials and regulatory approvals;
·
drug discovery and research and
development;
·
entering into new collaborative or product
license agreements for products in our pipeline; and
·
costs related to obtaining, defending and
enforcing patents.
19
Item
6. Exhibits
10.1
|
|
Second
Amendment to Lease between Sonus Pharmaceuticals, Inc. and BMR-217
th
Place, LLC, dated for reference purposes only as of January 28, 2008.
|
|
|
|
31.1
|
|
Certification of
President and Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14(a).
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31.2
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|
Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a).
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|
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32.1
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|
Certification of
President and Chief Executive Officer pursuant to Rule 13a-14(b) or
15d-14(b).
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|
|
|
32.2
|
|
Certification of Chief
Financial Officer pursuant to Rule 13a-14(b) or 15d-14(b).
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20
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.
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SONUS PHARMACEUTICALS, INC.
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Date:
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May 9, 2008
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By:
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/s/ Alan Fuhrman
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|
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Alan Fuhrman
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Senior Vice President,
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|
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Chief Financial Officer
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|
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(Principal Financial
Officer)
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21
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