<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended September 30, 1999
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
SONOSITE, INC.
(Exact name of registrant as specified in its charter)
Washington 91-1405022
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
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 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 [ ]
As of November 8, 1999, there were 7,944,006 shares of the registrant's $.01 par
value Common Stock outstanding.
Page 1 of 18 sequentially numbered pages
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SONOSITE, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------------
<C> <S> <C>
Part I Financial Information
Item 1. Financial Statements (unaudited)
Condensed Balance Sheets -- September 30, 1999 and December 31, 1998.......................... 3
Condensed Statements of Operations -- One and three quarters ended September 30, 1999 and
1998, and period from inception through September 30, 1999.................................... 4
Condensed Statements of Cash Flows -- Three quarters ended September 30, 1999 and 1998, and
period from inception through September 30, 1999.............................................. 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.................................... 17
Part II Other Information
Item 6. Exhibits and Reports on Form 8-K.............................................................. 17
Signature..................................................................................... 18
</TABLE>
Page 2 of 18 sequentially numbered pages
<PAGE>
Part I: Financial Information
Item 1: Financial Statements
SONOSITE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS
September 30, December 31,
1999 1998
------------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,027,985 $ 7,525,762
Investment in marketable securities 30,430,303 --
Receivable from ATL Ultrasound -- 12,000,000
Accounts receivable 726,863 --
Inventory 1,646,841 --
Prepaid expenses and other current assets 540,388 304,599
------------------------- --------------------
Total current assets 34,372,380 19,830,361
Investment in marketable securities 2,180,688 --
Property and equipment, net 4,541,923 3,379,815
Other assets 97,876 80,057
------------------------- --------------------
Total assets $ 41,192,867 $ 23,290,233
========================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Checks drawn in excess of bank balances $ -- $ 601,629
Accounts payable 1,464,384 781,999
Accrued and other expenses 1,618,081 1,123,948
Current portion of long-term obligations 428,992 388,795
------------------------- --------------------
Total current liabilities 3,511,457 2,896,371
Deferred rent 82,674 79,923
Long-term obligations, less current portion 205,093 480,964
------------------------- --------------------
Total liabilities 3,799,224 3,457,258
Commitments and contingencies
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:
As of December 31, 1998 -- 4,872,193
As of September 30, 1999 -- 7,920,347 79,203 48,722
Additional paid-in-capital 76,677,978 40,693,195
Accumulated other comprehensive loss (52,670) --
Deficit accumulated during development stage (39,310,868) (20,908,942)
------------------------- --------------------
Total shareholders' equity 37,393,643 19,832,975
------------------------- --------------------
Total liabilities and shareholders' equity $ 41,192,867 $ 23,290,233
========================= ====================
</TABLE>
See accompanying notes.
Page 3 of 18 sequentially numbered pages
<PAGE>
SONOSITE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Period from
February, 1994
(inception)
Quarter Ended Three Quarters Ended Through
September 30, September 30, September 30,
1999 1998 1999 1998 1999
------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Grant revenue $ -- $ -- $ 124,506 $ 973,107 $ 5,074,208
Sales revenue 745,438 -- 745,438 -- 745,438
Cost of sales 507,571 -- 507,571 -- 507,571
------------- ------------ ------------ ----------- ------------
Gross margin on sales revenue 237,867 -- 237,867 -- 237,867
Operating expenses:
Research and development 4,072,731 2,273,436 11,139,820 6,456,449 30,367,309
Sales and marketing 2,187,057 641,113 6,687,916 1,992,708 11,076,426
General and administrative 573,977 512,550 1,785,825 1,208,325 4,528,506
------------- ------------ ------------ ----------- ------------
Total operating expenses 6,833,765 3,427,099 19,613,561 9,657,482 45,972,241
Interest income, net 342,304 175,155 849,262 394,426 1,349,298
------------- ------------ ------------ ----------- ------------
Net loss $(6,253,594) $(3,251,944) $(18,401,926) $(8,289,949) $(39,310,868)
============= ============ ============ =========== ============
Basic and diluted net
loss per share $(0.79) $(0.67) $(2.80) $(1.72)
============= ============ ============ ===========
Weighted average shares used
in computation of basic
and diluted net loss per share 7,883,109 4,862,861 6,574,365 4,830,790
============= ============ ============ ===========
</TABLE>
See accompanying notes.
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<PAGE>
SONOSITE, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Period from
Three Quarters Ended February 1994,
September 30, (inception)
---------------------------------------- through
September 30,
1999 1998 1999
------------------ ----------------- -----------------
<S> <C> <C> <C>
Operating activities:
Net loss $(18,401,926) $(8,289,949) $(39,310,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 928,932 230,609 1,474,207
Amortization of deferred stock compensation 262,506 -- 321,420
Changes in operating assets and liabilities:
Increase in accounts receivable (726,863) -- (726,863)
Increase in inventory (1,646,841) -- (1,646,841)
Increase in prepaid expenses and other current assets (235,789) (292,880) (540,388)
Increase in accounts payable 682,385 788,061 1,464,384
Increase in accrued and other expenses 494,133 900,745 1,618,081
Increase in deferred rent 2,751 -- 82,674
------------------ ----------------- -----------------
Net cash used in operating activities (18,640,712) (6,663,414) (37,264,194)
Investing activities:
Proceeds from maturity of marketable securities 5,345,000 -- 5,345,000
Purchase of marketable securities (38,008,661) -- (38,008,661)
Purchases of property and equipment (2,091,040) (1,197,309) (4,956,137)
Increase in other assets (17,819) (84,037) (97,876)
------------------ ----------------- -----------------
Net cash used in investing activities (34,772,520) (1,281,346) (37,717,674)
Financing activities:
Decrease in checks drawn in excess of bank balances (601,629) -- --
Repayment of long-term obligations (235,674) (81,980) (425,908)
Exercise of stock options 226,503 1,278 233,231
Proceeds from sale of common stock, net of costs 35,526,255 -- 35,526,255
Contributions from ATL 12,000,000 20,552,261 40,676,275
------------------ ----------------- -----------------
Net cash provided by financing activities 46,915,455 20,471,559 76,009,853
Net (decrease)/increase in cash and cash equivalents (6,497,777) 12,526,799 1,027,985
Cash and cash equivalents at beginning of period 7,525,762 -- --
------------------ ----------------- -----------------
Cash and cash equivalents at end of period $ 1,027,985 $12,526,799 $ 1,027,985
================== ================= =================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 101,420 $ 20,664 $ 142,484
================== ================= =================
Supplemental disclosure of non-cash investing and financing
activities:
Equipment acquired through long-term obligations $ -- $ 732,870 $ 1,059,993
================== ================= =================
Unrealized loss on investments $ 52,670 $ -- $ 52,670
================== ================= =================
</TABLE>
See accompanying notes.
Page 5 of 18 sequentially numbered pages
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SONOSITE, 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 SonoSite, Inc. ("SonoSite") management, 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
quarter and three quarters ended September 30, 1999 are not necessarily
indicative of our results to be expected for the entire year ending December 31,
1999 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, 1998, included in
our Annual Report on Form 10-K/A.
SonoSite, a development stage enterprise, began operations in 1994 as a project
of ATL Ultrasound, Inc. ("ATL"). The project was chartered to develop the design
and specifications for a hand-carried ultrasound device. During the period from
inception (February 1994) through April 6, 1998, the project was organized as a
separate division of ATL. On February 2, 1998, the ATL Board of Directors
approved a plan to spin off SonoSite as an independent publicly owned company
(the "Distribution"). This transaction was effected through a tax-free dividend
distribution of SonoSite's shares to ATL shareholders as of April 6, 1998 (the
"Distribution Date"). ATL shareholders received one share of SonoSite common
stock for each three shares of ATL common stock held. In addition, ATL option
holders were granted one option to purchase SonoSite shares for every six
options to purchase ATL shares.
The financial statement information for periods prior to the Distribution Date
represents the combination of the hand-carried ultrasound division of ATL and
the corporate entity, SonoSite, Inc. Such information has been derived from the
historical books and records of ATL and reflects the assets, liabilities,
revenues and expenses of SonoSite, as it was operated as a division of ATL, at
historical cost.
Financial statement information for subsequent periods consists solely of
SonoSite's activity as a separate company.
For periods prior to the Distribution Date, the statement of operations includes
allocations for facilities and certain support services, such as engineering
overhead, administration, accounting, finance, human resources and regulatory
functions. The allocations were based on estimates of personnel time and effort
spent by ATL on behalf of SonoSite. Management believes these allocations were
made on a reasonable basis. Subsequent to the Distribution Date, items noted
above were incorporated into agreements with ATL and charges were based upon
actual time spent by ATL on behalf of SonoSite.
Reclassification of Prior Period Balances
Certain amounts reported in previous periods have been reclassified to conform
to the current period presentation.
Investments
Investments are managed by a third-party investment advisor and consist of high-
quality debt securities and commercial paper. The entire investment portfolio is
classified as available for sale and is classified based upon management's
intended liquidation date.
Risk Purchases
As part of our operations, we permitted our manufacturer, ATL, to procure
certain raw material items with long lead-times that will be used for the
production of our products. If these procurements become obsolete, we would be
responsible for compensating ATL for these items.
Page 6 of 18 sequentially numbered pages
<PAGE>
Accumulated Other Comprehensive Loss
Other comprehensive losses consist entirely of net unrealized gains and losses
on investment for the period ending September 30, 1999. For the quarter ended
September 30, 1999, SonoSite had an unrealized gain of $40,130 and for the
three-quarters ended September 30, 1999, SonoSite had an unrealized loss of
$52,670. No such gain or loss existed as of December 31, 1998.
Net Loss per Share
Basic and diluted net loss per share was computed by dividing the net loss by
the weighted average shares outstanding.
Weighted average shares outstanding represent weighted average shares of
SonoSite outstanding from the Distribution Date forward and, for the periods
prior to the Distribution Date, weighted average shares outstanding represent
ATL weighted average shares as adjusted for the exchange ratio established on
the Distribution Date of one SonoSite share for every three shares of ATL. All
periods presented were restated to reflect this distribution.
Options to purchase SonoSite shares and unvested restricted SonoSite shares
issued by ATL and options issued by SonoSite after the Distribution Date which
were outstanding were not included in the computations of diluted net loss per
share because to do so would be antidilutive. As of September 30, 1999 and 1998,
outstanding SonoSite options and unvested restricted shares issued by ATL
through the Distribution totaled 244,994 and 327,197 and outstanding stock
options issued by SonoSite as of September 30, 1999 and 1998, totaled 1,884,015
and 1,100,000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion and analysis should be read in conjunction with our condensed
financial statements and the related notes thereto appearing in Item 1 of this
report. In addition to historical information, this report contains and
incorporates forward-looking statements that are based on current expectations,
assumptions, estimates and projections about us and our industry. When used in
this discussion, the words "expects," "anticipates," "estimates" and "intends"
and similar expressions are intended to identify forward-looking statements.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in such forward-looking
statements as a result of numerous factors, as more fully described below under
"Factors Regarding Forward-Looking Statements" and elsewhere in this Report. You
should not unduly rely on these forward-looking statements, which apply only as
of the date of this Report.
Overview
SonoSite, a development-stage enterprise, commenced operations in 1994 as a
project of ATL Ultrasound. We were formed to develop the design and
specifications for miniaturized ultrasound products for diagnostic imaging in a
variety of clinical settings. From the time we started on this project until we
became an independent company on April 6, 1998, we were organized as a separate
division within ATL Ultrasound. On February 2, 1998, the ATL Ultrasound board of
directors approved a plan to spin off our division as an independent publicly
owned company. This transaction was completed through the tax-free distribution
of one new share of SonoSite common stock for every three shares of ATL
Ultrasound common stock held on April 6, 1998, and options to purchase one share
of SonoSite common stock for every six shares of ATL Ultrasound common stock
subject to outstanding options on April 6, 1998.
ATL Ultrasound retained no ownership in us following the spin-off. In an
unrelated event, the Philips Medical Products Division of Philips Electronics,
N.V. of the Netherlands acquired ATL Ultrasound later in 1998.
To date, our capital requirements have been met primarily by contributions from
ATL Ultrasound in connection with our spin-off, funding from the U.S. Office of
Naval Research under a U.S. Government Defense Advanced Research Projects Agency
grant and net proceeds from our public offering of 2,990,000 shares of common
stock, which
Page 7 of 18 sequentially numbered pages
<PAGE>
resulted in net proceeds of approximately $35.5 million. ATL Ultrasound's
funding obligations have been met and any future grant revenue is expected to be
insignificant.
Results of operations
Grant revenues
In prior periods, we received grant revenue from a contract with the U.S. Office
of Naval Research that was generally tied to the achievement of technological
milestones. There was no grant revenue for the quarter ended September 30, 1999
or 1998. Grant revenue for the three-quarters ended September 30, 1999 and 1998
was $124,506 and $973,107. The 1999 decrease in grant revenue was consistent
with our expectations, as the majority of technological milestones had been
achieved by the end of June 1998.
Sales revenue, cost of sales and gross margin on sales revenue
Sales revenue for the quarter and three-quarters ended September 30, 1999 was
$745,438. Cost of sales for the same periods was $507,571. There were no such
activities during the same periods in 1998. Sales of our SonoSite 180 ultrasound
systems and accessories began during September 1999 and therefore our revenue,
cost of sales and resulting gross margin are entirely related to September
activity. Our initial gross margin of $237,867, represents an initial gross
margin percentage of 32%, which is consistent with our initial expectations
which included discounts and reduced pricing to stimulate market demand and
lower than capacity manufacturing volumes. We expect sales revenue to increase
in the future and margins to improve moderately with increased sales revenue.
Research and development expenses
Research and development expenses for the quarter and three-quarters ended
September 30, 1999 were $4,072,731 and $11,139,820. In the comparable periods in
1998, we reported research and development expenses of $2,273,436 and
$6,456,449. The increase in research and development expenses was primarily the
result of initial development and start-up activities surrounding the
manufacturing and tooling of our initial product and accessories and additional
personnel and personnel-related expenses to facilitate the transition to an
operating company, in particular in the manufacturing operations area. We
anticipate that spending levels in research and development in 1999 will
decrease slightly in the fourth quarter as a result of manufacturing overhead
costs being absorbed as inventory is produced. Other research and development
expenses are expected to remain stable as we proceed with our next generation of
products.
Sales and marketing expenses
Sales and marketing expenses for the quarter and three-quarters ended September
30, 1999 were $2,187,057 and $6,687,916. In the comparable periods in 1998, we
reported sales and marketing expenses of $641,113 and $1,992,708. The increase
was primarily the result of increases in personnel and personnel-related
expenses and increases in consulting, travel and trade show related expenditures
in 1999 in connection with the formal launch and first sales of our SonoSite 180
system and accessories. We expect sales and marketing expenses to increase as we
continue promotional activity, support our worldwide distribution network and
actively create market demand for our products.
General and administrative expenses
General and administrative expenses for the quarter and three-quarters ended
September 30, 1999 were $573,977 and $1,785,825. In the comparable periods in
1998, we reported general and administrative expenses of $512,550 and
$1,208,325. The comparable period increases were primarily the result of
additional personnel being added to support the growing development, marketing
and distribution functions, including accounting and finance, investor
relations, human resources and information services. We intend to add
administrative personnel to support the research and development, manufacturing
and selling and marketing activities, and, consequently, expect that general and
administrative expenses will increase at a moderate rate.
Page 8 of 18 sequentially numbered pages
<PAGE>
Net loss
Net loss for the quarter and three-quarters ended September 30, 1999 was
$6,253,594 and $18,401,926. In the 1998 comparable periods, we reported a net
loss of $3,251,944 and $8,289,949. The quarter to quarter increase in net losses
was due to the increase in expenses as noted above. These expenses were
partially offset by our gross margin on sales and investment income earned
during the period. The three-quarter to three-quarter increase in net losses was
due to increases in expenses and decreases in grant revenue, both of which were
partially offset by our gross margin on sales and investment income. We expect
to incur net losses in the near term as we continue research and development
activities relating to our next generation products, establish our manufacturing
processes, support and possibly increase sales and marketing efforts to
stimulate market demand, support current and future customer needs and continue
to provide necessary administrative support for increased activities throughout
SonoSite.
Liquidity and Capital Resources
On April 6, 1998, the day we became an independent public company, ATL
Ultrasound contributed $18.0 million in cash and was obligated to contribute an
additional $12.0 million in cash on January 15, 1999. That payment was received
on schedule. In April 1999, we received approximately $35.5 million, net of
underwriters' fees and other offering expenses, from our public offering of
2,990,000 shares of common stock. The $30.0 million cash transfer from ATL
Ultrasound, development grant revenues from the U.S. Office of Naval Research of
$5.1 million, lease financing of $1.1 million and net proceeds of our public
offering of common stock continue to fund our capital requirements.
As of September 30, 1999, cash and cash equivalents on hand totaled $1.0 million
and investments in marketable securities totaled $32.6 million. Our cash
requirements have increased in recent quarters due to continued product
development, validation and verification activities, preproduction manufacturing
expenditures, sales and marketing activity and activity to support our worldwide
distribution network. As described above, our cash requirements are expected to
continue to increase in 1999 as we build inventories, continue those activities
discussed and support our customers and distribution network.
We believe that our existing cash and cash equivalents, together with interest
thereon and product revenue, should be sufficient to fund our operations at
least through 2000. However, it is difficult to accurately predict the amount of
cash that we may require in the future. The amount required will depend, in
part, upon factors beyond our control. Capital requirements could exceed our
estimates as a result of a variety of factors. These factors include technical
obstacles, strategic initiatives, delays in product shipment, cost overruns in
research and development programs or manufacturing activities, greater than
anticipated administrative expenses or lower than anticipated customer demand.
From time to time, we may seek additional financing from various sources.
Adequate financing may not be available on a timely basis, on favorable terms,
or at all. If we are unable to meet our cash needs, we will be required to
significantly alter our operating plans. Activities that may be affected could
include our research and development programs, overall spending levels,
strategic and marketing initiatives or future product and accessory
introductions. We also may be required to seek to obtain funds through
arrangements with collaborative partners or others that may require us to
relinquish rights to aspects of our technology or products.
Subsequent Event
Subsequent to September 30, 1999, we entered into a definitive agreement for the
sale of 1,250,000 shares of common stock at a price of $25 per share to selected
institutional and other accredited investors. Gross proceeds from this private
placement are expected to be $31.25 million. The closing of this financing is
expected to occur concurrently with the declaration of effectiveness of a resale
registration statement relating to the shares, which has not occurred as of the
filing of this document.
Year 2000 Compliance
Overview
Many computer programs were 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. This
problem has been dubbed the
Page 9 of 18 sequentially numbered pages
<PAGE>
"Year 2000 Problem." The Year 2000 Problem is complex and pervasive in the
general economy, as virtually every computer operation will be affected in some
way by the rollover of the two-digit year value to 00.
Readiness
We conducted a review and tested our SonoSite 180 system and its accessories.
Through our testing, which included testing of both operability and
calculations, we found that our products are year 2000 compliant and we do not
anticipate problems relating to the rollover to the year 2000 and beyond,
including the leap year.
In addition to our products, we conducted a review of our existing information
technology infrastructure and computer systems. Based on representations made by
our vendors and limited testing performed, we believe that our existing
information technology infrastructure and computer systems are year 2000
compliant. We also contacted other vendors via direct mail or the internet and,
to date, have received a response from over eighty percent of those vendors and
nearly one hundred percent of those vendors considered to be critical to our
ability to continue as a going concern. None of the responses received indicated
a significant year 2000 issue. We will continue to contact new vendors
throughout the year and follow-up with vendors from which we do not receive a
response or have defined as critical.
Costs
To date, we have not incurred any significant costs directly associated with our
year 2000 compliance efforts. At this time, we cannot determine the full cost of
correcting any potential year 2000 issues. The full estimated cost of correcting
any year 2000 issues will not be known until after we complete our initial
survey of third-party vendors. We do not anticipate that these costs will be
significant.
Risks
In assessing the overall risks related to the Year 2000 Problem, although we
have noted no issues during our testing, we believe our greatest potential
exposures involve development activities relating to our products. Additional
areas of risk include equipment and materials that will be used in manufacturing
our products and accessories, vendors providing distribution functions and
software and hardware support for these and other administrative functions. If
the Year 2000 Problem exists in these areas, it could significantly delay or
eliminate our ability to bring our products to market, which would have a
material adverse effect on our business. Because these areas of risk involve
third parties, over which we have little or no control, we are in the process of
developing a contingency plan for these risks, but cannot assure you that we
will be able to develop one to address all potential issues.
Factors Affecting Forward-Looking Statements
In addition to the other information contained in this Report, you should
carefully read and consider the following risk factors before purchasing our
common stock. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In such case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
We have a limited operating history and there are numerous reasons why we may
not be successful
We commenced operations as a separate company in April 1998. Prior to that, we
operated as a business unit of ATL Ultrasound. We have only recently begun to
ship our first products. Accordingly, we have a limited operating history and
our prospects for success are difficult to determine. You should consider our
business and prospects in light of the risks and uncertainties encountered by
new technology companies in evaluating whether to invest in our common stock.
There are many reasons why we may be unsuccessful in implementing our strategy,
including:
. any inability to manufacture our products with the quality and quantity
necessary to achieve profitability;
. our dependence on the market acceptance of a new platform for ultrasound
imaging procedures;
. our inability to achieve market acceptance of our products for any other
reason;
. our reliance on third-party manufacturing of our products;
Page 10 of 18 sequentially numbered pages
<PAGE>
. our need to maintain and expand distribution networks;
. our need to obtain governmental approvals in key foreign markets;
. any loss of key personnel;
. any inability to respond effectively to competitive pressures;
. any inability to manage rapid growth and expanding operations; and
. any failure to comply with governmental regulations.
We have a history of losses, we expect future losses and we may never be
profitable
We have incurred net losses in each quarter since we started operations and have
only recently begun product sales. As of September 30, 1999, we had an
accumulated deficit of approximately $39.3 million, including approximately
$10.3 million that was accumulated prior to our commencing operations as a
separate company in April 1998. We expect to incur substantial additional
expenses in the future as we continue to conduct research and development
efforts on newer generation products and increase sales and marketing efforts on
our recently released first generation products. We will need to generate
significant additional revenues in the future before we will be able to achieve
and maintain profitability. Our business strategies may not be successful and we
may not be profitable in any future period. If we do become profitable, we
cannot be certain that we can sustain or increase profitability on a quarterly
or annual basis.
Demand for our products may fluctuate, is subject to numerous uncertainties and
may not support a profitable business
Our products represent a new platform for ultrasound imaging procedures and we
have only sold our products in limited quantities. The market for hand-carried,
high-performance ultrasound devices is new and largely untested. We do not know
the rate at which physicians or other healthcare providers will adopt our
products or the rate at which they will purchase them in the future. Acceptance
of our products by physicians, including physicians who do not currently use
ultrasound, is essential to our success and may require us to overcome
resistance to a new platform for ultrasound imaging. Use of our products will
require training for physicians who currently do not use ultrasound imaging
instruments. The time required to complete such training may be substantial and
could result in a delay or decrease in market acceptance. Currently, patients
requiring an ultrasound examination are generally referred to a centralized
testing location. Radiologists and other specialized providers of ultrasound at
these locations may have an incentive to discourage market acceptance for our
products in order to maintain these referrals.
Physicians and other healthcare providers will not purchase our products unless
they determine that they are preferable to other means of obtaining an
ultrasound examination and that the benefits to the patient and physician
outweigh the costs of purchasing our products. This determination will depend on
our products' image quality, cost-effectiveness, ease of use, reliability and
portability. Furthermore, acceptance of our products by physicians and other
healthcare providers may be more difficult if they are unable to obtain adequate
reimbursement from third-party payors for tests performed using our products. In
addition, while we have priced our products to be competitive in the marketplace
for lower-end ultrasound machines, our pricing policies could limit market
acceptance compared to competing products or alternative testing methods.
We rely on ATL Ultrasound for manufacturing our products and any interruption or
delay at ATL Ultrasound could harm our business
We have contracts with ATL Ultrasound for manufacturing services for all of our
ultrasound products. These services are critical to our ability to deliver our
products to customers. ATL Ultrasound may be unable to provide all the
manufacturing capacity we will need to meet our planned objectives. Although we
believe that we will ultimately develop alternative sources for the services
provided by ATL Ultrasound, we may lose future sales and incur additional
expenses as a result of any interruption or delay by ATL Ultrasound in
manufacturing our products. Additionally, ATL Ultrasound has the right to
terminate our manufacturing contract on 180 days' notice.
Page 11 of 18 sequentially numbered pages
<PAGE>
We intend to assume some or all of the manufacture and assembly of our products
but we have no manufacturing experience or capability
Within the next two years, we intend to assume some or all of the manufacture
and assembly of our products. To do so, we will be required to develop our own
manufacturing capability. We may be unable to comply with regulations applicable
to manufacturers of ultrasound devices or manufacture our products at a cost or
in quantities necessary to achieve or maintain profitability. In addition to
compliance with regulatory requirements, we may encounter difficulties in
scaling up production of our products, including problems involving
manufacturing yields, quality control and assurance and shortages of qualified
personnel. We will also need to effectively manage raw material inventories to
minimize shortages that would disrupt manufacture. We have no experience with
manufacturing and assembly and we may be unable to successfully meet these
challenges.
If our third-party vendors fail to supply us with the highly specialized parts
and other components we need for our products, we will be unable to effectively
ship our products
We depend on third-party vendors to supply highly specialized parts, such as
custom-designed integrated circuits and some transducer components. These
vendors may experience difficulty in manufacturing these parts, or in meeting
our high quality standards. In addition, these parts generally have long order
lead times which restrict our ability to respond quickly to changing market
conditions. If we are required to switch vendors, the manufacture and delivery
of our products could be interrupted for an extended period. We also rely on
third party vendors to supply essential parts and components that are in high
demand in other industries such as electronics manufacturing and
telecommunications equipment manufacturing. Our ability to manufacture and
deliver products in a timely manner could be harmed if these vendors fail to
maintain an adequate supply of these components.
We depend on single-source vendors for some of our components which may be
difficult and costly to replace
We depend on single-source vendors for some key components for our products,
including custom-designed integrated circuits, image displays, batteries,
capacitors and transformers. There are relatively few alternative sources of
supply for some of these components. While these vendors have generally produced
our components with acceptable quality, quantity and cost in the past, they have
experienced periodic problems that have caused us delays in production. To date
these problems have not been material. These suppliers may be unable to meet our
future demands or may continue to experience quality and specification problems
which might cause us to experience delays, incur additional costs and possibly
miss customer deliveries. Establishing additional or replacement suppliers for
these components may take a substantial amount of time. If we have to switch to
a replacement vendor, the manufacture and delivery of our products could be
interrupted for an extended period.
Our future success could be impaired if the perception of our products is based
on any early performance problems
We will not succeed unless the marketplace is confident that we can provide
quality products and deliver them in a timely manner. We have only recently
begun to ship our products. If these initial shipments fail to perform as
advertised or if they are perceived as being difficult to use or causing
discomfort to patients, the public image of our products may be impaired. Public
perception may also be impaired if we fail to deliver our products in a timely
manner due to difficulties with our suppliers and vendors or due to our
inability to efficiently manufacture and assemble products in-house. A tarnished
reputation could result in the failure of our products to gain market acceptance
even after any quality or delivery problems are resolved.
We may be unable to manage our growth, which could strain our resources and
impair our ability to deliver our products
We expect significant growth in all areas of operations as we develop and market
our products. We will need to add personnel and expand our capabilities, which
may strain our existing management, operational, financial and other resources.
To compete effectively and manage future growth, we must
. accurately forecast demand for our products;
. train, manage and motivate a growing employee base; and
Page 12 of 18 sequentially numbered pages
<PAGE>
. improve existing operational, financial and management information systems.
We may be unable to complete necessary improvements to our systems, procedures
and controls to support our future operations in a timely manner. In addition,
we may be unable to attract or retain required personnel and our management may
be unable to develop the additional expertise required to manage any future
growth.
Our quarterly operating results are uncertain and may fluctuate significantly,
which could impair the value of your investment
Our future operating results will depend on numerous factors, many of which we
do not control. Changes in any or all of these factors could cause our operating
results to fluctuate and increase the volatility of our stock. Some of these
factors are
. demand for our products;
. product and price competition;
. changes in the costs of components;
. success of our indirect sales and distribution channels;
. successful development and commercialization of new and enhanced products on
a timely basis;
. timing of new product introductions and product enhancements by us or our
competitors; and
. timing and magnitude of our expenditures.
In addition, we intend to have our products manufactured based on forecasts of
sales in future periods. Our forecast in any particular period may prove
inaccurate, which could cause fluctuations in our manufacturing costs and our
operating results. Our future operating results could fall below the
expectations of securities analysts or investors and reduce the market price of
our stock. We believe that there may be some fluctuations caused by year-end
budgetary pressures on our customers, customer buying patterns and the efforts
of our indirect sales and distribution network to meet or exceed annual sales
quotas. These factors make it difficult to forecast our revenues and operating
results.
The market for ultrasound imaging products is highly competitive and we may be
unable to compete effectively
The existing market for ultrasound imaging products is well established and
intensely competitive. In addition, we are seeking to develop new markets for
our hand-carried ultrasound imaging products. In response, we expect competition
to increase as potential and existing competitors begin to enter these new
markets or modify their existing products to compete directly with ours. Our
primary competitors have
. better name recognition;
. significantly greater financial resources; and
. existing relationships with some of our potential customers.
Our competitors may be able to use their existing relationships to discourage
customers from purchasing our products. In addition, our competitors may be able
to devote greater resources to the development, promotion and sale of new or
existing products, thereby allowing them to respond more quickly to new or
emerging technologies and changes in customer requirements.
We have limited sales and marketing experience and rely on an indirect sales and
distribution network to sell our products which we may be unable to successfully
maintain or replace
We have limited sales and distribution capabilities and have established an
indirect sales and distribution network to sell our products domestically and
internationally. Our future revenue growth will depend in large part on our
success in maintaining and expanding these indirect sales and distribution
channels. We depend on these distributors to help promote market acceptance and
demand for our products. We may elect to develop our own direct sales and
distribution capabilities in the future or we may be required to do so if we
fail to maintain or expand our existing
Page 13 of 18 sequentially numbered pages
<PAGE>
third-party distribution network. Developing our own direct sales and
distribution capabilities will be expensive and time-consuming. We may be unable
to develop our own distribution capabilities in a timely manner, if at all,
which would have an adverse effect on our ability to sell our products.
Many of our third-party distributors will be in the business of distributing
other, sometimes competing, medical products. As a result, our products may not
receive the resources and support required within this network to meet our sales
objectives.
We intend to manage our third-party distribution network with several sales
directors. These sales directors will need a high level of technical expertise
and knowledge regarding our products' capabilities and ultrasound imaging
products in general and their use. We face intense competition for qualified
sales directors and may be unable to attract and retain such personnel, which
would adversely affect our ability to expand and maintain our third-party
distribution network.
If we do not retain key employees and attract additional highly skilled
employees, we will not be successful
Our future performance will depend largely on the efforts and abilities of our
key technical, marketing and managerial personnel and our ability to retain
them. Our success depends on our ability to attract and retain additional key
personnel in the future. The loss of any of our key employees could adversely
affect our business, particularly the loss of any of our key engineering
personnel. We do not have any employment agreements with any of our employees.
We do not maintain key person insurance on any of our employees.
We may be unable to adequately protect our intellectual property rights, which
could harm our business
Our success and ability to compete depend on our licensed and internally
developed technology. We protect our proprietary technology through a
combination of patent, copyright, trade secret and trademark law. We also enter
into confidentiality or license agreements with our employees, consultants and
corporate partners, and generally control access to, and the distribution of,
our product designs, documentation and other proprietary information, as well as
the designs, documentation and other information we license from others. Despite
our efforts to protect these proprietary rights, unauthorized parties may copy,
develop independently or otherwise obtain and use our products or technology.
We cannot be sure that our pending patent applications will result in issued
patents. In addition, our issued patents or pending applications may be
challenged or circumvented by our competitors. Policing unauthorized use of our
intellectual property will be difficult and we cannot be certain that we will be
able to prevent misappropriation of our technology, particularly in countries
where the laws may not protect our proprietary rights as fully as in the United
States.
Our products may infringe on the intellectual property rights of others which
could subject us to significant liability
Many of our competitors in the ultrasound imaging business hold issued patents
and have filed, or may file, patent applications. Our competitors may claim our
technology or products infringe upon the technology covered by these patents or
patent applications. Any such claims, with or without merit, could
. be time-consuming to defend;
. result in costly litigation;
. divert management's attention and resources;
. cause product shipment delays;
. require us to enter into royalty or licensing agreements;
. prevent us from manufacturing or selling some or all of our products; or
. result in our liability to one or more of these competitors.
Page 14 of 18 sequentially numbered pages
<PAGE>
If a third party makes a successful claim of patent infringement against us, we
may be unable to license the infringed or similar technology on acceptable
terms, if at all.
Our products may become obsolete
Our competitors may develop and market ultrasound products that render our
products obsolete or noncompetitive. In addition, although diagnostic ultrasound
imaging products may have price and/or performance advantages over competing
medical imaging equipment, such as computed tomography and magnetic resonance
imaging, any price or performance advantages may not continue. Our products
could become obsolete or unmarketable if other products utilizing new
technologies are introduced or new industry standards emerge. As a result, the
life cycles of our products are difficult to estimate. To be successful, we will
need to continually enhance our products and to design, develop and market new
products that successfully respond to any competitive developments. In addition,
because our products are based on a single platform, we may be more vulnerable
to adverse events affecting the healthcare industry generally, and the medical
ultrasound market specifically, than we would be if we offered products based on
more than one platform.
We may incur tax liability in connection with our spinoff from ATL Ultrasound
Our spinoff was treated by ATL Ultrasound as a tax-free spinoff under Section
355 of the Internal Revenue Code of 1986. However, if ATL Ultrasound were to
recognize taxable gain from the spinoff, the Internal Revenue Service could
impose that liability on any member of the ATL Ultrasound consolidated group as
constituted prior to the spinoff, including SonoSite. ATL Ultrasound has agreed
to cover 85% of any such liability (unless the tax is imposed due to the actions
by ATL Ultrasound solely or SonoSite solely, in which case ATL Ultrasound and
SonoSite have agreed that the party who is solely at fault shall bear all of the
tax liability). We cannot guarantee that ATL Ultrasound would indemnify us or
agree that it caused the liability to be imposed. If we were required to pay all
or a portion of any taxes related to the spinoff, our business would be
adversely affected.
Governmental regulation of our business could prevent us from introducing new
products in a timely manner
All of our planned products and our manufacturing activities and the
manufacturing activities of our third-party medical device manufacturers are
subject to extensive regulation by a number of governmental agencies, including
the U.S. Food and Drug Administration and comparable international agencies. We
and such third-party manufacturers are or will be required to
. undergo rigorous inspections by domestic and international agencies;
. obtain the prior approval of these agencies before we can market and sell our
products; and
. satisfy content requirements for all of our sales and promotional materials.
Compliance with the regulations of these agencies may delay or prevent us from
introducing new or improved products. We may be subject to sanctions, including
the temporary or permanent suspension of operations, product recalls and
marketing restrictions, if we fail to comply with the laws and regulations
pertaining to our business. Our third-party medical device manufacturers may
also be subject to the same sanctions and, as a result, may be unable to supply
our products.
We need to establish international markets for our products and our prospects of
doing so successfully are uncertain
Our current business strategy depends on our ability to establish international
markets for our products. We will need to devote significant management
attention and financial resources to obtain any necessary foreign governmental
approvals. International sales are subject to inherent risks, including
. the costs of localizing products for foreign markets;
. longer receivables collection periods and greater difficulty in receivables
collection, as compared to those experienced in the United States;
. reduced protection for intellectual property rights in some countries;
Page 15 of 18 sequentially numbered pages
<PAGE>
. fluctuations in the value of the U.S. dollar relative to other currencies;
and
. delays or failures in obtaining necessary regulatory approvals.
We may face product liability and warranty claims which could result in
significant costs
The sale and support of our products entails the risk of product liability or
warranty claims, such as those based on claims that the failure of one of our
products resulted in a misdiagnosis. The medical instrument industry in general
has been subject to significant medical malpractice litigation. We may incur
significant liability in the event of such litigation. Although we maintain
product liability insurance, we cannot be sure that this coverage is adequate or
that it will continue to be available on acceptable terms, if at all.
We also may face warranty exposure, which could adversely affect our operating
results. We anticipate that our products will carry a one-year warranty against
defects in materials and workmanship. We will be responsible for all claims,
actions, damages, liens, liabilities, costs and expenses under our manufacturing
contract with ATL Ultrasound for all product recalls, returns and defects
attributable to manufacturing. We intend to establish reserves for the liability
associated with product warranties. However, any unforeseen warranty exposure
could adversely affect our operating results.
We may require additional funding to satisfy our future capital expenditure
needs and our prospects of obtaining such funding are uncertain
Our future revenues may not be sufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations as we develop our products and
expand our sales internationally. To date, our capital requirements have been
met primarily by the sale of equity, contributions by ATL Ultrasound in
connection with our spinoff and by grant revenue from the U.S. Office of Naval
Research under a U.S. Government Defense Advanced Research Projects Agency
grant. ATL Ultrasound's funding obligations have been met and any future grant
revenue is expected to be immaterial. As such, if we need additional financing
we would need to explore other sources of financing, including public equity or
debt offerings, private placements of equity or debt and collaborative or other
arrangements with corporate partners. Financing may not be available when needed
or may not be available on acceptable terms. If we are unable to obtain
financing, we may be required to delay, reduce or eliminate some or all of our
research and development and/or sales and marketing efforts.
Our stock price has been and is likely to continue to be volatile
The market price for our common stock and for securities of medical technology
companies generally has been volatile in the past and is likely to continue to
be volatile in the future. If you decide to purchase our shares, you may not be
able to resell them at or above the price you paid due to a number of factors,
including
. actual or anticipated variations in quarterly operating results;
. the loss of significant orders;
. changes in earnings estimates by analysts;
. announcements of technological innovations or new products by our
competitors;
. changes in the structure of the healthcare financing and payment systems;
. general conditions in the medical industry; and
. significant sales of our common stock by one or more of our principal
shareholders.
Our restated articles of incorporation, our bylaws, Washington law and some of
our agreements contain provisions that could discourage a takeover that may be
beneficial to shareholders
There are provisions in our restated articles of incorporation, our bylaws and
Washington law that make it more difficult for a third party to obtain control
of SonoSite, even if doing so would be beneficial to our shareholders.
Additionally, the acquisition of SonoSite may be made more difficult or
expensive by the following:
Page 16 of 18 sequentially numbered pages
<PAGE>
. a provision in our license agreement with ATL Ultrasound requiring a
significant cash payment to ATL Ultrasound upon a change in control of
SonoSite;
. a shareholder rights agreement; and
. acceleration provisions in benefit plans and change-in-control agreements
with all of our employees.
The "Year 2000" problem could disrupt our business
Many currently installed computer systems are not capable of distinguishing 21st
century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries will produce erroneous results, or fail, unless
they are modified or upgraded to process date information correctly. Our
greatest potential exposure with respect to the Year 2000 problem stems from the
possibility that some computer systems used by us and third parties with whom we
do business will be unable to distinguish 21st century dates from 20th century
dates, which may significantly delay or limit our ability to market our
products. Based on our design process and assessment to date, we believe the
current versions of our products are "Year 2000 compliant"--that is, they are
capable of adequately distinguishing 21st century dates from 20th century dates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk relating to changes in interest rates which could
adversely affect the value of our investments in marketable securities or
increase interest expense on outstanding obligations.
Our portfolio consists of interest bearing securities with maturities of less
than two years. Our intent is to hold these securities until maturity, but have
classified them as available-for-sale in the event of liquidation or
unanticipated cash needs. The interest bearing securities are subject to
interest rate risk and will fall in value if market interest rates increase. A
10% increase in market interest rates would not have a material impact on either
the investment portfolio or our obligations.
Part II: Other Information
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, 1999.
Page 17 of 18 sequentially number pages
<PAGE>
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.
SonoSite, Inc.
(Registrant)
Dated: November 12, 1999 By: /S/ DONALD F. SEATON, III
Donald F. Seaton III
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and Principal
Financial Officer)
Page 18 of 18 sequentially numbered pages
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