- --------------------------------------------------------------------------------
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 March 31, 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
15,742,762 shares of Common Stock as of March 31, 1998.
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<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
INDEX
-----
Page
PART I. Financial Information
ITEM 1. Financial Statements.
Consolidated Balance Sheets - March 31, 1
1998 and December 31, 1997.
Consolidated Statements of Operations for 2
the three months ended March 31, 1998 and
1997 and for the period from October 17,
1986 (inception) to March 31, 1998.
Consolidated Statements of Cash Flows for 3
the three months ended March 31, 1998 and
1997 and for the period from October 17,
1986 (inception) to March 31, 1998.
Notes to Consolidated Financial Statements. 4
ITEM 2. Management's Discussion and Analysis of 6
Financial Condition and Results of
Operations.
PART II. Other Information.
ITEM 2. Changes in Securities. 10
ITEM 6. Exhibits and Reports on Form 8-K. 10
SIGNATURES 11
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
1998 December 31,
(unaudited) 1997
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,876 $ 393,608
Loan receivable - former officer 72,500 80,000
Prepaid expenses and other current assets 40,329 47,378
------------ ------------
Total current assets 120,705 520,986
------------ ------------
Property and equipment:
Laboratory equipment 185,853 185,852
Office equipment 109,002 142,562
------------ ------------
294,855 328,414
Less accumulated depreciation and amortization 198,683 185,201
------------ ------------
Net property and equipment 96,172 143,213
------------ ------------
Other assets 11,869 25,738
------------ ------------
Total assets $ 228,746 $ 689,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities $ 2,609,156 $ 887,782
Sponsored research payable 470,180 470,768
------------ ------------
Total current liabilities 3,079,336 1,358,550
6% convertible subordinated debenture 882,000 1,551,000
Interest payable on debenture -- 28,875
Cumulative convertible redeemable preferred stock, $.01 par value. Authorized,
3,000,000 shares; issued and outstanding, 10,000 and 25,000 shares at
March 31, 1998 and December 31, 1997, respectively 1,000,479 2,468,263
Commitments and contingencies
Stockholders' equity (net capital deficiency):
Common stock, $.01 par value. Authorized, 50,000,000 shares;
issued and outstanding, 15,742,762 and 12,649,539
shares at March 31, 1998 and December 31, 1997, respectively 157,428 126,495
Notes receivable in connection with sale of stock (49,300) (72,600)
Additional paid-in capital 33,603,041 31,386,644
Deficit accumulated during development stage (38,444,238) (36,157,290)
------------ ------------
(4,733,069) (4,716,751)
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) $ 228,746 $ 689,937
============ ============
</TABLE>
1
See accompanying notes to unaudited consolidated financial statements
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
October 17, 1986
Three months ended (inception) to
March 31, March 31
------------------------------------- ----------------
1998 1997 1998
----------------- ------------------ ----------------
<S> <C> <C> <C>
Revenues:
Sub-license revenue $ -- $ -- 1,010,000
Interest income 953 18,225 454,780
------------ ------------ ------------
Total revenue 953 18,225 1,464,780
Expenses:
Acquisition of R & D in-process
technology -- -- 1,650,000
Research and development 1,609,041 1,938,037 20,861,431
General and administrative 612,490 745,597 17,134,749
Interest 42,470 2,679 202,225
------------ ------------ ------------
Total expenses 2,264,001 2,686,313 39,848,405
------------ ------------ ------------
Loss before extraordinary item (2,263,048) (2,668,088) (38,383,625)
Extraordinary item -- -- 42,787
------------ ------------ ------------
Net loss $ (2,263,048) $ (2,668,088) (38,340,838)
============ ============ ============
Accretion of mandatorily redeemable
preferred stock (23,900) -- (103,400)
------------ ------------ ------------
Net loss - attributable to common shares $ (2,286,948) $ (2,668,088) $(38,444,238)
============ ============ ============
Loss per share of common stock - basic:
Loss before extraordinary item $ (0.17) $ (0.23) $ (7.49)
Extraordinary item -- -- 0.01
------------ ------------ ------------
Basic net loss per share $ (0.17) $ (0.23) (7.48)
============ ============ ============
Weighted average common shares
outstanding - basic: 13,655,722 11,388,274 5,133,612
============ ============ ============
</TABLE>
2
See accompanying notes to unaudited consolidated financial statements
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND FOR THE PERIOD
FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
October 17, 1986
Three months ended (inception) to
March 31, March 31,
---------------------------- -----------------
1998 1997 1998
----------- ----------- ----------------
<S> <C> <C> <C>
Cash outflows from development stage activities and extraordinary gain:
Loss before extraordinary item $(2,263,048) $(2,668,088) $(38,383,625)
Extraordinary gain on extinguishment of debt -- -- $ 42,787
----------- ----------- ------------
Net loss (2,263,048) (2,668,088) (38,340,838)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for fees/services 16,389 -- 1,938,448
Non-cash interest expense 41,381 -- 120,256
Write-off of in-process technology -- -- 1,650,000
Securities aquired under sub-license agreement -- -- (500,000)
Issuance of common stock for intellectual property rights -- -- 866,250
Amortization of organizational and debt issuance costs -- -- 77,834
Depreciation and amortization 13,482 17,775 260,073
Increase in debt issuance and organizational costs -- -- (77,834)
Loss realized on sale of marketable securities -- -- 324,915
Decrease (increase) in prepaid expenses and other current assets 7,049 15,006 (99,370)
Decrease (increase) in other assets 13,869 600 47,172
Increase (decrease) in accounts payable, accrued liabilities 1,721,374 (114,400) 2,037,302
Increase (decrease) in sponsored research payable (588) 592,153 1,047,250
----------- ----------- ------------
Net cash used by development stage activities (450,092) (2,156,954) (30,648,542)
----------- ----------- ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities -- -- 175,085
Acquisition of laboratory and office equipment -- -- (317,352)
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 7,500 -- (72,500)
Payments on notes receivable 23,300 -- 190,700
Purchase of Camelot Pharmacal L.L.C., net of cash acquired -- -- (46,687)
----------- ----------- ------------
Net cash provided (used) by investing activities 64,360 -- (277,194)
----------- ----------- ------------
Cash flows from financing activities:
Principal payments under capital lease -- (7,550) (72,453)
Conversion of convertible, subordinated notes -- -- 749,976
Proceeds from issuance of convertible debenture -- -- 2,300,000
Proceeds from issuance of common stock -- -- 13,268,035
Proceeds from issuance of preferred stock -- 3,212,136 3,284,812
Proceeds from exercise of stock options -- -- 1,337,677
Proceeds from exercise of warrants -- -- 10,064,481
----------- ----------- ------------
Net cash and cash equivalents provided by financing activities -- 3,204,586 30,932,528
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (385,732) 1,047,632 6,792
Cash and cash equivalents at beginning of period 393,608 1,979,871 394,692
=========== =========== ============
Cash and cash equivalents at end of period $ 7,876 $ 3,027,503 $ 401,484
=========== =========== ============
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services $ 16,389 -- 1,937,648
Common stock issued for acquisitions -- -- 1,655,216
Common stock issued for intellectual property rights -- -- 866,250
Common stock issued to retire debt -- -- 600,000
Common stock issued to redeem convertible securities 2,136,784 -- 3,470,889
Securities acquired under sub-license agreement -- -- 500,000
Unrealized (realized) depreciation of investments -- 241,183 --
Equipment acquired under capital lease -- -- 72,453
Notes payable converted to common stock -- -- 749,976
Stock dividends 104,281 -- 286,633
=========== =========== ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,089 $ 2,679 $ 131,969
=========== =========== ============
</TABLE>
3
See accompanying notes to unaudited consolidated financial statements
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(UNAUDITED)
1. CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of March 31, 1998 and
the accompanying consolidated statements of operations and cash flows
for the three months ended March 31, 1998 and 1997 and for the period
from October 17, 1986 (inception) to March 31, 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 March 31, 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 months ended
March 31, 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 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 January 26, 1995, the
Company's shareholders approved the proposal to reincorporate Sheffield
in Delaware, which was effected on June 13, 1995. 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. Unless the context requires otherwise, Sheffield, U-Tech, Ion and
CP are referred 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 which 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's
ability to meet its obligations as they become due and to continue as a
going concern through December 1998 is dependent upon obtaining
additional financing. Until such financing is obtained, the Company
must rely on short-term loans from its officers in order to meet
certain of its obligations.
4
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
2. BASIC 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. Common Stock equivalents 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.
4. SUBSEQUENT EVENTS
On April 15, 1998, the Company entered into an option agreement with
Zambon Group SpA ("Zambon") of Milan, Italy for a sublicense to the
Company's proprietary MSI drug delivery system. Under this contemplated
transaction, Zambon will receive an exclusive world-wide marketing and
development sub-license for respiratory products to be delivered by the
metered solution inhaler ("MSI") including four drugs currently under
development by Sheffield. Sheffield will maintain certain co-promotion
rights in the U.S. for respiratory drugs as well as the world-wide
marketing and development rights for all applications of the MSI
delivery system outside the respiratory therapeutic area. As part of
this transaction, Zambon will agree to fund all remaining development
costs relating to these respiratory products, will pay Sheffield an
up-front fee in the form of an equity investment as well as milestone
payments upon marketing approval for each of the four products and
royalties upon commercialization. In addition, Zambon will provide
Sheffield with an interest free line of credit upon the achievement of
certain early milestones. Sheffield has received a $650,000 option fee
from Zambon in the form of an equity investment. The consummation of
the sublicensing transaction with Zambon will be subject to the
negotiation by the parties of a definitive sublicensing agreement.
On April 15, 1998, the Company issued 1,250 shares of its Series B
Cummulative Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock") in a private placement for an aggregate purchase
price of $1,250,000. Under the terms of this offering, the Company must
redeem the preferred stock at the time it concludes a definitive
sub-license agreement on the MSI or other financing. As of May 15, 1998
all of the Series B Preferred Stock remains to be redeemed or available
for conversion.
On April 15, 1998, the Company made the DM 2.0 million payment to
Siemens, A.G. that was originally due in January 1998 under the terms
of its license agreement with Siemens, A.G. covering the MSI
technology. This payment was made with the proceeds of the Series B
Preferred Stock offering.
For the period January 1, 1998 through April 15, 1998, a total of
4,075,797 shares of common stock were issued as a result of conversion
of the Company's Series A Preferred Stock. As of April 15, 1998, all
outstanding shares of the Series A Preferred Stock had been converted.
For the period January 1, 1998 through May 15, 1998, a total of
2,291,798 shares of common stock were issued as a result of partial
conversion and interest payments made on the Company's outstanding 6%
subordinated convertible debentures. As of May 15, 1998, $447,500 in
principal remains to be repaid or available for conversion under the
debentures.
5
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company, being 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 several 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 $30.9 million through March 31, 1998. On April 15, 1998, the
Company completed a private offering of 1,250 shares of its Series B Cumulative
Convertible Redeemable Preferred Stock, which raised total gross proceeds of
$1.25 million. Also on April 15, 1998, the Company received a $650,000 option
fee from Zambon in the form of an equity investment. The proceeds of these
placements were to be used to make a DM 2.0 million payment to Siemens A.G. and
for working capital and general corporate purposes. The Company's operating
results have fluctuated significantly during each quarter since its inception,
and the Company anticipates that such fluctuations, largely attributable to
varying development commitments and expenditures, as well as the acquisition of
drug delivery technologies and products, 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, 1998, the Company funded $1,609,041 for research and development on
its projects. During the succeeding 12-month period, approximately $2.3 million
in additional funding is projected to be incurred on clinical and laboratory
research and development, as well as the final remaining payment of DM 2.0
million to Siemens relative to the MSI. All this estimated funding of $2.3
million, is expected to be applied to the MSI. The Company continues to seek
appropriate sub-licensing partners for its remaining early-stage technologies.
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.
6
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
REVENUES AND EXPENSES
Revenues:
From inception through the period ended March 31, 1998, the Company has earned
sub-license revenue of $1,010,000 relative to various early-stage technologies.
From inception through the period ended March 31, 1998, the Company has earned
interest income of $454,780 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 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 March 31, 1998 was $953 compared to
$18,225 for the same period ended March 31, 1997. The decrease in interest
earned is attributable to a decrease of cash invested in short-term investments.
Except for the sub-license revenue mentioned above, interest income represented
all of the Company's income in each of the prior periods.
Operating Expenses:
From inception through the period ended March 31, 1998, the Company incurred
$39,848,405 of operating expenses. Of the total operating expenses for that
period, $20,861,431 were costs of research and development for the Company's
technologies and $1,650,000 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 its completed and
proposed financing plans. Research and development costs are expected to 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, 1998, were $2,264,001
compared to $2,686,313 for the same period ended March 31, 1997. During the
quarter ended March 31, 1998, the Company recognized an approximately $1.1
million expense related to its obligation due in January, 1998 under the MSI
license agreement with Siemens A.G. There was no corresponding expense during
the quarter ended March 31, 1997 as the prior year obligation under the
agreement was not due until the quarter ended June 30, 1997. The remaining
decrease in operating expenses of approximately $1.5 million was primarily due
to significantly reduced spending on both research and development
(approximately $1.4 million) and general and administrative expenses
(approximately $130,000).
The table on the following page indicates (i) the Company's direct research and
development expenses by project for the three months ended March 31, 1998 and
from the Company's inception to March 31, 1998, (ii) the Company's current
estimate by project of committed and/or anticipated funding requirements after
March 31, 1998 and (iii) revenues received to date by project.
7
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
Direct Research and Development Expenses
(in dollars)
<TABLE>
<CAPTION>
Three months Committed and/or
ended Inception to anticipated R & D Revenue
R & D Projects 3/31/98 3/31/98 funding after 0/31/98* received
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Multi-Dose Solution Inhaler (MSI) 1,514,832 3,459,680 16,000,000** 0
Ion Pharmaceuticals, Inc. 610 4,823,205 0 510,000
Technologies
RBC-CD4 Electroinsertion 0 6,254,185 0 0
Technology
Lipsome-CD4 Technology 0 2,322,322 0 500,000
HIV/AIDS Vaccine 0 1,211,618 0 0
UGIF Technology 244 223,681 0 0
Membrane Attack Complex 0 365,618 0 0
(MAC)/Complement
</TABLE>
- ------------------------
* These figures include management's estimates of anticipated direct R&D
funding as of the date of this report. The amounts and rate of
application of the Company's funds to any particular project are
expected to fluctuate and will depend in part on the Company's
successful completion of various stages of research, the availability
of additional financing and the Company's identification and
acquisition of rights in new technologies in the future.
** It is contemplated that this amount will be reduced to zero dollars in
the event Zambon exercises its option agreement to acquire a sublicense
for MSI respiratory applications and assumes related development
funding obligations.
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 enteprises 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash available for funding its operations as of March 31, 1998 was
$7,876. As of such date, the Company had trade payables of $2,609,156 and
current research obligations of $470,180. In addition, committed and/or
anticipated funding of research and development after March 31, 1998 is
currently estimated at approximately $16,000,000. The Company will be required
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 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.
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.
8
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
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. In this regard, in
January, 1998 a payment of DM 2.0 million (approximately $1.1 million) was due
to Siemens AG under the terms of the agreement under which the Company holds the
world-wide marketing rights to the MSI. Although included as an expense for the
period ended March 31, 1998, this payment was not made until April 15, 1998.
On April 15, 1998, the Company entered into an option agreement with Zambon
Group SpA of Milan, Italy for a sublicense to the Company's proprietary MSI drug
delivery system. Under this contemplated transaction, Zambon will receive an
exclusive world-wide marketing and development sub-license for respiratory
products to be delivered by the MSI including four drugs currently under
development by Sheffield. Sheffield will maintain certain co-promotion rights in
the U.S. for respiratory drugs as well as the world-wide marketing and
development rights for all applications of the MSI outside the respiratory
therapeutic area. As part of this transaction, Zambon will agree to fund all
remaining development costs relating to these respiratory products, will pay
Sheffield an up-front fee in the form of an additional equity investment as well
as milestone payments upon marketing approval for each of the four products and
royalties upon commercialization. In addition, Zambon would provide Sheffield
with an interest free line of credit upon the achievement of certain early
milestones. Sheffield received a $650,000 fee from Zambon in the form of an
equity investment upon execution of the option agreement. The consummation of
the sublicensing transaction with Zambon is subject to the negotiation by the
parties of a definitive sublicensing agreement.
On April 15, 1998, the Company issued 1,250 shares of its Series B Cummulative
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") in a
private placement for an aggregate purchase price of $1,250,000. Under the terms
of this offering, the Company must redeem the preferred stock at the time it
concludes a definitive sub-license agreement on the MSI or other financing. As
of May 15, 1998, all of the Series B Preferred Stock remains to be redeemed or
available for conversion.
On April 15, 1998, the Company made the DM 2.0 million payment to Siemens, A.G.
that was originally due in January 1998 under the terms of the MSI license
agreement. This payment was made with the proceeds of the Series B Preferred
Stock offering.
As stated in the Company's press release on April 16, 1998 and included in a
Current Report on Form 8-K filed with the Securities and Exchange Commission on
April 17, 1998, the Company continues not to meet certain of the American Stock
Exchange's ("AMEX") continued listing guidelines, and, as a result, there can be
no assurance that the Company's common stock will continue to be listed on the
AMEX.
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 HEREBY. 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.
9
<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 March 31, 1998:
<TABLE>
<CAPTION>
Number
of Shares
Sold/Issued
Description /Subject to
Date of Of Securities Options or Offering/exercise
Sale/issuance Issued Warrants Price Per Share ($) Purchaser Or Class
------------- ------------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C>
January - Common Stock 3,093,223 $0.5719 - $1.3313 Holders of Series A
March 1998 Preferred Stock and
6% Convertible
Convertible Debentures
</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.
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 April 17, 1998 relating to (i) the Company's entering
into an option agreement to form a strategic arrangement with Zambon Group SpA
of Milan, Italy, for the worldwide development and commercialization of drugs to
treat respiratory disease in the Company's proprietary MSI system, (ii) the
announcement of the Company's financial results for the fourth quarter and year
ended December 31, 1997, (iii) the completion of the offering and sale of the
Company's Series B Cumulative Convertible Redeemable Preferred Stock for gross
proceeds of $1.25 million, and (iv) certain other matters.
10
<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: May 15, 1998 /S/ Loren G. Peterson
----------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: May 15, 1998 /S/ Judy Roeske Bullock
-----------------------
Judy Roeske Bullock
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> 7,876
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 120,705
<PP&E> 294,855
<DEPRECIATION> 198,683
<TOTAL-ASSETS> 228,746
<CURRENT-LIABILITIES> 3,079,336
<BONDS> 882,000
1,000,479
0
<COMMON> 157,428
<OTHER-SE> (4,733,069)
<TOTAL-LIABILITY-AND-EQUITY> 228,746
<SALES> 0
<TOTAL-REVENUES> 953
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,264,001
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,470
<INCOME-PRETAX> (2,263,048)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,263,048)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,263,048)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
