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SECURITIES AND EXCHANGE COMMISSIOM
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended April 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From ____ to ____
- ------------------------------------------------------------------
COMMISSION FILE NUMBER: 0-23791
SONOSIGHT, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1405022
(State of incorporation) (I.R.S. Employer
Identification Number.)
P.O. BOX 3020
NORTH CREEK PARKWAY
BOTHELL, WASHINGTON 98041-3020
(Address of principal executive offices) (Zip code)
(425) 482-8888
Registrant's telephone number)
Indicate by check mark 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 [ ] No [X]
Common Stock, par value $0.01 per share, 4,862,522 shares outstanding as
of April 6, 1998.
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<PAGE>
SONOSIGHT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. Financial Information PAGE NO.
<S> <C>
Combined Balance Sheets as of April 3, 1998 (unaudited)
and December 31, 1997.........................................1
Combined Statements of Operations (unaudited) for
the quarters ended April 3, 1998 and March 28,1997,
and the period from February, 1994 (inception) through
April 3, 1998.................................................2
Combined Statements of Cash Flows (unaudited) for the
quarters ended April 3, 1998 and March 28 1997, and the
period from February, 1994 (inception) through
April 3, 1998 ................................................3
Notes to Combined Financial Statements........................4
ITEM 2.
Management's Discussion and Analysis of Financial
Condition and Results of operation............................5
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk....*
PART II. Other Information
ITEM 1: Legal Proceedings...............................*
ITEM 2: Changes in Securities...........................*
ITEM 3: Defaults Upon Senior Securities.................*
ITEM 4: Submission of Matters to a Vote of Security
Holders.........................................*
ITEM 5: Other Information...............................9
ITEM 6: Exhibits and Reports on Form 8-K................9
SIGNATURE.....................................................10
* No information provided due to inapplicability of item.
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
SONOSIGHT, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 3, DECEMBER 31,
---------- ---------------
1998 1997
(Unaudited)
---------- ----------
<S> <C> <C>
ASSETS
------
Receivable from ATL........... $ 18,000,000 $ --
Property and equipment, net... 399,834 409,967
------------- -------------
Total Assets............. $ 18,399,834 $ 409,967
========== ==========
LIABILITIES AND OWNER'S EQUITY
---------------------------
Liabilities
Accrued expenses............. $ 130,139 $ 169,839
------------- -------------
Owner's equity
Preferred stock, par value
$1.00, 6,000,000 shares
authorized, no shares
issued or outstanding...... -- --
Common stock, par value
$0.01, 50,000,000 shares
authorized, 4,863,301 shares
outstanding at April 3, 1998 48,633 --
Additional paid-in capital... 40,566,471 --
Net advances from ATL........ -- 8,124,018
Due from ATL................. (12,000,000) --
Deficit accumulated during
the development stage........ (10,345,409) (7,883,890)
------------- -------------
Total Owner's Equity..... 18,269,695 240,128
------------- -------------
Total Liabilities and Owner's
Equity......................... $18,399,834 $ 409,967
========== ========
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
SONOSIGHT, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
QUARTER ENDED FEBRUARY, 1994
APRIL 3, MARCH 28, (INCEPTION)
-------------------------- THROUGH APRIL 3,
1998 1997 1998
----------- ----------- --------------
<S> <C> <C> <C>
Grant Revenues....... $ 758,607 $ 572,238 $ 4,735,202
Operating Expenses
Research and
development........ 2,154,957 1,295,668 11,908,372
Selling, general and
administrative..... 1,065,169 321,070 3,092,707
Other expenses..... -- 11,445 79,532
---------- ----------- ----------
Total Operating
Expenses............. 3,220,126 1,628,183 15,080,611
---------- ----------- ----------
Net Loss............. $(2,461,519) $(1,055,945) $(10,345,409)
=========== =========== ============
Basic and diluted
net loss per share.. $ (.52) $ (.23 )
========= =========
Weighted average
shares used in
computing basic
and diluted net
loss per share...... 4,767,667 4,657,000
========= =========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
SONOSIGHT, INC.
(A DEVELOPMENT STAGE COMPANY)
COMBINED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE QUARTER ENDED FEBRUARY 1994
APRIL 3, MARCH 28, (INCEPTION)
-------------------------------- THROUGH
1998 1997 APRIL 3, 1998
------------ ----------- ----------------
<S> <C> <C> <C>
Cash Flows from
Operating Activities:
Net Loss..............$(2,461,519) $(1,055,945) $(10,345,409)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation......... 29,457 18,717 164,119
Change in accrued
expenses............. (39,700) 97,673 130,139
---------- ---------- ----------
Net cash used in
operating
activities......... (2,471,762) (939,555) (10,051,151)
Cash Flows used by
Investing Activities--
Purchase of equipment... (19,324) (85,987) (563,953)
Cash Flows provided from
Financing Activities--
Net advances from ATL.. 2,491,086 1,025,542 10,615,104
----------- ----------- -----------
Net change in Cash....... -- -- --
Cash at Beginning of
Period.................. -- -- --
---------- ---------- ----------
Cash at End of Period....$ -- $ -- $ --
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
SONOSIGHT, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO COMBINED FINANCIAL STATEMENTS
1. Basis of Presentation
The information contained herein has been prepared in accordance with
instructions for Form 10-Q. The information furnished reflects, in the
opinion of management of SonoSight, Inc. ("SONO" or the "Company"), all
adjustments necessary for a fair presentation of the results for the
interim periods presented. All such adjustments are of a normal recurring
nature. Interim results are not necessarily indicative of results for a
full year. These financial statements do not include all disclosures
required by generally accepted accounting principles. For a presentation
including all disclosures required by generally accepted accounting
principles, these financial statements should be read in conjunction with
the audited financial statements for the year ended December 31, 1997,
included in the Company's Form 10.
SONO's business, which is the basis for these combined financial statements,
consists of the handheld ultrasound division of ATL Ultrasound, Inc.
("ATL"). The combined financial statements represent the combination of
ATL's handheld division and the corporate entity (SonoSight, Inc.)
established to effect the April 6, 1998 distribution of SONO's common stock
to the existing shareholders of ATL. The accompanying combined financial
statements, which are derived from the historical books and records of ATL,
include the assets, liabilities, revenues and expenses of SONO at historical
cost.
2. Weighted Average Shares Outstanding
The accompanying combined financial statements of SONO present the number
of shares of common stock outstanding and the number of weighted average
shares used in computing basic and diluted loss per share based on the
exchange ratio established in the April 6, 1998 distribution by ATL of one
SONO share for every three shares of ATL. All periods presented have been
restated to reflect this distribution. Options to purchase shares and
restrictive shares issued by ATL totaling 125,667 and 153,500 for the
quarters ended April 3, 1998 and March 29, 1997, respectively, were not
included in the computation of diluted net loss per share because to do so
would be antidilutive.
3. Subsequent Event
On April 6, 1998, ATL issued to its shareholders one share of SONO common
stock for every three shares of ATL common stock held by ATL shareholders
of record as of the close of business on March 30, 1998. The distribution
of SONO common stock was treated as a tax-free stock dividend. In connection
with the distribution, ATL contributed to the capital of SONO all cumulative
net advances made by ATL to SONO prior to April 6, 1998 and $18 million
in cash. ATL has also committed to unconditionally contribute to the
capital of SONO the amount of $12 million in cash on January 15, 1999. These
contributions have been recorded as additional paid-in capital in SONO's
financial statements. The uncollected $12 million due January 15, 1999 has
been classified in Owner's equity. The $18 million was paid in cash to SONO
on April 6, 1998. Also on April 6, 1998, ATL and SONO executed a number
of agreements disclosed in SONO's Form 10 that facilitated the distribution
of SONO's common shares and are intended to aid in the transition of SONO
to an independent business.
4
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains forward-looking statements concerning the Company,
anticipated results of operations, cash requirements and anticipated
products and product introductions. Forward looking statements are based on
management's projections and estimates on the dates on which the statements
are made, and are subject to certain risks and uncertainties and other
factors that could cause actual results to differ materially from those
projected. These risks, uncertainties and other factors include, without
limitations, uncertainties related to continued scientific progress in
research and development programs; the results of research and development
efforts and clinical trials; acquisitions of products or technology, if any;
relationships with corporate collaborators; competing technological and
market developments; the time and costs involved in filing, prosecuting and
enforcing patent claims; the time and costs of manufacturing scale-up and
commercialization activities; uncertain market acceptance of products and
other factors discussed in connection with particular forward looking
statements. Reference is made to the Company's Report on Form 10 for more
detailed description of such factors. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of
the date of this report. The Company undertakes no obligation to update
forward-looking statements to reflect events or circumstances after the date
of this report or to reflect changes in management's projections or
estimates.
Background
SonoSight, Inc. ("SONO" or the "Company"), a development stage company,
commenced operations in 1994 as a project of ATL Ultrasound, Inc. ("ATL")
and was chartered to develop the design and specifications for a handheld
ultrasound device and other highly portable ultrasound products. During the
years since inception, the project was organized as a separate division of
ATL with the purpose of accelerating research, development and
commercialization of this device. On February 2, 1998, the ATL Board of
Directors approved a plan to spin-off SONO as an independent, publicly
owned company. This transaction was effected through the tax-free
distribution of SONO's shares to ATL shareholders on April 6, 1998.
Shareholders of ATL received one share of SONO common stock for each three
shares of ATL common stock held.
SONO plans to use its technology to develop, manufacture, and market highly
portable, handheld diagnostic medical ultrasound devices. SONO plans to sell
these devices to physicians, hospitals, clinics, private medical practices
and emergency medical personnel worldwide. SONO's future growth will largely
depend on its ability to market and sell the handheld ultrasound products.
Completion of a prototype is expected in the second half of 1998. To date,
SONO has not generated any revenue from product sales. Since inception,
funding from ATL and the U.S. Navy under a U.S. Government Advanced Research
Projects Agency grant (the "Development Contract") has been used to finance
the development of SONO's technologies. SONO expects to continue to incur
operating losses until and unless handheld ultrasound product sales generate
sufficient revenue to fund its continuing operations.
Grant Revenues
Grant revenues for the quarter ended April 3, 1998 were $758,607 verses
$572,238 for the quarter ended March 28, 1997, an increase of $186,369 or
33%. Grant revenues are recognized per the terms of the Development
Contract and are generally tied to the achievement of technological
milestones. The increase in Grant revenues for the quarter ended April 3,
1998 is principally due to greater milestone recognition. Under the terms
of the Development Contract, most of the grant revenue available to SONO
has been recognized through April 3, 1998. Therefore, the Company will
recognize significantly less grant revenue, if any, in future quarters.
The Company will recognize no product sale revenues until it has developed a
marketable product approved by the Food and Drug Administration. The Company
therefore does not expect to recognize any significant revenues in the near
term.
5
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Research and Development Expense
Research and development expenses for the quarter ended April 3, 1998 were
$2,154,957 verses $1,295,668 for the quarter ended March 28, 1997, an
increase of $859,289 or 66%. The increase in research and development expense
is due primarily to more intense research efforts to meet the milestones of
the Development Contract and to accelerate product development. The Company
anticipates increased spending levels in research and development in the
near term as it focuses on closing out the Development Contract and creating
a marketable product.
Selling, General and Administrative Expense
Selling, general and administrative expenses for the quarter ended April 3,
1998 were $1,065,169 verses $321,070 for the quarter ended March 28, 1997,
an increase of $744,099 or 232%. The principal activity of the Company in
the first quarter of 1997 was research under the Development Contract. The
increase in selling, general and administrative expenses is a result of the
Company's hiring of additional sales, marketing and administrative personnel
in anticipation of the Company becoming a separate entity from ATL. The
Company has continued to add personnel and infrastructure and anticipates
that selling, general and administrative expenses will continue to increase.
Net Loss
The Net loss for the quarter ended April 3, 1998 was $2,461,519 or $1,405,574
greater than the loss of $1,055,945 from the quarter ended March 28, 1997.
This increase is due primarily to the increase in expenses as noted above.
The Company expects to incur significant net losses in the near term as it
continues to develop the infrastructure required for a stand alone company
and as it focuses on creating a marketable commercial product.
LIQUIDITY AND CAPITAL RESOURCES
To date, SONO has not generated any revenue from the sale of products, and
its cash requirements have been funded by advances from ATL and grants from
the Development Contract. For the quarter ended April 3, 1998, net cash
obtained from these sources and used in operations was $2,491,086. The cash
requirements of SONO's business have increased in recent periods and are
expected to continue to increase as SONO accelerates product development
activities, engages in market research and the creation of distribution
channels, and builds the management and administrative infrastructure
necessary to function as a stand-alone public company.
On April 6, 1998, ATL contributed to the capital of SONO all cumulative
advances made by ATL (net of Development Contract payments received) in the
amount of $10,615,104 and $18 million in cash. In addition, ATL is obligated
to contribute $12 million in cash on January 15, 1999. Under the agreement
between SONO and ATL, there is no contingency to be satisfied before ATL
makes the $12 million contribution. SONO has full recourse to ATL in the
event of a default of this obligation.
SONO has entered into a letter of intent with a bank for a $3 million line of
credit for working capital purposes and a $4 million term loan for the
financing of new capital equipment. Interest on the line of credit is
proposed to be at the lender's prime rate plus 0.25%. The line of credit is
expected to have a maturity date of either 12 months or 24 months from the
closing date, which is at the option of the Company. The term loan is
expected to be made available in two $2
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(Continued)
million tranches, to bear interest at the lender's prime rate of 5%, with
each tranche payable over 36 months. The proposed terms for the loans
include various financial covenants as well as non-financial covenants
including restrictions on the payment of dividends. The bank will require a
lien on all of SONO's assets except intellectual property. The bank
expects a negative pledge from SONO on the intellectual property. Both
loans are subject to further negotiation and the completion of documentation.
Per the terms of the agreements executed on April 6, 1998 with ATL, SONO
must relocate its business to a location separate from ATL. As a result,
SONO entered into a letter of intent on April 8, 1998 with TMT - Bothell,
LLC to lease approximately 20,282 square feet of office space. The proposed
five year lease calls for total rent payments of $1,431,384 plus SONO's share
of building expenses. SONO executed a completed lease on May 9, 1998 for the
office space and, barring any unforeseen circumstances, expects the lease
to be countersigned by TMT - Bothell, LLC.
Based on current operating plans, SONO management believes the $30 million
in cash from ATL and the Company's new bank loans, if obtained, should
provide sufficient working capital to fund its currently planned operations
through to an initial product launch, which is planned for in 1999. However,
the amount of cash required to fund the completion of product development,
the establishment of management, administrative and manufacturing
infrastructure, distribution channels, and the introduction of product to the
marketplace are difficult to predict, and will depend in part upon factors
beyond SONO's control. Cash requirements could exceed SONO's estimates as
a result of a variety of factors such as technical obstacles, delays in
development or in obtaining final regulatory approval, cost overruns in
research and development programs or establishing manufacturing activities,
greater than anticipated administrative expenses or lower than anticipated
adoption rates or revenues after product introduction. Unanticipated
opportunities or contingencies also could result in increased cash
requirements. Accordingly, SONO could require additional financing earlier
than it presently anticipates, and such financing may not be obtainable on
a timely basis, on favorable terms, or at all.
If adequate funds are not available to meet its cash needs, SONO may be
required to significantly curtail its research and development programs,
its overall spending levels, or delay or cancel marketing initiatives or
product introductions, or obtain funds through arrangements with
collaborative partners or others that may require SONO to relinquish rights
to certain of its technologies or products.
PART II - OTHER INFORMATION
ITEM 5: Other Information
On May 5, 1998, SONO announced the hiring of Douglas W. Tefft as Vice
President, Global Distribution and David H. Gusdorf as Vice President,
Marketing. SONO also expects to shortly announce the hiring of a
Chief Financial Officer.
On May 8, 1998 SONO received a preliminary approval from the Food and Drug
Administration ("FDA") under section 510(k) to market its initial ultrasound
product. A section 510(k) marketing approval is based on the determination
by the FDA that the product to be sold is substantially equivalent to devices
already marketed in interstate commerce. Prior to shipping the first product,
SONO must submit a postclearance special report showing that the final product
meets all applicable FDA rules and regulations.
7
<PAGE>
PART II - OTHER INFORMATION
(Continued)
ITEM 6: Exhibits and Reports on Form 8-K
(a) No Exhibits are filed with this report.
(b) No Reports on Form 8-K were filed during the quarter ended
April 3, 1998.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SONOSIGHT, INC
Date: May 14, 1998 By: /S/ Kevin M. Goodwin
------------------ -----------------------
Kevin M. Goodwin
Principal Executive Officer
and President
Date: May 14, 1998 By: /S/ Mark Manum
------------------ ------------------------
Mark Manum
Principal Financial and
Accounting Officer
8
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> APR-03-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 18,000,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,000,000
<PP&E> 399,834
<DEPRECIATION> 29,457
<TOTAL-ASSETS> 18,399,834
<CURRENT-LIABILITIES> 130,139
<BONDS> 0
0
0
<COMMON> 48,633
<OTHER-SE> 18,221,062
<TOTAL-LIABILITY-AND-EQUITY> 18,399,834
<SALES> 758,607
<TOTAL-REVENUES> 758,607
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,220,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,461,519)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,461,519)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 00
<NET-INCOME> (2,461,519)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
