================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter Ended March 31, 1996
Commission File Number 1-12584
----------------------------------
SHEFFIELD MEDICAL TECHNOLOGIES INC.
DELAWARE 13-3808303
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
30 Rockefeller Plaza, Suite 4515 10112
New York, New York (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (212) 957-6600
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the Issuer's Common Stock is
10,067,397 shares of Common Stock as of March 31, 1996.
Transitional Small Business Disclosure Format:
Yes / / No /X/
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC.
(A Development Stage Enterprise)
INDEX
PART I. Financial Information Page
ITEM 1. Financial Statements
Consolidated Balance Sheet - March 31, 1996 1
Consolidated Statements of Operations For the 2
three months ended March 31, 1996 and 1995 and
for the period from October 17, 1986 (inception)
to March 31, 1996
Consolidated Statements of Cash Flows For the 3
three months ended March 31, 1996 and 1995 and
for the period from October 17, 1986 (inception)
to March 31, 1996
Notes to Consolidated Financial Statements 4
ITEM 2. Management's Discussion and Analysis or Plan of 13
Operation
PART II. Other Information 16
SIGNATURES 17
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1996
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets:
Cash and cash equivalents $ 2,042,759
Prepaid expenses and other current assets 62,101
------------
Total current assets 2,104,860
------------
Property and Equipment:
Laboratory equipment 185,852
Office equipment 82,198
Leasehold improvements 61,390
------------
329,440
Less accumulated depreciation 108,892
------------
Net property and equipment 220,548
------------
Other Assets 201,090
------------
Total assets $ 2,526,498
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 174,709
Sponsored research payable 244,939
Capital lease obligation-current portion 24,422
------------
Total current liabilities 444,070
------------
Capital lease obligation - non-current portion 42,540
Stockholders' equity
Preferred stock, $.01 par value. Authorized, 3,000,000 shares; none issued --
Common stock, $.01 par value. Authorized, 20,000,000 shares; issued and
outstanding, 10,067,397 shares 100,674
Additional paid-in capital 23,174,630
Deficit accumulated during development stage (21,235,416)
------------
2,039,888
------------
Total liabilities and stockholders' equity $ 2,526,498
============
</TABLE>
1
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
October 17, 1986
Three months ended (inception) to
March 31, March 31,
---------------------------------- ----------------
1996 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest Income $ 16,515 $ 1,619 $ 249,764
Expenses:
Research and development 1,239,791 885,999 12,921,170
General and administrative 430,548 541,884 8,494,036
Interest 1,829 4,595 112,761
----------- ----------- -----------
Loss before extraordinary item 1,655,653 1,430,859 21,278,203
Extraordinary item -- -- 42,787
----------- ----------- -----------
Net Loss $ 1,655,653 $ 1,430,859 $21,235,416
=========== =========== ===========
Loss per share of common stock:
Loss before extraordinary item $ 0.17 $ 0.21 $ 5.74
Extraordinary item -- -- 0.01
-----------
=========== =========== ===========
Net Loss $ 0.17 $ 0.21 $ 5.73
=========== =========== ===========
Weighted average common shares outstanding 9,656,540 6,795,995 3,706,141
=========== =========== ===========
</TABLE>
2
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1996
<TABLE>
<CAPTION>
October 17, 1986
Three months ended (inception) to
March 31 March 31
----------------------------- ----------------
1996 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash outflows from development stage activities and extraordinary gain:
Loss before extraordinary item ($ 1,655,653) ($ 1,430,859) ($21,278,203)
Extraordinary gain on extinguishment of debt -- -- 42,787
------------ ------------ ------------
Net loss (1,655,653) (1,430,859) (21,235,416)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options and warrants for services -- -- 900,241
Non-cash interest expense -- -- 50,000
Issuance of common stock for license -- -- 5,216
Issuance of common stock for intellectual property rights -- -- 866,250
Amortization of organizational and debt issuance costs -- -- 77,834
Depreciation 18,537 12,022 108,892
Increase in debt issuance and organizational costs -- -- (77,834)
Decrease (increase) in prepaid expenses and other current assets 91,684 (34,166) (121,142)
(Increase) decrease in other assets (116,720) 49,941 (142,049)
(Decrease) in accounts payable, accrued liabilities (26,576) (287,793) (402,361)
Increase in sponsored research payable 17,537 523,048 822,009
------------ ------------ ------------
Net cash used by development stage activities (1,671,191) (1,167,807) (19,148,360)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of laboratory and office equipment (44,314) (8,543) (256,987)
------------ ------------ ------------
Net cash used by investing activities (44,314) (8,543) (256,987)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease (5,491) -- (5,491)
Conversion of convertible, subordinated notes -- -- 749,976
Proceeds from issuance of debt -- 550,000 550,000
Proceeds from issuance of common stock -- 3,233,571 13,268,035
Proceeds from exercise of stock options 137,175 -- 1,003,302
Proceeds from exercise of warrants 1,766,003 -- 5,881,200
------------ ------------ ------------
Net cash and cash equivalents provided by financing activities 1,897,687 3,783,571 21,447,022
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 182,182 2,607,221 2,041,675
Cash and cash equivalents at beginning of period 1,860,577 80,130 1,084
============ ============ ============
Cash and cash equivalents at end of period $ 2,042,759 $ 2,687,351 $ 2,042,759
============ ============ ============
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ -- -- $ 900,241
Common stock issued for license -- -- 5,216
Common stock issued for intellectual property rights -- -- 866,250
Common stock issued to retire debt -- -- 600,000
Equipment acquired under capital lease 72,453 -- 72,453
Notes payable converted to common stock -- -- 749,976
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,829 $ 4,595 $ 112,761
============ ============ ============
</TABLE>
3
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of March 31, 1996 and the
accompanying consolidated statements of operations and cash flows for the
three months ended March 31, 1996 and 1995 and for the period from October
17, 1986 (inception) to March 31, 1996, have been prepared by Sheffield
Medical Technologies Inc. (the "Company"), without audit. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary to present fairly the financial position, results of operations,
and changes in cash flows at March 31, 1996, and for all periods presented
have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's annual report on
Form 10-KSB for the year ended December 31, 1995. The results of operations
for the three months ended March 31, 1996 and 1995 are not necessarily
indicative of the operating results for the full years.
Sheffield Medical Technologies Inc. ("Sheffield") was incorporated on
October 17, 1986, under the Canada Business Corporations Act. The Company's
wholly-owned subsidiary, U-Tech Medical Corporation ("U-Tech") was
incorporated in the state of Texas on January 13, 1992. On January 10,
1996, Ion Pharmaceuticals, Inc., a Delaware corporation ("Ion"), was formed
as a wholly-owned subsidiary of the Company. At that time, Ion acquired the
Company's rights with respect to the anti-proliferative technology. Unless
the context requires otherwise, Sheffield, U-Tech and Ion are referred to
as "the Company". The Company commenced its biotechnology operations in the
United States in January 1992 under new management and Sheffield became
domesticated as a Wyoming corporation in May 1992. At the Annual Meeting of
shareholders of the Company held on January 26, 1995, the Company's
shareholders approved the proposal to reincorporate the Company in
Delaware, which was effected on June 13, 1995. All significant intercompany
transactions are eliminated in consolidation.
The Company is in the development stage and as such has been principally
engaged in licensing and research efforts. The Company has not generated
any operating revenue and requires additional capital, which it intends to
obtain through equity and debt offerings to continue to operate its
business. The likelihood of the success of the Company must be considered
in light of the expenses, difficulties and delays frequently encountered in
emerging technology-related businesses, particularly since the Company will
focus on research, development and unproven technologies which may require
a lengthy period of time and substantial expenditures to complete. Even if
the Company is able to successfully develop new products or technologies,
there can be no assurance that the Company will generate sufficient
revenues from the sale or licensing of such products and technologies to be
profitable.
4
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
2. CAPITAL STOCK TRANSACTIONS
The following table represents the issuance of common stock since the
Company's incorporation:
Number of common
shares issued
-------------
Date of incorporation 900,000
Issued during year ended December 31, 1986 990,000
Issued during year ended December 31, 1991 412,500
Issued during year ended December 31, 1992 850,000
Issued during year ended December 31, 1993 2,509,171
Issued during year ended December 31, 1994 1,134,324
Issued during year ended December 31, 1995 2,765,651
Issued during three months ended March 31, 1996 505,751
-------
Balance outstanding at March 31, 1996 10,067,397
==========
On March 15, 1996, the Company offered holders of warrants issued in
private placements completed in 1995 the opportunity to exercise such
warrants at up to a 12 1/2 % discount from the actual exercise prices of
such warrants. This warrant discount offer expired on April 30, 1996. In
the first quarter, a total of $1,458,500 was received from the exercise of
362,750 of the Company's stock purchase warrants under the warrant discount
program. In addition to proceeds received from the warrant discount
program, $677,981 was received from the exercise of 143,001 of the
Company's stock purchase warrants and options.
3. STATUS OF RESEARCH AND DEVELOPMENT ACTIVITIES
---------------------------------------------
RBC-CD4 ELECTROINSERTION TECHNOLOGY
BACKGROUND. The Company is the worldwide licensee of certain technology
(the "RBC-CD4 Electroinsertion Technology") relating to the
electroinsertion of full-length CD4 protein into the red blood cell
membrane ("RBC-CD4") for use as a potential therapeutic in the treatment of
human immunodeficiency virus ("HIV") that leads to Acquired Immune
Deficiency Syndrome ("AIDS"). The electroinsertion process inserts CD4, the
protein that serves as the binding site of the HIV virus, into a red blood
cell. This altered cell complex acts as a decoy and is designed to cleanse
the blood of infection by binding to and removing the HIV virus from
circulation before it can infect other cells in the human immune system.
TECHNOLOGY. A number of AIDS research projects have studied CD4, which is a
glycoprotein found on the surface of T4 lymphocytes. T4 lymphocytes are
helper cells that mediate antigen presentation of the immune system. CD4
attaches to a glycoprotein on the surface of HIV known as gp120. HIV binds
the CD4 glycoprotein, which enables it to enter the T4 cells, where it can
replicate. By this process, HIV attacks T4 cells and, as a result,
debilitates the immune system by rendering the immune system incapable of
neutralizing HIV. Eventually, the number of T4 cells decrease and the level
of HIV in the blood increases. This typically leads to the development of
AIDS which is characterized by the ultimate collapse of the immune system.
Once the immune system is destroyed, other germs and viruses that
ordinarily
5
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
would be successfully neutralized by the immune system lead to
opportunistic diseases. These opportunistic diseases are ultimately the
cause of death in AIDS patients.
A number of approaches have been used in the search for a treatment for
AIDS. Scientific efforts have focused principally on the use of compounds
or vaccines with the ability to stop the multiplication or replication of
HIV. The four principal compounds that have been approved by the FDA to
date are AZT, ddI, ddC and d4T.
The use of CD4 as a potential treatment for AIDS is not new. Previous
research by many others focused on the soluble form of CD4. This technique
has proved ineffective because: (i) the half-life of soluble CD4 or hybrid
molecules such as CD4-IgG is short in blood circulation; (ii) the binding
of soluble CD4 to HIV appears to tear some of the viral envelope
glycoprotein without reducing infectivity; and (iii) the amounts of soluble
CD4 needed to establish therapeutic concentrations are very large.
The Company's RBC-CD4 Electroinsertion Technology differs from the
traditional focus on compounds and vaccines that inhibit the replication of
HIV. RBC-CD4 Electroinsertion Technology has its basis in studies that
indicate that HIV will bind to red blood cells ("RBC") containing CD4 in
its membrane and that once so internalized into the RBC, may disintegrate.
In simplest terms, the technology focuses on incorporating the full-length
CD4 into the RBC membrane. The technology is intended to slow the spread of
HIV in the body of an infected patient and diminish or eliminate the
possibility of HIV infection being spread to others by contact with the
infected person, and to help eliminate cells that produce HIV from
circulation. Because the technology may slow or eliminate the advancement
of HIV infection to AIDS, it is a potential therapeutic, but may not be a
cure.
The Company's RBC-CD4 Electroinsertion Technology was originated in 1987 by
Dr. Y. Claude Nicolau and other scientists then associated with The Texas
A&M University System ("TAMUS"). Dr. Nicolau is the principal investigator
for the RBC-CD4 Electroinsertion Technology research sponsored by the
Company. RBC-CD4 Electroinsertion Technology exposes RBC to a pulsed
electric field that allows the incorporation of certain proteins into the
cell membrane. Many types of proteins can be used as therapeutics. Proteins
which contain a sequence called a "hydrophobic membrane spanning sequence"
can be attached to RBC by the electroinsertion technique. The hydrophobic
membrane spanning sequence is a portion of the protein that is not water
soluble. This is critical in order for the protein to immerse itself into
the membrane during the electroinsertion procedure. The electroinsertion
process causes a temporary disordering of the cell membrane lipid bilayer.
When this disordering of the membrane occurs in the presence of a protein
with a hydrophobic sequence, the hydrophobic portion of the protein
immerses itself into the membrane at the point of disordering, resulting in
a cell with the protein inserted in the membrane. One such protein that
contains a hydrophobic sequence is "full-length" CD4. Significantly,
full-length CD4 consists of the hydrophobic portion and a soluble
extracellular domain and a cytoplasmic domain. When the hydrophobic
sequence is deleted, CD4 is secreted as a soluble protein which, as
described below, is the protein that has been unsuccessful in research for
the development of HIV/AIDS therapeutics. The Company's licensed technology
is for insertion of the potentially more effective "full-length" CD4 into
red blood cells for use as a therapeutic for the treatment of HIV/AIDS. In
the research funded by the Company, Dr. Nicolau has successfully
electroinserted full-length CD4 into rabbit, mouse, pig and human red blood
cell membranes to determine the affinity and binding strength of the
RBC-CD4 with the HIV virus. These tests have shown that RBC-CD4 may
overcome the problems associated with soluble CD4, including: (i) RBC-CD4
has shown no immune response in animals or humans; (ii) RBC-CD4 remains in
the body for almost the normal half life span of a RBC, which is 60 days;
and (iii) RBC-CD4 has shown a significantly improved binding affinity and
indicates the capacity to inhibit HIV infection of susceptible cells.
6
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
Because infection also occurs in the lymph nodes, the Company is developing
a companion technology, Liposome-CD4, to address the elimination of HIV in
the lymphatic system. In addition, the Company is developing an AIDS
Vaccine for preventing HIV infection.
Progress of Research and Development. The IND and test protocols were
submitted in 1991 and were approved by the FDA in 1992. Phase I Clinical
Trials with HIV-infected patients began in February 1992 on four patients.
Researchers affiliated with TAMUS, the Center for Blood Research
Laboratories, Inc. ("CBRL"), a wholly owned subsidiary of The Center for
Blood Research, Inc. (an affiliate of Harvard Medical School), and Baylor
College of Medicine, in conjunction with the Veterans Affairs Medical
Center, completed these Phase I Clinical Trials in Houston, Texas, in April
1992. The 60-day trial included meeting three criteria: (i) adequate
residence time in the blood stream by RBC-CD4 (the red blood cells into
which the CD4 protein has been inserted that act as the binding site for
HIV) to permit the HIV virus to bind with the cells and potentially be
eliminated from the circulation; (ii) no reduction in the normal
functioning of the red blood cell; and (iii) no adverse immune response or
toxicity.
The completion of Phase I Clinical Trials essentially confirmed that there
are no significant adverse human responses to the process at
sub-therapeutic doses. Results indicated that (i) the red blood cell's
normal functioning is not altered by the electroinsertion procedure; (ii)
the life span of the RBC-CD4 is equal to the life span of normal red blood
cells; (iii) the majority of the electroinserted CD4 remains on the red
blood cell surface for the entire life span and little shedding of CD4
occurs, if any; and (iv) no side effects or immune responses were observed.
The companion studies demonstrated that RBC-CD4 reproducibly inhibits the
transmission of primary "wild type" HIV strains cultured from HIV-infected
patients, or cell-to-cell transmission of the virus, up to nearly 100
percent. IN VITRO studies also have shown that the RBC-CD4 loaded with HIV
virus does not infect macrophages during phagocytosis, the process of
normally removing foreign particles and red cells at the end of their life
span (approximately 120 days). Phase I Clinical Trials did not confirm
anti-viral activity in humans, which is the purpose of additional trials.
The IND for Phase I/IIA Clinical Trials was submitted by the Company to the
FDA on August 18, 1994 for approval to conduct Phase I/II human clinical
studies at the Johns Hopkins University Schools of Public Health and
Medicine ("Johns Hopkins") to test the product's safety and anti-viral
activity at various doses, and the Company received approval from the FDA
to commence the trial on July 17, 1995. The Phase I/IIA Clinical Trial
consists of a safety study with two patients at the lowest dose of RBC-CD4
and a safety and activity study with two parts: (1) five patients being
dosed with a middle dose of RBC-CD4, one of which receives placebo; and (2)
12 patients being dosed at the highest dose of RBC-CD4, two of which
receive placebo.
RECENT DEVELOPMENTS. The first patient under the Phase I/IIA Clinical
Trials was dosed on August 8, 1995, the first patient to be dosed with the
middle dose of RBC-CD4 was dosed on November 16, 1995, and the first
patient to be dosed at the highest dose of RBC-CD4 was dosed on January 29,
1996. No significant adverse events have been reported to date, and the
last portion of the trial with patients receiving the highest dose of
RBC-CD4 is ongoing. The Company is currently participating in discussions
with certain third parties regarding the possibility of partnering or
licensing this technology.
7
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
LIPOSOME-CD4 TECHNOLOGY
BACKGROUND. The Company is the worldwide licensee of certain technology
(the "Liposome-CD4 Technology") relating to the incorporation of CD4
antigens into liposome bilayers and their use as a potential therapeutic
agent in the treatment of HIV/AIDS. While RBC-CD4 Electroinsertion
Technology is being developed by the Company to target HIV and HIV-infected
cells in the blood, Liposome-CD4 Technology is being developed by the
Company to target infections in the human lymphatic system, a major
reservoir for infection not directly reached by blood circulation.
TECHNOLOGY. CD4 is a glycoprotein found on the surface of T4 lymphocytes,
which are helper cells that mediate antigen presentation of the immune
system. CD4 also acts as the receptor for a glycoprotein on the surface of
the human immunodeficiency virus (HIV) known as gp120. HIV binds to the CD4
glycoprotein which enables the virus to enter the T4 cells where it can
replicate. By this process, HIV attacks T4 cells and debilitates the immune
system, which typically leads to the development of AIDS. Once the immune
system is destroyed, other germs and viruses that would ordinarily be
successfully neutralized by the immune system lead to opportunistic
diseases, which ultimately cause death to AIDS patients.
Lipids consist of two layers (bilayers) of fatty acids surrounded by water;
such bilayers are fluid and very flexible. Liposomes can be formed by
agitating phospholipids in water suspensions at high frequencies to form a
closed vesicle surrounded by a continuous lipid bilayer. Liposomes have
properties that are very similar to those of natural membranes and have
been studied for carrying, in their interior, specific drugs for the
purpose of increasing their potency and safety. Liposomes are eventually
broken down and metabolized by the body, or fuse with their target, at
which time the content of the liposome is released. The Company is
researching the use of liposomes in treating HIV/AIDS because the virus is
not only found in the circulatory system, but the lymphatic system as well,
which is an area that liposomes can reach. It is believed that the lymph
nodes, which are a reservoir of HIV infection, could be targeted for
removal of HIV and HIV-infected cells. Liposomes inserted with CD4
("Liposome-CD4") would be used in conjunction with the Company's RBC-CD4
Electroinsertion Technology which targets the circulatory system, thereby
providing a treatment package for both the blood stream and the lymph
nodes.
The strategy of Liposome-CD4 is to incorporate CD4 in the bilayer of the
liposomes, providing a specific target (I.E., HIV and HIV-infected cells)
for liposome fusion. The Liposome-CD4 may also be loaded with cytotoxic
agents, or agents that will kill the target cell. When the free-floating
HIV comes in contact with Liposome-CD4, the virus fuses with Liposome-CD4
and is inactivated. The remains of the killed infected T4 cell and
inactivated virus fused with Liposome-CD4 would then be removed by
macrophages (white blood cells). The therapeutic aim, as with RBC-CD4, is
to reduce HIV infectivity and slow or eliminate the advancement of HIV
infection to AIDS.
PROGRESS OF RESEARCH AND DEVELOPMENT. The first milestone of the
Liposome-CD4 research, which included IN VITRO studies of Liposome-CD4
interaction with HIV from patient (and simian immunodeficiency virus
("SIV") from M. Rhesus monkeys) isolate studies with Liposome-CD4
encapsulating a cytotoxic agent, was completed in August 1994 with the IN
VITRO studies demonstrating promising anti-viral activity.
RECENT DEVELOPMENTS. IN VITRO HIV inactivation results have shown favorable
viral inhibition against HIV patient isolates and a new SHIV (hybrid virus
of SIV containing the HIV envelope) isolate. Further studies are underway
to optimize the liposome formulation and test viral inhibition against
patients isolates of HIV using the optimized formulation. In addition,
studies are underway to compare the effectiveness of
8
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
Liposome-CD4 loaded with a cytotoxic agent with Liposome-CD4 without a
cytotoxic agent. The Company is currently participating in discussions with
certain third parties regarding the possibility of partnering or licensing
this technology.
HIV/AIDS VACCINE
BACKGROUND. The Company holds an option to acquire an exclusive worldwide
license to a potential HIV/AIDS vaccine (the "HIV/AIDS Vaccine") under
development at the French National Institute of Health and Medical Research
("INSERM"). This research project is headed by Professor Jean-Claude
Chermann, one of the original Pasteur Institute discoverers of the HIV
virus. The vaccine concept developed by Professor Chermann utilizes a
portion of b2 microglobulin (the epitope), a cellular antigen, that is
presented on the HIV viral coating after the HIV virus has reproduced in a
human cell. This cellular antigen does not appear to vary across the
various strains of the virus and may provide a stable target to develop
antibodies that can prevent infection. The Company believes this approach
may also protect against both blood-born and sexual transmission of HIV.
The Company's goal is to develop an oral formulation that would make the
vaccine potentially less costly and easier to distribute to a broad
population.
TECHNOLOGY. When the HIV virus infects a cell, it replicates and then it
buds from the infected cell's surface. A protein which is present on the
cell's surface then becomes incorporated in HIV's viral envelope as it
leaves the infected cell. The classical path of vaccine development to date
has been one of raising antibodies against a viral protein in an attempt to
neutralize the pathogen. All these attempts have been largely unsuccessful.
The HIV/AIDS Vaccine encompasses a new and different approach directed
toward immunization against HIV/AIDS. The HIV/Vaccine is designed to be
different than previous attempts for two basic reasons: (i) it would use a
cellular versus a viral antigenic approach and is therefore, common to all
strains of HIV, and (ii) it would utilize a delivery system that would
offer both humoral (blood transmission) and mucosal (sexual transmission)
protection, as opposed to other vaccines now being investigated as
therapeutics for preventing cell to cell transmission of the virus.
PROGRESS OF RESEARCH AND DEVELOPMENT. Research has been directed toward
HIV/AIDS prevention following isolation of the virus in 1983. Research
began in 1988 in this area and in the use of a cellular antigenic approach
directed toward conquering the disease. Preclinical research has
demonstrated neutralization of HIV IN VITRO. The peptide sequence that
encodes this portion of a cellular protein has been identified and
sequenced and will be incorporated in a vaccine to test for production of
antibodies against the epitope. The Company plans to produce a vaccine for
humans that will elicit mucosal as well as humoral immunity and that can be
delivered orally. Upon the successful completion of pre-clinical animal
studies, the Company plans to submit an IND for conducting Human Clinical
Trials.
RECENT DEVELOPMENTS. The Company entered into an agreement with an
unaffiliated consulting firm in December of 1995 to develop a commercial
diagnostic assay for detection of the monoclonal antibody. This assay would
be used in animal and human clinical studies for the vaccine and could be
sold for research purposes prior to receiving approval from the FDA. Upon
approval from the FDA, the assay could be sold to physicians and clinical
laboratories. The Company will be working over the next few months to
refine this assay.
9
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
UGIF TECHNOLOGY - PROSTATE CANCER AND BENIGN PROSTATIC HYPERPLASIA THERAPY
BACKGROUND. The Company holds an option to acquire an exclusive worldwide
license for a growth regulator factor, termed Urogenital Sinus Derived
Growth Inhibitory Factor ("UGIF/ps20"), which could serve as a potential
prostate cancer therapy (the "UGIF Technology").
TECHNOLOGY. Based on studies at Baylor College of Medicine directed at
understanding how one particular tissue type influences the growth of an
adjacent tissue in the development of the prostate gland, UGIF/ps20 was
identified. Specifically, UGIF/ps20 has been isolated and purified from rat
fetal urogenital sinus tissue which differentiates into the mature prostate
gland as a result of tissue-tissue interactions. Since UGIF/ps20 was
demonstrated to be active in human cells, it was believed that UGIF/ps20
isolated from the rat would be essentially identical to human UGIF/ps20.
Commercial application and economic feasibility of UGIF/ps20 is not
dependent upon the availability of either rat or human fetal urogenital
sinus tissue, but rather the successful cloning, expression and testing of
recombinant UGIF/ps20.
The discovery of UGIF/ps20 indicates that urogenital sinus tissue, and more
specifically UGIF/ps20, may possibly be effective in altering the phenotype
(state of cell differentiation) of cells that affect the secretion of newly
synthesized proteins. UGIF/ps20 has shown inhibition of the growth of
transformed cells and tumors in culture including human prostate cancer
cells with non-toxic and reversible effects. In addition to the treatment
of cancer, there exists a potential use of UGIF/ps20 or its analogues in
the treatment of other diseases or conditions dealing with abnormalities of
the genitourinary system. For example, since UGIF/ps20 induces changes in
the state of cellular differentiation to that more suggestive of what
should be normal, UGIF/ps20 may be effective in treating diseases that are
manifested by the loss or change in normal tissue or normal cell
differentiation.
Dr. David R. Rowley is the principal investigator for the UGIF Technology
project. Dr. Rowley is Assistant Professor in the Department of Cell
Biology at the Baylor College of Medicine
PROGRESS OF RESEARCH AND DEVELOPMENT. A method for successfully purifying
UGIF/ps20 was identified in April 1992 by Dr. David R. Rowley and
biological activity of the factor was demonstrated in mice in May 1992.
Research to date has shown that UGIF/ps20 inhibits the growth of
transformed cells and tumors in culture including human prostate cancer
cells with non-toxic and reversible effects. In addition, in preliminary
animal studies, UGIF/ps20 has shown an ability to inhibit DNA synthesis and
cell proliferation of human prostatic carcinoma cells. Results confirmed
that there is a human form of UGIF/ps20 and that it is a growth factor
associated with the prostate gland.
RECENT DEVELOPMENTS. The rat and human genes for UGIF/ps20 were sequenced
in late 1995. The rat gene has been incorporated into an expression system
and recombinant rat UGIF/ps20 is currently being produced. The human gene
is currently being incorporated into an expression system for production of
recombinant human UGIF/ps20. Once sufficient quantifies of recombinant
UGIF/ps20 are produced and purified, the activity of the UGIF/ps20 protein
will be tested for verification in IN VITRO and IN VIVO studies. It is
anticipated that additional animal studies will be conducted to determine
the modes of delivery and biological effects of recombinant UGIF/ps20 on
prostate cancer in "nude" mice. In the event that recombinant UGIF/ps20 is
verified in these studies, additional preclinical studies with a delivery
system, and toxicity tests, will be conducted prior to commencement of
human Clinical Trials.
10
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
ANTI-PROLIFERATIVE THERAPIES
BACKGROUND. The Company, through its wholly-owned subsidiary, Ion
Pharmaceuticals, Inc. ("Ion Pharmaceuticals"), is the worldwide licensee of
certain proprietary uses of certain anti-proliferative compounds (the
"Anti-Proliferatives"). Such compounds have demonstrated promise in
therapeutic applications for treating a number of conditions characterized
by abnormal cell proliferation, such as cancer and certain proliferative
dermatological conditions. The Company also has a collaborative program
with an unaffiliated company to develop proprietary new chemical entities
related to the Anti-Proliferatives.
TECHNOLOGY. The Anti-Proliferatives are active through ion transport
modulation and may be applicable for treating, either by topical or oral
administration, a number of diseases and conditions. Through research
conducted by Dr. Jose Halperin at Harvard Medical School, new potential
uses for the Anti-Proliferatives have been identified based on inhibition
of cell proliferation, including the use of such Anti-Proliferative
compounds in treating cancer, proliferative dermatological conditions,
cardiovascular disorders, such as arteriosclerotic conditions, and diseases
caused by neovascularization, such as diabetic retinopathy. In addition to
the compounds ability to inhibit cell proliferation, the Anti-Proliferative
compounds have also been shown to inhibit the Ca++-activated K+ channel in
the human red blood cell membrane. Dr. Carlo Brugnara at Children's
Hospital in Boston has studied and is continuing to study the effects of
such compounds in blocking this channel, one of the erythrocyte's principal
dehydration pathways, to prevent the sickling tendency of erythrocytes.
Such an approach could potentially be used in the treatment of sickle cell
anemia.
It is anticipated that the Anti-Proliferative compounds would be formulated
in two new formulations 3/4 an oral formulation and a topical formulation.
The new oral formulation will be used in the study and potential treatment
of cancers, including colon, lung and breast, sickle cell anemia,
atherosclerotic conditions, including restenosis after balloon angioplasty.
The new topical formulation will be used by the Company in the study and
potential treatment of proliferative dermatological conditions, such as
actinic keratosis, certain cancers, such as basal cell carcinoma and
Kaposi's sarcoma, and, possibly, other dermatological conditions.
PROGRESS OF RESEARCH AND DEVELOPMENT. An initial human efficacy study with
a preliminary topical formulation of one of the Anti-Proliferative
compounds at a low concentration in comparison with a placebo was conducted
by the Company in Kaposi's sarcoma patients which led to inconclusive
results. Results showed that the topical formulation was not optimized. The
Company has recently entered into an agreement with an unaffiliated company
to develop an optimal topical formulation at a higher concentration of drug
for use in additional clinical trials for actinic keratosis and Kaposi's
sarcoma.
Dr. Halperin has demonstrated that IN VITRO proliferation of three human
cancer cell lines (I.E.,a melanoma, a lung adenocarcinoma, and a colon
adenocarcinoma) were strongly inhibited by one of the Anti-Proliferatives
in a dose-dependent manner. Dr. Halperin's group has also studied the
effect of certain of the Anti-Proliferatives in an experimental model for
lung metastasis induced by injection of a human melanoma cell line in mice.
After 10 weeks, all control animals developed numerous lung
micrometastases; in contrast, half of the treated animals were free of
metastases and two did not demonstrate any evidence of disease. No evidence
of toxicity was seen based on clinical observations and animal weights. In
another animal study, the induction of skin tumors by a known carcinogen,
with and without the Anti-Proliferatives treatment, was evaluated with
favorable results.
For the sickle cell application, in vitro studies performed by Dr. Brugnara
have demonstrated that the Anti-Proliferative compounds blocked ion
transport in homozygous sickle cells, and studies in a transgenic
11
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
mouse model for sickle cells have demonstrated that the compound given
orally produced inhibition of the red cell Gardos channel, increased red
cell potassium content, and decreased mean corpuscular hemoglobin
concentration. A pilot Phase I clinical trial has been completed in which
four normal subjects were given the Anti-Proliferative compound orally and
the peak inhibition of the Gardos channel was measured.
RECENT DEVELOPMENTS. The Company is currently negotiating a sponsored
research and license option agreement with an option to license the use of
the Anti-Proliferatives in treating secretory diarrhea.
A topical formulation of one of the Anti-Proliferatives has been developed
for the Company pursuant to an agreement with an unaffiliated company. The
lead topical formulation is currently being tested for long-term stability
and other testing needed to meet FDA requirements. Clinical trial material
is also being manufactured for use in the Company's Phase I/II Clinical
Trial for the treatment of actinic keratosis. Two clinical sites in Israel
have been chosen and the Company anticipates this Phase I/II Clinical Trial
will begin the second quarter of 1996. Upon successful results of this
study, the Company plans to file an IND application with the FDA for
conducting a clinical trial in the U.S. for the treatment of actinic
keratosis.
Additional animal tumor model studies are underway to test the effects of
the Anti-Proliferative compounds in the treatment of certain cancers.
A Phase II Clinical Trial supported by the National Institutes of Health
and the FDA is currently underway in which five sickle cell anemia patients
are being given an Anti-Proliferative compound orally. For this clinical
trial, short-term results show that the administration of the compound
results in an increase in cell potassium content, a reduction in the number
of dense cells, a significant reduction in plasma indirect bilirubin
levels, and an increase in hemoglobin levels, indicating that the drug
decreases the tendency of the red cells to sickle. The next phase of the
ongoing Phase II clinical trial will assess the survival of red blood cells
and hemoglobin levels over a longer-term period. The Company plans to
conduct an additional clinical study to assess long-term efficacy of a new
oral formulation of the Anti-Proliferative compound.
4. SUBSEQUENT EVENT
On April 30, 1996, the Company completed its warrant discount program,
whereby, the Company offered holders of warrants issued in private
placements completed in 1995 the opportunity to exercise such warrants at
up to a 12 1/2% discount from the actual exercise prices of such warrants.
At the expiration of the discount program, on April 30, 1996, a total of
$5.6 million was received from the exercise of 1,360,750 of the Company's
stock purchase warrants.
12
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
PLAN OF OPERATIONS
The Company, being a development enterprise, has incurred a net loss in each of
the fiscal years since its inception and has had to rely on outside sources of
funds to maintain its liquidity. Substantial operating losses are expected to be
incurred for the next several years as the Company expends its resources for
product acquisition, sponsored research and development and preclinical and
clinical testing.
As a development stage company without revenues, the Company has financed its
technology development activities and operations primarily through public and
private offerings of securities. In connection with this, the Company completed
two private offerings in 1995, raising total gross proceeds of $8.8 million. On
March 15, 1996, the Company offered holders of warrants issued in private
placements completed in 1995 the opportunity to exercise such warrants at up to
a 12 1/2% discount from the actual exercise prices of such warrants. As of the
close of business on April 30, 1996, the expiration date of the warrant discount
program, a total of $5.6 million was received. Management estimates that based
on its successful history of raising capital, its plans to seek additional funds
through planned offerings, the results of the warrant discount program, and the
continued focus on selling, licensing and commercialization of its technologies,
the Company will have sufficient resources to fund its activities for at least
the next twelve months. There can be no assurance that planned offerings will be
completed or, if not completed as planned, that other sources of capital can be
obtained in amounts and upon terms acceptable to the Company during the twelve
month plan period. In the event that such funds are not available when needed,
the Company would be required to reduce or delay its funding of current research
projects and delay making commitments for future research projects. The
Company's operating results have fluctuated significantly during each quarter
since its reorganization, and the Company anticipates that such fluctuations,
largely attributable to varying sponsored research and development commitments
and expenditures, will continue into the foreseeable future.
The Company continues to conduct scientific research, clinical trials,
development, and intellectual property protection. During the three months ended
March 31, 1996, the Company paid $1.2 million for research and development on
its projects. During the succeeding 12-month period, approximately $2.8 million
in additional funding is projected to be spent on clinical and laboratory
research and development.
Of the $2.8 million estimated to be spent on clinical and laboratory research
and development during the next 12 months, approximately $100,000 is expected to
be applied to RBC-CD4 Technology, $800,000 to the HIV/AIDS project, $200,000 to
the UGIF Technology, and $2,100,000 to the Anti-Proliferative Therapies.
In addition to clinical and laboratory research development, the Company expects
to incur ongoing costs in connection with its intellectual property protection
and patent prosecution, which costs are expected to approximate $100,000 over
the next 12 months.
13
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
REVENUES AND EXPENSES
Interest Income:
From inception through the period ended March 31, 1996, the Company has earned
interest income of $249,764 and an extraordinary item from gain on early
extinguishment of debt of $42,787. The Company's ability to generate material
revenues is contingent on the successful commercialization of the RBC-CD4
Electroinsertion Technology, the Liposome-CD4 Technology, the HIV/AIDS Vaccine,
UGIF Technology, Anti-Proliferative Therapies and other technologies which it
may acquire, followed by the successful marketing and commercialization of such
technologies through licenses, joint ventures or other arrangements.
Income for the three months ended March 31, 1996 was $16,515 compared to $1,619
for the same period ended March 31, 1995. The increase in interest earned is
attributable to a higher amount of cash applied to short-term investments In
each period interest income represented all of the Company's income.
Operating Expenses:
From inception through the period ended March 31, 1996, the Company incurred
$21,527,967 of operating expenses. Sixty percent (60%) or $12,921,170 of the
total operating expenses for that period were costs of research and development
for the Company's technologies. The remainder of expenses for the same period
were incurred principally as consulting costs, costs of management, legal and
other professional support for the Company's technologies, and for its completed
and proposed financing plans. Research and development costs will remain high as
the Company implements later-stage research projects of its technologies and
such costs will continue to be expensed for financial reporting purposes.
Operating expenses for the three months ended March 31, 1996, were $1,653,653
compared to $1,430,859 for the same period ended March 31, 1995. The increase
was due primarily to the advancement of projects to clinical trials; general and
administrative costs decreased for the period. Research and development costs
were $1,239,791, or $353,792 higher. The increase was attributable primarily to
three factors: (1) increased sponsored research payments for the Company's
RBC-CD4 project as it entered into its Phase I/II Human Clinical Trials, (2) the
completion of the second milestone of its Liposome-CD4 project and the
subsequent advancement of the project to its next stage of development (3)
increased costs of production of CD4 for both those projects and (4) continued
funding of the HIV/AIDS Vaccine project and the Anti-Proliferative therapies.
LIQUIDITY AND CAPITAL RESOURCES
In February 1993, the Company conducted its initial United States public
offering of 833,334 Units, each Unit consisting of two shares of Common Stock
and one Redeemable Common Stock Purchase Warrant exercisable for one share of
Common Stock at a price of $3.75, subject to adjustment in certain
circumstances, at any time until February 10, 1998 (the "public offering"). The
net proceeds of the public offering to the Company, after payment of
Underwriter's discounts and commissions, non-accountable expenses and
reimbursable expenses, and other expenses of the offering, were approximately
$4,190,000. Also, during fiscal year 1993, the Company received $762,833 in
total proceeds from the exercise of warrants. In March 1994 a total of
$3,121,164 was received from the exercise of 832,324 of the Company's Redeemable
Stock Purchase Warrants. Each warrant was exercisable for one share of
Sheffield's Common Stock at an exercise price of $3.75.
In April 1995, the Company completed a private placement of 410,075 units to
accredited investors at a price of $8.00 per unit for gross proceeds of
$3,280,600. Each unit consists of two shares of the Company's common stock and a
warrant to purchase one share of common stock at a price of $5.00 at any time to
and including February 10, 2000. The warrants are redeemable by the Company
under certain circumstances. Proceeds will be used for
14
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
funding research and development for projects and licensing arrangements, patent
prosecution and working capital and general corporate purposes.
In July 1995, the Company completed a second private placement of 1,375,000
units at $4.00 per unit, which grossed $5,500,000. Each unit consists of one
share of the Company's common stock and one warrant to purchase one share of
common stock at a price of $4.50 at any time from March 1, 1996 to and including
February 10, 2000. The warrants are subject to redemption under certain
conditions.
On April 30, 1996, the Company completed its warrant discount program through
which the Company offered holders of warrants issued in private placements
completed in 1995 the opportunity to exercise such warrants at up to a 12 1/2%
discount from the actual exercise prices of such warrants. At the expiration of
the discount program, on April 30, 1996, a total of $5.6 million was received
from the exercise of such warrants and the related issuance of 1,360,750 shares
of common stock.
In addition to the potential commercialization of its technologies, the Company
plans to seek additional funds through exercise of outstanding warrants and
options, financings and/or public grants, joint ventures or other commercial
arrangements to obtain necessary working capital. It is not uncommon, for
instance, for a third-party commercial partner to enter into a license agreement
with a development company, on the merits of successful research relating to a
given technology, which would yield up-front royalty advances to such company
before market-ready products are developed. It is also not uncommon for a
third-party commercial partner to enter into an agreement with a development
company whereby a third party will contribute funds in support of the research
and operating needs of such development companies in consideration for rights
related to the technologies.
At March 31, 1996, the Company's assets were $2.5 million of which $2.0 million
was cash and cash equivalents.
15
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
No reports on Form 8-K were filed by the Company during the quarter
ended March 31, 1996.
16
<PAGE>
SHEFFIELD MEDICAL TECHNOLOGIES INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SHEFFIELD MEDICAL TECHNOLOGIES INC.
Dated: May 9, 1996 /s/ Douglas R. Eger
-----------------------------------
Douglas R. Eger
Chairman & Chief Executive Officer
Dated: May 9, 1996 /s/ George Lombardi
-----------------------------------
George Lombardi
Vice President & Chief Financial Officer
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
condensed financial statements for the first quarter ended March 31, 1996 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,042,759
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,104,860
<PP&E> 329,440
<DEPRECIATION> 108,892
<TOTAL-ASSETS> 2,526,498
<CURRENT-LIABILITIES> 444,070
<BONDS> 0
0
0
<COMMON> 100,674
<OTHER-SE> 1,939,214
<TOTAL-LIABILITY-AND-EQUITY> 2,526,498
<SALES> 0
<TOTAL-REVENUES> 16,515
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,670,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,829
<INCOME-PRETAX> (1,655,653)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,655,653)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,655,653)
<EPS-PRIMARY> 0.17
<EPS-DILUTED> 0.17
</TABLE>
