<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
_____________________
FORM 10-Q
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarter ended September 30, 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 or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
P.O. Box 3020
North Creek Parkway
Bothell, WA 98041-3020
(425) 951-1200
(Address and telephone number of registrant's principal executive offices)
_____________________
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 shorter periods that the
registrant has been required to file such reports), and (2) has been subject
to filing requirements for the past 90 days.
Yes (X) No ( )
--- ---
As of November 10, 1998, there were 4,921,671 shares of the registrant's $.01
par value Common Stock outstanding.
Page 1 of 12 sequentially numbered pages
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SONOSIGHT, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
Page No.
--------
<S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -
September 30, 1998 and December 31, 1997............................... 3
Condensed Statements of Operations -
One and three quarters ended September 30, 1998 and September 26, 1997,
and period from inception through September 30, 1998.................. 4
Condensed Statements of Cash Flows -
Three quarters ended September 30, 1998 and September 26, 1997,
and period from inception through September 30, 1998.................. 5
Notes to Condensed Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 10
Part II
Part II Other Information
Item 5. Other information........................................................ 11
Item 6. Exhibits and Reports on Form 8-K......................................... 11
Signature................................................................ 12
</TABLE>
Page 2 of 12 sequentially numbered pages
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Part I: Financial Information
Item 1: Financial Statements
SONOSIGHT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,526,799 $ --
Prepaid expenses and other current assets 292,880 --
------------ -----------
Total current assets 12,819,679 --
Property and equipment, net 2,109,536 409,967
Other assets 84,037 --
----------- -----------
Total assets $ 15,013,252 $ 409,967
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 788,061 $ --
Accrued expenses 1,070,584 169,839
Current portion of long-term obligations 287,796 --
------------ -----------
Total current liabilities 2,146,441 169,839
Long-term obligations, less current portion 363,094 --
Commitments -- --
Shareholders' equity:
Preferred stock, $1.00 par value:
Authorized shares--6,000,000;
Issued and outstanding shares--none -- --
Common stock, $.01 par value:
Authorized shares--50,000,000;
Issued and outstanding shares--
4,862,871 at September 30,1998 48,628 --
Additional paid-in-capital 40,628,928 --
Net advances from ATL -- 8,124,018
Net due from ATL (12,000,000) --
Deficit accumulated during development stage (16,173,839) (7,883,890)
------------ -----------
Total shareholders' equity 12,503,717 240,128
------------ -----------
Total liabilities and shareholders' equity $ 15,013,252 $ 409,967
============ ===========
</TABLE>
See accompanying notes.
Page 3 of 12 sequentially numbered pages
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SONOSIGHT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Quarter ended, Three Quarters ended, Period from February, 1994
September 30, September 26, September 30, September 26, (inception) through
1998 1997 1998 1997 September 30, 1998
-------------- ------------- ------------- ------------- --------------------------
<S> <C> <C> <C> <C> <C>
Grant revenue $ -- $ 540,496 $ 973,107 $ 1,863,581 $ 4,949,702
Expenses:
Research and development 2,273,436 1,928,834 6,456,449 4,952,306 16,209,865
Sales and marketing 641,113 427,546 1,992,708 693,265 3,260,980
General and administrative 512,550 168,935 1,208,325 439,023 2,047,122
----------- ----------- ----------- ----------- ------------
3,427,099 2,525,315 9,657,482 6,084,594 21,517,967
Interest income 175,155 -- 394,426 -- 394,426
----------- ----------- ----------- ----------- ------------
Net loss $(3,251,944) $(1,984,819) $(8,289,949) $(4,221,013) $(16,173,839)
=========== =========== =========== =========== ============
Basic and diluted net loss per $ (0.67) $ (0.42) $ (1.72) $ (0.90)
share =========== =========== =========== ===========
Weighted average shares used in
computation of basic and diluted
net loss per share: 4,862,861 4,696,000 4,830,790 4,672,000
</TABLE>
See accompanying notes.
Page 4 of 12 sequentially numbered pages
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SONOSIGHT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Quarters ended Period from February, 1994
September 30, September 26, (inception) through
1998 1997 September 30, 1998
------------- ------------- --------------------------
<S> <C> <C> <C>
Operating activities:
Net loss $(8,289,949) $(4,221,013) $(16,173,839)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 230,609 74,629 365,272
Changes in operating assets and liabilities:
(Increase) in prepaid expenses and other
current assets (292,880) -- (292,880)
Increase in accounts payable and other
accrued liabilities 1,688,806 110,550 1,858,645
----------- ----------- ------------
Net cash used in operating activities (6,663,414) (4,035,834) (14,242,802)
Investing activities:
Purchases of property and equipment (1,197,309) (283,617) (1,741,940)
Increases in deposits (84,037) -- (84,037)
----------- ----------- ------------
Net cash used in investing activities (1,281,346) (283,617) (1,825,977)
Financing activities:
Repayment of long-term obligations (81,980) -- (81,980)
Issuance of common stock 1,278 -- 1,278
Contributions from ATL 20,552,261 4,319,451 28,676,280
----------- ----------- ------------
Net cash provided by financing activities 20,471,559 4,319,451 28,595,578
Net increase in cash and cash equivalents 12,526,799 -- 12,526,799
Cash and cash equivalents at beginning of period -- -- --
----------- ----------- ------------
Cash and cash equivalents at end of period $12,526,799 $ -- $ 12,526,799
=========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 20,664 $ -- $ 20,644
=========== =========== ============
Supplemental disclosure of non-cash investing and
financing activities:
Equipment acquired through capital lease obligations $ 732,870 $ -- $ 732,870
=========== =========== ============
</TABLE>
See accompanying notes.
Page 5 of 12 sequentially numbered pages
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SONOSIGHT, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Interim Financial Information
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. The results of
operations for the three and nine months ended September 30, 1998, are not
necessarily indicative of results to be expected for the entire year ending
December 31, 1998 or for any other fiscal period. 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.
On April 6, 1998, SonoSight became an independent public company having been
spun-off to the shareholders of ATL Ultrasound, Inc. ("ATL"). The accompanying
condensed financial statements include the accounts of the Company business,
which consist of what was, until April 6, 1998, the highly-portable ultrasound
division of ATL. The financial statements for periods prior to April 6, 1998,
represent the combination of ATL's highly-portable ultrasound products 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 for the periods prior to April 6,
1998, which are derived from the historical books and records of ATL, include
the assets, liabilities, revenues and expenses of SONO at historical cost.
Reclassification of Prior Period Balances
Certain amounts reported in previous periods have been reclassified to conform
with the current period presentation.
Weighted Average Shares Outstanding
The accompanying combined financial statements of SONO for the nine months ended
September 26, 1997 present the number of weighted average shares used in
computing basic and diluted net 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 restricted shares issued by ATL
which were outstanding and totaling 327,197 and 617,585 as of September 30, 1998
and September 26, 1997, respectively, along with outstanding options to purchase
shares issued by SONO totaling 1,100,000 as of September 30, 1998, were not
included in the computation of diluted net loss per share because to do so would
be antidilutive.
Page 6 of 12 sequentially numbered pages
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Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis should be read in conjunction with the Company's
condensed financial statements and the related notes thereto appearing in Item 1
of this report. In addition to historical information, this report contains and
may incorporate by reference 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. The words "believe",
"expect", "internal", "anticipate", variations of such words, and similar
expressions identify forward-looking statements, but their absence does not mean
that the statement is not forward looking. These statements are not guarantees
of future performance and are subject to certain risks, uncertainties and other
factors that are difficult to predict. These risks, uncertainties and other
factors include, without limitation, uncertainties related to continued
scientific progress in research and development programs; 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, including demand for the Company's or
similar products and the level of competition; the ability and costs to file,
prosecute and enforce patent claims; the ability, time and costs to scale-up
manufacturing and commercialize the Company's products; 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 these and other 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.
Overview
SonoSight, Inc. ("SONO" or the "Company"), a development stage enterprise,
commenced operations in 1994 as a project of ATL Ultrasound, Inc. ("ATL").
SONO was chartered to develop the design and specifications for a highly-
portable ultrasound device and other highly-portable ultrasound products.
During the period from inception through April 6, 1998, 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, at
which time 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 diagnostic medical ultrasound devices. SONO's future growth will
largely depend on its ability to market and sell its ultrasound products to
physicians, hospitals, clinics, private medical practices and emergency medical
personnel worldwide. Since inception, funding from ATL and the U.S. Navy under
a U.S. Government Defense Advanced Research Projects Administration grant (the
"Development Contract") has been used to finance the development of SONO's
technologies. To date, SONO has not generated any revenue from product sales.
SONO will continue to incur operating losses at least until its product sales
generate sufficient revenue to fund its continuing operations. There can be no
assurances that there will be sufficient revenue to fund SONO's operations in
future periods.
Results of operations
Grant revenue
Grant revenue is recognized per the terms of the Development Contract and is
generally tied to the achievement of technological milestones. There was no
grant revenue for the quarter ended September 30, 1998, as compared to $540,496
for the comparable period in 1997. The absence of grant revenue in the most
recent quarter is consistent with management's expectations as the majority of
technological milestones had been achieved by the end of the second quarter,
June 30, 1998. Grant revenue for the three quarters ended September 30, 1998
was $973,107 versus $1,863,581 for the comparable period in 1997. The decrease
in grant revenue during 1998 as compared to 1997 was anticipated and is due to
SONO nearing the completion of the Development Contract and therefore reaching
fewer
Page 7 of 12 sequentially numbered pages
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milestone achievements. Under the terms of the Development Contract, most
of the grant revenue available to SONO had been recognized through June 30,
1998. Future revenues will depend primarily on product sales, which are not
anticipated until, at the earliest, the latter part of 1999 at which time SONO
expects to complete development of its initial product. The Company, therefore,
does not expect to recognize any significant revenues in the near term.
Research and development expense
Research and development expenses for the one and three quarters ended September
30, 1998 were $2,273,436 and $6,456,449 versus $1,928,834 and $4,952,306 for the
comparable periods in 1997. The increase in research and development expense is
due primarily to additional personnel and personnel related expenses and product
development expenses. The Company anticipates increased spending levels in
research and development in the near term as the Company completes development
of its initial products, continues to develop next generation products and
begins to equip facilities for manufacturing activity.
Sales and marketing expense
Sales and marketing expenses for the one and three quarters ended September 30,
1998 were $641,113 and $1,992,708 versus $427,546 and $693,265 for the
comparable periods in 1997. The increase in selling and marketing expenses is a
result of the Company's hiring of additional sales and marketing personnel and
increases in consulting and travel expenditures in 1998 versus 1997. Such
increases in personnel and marketing activities have been in support of product
definition, refinement of customer requirement specifications and attainment of
United States and international distributor agreements. The Company intends to
continue to add personnel and infrastructure to its selling and marketing
functions in anticipation of product introduction and expects that selling and
marketing expenses will increase significantly in the upcoming quarters.
General and administrative expense
General and administrative expenses for the one and three quarters ended
September 30, 1998 were $512,550 and $1,208,325 versus $168,935 and $439,023 for
the comparable periods in 1997. The increase in general and administrative
expenses is a result of an increase in personnel in the general management,
administration, finance and accounting functions in anticipation and as a result
of SONO becoming a stand-alone public company. SONO intends to continue to add
personnel and infrastructure, though at a slower rate than in the most recent
period, and consequently expects that general and administrative expenses will
continue to increase.
Net loss
Net losses for the one and three quarters ended September 30, 1998 were
$3,251,944 and $8,289,949 versus $1,984,819 and $4,221,013 for the comparable
periods in 1997. This increase is due primarily to the increase in expenses and
reduction in grant revenue as noted above. The Company expects to incur
significant net losses in the near term as it continues research and development
activity relating to its initial and next generation products, develops the
infrastructure required to support the manufacturing and distribution of the
products and continues to support necessary administrative systems for a stand-
alone public company.
Liquidity and Capital Resources
On April 6, 1998, ATL contributed to the capital of SONO all cumulative advances
made by ATL (net of Development Contract payments received) of approximately
$10.7 million in addition to $18 million in cash. Further, ATL is obligated,
without contingency, to contribute an additional $12 million cash on January 15,
1999. To date, advances from ATL, including the $18 million in cash received at
the time of the spin-off, grants from the Development Contract and proceeds from
lease financing have funded the Company's capital requirements. As of September
30, 1998, cash and cash equivalents on hand totaled $12.5 million. The cash
requirements of SONO's business have increased in recent periods and are
expected to continue to increase as SONO continues research and development
activity relating to its initial and next generation products, develops the
infrastructure required to support
Page 8 of 12 sequentially numbered pages
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the manufacturing and distribution of the products and continues to support
necessary administrative systems for a stand-alone public company.
SONO believes the existing cash and cash equivalents together with the $12
million to be received from ATL in January 1999 and funds which are available
through lease financing should be sufficient to fund the Company's operations
through the end of 1999. However, the amount of cash required to fund SonoSight
is difficult to predict, and will depend, in part, upon factors beyond SONO's
control. Capital requirements could exceed SONO's estimates as a result of a
variety of factors including, without limitation, technical obstacles, delays in
development, cost overruns in research and development programs or establishing
manufacturing activities, lower than or much greater than anticipated adoption
rates and greater than anticipated administrative expenses. Accordingly, SONO
could need to seek additional equity or debt 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 or cease operations.
Year 2000
Overview
The Year 2000 issue is pervasive in the general economy and complex, as
virtually every computer operation will be affected in some way by the rollover
of the two-digit year value to 00. The Year 2000 issue is the result of many
computer programs being written using two, rather than four, digits to define
the applicable year. Unless corrected, those systems that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000, potentially resulting in system failures or miscalculations.
Readiness
SONO is undertaking an initial review of its information technology computer
systems and currently believes that the Year 2000 issue does not pose
significant operational problems to its information technology systems. The
majority of SONO's software and computer equipment has been purchased within the
last two years from third-party vendors. The Company plans to survey its
equipment and third-party vendors to determine any needed Year 2000 solutions.
Furthermore, proper operation of our device with regard to Year 2000 related
issues is part of the functional requirements specification of our product, and
verification and validation testing will be performed to ensure compliance.
Costs
At this time, SONO cannot determine the full cost, if any, of correcting any
potential year 2000 problems. The full estimated cost, if any, of correcting the
Year 2000 issue will be known, if possible, after the Company completes its
initial review of equipment and third-party vendors.
Risks
SONO anticipates its greatest Year 2000 risks are activities involving research
and development software and equipment and manufacturing equipment and
material suppliers. If Year 2000 problems exist in these areas, it could take
significantly longer for the Company to bring products to market, which could
have a material adverse effect on the Company's business and financial
condition.
Contingency
After SONO completes its survey of Year 2000 issues, it will establish a
contingency plan to address any "high-risk" issues that could delay its efforts
to bring products to market.
Page 9 of 12 sequentially numbered pages
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Page 10 of 12 sequentially numbered pages
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Part II: Other Information
Item 5. Other Information
The Company had previously utilized financial quarters that were based on a
four-four-five week per quarter structure independent of particular calendar
quarter-end days, with any remainder being adjusted to a true year-end. For
ease of financial reporting, and other related reasons, the Company now bases
its financial quarters on calendar quarter-end days. The result of this change
is that the Company's quarters now end on the following days: December 31, March
31, June 30 and September 30.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
--------
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
-------------------
No reports on form 8-K were filed during the quarter ended September 30, 1998.
Page 11 of 12 sequentially numbered pages
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SIGNATURE
Pursuant to the requirements of the Securities and 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.
(Registrant)
Dated: November 12, 1998 By: /S/ DONALD F. SEATON, III
------------------ -----------------------------
Donald F. Seaton III
Vice President, Finance,
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Page 12 of 12 sequentially numbered pages
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,526,799
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 12,819,679
<PP&E> 2,438,299
<DEPRECIATION> (328,763)
<TOTAL-ASSETS> 15,013,252
<CURRENT-LIABILITIES> 2,146,441
<BONDS> 363,094
0
0
<COMMON> 48,628
<OTHER-SE> 12,455,089
<TOTAL-LIABILITY-AND-EQUITY> 15,013,252
<SALES> 0
<TOTAL-REVENUES> 973,107
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 9,657,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,289,949)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,289,949)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,289,949)
<EPS-PRIMARY> (1.72)
<EPS-DILUTED> (1.72)
</TABLE>
