- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1998
Commission File Number 1-12584
----------------------------
SHEFFIELD PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT IN ITS CHARTER)
DELAWARE 13-3808303
(State of Incorporation) (IRS Employer Identification No.)
425 SOUTH WOODSMILL ROAD, SUITE 270
ST. LOUIS, MISSOURI 63017-3441
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (314) 579-9899
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the issuer's Common Stock is
27,058,419 shares of Common Stock as of September 30, 1998.
- --------------------------------------------------------------------------------
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
-----
Page
PART I. Financial Information
ITEM 1. Financial Statements.
Consolidated Balance Sheets - September
30, 1998 and December 31, 1997. 1
Consolidated Statements of Operations for 2
the three and nine months ended September
30, 1998 and 1997 and for the period from
October 17, 1986 (inception) to September
30, 1998.
Consolidated Statements of Cash Flows for 3-4
the three and nine months ended September
30, 1998 and 1997 and for the period from
October 17, 1986 (inception) to September
30, 1998.
Consolidated Statements of Stockholders' 5-6
Equity (Net Capital Deficiency) for the
period from October 17, 1986 (inception)
to September 30, 1998.
Notes to Consolidated Financial 7
Statements.
ITEM 2.
Management's Discussion and Analysis of 9
Financial Condition and Results of
Operations.
PART II. Other Information.
ITEM 2. Changes in Securities. 12
ITEM 4. Submission of Matters to a Vote of 13
Security-Holders.
ITEM 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
-------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,585,013 $ 393,608
Marketable securities 200,500 --
Loan receivable - former officer 67,876 80,000
Prepaid expenses and other current assets 39,094 47,378
------------ ------------
Total current assets 2,892,483 520,986
------------ ------------
Property and equipment:
Laboratory equipment 264,273 185,852
Office equipment 120,087 142,562
------------ ------------
384,360 328,414
Less accumulated depreciation and amortization 227,639 185,201
------------ ------------
Net property and equipment 156,721 143,213
------------ ------------
Other assets 5,681 25,738
------------ ------------
Total assets $ 3,054,885 $ 689,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities $ 526,654 $ 887,782
Sponsored research payable 449,805 470,768
------------ ------------
Total current liabilities 976,459 1,358,550
Convertible promissory note 500,000 --
6% convertible subordinated debenture -- 1,551,000
Interest payable on debenture -- 28,875
Preferred stock, $.01 par value, authorized 3,000,000 shares:
Series A cumulative convertible redeemable preferred stock,
0 and 10,000 shares issued and oustanding at September 30, 1998
and December 31, 1997, respectively -- 2,468,263
Series B cumulative convertible redeemable preferred stock,
0 shares issued and oustanding at September 30, 1998
and December 31, 1997 -- --
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Series C convertible preferred stock, 11,500 and 0 shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively 115 --
Common stock, $.01 par value. Authorized, 50,000,000 shares;
issued and outstanding, 27,058,419 and 12,649,539
shares at September 30, 1998 and December 31, 1997, respectively 270,584 126,495
Notes receivable in connection with sale of stock (12,500) (72,600)
Valuation allowance for unrealized loss on marketable securities (149,500) --
Additional paid-in capital 55,359,496 31,386,644
Deficit accumulated during development stage (53,889,769) (36,157,290)
----------- ------------
1,578,426 (4,716,751)
------------ ------------
============
Total liabilities and stockholders' equity (net capital deficiency) $ 3,054,885 $ 689,937
============ ============
</TABLE>
1
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO SEPTEMBER 30, 1998
(UNAUDITED)
October 17, 1986
Three months ended Nine months ended (inception) to
September 30, September 30, September 30,
------------------------------------------------------------------- -----------------
1998 1997 1998 1997 1998
---------------- ------------------ ---------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sub-license revenue $ -- $ -- $ 350,000 $ -- 1,360,000
Interest income 32,450 9,391 35,965 49,363 489,792
------------ ------------ ------------ ------------ ------------
Total revenue 32,450 9,391 385,965 49,363 1,849,792
Expenses:
Acquisition of R & D in-process
technology 741,745 -- 13,241,745 1,650,000 14,891,745
Research and development 218,063 570,170 2,014,167 3,283,632 21,266,557
General and administrative 1,039,390 1,325,874 2,534,289 3,087,103 19,056,548
Interest 175,662 2,183 304,343 6,951 464,098
------------ ------------ ------------ ------------ ------------
Total expenses 2,174,860 1,898,227 18,094,544 8,027,686 55,678,948
------------ ------------ ------------ ------------ ------------
Loss before extraordinary item (2,142,410) (1,888,836) (17,708,579) (7,978,323) (53,829,156)
Extraordinary item -- -- -- -- 42,787
============ ============ ============ ============ ============
Net loss $ (2,142,410) $ (1,888,836) $(17,708,579) $ (7,978,323) (53,786,369)
============ ============ ============ ============ ============
Accretion of mandatorily redeemable
preferred stock -- -- (23,900) -- (103,400)
============ ============ ============ ============ ============
Net loss - attributable to common shares $ (2,142,410) $ (1,888,836) $(17,732,479) $ (7,978,323) $(53,889,769)
============ ============ ============ ============ ============
Loss per share of common stock - basic
and diluted:
Loss before extraordinary item $ (0.08) $ (0.16) $ (0.88) $ (0.68) $ (9.13)
Extraordinary item -- -- -- -- 0.01
============ ============ ============ ============ ============
Basic and diluted net loss per share $ (0.08) $ (0.16) $ (0.88) $ (0.68) (9.12)
============ ============ ============ ============ ============
Weighted average common shares
outstanding - basic and diluted: 26,858,366 12,077,667 20,203,133 11,765,653 5,900,036
============ ============ ============ ============ ============
</TABLE>
2
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO SEPTEMBER 30, 1998
(UNAUDITED)
Three months ended
September 30,
---------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Cash outflows from development stage activities
and extraordinary gain:
Loss before extraordinary item $ (2,142,410) $ (1,888,836)
Extraordinary gain on extinguishment of debt - -
---------------- ----------------
Net loss (2,142,410) (1,888,836)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants
for fees/services 343,525 118,750
Non-cash interest income (670) -
Non-cash interest expense - -
Non-cash acquisition of R&D in process technology - -
Securities aquired under sub-license agreement - -
Issuance of common stock for intellectual property rights - -
Amortization of organizational and debt issuance costs - -
Depreciation and amortization 16,061 35,915
Increase in debt issuance and organizational costs - -
Loss realized on sale of marketable securities - 300,259
Decrease (increase) in prepaid expenses and other current assets (5,643) (14,324)
Decrease (increase) in other assets - -
Increase (decrease) in accounts payable, accrued liabilities (189,851) 292,130
Increase (decrease) in sponsored research payable (20,375) (196,598)
---------------- ----------------
Net cash used by development stage activities (1,999,363) (1,352,704)
---------------- ----------------
Cash flows from investing activities:
Proceeds on sale of marketable securities - 174,407
Decrease in segregated cash - 25,000
Acquisition of laboratory and office equipment (86,910) (1,801)
Disposition of office equipment - -
Increase in notes receivable in connection with sale of stock - -
Decrease (increase) in loan receivable - former officer (2,876) -
Payments received on notes receivable 2,500 37,400
Purchase of Camelot Pharmacal L.L.C., net of cash acquired - -
---------------- ----------------
Net cash provided (used) by investing activities (87,286) 235,006
---------------- ----------------
Cash flows from financing activities:
Principal payments under capital lease - (6,097)
Proceeds from issuance of convertible notes 500,000 -
Conversion of convertible, subordinated notes - -
Proceeds from issuance of convertible debenture - 1,589,614
Proceeds from issuance of common stock - -
Proceeds from issuance of preferred stock - -
Redemption of preferred stock (1,250,000) -
Proceeds from exercise of stock options - -
Proceeds from exercise of warrants - -
---------------- ----------------
Net cash provided (used) by financing activities (750,000) 1,583,517
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,836,649) 465,819
Cash and cash equivalents at beginning of period 5,421,662 539,287
================ ================
Cash and cash equivalents at end of period $ 2,585,013 $ 1,005,106
================ ================
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 343,525 $ 118,750
Common stock redeemed in payment of notes receivable 10,400 -
Acquisiton of R&D in-process technology - -
Common stock issued for intellectual property rights - -
Common stock issued to retire debt - -
Common stock issued to redeem convertible securities - -
Securities acquired under sub-license agreement - -
Unrealized (realized) depreciation of investments 149,500 -
Equipment acquired under capital lease - -
Notes payable converted to common stock - -
Stock dividends - -
================ ================
Supplemental disclosure of cash flow information:
Interest paid $ 175,662 $ 2,183
================ ================
</TABLE>
3
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO SEPTEMBER 30, 1998
(UNAUDITED)
October 17, 1986
Nine months ended (inception) to
September 30, September 30,
---------------------------------- ------------------
1998 1997 1998
----------------- ---------------- ------------------
<S> <C> <C> <C>
Cash outflows from development stage activities
and extraordinary gain:
Loss before extraordinary item $ (17,708,579) $ (7,978,323) $ (53,829,156)
Extraordinary gain on extinguishment of debt - - 42,787
----------------- ---------------- ------------------
Net loss (17,708,579) (7,978,323) (53,786,369)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants
for fees/services 359,914 143,750 2,281,973
Non-cash interest income (670) - (670)
Non-cash interest expense 46,174 - 125,049
Non-cash acquisition of R&D in process technology - 1,650,000 1,650,000
Securities aquired under sub-license agreement (350,000) - (850,000)
Issuance of common stock for intellectual property rights - - 866,250
Amortization of organizational and debt issuance costs - - 77,834
Depreciation and amortization 42,438 71,930 289,029
Increase in debt issuance and organizational costs - - (77,834)
Loss realized on sale of marketable securities - 300,259 324,915
Decrease (increase) in prepaid expenses and other current assets 8,284 (74,769) (98,135)
Decrease (increase) in other assets 20,057 600 53,360
Increase (decrease) in accounts payable, accrued liabilities (361,128) 350,036 (45,200)
Increase (decrease) in sponsored research payable (20,963) (445,120) 1,026,875
----------------- ---------------- ------------------
Net cash used by development stage activities (17,964,473) (5,981,637) (48,162,923)
----------------- ---------------- ------------------
Cash flows from investing activities:
Proceeds on sale of marketable securities - 174,407 175,085
Decrease in segregated cash - 25,000 -
Acquisition of laboratory and office equipment (89,506) (3,888) (406,858)
Disposition of office equipment 33,560 - 33,560
Increase in notes receivable in connection with sale of stock - - (240,000)
Decrease (increase) in loan receivable - former officer 12,124 - (67,876)
Payments received on notes receivable 49,700 37,400 217,100
Purchase of Camelot Pharmacal L.L.C., net of cash acquired - (8,259) (46,687)
----------------- ---------------- ------------------
Net cash provided (used) by investing activities 5,878 224,660 (335,676)
----------------- ---------------- ------------------
Cash flows from financing activities:
Principal payments under capital lease - (19,538) (72,453)
Proceeds from issuance of convertible notes 500,000 - 500,000
Conversion of convertible, subordinated notes - - 749,976
Proceeds from issuance of convertible debenture - 1,589,614 2,300,000
Proceeds from issuance of common stock 8,150,000 - 21,418,035
Proceeds from issuance of preferred stock 12,750,000 3,212,136 16,034,812
Redemption of preferred stock (1,250,000) - (1,250,000)
Proceeds from exercise of stock options - - 1,337,677
Proceeds from exercise of warrants - - 10,064,481
----------------- ---------------- ------------------
Net cash provided (used) by financing activities 20,150,000 4,782,212 51,082,528
----------------- ---------------- ------------------
Net increase (decrease) in cash and cash equivalents 2,191,405 (974,765) 2,583,929
Cash and cash equivalents at beginning of period 393,608 1,979,871 1,084
================= ================ ==================
Cash and cash equivalents at end of period $ 2,585,013 $ 1,005,106 $ 2,585,013
================= ================ ==================
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 359,914 $ 143,750 $ 2,281,173
Common stock redeemed in payment of notes receivable 10,400 - 10,400
Acquisiton of R&D in-process technology - 1,650,000 1,650,000
Common stock issued for intellectual property rights - - 866,250
Common stock issued to retire debt - - 600,000
Common stock issued to redeem convertible securities 4,019,263 - 5,353,368
Securities acquired under sub-license agreement 350,000 - 850,000
Unrealized (realized) depreciation of investments 149,500 - 149,500
Equipment acquired under capital lease - - 72,453
Notes payable converted to common stock - - 749,976
Stock dividends 182,195 - 364,547
================= ================ ==================
Supplemental disclosure of cash flow information:
Interest paid $ 183,081 $ 6,951 $ 307,631
================= ================ ==================
</TABLE>
4
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO SEPTEMBER 30, 1998
(UNAUDITED)
Notes
receivable
in connection Additional
Common Preferred with sale paid-in
stock stock of stock capital
----------------- ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Balance at October 17, 1986 - - - -
Common stock issued $ 11,288,329 - - $ 254,864
Common stock options issued - - - 75,000
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at December 31, 1994 11,288,329 - - 329,864
Reincorporation in Delaware at $.01 par value (11,220,369) - - 11,220,369
Common stock issued 27,656 - - 9,726,277
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at December 31, 1995 95,616 - - 21,276,510
Common stock issued 18,267 - - 7,043,328
Common stock subscribed - - $ (110,000) -
Unrealized loss on marketable securities - - - -
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at December 31, 1996 113,883 - (110,000) 28,319,838
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, L.L.C. 6,000 - - 1,644,000
Common stock issued 6,612 - 37,400 1,041,750
Common stock options and warrants issued - - - 165,868
Common stock options extended - - - 215,188
Accretion of issuance costs for cumulative
convertible redeemable preferred stock - - - -
Unrealized gain on marketable securities - - - -
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at December 31, 1997 126,495 - (72,600) 31,386,644
Common stock issued 30,933 - 23,300 2,216,397
Accretion of issuance costs for cumulative
convertible redeemable preferred stock - - - -
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at March 31, 1998 157,428 - (49,300) 33,603,041
Common stock issued 111,106 - 23,900 9,926,164
Preferred stock issued - $ 115 - 11,499,885
Net loss - - - -
----------------- ------------------ ----------------- ----------------
Balance at June 30, 1998 268,534 115 (25,400) 55,029,090
Common stock issued 2,050 - 12,900 330,406
Unrealized loss on marketable securities - - - -
Net loss - - - -
========================================================================
Balance at September 30,1998 $ 270,584 $ 115 $ (12,500) $ 55,359,496
========================================================================
</TABLE>
5
See accompanying notes to unaudited consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO SEPTEMBER 30, 1998
(UNAUDITED)
Unrealized Deficit Total
gain (loss) accumulated stockholders'
on during equity
marketable development (Net capital
securities stage deficiency)
------------------ ----------------- -----------------
<S> <C> <C> <C>
Balance at October 17, 1986 - - -
Common stock issued - - $ 11,543,193
Common stock options issued - - 75,000
Net loss - $ (12,192,046) (12,192,046)
------------------ ----------------- -----------------
Balance at December 31, 1994 - (12,192,046) (573,853)
Reincorporation in Delaware at $.01 par value - - -
Common stock issued - - 9,753,933
Net loss - (7,387,717) (7,387,717)
------------------ ----------------- -----------------
Balance at December 31, 1995 - (19,579,763) 1,792,363
Common stock issued - - 7,061,595
Common stock subscribed - - (110,000)
Unrealized loss on marketable securities $ (39,232) - (39,232)
Net loss - (7,008,889) (7,008,889)
------------------ ----------------- -----------------
Balance at December 31, 1996 (39,232) (26,588,652) 1,695,837
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, L.L.C. - - 1,650,000
Common stock issued - - 1,085,762
Common stock options and warrants issued - - 165,868
Common stock options extended - - 215,188
Accretion of issuance costs for cumulative
convertible redeemable preferred stock - (79,500) (79,500)
Unrealized gain on marketable securities 39,232 - 39,232
Net loss - (9,489,138) (9,489,138)
------------------ ----------------- -----------------
Balance at December 31, 1997 - (36,157,290) (4,716,751)
Common stock issued 2,270,630
Accretion of issuance costs for cumulative
convertible redeemable preferred stock - (23,900) (23,900)
Net loss - (2,263,048) (2,263,048)
------------------ ----------------- -----------------
Balance at March 31, 1998 - (38,444,238) (4,733,069)
Common stock issued - - 10,061,170
Preferred stock issued - - 11,500,000
Net loss - (13,303,121) (13,303,121)
------------------ ----------------- -----------------
Balance at June 30, 1998 - (51,747,359) 3,524,980
Common stock issued - - 345,356
Unrealized loss on marketable securities (149,500) - (149,500)
Net loss - (2,142,410) (2,142,410)
========================================================
Balance at September 30,1998 $ (149,500) $ (53,889,769) $ 1,578,426
========================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements
6
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheets as of September 30,
1998 and December 31, 1997 and the accompanying consolidated
statements of operations and cash flows for the three and nine
months ended September 30, 1998 and 1997 and for the period from
October 17, 1986 (inception) to September 30, 1998, have been
prepared by Sheffield Pharmaceuticals, 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 cash flows at
September 30, 1998 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-K, as amended, for the
year ended December 31, 1997. The results of operations for the
three and nine months ended September 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full years.
Sheffield Medical Technologies Inc. ("Sheffield") was incorporated
on October 17, 1986. The Company's wholly-owned subsidiary, U-Tech
Medical Corporation ("U-Tech") was incorporated on January 13, 1992
and was liquidated on June 30, 1997. On January 26, 1995, the
Company's shareholders approved the proposal to reincorporate
Sheffield in Delaware, which was effected on June 13, 1995. On
January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a
wholly-owned subsidiary of the Company. At that time, Ion acquired
the Company's rights to certain early-stage biomedical technologies.
On April 17, 1997, CP Pharmaceuticals, Inc. ("CP") was formed for
the purpose of acquiring Camelot Pharmacal, L.L.C., a privately held
pharmaceutical development company, which acquisition was
consummated on April 25, 1997. On June 26, 1997, the Company's
shareholders approved the proposal to change Sheffield's name from
Sheffield Medical Technologies Inc. to Sheffield Pharmaceuticals,
Inc. As part of an agreement with Elan Corporation, plc, on June 30,
1998, Systemic Pulmonary Delivery, Ltd. ("SPD") was formed as a
wholly-owned subsidiary of the Company. At that time, SPD acquired
the Company's rights to the systemic applications of the Metered
Solution Inhaler ("MSI") and acquired Elan's rights to certain
pulmonary delivery technologies. Unless the context requires
otherwise, Sheffield, U-Tech, Ion, CP and SPD are referred herein to
as "the Company." All significant intercompany transactions are
eliminated in consolidation.
The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts.
The Company has generated minimal operating revenue and requires
additional capital that the Company intends to obtain through
out-licensing as well as through equity and debt offerings to
continue to operate its business. The Company's ability to meet its
obligations as they become due and to continue as a going concern
must be considered in light of the expenses, difficulties and delays
frequently encountered in developing a new business, particularly
since the Company will focus on product development that may require
a lengthy period of time and substantial expenditures to complete.
Even if the Company is able to successfully develop new products,
there can be no assurance that the Company will generate sufficient
revenues from the sale or licensing of such products to be
profitable. Management believes that the Company has the ability to
meet its obligations as they become due and to continue as a going
concern through December 1998.
7
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
2. LOSS PER COMMON SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
Earnings Per Share. SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per
share. Basic net loss per share is based upon the weighted average
Common Stock outstanding during each year. Options, warrants and
convertible securities are not included as their effect is
antidilutive. The effect of adoption of SFAS No. 128 had no
financial impact, and accordingly, no restatement of loss per share
for prior periods was necessary.
3. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and
its components and is applied to all enterprises. The adoption of
SFAS No. 130 had no impact on the Company's consolidated results of
operations, financial position or cash flows.
In June 1997, the FASB issued SFAS No. 131. "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131").
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas,
and major customers. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. The
Company will adopt the new requirements in conjunction with its 1998
Form 10-K. The adoption of SFAS No. 131 will have no significant
impact on the Company's financial reporting.
4. SIGNIFICANT TRANSACTIONS
On April 15, 1998, the Company issued 1,250 shares of its Series B
Cumulative Convertible Redeemable Preferred Stock in a private
placement for an aggregate purchase price of $1,250,000. On July 31,
1998, all of the Series B Preferred Stock was redeemed for cash by
the Company.
On July 15, 1998, the Company acquired from Aeroquip Corporation a
new generation metered dose inhaler (MDI) system called the Aerosol
Drug Delivery System (ADDS) for $825,000 cash. Part of the purchase
price was made in the form of an option payment made during the
quarter ended June 30, 1998. The remainder has been expensed during
the quarter ended September 30, 1998 as acquired R&D in-process
technology because the assets acquired, which consist solely of
intellectual property related to ADDS, have not demonstrated
technological feasibility and have no alternative future uses. SPD
holds the rights to all systemic disease applications of the ADDS
technology while Sheffield retains the rights to develop the
respiratory disease applications of ADDS.
On September 29, 1998, the Company received $500,000 from an
affiliate of Elan Corporation, plc. Such funds were borrowed under
the terms of a convertible promissory note that provides Sheffield
with the right to borrow up to $2 million, subject to satisfying
certain conditions. No more than $500,000 may be drawn under this
note in any calendar quarter and at least one-half of the proceeds
must be used to fund SPD's development activities. The principal
outstanding under this note draws interest at the prime rate plus 1%
and, if not previously converted, matures on June 30, 2005. Prior to
repayment, Elan has the right to convert all principal and accrued
interest into shares of Sheffield common stock at a conversion price
of $1.75 per share.
8
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE INTENDED TO BE COVERED BY
THE SAFE HARBORS CREATED THEREBY. ALL FORWARD-LOOKING STATEMENTS INVOLVE RISKS
AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, THE SUCCESSFUL DEVELOPMENT AND
LICENSING OF THE COMPANY'S TECHNOLOGIES AND THE SUCCESSFUL COMPLETION OF PLANNED
FINANCINGS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS UNDERLYING THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE, AND THEREFORE, THERE CAN BE NO ASSURANCE THAT
THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT WILL PROVE TO BE
ACCURATE. IN LIGHT OF THE SIGNIFICANT UNCERTAINTIES INHERENT IN THE
FORWARD-LOOKING STATEMENTS INCLUDED HEREIN, THE INCLUSION OF SUCH INFORMATION
SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY OTHER PERSON
THAT THE OBJECTIVES AND PLANS OF THE COMPANY WILL BE ACHIEVED.
OVERVIEW
The Company is a specialty pharmaceutical company focused on the development and
commercialization of later stage, lower risk pharmaceutical opportunities,
particularly those utilizing unique pulmonary delivery technologies over a range
of therapeutic areas. The Company is focusing its resources on the development
and commercialization of pharmaceutical products whose utility and commercial
potential can be exploited or enhanced by delivery in one of the Company's
proprietary pulmonary delivery systems. The Company has established strategic
alliances with Siemens AG, Zambon Group SpA, and Elan Corporation, plc for the
development of these systems. The Company, through its wholly-owned subsidiary,
Systemic Pulmonary Delivery, Ltd. ("SPD"), has expanded its portfolio of
proprietary pulmonary delivery technologies with the recent acquisitions of the
UPDAS(TM) and Enhancing Technology from Elan Corporation, plc and the ADDS
system from Aeroquip Corporation. The Company will seek to acquire additional
novel platform drug delivery systems and technologies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash available for funding its operations as of September 30, 1998
was $2,585,013. As of such date, the Company had trade payables of $526,654 and
current research obligations of $449,805. At September 30, 1998, the Company had
$1.5 million available to be borrowed under the terms of a $2.0 million
convertible promissory note from an affiliate of Elan Corporation plc. No more
than $500,000 may be drawn under this note in any calendar quarter and at least
one-half of the proceeds must be used to fund SPD's development activities. In
addition, under the terms of its agreement with Zambon Group, SpA, the Company
will be entitled to receive two separate $1.0 million interest-free advances
against future milestone payments upon the demonstration of certain technical
capabilities related to the performance of the Metered Solution Inhaler (MSI)
during the initial stage of the development program for respiratory drugs in the
MSI.
As a result of its development and growth plans, the Company will need to obtain
additional funds for its business through operations or equity or debt
financings, collaborative arrangements with corporate partners or from other
resources. No assurance can be given that these funds will be available for the
Company to finance its development and growth on acceptable terms, if at all. If
adequate funds are not available from operations or additional sources of
funding, the Company's business will suffer a material adverse effect.
9
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
The Company's operations to date have consumed substantial and increasing
amounts of cash. The negative cash flow from operations is expected to continue
in the foreseeable future. The Company has not yet begun to generate revenues
from the sale of products. The Company's products will require significant
additional development, clinical testing and investment prior to
commercialization. The Company does not expect regulatory approval for
commercial sales of any of its products in the immediate future. There can be no
assurance that such products will be successfully developed, proven to be safe
and efficacious in clinical trials, able to meet applicable regulatory
standards, able to obtain required regulatory approvals, or produced in
commercial quantities at reasonable costs or be successfully commercialized and
marketed.
The owners and licensors of the technology rights acquired by the Company are
entitled to receive a certain percentage of all royalties and payments in lieu
of royalties received by the Company from commercialization, if any, of products
in respect of which the Company holds licenses. Accordingly, in addition to its
substantial investment in product development, the Company will be required to
make substantial payments to others in connection with revenues derived from
commercialization of products, if any, developed under licenses the Company
holds. Consequently, the Company will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.
Under the terms of existing agreements, the Company is obligated to make certain
payments to its licensors. In the event that the Company defaults on the payment
of an installment under the terms of an existing licensing agreement, its rights
thereunder could be forfeited. As a consequence, the Company could lose all
rights under a license agreement to the related licensed technology,
notwithstanding the total investment made through the date of the default. There
can be no assurance that unforeseen obligations or contingencies will not
deplete the Company's financial resources and, accordingly, sufficient resources
may not be available to fulfill the Company's commitments.
RESULTS OF OPERATIONS
The Company, a development stage 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. Additional operating losses are expected to be
incurred for the next few years as the Company expends its resources for product
acquisition, research and development and preclinical and clinical testing.
As a development stage company without significant revenues, the Company has
financed its development activities and operations primarily through public and
private offerings of securities, from which it has raised an aggregate of
approximately $52.2 million through September 30, 1998.
Revenues:
From inception through the period ended September 30, 1998, the Company has
earned sub-license revenue of $1,360,000 relative to various early-stage
technologies. The Company earned no sub-license revenue for the quarter ended
September 30, 1998.
From inception through the period ended September 30, 1998, the Company has
earned interest income of $489,792 and had 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 its
technologies and other technologies and products that it may acquire, followed
by the successful marketing and commercialization of such technologies through
licenses, joint ventures or other arrangements.
Interest income for the three months ended September 30, 1998 was $32,450
compared to $9,391 for the same period ended September 30, 1997. The increase in
interest earned is attributable to an increase in cash available for investment
during the period ended September 30, 1998. Except for the sub-license revenue
mentioned above, interest income represented all of the Company's income in each
of the prior periods.
10
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
Operating Expenses:
From inception through the period ended September 30, 1998, the Company incurred
$55,678,948 of operating expenses. Of the total operating expenses for that
period, $21,266,557 were costs of research and development for the Company's
technologies and $14,891,745 for the acquisition of R & D in-process technology.
The remainder of expenses for the same period were incurred principally as
consulting costs, costs of management, legal and other professional fees and
expenses relating to the Company's technologies, and for the cost of completing
its financings. Research and development costs are expected to remain high as
the Company develops its current technologies and acquires additional
technologies. Such costs will continue to be expensed for financial reporting
purposes.
Operating expenses for the three months ended September 30, 1998, were
$2,174,860 compared to $1,898,226 for the same period ended September 30, 1997.
Of the total operating expenses for the period ended September 30, 1998,
$218,063 were costs of research and development for the Company's technologies
and $741,745 for the acquisition of R & D in-process technology related to the
ADDS system. General and administrative expenses for the three months ended
September 30, 1998 were $1,039,390 compared to $1,325,874 for the same period
ended September 30, 1997. The reduction in general and administrative expenses
is primarily due to the relocation of the Company's headquarters to St. Louis,
Missouri. Interest expense for the three months ended September 30, 1998 were
$175,662 compared to $2,183 for the same period ended September 30, 1997. The
increase in interest expense is attributable to the redemption of the Company's
Series B cumulative convertible redeemable preferred stock.
The Company's direct research and development expenses were $794,822 and
$32,002,860 for the three months ended September 30, 1998 and from the Company's
inception to September 30, 1998, respectively. The Company's committed direct
research and development funding after September 30, 1998 is currently $2.0
million and relates primarily to the development of certain pulmonary delivery
technologies by SPD (i.e., systemic applications of the MSI, UPDAS(TM),
Enhancing Technology, and ADDS technologies). The Company anticipates funding
the development costs associated with the respiratory applications of the
UPDAS(TM) and ADDS technologies, the anticipated costs of which have not been
determined at the time of this filing. The Company continues to out-license the
early-stage technologies remaining in its portfolio, seeking organizations
having the interest and resources to continue development accordingly.
11
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
----------------------
The following unregistered securities were issued by the Company
during the quarter ended September 30, 1998:
<TABLE>
<CAPTION>
Number of
Shares
Sold/Issued
/Subject to
Date of Description Options or Offering/Exercise
Sale/Issuancd of Securities Issued Warrants Price Per Share ($) Purchaser Or Class
------------- -------------------- --------------- ------------------- ------------------
<S> <C> <C> <C> <C>
June 1998 Common Stock 150,000 $1.6875 Holders of Short-term Notes
Warrants Originated and Repaid during the
period
July 1998 Common Stock 187,500 $1.025 - $3.50 Advisors in lieu of cash
Warrants consideration
August 1998 Common Stock 620,000 $1.2375 - $3.125 Issuance to employees pursuant
Options to 1993 Stock Option Plan
August 1998 Common Stock Options 325,000 $1.75 Employees
September 1998 Common Stock 25,000 $1.4375 Issuance to eligible Directors
Options pursuant to the 1996 Directors
Stock Option Plan
September 1998 Common Stock Warrants 100,000 $1.125 Holders of Short-term Notes
Originated during the period
September 1998 Common Stock 35,000 $1.375 Advisors in lieu of cash
consideration
September 1998 Common Stock 175,000 $1.688 Advisors in lieu of cash
consideration
</TABLE>
The issuance of these securities is claimed to be exempt
from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, as transactions by
an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection
with the issuance of any of these securities.
12
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
An annual Meeting of Stockholders was held on July 15,
1998. All management's nominees for director, as listed
in the Proxy Statement for the Annual Meeting were
elected. Listed below are the matters voted on by
stockholders and the number of votes cast at the Annual
Meeting:
(a) ELECTION OF MEMBERS OF THE BOARD OF DIRECTORS.
<TABLE>
<CAPTION>
Voted Votes Broker Non-Votes
Name Voted For Against Withheld And Abstentions
---- --------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Loren G. Peterson 15,386,075 0 92,985 0
Thomas M. Fitzgerald 15,379,375 0 99,685 0
John M. Bailey 15,382,975 0 96,085 0
Digby W. Barrios 15,382,975 0 96,085 0
</TABLE>
(B) AMENDMENT TO THE COMPANY'S 1993 STOCK OPTION PLAN TO
INCREASE THE NUMBER OF SHARES OF THE COMPANY'S COMMON
STOCK AVAILABLE FOR ISSUANCE THEREUNDER FROM 3,000,000
TO 4,000,000 SHARES.
Voted For: 15,105,464
Voted Against: 334,110
Voted Abstained: 39,486
Broker Non-Votes: 0
(C) RATIFICATION OF ERNST & YOUNG LLP AS INDEPENDENT PUBLIC
ACCOUNTANT FOR FISCAL YEAR ENDING DECEMBER 31, 1998.
Voted For: 14,428,770
Voted Against: 446,343
Voted Abstained: 603,947
Broker Non-Votes: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
NO. DESCRIPTION
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
The Company filed a current Report on Form 8-K with the
Securities and Exchange Commission on July 16, 1998 relating to the Company's
consummation of a license and financing transaction with Elan International
Services, Ltd. (an affiliate of Elan Corporation plc) in accordance with the
terms of the binding letter of intent dated June 3, 1998.
13
<PAGE>
SHEFFIELD PHARMACEUTICALS, 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 PHARMACEUTICALS, INC.
Dated: November 13, 1998 /S/ LOREN G. PETERSON
----------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: November 13, 1998 /S/ JUDY ROESKE BULLOCK
------------------------
Judy Roeske Bullock
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,585,013
<SECURITIES> 200,500
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,892,483
<PP&E> 384,360
<DEPRECIATION> 227,639
<TOTAL-ASSETS> 3,054,885
<CURRENT-LIABILITIES> 976,459
<BONDS> 500,000
0
115
<COMMON> 270,584
<OTHER-SE> 1,578,426
<TOTAL-LIABILITY-AND-EQUITY> 3,054,885
<SALES> 0
<TOTAL-REVENUES> 32,450
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,174,860
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175,662
<INCOME-PRETAX> (2,142,410)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,142,410)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,142,410)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
