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 September 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 November 12, 1999.
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Form 10-Q
For the Quarter Ended September 30, 1999
Table of Contents
Page
PART I
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.......................................................3
Consolidated Statements of Operations
for the three and nine months ended September 30,
1999 and 1998 and for the period from
October 17, 1986 (inception) to September 30, 1999 ..........................4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and
1998 and for the period from
October 17, 1986 (inception) to September 30, 1999...........................5
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency) for the period from October 17, 1986
(inception) to September 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 6. Exhibits and Reports on Form 8-K.....................................12
Signatures....................................................................13
2
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Balance Sheets
Assets
<TABLE>
<CAPTION>
September 30, December 31, 1998
1999 1998
Current assets: (unaudited)
<S> <C> <C>
Cash and cash equivalents ................................................. $ 828,620 $ 2,456,290
Marketable equity security ................................................ 163,992 127,774
Prepaid expenses and other current assets ................................. 305,842 39,035
------------ ------------
Total current assets ............................................ 1,298,454 2,623,099
------------ ------------
Property and equipment:
Laboratory equipment ...................................................... 351,291 317,032
Office equipment .......................................................... 168,871 175,062
Leasehold improvements .................................................... 16,323 1,323
------------ ------------
Total at cost ................................................... 536,485 493,417
Less accumulated depreciation and amortization ............................ (293,278) (253,995)
------------ ------------
Property and equipment, net ..................................... 243,207 239,422
------------ ------------
Other assets ...................................................................... 15,642 --
------------ ------------
Total assets ...................................................................... $ 1,557,303 $ 2,862,521
============ ============
Liabilities and Stockholders' Equity (Net Capital Deficiency)
Current liabilities:
Accounts payable and accrued liabilities .................................. $ 573,213 $ 615,138
Sponsored research payable ................................................ 449,805 449,805
Notes payable - related party ............................................. 600,000 101,323
------------ ------------
Total current liabilities ....................................... 1,623,018 1,166,266
Unearned revenue .................................................................. 1,000,000 --
Convertible promissory note ....................................................... 2,000,000 1,000,000
Other long-term liabilities ....................................................... 135,067 41,050
Commitments and contingencies ..................................................... -- --
------------ ------------
Total liabilities ......................................................... 4,758,085 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; 12,556 and 11,914 shares issued and outstanding at September 30,
1999 and December 31, 1998, respectively ............................... 125 119
Common stock, $.01 par value, authorized 60,000,000 shares at September 30,
1999 and 50,000,000 at December 31, 1998; issued and outstanding
27,296,346 and 27,058,419 shares at September 30, 1999 and December 31,
1998, respectively...................................................... 272,963 270,584
Notes receivable in connection with sale of stock ......................... -- (10,000)
Additional paid-in capital ................................................ 56,617,173 55,773,491
Other comprehensive income (loss) ......................................... (186,008) (222,226)
Deficit accumulated during development stage .............................. (59,905,035) (55,156,763)
------------ ------------
Total stockholders' equity (net capital deficiency) ................... (3,200,782) 655,205
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) ............... $ 1,557,303 $ 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 Nine Months Ended September 30, 1999 and 1998 and
for the Period October 17, 1986 (inception) to September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended October 17, 1986
September 30 September 30 (inception) to
1999 1998 1999 1998 September 30, 1999
---- ---- ---- ---- ------------------
Revenues:
<S> <C> <C> <C> <C> <C>
Sublicense revenue ................................. $ -- $ -- $ -- $ 350,000 $ 1,360,000
Interest income .................................... 6,696 32,450 46,049 35,965 560,149
----------- ----------- ------------ ------------ ------------
Total revenues ................................ 6,696 32,450 46,049 385,965 1,920,149
Expenses:
Acquisition of research and development in-
process technology
-- 741,745 -- 13,241,745 14,975,000
Research and development ........................... 919,718 218,063 2,410,672 2,014,167 24,014,363
General and administrative ......................... 498,734 1,039,390 1,631,090 2,534,289 21,196,419
Interest ........................................... 43,186 175,662 108,895 304,343 520,013
----------- ----------- ------------ ------------ ------------
Total expenses ................................ 1,461,638 2,174,860 4,150,657 18,094,544 60,705,795
----------- ----------- ------------ ------------ ------------
Loss before extraordinary item ........................ (1,454,942) (2,142,410) (4,104,608) (17,708,579) (58,785,646)
Extraordinary item .................................... -- -- -- -- 42,787
----------- ----------- ------------ ------------ ------------
Net loss .............................................. $(1,454,942) $(2,142,410) $ (4,104,608) $(17,708,579) $(58,742,859)
=========== =========== ============ ============ ============
Accretion of mandatorily redeemable preferred stock ... -- -- -- (23,900) (103,400)
----------- ----------- ------------ ------------ ------------
Net loss - attributable to common shares .............. $(1,454,942) $(2,142,410) $ (4,104,608) $(17,732,479) $(58,846,259)
=========== =========== ============ ============ ============
Weighted average common shares outstanding-
basic and diluted .................................. 27,296,346 26,858,366 27,216,481 20,203,133 7,541,197
Net loss per share of common stock - basic and diluted:
Loss before extraordinary item
$ (0.05) $ (0.08) $ (0.15) $ (0.88) $ (7.80)
Extraordinary item .............................. -- -- -- -- .01
=========== =========== ============ ============ ============
Net loss per share .............................. $ (0.05) $ (0.08) $ (0.15) $ (0.88) $ (7.79)
=========== =========== ============ ============ ============
</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 Nine Months Ended September 30, 1999 and 1998 and for the Period
October 17, 1986 (inception) to September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 17, 1986
September 30, (inception) to
1999 1998 Sept. 30, 1999
---- ---- --------------
<S> <C> <C> <C>
Cash outflows from development stage activities and
extraordinary gain: Loss before extraordinary item ......................... $(4,104,608) $(17,708,579) $(58,785,646)
Extraordinary gain on extinguishment of debt .......................... -- -- 42,787
----------- ------------ ------------
Net loss .............................................................. (4,104,608) (17,708,579) (58,742,859)
----------- ------------ ------------
Adjustments to reconcile net loss to net cash used by development stage
activities:
Issuance of common stock, stock options/warrants for
services .............................................................. 129,692 359,914 2,411,665
Non-cash acquisition of research and development in-process technology .... -- -- 1,650,000
Depreciation and amortization ............................................. 67,867 42,438 461,086
Other items ............................................................... 102,072 (304,496) 513,666
(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 ............ (266,807) 8,284 (377,424)
Decrease in accounts payable and accrued liabilities ...................... (44,735) (361,128) (17,432)
(Decrease) increase in sponsored research payable ......................... -- (20,963) 1,026,875
----------- ------------ ------------
Net cash used by development stage activities .................................. (3,132,161) (17,964,473) (52,018,482)
----------- ------------ ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities ................................. -- -- 175,085
Acquisition of laboratory and office equipment, and
leasehold improvements ................................................ (71,652) (89,506) (520,776)
Disposition of office equipment ........................................... -- 33,560 --
Increase in notes receivable in connection with sale of stock ............. -- -- (240,000)
Decrease in loan receivable - former officer .............................. -- 12,124 --
Payments of notes receivable .............................................. 10,000 49,700 229,600
Purchase of Camelot Pharmacal, L.L.C., net cash acquired .................. -- -- (46,687)
----------- ------------ ------------
Net cash provided (used) by investing activities ............................... (61,652) 5,878 (402,778)
----------- ------------ ------------
Cash flows from financing activities:
Principal payments under capital lease .................................... (4,087) -- (80,560)
Proceeds from notes payable - related party ............................... 600,000 -- 754,145
Repayments of notes payable - related party ............................... (104,145) -- (154,145)
Proceeds from issuance of convertible securities .......................... 1,000,000 500,000 4,300,000
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) (1,250,000)
Proceeds from exercise of warrants/stock options .......................... 74,375 -- 11,476,533
----------- ------------ ------------
Net cash provided by financing activities ...................................... 1,566,143 20,150,000 53,248,796
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents ........................... (1,627,670) 2,191,405 827,536
Cash and cash equivalents at beginning of period ............................... 2,456,290 393,608 1,084
----------- ------------ ------------
Cash and cash equivalents at end of period ..................................... $ 828,620 $ 2,585,013 $ 828,620
----------- ------------ ------------
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services .............. $ 129,692 $ 359,914 $ 2,411,665
Common stock redeemed in payment of notes receivable ...................... -- 10,400 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 ........................................................... 643,664 182,194 1,422,206
Supplemental disclosure of cash flow information:
Interest paid ............................................................. $ 5,078 $ 183,081 $ 272,479
</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 September 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 .................................... -- 2,379 10,000 71,996
Series C preferred stock dividends ..................... 6 -- -- 641,994
Common stock warrants issued ........................... -- -- -- 129,692
Comprehensive income (loss):
Unrealized gain on marketable security ............ -- -- -- --
Net loss .......................................... -- -- -- --
Comprehensive income (loss) .................. -- -- -- --
------------ ------------ --------- -----------
Balance at September 30, 1999 .......................... $ 125 $ 272,963 $ -- $56,617,173
============ ============ ========= ===========
6
</TABLE>
<TABLE>
<CAPTION>
<PAGE>
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)
------------
Comprehensive income (loss) ................ -- -- (26,627,884)
--------- ------------ ------------
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 ..................... -- (643,664) (1,664)
Common stock warrants issued ........................... -- -- 129,692
Comprehensive income (loss):
Unrealized gain on marketable security ............ 36,218 -- 36,218
Net loss .......................................... -- (4,104,608) (4,104,608)
------------
Comprehensive income (loss) .................. (4,068,390)
--------- ------------ ------------
Balance at September 30, 1999 .......................... $(186,008) $(59,905,035) $ (3,200,782)
========= ============ ============
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Notes to Consolidated Financial Statements
September 30, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q of the
Securities and Exchange Commission and should 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. 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
September 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. The results of
operations for the three and nine months ended September 30, 1999 and
1998 are not necessarily indicative of the operating results for the
full years. These consolidated 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 unaudited consolidated 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 2000 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 period. Potentially dilutive securities such as
stock options, warrants, convertible debt and preferred stock, have not
been included in any periods presented as their effect is antidilutive.
3. SUBSEQUENT EVENT
On October 18, 1999, pursuant to a definitive agreement with an
affiliate of Elan Corporation, plc, Elan International Services, Ltd.
("Elan International"), the Company and Elan International formed a new
joint venture to develop certain respiratory steroid products. Under
the terms of the agreement, the Company issued to Elan International
12,015 shares of Series D Cumulative Convertible Exchangeable Preferred
Stock, convertible into shares of Common Stock of the Company at $4.86
per Common Share or exchangeable for an additional 30.1% ownership
interest in the new joint venture, for $12.015 million. In turn, the
Company made an equity investment of $12.015 million representing an
initial 80.1% ownership in the joint venture. The joint venture paid
$15.0 million to license certain pulmonary NanoCrystal(TM) dispersion
technology from Elan Pharmaceutical Technologies, a division of Elan
Corporation, plc. Elan International has also committed to purchase, on
a drawdown basis, up to an additional $4.0 million of the Company's
Series E Cumulative Convertible Preferred Stock, convertible into
shares of Common Stock of the Company at $3.89 per Common Share. The
Series E Preferred Stock will be utilized by the Company to fund its
portion of the joint venture's operating and development costs. In
addition to the above, the Company issued to Elan International 5,000
shares of Series F Cumulative Convertible Preferred Stock, convertible
into shares of Common Stock of the Company at $3.40 per Common Share,
for $5.0 million. The proceeds of the Series F Preferred Stock will be
utilized by Sheffield for its own operating purposes. As part of this
transaction, Elan International also received a warrant to purchase
150,000 shares of Common Stock of the Company at an exercise price of
$6.00 per share. To satisfy applicable American Stock Exchange
requirements, Sheffield will seek shareholder approval for the issuance
of the Series D and E Preferred Stock within the next year.
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 thereby. 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 progress 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
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 earned from available cash balances for investment was $6,696
and $32,450 for the quarters ended September 30, 1999 and 1998, respectively,
and $46,049 and $35,965, for the nine months ended September 30, 1999 and 1998,
respectively. From inception through the period June 30, 1999, the Company has
earned interest income of $560,149.
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.
ACQUISITION OF RESEARCH & DEVELOPMENT IN-PROCESS TECHNOLOGY
Acquisition of research and development in-process technology were $0 and
$741,745 for the third quarter of 1999 and 1998, respectively, and $0 and
$13,241,745 for the first nine months of 1999 and 1998, respectively. In the
second quarter of 1998 the Company licensed certain delivery technologies from
Elan for $12,500,000 and in the third quarter of 1998 the Company purchased the
ADDS from Aeroquip-Vickers, Inc. 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, and the
previously mentioned licensing of Elan delivery technologies and purchase of the
ADDS.
9
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $919,718 and $218,063 for the third
quarter of 1999 and 1998, respectively, and $2,410,672 and $2,014,167, for the
first nine months of 1999 and 1998, respectively. The increase in both the three
and nine month periods of 1999 of $701,655 and $396,505, respectively, primarily
resulted from certain device development expenses relating to the MSI and ADDS,
costs associated with the completion of the Company's study for the delivery of
morphine utilizing the MSI, and the initiation of a study for migraine therapy
using the ADDS. These increases were partially offset by the shifting of
responsibility for development expenses of the respiratory applications of the
MSI to the Company's partner, Zambon.
GENERAL AND ADMINISTRATIVE
General and administrative expenses were $498,734 and $1,039,390 for the three
months ended September 30, 1999 and 1998, respectively, and $1,631,090 and
$2,534,289 for the nine months ended September 30, 1999 and 1998, respectively.
The decrease in the third quarter of 1999 of $540,656 was primarily attributable
to the 1998 costs associated with the retention of the Company's former investor
relations firm, as well as the legal fees associated with completing the 1998
agreement with Elan. In addition to the above-mentioned investor relations
expense and higher legal fees, the decrease for the first nine months of 1999 of
$903,199 reflects additional legal and consulting costs associated with
completing the Zambon agreement and the expense associated with the settlement
of an old dispute with the innovator of one of the Company's early stage
research projects, both of which occurred in 1998.
INTEREST EXPENSE
Interest expense was $43,186 and $175,662 for the third quarters of 1999 and
1998, respectively, and $108,895 and $304,343 for the first nine months of 1999
and 1998, respectively. The decrease in 1999 as compared to 1998 primarily
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 September 30, 1999 for funding its operations
was $828,620. As of such date, the Company had trade payables of $573,213 and
current research obligations of $449,805. Subsequent to September 30, 1999, the
Company has committed to fund an additional $543,713 for development of
pulmonary delivery systems, as well as $4.0 million for the development of
certain inhaled steroid products through its new joint venture with Elan
International.
On September 30, 1999, the Company signed a letter of agreement to enter into a
licensing and funding arrangement with Elan Corporation, plc. As part of this
agreement, Elan advanced the Company $600,000 in the form of a short-term note
payable. On October 18, 1999, pursuant to the definitive agreement with an
affiliate of Elan Corporation, plc, Elan International Services, Ltd. ("Elan
International"), the Company and Elan International formed a new joint venture
to develop certain respiratory steroid products. Under the terms of the
agreement, the Company issued to Elan International 12,015 shares of Series D
Cumulative Convertible Exchangeable Preferred Stock, convertible into shares of
Common Stock of the Company at $4.86 per Common Share or exchangeable for an
additional 30.1% ownership interest in the new joint venture, for $12.015
million. In turn, the Company made an equity investment of $12.015 million
representing an initial 80.1% ownership in the joint venture. The joint venture
paid $15.0 million to license certain pulmonary NanoCrystal(TM) dispersion
technology from Elan Pharmaceutical Technologies, a division of Elan
Corporation, plc. Elan International has also committed to purchase, on a
drawdown basis, up to an additional $4.0 million of the Company's Series E
Cumulative Convertible Preferred Stock, convertible into shares of Common Stock
of the Company at $3.89 per Common Share. The Series E Preferred Stock will be
utilized by the Company to fund its portion of the joint venture's operating and
development costs. In addition to the above, the Company issued to Elan
International 5,000 shares of Series F Cumulative Convertible Preferred Stock,
convertible into shares of Common Stock of the Company at $3.40 per Common
Share, for $5.0 million. A portion of the proceeds of the Series F Preferred
Stock was used to repay the short-term note payable, with the remainder to be
utilized by Sheffield for its own operating purposes. As part of this
transaction, Elan International also received a warrant to purchase 150,000
shares of Common Stock of the Company at an exercise price of $6.00 per share.
To satisfy applicable American Stock Exchange requirements, Sheffield will seek
shareholder approval for the issuance of the Series D and E Preferred Stock
within the next year.
As part of a 1998 joint venture agreement with Elan relating to the formation of
the Company's subsidiary, Systemic Pulmonary Delivery, Ltd. ("SPD"), 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 September 30, 1999, $2,000,000 was outstanding
under this note.
10
<PAGE>
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 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 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.
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 continues to seek to obtain Year 2000 compliance certification from
its significant third party suppliers. To date, all third party suppliers that
have responded to the Company's inquiries have advised that they are Year 2000
compliant or plan to be Year 2000 compliant or substantially compliant by year
end. However, there can be no assurance that the computer systems of third party
suppliers (and their respective vendors) will be Year 2000 compliant on a timely
basis.
The Company relies on several universities and independent laboratories
(collectively, "CROs") for conducting a significant portion of the research and
development of its technologies and products. In addition, the Company relies on
its strategic alliance partners to perform certain manufacturing, research and
development activities related to its products in development. If these CROs
and/or strategic alliance partners (or their significant vendors) were to
experience Year 2000 computer failures, these failures could have a material
adverse affect on the Company's business, including the possibility of material
delays in the progress of clinical trials, product development and future
receipt of product sales and related royalties.
Given the lack of legacy systems at the Company, the limited number of issues
that have arisen to date, and the level of development activity anticipated
during the end of the year, the Company does not plan to develop a formal
contingency plan for its worse case scenario described above. While the Company
does not anticipate that its worst case scenario will occur, in the event that
any of its major CROs or strategic alliance partners suffer material Year 2000
disruptions that negatively impact the Company, the Company will evaluate the
materiality of the disruptions at that time. Following the completion of any
necessary evaluation, the Company will determine whether to delay the related
clinical trials or other research and development while corrective efforts are
being implemented. Depending on the anticipated period of time it will take to
complete such efforts, the Company may consider replacing the applicable CRO
with another Year 2000 compliant provider.
As of September 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 less than an additional $5,000 to complete its Year
2000 efforts. These costs and the date on which the Company plans to complete
the Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no assurance that
these estimates will be achieved and actual results could differ from those
plans.
11
<PAGE>
PART II: OTHER INFORMATION
Item 2. CHANGES IN SECURITIES.
The following unregistered securities were issued by the Company during
the quarter ended September 30, 1999:
<TABLE>
<CAPTION>
Number of
Shares
Sold/Issued
Description /Subject to
Date of of Securities Options or Offering/Exercise
Sale/Issuance Issued Warrants Price per Share($) Purchaser or Class
------------- ------ -------- ------------------ ------------------
<S> <C> <C> <C> <C>
July 1999 Common stock 50,000 $2.625 Advisors in lieu of
warrants cash consideration.
July 1999 Common stock 10,000 $2.3125 Advisor in lieu of
warrants 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.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended September
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: November 12, 1999 /s/ Loren G. Peterson
---------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: November 12, 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 September 30, 1999 and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 828,620
<SECURITIES> 163,992
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,298,454
<PP&E> 536,485
<DEPRECIATION> 293,278
<TOTAL-ASSETS> 1,557,303
<CURRENT-LIABILITIES> 1,623,018
<BONDS> 0
0
125
<COMMON> 272,963
<OTHER-SE> (3,473,870)
<TOTAL-LIABILITY-AND-EQUITY> 1,557,303
<SALES> 0
<TOTAL-REVENUES> 46,049
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,150,657
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,895
<INCOME-PRETAX> (4,104,608)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,104,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,104,608)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
