Sonus Pharmaceuticals, Inc.
Notes to Financial Statements
1. Description of Business and Summary of Accounting Policies
Overview
Sonus Pharmaceuticals, Inc. ("Sonus" or the "Company") 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 and two earlier stage programs. Our plan is to continue to develop our internal pipeline of clinical compound opportunities and to evaluate possible strategic alternatives, including
in-licensing, out-licensing and merger and acquisition opportunities, as a means of achieving our business strategies and enhancing stockholder value.
Liquidity
The Company has historically experienced recurring losses from operations which have generated an accumulated deficit of $124.8 million through
December 31, 2007. For the year ended December 31, 2007, the Company used $23.3 million of cash to fund operations. At December 31, 2007, the Company had cash, cash
equivalents and marketable securities of $34.2 million, and working capital of $28.9 million.
We
expect that our cash requirements will decrease in 2008 due to the termination of the development of TOCOSOL Paclitaxel and related staff reductions. Under our current forecasted cash
needs, which assume continued development of our lead compound, SN2310, and other earlier stage product candidates, we believe that existing cash, cash equivalents and marketable securities will be
sufficient to fund expected operations into the third quarter of 2009. We will need additional capital in 2009 to support the continued development of SN2310, other product candidates and to fund
continuing operations.
On
November 1, 2007, the Company implemented a reduction of workforce ("Reduction of Workforce") pursuant to which the Company's workforce was reduced by 16 positions, or
approximately 25%. The Company undertook the Reduction of Workforce in light of the outcome of its Phase 3 Pivotal Trial for TOCOSOL Paclitaxel. These steps were taken in order to conserve cash
and preserve the critical capabilities necessary to pursue the highest priority development programs. Additional information is provided in Note 6.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less at the date of purchase. The Company was invested in
$5.3 million in money market funds and
$1.0 million in commercial paper at December 31, 2007. The Company had $35.6 million of repurchase agreements as of December 31, 2006.
Fair Value of Financial Instruments
The carrying amounts of certain of the Company's financial instruments, principally cash and cash equivalents, and marketable securities approximate fair value
due to their short maturities.
Marketable Securities
The Company classifies the marketable securities portfolio as available-for-sale, and such securities are stated at fair value based on
quoted market prices, with the unrealized gains and losses included as
36
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
1. Description of Business and Summary of Accounting Policies (Continued)
a
component of accumulated other comprehensive income(loss). Interest earned on securities available-for-sale is included in interest income. The carrying value of debt
securities in this category is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses
and declines in value judged to be other than temporary on securities available-for-sale also are included in interest income. The cost of securities sold is based on the
specific identification method.
Concentrations of Credit Risk
The Company invests its excess cash in accordance with investment guidelines, which limit the credit exposure to any one financial institution other than
securities issued by the U.S. government. The guidelines also specify that the financial instruments are issued by institutions with strong credit ratings. These securities generally mature within one
year or less and in some cases are not collateralized. At December 31, 2007 the average days to maturity of the Company's portfolio of cash equivalents and marketable securities was
73 days.
Revenue Recognition
Since inception, we have generated revenue from collaborative agreements, licensing fees and from the assignment of developed and patented technology. These
arrangements may include upfront non-refundable payments, development milestone payments, payments for research and development services performed and product sales royalties or revenue.
Our revenue recognition policies are based on the requirements of SEC Staff Accounting Bulletin No. 104 "
Revenue Recognition
," and, for contracts
with multiple deliverables, we allocate arrangement consideration based on the fair value of the elements under guidance from Emerging Issues Task Force Issue 00-21
("EITF 00-21"), "
Revenue Arrangements with Multiple Deliverables
." Under EITF 00-21, revenue arrangements with
multiple deliverables are divided into separate units of accounting and revenue is allocated to these units based upon relative fair values with revenue recognition criteria considered separately for
each unit.
Nonrefundable
upfront technology license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as revenue
over the estimated development period.
The
timing and amount of revenue that we recognize from licenses of technology, either from upfront fees or milestones where we are providing continuing services related to product
development, is primarily dependent upon our estimates of the development period. We define the development period as the point from which research activities commence up to FDA approval of our
submission assuming no further research is necessary. As product candidates move through the development process, it is necessary to revise these estimates to consider changes to the product
development cycle, such as changes in the clinical development plan, regulatory requirements, or various other factors, many of which may be outside of our control. Should our clinical development
plans change, as a result of regulatory or other matters, we would adjust our development period estimates accordingly. The impact on revenue of changes in our estimates and the timing thereof is
recognized prospectively over the remaining estimated product development period. Revenue from research and development services performed under collaboration agreements is generally recognized in the
period when the services are performed. Payments received in excess of amounts earned are recorded as deferred revenue.
37
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
1. Description of Business and Summary of Accounting Policies (Continued)
Research and Development Costs
Research and development ("R&D") costs including personnel costs, supplies, depreciation and other indirect costs are expensed as incurred. Costs are expensed the
earlier of when amounts are due or
when services are performed. R&D expenses consist of independent R&D costs and costs associated with collaborative R&D arrangements.
Other (expense) income
Other (expense) income includes net transaction gains and losses on foreign denominated payables of approximately ($125,000), ($115,000) and $0 in 2007, 2006 and
2005, respectively.
Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements are stated at cost. Depreciation is provided using the straight-line basis generally over three years
for equipment and 5 years for furniture and fixtures which represents the estimated useful life of the assets. Leasehold improvements are amortized over the lesser of the economic useful lives
of the improvements or the term of the related lease. The current lease has 10 years remaining. Repair and maintenance costs are expensed as incurred.
Segment Information
The Company follows the requirements of SFAS No. 131, "
Disclosure About Segments of an Enterprise and Related
Information
." The Company has one operating segment, the development of oncology drugs.
Stock-Based Compensation
The Company adopted the requirements of SFAS No. 123 (revised 2004), "
Share-Based Payment,
" (or
"SFAS 123R") on January 1, 2006, utilizing the "modified prospective" method. The Company uses the Black-Scholes-Merton option pricing model as the most appropriate
fair-value method for its awards and recognizes compensation cost on a straight-line basis over its awards' vesting periods in accordance with the provisions of
SFAS 123R. In valuing its options using the Black-Scholes-Merton option pricing model, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and
weighted average expected lives, including estimated forfeiture rates, of the options. Risk-free interest rates are derived from United States treasury securities as of the option grant
date. Dividend yields are based on the Company's historical dividend payments, which have been zero to date. Volatility is derived from the historical volatility of
the Company's common stock as traded on NASDAQ. Forfeiture rates are estimated using historical actual forfeiture rates that resulted over the estimated life of the option grant for options granted as
of the beginning of the forfeiture measurement period. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. The weighted
average expected life of the options is based on historical experience of option exercises and the average vesting option schedule. In November 2005, the FASB issued FASB Staff Position
No. 123R-3,
"Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards"
. The Company has adopted
the simplified method to calculate the beginning balance of the additional paid-in-capital (or "APIC") pool of excess tax benefit, and to determine the subsequent effect on the
APIC pool and the Statements of Cash Flows of the tax effects of stock-based compensation awards that were outstanding upon our adoption of SFAS 123R.
38
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
1. Description of Business and Summary of Accounting Policies (Continued)
For
unvested awards granted prior to the adoption date, compensation expense is based on the original grant date fair value measurement under SFAS 123,
"
Accounting for Stock-Based Compensation
".
Income Taxes
The Company utilizes the liability method of accounting for income taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under this method,
deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws
that are expected to be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be
realized. Due to uncertainty of the Company's ability to generate taxable income, a full valuation allowance has been established as of December 31, 2007.
Effective
January 1, 2007, the Company adopted the provisions of Financial Interpretation No. 48, "
Accounting for Uncertainty in Income
Taxesan interpretation of FASB Statement No. 109
" ("FIN 48"). FIN 48 prescribes a recognition threshold and a measurement attribute for the
financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. At the date of adoption of FIN 48, we had no unrecognized tax benefits and
expected no significant changes in unrecognized tax benefits in the next twelve months. The adoption of this statement did not result in a cumulative accounting adjustment and did not impact our
financial position, results of operations or cash flows.
Comprehensive Income
In accordance with Statement of Financial Accounting Standard No. 130, "
Reporting Comprehensive Income
"
(SFAS 130), the Company has reported comprehensive income, defined as net income (loss) plus other comprehensive income(loss), in the Statements of Stockholders' Equity. The total of other
accumulated comprehensive income(loss) consists of unrealized gains and losses on certain cash equivalents and marketable securities.
Per Share Data
Basic net loss per share is based on the weighted average number of common shares outstanding. Diluted net loss per share is based on the weighted average number
of common shares and dilutive potential common shares. Dilutive potential common shares are calculated under the treasury stock method and consist of unexercised stock options and warrants.
Use of Estimates and Reclassifications
The preparation of financial statement in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Certain
reclassifications of prior period amounts have been made to our financial statements to conform to the current period presentation.
39
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
1. Description of Business and Summary of Accounting Policies (Continued)
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "
Fair Value
Measurements
," which establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. This statement does not require any new fair value measurements, but increases consistency and comparability in the use of fair value measurements and calculations. This
statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and for interim periods within those fiscal years. Management does not anticipate that
the adoption of SFAS No. 157 will have a material effect on our financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, "
The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment to
FASB Statement No. 115
". SFAS 159 allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in
earnings. Fair value treatment for eligible assets and liabilities may be elected either prospectively upon initial recognition, or if an event triggers a new basis of accounting for an existing asset
or liability. SFAS 159 is effective in the first quarter of 2008, and the Company is currently evaluating the impact of adoption on its financial position and results of operations.
In
June 2007, the EITF reached a consensus on EITF No. 07-03,
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in
Future Research and Development Activities
, or EITF 07-03. EITF 07-03 requires that nonrefundable advance payments for goods or services
that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the goods are delivered or the related services are performed.
EITF 07-03 is effective for fiscal years beginning after December 15, 2007, and will be adopted by the Company in the first quarter of 2008. The adoption of
EITF 07-3 will have the effect of changing our policy on nonrefundable prepayments for research and development services whereby such costs will be deferred and recognized as the
services are rendered as compared to the existing policy whereby such payments are charged to research and development expense as paid. This change may have an impact on financial condition and the
results of operations in future periods.
In
December 2007, the EITF reached a consensus on EITF No. 07-01,
Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property
, or EITF 07-01. EITF 07-01 discusses the appropriate income statement presentation and
classification for the activities and payments between the participants in arrangements related to the development and commercialization of intellectual property. The sufficiency of disclosure related
to these arrangements is also specified. EITF 07-01 is effective for fiscal years beginning after December 15, 2008. As a result, EITF 07-01 is effective
for us in the first quarter of fiscal 2009. We do not expect the adoption of EITF 07-01 to have a material impact on either our financial position or results of operations.
2. Collaboration and License Agreement with Bayer Schering
On October 17, 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%).
40
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
2. Collaboration and License Agreement with Bayer Schering (Continued)
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.
On
October 3, 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 and the results of the trial do not support, in Bayer Schering's judgment, a submission for a New Drug Application with the United States
Food and Drug Administration ("FDA"). 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.
Due
to the termination of the Agreement, in the fourth quarter of 2007 the Company recognized as revenue the balance of the unamortized deferred revenue from the upfront license fee.
Revenue recognized from the amortization of the deferred revenue from the upfront license fee was $11.0 million, $5.5 million and $1.2 million in 2007, 2006 and 2005,
respectively. The Company reduced the revenue to be recognized over the development period related to the $20 million upfront license payment by $2.3 million, which represented the
excess fair value of the warrants purchased by an affiliate of Bayer Schering above the amount paid in connection with its equity investment in Sonus. This adjustment was made because both the equity
investment and the upfront payment were considered to be a single unit of accounting.
The
Company recognized revenue of $9.1 million, $16.9 million and $7.1 million in 2007, 2006 and 2005, respectively for reimbursement of expenses related to research
and development services performed for the Phase 3 trial for TOCOSOL Paclitaxel and related drug supply and manufacturing costs, including expenses associated with the termination of the
Phase 3 trial. In addition, the Company recognized expenses of $4.1 million in 2007 and $1.7 million in 2006 for the Company's share of development expenses incurred by Bayer
Schering in accordance with the terms of the Agreement. There were no such expenses in 2005.
The
Company does not expect to earn revenue or incur expense 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. No receivables from, or payables to, Bayer Schering are
outstanding at December 31, 2007.
41
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
3. Marketable Securities
Marketable securities consist of the following:
|
|
Cost
|
|
Unrealized Gains
|
|
Unrealized Losses
|
|
Fair Value
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
26,019,825
|
|
$
|
1,910
|
|
|
|
|
$
|
26,021,735
|
Government debt securities
|
|
|
1,344,037
|
|
|
160
|
|
|
|
|
|
1,344,197
|
Asset-backed securities
|
|
|
298,342
|
|
|
|
|
|
(720
|
)
|
|
297,622
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,662,204
|
|
$
|
2,070
|
|
$
|
(720
|
)
|
$
|
27,663,554
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
|
$
|
21,100,297
|
|
$
|
3,068
|
|
$
|
(1,111
|
)
|
$
|
21,102,254
|
Asset-backed securities
|
|
|
1,406,481
|
|
|
|
|
|
(2,649
|
)
|
|
1,403,832
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,506,778
|
|
$
|
3,068
|
|
$
|
(3,760
|
)
|
$
|
22,506,086
|
|
|
|
|
|
|
|
|
|
There
were no significant realized or unrealized gains or losses on the sales of marketable securities in 2007, 2006 or 2005. All of the marketable securities held as of
December 31, 2007 had maturities of one year or less. The Company only invests in A (or equivalent) rated securities with maturities of one year or less. The Company does not believe that there
are any permanent impairments related to unrealized losses for the year ended December 31, 2007 given the quality of the investment portfolio and its short-term nature.
4. Equipment, Furniture and Leasehold Improvements
Equipment, furniture and leasehold improvements consist of the following:
|
|
2007
|
|
2006
|
|
Laboratory equipment
|
|
$
|
3,378,189
|
|
$
|
3,973,654
|
|
Office furniture and equipment
|
|
|
885,455
|
|
|
1,584,861
|
|
Leasehold improvements
|
|
|
7,673,040
|
|
|
1,390,879
|
|
|
|
|
|
|
|
|
|
|
11,936,684
|
|
|
6,949,394
|
|
Less accumulated depreciation and amortization
|
|
|
(3,293,885
|
)
|
|
(5,763,220
|
)
|
|
|
|
|
|
|
|
|
|
8,642,799
|
|
|
1,186,174
|
|
Construction in progress
|
|
|
934,768
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,577,567
|
|
$
|
1,186,174
|
|
|
|
|
|
|
|
We
held laboratory equipment acquired under capital leases with an original cost of $392,968 as of December 31, 2007 and 2006. Accumulated depreciation on this equipment was
$392,968 and $380,500 at December 31, 2007 and 2006, respectively.
During
2007, in preparation for a move to a new facility, the Company disposed of $1,756,163 of furniture, fixtures and equipment that would no longer be utilized by the Company.
Accumulated depreciation on this equipment was $1,737,954 at the time of disposal. In addition, at the expiration of its facilities lease the Company abandoned leasehold improvments that had been made
to the facility of
42
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
4. Equipment, Furniture and Leasehold Improvements (Continued)
$1,390,879.
Accumulated amortization of these leasehold improvements at the lease expiration was $1,387,073.
5. Accrued Expenses
Accrued expenses consist of the following:
|
|
2007
|
|
2006
|
Clinical trials
|
|
$
|
2,627,765
|
|
$
|
8,497,278
|
Product manufacturing
|
|
|
|
|
|
1,617,580
|
Severance
|
|
|
908,496
|
|
|
|
Compensation
|
|
|
227,044
|
|
|
1,459,128
|
Other
|
|
|
377,968
|
|
|
354,138
|
|
|
|
|
|
|
|
$
|
4,141,273
|
|
$
|
11,928,124
|
|
|
|
|
|
6. Reduction of Workforce
On November 1, 2007, the Company implemented a reduction of workforce ("Reduction of Workforce") pursuant to which the Company's workforce was reduced by
16 positions, or approximately 25%. The effective date of the Reduction of Workforce was November 30, 2007. The Company announced the Reduction of Workforce in light of the outcome of its
Phase 3 Pivotal Trial for TOCOSOL Paclitaxel. These steps were taken in order to conserve cash and preserve the critical capabilities necessary to pursue the highest priority development
programs. The total cost of the Reduction of Workforce was approximately $1.2 million, which consisted of payments for severance and medical insurance and was recognized as expense in the
fourth quarter of 2007. Severance expense of approximately $575,000 and $625,000 was recognized in research and development expense and general and administrative expense, respectively, in the fourth
quarter of 2007. The following table summarizes the severance expense activity:
Severance expense recorded in 2007
|
|
$
|
1,192,659
|
Cash Payments made in 2007
|
|
|
284,163
|
|
|
|
|
Accrued severance as of December 31, 2007
|
|
$
|
908,496
|
|
|
|
The
severance accrual as of December 31, 2007 was paid in the first quarter of 2008.
7. Other assets
Other assets consist of the following:
|
|
2007
|
|
2006
|
Deposit on facility lease
|
|
$
|
439,822
|
|
$
|
439,822
|
Long-term portion of prepaid insurance
|
|
|
|
|
|
20,895
|
|
|
|
|
|
|
|
$
|
439,822
|
|
$
|
460,717
|
|
|
|
|
|
43
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
8. Income Tax
The Company recorded no income tax expense or benefit during 2007, 2006 or 2005.
A
reconciliation of the Federal Statutory tax rate of 34% to the Company's effective income tax rate follows:
|
|
2007
|
|
2006
|
|
2005
|
|
Statutory tax rate
|
|
(34.00
|
)%
|
(34.00
|
)%
|
(34.00
|
)%
|
Research Credits
|
|
12.61
|
|
(1.99
|
)
|
(1.67
|
)
|
Permanent difference
|
|
0.05
|
|
0.04
|
|
3.67
|
|
Change in valuation allowance
|
|
19.87
|
|
35.08
|
|
33.63
|
|
Other
|
|
1.47
|
|
.87
|
|
(1.63
|
)
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
components of the Company's net deferred tax assets and liabilities as of December 31, 2007 and 2006 are as follows:
|
|
2007
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards
|
|
$
|
40,251,000
|
|
$
|
32,863,000
|
|
Deferred Revenue
|
|
|
|
|
|
3,769,000
|
|
Accrued expenses
|
|
|
239,000
|
|
|
195,000
|
|
Research and development credits
|
|
|
1,471,000
|
|
|
3,119,000
|
|
Stock Options
|
|
|
1,304,000
|
|
|
739,000
|
|
Book depreciation expense in excess of tax depreciation expense
|
|
|
(48,000
|
)
|
|
(62,000
|
)
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
43,217,000
|
|
|
40,623,000
|
|
Valuation allowance for net deferred tax assets
|
|
|
(43,217,000
|
)
|
|
(40,623,000
|
)
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
Due
to the uncertainty of the Company's ability to generate taxable income to realize its net deferred tax assets at December 31, 2007 and 2006, a valuation allowance has been
recognized for financial reporting purposes. The Company's valuation allowance for deferred tax assets increased $2.6 million and $8.3 million for the years ended December 31,
2007 and 2006, respectively. The increase in the deferred tax assets in 2007 is primarily the result of increasing net operating loss carryforwards.
At
December 31, 2007 the Company has federal net operating loss carryforwards of approximately $119 million for income tax reporting purposes and research and development
tax credit carryforwards of approximately $1.5 million. The federal operating loss carryforwards and research and development credits will expire between 2008 and 2028. To the extent that net
operating loss carryforwards, when realized, relate to stock option deductions of approximately $3 million, the resulting benefit will be credited to stockholders' equity.
The
initial public offering of common stock by the Company in 1995 caused an ownership change pursuant to applicable regulations in effect under the Internal Revenue Code of 1986.
Therefore, the
44
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
8. Income Tax (Continued)
Company's
use of losses incurred through the date of ownership change will be limited during the carryforward period and may result in the expiration of net operating loss carryforwards before
utilization.
The
Company adopted the provisions of FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxes
, on January 1,
2007. The Company has no unrecognized tax benefits which would require an adjustment to the January 1, 2007 beginning balance of retained earnings. The Company had no unrecognized tax benefits
at January 1, 2007 and at December 31, 2007.
The
Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2007 and 2006, the Company
recognized no interest and penalties.
9. Stockholders' Equity
Common Stock
At December 31, 2007, the Company had shares of common stock reserved for possible future issuance as follows:
Stock options outstanding
|
|
4,278,960
|
Warrants outstanding
|
|
4,080,533
|
Shares available for future grant under stock plans
|
|
5,325,366
|
|
|
|
|
|
13,684,859
|
|
|
|
Common Stock Issuances
In May 2006, the Company issued approximately 6.1 million shares of common stock in a registered direct offering for gross proceeds of $30.6 million
(approximately $28.6 million net of transaction costs). The common stock was sold at a price of $5.00 per share and was previously registered through a shelf registration statement on
Form S-3 that was declared effective by the SEC in April 2006.
In
October 2005, the Company issued 3,900,000 shares of common stock and warrants to purchase 975,000 shares of common stock to Schering Berlin Venture Corporation for aggregate
consideration of $15.8 million in connection with the Collaboration and License Agreement with Bayer Schering. The common stock was sold at $4.02 per share, which was equal to the per share
closing price of the Company's common stock as reported on the Nasdaq National Market on October 14, 2005, the trading day immediately preceding the date of the Securities Purchase Agreement.
The five-year warrants were sold at a price of $0.125 per share underlying each warrant, have an exercise price of $4.42 per share and expire in October 2010.
In
August 2005, the Company sold 4.7 million shares of common stock and warrants to purchase up to 2.3 million shares of common stock in a private placement transaction for
gross proceeds of $17.8 million (approximately $16.6 million net of transaction costs). The common stock was sold at a price of $3.77 per share. The five-year warrants were
sold at a price of $0.125 per share underlying each warrant, have an exercise price of $4.15 per share and expire in August 2010.
45
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
Stock Warrants
At December 31, 2007, there were warrants outstanding to purchase 4.1 million shares of common stock at exercise prices ranging from $4.09 to $4.42
per share and expiration dates ranging from July 2008 to October 2010. During 2007, the Company recorded $57,440 in proceeds from the issuance of 14,044 shares of common stock from the exercise of
common stock warrants. During 2006, the Company recorded $301,330 in proceeds from the issuance of 73,675 shares of common stock from the exercise of common stock warrants.
Stock Options
The Company has stock option plans whereby shares of common stock are reserved for future issuance pursuant to stock option grants or other issuances. Under the
2000 Stock Incentive Plan, an incremental number of shares equal to four percent of the Company's common stock outstanding as of December 31 of each year commencing December 31, 2000 are
made available for issuance under the plan up to a lifetime maximum of five million shares. The Company reached the lifetime cap in 2006. In 2007 Sonus shareholders approved a new incentive plan
entitled the "2007 Performance Incentive Plan." Under the term of this plan the Company can issue up to 3,900,000 additional shares of the Company's common stock through the grant of stock options and
restricted stock. 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.
Adoption of SFAS 123R
The Company adopted the requirements of SFAS No. 123 (revised 2004), "
Share-Based Payment,
" (or
"SFAS 123R") on January 1, 2006, utilizing the "modified prospective" method. The Company uses the Black-Scholes-Merton option pricing model as the most appropriate
fair-value method for its awards and recognizes compensation cost on a straight-line basis over its awards' vesting periods in accordance with the provisions of
SFAS 123R. In valuing its options using the Black-Scholes-Merton option pricing model, the Company makes assumptions about risk-free interest rates, dividend yields, volatility and
weighted average expected lives, including estimated forfeiture rates, of the options. Risk-free interest rates are derived from United States treasury securities as of the option grant
date. Dividend yields are based on the Company's historical dividend payments, which have been zero to date. Volatility is derived from the historical volatility of the Company's common stock as
traded on NASDAQ. Forfeiture rates are estimated using historical actual forfeiture rates that resulted over the estimated life of the option grant for options granted as of the beginning of the
forfeiture measurement period. These rates are adjusted on a quarterly basis and any change in compensation expense is recognized in the period of the change. The weighted average expected life of the
options is based on historical experience of option exercises and the average vesting option schedule.
For
unvested awards granted prior to the adoption date, compensation expense is based on the original grant date fair value measurement under SFAS 123, "Accounting for Stock-Based
Compensation". We currently believe that the assumptions used to generate those fair values are appropriate and therefore have not revised those calculations.
46
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
Prior to the adoption of SFAS 123R
The Company previously applied Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations
and provided the required pro forma disclosures of SFAS No. 123.
The
pro forma information for the year ended December 31, 2005 was as follows:
|
|
2005
|
|
Net loss, as reported
|
|
$
|
(21,097,017
|
)
|
Add: Stock-based employee compensation expense included in reported net loss
|
|
|
|
|
Deduct: Stock-based employee compensation expense determined under fair value based method
|
|
|
(1,629,317
|
)
|
|
|
|
|
Pro forma net loss
|
|
$
|
(22,726,334
|
)
|
|
|
|
|
Loss per share:
|
|
|
|
|
Basic and diluted-as reported
|
|
$
|
(0.88
|
)
|
Basic and diluted-pro forma
|
|
$
|
(0.95
|
)
|
Impact of the adoption of SFAS 123R
The Company elected to implement SFAS 123R using the modified prospective application method. Accordingly, during the year ended December 31, 2006,
the Company recorded stock-based compensation expense totaling the amount that would have been recognized had the fair value method been applied since the effective date of SFAS 123 for
unvested options outstanding as of January 1, 2006 and recorded compensation expense under the provisions of SFAS 123R for options granted during the years ended December 31, 2007
and 2006. Previously reported amounts have not been restated. As the Company uses a full valuation allowance with respect to deferred taxes, the adoption of SFAS 123R had no impact on deferred
taxes or cash flow.
The
effect of recording stock-based compensation for the periods ended December 31, 2007 and December 31, 2006 was as follows:
|
|
2007
|
|
2006
|
|
Stock-based compensation expense:
|
|
|
|
|
|
|
|
|
General & administrative
|
|
$
|
(1,080,455
|
)
|
$
|
(1,105,253
|
)
|
|
Research & development
|
|
|
(580,740
|
)
|
|
(1,068,126
|
)
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
|
(1,661,195
|
)
|
|
(2,173,379
|
)
|
Tax effect on stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net effect on income
|
|
$
|
(1,661,195
|
)
|
$
|
(2,173,379
|
)
|
|
|
|
|
|
|
Effect on earnings per share:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.06
|
)
|
|
|
|
|
|
|
47
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
As
of January 1, 2006, the Company had an unrecorded deferred stock-based compensation balance related to stock options of $5.4 million before estimated forfeitures. In the
Company's pro forma disclosures prior to the adoption of SFAS 123R, the Company accounted for forfeitures upon occurrence. SFAS 123R requires forfeitures to be estimated at the time of
grant and revised if necessary in subsequent periods if actual forfeitures differ from those estimates. Accordingly, as of January 1, 2006, the Company estimated that the stock-based
compensation for the awards not expected to vest was $1.2 million, and therefore, the pro forma deferred stock-based compensation balance related to stock options was adjusted to
$4.2 million after estimated forfeitures.
As
of December 31, 2007, the pro forma deferred stock-based compensation balance related to stock options after adjusting for estimated forfeitures was $3.5 million and
will be recognized over an estimated weighted average period of 2.0 years.
The
reduction of expense in the research & development area in 2007 related to the impact of a mark to market adjustment for consultant option awards. These awards are revalued at
the end of each quarter. The significant decline in the Company's stock price in 2007 resulted in a decrease of approximately $200,000 in stock compensation expense as compared to 2006.
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 to 6.59 years, four years and four years in 2007, 2006 and 2005,
respectively, (4) no expected dividends for each period presented, (5) stock price volatility factor of 1.01%, 62.9% and 78.7% in 2007, 2006 and 2005, respectively, and (6) a
risk-free interest rate of 4.0%, 4.6% and 4.4% in 2007, 2006 and 2005, respectively.
The
Company's change in the estimated forfeiture rate in 2007 was based on personnel reductions in the fourth quarter of 2007, and resulted in a decrease of approximately $445,000 in
stock compensation expense as compared to 2006. This change in estimate was based on events which occurred or were triggered in the third quarter 2007.
The
Black-Scholes-Merton option pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. The Company
will evaluate its assumptions on a regular basis. These evaluations may result in changes to assumptions which may have a material effect on compensation expense recorded under SFAS 123R.
48
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
A
summary of activity related to the Company's stock options follows:
|
|
Shares
|
|
Exercise Price
|
Balance, December 31, 2004
|
|
3,010,509
|
|
0.63 - 44.00
|
|
Granted
|
|
1,039,000
|
|
2.87 - 5.10
|
|
Exercised
|
|
(60,998
|
)
|
0.88 - 4.06
|
|
Canceled
|
|
(169,341
|
)
|
2.03 - 8.19
|
|
|
|
|
|
Balance, December 31, 2005
|
|
3,819,170
|
|
0.63 - 44.00
|
|
Granted
|
|
1,023,650
|
|
4.48 - 6.11
|
|
Exercised
|
|
(53,720
|
)
|
0.88 - 3.86
|
|
Canceled
|
|
(32,210
|
)
|
2.30 - 20.50
|
|
|
|
|
|
Balance, December 31, 2006
|
|
4,756,890
|
|
0.63 - 44.00
|
|
Granted
|
|
101,750
|
|
5.03 - 5.74
|
|
Exercised
|
|
(35,937
|
)
|
5.36 - 5.78
|
|
Canceled
|
|
(543,743
|
)
|
2.30 - 44.00
|
|
|
|
|
|
Balance, December 31, 2007
|
|
4,278,960
|
|
.63 - 19.38
|
|
|
|
|
|
Options
exercisable at December 31, 2007, 2006, and 2005, were 3,356,015, 2,618,765 and 1,953,680, respectively. The weighted average exercise prices for those options for the
years ended December 31, 2007, 2006 and 2005, were $4.69, $4.72 and $4.83, respectively.
The
intrinsic value of options exercised during 2007, 2006 and 2005 was $154,353, $178,220 and $109,644, respectively. The estimated fair value of shares vested during 2007, 2006 and
2005 was $3,099,433, $2,310,842 and $2,186,496, respectively. The weighted-average estimated fair value of stock options granted during 2007, 2006 and 2005 was $2.57, $3.09 and $2.99, respectively,
based on the assumptions in the Black-Scholes-Merton valuation model discussed above.
49
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
The
following table summarizes information about stock options outstanding at December 31, 2007:
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
Weighted-
Average
Remaining
Contractual
Life
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number of Shares Outstanding
|
|
Weighted-
Average Exercise Price
|
|
Number of Shares Outstanding
|
|
Weighted-
Average Remaining Contractual Life (in years)
|
|
Weighted-
Average Exercise Price
|
$0.63 - $2.30
|
|
557,524
|
|
4.25
|
|
$
|
1.70
|
|
557,524
|
|
4.25
|
|
$
|
1.70
|
$2.30 - $3.23
|
|
520,560
|
|
6.96
|
|
$
|
3.10
|
|
429,660
|
|
6.97
|
|
$
|
3.10
|
$3.23 - $5.01
|
|
728,720
|
|
6.00
|
|
$
|
4.54
|
|
695,003
|
|
5.91
|
|
$
|
4.54
|
$5.01 - $5.08
|
|
21,000
|
|
7.91
|
|
$
|
5.05
|
|
8,500
|
|
5.95
|
|
$
|
5.08
|
$5.08 - $5.10
|
|
720,726
|
|
7.96
|
|
$
|
5.10
|
|
425,476
|
|
7.96
|
|
$
|
5.10
|
$5.10 - $6.00
|
|
592,495
|
|
5.97
|
|
$
|
5.66
|
|
480,681
|
|
5.38
|
|
$
|
5.73
|
$6.00 - $6.11
|
|
501,961
|
|
8.99
|
|
$
|
6.11
|
|
125,489
|
|
9.00
|
|
$
|
6.11
|
$6.11 - $6.75
|
|
428,133
|
|
3.10
|
|
$
|
6.59
|
|
426,258
|
|
3.08
|
|
$
|
6.59
|
$6.75 - $8.08
|
|
197,841
|
|
3.88
|
|
$
|
7.86
|
|
197,424
|
|
3.87
|
|
$
|
7.86
|
$19.38 - $19.38
|
|
10,000
|
|
.33
|
|
$
|
19.38
|
|
10,000
|
|
.33
|
|
$
|
19.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,278,960
|
|
6.17
|
|
$
|
4.82
|
|
3,356,015
|
|
|
|
$
|
4.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2007, the aggregate intrinsic value of the outstanding options was $0 and the aggregate intrinsic value of the exercisable options was $0.
Stock Purchase Plan
The Company has an employee stock purchase plan whereby employees may contribute up to 15% of their compensation to purchase shares of the Company's common stock
at 85% of the stock's fair market value at the lower of the beginning or end of each six-month offering period. Shares purchased under the plan were 46,807, 13,642 and 6,493 in 2007, 2006
and 2005, respectively. At December 31, 2007, a total of 39,551 shares remain available for purchase by employees under the plan. The previous plan expired on December 31, 2005 and a new
plan was approved by the shareholders at the 2006 annual meeting with a ten year term.
401(k) 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 Company's common stock. Shares issued as matching contributions under the plan were 96,573, 17,191 and 18,591 in 2007, 2006 and 2005, respectively. The related expense recorded
on these matching contributions was $103,697, $92,762 and $66,767 in 2007, 2006 and 2005, respectively. At December 31, 2007, a total of 14,714 shares remain available for future issuances as
matching contributions under the plan.
Shareholder Rights Plan
The Company has adopted a Shareholder Rights Plan ("Plan") which was amended in July 2002 and more recently in August 2006. Under the Plan, as amended, the
Company's Board of Directors
50
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
9. Stockholders' Equity (Continued)
declared
a dividend of one Preferred Stock Purchase Right ("Right") for each outstanding common share of the Company. The Rights have an exercise price of $140 per Right and provide the holders with
the right to purchase, in the event a person or group acquires 15% or more of the Company's common stock, additional shares of the Company's common stock having a market value equal to two times the
exercise price of the Right. The Rights expire in 2016.
10. Net Loss Per Share
The following table presents the computation of basic and diluted net loss per share:
|
|
2007
|
|
2006
|
|
2005
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,063,168
|
)
|
$
|
(23,551,296
|
)
|
$
|
(21,097,017
|
)
|
Weighted average common shares
|
|
|
36,909,462
|
|
|
34,729,930
|
|
|
24,027,127
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.35
|
)
|
$
|
(0.68
|
)
|
$
|
(0.88
|
)
|
|
|
|
|
|
|
|
|
As
of December 31, 2007, 2006 and 2005 a total of 8,359,493, 9,237,267 and 8,373,322 options and warrants, respectively, have not been included in the calculation of potential
common shares as their effect on diluted per share amounts would have been anti-dilutive.
11. Commitments and Contingencies
The Company has leased office space under a non-cancelable operating lease expiring in 2017 and office equipment under two non-cancelable
operating leases which expire in 2009 and 2010. Rental expense for the years ended December 31, 2007, 2006 and 2005 was $784,000, $655,000 and $644,000, respectively.
In
November 2006 the Company entered into a new operating lease agreement for combined laboratory and office space. Our previous operating lease for facilities expired
December 31, 2007, and we moved into the newly leased facility in December 2007. The new lease, as amended in 2007, is for approximately 42,600 square feet and expires on December 31,
2017, with a provision for two additional five year renewals. In connection with the new lease, we received landlord-provided incentives of approximately $7.7 million in the form of tenant
improvements, which have been recorded as additions to fixed assets and deferred rent liabilities and will be amortized over the term of the lease. In connection with our new lease arrangement, we
were required to provide a cash security deposit of approximately $497,000 of which approximately $440,000 was paid upon lease signing in November 2006, and the remainder was paid in February 2008. In
addition, the lease stipulates the Company must issue a standby letter of credit for approximately $500,000 which is expected to be issued during the first quarter of 2008.
51
Sonus Pharmaceuticals, Inc.
Notes to Financial Statements (Continued)
11. Commitments and Contingencies (Continued)
Future
minimum lease payments under these leases are as follows:
2008
|
|
$
|
1,929,120
|
2009
|
|
|
1,981,996
|
2010
|
|
|
1,997,220
|
2011
|
|
|
2,055,144
|
2012
|
|
|
2,116,800
|
Thereafter
|
|
|
11,575,536
|
|
|
|
|
|
$
|
21,655,816
|
|
|
|
12. Subsequent Event
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 approximately $850,000 for returned material.
13. Quarterly Financial Information (unaudited)
|
|
Quarter Ended
|
|
|
|
Mar. 31
|
|
June 30
|
|
Sept. 30
|
|
Dec. 31
|
|
|
|
(in thousands, except per share data)
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue from Bayer Schering Pharma AG
|
|
$
|
5,051
|
|
$
|
3,271
|
|
$
|
4,079
|
|
$
|
7,730
|
|
|
Operating expenses
|
|
$
|
8,915
|
|
$
|
9,825
|
|
$
|
10,433
|
|
$
|
6,193
|
|
|
Operating income (loss)
|
|
$
|
(3,864
|
)
|
$
|
(6,554
|
)
|
$
|
(6,354
|
)
|
$
|
1,537
|
|
|
Net income (loss)
|
|
$
|
(3,225
|
)
|
$
|
(5,963
|
)
|
$
|
(5,808
|
)
|
$
|
1,933
|
|
|
Net income (loss) per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
$
|
(0.16
|
)
|
$
|
(0.16
|
)
|
$
|
.05
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collaboration revenue from Bayer Schering Pharma AG
|
|
$
|
4,054
|
|
$
|
7,514
|
|
$
|
4,931
|
|
$
|
5,893
|
|
|
Operating expenses
|
|
$
|
9,879
|
|
$
|
13,136
|
|
$
|
12,067
|
|
$
|
13,596
|
|
|
Operating loss
|
|
$
|
(5,825
|
)
|
$
|
(5,623
|
)
|
$
|
(7,136
|
)
|
$
|
(7,703
|
)
|
|
Net loss
|
|
$
|
(5,310
|
)
|
$
|
(4,935
|
)
|
$
|
(6,293
|
)
|
$
|
(7,013
|
)
|
|
Net loss per share*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.17
|
)
|
$
|
(0.14
|
)
|
$
|
(0.17
|
)
|
$
|
(0.19
|
)
|
-
*
-
Quarterly
EPS may not add to annual figure due to rounding.
52