SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3808303
(State of Incorporation) (IRS Employee Identification Number)
425 SOUTH WOODSMILL ROAD 63017 (314) 579-9899
ST. LOUIS, MISSOURI (Zip Code) (Registrant's telephone,
(Address of principal executive offices) including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange on which registered
Common Stock. $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
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. /X/Yes / / No
The number of shares outstanding of the Registrant's Common Stock is 27,296,346
shares of Common Stock as of August 6, 1999.
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Form 10-Q
For the Quarter Ended June 30, 1999
Table of Contents
Page
----
PART I
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998.................................................. 3
Consolidated Statements of Operations
for the three and six months ended June 30, 1999
and 1998 and for the period from October 17, 1986
(inception) to June 30, 1999 ........................................... 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 and
for the period from October 17, 1986 (inception)
to June 30, 1999....................................................... 5
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency) for the period from
October 17, 1986 (inception) to June 30, 1999 ........................ 6
Notes to Consolidated Financial Statements .............................. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 9
PART II
Item 2. Changes in Securities........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............. 12
Item 6. Exhibits and Reports on Form 8-K................................ 12
Signatures............................................................... 13
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<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
---------------------
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 1,259,022 $ 2,456,290
Marketable equity security............................................... 191,359 127,774
Prepaid expenses and other current assets................................ 124,814 39,035
------------ ------------
Total current assets................................... 1,575,195 2,623,099
------------ ------------
Property and equipment:
Laboratory equipment..................................................... 331,311 317,032
Office equipment......................................................... 165,191 175,062
Leasehold improvements................................................... 16,323 1,323
------------ ------------
Total at cost.......................................... 512,825 493,417
Less accumulated depreciation and amortization (267,554) (253,995)
------------ ------------
Property and equipment, net 245,271 239,422
------------ ------------
Other assets.................................................................... 15,642 --
------------ ------------
Total assets $ 1,836,108 $ 2,862,521
============ ============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable and accrued liabilities................................. $ 533,061 $ 615,138
Sponsored research payable............................................... 449,805 449,805
Note payable - related party............................................. -- 101,323
------------ ------------
Total current liabilities.............................. 982,866 1,166,266
Unearned revenue................................................................ 1,000,000 --
Convertible promissory note..................................................... 1,500,000 1,000,000
Other long-term liabilities..................................................... 95,088 41,050
Commitments and contingencies................................................... -- --
------------ ------------
Total liabilities............................................. 3,577,954 2,207,316
Stockholders' equity (net capital deficiency):
Preferred stock, $.01 par value, authorized 3,000,0000 shares:
Series C cumulative convertible preferred stock, authorized
23,000 shares; 12,336 and 11,914 shares issued and outstanding at
June 30, 1999 and December 31, 1998, respectively..................... 123 119
Common stock, $.01 par value, authorized 60,000,000 shares at June 30,
1999 and 50,000,000 at December 31, 1998; issued and outstanding 27,296,
346 and 27,058,419 shares at June 30, 1999 and December 31, 1998,
respectively............................................................ 271,134 270,584
Notes receivable in connection with sale of stock....................... -- (10,000)
Additional paid-in capital.............................................. 56,374,954 55,773,491
Other comprehensive income (loss)....................................... (158,641) (222,226)
Deficit accumulated during development stage............................ (58,229,416) (55,156,763)
------------ ------------
Total stockholders' equity (net capital deficiency)........... (1,741,846) 655,205
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency)............. $ 1,836,108 $ 2,862,521
============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 1999 and 1998
and for the Period October 17, 1986 (inception)
to June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30 October 17, 1986
--------------------------- ---------------------------- (inception) to
1999 1998 1999 1998 June 30, 1999
---- ---- ---- ---- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sublicense revenue............................... $ -- $ 350,000 $ -- $ 350,000 $ 1,360,000
Interest income.................................. 17,476 2,562 39,353 3,515 553,453
------------ ------------ ------------ ------------ ------------
Total revenues.............................. 17,476 352,562 39,353 353,515 1,913,453
Expenses:
Acquisition of research and development
in-process technology....................... -- 12,500,000 -- 12,500,000 14,975,000
Research and development......................... 835,975 187,063 1,490,954 1,796,104 23,094,644
General and administrative....................... 632,693 882,409 1,132,356 1,494,899 20,697,685
Interest......................................... 35,818 86,211 65,709 128,681 476,827
------------ ------------ ------------ ------------ ------------
Total expenses.............................. 1,504,486 13,655,683 2,689,019 15,919,684 59,244,156
------------ ------------ ------------ ------------ ------------
Loss before extraordinary item...................... (1,487,010) (13,303,121) (2,649,666) (15,566,169) (57,330,703)
Extraordinary item.................................. -- -- -- -- 42,787
------------ ------------ ------------ ------------ ------------
Net loss............................................ $ (1,487,010) $(13,303,121) $ (2,649,666) $(15,566,169) $(57,287,916)
============ ============ ============ ============ ============
Accretion of mandatorily redeemable preferred
stock............................................. -- -- -- (23,900) (103,400)
------------ ------------ ------------ ------------ ------------
Net loss - attributable to common shares............ $ (1,487,010) $(13,303,121) $ (2,649,666) $(15,590,069) $(57,391,316)
============ ============ ============ ============ ============
Weighted average common shares outstanding-
basic and diluted................................ 27,276,405 19,950,354 27,175,887 16,820,359 7,149,495
Net loss per share of common stock - basic and
diluted:
Loss before extraordinary item................ $ (0.05) $ (0.67) $ (0.10) $ (0.93) $ (8.03)
Extraordinary item -- -- -- -- .01
------------ ------------ ------------ ------------ ------------
Net loss per share............................ $ (0.05) $ (0.67) $ (0.10) $ (0.93) $ (8.02)
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements
-4-
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Cash Flows
For the Three and Six Months Ended June 30, 1999
and 1998 and for the Period October 17, 1986
(inception) to June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended October 17,
June 30, 1986
-------------------------- (inception) to
1999 1998 June 30, 1999
---- ---- -------------
<S> <C> <C> <C>
Cash outflows from development stage activities and
extraordinary gain: Loss before extraordinary item..................... $(2,649,666) $(15,566,169) $(57,330,703)
Extraordinary gain on extinguishment of debt...................... -- -- 42,787
----------- ------------ ------------
Net loss.......................................................... (2,649,666) (15,566,169) (57,287,916)
----------- ------------ ------------
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for
services.......................................................... 105,642 16,389 2,387,615
Non-cash acquisition of research and development in-process
technology........................................................ -- -- 1,650,000
Depreciation and amortization......................................... 42,143 26,377 435,362
Other items........................................................... 60,457 (303,826) 472,051
(Increase) decrease in other assets................................... (15,642) 20,057 55,941
Increase in unearned revenue.......................................... 1,000,000 -- 1,000,000
(Increase) decrease in prepaid expenses & other current assets........ (85,779) 13,927 (196,397)
Decrease in accounts payable and accrued liabilities.................. (83,991) (171,277) (56,688)
(Decrease) increase in sponsored research payable..................... -- (588) 1,026,875
----------- ------------ ------------
Net cash used by development stage activities.............................. (1,626,836) (15,965,110) (50,513,157)
----------- ------------ ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities............................. -- -- 175,085
Acquisition of laboratory and office equipment, and
leasehold improvements............................................ (47,992) (2,596) (497,116)
Disposition of office equipment....................................... -- 33,560 --
Increase in notes receivable in connection with sale of stock......... -- -- (240,000)
Decrease in loan receivable - former officer.......................... -- 15,000 --
Payments of notes receivable.......................................... 10,000 47,200 229,600
Purchase of Camelot Pharmacal, L.L.C., net cash acquired.............. -- -- (46,687)
----------- ------------ ------------
Net cash provided (used) by investing activities........................... (37,992) 93,164 (379,118)
----------- ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease................................ (2,670) -- (79,143)
Proceeds from notes payable - related party........................... -- -- 154,145
Repayments of notes payable - related party........................... (104,145) -- (154,145)
Proceeds from issuance of convertible securities...................... 500,000 -- 3,800,000
Conversion of convertible, subordinated notes......................... -- -- 749,976
Proceeds from issuance of common and preferred stock.................. -- 20,900,000 37,452,847
Redemption of preferred stock......................................... -- -- (1,250,000)
Proceeds from exercise of warrants/stock options...................... 74,375 -- 11,476,533
----------- ------------ ------------
Net cash provided by financing activities.................................. 467,560 20,900,000 52,150,213
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents....................... (1,197,268) 5,028,054 1,257,938
Cash and cash equivalents at beginning of period........................... 2,456,290 393,608 1,084
----------- ------------ ------------
Cash and cash equivalents at end of period................................. $ 1,259,022 $ 5,421,662 $ 1,259,022
----------- ------------ ------------
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services.......... $ 105,642 $ -- $ 2,387,615
Common stock redeemed in payment of notes receivable.................. -- -- 10,400
Acquisition of research and development in-process technology......... -- -- 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.................. -- 4,019,263 5,353,368
Securities acquired under sublicense agreement........................ -- 350,000 850,000
Equipment acquired under capital lease................................ -- -- 121,684
Notes payable converted to common stock............................... -- -- 749,976
Stock dividends....................................................... 422,987 -- 1,201,534
Supplemental disclosure of cash flow information:
Interest paid......................................................... $ 4,152 $ 182,195 $ 271,553
</TABLE>
See notes to consolidated financial statements.
-5-
<PAGE>
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 June 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Notes
receivable
in
connection Additional
Preferred Common with sale of paid-in
stock stock stock capital
------------- ------ ------------ -----------
<S> <C> <C> <C> <C>
Balance at October 17, 1986 ............................ $ -- $ -- $ -- $ --
Common stock issued .................................... -- 11,334,252 -- 17,024,469
Reincorporation in Delaware at $.01 par value .......... -- (11,220,369) -- 11,220,369
Common stock options issued ............................ -- -- -- 75,000
Common stock subscribed ................................ -- -- (110,000) --
Comprehensive income (loss):
Unrealized loss on marketable security .......... -- -- -- --
Net loss ........................................ -- -- -- --
Comprehensive income (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 Series A preferred stock -- -- -- --
Comprehensive income (loss):
Unrealized gain on marketable security ............ -- -- -- --
Net loss .......................................... -- -- -- --
Comprehensive income (loss) .................. --------- ------------ ----------- -----------
Balance at December 31, 1997 ........................... -- 126,495 (72,600) 31,386,644
Common stock issued .................................... -- 144,089 62,600 12,472,966
Series C preferred stock issued ........................ 115 -- -- 11,499,885
Series C preferred stock dividends ..................... 4 -- -- 413,996
Accretion of issuance costs for Series A preferred stock -- -- -- --
Comprehensive income (loss):
Unrealized loss on marketable security ............ -- -- -- --
Net loss .......................................... -- -- -- --
Comprehensive income (loss) ..................
----------- ------------ ----------- -----------
Balance at December 31, 1998 ........................... 119 270,584 (10,000) 55,773,491
Common stock issued .................................... -- 550 10,000 73,825
Series C preferred stock dividends ..................... 4 -- -- 421,996
Common stock warrants issued ........................... -- -- -- 105,642
Comprehensive income (loss):
Unrealized gain on marketable security ............ -- -- -- --
Net loss .......................................... -- -- -- --
Comprehensive income (loss) ..................
----------- ------------ ----------- -----------
Balance at June 30, 1999 ............................... $ 123 $ 271,134 $ -- $56,374,954
=========== ============ =========== ===========
</TABLE>
See notes to consolidated financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
Deficit Total
Other accumulated stockholders'
comprehen- during equity (net
sive income development capital
(loss) stage deficiency)
----------- ------------ -------------
<S> <C> <C> <C>
Balance at October 17, 1986 ............................ $ -- $ -- $ --
Common stock issued .................................... -- -- 28,358,721
Reincorporation in Delaware at $.01 par value .......... -- -- --
Common stock options issued ............................ -- -- 75,000
Common stock subscribed ................................ -- -- (110,000)
Comprehensive income (loss):
Unrealized loss on marketable security .......... (39,232) -- (39,232)
Net loss ........................................ -- (26,588,652) (26,588,652)
------------
(26,627,884)
Comprehensive income (loss) .................. --------- ----------- ------------
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 Series A preferred stock -- (79,500) (79,500)
Comprehensive income (loss):
Unrealized gain on marketable security ............ 39,232 -- 39,232
Net loss .......................................... -- (9,489,138) (9,489,138)
------------
Comprehensive income (loss) .................. (9,449,906)
-------- ----------- ------------
Balance at December 31, 1997 ........................... -- (36,157,290) (4,716,751)
Common stock issued .................................... -- -- 12,679,655
Series C preferred stock issued ........................ -- -- 11,500,000
Series C preferred stock dividends ..................... -- (415,112) (1,112)
Accretion of issuance costs for Series A preferred stock -- (23,900) (23,900)
Comprehensive income (loss):
Unrealized loss on marketable security ............ (222,226) -- (222,226)
Net loss .......................................... -- (18,560,461) (18,560,461)
------------
Comprehensive income (loss) .................. (18,782,687)
--------- ----------- ------------
Balance at December 31, 1998 ........................... (222,226) (55,156,763) 655,205
Common stock issued .................................... -- -- 84,375
Series C preferred stock dividends ..................... -- (422,987) (987)
Common stock warrants issued ........................... -- -- 105,642
Comprehensive income (loss):
Unrealized gain on marketable security ............ 63,585 -- 63,585
Net loss .......................................... -- (2,649,666) (2,649,666)
------------
Comprehensive income (loss) .................. (2,586,081)
--------- ----------- ------------
Balance at June 30, 1999 ............................... $(158,641) $(58,229,416) $ (1,741,846)
========= ============ ============
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
June 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet as of June 30, 1999 and the
accompanying consolidated statements of operations, stockholders' equity
and cash flows for the three and six months ended June 30, 1999 and 1998
and for the period from October 17, 1986 (inception) to June 30, 1999, have
been prepared by Sheffield Pharmaceuticals, Inc. 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, stockholders' equity and cash flows at June 30, 1999 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 for the year ended December 31, 1998. The results of operations
for the three and six months ended June 30, 1999 and 1998 are not
necessarily indicative of the operating results for the full years.
The consolidated interim financial statements include the accounts of
Sheffield Pharmaceuticals, Inc. and its wholly-owned subsidiaries,
including Systemic Pulmonary Delivery, Ltd., and Ion Pharmaceuticals, Inc.
and are herein referred to as "the Company." All significant intercompany
transactions are eliminated in consolidation.
The accompanying consolidated interim financial statements have been
prepared on a going concern basis which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course
of business. 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, sustained significant net
operating losses, 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's
ability to meet its obligations as they become due and to continue as a
going concern through December 1999 is dependent upon obtaining additional
funding. However, the accompanying consolidated interim financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
2. BASIC LOSS PER COMMON SHARE
Basic net loss per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss
per share is based upon the weighted average common stock outstanding
during each year. Potentially dilutive securities such as stock options,
warrants, convertible debt and preferred stock, have not been included in
any years presented as their effect is antidilutive.
3. UNEARNED REVENUE
In May 1999, in conjunction with the completion of the Phase I/II Metered
Solution Inhaler-albuterol trial, Zambon Group, SpA provided the Company
with a $1 million interest-free advance against future milestone payments.
Upon the attainment of certain future milestones, the Company will
recognize this advance as revenue. If the Company does not achieve these
future milestones, the advance must be repaid in quarterly installments of
$250,000 commencing on January 1, 2002. The proceeds from this advance are
not restricted as to their use by the Company.
-8-
<PAGE>
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 hereby. All forward-looking statements involve risks
and uncertainty. 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. Important factors that could cause actual results to differ materially
from the forward-looking statements include the Company's need to obtain
substantial additional capital (through financings or otherwise) to fund its
operations and the program of development and licensing/commercialization of the
Company's technologies. 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 products that
utilize the Company's delivery technologies. In 1997, the Company acquired the
Metered Solution Inhaler ("MSI") pulmonary delivery system through a worldwide
exclusive license and supply arrangement with Siemens AG. During the second half
of 1998, the Company acquired the rights to an additional pulmonary delivery
technology, the Aerosol Drug Delivery System ("ADDS") from a subsidiary of
Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The ADDS technology is a new
generation propellant-based pulmonary delivery system.
Using these pulmonary delivery systems as platforms, the Company has established
strategic alliances with Elan Corporation, plc ("Elan"), Siemens AG ("Siemens")
and Zambon Group SpA ("Zambon") for developing initial products. In a
collaboration with Zambon, the Company is developing a range of pharmaceutical
products delivered by the MSI to treat respiratory diseases. As part of the
strategic alliance with Elan, a world leader in pharmaceutical delivery
technology, the Company is developing therapies for systemic diseases to be
delivered to the lungs. The initial systemic programs are for therapies in the
breakthrough pain and migraine headache markets. Elan licensed two of its own
delivery technologies to the Company that complement the MSI and ADDS
technologies. Outside of its strategic alliances, the Company owns the worldwide
rights to respiratory disease applications of all of its technologies, subject
only to the MSI respiratory rights licensed to Zambon. The Company will seek to
acquire additional novel platform drug delivery systems and technologies.
Results of Operations
Revenue
Sublicense revenue for the three months ended June 30, 1998 relates to an
agreement with Lorus Therapeutics, Inc. (formerly Imutec Pharma Inc.) licensing
the rights to a series of compounds for the treatment of cancer, Kaposi's
sarcoma and actinic kerotosis. The Company received 583,188 shares of Lorus
Therapeutics, Inc. stock with a value of $350,000. From inception through the
period ended June 30, 1999, the Company has earned sublicense revenue of
$1,360,000 related to the sublicensing of various early stage technologies. As
part of the Company's focus on later stage opportunities, the Company continues
seeking to outlicense its remaining portfolio of early stage technologies. There
can be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage
technologies will have no material impact on the financial position of the
Company.
Interest income was $17,476 and $2,562 for the quarter ended June 30, 1999 and
1998, respectively, and $39,353 and $3,515, for the six months ended June 30,
1999 and 1998, respectively. The increase between years is attributable to
higher available cash balances for investment reflecting the cash received from
the sale of stock associated with the 1998 agreements with Zambon and Elan. From
inception through the period June 30, 1999, the Company has earned interest
income of $553,453.
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 and
other arrangements.
-9-
<PAGE>
Acquisition of Research & Development In-Process Technology
Acquisition of research and development in-process technology of $12,500,000 for
the second quarter of 1998 relates to the purchase of certain pulmonary device
delivery technologies from Elan. The acquisition of research and development
in-process technology from inception to June 30, 1999 of $14,975,000 reflects
the acquisitions of Camelot Pharmacal, LLC in 1997 for $1,650,000, certain
delivery technologies from Elan totaling $12,500,000 and the ADDS from
Aeroquip-Vickers for $825,000 in 1998.
Research and Development
Research and development expenses were $835,975 and $187,063 for the second
quarter of 1999 and 1998, respectively, and $1,490,954 and $1,796,104, for the
first half of 1999 and 1998, respectively. The increase for the three month
period ended June 30, 1999 of $648,912 primarily resulted from development
expenses associated with the ADDS which was purchased during the third quarter
of 1998. The decrease for the six months ended June 30, 1999 of $305,150
reflects the shifting of responsibility for development expenses of the
respiratory applications of the MSI to the Company's partner, Zambon, partially
offset by the above-mentioned increase in ADDS development expenses.
General and Administrative
General and administrative expenses were $632,693 and $882,409 for the three
months ended June 30, 1999 and 1998, respectively, and $1,132,356 and $1,494,899
for the six months ended June 30, 1999 and 1998, respectively. The decrease for
the second quarter of 1999 of $249,716 was primarily attributable to the expense
associated with the settlement of an old dispute with the innovator of one of
the Company's early stage research projects, and legal and consulting fees
associated with completing the agreements with Zambon and Elan, both of which
occurred in 1998. The decrease for the first half of 1999 of $362,543 was due to
lower compensation expense reflecting fewer employees during the first quarter
of 1999 as compared to the same period in 1998, in addition to the
above-mentioned settlement and lower legal and consulting costs.
Interest Expense
Interest expense was $35,818 and $86,211 for the second quarter of 1999 and
1998, respectively, and $65,709 and $128,681 for the first six months of 1999
and 1998, respectively. The decrease in 1999 as compared to 1998 resulted from
interest associated with the Company's Series A Cumulative Convertible Preferred
Stock and 6% Convertible Subordinated Debentures which were both converted into
Common Stock during 1998.
Liquidity and Capital Resources
The Company's cash available as of June 30, 1999 for funding its operations was
$1,259,022. As of such date, the Company had trade payables of $352,349 and
current research obligations of $449,805. In addition, subsequent to June 30,
1999, the Company has committed to fund an additional $1,029,322 for development
of pulmonary delivery systems.
As part of an agreement with Elan, Elan agreed to make available to the Company
a convertible promissory note that provides the Company the right to borrow up
to $2,000,000, subject to satisfying certain conditions. No more than $500,000
may be drawn under the note in any calendar quarter and at least one-half of the
proceeds must be used to fund SPD's development activities. As of June 30, 1999,
the Company had borrowed $1,500,000 under this note. In July 1999, the Company
borrowed an additional $500,000 under the note.
In May 1999, in conjunction with the completion of its Phase I/II Metered
Solution Inhaler-albuterol trial, Zambon Group, SpA provided the Company with a
$1 million interest-free advance against future milestone payments. Upon the
attainment of certain future milestones, the Company will recognize this advance
as revenue. If the Company does not achieve these future milestones, the advance
must be repaid in quarterly installments of $250,000 commencing on January 1,
2002. The proceeds from this advance are not restricted as to their use by the
Company. Upon the achievement of certain other early milestones, Zambon will
provide an additional $1,000,000 advance under the terms of the agreement.
The Company expects to incur additional costs in the future to fund certain
ongoing technology research projects, including costs relating to its ongoing
research and development activities, and preclinical and clinical testing of its
product candidates. The Company may also bear considerable costs in connection
with filing, prosecuting, defending and/or enforcing its patent and other
intellectual property claims. There can be no assurance that any of the
technologies to which the Company currently has or may acquire rights to can or
will be commercialized or that any revenues generated from such
commercialization will be sufficient to fund existing and future research and
development activities.
-10-
<PAGE>
Because the Company does not expect to generate significant cash flows from
operations for at least the next few years, the Company believes it will require
additional funds to meet future costs. The Company will attempt to meet its
capital requirements with existing cash balances and through additional public
or private offerings of its securities, debt financing and collaboration and
licensing arrangements with other companies. There can be no assurance that the
Company will be able to obtain such additional funds or enter into such
collaborative and licensing arrangements on terms favorable to the Company, if
at all. The Company's development programs may be curtailed if future financings
are not completed.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 compliance issue. Such
systems that are not Year 2000 compliant may not be able to properly interpret
dates beyond the Year 1999, which could lead to business disruptions in the U.S.
and internationally. The potential costs and uncertainties associated with the
Year 2000 issue will depend on a number of factors, including software, hardware
and the nature of the industry in which a company operates. Additionally,
companies must coordinate with other entities with which they electronically
interact, such as customers, creditors and borrowers.
During 1998, the Company conducted an assessment of its computer systems to
identify systems that could be affected by the Year 2000 issue. All identified
systems that could potentially be affected by the turnover to the Year 2000 were
tested. During the second quarter of 1999, all noncompliant internal software
and hardware were replaced or upgraded to reach compliance.
The Company relies on various universities and laboratories for conducting a
significant portion of the research and development of its products. The Company
is currently in the process of communicating with third parties with which it
does significant business to determine their Year 2000 compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
issues. The Company anticipates completing its third party review during the
third quarter of 1999. To date, all vendors that have responded to the Company's
requests are either fully compliant, or plan to be within the timeframe for the
completion of this project. However, there can be no guarantee that the systems
of third parties, principally clinical research companies and institutions, on
which the Company relies will be timely Year 2000 compliant or that a failure to
become Year 2000 compliant by another company, or a Year 2000 conversion process
that is incompatible with the Company's systems, would not have material adverse
effect on the Company, including delays of continued research and development
efforts. At this time, the Company does not anticipate this worst case scenario
to occur, nor does the Company anticipate any major interruptions in its
development efforts.
Due to the lack of legacy systems at the Company and the limited number of
issues that have arisen, to date the Company has not formalized a contingency
plan. A formal contingency plan will be addressed after the communication effort
with outside vendors/contractors is completed. This contingency plan may include
alternate vendor selection if necessary, and address potential manual procedures
in areas where systems will not operate properly.
As of June 30, 1999 the Company has spent approximately $15,000 to replace
software and hardware which were identified as lacking compliance. The Company
estimates that it will incur an additional $5,000 to complete its Year 2000
efforts. These costs and the date on which the Company plans to complete the
Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ from those
plans.
-11-
<PAGE>
PART II: OTHER INFORMATION
Item 2. Changes in Securities.
---------------------
The following unregistered securities were issued by the Company
during the quarter ended June 30, 1999:
Number of
Shares
Sold/Issued Offering/
Date of Description /Subject to Exercise
Sale/ of Securities Options or Price per Purchaser or
Issuance Issued Warrants Share ($) Class
- ---------- ------ ---------- ------------ ----------------
June 1999 Common stock 50,000 $2.25 Advisors in lieu
warrants of cash
consideration.
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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
An annual Meeting of Stockholders was held on June 29, 1999. 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.
---------------------------------------------
Voted Votes Broker Non-Votes
Name Voted for Against Withheld and Absentions
---- --------- ------- -------- -----------------
Loren G. Peterson 23,119,708 - 63,905 -
Thomas M. Fitzgerald 23,118,833 - 64,780 -
John M. Bailey 23,118,883 - 64,730 -
Digby W. Barrios 23,120,883 - 62,730 -
Todd C. Davis 23,135,383 - 48,230 -
George R. Griffiths 23,134,058 - 49,555 -
(b) Amendment to the Company's Certificate of Incorporation to increase
the number of shares of Common Stock that the Company is authorized to
issue from 50,000,000 to 60,000,000.
---------------------------------------------------------------------
Voted For: 22,644,577
Voted Against: 422,316
Voted Abstained: 116,720
Broker Non-Votes: -
(c) Ratification of Ernst & Young LLP as independent public accountant for
fiscal year ending December 31, 1999.
----------------------------------------------------------------------
Voted For: 22,609,648
Voted Against: 449,900
Voted Abstained: 124,065
Broker Non-Votes: -
Item 6. Exhibits and Reports on Form 8-K.
--------------------------------
No reports on Form 8-K were filed during the quarter ended June 30,
1999.
Exhibits
--------
No. Description
-- -----------
27 Financial Data Schedule.
-12-
<PAGE>
SIGNATURES
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: August 11, 1999 /s/ Loren G. Peterson
--------------------------------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: August 11, 1999 /s/ Scott A. Hoffmann
--------------------------------------------
Scott A. Hoffmann
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed financial statements for the quarter ended June 30, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Jun-30-1999
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<SECURITIES> 191,359
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<ALLOWANCES> 0
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<PP&E> 512,825
<DEPRECIATION> 267,554
<TOTAL-ASSETS> 1,836,108
<CURRENT-LIABILITIES> 982,866
<BONDS> 0
0
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<COMMON> 271,134
<OTHER-SE> (2,013,103)
<TOTAL-LIABILITY-AND-EQUITY> 1,836,108
<SALES> 0
<TOTAL-REVENUES> 39,353
<CGS> 0
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<OTHER-EXPENSES> 2,689,019
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<INTEREST-EXPENSE> 65,709
<INCOME-PRETAX> (2,649,666)
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