<PAGE> 1
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U.S. 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, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
______________ TO _____________.
Commission file number 0-26866
SONUS PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4343413
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
22026 20TH AVE. SE, BOTHELL, WASHINGTON 98021
(Address of Principal Executive Offices)
(425) 487-9500
(Registrant's Telephone Number, Including Area Code)
Indicate by check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date.
Class Outstanding at September 30, 2000
----- ---------------------------------
Common Stock, $.001 par value 9,160,334
Page 1 of 16 Pages
Exhibit Index appears on Page 15
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SONUS PHARMACEUTICALS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
Number
------
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of September 30, 2000 (unaudited) and
December 31, 1999 3
Statements of Operations (unaudited) for the three and
nine months ended September 30, 2000 and September 30, 1999........... 4
Statements of Cash Flows (unaudited) for the nine months ended
September 30, 2000 and September 30, 1999............................. 5
Notes to Financial Statements........................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 7
Item 3. Market Risk ............................................................ 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................ 15
Items 2, 3, 4 and 5 are not applicable and therefore have been omitted.
SIGNATURES.............................................................................. 16
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SONUS PHARMACEUTICALS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and marketable securities .............. $ 15,286,417 $ 16,804,486
Other current assets .......................................... 408,327 422,851
------------ ------------
Total current assets ....................................... 15,694,744 17,227,337
Equipment, furniture and leasehold improvements, net of
accumulated depreciation of $3,485,614 and $3,179,956 ......... 565,161 861,434
------------ ------------
Total assets ..................................................... $ 16,259,905 $ 18,088,771
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit ........................................... $ 5,000,000 $ 5,000,000
Accounts payable and accrued expenses ......................... 2,765,868 2,826,169
Accrued clinical trial expenses ............................... 117,006 215,102
------------ ------------
Total current liabilities .................................. 7,882,874 8,041,271
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.001 par value;
5,000,000 authorized; no shares issued or outstanding ...... - -
Common stock; $.001 par value;
30,000,000 shares authorized; 9,160,334 and 8,989,225
shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively ............................ 37,726,876 37,142,965
Accumulated deficit ........................................... (29,332,134) (27,071,604)
Accumulated other comprehensive loss .......................... (17,711) (23,861)
------------ ------------
Total stockholders' equity ................................. 8,377,031 10,047,500
------------ ------------
Total liabilities and stockholders' equity ....................... $ 16,259,905 $ 18,088,771
============ ============
</TABLE>
See accompanying notes.
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SONUS PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Collaborative agreements .......................... $ - $ 10,000,000 $ - $ 12,050,000
Royalty revenue ................................... 68,338 - 113,307 -
------------ ------------ ------------ ------------
Total revenue ........................................ 68,338 10,000,000 113,307 12,050,000
------------ ------------ ------------ ------------
Operating expenses:
Research and development .......................... 1,374,687 1,214,740 3,753,346 4,406,223
General and administrative ........................ 1,028,660 1,916,067 3,549,949 5,499,311
------------ ------------ ------------ ------------
Total operating expenses ............................. 2,403,347 3,130,807 7,303,295 9,905,534
------------ ------------ ------------ ------------
Operating income (loss) .............................. (2,335,009) 6,869,193 (7,189,988) 2,144,466
Other income (expense):
Interest income ................................... 173,672 63,471 526,269 355,662
Interest expense .................................. (4,998) (20,335) (23,750) (91,814)
Other income ...................................... - - 4,250,000 -
------------ ------------ ------------ ------------
Income (loss) before taxes ........................... (2,166,335) 6,912,329 (2,437,469) 2,408,314
Income taxes ......................................... - - (176,939) -
------------ ------------ ------------ ------------
Net income (loss) .................................... $ (2,166,335) $ 6,912,329 $ (2,260,530) $ 2,408,314
============ ============ ============ ============
Net income (loss) per common share:
Basic ............................................. $ (0.24) $ 0.77 $ (0.25) $ 0.27
Diluted ........................................... $ (0.24) $ 0.76 $ (0.25) $ 0.27
Shares used in computation of per share amounts:
Basic ............................................. 9,157,964 8,984,550 9,127,846 8,786,465
Diluted ........................................... 9,157,964 9,089,663 9,127,846 8,932,683
</TABLE>
See accompanying notes.
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SONUS PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................ $ (2,260,530) $ 2,408,314
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization ................................. 305,193 484,152
Changes in operating assets and liabilities:
Contract receivable ........................................ - (5,000,000)
Other current assets ....................................... 14,524 253,520
Accounts payable and accrued expenses ...................... (60,301) 1,020,262
Accrued clinical trial expenses ............................ (98,096) (995,954)
------------ ------------
Net cash used in operating activities ............................ (2,099,210) (1,829,706)
INVESTING ACTIVITIES:
Purchases of equipment, furniture and leasehold improvements ..... (8,920) (39,098)
Purchases of marketable securities ............................... (7,690,228) (15,350,254)
Proceeds from sale of marketable securities ...................... 499,995 12,613,763
Proceeds from maturities of marketable securities ................ 8,883,781 7,049,147
------------ ------------
Net cash provided by investing activities ........................ 1,684,568 4,273,558
FINANCING ACTIVITIES:
Proceeds from bank line of credit ................................ 15,000,000 15,000,000
Repayment of bank line of credit ................................. (15,000,000) (15,000,000)
Increase in long-term debt ....................................... - 30,783
Repayment of capitalized lease obligations ....................... - (62,156)
Proceeds from issuance of common stock ........................... 583,911 41,668
------------ ------------
Net cash provided by financing activities ........................ 583,911 10,295
------------ ------------
Increase in cash and cash equivalents for the period ............. 169,269 2,454,147
Cash and cash equivalents at beginning of period ................. 5,894,194 5,203,925
------------ ------------
Cash and cash equivalents at end of period ....................... 6,063,463 7,658,072
Marketable securities at end of period ........................... 9,222,954 7,490,663
------------ ------------
Total cash, cash equivalents and marketable securities ........... $ 15,286,417 $ 15,148,735
============ ============
Supplemental cash flow information:
Conversion of long-term debt to common stock .................. $- $ 2,080,005
Interest paid ................................................. $ 23,750 $ 39,729
Income taxes paid ............................................. $- $-
</TABLE>
See accompanying notes.
5
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SONUS PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required to be presented for complete financial
statements. The accompanying financial statements reflect all adjustments
(consisting only of normal recurring items) which are, in the opinion of
management, necessary for a fair presentation of the results for the interim
periods presented.
The financial statements and related disclosures have been prepared with
the assumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto included in the Form
10-K for the year ended December 31, 1999 and filed with the SEC on February 29,
2000.
2. CONTINGENCIES
The Company is party to certain legal matters related to its business.
See "Part II. Other Information; Item 1. Legal Proceedings."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MD&A OVERVIEW
In Management's Discussion and Analysis we explain the general financial
condition and the results of operations for our Company, including:
- an overview of our Company's business;
- results of operations and why those results are different from the
prior year;
- the capital resources our Company currently has and possible sources
of additional funding for future capital requirements; and
- certain factors that may affect our business and future results.
BUSINESS OVERVIEW
Our Company is engaged in the research and development of drug delivery
and blood substitute products based on our proprietary emulsion and surfactant
technology.
In the area of drug delivery, we are applying our TOCOSOL(TM)
oil-in-water emulsion technology to the formulation of poorly soluble drugs for
delivery to the patient in a less toxic and more convenient method of
administration. The first application of our drug delivery technology is an
injectable paclitaxel emulsion formulation, S-8184, which is under development
for the treatment of breast, ovarian or lung cancer. We recently filed an
Investigational New Drug Application, or IND, with the U.S. Food and Drug
Administration and plan to initiate Phase 1 human clinical studies with S-8184
early in 2001.
We are also developing a perfluorocarbon-based blood substitute product,
S-9156, for oxygenation of the body's tissues in applications such as acute or
surgical blood loss, treatment of radiotherapy resistant tumors or in cases of
compromised blood oxygen carrying capacity. We entered into a research agreement
with the State University of New York at Buffalo in March 2000 for development
of our blood substitute product and plan to complete pre-clinical studies with
S-9156 and file an Investigational New Drug Application, or IND, in 2001.
In October 2000, we announced a strategic decision to refocus our
business on the development of our drug delivery and blood substitute products.
In addition, we withdrew the New Drug Application, or NDA, and discontinued
clinical activity for our ultrasound contrast product, EchoGen(R). We also
decided not to pursue commercialization of EchoGen in Europe. These decisions
were based on several factors, including discussions with the FDA that revealed
that significant amount of additional work would need to be done to get EchoGen
approved in the U.S. and the opportunities available to advance our drug
delivery and blood substitute products.
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RESULTS OF OPERATIONS
Our results of operations have varied and will continue to vary
significantly and depend on, among other factors:
- timing of payments under contractual and license agreements;
- entering into additional contractual agreements;
- timing and costs of clinical trials, legal matters and expenses related to
product development; and
- timing of regulatory approvals.
Revenue in the third quarter of 2000 was $68,000 compared to $10.0
million in the third quarter of 1999. Revenue in the third quarter of 2000
represents royalty income payable to us by Nycomed under our patent license
agreement with Nycomed. Revenue in the third quarter of 1999 represents the
$10.0 million license fee paid to us by Nycomed upon signing the patent
licensing agreement with Nycomed. Revenue was $113,000 for the nine months ended
September 30, 2000 and represented royalty income from Nycomed while revenue in
the prior year period was $12.1 million, consisting of the $10.0 million license
fee from Nycomed and $2.1 million received under collaborative agreements with
third parties.
Total operating expenses were $2.4 million for the third quarter of 2000
compared with $3.1 million for the third quarter of 1999. Total operating
expenses for the nine months ended September 30, 2000 were $7.3 million compared
with $9.9 million for the same period in 1999. The decrease in operating
expenses from the prior year was primarily due to a lower level of research and
development spending and lower general and administrative expenses due to the
reduction in legal costs as a result of the transfer of ongoing patent
litigation responsibilities to Nycomed under the patent license agreement that
we entered into with Nycomed in 1999 and the settlement of that patent
litigation in May 2000.
Other income for the nine months ended September 30, 2000 represents
payments received in the second quarter of 2000 totalling $4.25 million from
patent litigation and insurance settlements.
Interest income, net of interest expense, was $168,000 for the third
quarter of 2000 compared with $43,000 for the same period of the prior year and
$503,000 and $264,000 for the nine months ended September 30, 2000 and 1999,
respectively. The increase in net interest income was primarily due to higher
levels of invested cash in 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations with payments received under
contractual agreements with third parties, proceeds from equity financings and a
bank line of credit. At September 30, 2000, we had cash, cash equivalents and
marketable securities of $15.3 million compared with $16.8 million at December
31, 1999. The slight decrease in cash balances from December 31, 1999 was
primarily due to the current year net loss of $2.2 million offset in part by
cash received of $583,000 from the exercise of stock options.
We have a bank loan agreement which provides for a $5.0 million
revolving line of credit facility and bears interest at the prime rate plus
1.0%. At September 30, 2000, we had borrowings of $5.0 million outstanding under
the line of credit. The line of credit expires August 30, 2001 and is secured by
our tangible assets. We are required to maintain a minimum of $5.0 million of
cash in order to borrow under the line of credit, and the borrowed funds are
required to be held at the borrowing bank. We cannot give assurance that we will
be able to renew the loan agreement or that we will be able to maintain the
minimum balances necessary to borrow under the line of credit.
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<PAGE> 9
We expect that our cash needs will increase in future periods due to
planned clinical trials and other product development costs associated with our
drug delivery and blood substitute products. Based on our current operating plan
for 2001 including planned clinical trials and other product development costs,
we estimate that existing cash and marketable securities will be sufficient to
meet our cash requirements through 2001. However, we may seek additional funding
through available means, which may include debt and/or equity financing or
funding under additional third party agreements. Our future capital requirements
depend on many factors including:
- the ability to attract and retain new collaborative agreement partners;
- the ability to obtain funding under contractual and licensing agreements;
- the ability to maintain our bank line of credit;
- the progress of our research and development programs and clinical trials;
- the time and costs required to obtain regulatory approvals;
- the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks; and
- the cost of defending, and any damages or settlement payments that may be
paid pursuant to legal proceedings.
We cannot give assurance that additional financing will be available on
acceptable terms, if at all. Any equity financing would likely result in
substantial dilution to our existing stockholders and debt financing, if
available, may include restrictive covenants. If we are unable to raise
additional financing, we may be required to curtail or delay the development of
our products and new product research and development, which could seriously
harm our business.
CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS AND FUTURE RESULTS
This report contains forward looking statements which are based upon
management's current beliefs and judgment. These statements and our business are
subject to a number of risks and uncertainties, some of which are discussed
below. Other risks are presented elsewhere in this report. You should consider
the following risks carefully in addition to the other information contained in
this report before purchasing shares of our common stock. If any of the
following risks actually occur, they could seriously harm our business,
financial condition or results of operations. In such case, the trading price of
our common stock could decline, and you may lose all or part of your investment.
If we fail to develop products, then we may never realize revenue from
product commercialization. A key element of our business strategy is to utilize
our technologies for the development and commercialization of drug delivery and
blood substitute products. Our drug delivery technology is a new approach to the
formulation of water insoluble compounds for therapeutic applications. To date,
we have performed preclinical testing on our blood substitute product, S-9156,
and only one of our drug delivery products, S-8184. Significant expenditures in
additional research and development, clinical testing, regulatory and sales and
marketing activities will be necessary in order for us to commercialize any
products developed with our technology. While it is our strategy to develop
additional products under our drug delivery technology by entering into
feasibility study agreements with companies who own active compounds, there can
be no assurance that we will enter into any additional feasibility studies.
Moreover, there can be no assurance that these feasibility studies will result
in development or license agreements. Without feasibility studies or development
or license agreements, we may need to scale back or terminate our efforts to
develop other products under our drug delivery technology.
We have a history of operating losses; and we may never become
profitable. We have experienced significant accumulated losses since our
inception in 1991, and are expected to incur net losses in the foreseeable
future. These losses have resulted primarily from expenses associated with our
research and development activities, including preclinical and clinical trials,
and general and administrative expenses.
9
<PAGE> 10
We anticipate that our operating losses will continue as we further invest in
research and development for our drug delivery and blood substitute products.
Even if we generate significant product revenues, there can be no assurance that
we will be able to sustain profitability. Our results of operations have varied
and will continue to vary significantly and depend on, among other factors:
- the entering into new collaborative or product license agreements;
- the timing of payments, if any, under collaborative partner
agreements;
- the timing and costs of clinical trials;
- the success of our research and development efforts; and
- costs related to obtaining, defending and enforcing patents.
We may need additional capital in the future. If additional capital is
not available, we may have to curtail or cease operations. Our development
efforts to date have consumed substantial amounts of cash and we have generated
only limited revenues from payments received from our contractual agreements.
Our future capital requirements depend on many factors including:
- our ability to obtain and retain funding from third parties under
contractual agreements;
- the ability to maintain our bank line of credit;
- our progress on research and development programs and clinical
trials;
- the time and costs required to gain regulatory approvals;
- the costs of filing, prosecuting and enforcing patents, patent
applications, patent claims and trademarks;
- the costs of marketing and distribution;
- the status of competing products; and
- the market acceptance and third-party reimbursement of our products,
if approved.
Additional capital may not be available on terms acceptable to us, or at
all. Any equity financing would likely result in substantial dilution to
existing stockholders and debt financing, if available, may include restrictive
covenants. If we are unable to raise additional financing, we may have to reduce
our expenditures, scale back our development of new products or license to
others products that we otherwise would seek to commercialize ourselves.
We depend on third parties for funding, clinical development and
distribution. We are dependent on third parties for funding and performance of a
variety of activities including research, clinical development and manufacturing
our products. If we are unable to establish these arrangements with third
parties, if they are terminated or the collaborations are not successful, we
will be required to identify alternative partners to fund or perform research,
clinical development, and/or manufacturing, which could have a material adverse
effect on our business, financial condition and results of operations. Our
success depends in part upon the performance by these collaborators of their
responsibilities under these arrangements. We have no control over the resources
that any collaborator may devote to the development and commercialization of
products under these collaborations and our collaborators may fail to conduct
their collaborative activities successfully or in a timely manner.
Governmental regulatory requirements are lengthy and expensive and
failure to obtain necessary approvals will prevent us or our collaborators from
commercializing a product. We are subject to uncertain governmental regulatory
requirements and a lengthy approval process for our products prior to any
commercial sales of our products. The development and commercial use of our
products is regulated by the U.S. Food and Drug Administration, or FDA, the
European Medicines Evaluation Agency, or EMEA, and comparable foreign regulatory
agencies. The regulatory approval process for new products is lengthy and
expensive. Before we can file an application with the FDA and comparable foreign
agencies, the product candidate must undergo extensive testing, including animal
studies and human clinical trials that can take many years and may require
substantial expenditures. Data obtained from such testing may
10
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be susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. In addition, changes in regulatory policy for product
approval may cause delays or rejections. Our company, and any collaborative
partners may encounter significant delays or excessive costs in our efforts to
secure necessary approvals. We cannot predict if or when any of our products
under development will be commercialized.
Future U.S. or foreign legislative or administrative actions also could
prevent or delay regulatory approval of our products. Even if regulatory
approvals are obtained, they may include significant limitations on the
indicated uses for which a product may be marketed. A marketed product also is
subject to continual FDA, EMEA and other regulatory agency review and
regulation. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on the
marketing of a product or withdrawal of the product from the market, as well as
possible civil or criminal sanctions. In addition, if marketing approval is
obtained, the FDA, EMEA or other regulatory agency may require post-marketing
testing and surveillance programs to monitor the product's efficacy and side
effects. Results of these post-marketing programs may prevent or limit the
further marketing of a product.
The markets for pharmaceutical products are highly competitive and if we
fail to compete effectively our revenues will decline. The health care industry
is characterized by extensive research efforts and rapid technological change.
Competition in the development of pharmaceutical products is intense and
expected to increase. We also believe that other medical and pharmaceutical
companies will compete with us in the areas of research and development,
acquisition of products and technology licenses, and the manufacturing and
marketing of drug delivery and blood substitute products. We expect that
competition in the drug delivery and blood substitute fields will be based
primarily on:
- efficacy;
- safety;
- ease of administration;
- breadth of approved indications; and
- physician, healthcare payor and patient acceptance.
Many of our competitors and potential competitors have substantially greater
financial, technical and human resources than we do and have substantially
greater experience in developing products, obtaining regulatory approvals and
marketing and manufacturing medical products. Accordingly, these competitors may
succeed in obtaining FDA approval for their products more rapidly than us. In
addition, other technologies or products may be developed that have an entirely
different that would render our technology and products noncompetitive or
obsolete.
We primarily rely on third party suppliers and manufacturers to produce
products that we develop and failure to retain such suppliers and manufacturers
would adversely impact our ability to commercialize our products. We currently
rely on third parties to supply the chemical ingredients necessary for our drug
delivery and blood substitute products. The active chemical ingredients for our
products are manufactured by a limited number of vendors. The inability of these
vendors to supply medical-grade materials to us could delay the manufacture of,
or cause us to cease the manufacturing of our products. We also rely on third
parties to manufacture our drug delivery and blood substitute products for
research and development and clinical trials. Suppliers and manufacturers of our
products must operate under GMP regulations, as required by the FDA, and there
are a limited number of contract manufacturers that operate under GMP
regulations. If we do not develop an in-house manufacturing capability or we are
not able to identify and qualify alternative contract manufacturers, we may not
be able to produce the required amount of our products for research and
development and clinical trials. Failure to retain qualified suppliers and
manufacturers will delay our research and development efforts as well as the
time it takes to commercialize our products, which could materially adversely
affect our operating results.
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If we fail to secure adequate intellectual property protection or become
involved in an intellectual property dispute, it could significantly harm our
financial results and ability to compete. Our success will depend, in part, on
our ability to obtain and defend patents and protect trade secrets. The patent
position of medical and pharmaceutical companies is highly uncertain and
involves complex legal and factual questions. There can be no assurance that any
claims which are included in pending or future patent applications will be
issued, that any issued patents will provide us with competitive advantages or
will not be challenged by third parties, or that the existing or future patents
of third parties will not have an adverse effect on our ability to commercialize
our products. Furthermore, there can be no assurance that other companies will
not independently develop similar products, duplicate any of our products or
design around patents that may be issued to us. Litigation may be necessary to
enforce any patents issued to us or to determine the scope and validity of
others' proprietary rights in court or administrative proceedings. Any
litigation or administrative proceeding could result in substantial costs to us
and distraction of our management. An adverse ruling in any litigation or
administrative proceeding could have a material adverse effect on our business,
financial condition and results of operations.
Our commercial success will depend in part on not infringing patents
issued to competitors. There can be no assurance that patents belonging to
competitors will not require us to alter our products or processes, pay
licensing fees or cease development of our current or future products. Any
litigation regarding infringement could result in substantial costs to us and
distraction of our management, and any adverse ruling in any litigation could
have a material adverse effect on our business, financial condition and results
of operations. Further, there can be no assurance that we will be able to
license other technology that we may require at a reasonable cost or at all.
Failure by us to obtain a license to any technology that we may require to
commercialize our products would have a material adverse effect on our business,
financial condition and results of operations. In addition, to determine the
priority of inventions and the ultimate ownership of patents, we may participate
in interference, reissue or re-examination proceedings conducted by the PTO or
in proceedings before foreign agencies with respect to any of our existing
patents or patent applications or any future patents or applications, any of
which could result in loss of ownership of existing, issued patents, substantial
costs to us and distraction of our management.
The success of our products will depend, in part, on the acceptance of
our products by third party payors. Our ability to successfully commercialize
products that we develop will depend, in part, upon the extent to which
reimbursement of the cost of such products will be available from domestic and
foreign health administration authorities, private health insurers and other
payor organizations. Third party payors are increasingly challenging the price
of medical products and services or restricting the use of certain procedures in
an attempt to limit costs. Further, significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be no
assurance that adequate third party coverage will be available.
Failure to satisfy Nasdaq National Market Listing requirements may
result in our stock being delisted from the Nasdaq National Market. Our common
stock is currently listed on the Nasdaq National Market under the symbol "SNUS."
For continued inclusion on the Nasdaq National Market, we must maintain among
other requirements net tangible assets of at least $4.0 million, a minimum bid
price of $1.00 per share, and a market value of our public float of at least
$5.0 million. As of the date of this report, we had net tangible assets in
excess of the $4.0 million requirement; however, our shares were trading at less
than $1.00 per share and the market cap of our public float was less than $5.0
million. In the event that we fail to satisfy the listing standards on a
continuous basis, our common stock may be removed from listing on the Nasdaq
National Market. If our common stock is delisted from the Nasdaq National
Market, trading of our common stock, if any, would be conducted in the
over-the-counter market in the so-called "pink sheets" or, if available, the
NASD's "Electronic Bulletin Board." As a result, stockholders could find it more
difficult to dispose of, or to obtain accurate quotations as to the value of,
our common stock and the trading price per share could be reduced.
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If we lose our key personnel or are unable to attract and retain
qualified scientific and management personnel, we may be unable to become
profitable. We are highly dependent on our key executives. The loss of any of
these key executives or the inability to recruit and retain qualified scientific
personnel to perform research and development and qualified management personnel
could have a material adverse effect on our business, financial condition and
results of operations. There can be no assurance that we will be able to attract
and retain such personnel on acceptable terms, if at all, given the competition
for experienced scientists and other personnel among numerous medical and
pharmaceutical companies, universities and research institutions.
ITEM 3. MARKET RISK
The market risk inherent in our short-term investment portfolio
represents the potential loss that could arise from adverse changes in interest
rates. If market rates hypothetically increase immediately and uniformly by 100
basis points from levels at September 30, 2000, the decline in the fair value of
the investment portfolio would not be material. We believe we have the ability
to hold our fixed income investments until maturity and therefore we do not
expect our operating results or cash flows to be affected to any significant
degree by a sudden change in market interest rates.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
a. In July 2000, DuPont Pharmaceuticals Company, DuPont Contrast Imaging, Inc.,
E.I. Du Pont de Nemours & Co., Inc. and DuPont Pharma, Inc. (collectively
"DuPont") filed a complaint in the United States District Court for the District
of Massachusetts against us and certain Nycomed Amersham-related entities.
DuPont's complaint seeks a declaratory judgment that certain ultrasound contrast
patents owned by us and licensed to Nycomed are invalid and not infringed by
DuPont. We and Nycomed believe DuPont's complaint is without merit and intend to
vigorously defend against the complaint.
Under our license agreement with Nycomed, Nycomed has the right to
enforce the patents in the field of non-perflouropentane ultrasound contrast
agents on behalf of Nycomed and on our behalf, at Nycomed's expense. Pursuant to
this right, Nycomed and we also have filed against DuPont a patent infringement
action in the U.S. District Court for the Western District of Washington
alleging that DuPont's contrast agent known as "Definity" infringes patents we
own and have licensed to Nycomed. The patent infringement action filed in
Washington is based on the same questions of patent infringement and validity
that were raised in the Massachusetts action. It is likely that only one of
these actions will go forward so that the entire patent dispute between Nycomed,
us, and DuPont will be heard in one court, either in Washington or in
Massachusetts.
Pursuant to our license agreement with Nycomed, Nycomed will bear all
costs and expenses associated with the prosecution of the Washington action and
the defense of the Massachusetts action.
b. In 1998, various class action complaints were filed in the Superior Court of
Washington (the "State Action") and in the U.S. District Court for the Western
District of Washington (the "Federal Action") against us and certain of our
officers and directors, alleging violations of Washington State and U.S.
securities laws. In October 1998, we and the individual defendants moved to
dismiss and stay the State Action. The state law claims in the State Action were
subsequently re-filed in the Federal Action. In February 1999, plaintiffs filed
a consolidated and amended complaint in the Federal Action, alleging violations
of Washington State and U.S. securities laws. In March 1999, we and the
individual defendants filed a motion to dismiss the consolidated amended
complaint in the Federal Action. In July 1999, the Court entered an order
denying in part and granting in part the motion to dismiss the complaint in the
Federal Action. In November 1999, we filed motions for summary judgment and to
stay discovery.
In July 2000, we, with the consent of our insurance carrier, entered
into a Memorandum of Understanding with plaintiffs to settle the Federal Action
for an amount within our directors and officers' insurance policy limits. In
November 2000, the parties filed with the Court a Stipulation of Settlement and
related exhibits. The settlement is subject to approval of the Court after
notice and an opportunity to object is provided to the shareholder class.
Because of the time involved in providing notice and obtaining approvals, it is
not likely that final approval would be obtained until early 2001. Given the
uncertainties of litigation, we believe that the settlement is in the best
interests of our shareholders. However, there can be no assurance that the
settlement will be approved by the Court.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.43 Loan and Security Agreement between SONUS Pharmaceuticals,
Inc. and Silicon Valley Bank
10.44 Change in Control Agreement for Richard J. Klein
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
The Company filed no reports on Form 8-K during the quarter ended
September 30, 2000.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SONUS PHARMACEUTICALS, INC.
Date: November 14, 2000 By: /s/ Richard J. Klein
----------------------------------------
Richard J. Klein
Chief Financial Officer
(Principal Financial and Accounting Officer)
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