# **UNITEDSTATES**

# **SECURITIESAND 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 MARCH 31, 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                       .**

 

**Commissionfile number 000-21243**

 

**SonusPharmaceuticals, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                     | **95-4343413**                           |
|----------------------------------|------------------------------------------|
| (State or Other  Jurisdiction of | (I.R.S. Employer  Identification Number) |
| Incorporation or  Organization)  |                                     |

 

**1522217th Place SE, Suite 100, Bothell, Washington 98021**

(Address ofPrincipal Executive Offices)

 

**(425) 487-9500**

(Registrant’s telephone number, including areacode)

 

Indicate by check whetherthe registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).Yes  o  No x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Class**                       | ** ** | **Outstanding at April 30, 2008** |
|---------------------------------|------------|-------------------------------------------------------|
|                            |       |
| Common Stock,  $0.001 par value |       | 37,062,049                                            |

 

 

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**SonusPharmaceuticals, Inc.**

**Index to Form 10-Q**

 
| **Part I.** | **Financial Information**                                                                                     | **Page**                                                                                    |
|------------------|---------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|
|             |                                                                                                          | **Number**                                                                                  |
|             |                                                                                                          | ** **                                                                                  |
|             |                                                                                                          |                                                                                        |
|             | Item 1.                                                                                                       | Financial Statements                                                                        |   |
|             |                                                                                                          |                                                                                        |
|             | Balance Sheets as of March 31, 2008 (unaudited)  and December 31, 2007                              | 3                                                                                           |
|             |                                                                                                          |                                                                                        |
|             | Statements of Operations (unaudited) for the three  months ended March 31, 2008 and March 31, 2007  | 4                                                                                           |
|             |                                                                                                          |                                                                                        |
|             | Statements of  Cash Flows (unaudited) for the three months ended March 31, 2008 and  March 31, 2007 | 5                                                                                           |
|             |                                                                                                          |                                                                                        |
|             | Notes to Financial Statements (unaudited)                                                                     | 6                                                                                           |
|             |                                                                                                          |                                                                                        |
|             | Item 2.                                                                                                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11 |
|             |                                                                                                          |                                                                                        |   |
|             | Item 3.                                                                                                       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 17 |
|             |                                                                                                          |                                                                                        |   |
|             | Item 4.                                                                                                       | Controls and  Procedures                                                                    | 17 |
|             |                                                                                                          |                                                                                        |   |
| **Part II** | **Other Information**                                                                                         |                                                                                        |
| ** **       | ** **                                                                                                    |                                                                                        |
|             | Item 1A.                                                                                                      | Risk Factors                                                                                | 17 |
|             |                                                                                                          |                                                                                        |   |
|             | Item 6.                                                                                                       | Exhibits                                                                                    | 20 |
|             |                                                                                                          |                                                                                        |   |
|             | Items 1, 2, 3, 4 and 5  are not applicable and therefore have been omitted.                                   |                                                                                        |
|                  |                                                                                                               |                                                                                             |  |  |

 

2

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**Part I.****              FinancialInformation**

 

**Item1.**           Financial Statements

** **

**Sonus Pharmaceuticals, Inc.**

**BalanceSheets**

 
| ** **                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                |       |               |       |                  |       |
| Current assets:                                                                                                           |       |               |       |                  |       |
| Cash and cash  equivalents                                                                                                |       | $                  | 17,597,297 |                  | $          | 6,535,272 |   |
| Marketable  securities                                                                                                    |       | 11,215,107         |       | 27,663,554            |       |
| Interest receivable                                                                                                       |       | 181,591            |       | 456,149               |       |
| Other current  assets                                                                                                     |       | 615,984            |       | 576,905               |       |
| Total current assets                                                                                                      |       | 29,609,979         |       | 35,231,880            |       |
|                                                                                                                      |       |               |       |                  |       |
| Equipment,  furniture and leasehold improvements, net                                                                     |       | 9,279,364          |       | 9,577,567             |       |
| Other assets                                                                                                              |       | 497,327            |       | 439,822               |       |
|                                                                                                                      |       |               |       |                  |       |
| Total assets                                                                                                              |       | $                  | 39,386,670 |                  | $          | 45,249,269 |   |
|                                                                                                                      |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                            |       |               |       |                  |       |
| Current  liabilities:                                                                                                     |       |               |       |                  |       |
| Accounts payable                                                                                                          |       | $                  | 1,429,065  |                  | $          | 1,462,444 |   |
| Accrued expenses                                                                                                          |       | 2,241,413          |       | 4,141,273             |       |
| Current portion  of deferred rent                                                                                         |       | 762,915            |       | 765,005               |       |
| Total current  liabilities                                                                                                |       | 4,433,393          |       | 6,368,722             |       |
|                                                                                                                      |       |               |       |                  |       |
| Deferred rent,  less current portion                                                                                      |       | 6,852,292          |       | 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;                                                             |       |               |       |                  |       |
| 37,062,049 and  37,048,335 shares issued and outstanding at March 31, 2008 and  December 31, 2007, respectively |       | 157,014,818        |       | 156,704,899           |       |
| Accumulated  deficit                                                                                                      |       | (128,917,030       | )          | (124,801,837          | )          |
| Accumulated  other comprehensive loss                                                                                     |       | 3,197              |       | 1,355                 |       |
| Total  stockholders’ equity                                                                                          |       | 28,100,985         |       | 31,904,417            |       |
|                                                                                                                      |       |               |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                          |       | $                  | 39,386,670 |                  | $          | 45,249,269 |   |

 

See accompanyingnotes.

 

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**Sonus Pharmaceuticals, Inc.**

**Statementsof Operations**

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                          | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Revenue:                                                            |       |                                  |       |   |   |
| Collaboration  revenue from Bayer Schering                          |       | $                                     | —     |   | $ | 5,051,035 |   |
|                                                                |       |                                  |       |   |   |
| Operating  expenses:                                                |       |                                  |       |   |   |
| Research and  development                                           |       | 2,269,034                             |       | 6,939,399 |   |
| General and  administrative                                         |       | 2,101,409                             |       | 1,975,600 |   |
| Total operating  expenses                                           |       | 4,370,443                             |       | 8,914,999 |   |
| Operating loss                                                      |       | (4,370,443                            | )          | (3,863,964 | ) |
|                                                                |       |                                  |       |   |   |
| Other income  (expense):                                            |       |                                  |       |   |   |
| Other expense                                                       |       | (44,378                               | )          | (34,953 | ) |
| Interest income                                                     |       | 299,628                               |       | 673,873 |   |
| Interest expense                                                    |       | —                                |       | (309 | ) |
| Total other  income, net                                            |       | 255,250                               |       | 638,611 |   |
| Net loss                                                            |       | $                                     | (4,115,193 | ) | $ | (3,225,353 | ) |
|                                                                |       |                                  |       |   |   |
| Basic and  diluted net loss per share                               |       | $                                     | (0.11      | ) | $ | (0.09 | ) |
| Shares used in  computation of basic and diluted net loss per share |       | 37,052,022                            |       | 36,854,037 |   |

 

See accompanyingnotes.

 

4

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**Sonus Pharmaceuticals, Inc.**

**Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                   | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| **Operating  activities:**                                                   |       |                                  |       |   |   |
| Net loss                                                                     |       | $                                     | (4,115,193 | ) | $ | (3,225,353 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                  |       |   |   |
| Depreciation                                                                 |       | 345,486                               |       | 154,176 |   |
| Non-cash  stock-based compensation                                           |       | 304,607                               |       | 495,149 |   |
| Accretion of investments                                                     |       | (6,089                                | )          | (207,332 | ) |
| Changes in  operating assets and liabilities:                                |       |                                  |       |   |   |
| Accounts  receivable from related party                                      |       | —                                |       | (127,774 | ) |
| Interest  receivable                                                         |       | 274,558                               |       | (189,309 | ) |
| Other current  assets                                                        |       | (39,079                               | )          | (535,245 | ) |
| Other long term  assets                                                      |       | (57,505                               | )          | 7,836 |   |
| Accounts payable                                                             |       | (33,379                               | )          | (655,020 | ) |
| Accounts payable  to related party                                           |       | —                                |       | 130,650 |   |
| Accrued expenses                                                             |       | (1,899,860                            | )          | (3,881,002 | ) |
| Deferred rent                                                                |       | (125,928                              | )          | — |   |
| Other current  liabilities                                                   |       | —                                |       | (25,008 | ) |
| Deferred revenue  from related party                                         |       | —                                |       | (1,386,479 | ) |
| Net cash used in  operating activities                                       |       | (5,352,382                            | )          | (9,444,711 | ) |
|                                                                         |       |                                  |       |   |   |
| **Investing  activities:**                                                   |       |                                  |       |   |   |
| Purchases of  capital equipment and leasehold improvements                   |       | (47,283                               | )          | (64,456 | ) |
| Purchases of  marketable securities                                          |       | (7,006,432                            | )          | (22,622,304 | ) |
| Proceeds from  sales of marketable securities                                |       | 23,215,000                            |       | 12,035,014 |   |
| Proceeds from  maturities of marketable securities                           |       | 247,810                               |       | 60,220 |   |
| Net cash  provided by (used in) investing activities                         |       | 16,409,095                            |       | (10,591,526 | ) |
|                                                                         |       |                                  |       |   |   |
| **Financing  activities:**                                                   |       |                                  |       |   |   |
| Proceeds from  issuance of common stock under employee benefit plans         |       | 5,312                                 |       | 28,399 |   |
| Payments on  lease obligations                                               |       | —                                |       | (7,290 | ) |
| Net cash  provided by investing activities                                   |       | 5,312                                 |       | 21,109 |   |
|                                                                         |       |                                  |       |   |   |
| Increase  (Decrease) in cash and cash equivalents for the period             |       | 11,062,025                            |       | (20,015,128 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 6,535,272                             |       | 35,771,784 |   |
|                                                                         |       |                                  |       |   |   |
| Total cash and  cash equivalents                                             |       | $                                     | 17,597,297 |   | $ | 15,756,656 |   |
|                                                                         |       |                                  |       |   |   |
| Supplemental  cash flow information:                                         |       |                                  |       |   |   |
| Interest paid                                                                |       | $                                     | —     |   | $ | 309 |   |

 

See accompanyingnotes.

 

5

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## ** **

** **

**Sonus Pharmaceuticals, Inc.**

**Notes toFinancial Statements**

**(Unaudited)**

 

**1.****              Basis ofPresentation**

 

The unaudited financial statements havebeen prepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q. Accordingly,they do not include all of the information and footnotes required to bepresented for complete financial statements. The accompanying financialstatements reflect all adjustments (consisting only of normal recurring items)which are, in the opinion of management, necessary for a fair presentation ofthe results for the interim periods presented. The accompanying Balance Sheetat December 31, 2007 has been derived from the audited financialstatements included in the Company’s Annual Report on Form 10-K for theyear then ended. The financial statements and related disclosures have beenprepared with the assumption that users of the interim financial informationhave read or have access to the audited financial statements for the precedingfiscal year. Accordingly, these financial statements should be read inconjunction with the audited financial statements and the related notes theretoincluded 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 Companyadopted SFAS No. 157, “*Fair Value Measurements*”(“SFAS No. 157”) effective January 1, 2008. SFAS No. 157 definesfair value, establishes a framework for measuring fair value and expandsdisclosure of fair value measurements. The Company did not have a transitionadjustment to beginning retained earnings as a result of adopting thisstandard. SFAS No. 157 applies to all financial instruments that aremeasured and reported on a fair value basis. This includes those items reportedin marketable securities on the balance sheets. See Note 4 for additionalinformation.

 

Inconjunction with the adoption of SFAS No. 157, the Company also adoptedSFAS 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 selectfinancial assets and liabilities at fair value. This statement also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities. After the initial adoption, the election ismade at the acquisition of a financial asset or financial liability and it maynot be revoked. We did not apply the fair value option to any of ouroutstanding instruments; therefore, there has been no impact on our financialstatements.

 

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 orServices Received for Use in Future Research and Development Activities, orEITF 07-3. In accordance with EITF 07-3, nonrefundable contractualprepayments related to future R&D activities are deferred and recognized asan expense in the period that the related goods are delivered or services areperformed. Our adoption of this standard has not had a material impact on ourfinancial statements.

 

**2.****              RelatedParty**

 

The Company hasengaged in significant transactions with Bayer Schering Pharma AG, Germany (“BayerSchering”). Bayer Schering is a related party due to their ownership interestin the Company (approximately 10.6% fully diluted) and has been appropriatelyidentified as such on the face of the financial statements. All amountsdisclosed on the face of the financial statements with related parties are

 

6

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attributable to BayerSchering. Please see Note 3 “Collaboration and License Agreement with BayerSchering Pharma AG” for additional details.

 

**3.****              Collaborationand License Agreement with Bayer Schering Pharma AG**

 

In October 2005, the Company entered into a Collaboration and LicenseAgreement with Bayer Schering, a German corporation, pursuant to which, amongother things, the Company granted Bayer Schering an exclusive, worldwidelicense to TOCOSOL Paclitaxel, its anti-cancer product candidate (the “Product”).With respect to the Product, Bayer Schering paid Sonus an upfront license feeof $20 million and paid Sonus for research and development services performedequal to 50% of eligible product research and development costs (in certaincases the reimbursement rate was 100%). In connection with the Collaborationand Licensing Agreement, the Company and an affiliate of Bayer Schering enteredinto a Securities Purchase Agreement whereby the Company sold 3,900,000 sharesof common stock for an aggregate of $15.7 million and warrants to purchase975,000 shares of common stock for an aggregate purchase price of $122,000.

 

In October 2007, Sonus received notificationfrom Bayer Schering of its decision to terminate the Collaboration and LicenseAgreement in accordance with its terms because the Phase 3 pivotal trial didnot meet its primary endpoint. The termination was effective on November 2,2007. In accordance with the terms of the Agreement, all rights to TOCOSOLPaclitaxel have reverted back to Sonus. The Company has discontinueddevelopment of TOCOSOL Paclitaxel due to results of the Phase 3 study. Theseclosure activities were substantially complete by December 31, 2007.

 

During the three month period ended March 31, 2007, the Companyrecognized revenue of $1.4 million as amortization of the upfront license feeand an additional $3.7 million related to research and development servicesperformed by Sonus primarily for the Phase 3 trial for TOCOSOL Paclitaxel andrelated drug supply and manufacturing costs.

 

The Company does not expect to earn revenue or incurexpense related to the Agreement with Bayer Schering beyond 2007. The final netbilling between the Company and Bayer Schering was completed during the fourthquarter of 2007. Settlement of the final amount outstanding was received fromBayer Schering in December 2007. There were no receivables from, orpayables to, Bayer Schering outstanding at March 31, 2008 or at December 31,2007.

 

**4.****              MarketableSecurities**

 

With the adoption of SFAS No. 157, beginning January 1,2008, assets and liabilities recorded at fair value in the balance sheets arecategorized based upon the level of judgment associated with the inputs used tomeasure their fair value. SFAS No. 157 specifies a hierarchy of valuationtechniques based on whether the inputs to those valuation techniques areobservable or unobservable. In accordance with SFAS No. 157, these inputsare summarized in the three broad levels listed below:

 

·                  Level 1 – Quoted prices in active markets foridentical securities;

·                  Level 2 – Other significant observable inputsthat are observable through corroboration with market date (including quotedprices in active markets for similar securities);

·                  Level 3 – Significant unobservable inputsthat reflect management’s best estimate of what market participants would usein pricing the asset or liability.

 

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In determining the appropriate levels, the Companyperformed a detailed analysis of the assets and liabilities that are subject toSFAS No. 157. The following table presents information about our assetsand liabilities that are measured at fair value on a recurring basis as of March 31,2008, and indicates the fair value hierarchy of the valuation techniques weutilized to determine such fair value:

 
| ** **                 | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **2007**  | ** ** |
|----------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Corporate debt securities  |       | $           | 378,657    |        | $          | 6,241,761   |       | $         | —     |   | $ | 6,620,418 |   |
| Government debt securities |       | —      |       | 4,543,267   |       | —      |       | 4,543,267 |       |
| Asset-backed securities    |       | —      |       | 51,422      |       | —      |       | 51,422    |       |
|                       |       | $           | 378,657    |        | $          | 10,836,450  |       | $         | —     |   | $ | 11,215,107 |   |
|                            |            |             |            |             |            |             |            |           |            |  |  |  |  |  |

 

**5.****             ****Accrued Expenses**

 

Accrued expenses consistof the following:

 
| ** **      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|--------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Clinical trials |       | $                  | 680,100    |                  | $          | 2,627,765 | ** ** |
| Severance       |       | 1,092,074          |       | 908,496               |       |
| Compensation    |       | 169,158            |       | 227,044               |       |
| Other           |       | 300,081            |       | 377,968               |       |
|            |       | $                  | 2,241,413  |                  | $          | 4,141,273 |   |

 

**6.****             ****Reduction of Workforce**

 

On March 19, 2008, theCompany implemented a reduction of workforce (“Reduction of Workforce”)pursuant to which the Company’s workforce was reduced by approximately 37%. Theeffective date of the Reduction of Workforce was March 31, 2008. TheCompany implemented the Reduction of Workforce in order to conserve cash andalign its workforce with its anticipated staffing needs. The total cost of theReduction of Workforce was approximately $1.0 million, which consisted ofseverance costs and medical insurance and was recognized as expense in thefirst quarter of 2008. Severance expense of approximately $656,000 and $393,000was recognized in research and development expense and general andadministrative expense, respectively, in the first quarter of 2008. Thefollowing table summarizes the severance expense activity, including paymentsof severance amounts accrued as of December 31, 2007:

 
| Accrued severance as of December 31, 2007           |   | $         | 908,496   |   |
|----------------------------------------------------------|--------|-----------|-----------|--------|
| Cash payments made in the first quarter of 2008          |   | (865,617  | )         |
| Severance expense recorded in the first quarter of  2008 |   | 1,049,195 |      |
| Accrued  severance as of March 31, 2008             |   | $         | 1,092,074 |   |

 

The accrued severance as of March 31,2008 is expected to be paid in the second quarter of 2008.

 

**7.****             ****Refund from Return of Recalled Taxol**

 

In March 2007,Bristol-Myers Squibb Pharmaceuticals recalled certain batches of Taxol due topotential lack of sterility assurance. Sonus had some of these batches atclinical sites which were being used in the reference arm of the Phase 3TOCOSOL Paclitaxel pivotal study. The Company has returned all of the recalledmaterial 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 forreturned material which was recorded as a

 

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reduction of research and development expense in thefirst quarter of 2008. We are not reasonably able to estimate an amount for anyadditional refund that we may receive in future periods. Accordingly, there areno receivables recorded for any potential future refunds.

 

**8.****              Comprehensive Income(Loss)**

 
| ** **                                                            | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Net loss                                                              |       | $                                     | (4,115,193 | ) | $ | (3,225,353 | ) |
| Unrealized gain  (loss) on cash equivalents and marketable securities |       | 3,197                                 |       | (8,797 | ) |
| Comprehensive loss                                                    |       | $                                     | (4,111,996 | ) | $ | (3,234,150 | ) |

 

**9.**              Stockholders’ Equity

** **

***Employee Stock Plans***

 

Employee stock optionsvest over a period of time determined by the Board of Directors, generally fouryears, and director stock options are generally fully vested on the date ofgrant. Stock options generally are granted at the fair market value on the dateof 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 commonstock. These options fully vest two years from the date of grant.

 

The Company has anemployee stock purchase plan whereby employees may contribute up to 15% oftheir compensation to purchase shares of the Company’s common stock at 85% ofthe stock’s fair market value at the lower of the beginning or end of eachsix-month offering period. At March 31, 2008, a total of 39,551 sharesremain available for purchase by employees under the plan.

 

The Company has a 401(k) plan forall employees under which it provides a specified percentage match on employeecontributions. Currently, the Company match is made in shares of the Company’scommon stock. The Company recognized compensationexpense related to this plan for the three month period ended March 31,2008 of $5,312. At March 31,2008, there are no shares available for future issuances as matchingcontributions under the plan.

 

***Stock-Based Compensation***

 

During the three month periods ended March 31, 2008 and 2007,respectively, the Company recorded stock-based compensation cost under theprovisions of Statement of Accounting Standard 123 (revised 2004), “Share BasedPayment,” or “SFAS 123R”. The following table summarizes the income statementclassification of stock-based compensation:

 
| ** **                             | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2008**                              | ** ** | **2007** | ** ** |
| Stock-based compensation expense:      |       |                                  |       |   |   |
| General &  administrative     |       | $                                     | 166,558    |   | $ | 286,161 |   |
| Research &  development       |       | 138,049                               |       | 208,988 |   |
|                                   |       |                                  |       |   |   |
| Total stock-based compensation expense |       | $                                     | 304,607    |   | $ | 495,149 |   |

 

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The Company changed its estimatedforfeiture rate based on personnel reductions in the first quarter of 2008. Theimpact in stock compensation expense as a result of the change in estimatedforfeiture rate was not significant. The fair value of each stock option usedin the calculations under SFAS 123R is estimated using the Black-Scholes-Mertonoption pricing model. The assumptions used in this model include (1) thestock price at grant date, (2) the exercise price, (3) an estimatedoption life of four years as of March 31, 2008 and 2007, (4) noexpected dividends for each period presented, (5) stock price volatilityfactor of 106.08% and 60.2% as of March 31, 2008 and 2007, respectively,and (6) a risk-free interest rate of 2.75%****and4.65% as of March 31, 2008 and 2007, respectively.

 

***Stock Option Activity***

 

Thefollowing is a summary of option activity for the first quarter 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 |   |

 

**10.**       Subsequent Events

** **

InApril 2008, we began evaluating our space needs and various options thatwe believe will result in the consolidation of our operations into a smallerportion of our current facility. As we have not yet finalized the course ofaction for implementation of a facilities plan, including potential sublease ofcertain space, we cannot currently estimate the type of costs that will beassociated with a plan, the total charge that will result from theimplementation of a plan, or any charges associated with the plan that willresult in future cash expenditures. Also, the cease use date of a portion ofour facilities did not occur until the second quarter of 2008 after our reductionof workforce.

 

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Forward-LookingStatements**

 

This report contains certain forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended, and we intend that such forward-looking statements be subject tothe safe harbors created thereby. Examples of these forward-looking statementsinclude, but are not limited to:

 

·                  timing and amount of future contractualpayments, product revenue and operating expenses;

·                  progress and preliminary results of clinicaltrials;

·                  our anticipated future capital requirementsand the terms of any capital financing agreements;

·                  anticipated regulatory filings, requirementsand future clinical trials; and

·                  market acceptance of our products and theestimated potential size of these markets.

 

While these forward-looking statements made byus are based on our current beliefs and judgments, they are subject to risksand uncertainties that could cause actual results to vary from the projectionsin the forward-looking statements. You should consider the risks belowcarefully in addition to other information contained in this report beforeengaging in any transaction involving shares of our common stock. If any ofthese risks occur, they could seriously harm our business, financial conditionor results of operations. In such case, the trading price of our common stockcould decline, and you may lose all or part of your investment.

 

The discussion and analysis set forth in thisdocument contains trend analysis, discussions of regulatory status and otherforward-looking statements. Actual results could differ materially from thoseprojected in the forward-looking statement as a result of the followingfactors, among others:

 

·            futurecapital requirements and uncertainty of obtaining additional funding throughcorporate partnerships, debt or equity financings;

·            abilityto integrate and realize benefits from strategic opportunities, includingmergers and acquisitions;

·            continuedlisting on the NASDAQ Global Market (formerly NASDAQ National Market);

·            resultsof research and preclinical studies may not be indicative of results in humans;

·            abilityto build out our product candidate pipeline through product in-licensing oracquisition activities;

·            propermanagement of our operations will be critical to the success of the company;

·            historyof operating losses and uncertainty of future financial results;

·            volatilityin the value of our common stock;

·            dependenceon the development and commercialization of products;

·            uncertaintyof governmental regulatory requirements and lengthy approval process;

·            dependenceon third parties for funding, clinical development, regulatory approvals,manufacturing and distribution;

·            dependenceon key employees;

·            uncertaintyof U.S. or international legislative or administrative actions;

·            competitionand risk of competitive new products;

·            limitedmanufacturing experience and dependence on a limited number of contractmanufacturers and suppliers;

·            abilityto obtain and defend patents, protect trade secrets and avoid infringingpatents held by third parties;

·            limitationson third-party reimbursement for medical and pharmaceutical products;

·            acceptanceof our products by the medical community;

·            potentialfor product liability issues and related litigation;

 

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·            potentialfor claims arising from the use of hazardous materials in our business;

·            fluctuationsin our operating results;

·            uncertaintyrelating 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****and in thisQuarterly Report on Form 10-Q.

 

## **MD&AOverview**

## ** **

In Management’s Discussion and Analysis ofFinancial Condition and Results of Operations we explain the general financialcondition and the results of operations for our Company, including:

 

·                  an overview of our business;

·                  results of operations and why those resultsare different from the prior year; and

·                  capitalresources we currently have and possible sources of additional funding forfuture capital requirements.

 

# **BusinessOverview**

# ** **

Sonus Pharmaceuticals isdeveloping novel small molecule drugs for the treatment of patients withcancer. Our objective is to identify opportunities where there is thepossibility for major improvements in patient treatments and where we believewe can mitigate development risk. We currently have one drug in clinicaldevelopment. Our plan is to continue to develop our internal pipeline ofclinical compound opportunities and to evaluate possible strategicalternatives, including in-licensing and merger and acquisition opportunities,as a means of achieving our business strategies and enhancing stockholdervalue. In the fourth quarter of 2007, we engaged Ferghana Partners Inc. toassist us with these strategic alternatives.

 

## **ProductCandidates**

## ** **

SN2310

 

SN2310 Injectable Emulsion (“SN2310”)is a novel camptothecin derivative. Camptothecins are an important class ofanti-cancer drugs, however, the marketed camptothecin analogs, irinotecan(Camptosar®) and topotecan (Hycamtin®), have demonstrated limitations that mayreduce their clinical utility. Irinotecan and topotecan are used in thetreatment of colorectal, lung, and ovarian cancers. SN2310 is a prodrug ofSN-38. SN-38 is also the active moiety of irinotecan. Our objective with SN2310is to provide a product that has enhanced anti-tumor activity and improved tolerabilitycompared with the approved camptothecin-based products. An Investigational NewDrug Application (“IND”) was submitted to the U.S. Food and Drug Administration(“FDA”) for SN2310 in June 2006 and Phase 1 clinical testing was initiatedin September 2006. We expect to close enrollment in this study in 2008 andinitiate a Phase 2 clinical trial soon thereafter if warranted based on resultsof the Phase 1 trial. As this product candidate is early in clinicaldevelopment, we cannot give any assurance that this compound will be clinicallysuccessful.

 

TOCOSOL® Paclitaxel

 

TOCOSOL Paclitaxel is anovel formulation of paclitaxel manufactured in a ready-to-use, injectablevitamin E-based emulsion formulation. In September 2007 we announced thatTOCOSOL Paclitaxel failed to meet the primary endpoint in Phase 3 clinicaltesting. We have discontinued development of TOCOSOL Paclitaxel due to resultsof the Phase 3 study, and the time and cost that would be required to conductthe necessary clinical studies to continue development, which at a minimum,would include another Phase 3 pivotal trial. These closure activities weresubstantially complete by December 31, 2007, although limited closureactivities continue in the first and second quarters of 2008.

 

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Research and Development

 

Following the Reduction ofWorkforce in March 2008, we have substantially reduced our internal drugdiscovery capabilities. Our current strategy for broadening our productcandidate pipeline will be primarily through in-licensing of novel compounds orother strategic activities. Our primary product focus will remain oncology andsupportive care.

 

**Collaboration and License Agreement with Bayer Schering Pharma AG**

 

In October 2005, the Company entered into aCollaboration and License Agreement with Bayer Schering, a German corporation,pursuant to which, among other things, the Company granted Bayer Schering anexclusive, worldwide license to TOCOSOL Paclitaxel, its anti-cancer productcandidate (the “Product”). With respect to the Product, Bayer Schering paidSonus an upfront license fee of $20 million and paid Sonus for research anddevelopment services performed equal to 50% of eligible product research anddevelopment costs. In connection with the Collaboration and LicensingAgreement, the Company and an affiliate of Bayer Schering entered into aSecurities Purchase Agreement whereby the Company sold 3,900,000 shares ofcommon stock for an aggregate of $15.7 million and warrants to purchase 975,000shares of common stock for an aggregate purchase price of $122,000.

 

In October 2007, Sonus received notificationfrom Bayer Schering of its decision to terminate the Collaboration and LicenseAgreement in accordance with its terms because the Phase 3 pivotal trial didnot meet its primary endpoint. The termination was effective on November 2,2007. In accordance with the terms of the Agreement, all rights to TOCOSOLPaclitaxel have reverted back to Sonus. The Company has discontinueddevelopment of TOCOSOL Paclitaxel due to results of the Phase 3 study. Theseclosure activities were substantially complete by December 31, 2007,although limited closure activities continue in the first and second quartersof 2008.

 

The Company does not expect to earn revenue or incurexpense related to the Agreement with Bayer Schering beyond 2007. The final netbilling between the Company and Bayer Schering was completed during the fourthquarter of 2007. Settlement of the final amount outstanding was received from BayerSchering in December 2007. There were no receivables from, or payables to,Bayer Schering outstanding at March 31, 2008 or at December 31, 2007.

 

**Reduction of Workforce**

 

On March 19, 2008, the Company implemented areduction of workforce (“Reduction of Workforce”) pursuant to which the Company’sworkforce was reduced by approximately 37%. The effective date of the Reductionof Workforce was March 31, 2008. The Company implemented the Reduction ofWorkforce in order to conserve cash and align its workforce with itsanticipated staffing needs. The total cost of the Reduction of Workforce wasapproximately $1.0 million, which consisted of severance costs and medicalinsurance and was recognized as expense in the first quarter of 2008.

 

**Results of Operations**

** **

As of March 31, 2008, our accumulated deficit was approximately$128.9 million. We expect to incur substantial additional operating losses overthe next several years. Such losses have been and will continue to principallybe the result of various costs associated with our research and developmentprograms. Substantially all of our working capital in recent years has resultedfrom equity financings and payments received under corporate partnershipagreements. Our ability to achieve a consistent, profitable level of operationsdepends in large part on obtaining regulatory approval for future product

 

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candidates in addition to successfully manufacturing and marketingthose products if they are approved. Even if we are successful in theaforementioned activities our operations may not be profitable.

 

The company recognized no revenue for the threemonths ended March 31, 2008 as compared with $5.1 million for the sameperiod in 2007. All revenue recognized in the first quarter of 2007 was fullyattributable to the Agreement with Bayer Schering. This agreement wasterminated in the fourth quarter of 2007. The revenue recognized in the threemonth period ended March 31, 2007 included $1.4 million in amortization ofan upfront license fee and an additional $3.7 million in research anddevelopment reimbursements.

 

Our research and development (“R&D”)expenses were $2.3 million for the three months ended March 31, 2008compared with $6.9 million for the same period in 2007. The decrease wasprimarily the result of lower spending on clinical trials and drug supply andmanufacturing costs due to the termination of the Phase 3 trial for TOCOSOLPaclitaxel in the fourth quarter of 2007. Research and development expenses inthe first quarter of 2008 are also lower as a result of recognition of a refundof approximately $850,000 for recalled material which had been returned tosuppliers. This refund was recorded as a reduction of research and developmentexpense in the first quarter of 2008. Although research and developmentpersonnel costs were reduced in the three months ended March 31, 2008 ascompared to the same period in 2007 due to a reduction in workforce effectivein November 2007, this reduction was offset by the recognition ofapproximately $656,000 of severance expenses recorded in connection with anadditional reduction in workforce effective March 31, 2008. We expectR&D expenses in 2008 to be significantly lower than levels experienced in2007, absent any strategic transaction which could affect R&D expenses.

 

Our general and administrative (“G&A”)expenses were $2.1 million for the three months ended March 31, 2008compared with $2.0 million for the same period in 2007. The G&A expensesfor the first quarter of 2008 included approximately $393,000 of expenses fromseverance benefits due to a reduction of workforce effective in March 2008.We expect G&A expenses for the remainder of 2008 to be lower than levelsexperienced in 2007, absent any strategic transaction which could affectG&A expenses.

 

Our total operating expenses in 2008 areexpected to decrease from 2007 levels due to the termination of research anddevelopment activities for TOCOSOL Paclitaxel and the two reductions ofworkforce which occurred in November 2007 and March 2008. We estimatethat R&D spending will comprise more than 50% of the anticipated spendingin 2008. A significant portion of the R&D spending will be devoted todevelopment activities for SN2310. These estimates and actual expenses aresubject to change depending on many factors.

 

Our other income, net, was $255,000 for thethree months ended March 31, 2008 compared with $639,000 for the sameperiod in 2007. The decrease was due primarily to lower levels of invested cashin 2008 compared to the same periods in 2007.

 

The Company had no income tax expense for thethree periods ended March 31, 2008 or 2007 as it had incurred pretaxlosses.

 

## **Liquidity and Capital Resources**

## ** **

We have historically financed operations withproceeds from equity financings and payments under collaboration agreementswith third parties. At March 31, 2008, we had cash, cash equivalents andmarketable securities totaling $28.8 million compared to $34.2 million at December 31,2007. The decrease was primarily due to the net loss for the three month periodended March 31, 2008 of $4.1 million, in addition to timing of itemsaccrued in 2007 and paid in 2008.

 

14

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Net cash used in operating activities for the threemonths ended March 31, 2008 and 2007 was $5.4 million and $9.4 million,respectively. We recognized no revenue for the three months ended March 31,2008 as compared with $5.1 million for the same period in 2007. All revenuerecognized in the first quarter of 2007 was fully attributable to the Agreementwith Bayer Schering. This agreement was terminated in the fourth quarter of2007 and no additional revenue from this agreement is expected to be received. Expendituresin all periods were a result of R&D expenses, including clinical trialcosts, and G&A expenses in support of our operations. Product developmentactivities were primarily related to SN2310 and pipeline development activitiesin the first quarter of 2008, whereas product development activities in thefirst quarter of 2007 consisted primarily of expenditures related to TOCOSOLPaclitaxel and to a lesser extent other potential product candidates. Thedecrease in net cash used in operating activities for the three months ended March 31,2008 compared to the same period in 2007 was primarily due to the reduction ofexpenditures for TOCOSOL Paclitaxel.

 

Netcash provided by (used in) investing activities for the three months ended March 31,2008 and 2007 was $16.4 million and ($10.6) million, respectively. The net cashprovided by and used in investing activities was primarily due to transactionsinvolving marketable securities in the normal course of business. The relatedmaturities and sales of those investments provide us with working capital on anas-needed basis. We initiate shifts between cash equivalent securities andmarketable securities based on our cash needs and the prevailing interest rateenvironment. The cash provided by investing activities for the three monthsended March 31, 2008 primarily related to proceeds from sales ofmarketable securities. The cash used in investing activities for the sameperiod in 2007 primarily reflected purchases of marketable securities.

 

Net cash provided by financing activities for thethree months ended March 31, 2008 and 2007 was approximately $5,000 and$21,000, respectively. The net cash provided by financing activities duringboth of these periods was primarily due to the issuance of common stock under employeebenefit plans.

 

Weexpect that our cash requirements will decrease in 2008 due to the terminationof development of TOCOSOL Paclitaxel and related staff reductions. Under ourcurrent forecasted cash needs, which assume continued development of SN2310, webelieve that existing cash, cash equivalents and marketable securities will besufficient to fund expected operations through 2009. We will need additionalcapital to support the continued development SN2310, other product candidatesand to fund continuing operations after 2009. Our future capital requirementsdepend on many factors including:

 

·                  our ability to obtain equity or debtfinancings;

·                  outcome related to strategic activitiescurrently being evaluated;

·                  timing and costs of preclinical development,clinical trials and regulatory approvals;

·                  timing and cost of product development and in-licensingactivities;

·                  entering into new collaborative or productlicense agreements for products in our pipeline; and

·                  costs related to obtaining, defending andenforcing patents.

 

We have contractual obligations in the form of operating leases which expirebetween 2010 and 2017. We signed a new facility lease in November 2006. Thenew facility lease has a term of 10 years with a provision for two additionalfive year renewals. The term commencement date for the new lease was January 1,2008. The following table summarizes our contractual obligations under theseagreements as of March 31, 2008:

 
| **Contractual  Obligations** | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
|                         |       |      |       |                            |       |               |       |               |       |                        |       |
| Operating lease  obligations |       | $         | 21,173,536 |                            | $          | 1,943,226          |       | $                  | 3,996,616  |                        | $          | 4,203,234 |   | $ | 11,030,460 |   |
|                              |            |           |            |                                 |            |                    |            |                    |            |                             |            |  |  |  |  |  |

 

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**Material Changes in Financial Condition**

 
| ** **                | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|---------------------------|------------|-------------------------|------------|----------------------------|------------|
|                      |       |                    |       |                       |       |
| Total assets              |       | $                       | 39,386,670 |                       | $          | 45,249,269 |   |
| Total liabilities         |       | $                       | 11,285,685 |                       | $          | 13,344,852 |   |
| Shareholders’ equity |       | $                       | 28,100,985 |                       | $          | 31,904,417 |   |

 

The decline in assets from December 31,2007 primarily relates to declines in cash, cash equivalents and marketablesecurities used to fund operations.  Thedecline in liabilities from December 31, 2007 relates primarily togenerally lower accrued liabilities on reduced clinical trial expense.  The decline in shareholders equity isprimarily due to the net loss for the quarter.

 

**Critical Accounting Policies and Estimates**

 

We previously identifiedcertain policies and estimates as critical to our business operations and theunderstanding of our past or present results of operations in our Annual Reporton Form 10-K for the year ended December 31, 2007 and filed with theSecurities and Exchange Commission on March 14, 2008.  These policies and estimates are consideredcritical because they had a material impact, or they have the potential to havea material impact, on our financial statements and because they requiresignificant judgments, assumptions or estimates.  Our preparation of financial statementsrequires us to make estimates and assumptions that affect the reported amountof assets and liabilities, disclosure of contingent assets and liabilities atthe date of our financial statements, and the reported amounts of revenue andexpenses during the reporting period.

 

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 formeasuring fair value and expands disclosure of fair value measurements. TheCompany did not have a transition adjustment to beginning retained earnings asa result of adopting this standard. SFAS No. 157 applies to all financialinstruments that are measured and reported on a fair value basis. This includesthose items reported in marketable securities on the balance sheets.

 

In conjunction with theadoption of SFAS No. 157, the Company also adopted SFAS 159, “The FairValue Option for Financial Assets and Financial Liabilities – Including anAmendment of SFAS No. 115” (“SFAS No. 159”) as of January 1,2008. SFAS No. 159 provides companies the option to report selectfinancial assets and liabilities at fair value. This statement also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities. After the initial adoption, the election ismade at the acquisition of a financial asset or financial liability and it maynot be revoked. We did not apply the fair value option to any of ouroutstanding instruments; therefore, there has been no impact on our financialstatements.

 

Effective January 1, 2008, the Companyadopted the provisions of FASB Emerging Issues Task Force, Issue 07-3,Accounting for Nonrefundable Advance Payments for Goods or Services Receivedfor Use in Future Research and Development Activities, or EITF 07-3. Inaccordance with EITF 07-3, nonrefundable contractual prepayments relatedto future R&D activities are deferred and recognized as an expense in the periodthat the related goods are delivered or services are performed.  Our adoption of this standard has not had amaterial impact on our financial statements.

 

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**Item 3. Quantitative and Qualitative Disclosures AboutMarket Risk**

 

*Interest rate risk:*

 

The market risk inherent in our marketablesecurities portfolio represents the potential loss arising from adverse changesin interest rates. If market rates hypothetically increase immediately anduniformly by 100 basis points from levels at March 31, 2008, the declinein the fair value of the investment portfolio would not be material. Given theshort-term nature of our investment portfolio, we do not expect our operatingresults or cash flows to be affected to any significant degree by a suddenchange in market interest rates.

 

*Foreign currency exchange risk:*

 

Weare exposed to risks associated with foreign currency transactions on certaincontracts denominated in foreign currencies (primarily Euro and Pound Sterlingdenominated contracts) and we have not hedged these amounts. As our unhedgedforeign currency transactions fluctuate, our earnings might be negativelyaffected. Accordingly, changes in the value of the U.S. dollar relative to theEuro/Pound Sterling might have an adverse effect on our reported results ofoperations and financial condition, and fluctuations in exchange rates mightharm our reported results and accounts from period to period.  The impact of foreign currency fluctuationsrelated to realized gains and losses during the three month periods ended March 31,2008 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 periodcovered by this report was carried out under the supervision and participationof management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosurecontrols and procedures.  Based upon theevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures are effective in timely alertingthem to material information required to be included in our periodic SECfilings.  A controls system, no matterhow well designed and operated, cannot provide absolute assurance that theobjectives of the controls are met, and no evaluation of controls can provideabsolute assurance that all controls and instances of fraud, if any, within acompany have been, or will be, detected.

 

Changes in internal controlover financial reporting

 

We have not made any changes to our internal controlover financial reporting (as defined in rule 13a-15(f) and 15d-15(f) underthe Exchange Act) during the fiscal quarter ended March 31, 2008 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Part II.   Other Information**

 

**Item1A.  Risk Factors**

 

You should consider the risks below carefully inaddition to other information contained in this report before engaging in anytransaction 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 “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in our Annual Report on Form 10-K for the yearended December 31, 2007, the section entitled “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” in this QuarterlyReport on Form 10-Q, and as set forth below in this Item 1A. Readersshould carefully review those risks, as well as additional risks described inother documents we file from time to time with the Securities and Exchange Commission.The following risk factors include material changes to the risk factorspreviously disclosed in our Form 10-K for the year ended December 31,2007, and are

 

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nota complete list of our risk factors. We undertake no obligation to publiclyrelease the results of any revisions to any forward-looking statements toreflect anticipated or unanticipated events or circumstances occurring afterthe date of such statements.

 

*We will need additional capital in the future to support the continueddevelopment of our product candidates and to fund continuing operations.*

 

Although our cash requirements have decreased due tothe discontinuation of development of TOCOSOL Paclitaxel and reductions inworkforce, we will need additional capital to support the continued developmentof SN2310, other product candidates and to fund continuing operations after2009. We believe that existing cash, cash equivalents and marketable securitieswill be sufficient to fund current operations through 2009. Our future capitalrequirements depend on many factors including:

 

·      our ability to obtain debt or equityfinancings;

·      timing and costs of preclinicaldevelopment, clinical trials and regulatory approvals;

·      timing and cost of research anddevelopment;

·      entering into new collaborative or productlicense agreements for products in our pipeline; and

·      costs related to obtaining, defending andenforcing patents.

 

*Failure to satisfy NASDAQ Global Market listing requirements may resultin our common stock being delisted from The NASDAQ Global Market.*

 

Our common stock is currently listed on The NASDAQGlobal Market under the symbol “SNUS.” For continued inclusion on The NASDAQGlobal Market, we must maintain, among other requirements, stockholders’ equityof at least $10.0 million, a minimum bid price of $1.00 per share and a marketvalue of our public float of at least $5.0 million; or market capitalization ofat least $50 million, a minimum bid price of $1.00 per share and a market valueof our public float of at least $15.0 million. The closing price of our commonstock, as reported on the NASDAQ Global Market as of May 5, 2008 was $0.39per share. On November 5, 2007, we received notice from NASDAQ that we didnot comply with NASDAQ’s continued listing standards because the closing bidprice 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 astaff determination letter indicating that we have failed to regain compliancewith the minimum bid price requirement prior to expiration of the grace periodto regain compliance, as permitted by NASDAQ. We intend to request a hearing toappeal NASDAQ’s determination, which would stay delisting during the hearing process.If NASDAQ does not grant our request for continued listing, our common stockwill be removed from listing on The NASDAQ Global Market. If our common stockis delisted from The NASDAQ Global Market and we are unable to transfer to TheNASDAQ Capital Market, trading of our common stock, if any, may be conducted inthe over-the-counter market in the so-called “pink sheets” or, if available,the OTC Bulletin Board. Consequently, broker-dealers may be less willing orable to sell and/or make a market in our common stock. Additionally, aninvestor would find it more difficult to dispose of, or to obtain accuratequotations for the price of, our common stock. As a result of a delisting fromThe NASDAQ Global Market, it may become more difficult for us to raise fundsthrough the sale of our securities.

 

*We have a history of operating losses which we expect will continue andwe may never become profitable.*

 

We have experienced significant accumulated lossessince our inception, and expect to incur net losses for the foreseeable future.These losses have resulted primarily from expenses associated with our researchand development activities, including nonclinical and clinical trials, andgeneral and administrative expenses. As of March 31, 2008, our accumulateddeficit totaled $128.9 million. We

 

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anticipatethat our operating losses will continue as we further invest in research anddevelopment for our products. Our results of operations have varied and will continueto vary significantly and depend on, among other factors:

 

·      our ability to obtain debt or equityfinancings;

·      outcome related to strategic activitiescurrently being evaluated;

·      timing and costs of preclinicaldevelopment, clinical trials and regulatory approvals;

·      drug discovery and research anddevelopment;

·      entering into new collaborative or productlicense agreements for products in our pipeline; and

·      costs related to obtaining, defending andenforcing patents.

 

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**Item6.  Exhibits**

 
| 10.1   |   | Second  Amendment to Lease between Sonus Pharmaceuticals, Inc. and BMR-217th  Place, LLC, dated for reference purposes only as of January 28, 2008. |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                          |
| 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 Officer pursuant to Rule 13a-14(b) or 15d-14(b).                                                                  |

 

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**SIGNATURES**

 

In accordance withthe requirements of the Securities Exchange Act, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.

 
| ** ** | ** **       | **SONUS PHARMACEUTICALS, INC.** |
|------------|------------------|---------------------------------|
|       |             |                            |   |   |
| Date:      | May 9, 2008 |                            | By: | /s/ Alan Fuhrman |
|       |             |                            |   | Alan Fuhrman |
|       |             |                            |   | Senior Vice President, |
|       |             |                            |   | Chief Financial Officer |
|       |             |                            |   | (Principal Financial  Officer) |

 

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