Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.
20549
FORM 10-Q
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 2008
or
o
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 000-21243
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)
|
|
|
1522
217
th
Place SE, Suite 100, Bothell, Washington 98021
(Address of
Principal Executive Offices)
(425) 487-9500
(Registrants telephone number, including area
code)
Indicate by check whether
the registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, or a
non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
|
|
Accelerated
filer
x
|
|
|
|
Non-accelerated
filer
o
(Do not check if a smaller reporting company)
|
|
Smaller
reporting company
o
|
Indicate by check mark
whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
Yes
o
No
x
Indicate the number of shares outstanding
of each of the issuers classes of common stock, as of the latest practicable
date.
Class
|
|
Outstanding at July 31, 2008
|
|
|
|
Common Stock,
$0.001 par value
|
|
37,089,679
|
Table
of Contents
Part I.
Financial Information
Item 1. Financial Statements
Sonus Pharmaceuticals, Inc.
Balance
Sheets
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
5,727,889
|
|
$
|
6,535,272
|
|
Marketable
securities
|
|
17,532,448
|
|
27,663,554
|
|
Interest
receivable
|
|
233,545
|
|
456,149
|
|
Other current
assets
|
|
454,633
|
|
576,905
|
|
Total current assets
|
|
23,948,515
|
|
35,231,880
|
|
|
|
|
|
|
|
Equipment,
furniture and leasehold improvements, net
|
|
8,987,747
|
|
9,577,567
|
|
Other assets
|
|
497,327
|
|
439,822
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,433,589
|
|
$
|
45,249,269
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
151,530
|
|
$
|
1,462,444
|
|
Accrued expenses
|
|
1,104,012
|
|
4,141,273
|
|
Current portion
of deferred rent and long-term obligation
|
|
902,606
|
|
765,005
|
|
Total current
liabilities
|
|
2,158,148
|
|
6,368,722
|
|
|
|
|
|
|
|
Deferred rent
and long-term obligation, less current portion
|
|
6,759,191
|
|
6,976,130
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
Stockholders
equity:
|
|
|
|
|
|
Preferred stock;
$.001 par value; 5,000,000 authorized; no shares issued or outstanding
|
|
|
|
|
|
Common stock;
$.001 par value; 75,000,000 shares authorized; 37,089,679 and 37,048,335
shares issued and outstanding at June 30, 2008 and December 31,
2007, respectively
|
|
157,248,395
|
|
156,704,899
|
|
Accumulated
deficit
|
|
(132,723,932
|
)
|
(124,801,837
|
)
|
Accumulated
other comprehensive (income) loss
|
|
(8,213
|
)
|
1,355
|
|
Total
stockholders equity
|
|
24,516,250
|
|
31,904,417
|
|
|
|
|
|
|
|
Total
liabilities and stockholders equity
|
|
$
|
33,433,589
|
|
$
|
45,249,269
|
|
See accompanying
notes.
3
Table of Contents
Sonus Pharmaceuticals, Inc.
Statements
of Operations
(Unaudited)
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Collaboration
revenue from Bayer Schering
|
|
$
|
|
|
$
|
3,271,018
|
|
$
|
|
|
$
|
8,322,052
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development
|
|
1,487,766
|
|
7,695,972
|
|
3,756,800
|
|
14,635,370
|
|
General and
administrative
|
|
2,507,076
|
|
2,128,522
|
|
4,608,485
|
|
4,104,121
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
3,994,842
|
|
9,824,494
|
|
8,365,285
|
|
18,739,491
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(3,994,842
|
)
|
(6,553,476
|
)
|
(8,365,285
|
)
|
(10,417,439
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
12,935
|
|
949
|
|
(31,443
|
)
|
(34,004
|
)
|
Interest income
|
|
175,003
|
|
589,485
|
|
474,631
|
|
1,263,358
|
|
Interest expense
|
|
|
|
(125
|
)
|
|
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
Total other
income, net
|
|
187,938
|
|
590,309
|
|
443,188
|
|
1,228,920
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(3,806,904
|
)
|
$
|
(5,963,167
|
)
|
$
|
(7,922,097
|
)
|
$
|
(9,188,519
|
)
|
|
|
|
|
|
|
|
|
|
|
Basic and
diluted net loss per share
|
|
$
|
(0.10
|
)
|
$
|
(0.16
|
)
|
$
|
(0.21
|
)
|
$
|
(0.25
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares used in
computation of basic and diluted net loss per share
|
|
37,062,353
|
|
36,883,944
|
|
37,057,187
|
|
36,868,990
|
|
See accompanying
notes.
4
Table
of Contents
Sonus Pharmaceuticals, Inc.
Statements
of Cash Flows
(Unaudited)
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Operating
activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(7,922,097
|
)
|
$
|
(9,188,519
|
)
|
Adjustments to
reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation
|
|
695,454
|
|
302,288
|
|
Non-cash
stock-based compensation
|
|
530,724
|
|
1,309,490
|
|
Amortization
(Accretion) of investments
|
|
12,787
|
|
(322,799
|
)
|
Changes in
operating assets and liabilities:
|
|
|
|
|
|
Accounts
receivable from related party
|
|
|
|
2,494,678
|
|
Interest
receivable
|
|
222,604
|
|
(535,535
|
)
|
Other current
assets
|
|
122,272
|
|
(13,060
|
)
|
Other long term
assets
|
|
(57,505
|
)
|
15,671
|
|
Accounts payable
|
|
(1,310,914
|
)
|
(757,115
|
)
|
Accounts payable
to related party
|
|
|
|
297,250
|
|
Accrued expenses
|
|
(3,037,261
|
)
|
(4,828,936
|
)
|
Deferred rent
|
|
(251,856
|
)
|
|
|
Other current
liabilities
|
|
139,691
|
|
(50,029
|
)
|
Deferred revenue
from related party
|
|
|
|
(2,772,959
|
)
|
Other long-term
liabilities
|
|
32,827
|
|
|
|
Net cash used in
operating activities
|
|
(10,823,274
|
)
|
(14,049,575
|
)
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
Purchases of
capital equipment and leasehold improvements
|
|
(105,634
|
)
|
(437,453
|
)
|
Purchases of
marketable securities
|
|
(21,145,760
|
)
|
(38,690,506
|
)
|
Proceeds from
sales of marketable securities
|
|
30,955,000
|
|
19,510,014
|
|
Proceeds from
maturities of marketable securities
|
|
299,513
|
|
281,587
|
|
Net cash
provided by (used in) investing activities
|
|
10,003,119
|
|
(19,336,358
|
)
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
Proceeds from of
common stock warrants
|
|
|
|
57,440
|
|
Proceeds from
issuance of common stock under employee benefit plans
|
|
12,772
|
|
116,509
|
|
Payments on
lease obligations
|
|
|
|
(14,763
|
)
|
Net cash
provided by investing activities
|
|
12,772
|
|
159,186
|
|
|
|
|
|
|
|
Decrease in cash
and cash equivalents for the period
|
|
(807,383
|
)
|
(33,226,747
|
)
|
Cash and cash
equivalents at beginning of period
|
|
6,535,272
|
|
35,771,784
|
|
|
|
|
|
|
|
Total cash and
cash equivalents
|
|
$
|
5,727,889
|
|
$
|
2,545,037
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
|
|
$
|
434
|
|
See accompanying
notes.
5
Table of Contents
Sonus
Pharmaceuticals, Inc.
Notes to
Financial Statements
(Unaudited)
1.
Basis of
Presentation
The unaudited financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required to be presented for complete financial
statements. The accompanying financial
statements reflect all adjustments (consisting only of normal recurring items)
which are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods presented.
The accompanying Balance Sheet at December 31, 2007 has been
derived from the audited financial statements included in the Companys Annual
Report on Form 10-K for the year then ended. The financial statements and related
disclosures have been prepared with the assumption that users of the interim
financial information have read or have access to the audited financial
statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction
with the audited financial statements and the related notes thereto included in
the Annual Report on Form 10-K for the year ended December 31, 2007
and filed with the Securities and Exchange Commission on March 14, 2008.
The Company
adopted SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) effective January 1, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. The Company did not have a transition
adjustment to beginning retained earnings as a result of adopting this
standard. SFAS No. 157 applies to all financial instruments that are
measured and reported on a fair value basis. This includes those items reported
in marketable securities on the balance sheets. See Note 5 for additional
information.
In
conjunction with the adoption of SFAS No. 157, the Company also adopted
SFAS 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115
(SFAS No. 159) as of January 1, 2008. SFAS No. 159 provides
companies the option to report select financial assets and liabilities at fair
value. This statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. After the
initial adoption, the election is made at the acquisition of a financial asset
or financial liability and it may not be revoked. We did not apply the fair
value option to any of our outstanding instruments; therefore, there has been
no impact on our financial statements.
Effective January 1,
2008, the Company adopted the provisions of FASB Emerging Issues Task Force,
Issue 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities, or
EITF 07-3. In accordance with EITF 07-3, nonrefundable contractual
prepayments related to future R&D activities are deferred and recognized as
an expense in the period that the related goods are delivered or services are
performed. Our adoption of this standard
has not had a material impact on our financial statements.
2.
Arrangement
Agreement
On May 27, 2008, the Company entered into an
Arrangement Agreement with OncoGenex Technologies Inc., a privately held
corporation existing under the federal laws of Canada (
OncoGenex
),
providing for a business combination between OncoGenex and Sonus. Under the terms of the Arrangement Agreement,
Sonus will acquire all of the outstanding shares of capital stock of OncoGenex
pursuant to a Plan of Arrangement (the
Arrangement
) under Section 192
of the Canada Business Corporations Act. Assuming the Arrangement is
completed, it would have the effect of making OncoGenex a wholly owned
subsidiary of Sonus.
6
Table of Contents
Upon consummation of the Arrangement, Sonus will
issue to the securityholders of OncoGenex a number of shares of Sonus common
stock equal to the number of common shares of Sonus outstanding immediately
prior to the closing, such that immediately after the closing of the
Arrangement, Sonus stockholders and OncoGenex securityholders will each own
50%, respectively, of the outstanding shares of Sonus common stock. As of
June 30, 2008,
37,089,679
shares
of Sonus common stock were outstanding. Assuming no additional shares of
Sonus common stock are issued prior to the closing, 37,089,679 shares of Sonus common
stock will be issued to OncoGenex securityholders upon the closing of the
Arrangement.
In addition to the shares of Sonus common stock
issued upon the closing of the Arrangement, the former holders of OncoGenex
capital stock are also entitled to receive up to an aggregate of 25,000,000
additional shares of Sonus common stock (the
Milestone Shares
) upon
the achievement of certain agreed-upon milestones, as more particularly set
forth in escrow agreements to be executed prior to the closing. The
25,000,000 Milestone Shares will be placed into escrow at the closing of the
Arrangement. If the Milestone Shares are not earned within six (6) years
after the closing of the Arrangement, they will be returned to Sonus for
cancellation. On July 14, 2008,
OncoGenex announced that it has reached an agreement with the U.S. Food and
Drug Administration (FDA) on the design of a Phase 3 registration trial of
OGX-011, its lead product candidate targeting hormone refractory prostate
cancer, via the Special Protocol Assessment (SPA) process. This event is one of the agreed-upon
milestones, and thus, upon closing of the Arrangement, 25% of the Milestone
Shares, or 6,250,000 shares, would be immediately released to former holders of
OncoGenex capital stock following Board approval.
Each option to purchase OncoGenex common stock
will be assumed by Sonus and will be exercisable by its holder for shares of
Sonus common stock, as adjusted for the share exchange ratio.
Upon completion of the Arrangement, OncoGenex
securityholders will hold approximately 50% of the outstanding shares of the
combined company (or up to 62.6% if certain milestones are reached) and both
OncoGenex and Sonus will have equal representation on the Board of Directors of
the combined company. Because OncoGenex senior management will comprise the
majority of senior management positions of the combined company and because
OncoGenex shareholders will hold more than 50% of the combined company upon
achievement of certain milestones, it is anticipated that the transaction will
be treated as a reverse merger under the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations,
with OncoGenex
being identified as the acquiring entity. This means that OncoGenex will
allocate the purchase price, including the costs of the acquisition, to the
fair value of our tangible and intangible assets and liabilities as of the
effective date of the Arrangement. The preliminary estimated total purchase
price of the proposed transaction is $11.2 million. The actual purchase price will be based on
the Sonus shares and options to purchase Sonus shares outstanding on the
closing date of the transaction. Our
assets and liabilities and results of operations will be consolidated into the
results of operations of OncoGenex as of and from the effective date of the
Arrangement.
The Arrangement Agreement also contemplates that,
concurrently with the closing of the Arrangement and subject to the approval of
Sonus stockholders, Sonus will (i) effect a reverse stock split of
outstanding common stock of Sonus by a whole-number ratio of between 1-for-10
and up to 1-for-20, or by such other ratio as agreed upon by Sonus and
OncoGenex pursuant to the terms of the Arrangement Agreement (the
Reverse
Stock Split
); (ii) adjust the number of authorized shares of Sonus
common stock such that, immediately following the Reverse Stock Split, the
authorized share capital of Sonus consists of approximately two times the
number of shares of Sonus common stock outstanding immediately following the
closing of the Arrangement (including the Milestone Shares deposited into
escrow) (collectively, the
Capital Adjustment
); and (iii) change
the name of the corporation from Sonus Pharmaceuticals, Inc. to OncoGenex
Pharmaceuticals, Inc. (the
Name Change
).
7
Table of Contents
The
Arrangement
is
subject
to
a
number
of
closing
conditions,
including,
without
limitation,
(i)
the
approval
of
the
Arrangement
by
the
securityholders
of
OncoGenex,
(ii)
the
approval
of
the
issuance
of
shares
of
Sonus
common
stock
in
respect
of
the
Arrangement,
the
Reverse
Stock
Split,
the
Capital
Adjustment
and
the
Name
Change
by
the
stockholders
of
Sonus,
(iii)
the
receipt
of
a
final
order
from
the
Supreme
Court
of
British
Columbia
approving
the
Arrangement,
(iv)
the
exemption
of
the
issuance
of
Sonus
common
shares
and
substitute
options
in
respect
of
the
Arrangement
from
U.S.
securities
registration
requirements
under
section
3(a)(10)
of
the
Securities
Act
of
1933,
and
(v)
other
customary
closing
conditions.
The
Company
has
scheduled
its
meeting
of
stockholders
on
August
19,
2008
and
anticipates
closing
the
Arrangement
in
the
third
quarter
of
2008.
Costs
associated with this Arrangement include fees for financial advisors, attorneys
and accountants, filing fees and financial printing costs. As of June 30, 2008, we recorded
approximately $1.2 million of such costs which were included in general and
administrative expenses.
3.
Related
Party
The Company has
engaged in significant transactions with Bayer Schering Pharma AG, Germany (Bayer
Schering). Bayer Schering is a related
party due to their ownership interest in the Company (approximately 12.8% fully
diluted) and has been appropriately identified as such on the face of the
financial statements. All amounts
disclosed on the face of the financial statements with related parties are
attributable to Bayer Schering. Please
see Note 4 Collaboration and License Agreement with Bayer Schering Pharma AG
for additional details.
4. Collaboration and License Agreement with
Bayer Schering Pharma AG
In October 2005, the Company entered into a Collaboration and
License Agreement with Bayer Schering, a German corporation, pursuant to which,
among other things, the Company granted Bayer Schering an exclusive, worldwide
license to TOCOSOL Paclitaxel, its anti-cancer product candidate (the Product). With respect to the Product, Bayer Schering
paid Sonus an upfront license fee of $20 million and paid Sonus for research
and development services performed equal to 50% of eligible product research
and development costs (in certain cases the reimbursement rate was 100%). In connection with the Collaboration and
Licensing Agreement, the Company and an affiliate of Bayer Schering entered
into a Securities Purchase Agreement whereby the Company sold 3,900,000 shares
of common stock for an aggregate of $15.7 million and warrants to purchase
975,000 shares of common stock for an aggregate purchase price of $122,000.
In October 2007, Sonus received notification
from Bayer Schering of its decision to terminate the Collaboration and License
Agreement in accordance with its terms because the Phase 3 pivotal trial did
not meet its primary endpoint. The
termination was effective on November 2, 2007. In accordance with the
terms of the Agreement, all rights to TOCOSOL Paclitaxel have reverted back to
Sonus. The Company has discontinued
development of TOCOSOL Paclitaxel due to results of the Phase 3 study. These
closure activities were substantially complete by December 31, 2007.
During the six month period ended June 30, 2007, the Company
recognized revenue of $2.8 million as amortization of the upfront license fee
and an additional $5.5 million related to research and development services
performed by Sonus primarily for the Phase 3 trial for TOCOSOL Paclitaxel and
related drug supply and manufacturing costs.
The Company will not earn revenue related to the
Agreement with Bayer Schering beyond 2007.
The final net billing between the Company and Bayer Schering was
completed during the fourth quarter of 2007.
Settlement of the final amount outstanding was received from Bayer Schering
in December 2007. There were no
receivables from, or payables to, Bayer Schering outstanding at June 30,
2008 or at December 31, 2007.
8
Table
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5.
Marketable
Securities
With the adoption of SFAS No. 157, beginning January 1,
2008, assets and liabilities recorded at fair value in the balance sheets are
categorized based upon the level of judgment associated with the inputs used to
measure their fair value. SFAS No. 157 specifies a hierarchy of valuation
techniques based on whether the inputs to those valuation techniques are
observable or unobservable. In accordance with SFAS No. 157, these inputs
are summarized in the three broad levels listed below:
·
Level 1 Quoted prices in active markets for
identical securities;
·
Level 2 Other significant observable inputs
that are observable through corroboration with market date (including quoted
prices in active markets for similar securities);
·
Level 3 Significant unobservable inputs
that reflect managements best estimate of what market participants would use
in pricing the asset or liability.
In determining the appropriate levels, the Company
performed a detailed analysis of the assets and liabilities that are subject to
SFAS No. 157. The following table
presents information about our assets and liabilities that are measured at fair
value on a recurring basis as of June 30, 2008, and indicates the fair
value hierarchy of the valuation techniques we utilized to determine such fair
value:
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
2008
|
|
Corporate debt
securities
|
|
$
|
|
|
$
|
15,156,465
|
|
$
|
|
|
$
|
15,156,465
|
|
Government debt
securities
|
|
|
|
2,375,983
|
|
|
|
2,375,983
|
|
Asset-backed
securities
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
17,532,448
|
|
$
|
|
|
$
|
17,532,448
|
|
6.
Accrued
Expenses
Accrued expenses consist of the
following:
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
Clinical trials
|
|
$
|
223,249
|
|
$
|
2,627,765
|
|
Severance
|
|
76,939
|
|
908,496
|
|
Compensation
|
|
176,391
|
|
227,044
|
|
Other
|
|
627,433
|
|
377,968
|
|
|
|
$
|
1,104,012
|
|
$
|
4,141,273
|
|
7.
Restructuring
Activities
On March 31, 2008, the
Company reduced its workforce by approximately 37%. This action was taken in order to conserve
cash and align the workforce with anticipated staffing needs. The total severance cost associated with this
reduction of workforce of approximately $1.0 million, was recognized as expense
of $656,000 and $393,000 in research and development expense and general and administrative
expense, respectively in the first quarter of 2008. The following table
summarizes the severance expense activity associated with the reduction of
workforce:
Accrued
severance as of December 31, 2007
|
|
$
|
908,496
|
|
Cash payments
made in the first half of 2008
|
|
(1,880,752
|
)
|
Severance
expense recorded in the first quarter of 2008
|
|
1,049,195
|
|
Accrued
severance as of June 30, 2008
|
|
$
|
76,939
|
|
9
Table
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In the second quarter 2008,
we also vacated a portion of our laboratory and office. Excess facilities charges of approximately
$95,000 and $179,000 were recognized in research and development expense and
general and administrative expense, respectively. Pursuant to SFAS No.146,
Accounting for Costs Associated with Exit or Disposal
Activities
, we recorded restructuring charges when we ceased using
this space. The non-cash charge is
calculated as the present value of the lease commitments for unused space, net
of estimated sublease income. As of June 30,
2008, we had accrued approximately $173,000 related to these facilities
charges, of which approximately $140,000 was included in current portion of
long-term obligations and approximately $33,000 in deferred rent and long-term
obligation, less current portion.
8.
Refund from Return of Recalled
Taxol
In March 2007,
Bristol-Myers Squibb Pharmaceuticals recalled certain batches of Taxol due to
potential lack of sterility assurance.
Sonus had some of these batches at clinical sites which were being used
in the reference arm of the Phase 3 TOCOSOL Paclitaxel pivotal study. The Company has returned all of the recalled
material to its suppliers in accordance with the recall notice. On March 12, 2008, the Company received
an initial refund from its suppliers of $848,408 for returned material which
was recorded as a reduction of research and development expense in the first
quarter of 2008. We are not reasonably
able to estimate an amount for any additional refund that we may receive in
future periods. Accordingly, there are
no receivables recorded for any potential future refunds.
9.
Comprehensive
Income (Loss)
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Net loss
|
|
$
|
(3,806,904
|
)
|
$
|
(5,963,167
|
)
|
$
|
(7,922,097
|
)
|
$
|
(9,188,519
|
)
|
Unrealized
(loss) on cash equivalents and marketable securities
|
|
(12,764
|
)
|
(12,672
|
)
|
(9,567
|
)
|
(21,469
|
)
|
Comprehensive
loss
|
|
$
|
(3,819,668
|
)
|
$
|
(5,975,839
|
)
|
$
|
(7,931,664
|
)
|
$
|
(9,209,988
|
)
|
10.
Stockholders Equity
Employee Stock Plans
During the second quarter of 2008
, the Company received $7,460
in proceeds from the issuance of 27,630 shares of common stock under employee
benefit programs. For the six months
ended June 30, 2008, the Company received $12,772 in proceeds from the
issuance of 42,344 shares of common stock under employee benefit programs.
Employee stock options
vest over a period of time determined by the Board of Directors, generally four
years, and director stock options are generally fully vested on the date of
grant. Stock options generally are
granted at the fair market value on the date of grant and expire ten years from
the date of grant.
In the first quarter of
2008, the Company granted stock options to employees for 1,415,000 shares of
common stock. These options fully vest
two years from the date of grant.
The Company has an
employee stock purchase plan whereby employees may contribute up to 15% of
their compensation to purchase shares of the Companys common stock at 85% of
the stocks fair market value at the lower of the beginning or end of each
six-month offering period. At June 30,
2008, a total of 11,921 shares remain available for purchase by employees under
the plan.
The Company has a 401(k) plan for
all employees under which it provides a specified percentage match on employee
contributions. Currently, the Company match is made in shares of the Companys
common stock.
The Company recognized compensation
expense related to this plan for the three month period ended
10
Table
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June 30,
2008 of $5,312.
At
March 31, 2008, there were no shares available for future issuances as
matching contributions under the plan; therefore, no matching contributions
were made during the quarter ended June 30, 2008.
Stock-Based Compensation
During the three and six month periods ended June 30, 2008 and
2007, respectively, the Company recorded stock-based compensation cost under
the provisions of Statement of Accounting Standard 123 (revised 2004), Share
Based Payment, or SFAS 123R. The
following table summarizes the income statement classification of stock-based
compensation:
|
|
Three months ended June
30,
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Stock-based
compensation expense:
|
|
|
|
|
|
|
|
|
|
General &
administrative
|
|
$
|
(144,945
|
)
|
$
|
(480,688
|
)
|
$
|
(311,503
|
)
|
$
|
(766,849
|
)
|
Research &
development
|
|
(81,172
|
)
|
(333,653
|
)
|
(219,221
|
)
|
(542,641
|
)
|
Total
stock-based compensation expense
|
|
$
|
(226,117
|
)
|
$
|
(814,341
|
)
|
$
|
(530,724
|
)
|
$
|
(1,309,490
|
)
|
The Company changed its estimated
forfeiture rate based on personnel reductions in the first quarter of
2008. The impact in stock compensation
expense as a result of the change in estimated forfeiture rate was not
significant. The fair value of each
stock option used in the calculations under SFAS 123R is estimated using the
Black-Scholes-Merton option pricing model.
The assumptions used in this model include (1) the stock price at
grant date, (2) the exercise price, (3) an estimated option life of
four years as of June 30, 2008 and 2007, (4) no expected dividends
for each period presented, (5) stock price volatility factor of 106.99%
and 56.7% as of June 30, 2008 and 2007, respectively, and (6) a
risk-free interest rate of 3.16%
and 4.58% as
of June 30, 2008 and 2007, respectively.
Stock Option Activity
The
following is a summary of option activity for the first half of 2008:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
Available for
Grant
|
|
Number of
Shares
|
|
Weighted-
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
December 31,
2007
|
|
5,271,101
|
|
4,278,960
|
|
$
|
4.82
|
|
Grants
|
|
(1,415,000
|
)
|
1,415,000
|
|
$
|
0.37
|
|
Exercises
|
|
|
|
|
|
|
|
Cancellations
and expirations
|
|
958,612
|
|
(961,612
|
)
|
$
|
4.53
|
|
March 31,
2008
|
|
4,814,713
|
|
4,732,348
|
|
$
|
3.55
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
|
|
|
|
|
Exercises
|
|
|
|
|
|
|
|
Cancellations
and expirations
|
|
413,831
|
|
(458,081
|
)
|
$
|
5.49
|
|
June 30,
2008
|
|
5,228,544
|
|
4,274,267
|
|
$
|
3.34
|
|
11
Table
of Contents
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
This
report contains certain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Examples of these forward-looking statements include, but are not limited to:
·
our anticipated closing of the transaction
with OncoGenex Technologies, Inc. and the synergies and benefits arising
from such transaction;
timing
and amount of future contractual payments, product revenue and operating
expenses;
·
progress and preliminary results of clinical
trials;
·
our anticipated future capital requirements
and the terms of any capital financing agreements;
·
anticipated regulatory filings, requirements
and future clinical trials; and
·
market acceptance of our products and the
estimated potential size of these markets.
While
these forward-looking statements made by us are based on our current beliefs
and judgments, they are subject to risks and uncertainties that could cause
actual results to vary from the projections in the forward-looking statements.
You should consider the risks below carefully in addition to other information
contained in this report before engaging in any transaction involving shares of
our common stock. If any of these risks occur, they could seriously harm our
business, financial condition or results of operations. In such case, the
trading price of our common stock could decline, and you may lose all or
part of your investment.
The
discussion and analysis set forth in this document contains trend analysis,
discussions of regulatory status and other forward-looking statements. Actual
results could differ materially from those projected in the forward-looking
statement as a result of the following factors, among others:
·
our ability to complete the transaction with
OncoGenex Technologies, Inc., successfully execute our integration
strategies and achieve planned synergies;
·
uncertainties regarding the combined companys
future operating results, and the risk that the combined companys products
will not obtain the requisite regulatory approvals to commercialize its
products or that the future sales of the companys products may be less than
expected;
·
future capital requirements and uncertainty
of obtaining additional funding through corporate partnerships, debt or equity
financings;
·
the
risk that we may not maintain continued listing of our common stock on the
NASDAQ Global Market or NASDAQ Capital Market;
·
results
of research and preclinical studies may not be indicative of results in humans;
·
our
ability to build out our product candidate pipeline through product
in-licensing or acquisition activities;
·
proper
management of our operations will be critical to the success of the company;
·
history
of operating losses and uncertainty of future financial results;
·
volatility
in the value of our common stock;
·
dependence
on the development and commercialization of products;
·
uncertainty
of governmental regulatory requirements and lengthy approval process;
·
dependence
on third parties for funding, clinical development, regulatory approvals,
12
Table
of Contents
manufacturing and distribution;
·
dependence
on key employees;
·
uncertainty
of U.S. or international legislative or administrative actions;
·
competition
and risk of competitive new products;
·
limited
manufacturing experience and dependence on a limited number of contract
manufacturers and suppliers;
·
our
ability to obtain and defend patents, protect trade secrets and avoid
infringing patents held by third parties;
·
limitations
on third-party reimbursement for medical and pharmaceutical products;
·
acceptance
of our products by the medical community;
·
potential
for product liability issues and related litigation;
·
potential
for claims arising from the use of hazardous materials in our business;
·
fluctuations
in our operating results;
·
uncertainty
relating to the timing and results of clinical trials; and
·
other
factors set forth under Risk Factors contained in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2007 filed on March 14, 2008,
Quarterly Report on Form 10-Q filed on May 9, 2008 for the first
quarter ending March 31, 2008
and in this
Quarterly Report on Form 10-Q.
MD&A
Overview
In
Managements Discussion and Analysis of Financial Condition and Results of
Operations we explain the general financial condition and the results of
operations for our Company, including:
·
an overview of our business;
·
results of operations and why those results
are different from the prior year; and
·
capital resources we currently have and
possible sources of additional funding for future capital requirements.
Business Overview
Sonus Pharmaceuticals is developing novel small
molecule drugs for the treatment of patients with cancer. Our objective is to identify opportunities
where there is the possibility for major improvements in patient treatments and
where we believe we can mitigate development risk. We currently have one drug in clinical
development. Our plan is to continue to develop our internal pipeline of
clinical compound opportunities and to evaluate possible strategic
alternatives, including in-licensing and completion of the transaction with
OncoGenex Technologies, Inc., as a means of achieving our business
strategies and enhancing stockholder value.
Product Candidates
SN2310
SN2310 Injectable Emulsion (SN2310) is a novel
camptothecin derivative. Camptothecins are an important class of anti-cancer
drugs, however, the marketed camptothecin analogs, irinotecan (Camptosar®) and
topotecan (Hycamtin®), have demonstrated limitations that may reduce their
clinical utility. Irinotecan and topotecan are used in the treatment of colorectal,
lung, and ovarian cancers. SN2310 is a prodrug of SN-38. SN-38 is also the active moiety of
irinotecan. Our objective with SN2310 is
to provide a product that has enhanced anti-tumor activity and improved
tolerability compared with the approved camptothecin-based products. An
Investigational New Drug Application (IND) was submitted to the U.S. Food and
Drug Administration (FDA) for SN2310 in June 2006 and Phase 1 clinical
testing was initiated in September 2006. We expect to close enrollment in
this study in 2008 and initiate a Phase 2 clinical trial soon thereafter if
warranted based on results of the Phase 1 trial. As this product candidate is
early in clinical development, we cannot give any assurance that this compound
will be clinically successful.
13
Table
of Contents
TOCOSOL® Paclitaxel
TOCOSOL Paclitaxel is a
novel formulation of paclitaxel manufactured in a ready-to-use, injectable
vitamin E-based emulsion formulation. In September 2007 we announced that
TOCOSOL Paclitaxel failed to meet the primary endpoint in Phase 3 clinical
testing. We have discontinued
development of TOCOSOL Paclitaxel due to results of the Phase 3 study, and the
time and cost that would be required to conduct the necessary clinical studies
to continue development, which at a minimum, would include another Phase 3
pivotal trial. These closure activities
were substantially complete by December 31, 2007, although limited closure
activities continue in the first and second quarters of 2008.
Research
and Development
Following the reduction of workforce in March 2008, we have
substantially reduced our internal drug discovery capabilities. Our current strategy for broadening our
product candidate pipeline will be primarily through in-licensing of novel
compounds or other strategic activities.
Our primary product focus will remain oncology and supportive care.
Arrangement
Agreement
On May 27, 2008, we entered into an
Arrangement Agreement with OncoGenex Technologies Inc., a privately held
corporation existing under the federal laws of Canada (
OncoGenex
),
providing for a business combination between OncoGenex and Sonus. Under the terms of the Arrangement Agreement,
we will acquire all of the outstanding shares of capital stock of OncoGenex
pursuant to a Plan of Arrangement (the
Arrangement
) under Section 192
of the Canada Business Corporations Act. Assuming the Arrangement is
completed, it would have the effect of making OncoGenex a wholly owned
subsidiary of Sonus.
Upon consummation of the Arrangement, we will
issue to the securityholders of OncoGenex a number of shares of Sonus common
stock equal to the number of our common shares outstanding immediately prior to
the closing, such that immediately after the closing of the Arrangement, our
stockholders and OncoGenex securityholders will each own 50%, respectively, of
the outstanding shares of our common stock. As of June 30, 2008,
37,089,679 shares of our common
stock were outstanding. Assuming no additional shares of our common stock
are issued prior to the closing, 37,089,679
shares of
our common stock will be issued to OncoGenex securityholders upon the closing
of the Arrangement.
In addition to the shares of our common stock
issued upon the closing of the Arrangement, the former holders of OncoGenex
capital stock are also entitled to receive up to an aggregate of 25,000,000
additional shares of our common stock (the
Milestone Shares
) upon
the achievement of certain agreed-upon milestones, as more particularly set
forth in escrow agreements to be executed prior to the closing. The
25,000,000 Milestone Shares will be placed into escrow at the closing of the
Arrangement. If the Milestone Shares are not earned within six (6) years
after the closing of the Arrangement, they will be returned to us for
cancellation. On July 14, 2008,
OncoGenex announced that it has reached an agreement with the U.S. Food and
Drug Administration (FDA) on the design of a Phase 3 registration trial of
OGX-011, its lead product candidate targeting hormone refractory prostate
cancer, via the Special Protocol Assessment (SPA) process. This event is one of the agreed-upon
milestones, and thus, upon closing of the Arrangement, 25% of the Milestone
Shares, or 6,250,000 shares, would be immediately released to former holders of
OncoGenex capital stock. Upon completion
of the Arrangement, OncoGenex securityholders will hold more than 50% of the
outstanding shares
14
Table of Contents
of the combined company (or up to 62.6% if certain
milestones are reached) and both OncoGenex and Sonus will have equal
representation on the Board of Directors of the combined company.
Each option to purchase OncoGenex common stock
will be assumed by Sonus and will be exercisable by its holder for shares of
our common stock, as adjusted for the share exchange ratio.
The Arrangement Agreement also contemplates that,
concurrently with the closing of the Arrangement and subject to the approval of
our stockholders, we will (i) effect a reverse stock split of our
outstanding common stock by a whole-number ratio of between 1-for-10 and up to
1-for-20, or by such other ratio as agreed upon by Sonus and OncoGenex pursuant
to the terms of the Arrangement Agreement (the
Reverse Stock Split
);
(ii) adjust the number of authorized shares of our common stock such that,
immediately following the Reverse Stock Split, our authorized shares of common
stockwill consist of approximately two times the number of shares of our common
stock outstanding immediately following the closing of the Arrangement
(including the Milestone Shares deposited into escrow) (collectively, the
Capital
Adjustment
); and (iii) change the name of the corporation from Sonus
Pharmaceuticals, Inc. to OncoGenex Pharmaceuticals, Inc. (the
Name
Change
).
The Arrangement is subject to a number of closing
conditions, including, without limitation, (i) the approval of the
Arrangement by the securityholders of OncoGenex, (ii) the approval of the
issuance of shares of our common stock in respect of the Arrangement, the Reverse
Stock Split, the Capital Adjustment and the Name Change by our stockholders, (iii) the
receipt of a final order from the Supreme Court of British Columbia approving
the Arrangement, (iv) the exemption of the issuance of our shares of
common stock and substitute options in respect of the Arrangement from U.S.
securities registration requirements under section 3(a)(10) of the
Securities Act of 1933, and (v) other customary closing conditions.
Collaboration and License
Agreement with Bayer Schering Pharma AG
In
October 2005, we entered into a Collaboration and License Agreement with
Bayer Schering, a German corporation, pursuant to which, among other things, we
granted Bayer Schering an exclusive, worldwide license to TOCOSOL Paclitaxel,
its anti-cancer product candidate (the Product). With respect to the Product, Bayer Schering
paid us an upfront license fee of $20 million and paid us for research and
development services performed equal to 50% of eligible product research and
development costs. In connection with
the Collaboration and Licensing Agreement, we and an affiliate of Bayer
Schering entered into a Securities Purchase Agreement whereby we sold 3,900,000
shares of common stock for an aggregate of $15.7 million and warrants to
purchase 975,000 shares of common stock for an aggregate purchase price of
$122,000.
In
October 2007, we received notification from Bayer Schering of its decision
to terminate the Collaboration and License Agreement in accordance with its
terms because the Phase 3 pivotal trial did not meet its primary endpoint. The termination was effective on November 2,
2007. In accordance with the terms of the Agreement, all rights to TOCOSOL
Paclitaxel have reverted back to us.
Wehave discontinued development of TOCOSOL Paclitaxel due to results of
the Phase 3 study. These closure activities were substantially complete by December 31,
2007, although limited closure activities continue in the first and second
quarters of 2008.
We will not earn revenue and do not expect to incur
expenses related to the Agreement with Bayer Schering beyond 2007. The final net billing between Sonus and Bayer
Schering was completed during the fourth quarter of 2007. Settlement of the final amount outstanding
was received from Bayer Schering in December 2007. There were no receivables from, or payables
to, Bayer Schering outstanding at June 30, 2008 or at December 31,
2007.
15
Table of Contents
Restructuring Activities
On March 31, 2008, we
reduced our workforce by approximately 37% in order to conserve cash and align
the workforce with anticipated staffing needs.
The total cost associated with this reduction of workforce of
approximately $1.0 million, which consisted of severance costs and medical
insurance was recognized as expense in the first quarter 2008.
In the second quarter of
2008, we also vacated a portion of our laboratory and office facilities and
recorded excess facilities charges. An
excess facilities charge of approximately $274,000 was recognized in the second
quarter of 2008. We recorded
restructuring charges when we ceased using this space. The non-cash charge is calculated as the
present value of total lease commitments, net of estimated sublease
income. As of June 30, 2008, we had
approximately $173,000 accrued related to excess facilities charges.
Results of Operations
As of June 30, 2008, our accumulated deficit was approximately
$132.7 million. We expect to incur substantial additional operating losses over
the next several years. Such losses have
been and will continue to principally be the result of various costs associated
with our research and development programs.
Substantially all of our working capital in recent years has resulted
from equity financings and payments received under corporate partnership
agreements. Our ability to achieve a
consistent, profitable level of operations depends in large part on obtaining
regulatory approval for future product candidates in addition to successfully
manufacturing and marketing those products if they are approved. Even if we are successful in the
aforementioned activities our operations may not be profitable.
We
recognized no revenue for the three months ended June 30, 2008 as compared
with $3.2 million for the same period in 2007.
We had no revenue for the six months ended June 30, 2008 compared
with $8.3 million for the same period in 2007.
Revenue in the both periods was fully attributable to the agreement with
Bayer Schering. This agreement was
terminated in the fourth quarter of 2007.
We recognized $1.4 million and $2.8 million in amortization of an
upfront license fee received from Bayer Schering for the three and six month
periods ended June 30, 2007, respectively and an additional $1.9 million
and $5.5 million in research and development reimbursements for the three and
six month period ended June 30, 2007.
Our
research and development (R&D) expenses were $1.5 million for the three
months ended June 30, 2008 compared with $7.7 million for the same period
in 2007. Our R&D expenses were $3.8
million for the six months ended June 30, 2008 compared with $14.6 million
for the same period in 2007. The
decrease was primarily the result of lower spending on clinical trials and drug
supply and manufacturing costs due to the termination of the Phase 3 trial for
TOCOSOL Paclitaxel in the fourth quarter of 2007 and the discontinuation of
discovery efforts in the first quarter 2008.
Research and development expenses in the first half of 2008 are also
lower as a result of recognition of a refund of approximately $850,000 for
recalled material which had been returned to suppliers. This refund was recorded as a reduction of
research and development expense in the first quarter of 2008. Although research and development personnel
costs were reduced in the six months ended June 30, 2008 as compared to
the same period in 2007 due to a reduction in workforce effective in November 2007,
this reduction was offset by the recognition of approximately $656,000 of
severance expenses recorded in connection with an additional reduction in
workforce effective March 31, 2008. We expect R&D expenses in 2008 to
be significantly lower than levels experienced in 2007, absent any strategic
transaction which could affect R&D expenses.
Our
general and administrative (G&A) expenses were $2.5 million for the three
months ended June 30, 2008 compared with $2.1 million for the same period
in 2007. Our G&A expenses were $4.6
million for the six months ended June 30, 2008 compared with $4.1 million
for the same period in 2007. The
increase for both periods was primarily the result of higher spending associated
with personnel
16
Table of Contents
related costs
of approximately $393,000 for severance benefits due to a reduction of
workforce effective March 31, 2008 and increased legal and professional
services fees related to the evaluation of potential strategic alternatives and
activities associated with the pending arrangment with OncoGenex. We expect G&A expenses for the remainder
of 2008 to be higher than levels experienced in 2007, due to the continued cost
of activities associated with the pending arrangment with OncoGenex.
Our
total operating expenses in 2008 are expected to decrease from 2007 levels due
to the termination of research and development activities for TOCOSOL
Paclitaxel and the two reductions of workforce which occurred in November 2007
and March 2008. We estimate that R&D spending will comprise more than
42% of the anticipated spending in 2008. A significant portion of the R&D
spending will be devoted to development activities for SN2310. These estimated
expenses are subject to change depending on many factors, including, without
limitation, the affect of the proposed Arrangement with OncoGenex.
Our
other income, net, was $188,000 for the three months ended June 30, 2008
compared with $590,000 for the same period in 2007. The decrease was due primarily to lower
levels of invested cash in 2008 compared to the same periods in 2007.
The
Company had no income tax expense for the three periods ended March 31,
2008 or 2007 as it had incurred pretax losses.
Liquidity
and Capital Resources
We
have historically financed operations with proceeds from equity financings and
payments under collaboration agreements with third parties. At June 30, 2008, we had cash, cash
equivalents and marketable securities totaling $23.3 million compared to $34.2
million at December 31, 2007. The
decrease was primarily due to the net loss for the six month period ended June 30,
2008 of $7.9 million, in addition to timing of items accrued in 2007 and paid
in 2008.
Net
cash used in operating activities for the six months ended June 30, 2008
and 2007 was $10.8 million and $14.0 million, respectively. We recognized no revenue for the six months
ended June 30, 2008 as compared with $8.3 million for the same period in
2007. All revenue recognized in the six
month period ending June 30, 2007 was fully attributable to the agreement
with Bayer Schering. This agreement was
terminated in the fourth quarter of 2007 and no additional revenue from this
agreement is expected to be received.
Expenditures in all periods were a result of R&D expenses, including
clinical trial costs, and G&A expenses in support of our operations. Product development activities were primarily
related to SN2310 and pipeline development activities in the first half of
2008, whereas product development activities in the first half of 2007
consisted primarily of expenditures related to TOCOSOL Paclitaxel and to a
lesser extent other potential product candidates. The decrease in net cash used in operating
activities for the six months ended June 30, 2008 compared to the same
period in 2007 was primarily due to the reduction of expenditures for TOCOSOL
Paclitaxel.
Net cash
provided by (used in) investing activities for the six months ended June 30,
2008 and 2007 was $10.0 million and ($19.3) million, respectively. The net cash
provided by and used in investing activities was primarily due to transactions
involving marketable securities in the normal course of business. The related maturities and sales of those
investments provide us with working capital on an as-needed basis. We initiate shifts between cash equivalent
securities and marketable securities based on our cash needs and the prevailing
interest rate environment. The cash
provided by investing activities for the six months ended June 30, 2008
primarily related to proceeds from sales of marketable securities. The cash used in investing activities for the
same period in 2007 primarily reflected purchases of marketable securities.
Net cash provided by financing activities for the
six months ended June 30, 2008 and 2007 was approximately $13,000 and
$159,000, respectively. The net cash
provided by financing activities during both of these periods was primarily due
to the issuance of common stock under employee benefit plans.
17
Table of Contents
We
expect that our cash requirements will decrease in 2008 due to the termination
of development of TOCOSOL Paclitaxel and related staff reductions. Under our current forecasted cash needs,
which assume continued development of SN2310, we believe that existing cash,
cash equivalents and marketable securities will be sufficient to fund expected
operations through 2009. This forecast
does not reflect any additional cash needs if the OncoGenex transaction is
completed. We will need additional
capital to support the continued development SN2310, other product candidates
and to fund continuing operations after 2009.
Our future capital requirements depend on many factors including:
·
our ability to
obtain equity or debt financings;
·
completion of
the planned Arrangement with OncoGenex;
·
timing and
costs of preclinical development, clinical trials and regulatory approvals;
·
timing and cost
of product development and in-licensing activities;
·
entering into
new collaborative or product license agreements for products in our pipeline;
and
·
costs related
to obtaining, defending and enforcing patents.
We
have contractual obligations in the form of operating leases which expire
between 2010 and 2017. We signed our current facility lease in November 2006. The facility lease has a term of 10 years
with a provision for two additional five year renewals. The term commencement date for the new lease
was January 1, 2008. The following table summarizes our contractual
obligations under these agreements as of June 30, 2008:
Contractual
Obligations
|
|
Total
|
|
Less than
1 year
|
|
1-3 years
|
|
3-5 years
|
|
More than 5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligations
|
|
$
|
20,691,256
|
|
$
|
1,957,332
|
|
$
|
4,014,016
|
|
$
|
6,447,534
|
|
$
|
8,272,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Material Changes in Financial
Condition
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
33,433,589
|
|
$
|
45,249,269
|
|
Total
liabilities
|
|
$
|
8,917,339
|
|
$
|
13,344,852
|
|
Shareholders
equity
|
|
$
|
24,516,250
|
|
$
|
31,904,417
|
|
The decline in assets from December 31, 2007
primarily relates to declines in cash, cash equivalents and marketable
securities used to fund operations. The
decline in liabilities from December 31, 2007 relates primarily to
generally lower accrued liabilities on reduced clinical trial expense. The decline in shareholders equity is
primarily due to the net loss for the period.
Critical Accounting Policies and Estimates
We previously identified certain policies and
estimates as critical to our business operations and the understanding of our
past or present results of operations in our Annual Report on Form 10-K
for the year ended December 31, 2007 and filed with the Securities and
Exchange Commission on March 14, 2008.
These policies and estimates are considered critical because they had a
material impact, or they have the potential to have a material impact, on our
financial statements and because they require significant judgments,
assumptions or estimates. Our
preparation of financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amounts of revenue and expenses during the
reporting period.
18
Table of
Contents
The Company
adopted SFAS No. 157,
Fair Value Measurements
(SFAS No. 157) effective January 1, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands
disclosure of fair value measurements. The Company did not have a transition
adjustment to beginning retained earnings as a result of adopting this
standard. SFAS No. 157 applies to all financial instruments that are
measured and reported on a fair value basis. This includes those items reported
in marketable securities on the balance sheets.
In
conjunction with the adoption of SFAS No. 157, the Company also adopted
SFAS 159,
The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of SFAS No. 115
(SFAS
No. 159) as of January 1, 2008. SFAS No. 159 provides companies
the option to report select financial assets and liabilities at fair value.
This statement also establishes presentation and disclosure requirements
designed to facilitate comparisons between companies that choose different
measurement attributes for similar types of assets and liabilities. After the
initial adoption, the election is made at the acquisition of a financial asset
or financial liability and it may not be revoked. We did not apply the fair
value option to any of our outstanding instruments; therefore, there has been
no impact on our financial statements.
Effective January 1,
2008, the Company adopted the provisions of FASB Emerging Issues Task Force,
Issue 07-3, Accounting for Nonrefundable Advance Payments for Goods or
Services Received for Use in Future Research and Development Activities, or
EITF 07-3. In accordance with EITF 07-3, nonrefundable contractual
prepayments related to future R&D activities are deferred and recognized as
an expense in the period that the related goods are delivered or services are
performed. Our adoption of this standard
has not had a material impact on our financial statements.
Item 3. Quantitative and
Qualitative Disclosures About Market Risk
Interest
rate risk:
The
market risk inherent in our marketable securities portfolio represents the potential
loss arising from adverse changes in interest rates. If market rates
hypothetically increase immediately and uniformly by 100 basis points from
levels at June 30, 2008, the decline in the fair value of the investment
portfolio would not be material. Given the short-term nature of our investment
portfolio, we do not expect our operating results or cash flows to be affected
to any significant degree by a sudden change in market interest rates.
Foreign currency exchange risk:
We are exposed to risks associated with foreign
currency transactions on certain contracts denominated in foreign currencies
(primarily Euro and Pound Sterling denominated contracts) and we have not
hedged these amounts. As our unhedged foreign currency transactions fluctuate, our
earnings might be negatively affected. Accordingly, changes in the value of the
U.S. dollar relative to the Euro/Pound Sterling might have an adverse effect on
our reported results of operations and financial condition, and fluctuations in
exchange rates might harm our reported results and accounts from period to
period. The impact of foreign currency
fluctuations related to realized gains and losses during the six month periods
ended June 30, 2008 and 2007, respectively, was not material.
Item 4. Controls and Procedures
Evaluation
of disclosure controls and procedures
An evaluation as of the end of the period
covered by this report was carried out under the supervision and participation
of management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon the
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material
19
Table of Contents
information
required to be included in our periodic SEC filings. A controls system, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls are met, and no evaluation of controls can provide absolute
assurance that all controls and instances of fraud, if any, within a company
have been, or will be, detected.
Changes
in internal control over financial reporting
We
have not made any changes to our internal control over financial reporting (as
defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter ended June 30, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Part II.
Other Information
Item
1A. Risk Factors
You
should consider the risks below carefully in addition to other information
contained in this report before engaging in any transaction involving shares of
our common stock. Potential risks and
uncertainties include, among other things, those factors discussed in the
sections entitled Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the year ended December 31, 2007, the section
entitled Managements Discussion and Analysis of Financial Condition and
Results of Operations in this Quarterly Report on Form 10-Q, and as set
forth below in this Item 1A. Readers should carefully review those risks, as
well as additional risks described in other documents we file from time to time
with the Securities and Exchange Commission. The following risk factors include
material changes to the risk factors previously disclosed in our Form 10-K
for the year ended December 31, 2007, and are not a complete list of our
risk factors. We undertake no obligation to publicly release the results of any
revisions to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
Risks
Related to the Arrangement with OncoGenex
The Arrangement will result in substantial dilution to the ownership
interests of our current stockholders
.
Upon
consummation of the Arrangement, we will issue to the securityholders of
OncoGenex a number of shares of our common stock equal to the number of our
outstanding shares immediately prior to the closing, such that immediately
after the closing of the Arrangement, our stockholders and OncoGenex
securityholders will each own 50%, respectively, of the outstanding shares of
our common stock. As of June 30,
2008, 37,089,679 shares of our common stock were outstanding. Assuming no additional shares of our common
stock are issued prior to the closing, 37,089,679 shares of our common stock
will be issued to OncoGenex securityholders upon the closing of the
Arrangement. In addition, the former
holders of OncoGenex capital stock are also entitled to receive up to an
aggregate of 25,000,000 additional shares of our common stock (the Milestone
Shares ) upon the achievement of certain agreed-upon milestones. On July 14, 2008, OncoGenex announced
that it had achieved one of the agreed-upon milestones, and thus, upon closing
of the Arrangement, subject to approval of the combined Board of Directors
following the Arrangement, 25% of the Milestone Shares, or 6,250,000 shares,
will be immediately released to former holders of OncoGenex capital stock. Upon completion of the Arrangement, if the
Milestone Shares are earned, OncoGenex securityholders will hold up to 62.6% of
the combined company. As a result, our
stockholders will not be able to control the management or affairs of the
combined company, including the election of directors and approval of
significant corporate transactions.
20
Table of Contents
If we are not successful in integrating our organizations, we may not
be able to operate efficiently after the Arrangement.
Achieving
the benefits of the Arrangement will depend in part on the successful
integration of Sonus and OncoGenexs operations and personnel in a timely and
efficient manner. The integration
process requires coordination of different development, regulatory, clinical
research and executive teams, and involves the integration of systems,
applications, policies, procedures, business processes and operations. If we do not successfully integrate our
operations and personnel, we may not realize the expected benefits of the
Arrangement.
Integration efforts may divert managements attention away from our
operations.
Successful
integration of Sonus and OncoGenexs operations, product candidates and
personnel may place a significant burden on our management and our internal
resources. The diversion of managements
attention and any difficulties encountered in the transition and integration
process could result in delays in the companies clinical trial programs and
could otherwise harm our business, financial condition and operating results.
We may incur significant costs integrating the companies into a single
business.
We
may incur significant costs integrating Sonus and OncoGenexs operations,
products candidates and personnel. These
costs may include costs for:
·
employee
redeployment, relocation or severance;
·
conversion
of information systems;
·
combining
development, regulatory, clinical research and executive teams and processes;
·
reorganization
of facilities; and
·
relocation
or disposition of excess equipment.
If we fail to retain key employees, the benefits of the Arrangement
could be diminished.
The
successful combination of Sonus and OncoGenex will depend in part on the
retention of key personnel. There can be
no assurance that Sonus will be able to retain its or OncoGenexs key
management and scientific personnel. If
we fail to retain such key employees, we may not realize the anticipated
benefits of the Arragement.
Failure to complete the Arrangement could cause our stock price to
decline and could harm our business and operating results.
The
Arrangement Agreement contains conditions to consummate the Arrangement and
either party may terminate the Arrangement Agreement under certain
circumstances. If the Arrangement is not
completed for any reason, we may be subject to a number of risks, including the
following:
·
the
market price of our common stock may decline to the extent that the current
market price reflects a market assumption that the Arrangement will be
completed;
·
many
costs related to the Arrangement, such as legal, accounting, and financial
printing fees must be paid regardless of whether the Arrangement is completed;
and
·
there may
be substantial disruption to our business and distraction of our workforce and
management team.
21
Table of Contents
We will need additional capital in the future to support the continued
development of our product candidates and to fund continuing operations.
Although
our cash requirements have decreased due to the discontinuation of development
of TOCOSOL Paclitaxel and reductions in workforce, we will need additional
capital to support the continued development of SN2310and to fund continuing
operations after 2009. We believe that existing cash, cash equivalents and
marketable securities will be sufficient to fund current operations through
2009. This forecast does not reflect any
additional cash needs if the OncoGenex transaction is completed. The Arrangment with OncoGenex will add
several additional product candidates to our pipeline, which will require
additional capital to continue preclinical and clinical trials and regulatory
approvals. Our future capital
requirements depend on many factors including:
·
our ability to obtain debt
or equity financings;
·
timing and costs of
preclinical development, clinical trials and regulatory approvals;
·
timing and cost of research
and development;
·
entering into new
collaborative or product license agreements for products in our pipeline; and
·
costs related to obtaining,
defending and enforcing patents.
Failure to satisfy NASDAQ Global Market listing requirements may result
in our common stock being delisted from The NASDAQ Global Market.
Our
common stock is currently listed on The NASDAQ Global Market under the symbol SNUS. For continued inclusion on The NASDAQ Global
Market, we must maintain, among other requirements, stockholders equity of at
least $10.0 million, a minimum bid price of $1.00 per share and a market value
of our public float of at least $5.0 million; or market capitalization of at
least $50 million, a minimum bid price of $1.00 per share and a market value of
our public float of at least $15.0 million.
On November 5, 2007, we received notice from NASDAQ that we did not
comply with NASDAQs continued listing standards because the closing bid price
of our common stock had been below the required minimum bid price of $1.00 for
30 consecutive business days. On May 6,
2008, we received a staff determination letter indicating that we have failed
to regain compliance with the minimum bid price requirement prior to expiration
of the grace period to regain compliance, as permitted by NASDAQ. On June 12, 2008, we attended a hearing
with a NASDAQ Listing Qualifications Panel.
On July 17, 2008, we received a notice from the NASDAQ Listing
Qualifications Panel indicating that the NASDAQ Panel has determined to grant
Sonus request to continue the listing of its securities on The NASDAQ Global
Market. The Companys continued listing
on NASDAQ is subject to its compliance with certain conditions by August 29,
2008, including the implementation of a reverse stock split, the completion of
its planned arrangement with OncoGenex, and approval from NASDAQ of the
combined entitys application for initial listing on The NASDAQ Capital Market
upon completion of the arrangement. The
closing price of our common stock, as reported on the NASDAQ Global Market as
of July 31, 2008 was $0.26 per share.
We have a history of operating losses which we expect will continue and
we may never become profitable.
We
have experienced significant accumulated losses since our inception, and expect
to incur net losses for the foreseeable future. These losses have resulted
primarily from expenses associated with our research and development
activities, including nonclinical and clinical trials, and general and
administrative expenses. As of June 30, 2008, our accumulated deficit
totaled $132.7 million. We anticipate
that our operating losses will continue as we further invest in research and
development for our products. Our results of operations have varied and will
continue to vary significantly and depend on, among other factors:
22
Table of Contents
·
our
ability to obtain debt or equity financings;
·
completion
of planned Arrangement with OncoGenex;.
·
timing
and costs of preclinical development, clinical trials and regulatory approvals;
·
drug
discovery and research and development;
·
entering
into new collaborative or product license agreements for products in our
pipeline; and
·
costs
related to obtaining, defending and enforcing patents.
23
Table of Contents
Item 6. Exhibits
Exhibit No. 2: Plan of Acquisition
|
2.1*
|
|
|
Arrangement Agreement dated May 27, 2008, by
and between Sonus Pharmaceuticals, Inc., and OncoGenex Technologies Inc.
(incorporated by reference to the Companys Current Report on FORM 8-K
filed May 30, 2008).
|
|
|
|
|
Exhibit No. 4: Instruments Defining the
Rights of Security Holders
|
4.1
|
|
|
Third Amendment to Amended and Restated Rights
Agreement dated May 27, 2008, by and between Sonus
Pharmaceuticals, Inc. and Computershare Trust Company, N.A., as Rights
Agent (incorporated by reference to the Companys Current Report on
FORM 8-K filed May 30, 2008).
|
|
|
|
Exhibit No. 10: Material Contracts
|
|
|
|
10.1
|
|
|
Form of OncoGenex Voting Agreement
(incorporated by reference to the Companys Current Report on FORM 8-K
filed May 30, 2008).
|
10.1.1
|
|
|
Schedule of Parties to OncoGenex Voting Agreement
(incorporated by reference to the Companys Current Report on FORM 8-K
filed May 30, 2008).
|
10.2
|
|
|
Form of Sonus Voting Agreement (incorporated by
reference to the Companys Current Report on FORM 8-K filed May 30,
2008).
|
10.2.1
|
|
|
Schedule of Parties to Sonus Voting Agreement
(incorporated by reference to the Companys Current Report on FORM 8-K
filed May 30, 2008).
|
|
|
|
Certifications
|
31.1
|
|
|
Certification of President and Chief Executive
Officer pursuant to Rule 13a-14(a) or 15d-14(a).
|
31.2
|
|
|
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or 15d-14(a).
|
32.1
|
|
|
Certification of President and Chief Executive
Officer pursuant to Rule 13a-14(b) or 15d-14(b).
|
32.2
|
|
|
Certification of Chief Financial Office pursuant to
Rule 13a-14(b) or 15d-14(b).
|
* Schedules and similar attachments to
the Arrangement Agreement have been omitted pursuant to Item 601(b)(2) of
Regulation S-K. Registrant will furnish supplementally a copy of any omitted
schedule or similar attachment to the Securities and Exchange Commission upon
request.
24
Table of Contents
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:
|
August 5, 2008
|
By:
|
/s/ Alan Fuhrman
|
|
|
Alan Fuhrman
|
|
|
Senior Vice President,
|
|
|
Chief Financial Officer
|
|
|
(Principal Financial
Officer)
|
|
|
|
|
|
25
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