<PAGE> 1
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, 2000
Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its Charter)
DELAWARE 13-3808303
(State of Incorporation) (IRS Employer 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 28,105,293
shares as of August 11, 2000.
<PAGE> 2
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
FORM 10-Q
For the Quarter Ended June 30, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999..........................................................................3
Consolidated Statements of Operations
for the three and six months ended June 30, 2000 and 1999 and for the period
from October 17, 1986 (inception) to June 30, 2000.............................................4
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency) for the period from October 17, 1986
(inception) to June 30, 2000 ..................................................................5
Consolidated Statements of Cash Flows
for the six months ended June 30, 2000 and 1999 and for the period from
October 17, 1986 (inception) to June 30, 2000..................................................6
Notes to Consolidated Financial Statements ......................................................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................8
PART II
Item 4. Submission of Matters to a Vote of Security Holders....................................12
Item 6. Exhibits and Reports on Form 8-K.......................................................12
Signatures......................................................................................13
</TABLE>
2
<PAGE> 3
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,
2000 1999
---------------- ---------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 1,846,056 $ 3,874,437
Marketable equity securities................................................ 1,140,950 519,387
Prepaid expenses and other current assets .................................. 476,082 145,237
---------------- ---------------
Total current assets .................................................... 3,463,088 4,539,061
---------------- ---------------
Property and equipment:
Laboratory equipment ....................................................... 415,704 407,624
Office equipment ........................................................... 208,347 178,797
Leasehold improvements ..................................................... 18,320 15,000
---------------- ---------------
Total at cost ........................................................... 642,371 601,421
Less accumulated depreciation and amortization ............................. (364,708) (311,752)
---------------- ---------------
Property and equipment, net ............................................. 277,663 289,669
---------------- ---------------
Patent costs, net of accumulated amortization of $10,467 and $0, respectively .. 182,868 204,283
Other assets.................................................................... 15,830 15,642
---------------- ---------------
Total assets ............................................................... $ 3,939,449 $ 5,048,655
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities ................................... $ 508,698 $ 773,206
Sponsored research payable ................................................. 348,629 421,681
---------------- ---------------
Total current liabilities ............................................... 857,327 1,194,887
Convertible promissory note .................................................... 2,000,000 2,000,000
Unearned revenue ............................................................... 1,000,000 1,000,000
Other long-term liabilities .................................................... 283,287 182,695
Commitments and contingencies .................................................. -- --
---------------- ---------------
Total liabilities .......................................................... 4,140,614 4,377,582
Minority interest in subsidiary................................................. -- --
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; 13,236 and 12,780 shares issued and outstanding at June 30,
2000 and December 31, 1999, respectively............................... 132 128
Series D cumulative convertible exchangeable preferred stock, authorized
21,000 shares; 12,435 and 12,015 issued and outstanding at June 30,
2000 and December 31, 1999, respectively............................... 124 120
Series F convertible non-exchangeable preferred stock, 5,000 shares
authorized; 5,000 shares issued and outstanding at June 30, 2000 and
December 31, 1999...................................................... 50 50
Common stock, $.01 par value, authorized 60,000,000 shares; issued and
outstanding 28,080,293 and 27,308,846 shares at June 30, 2000 and
December 31, 1999, respectively........................................... 280,803 273,088
Additional paid-in capital ..................................................... 75,836,293 73,638,128
Other comprehensive income ..................................................... 808,955 169,387
Deficit accumulated during development stage ................................... (77,127,522) (73,409,828)
---------------- ---------------
Total stockholders' equity (net capital deficiency) .................. (201,165) 671,073
---------------- ---------------
Total liabilities and stockholders' equity (net capital deficiency)............. $ 3,939,449 $ 5,048,655
================ ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and 1999 and
for the Period from October 17, 1986 (inception) to
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended October 17, 1986
June 30, June 30, (inception) to
----------------------------- ----------------------------- June 30,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research revenue............... $ 124,505 $ 67,709 $ 245,675 $ 93,709 $ 645,053
Sublicense revenue...................... -- -- -- -- 1,360,000
------------- ------------- ------------- ------------- ---------------
Total revenues....................... 124,505 67,709 245,675 93,709 2,005,053
Expenses:
Acquisition of research and development
in-process technology................. -- -- -- -- 29,975,000
Research and development................ 882,755 903,684 1,784,778 1,584,663 26,810,202
General and administrative.............. 691,421 632,693 1,386,145 1,132,356 22,903,695
------------- ------------- ------------- ------------- ---------------
Total expenses....................... 1,574,176 1,536,377 3,170,923 2,717,019 79,688,897
------------- ------------- ------------- ------------- ---------------
Loss from operations...................... (1,449,671) (1,468,668) (2,925,248) (2,623,310) (77,683,844)
Interest income........................... 41,991 17,476 94,492 39,353 700,533
Interest expense.......................... (57,124) (35,818) (107,157) (65,709) (680,512)
Realized gain (loss) on sale of
marketable securities................. 52,614 -- 52,614 -- (272,301)
Minority interest in loss of subsidiary... 28,380 -- 44,399 -- 3,029,399
------------- ------------- ------------- ------------- ---------------
Loss before extraordinary item............ (1,383,810) (1,487,010) (2,840,900) (2,649,666) (74,906,725)
Extraordinary item........................ -- -- -- -- 42,787
------------- ------------- ------------- ------------- ---------------
Net loss.................................. $ (1,383,810) $ (1,487,010) $ (2,840,900) $ (2,649,666) $ (74,863,938)
============= ============= ============= ============= ===============
Accretion of mandatorily redeemable
preferred stock....................... -- -- -- -- (103,400)
------------- ------------- ------------- ------------- ---------------
Net loss - attributable to common shares.. $ (1,383,810) $ (1,487,010) $ (2,840,900) $ (2,649,666) $ (74,967,338)
============= ============= ============= ============= ===============
Weighted average common shares
outstanding-basic and diluted......... 27,975,234 27,276,405 27,781,815 27,175,887 8,640,140
Net loss per share of common stock -
basic and diluted:
Loss before extraordinary item........ $ (0.05) $ (0.05) $ (0.10) $ (0.10) $ (8.68)
Extraordinary item.................... -- -- -- -- --
------------- ------------- ------------- ------------- ---------------
Net loss per share.................... $ (0.05) $ (0.05) $ (0.10) $ (0.10) $ (8.68)
============= ============= ============== ============= ===============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
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, 2000
(Unaudited)
<TABLE>
<CAPTION>
Notes
receivable
in
connection Additional
Preferred Common with sale paid-in
stock Stock of stock capital
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at October 17, 1986 ...................... $ -- $ -- $ -- $ --
Common stock issued .............................. -- 11,340,864 37,400 18,066,219
Reincorporation in Delaware at $.01 par value .... -- (11,220,369) -- 11,220,369
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, L.L.C ..... -- 6,000 -- 1,644,000
Common stock options issued ...................... -- -- -- 240,868
Common stock options extended .................... -- -- -- 215,188
Accretion of issuance costs for Series A preferred
stock ....................................... -- -- -- --
Common stock subscribed .......................... -- -- (110,000) --
Comprehensive income (loss):
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 securities .... -- -- -- --
Net loss .................................... -- -- -- --
Comprehensive income (loss) ................. -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1998 ..................... 119 270,584 (10,000) 55,773,491
Common stock issued .............................. -- 2,504 10,000 89,059
Series C preferred stock dividends ............... 9 -- -- 865,991
Series D preferred stock issued .................. 120 -- -- 12,014,880
Series F preferred stock issued .................. 50 -- -- 4,691,255
Common stock warrants issued ..................... -- -- -- 203,452
Comprehensive income (loss):
Unrealized gain on marketable securities .... -- -- -- --
Net loss .................................... -- -- -- --
Comprehensive income (loss) ................. -- -- -- --
------------- ------------- ------------- -------------
Balance at December 31, 1999 ..................... 298 273,088 -- 73,638,128
Common stock issued .............................. -- 8,625 -- 1,569,450
Repurchase and retirement of common stock ........ -- (910) -- (312,279)
Series C preferred stock dividends ............... 4 -- -- 455,996
Series D preferred stock dividends ............... 4 -- -- 419,996
Common stock warrants issued ..................... -- -- -- 65,002
Comprehensive income (loss):
Unrealized gain on marketable securities .... -- -- -- --
Net loss .................................... -- -- -- --
Comprehensive income (loss) ................. -- -- -- --
------------- ------------- ------------- -------------
Balance at June 30, 2000 ......................... $ 306 $ 280,803 $ -- $ 75,836,293
============= ============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Deficit Total
Other accumulated stockholders'
comprehensive during equity (net
income development capital
(loss) stage deficiency)
------------- ------------- -------------
<S> <C> <C> <C>
Balance at October 17, 1986 ...................... $ -- $ -- $ --
Common stock issued .............................. -- -- 29,444,483
Reincorporation in Delaware at $.01 par value .... -- -- --
Issuance of common stock in connection with
acquisition of Camelot Pharmacal, L.L.C ..... -- -- 1,650,000
Common stock options issued ...................... -- -- 240,868
Common stock options extended .................... -- -- 215,188
Accretion of issuance costs for Series A preferred
stock ....................................... -- (79,500) (79,500)
Common stock subscribed .......................... -- -- (110,000)
Comprehensive income (loss):
Net loss .................................... -- (36,077,790) --
Comprehensive income (loss) ................. -- -- (36,077,790)
------------- ------------- -------------
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 securities .... (222,226) -- --
Net loss ................................... -- (18,560,461) --
Comprehensive income (loss) ................. -- -- (18,782,687)
------------- ------------- -------------
Balance at December 31, 1998 ..................... (222,226) (55,156,763) 655,205
Common stock issued .............................. -- -- 101,563
Series C preferred stock dividends ............... -- (868,277) (2,277)
Series D preferred stock issued .................. -- -- 12,015,000
Series F preferred stock issued .................. -- -- 4,691,305
Common stock warrants issued ..................... -- -- 203,452
Comprehensive income (loss):
Unrealized gain on marketable securities .... 391,613 -- --
Net loss .................................... -- (17,384,788) --
Comprehensive income (loss) ................. -- -- (16,993,175)
------------- ------------- -------------
Balance at December 31, 1999 ..................... 169,387 (73,409,828) 671,073
Common stock issued .............................. -- -- 1,578,075
Repurchase and retirement of common stock ........ -- -- (313,189)
Series C preferred stock dividends ............... -- (456,269) (269)
Series D preferred stock dividends ............... -- (420,525) (525)
Common stock warrants issued ..................... -- -- 65,002
Comprehensive income (loss):
Unrealized gain on marketable securities .... 639,568 -- --
Net loss .................................... -- (2,840,900) --
Comprehensive income (loss) ................. -- -- (2,201,332)
------------- ------------- -------------
Balance at June 30, 2000 ......................... $ 808,955 $(77,127,522) $ (201,165)
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999 and for the Period from
October 17, 1986 (inception) to
June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
October 17,
Six Months Ended 1986
June 30, (inception) to
--------------------------------- June 30,
2000 1999 2000
--------------- -------------- ----------------
<S> <C> <C> <C>
Cash outflows from operating activities:
Net loss................................................ $ (2,840,900) $ (2,649,666) $ (74,863,938)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for
services............................................... 77,002 105,642 2,562,427
Non-cash acquisition of research and development
in-process technology................................ -- -- 1,650,000
Depreciation and amortization.......................... 63,423 42,143 542,983
(Gain) loss realized on sale of marketable securities.. (52,614) -- 272,301
Increase in prepaid expenses & other current assets.... (330,845) (85,779) (535,123)
Decrease (increase) in other assets.................... 10,760 (15,642) (150,124)
Decrease in accounts payable and accrued liabilities... (220,723) (83,991) (34,857)
(Decrease) increase in sponsored research payable...... (73,052) -- 925,699
Increase in unearned revenue........................... -- 1,000,000 1,000,000
Other.................................................. 59,116 60,457 297,191
--------------- -------------- ----------------
Net cash used by development stage activities............... (3,307,833) (1,626,836) (68,333,441)
--------------- -------------- ----------------
Cash flows from investing activities:
Proceeds on sale of marketable securities.............. 70,618 -- 245,703
Acquisition of laboratory and office equipment, and
leasehold improvements............................... (40,950) (47,992) (626,662)
Other.................................................. -- 10,000 (57,087)
--------------- -------------- ----------------
Net cash provided (used) by investing activities............ 29,668 (37,992) (438,046)
--------------- -------------- ----------------
Cash flows from financing activities:
Payments on debt and capital leases.................... (3,102) (2,670) (839,276)
Net proceeds from issuance of:
Debt................................................ -- 500,000 5,050,000
Common stock........................................ -- -- 21,418,035
Preferred stock..................................... -- -- 32,741,117
Proceeds from exercise of warrants/stock options....... 1,566,075 74,375 13,059,796
Repurchase and retirement of common stock.............. (313,189) -- (313,189)
Other.................................................. -- (104,145) (500,024)
--------------- -------------- ----------------
Net cash provided by financing activities................... $ 1,249,784 467,560 70,616,459
--------------- -------------- ----------------
Net (decrease) increase in cash and cash equivalents........ (2,028,381) (1,197,268) 1,844,972
Cash and cash equivalents at beginning of period............ 3,874,437 2,456,290 1,084
--------------- -------------- ----------------
Cash and cash equivalents at end of period.................. $ 1,846,056 $ 1,259,022 $ 1,846,056
=============== ============== ================
Noncash investing and financing activities:
Common stock, stock options/warrants issued for
services........................................... $ 77,002 $ 105,642 $ 2,562,427
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... -- -- 5,353,368
Securities acquired under sublicense agreement......... -- -- 850,000
Equipment acquired under capital lease................. -- -- 121,684
Notes payable converted to common stock................ -- -- 749,976
Stock dividends........................................ 876,000 422,987 2,522,824
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 1,070 $ 4,152 $ 277,390
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(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,
1999. 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, 2000 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 six months ended June 30, 2000 and 1999 are not
necessarily indicative of the operating results for the full years.
The consolidated financial statements include the accounts of
Sheffield Pharmaceuticals, Inc. and its wholly owned subsidiaries,
Systemic Pulmonary Delivery, Ltd., Ion Pharmaceuticals, Inc., and CP
Pharmaceuticals, Inc., and its 80.1% owned subsidiary, Respiratory
Steroid Delivery, Ltd., and are herein referred to as "Sheffield" or
the "Company." All significant intercompany transactions are
eliminated in consolidation.
The Company is focused on the development and commercialization of
later stage, lower risk pharmaceutical products that utilize the
Company's unique proprietary pulmonary delivery technologies. 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. 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.
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. RECLASSIFICATIONS
Certain amounts in the prior year financial statements and notes have
been reclassified to conform to the current year presentation.
7
<PAGE> 8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The following 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. The Company's actual results may differ materially from the results
anticipated in the forward-looking statements. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Important Factors
that May Affect Future Results" included herein for a discussion of factors that
could contribute to such material differences. 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 development and
commercialization of later stage, lower risk pharmaceutical products that
utilize the Company's unique proprietary pulmonary delivery technologies. The
Company is in the development stage and, as such, has been principally engaged
in the development of its pulmonary delivery systems. The Company and its
development partners currently have nine products in various stages of
development.
In 1997, the Company acquired the Metered Solution Inhaler ("MSI"), a portable
nebulizer-based pulmonary delivery system, through a worldwide exclusive license
and supply arrangement with Siemens AG ("Siemens"). 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. Additionally, during
1998, Sheffield licensed from Elan Corporation, plc ("Elan"), the Ultrasonic
Pulmonary Drug Absorption System ("UPDAS"), a novel disposable unit dose
nebulizer system, and Elan's Absorption Enhancing Technology, ("Enhancing
Technology") a therapeutic agent to increase the systemic absorption of drugs.
In October 1999, the Company licensed Elan's Nanocrystal(TM) technology to be
used in developing certain inhaled steroid products.
Using the above pulmonary delivery systems and technologies as platforms, the
Company has established strategic alliances for developing its initial products
with Elan, Siemens and Zambon Group SpA ("Zambon").
In a collaboration with Zambon, the Company is developing a range of
pharmaceutical products delivered by the MSI to treat respiratory diseases.
Under its agreement with Zambon, MSI commercial rights for respiratory products
have been sublicensed to Zambon in return for an equity investment in the
Company (approximately 10%). The Company has maintained co-marketing rights for
the U.S. The Company's ability to co-market MSI respiratory products in the U.S.
requires no additional payment by the Company. Zambon has committed to fund the
development costs for respiratory compounds delivered by the MSI, as well as
make certain milestone payments and pay royalties on net sales to the Company
resulting from these MSI products. Initial products for respiratory disease
therapy delivered through the MSI include albuterol, ipratropium, cromolyn and
inhaled steroids.
As part of a strategic alliance with Elan, the Company is developing therapies
for non-respiratory diseases to be delivered to the lungs using both the ADDS
and MSI. In 1998, the systemic applications of the MSI and ADDS were licensed to
Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary of the
Company. In addition, two Elan technologies, UPDAS(TM) and the Enhancing
Technology, were also licensed to SPD. The Company retained exclusive rights
outside of the strategic alliance to respiratory disease applications utilizing
the ADDS technology and the two Elan technologies. Two systemic compounds for
pulmonary delivery are currently under development. For the treatment of
breakthrough pain, the Company is developing morphine delivered through the MSI.
Ergotamine, a therapy for the treatment of migraine headaches, is currently
being developed for use in the ADDS.
In addition to the above alliance with Elan, in 1999, the Company and Elan
formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to develop
certain inhaled steroid products to treat respiratory diseases using Elan's
NanoCrystal technology. The inhaled steroid products to be developed include a
propellant-based steroid formulation for delivery through the ADDS, a
solution-based unit-dose-packaged steroid formulation for delivery using a
conventional tabletop nebulizer, and a solution-based steroid formulation for
delivery using the MSI system, subject to further agreement with Zambon.
8
<PAGE> 9
Outside of these alliances, the Company owns the worldwide rights to respiratory
disease applications of all of its technologies, subject only to the MSI
respiratory rights sublicensed to Zambon.
RESULTS OF OPERATIONS
Revenue
Contract research revenues primarily represent revenue earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of the MSI. Contract research revenue for the second
quarter of 2000 and 1999 were $124,505 and $67,709, respectively. For the first
six months of 2000 and 1999, contract research revenues were $245,675 and
$93,709, respectively. The increase for both the second quarter and first half
of 2000 relates to three additional respiratory programs in development in 2000
as compared to 1999. Costs of contract research revenue approximate such revenue
and are included in research and development expenses. Future contract research
revenues and expenses are anticipated to fluctuate depending, in part, upon the
success of current clinical studies, and obtaining additional collaborative
agreements.
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.
Research and Development
Research and development ("R&D") expenses were $882,755 and $903,684 for the
second quarter of 2000 and 1999, respectively. For the six months ended June 30,
2000 and 1999, R&D costs were $1,784,778 and $1,584,663, respectively. The
decrease of $20,929 in the second quarter of 2000 was primarily due to lower
development costs on the Company's two systemic programs, partially offset by
higher expenses related to (1) the development by RSD of three steroid products
initiated during the fourth quarter of 1999, (2) costs associated with increased
contract research revenue as discussed above, and (3) formulation work begun
during 2000 on an undisclosed respiratory product to be delivered via the ADDS.
The increase for the first half of 2000 was $200,115 primarily reflecting costs
associated with modifications being made to the MSI to enhance its commercial
appeal prior to the start of Phase III MSI-albuterol clinical trials. In
addition, the increase reflects higher costs associated with the above-mentioned
steroid programs and higher contract research costs, partially offset by lower
development costs on the Company's two systemic programs and lower engineering
costs related to the ADDS device.
General and Administrative
General and administrative expenses were $691,421 and 632,693 for the quarters
ended June 30, 2000, and 1999, respectively, and $1,386,145 and $1,132,356 for
the first half of 2000 and 1999, respectively. The increase for both the second
quarter and the first six months of 2000 was primarily due to higher consulting
costs and legal fees associated with expanded business development activity.
Interest
Interest income was $41,991 and $17,476 for the quarter ended June 30, 2000 and
1999, respectively, and $94,492 and $39,353 for the first six months of 2000 and
1999, respectively. The increase in interest income for both the second quarter
and first six months of 2000 was primarily due to larger balances of cash
available for investment and higher average yields on those investments.
Interest expense was $57,124 and $35,818 for the second quarter of 2000, and
1999, respectively, and $107,157 and $65,709 for the first half of 2000 and
1999, respectively. The increase in both the second quarter and first half of
2000 resulted from higher outstanding balances on the Company's convertible
promissory note with Elan, as well as a higher average interest rate on the
note.
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<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $1,846,056 in cash and cash equivalents
compared to $3,874,437 at December 31, 1999. The decrease of $2,028,381
primarily reflects $3,307,833 of cash disbursements used primarily to fund
operating activities and $313,189 to repurchase and retire 91,043 shares of the
Company's common stock, partially offset by $1,566,075 in net proceeds from the
exercise of common stock options and warrants.
During the second quarter of 2000, the Company sold 30,000 shares of its
investment in Lorus Therapeutics, Inc. ("Lorus") for proceeds of $70,618,
resulting in a gain of $52,614. At June 30, 2000, the value of the Company's
remaining Lorus investment of 553,188 shares was $1,140,950.
In October 1999, as part of a licensing agreement with Elan, the Company
received gross proceeds of $17,000,000 related to the issuance to Elan of 12,015
shares of Series D Cumulative Convertible Exchangeable Preferred Stock and 5,000
shares of Series F Convertible Non-Exchangeable Preferred Stock. In turn, the
Company made an equity investment of $12,015,000 in a joint venture, RSD,
representing an initial 80.1% ownership. The remaining proceeds from the
above-mentioned preferred stock issuance will be utilized for general operating
purposes. As part of the agreement, Elan also committed to purchase, on a
drawdown basis, up to an additional $4,000,000 of the Company's Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"). The
proceeds from the Series E Preferred Stock will be utilized by the Company to
fund its portion of RSD's operating and development costs. As of June 30, 2000,
no purchases of Series E Preferred Stock have been made.
In May 1999, in conjunction with the completion of its Phase I/II MSI-albuterol
trial, Zambon provided the Company with a $1,000,000 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 technical milestones, Zambon will provide an
additional $1,000,000 advance under the terms of the agreement.
Since its inception, the Company has financed its operations primarily through
the sale of securities and convertible debentures, from which it has raised an
aggregate of approximately $72.3 million through June 30, 2000, of which
approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $26.8 million has been incurred to
fund certain ongoing technology research projects. The Company expects to incur
additional costs in the future, 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. Therefore, the Company will need substantial
additional capital before it will recognize significant cash flow from
operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights 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.
IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS
The following are some of the factors that could affect the Company's future
results. They should be considered in connection with evaluating forward-looking
statements contained in this report and otherwise made by the Company or on the
Company's behalf, because these factors could cause actual results and
conditions to differ materially from those projected in forward-looking
statements.
The Company's future results are subject to risks and uncertainties including,
but not limited to, the risks that (1) to continue to fund its operations, the
Company may not be able to obtain additional financing on acceptable terms, or
at all, and may be required to delay, reduce the scope of, or eliminate one or
more of its research and development programs, or obtain funds through
arrangements with collaborative partners or others that may require the Company
to relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop; (2) the Company's
product opportunities may
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<PAGE> 11
not be successfully developed, proven to be safe and efficacious in clinical
trials, may not meet applicable regulatory standards, may not receive the
required regulatory approvals, or may not be produced in commercial quantities
at reasonable costs or be successfully commercialized and marketed; (3) the
Company may default in payments required under certain licensing agreements,
thereby potentially forfeiting its rights under those agreements; (4) due to
rapid technological change and innovation, the Company may not have a
competitive advantage in its fields of technology or in any of the fields in
which the Company may concentrate its efforts; (5) government regulation may
prevent or delay regulatory approval of the Company's products; (6) the Company
may not develop or receive sublicenses or other rights related to proprietary
technology that are patentable, one or more of the Company's pending patents may
not issue, or that any issued patents may not provide the Company with any
competitive advantages, or that the patents may be challenged by third parties;
(7) the Company may not have the resources available to build or otherwise
acquire its own marketing capabilities, or that agreements with other
pharmaceutical companies to market the Company's products may not be reached on
terms acceptable to the Company; (8) manufacturing and supply agreements entered
into by the Company will not be adequate or that the Company will not be able to
enter into future manufacturing and supply agreements on terms acceptable to the
Company; (9) private health insurance and government health program
reimbursement price levels may not be sufficient to provide a return to the
Company on its investment in new products and technologies; (10) the Company may
not be able to maintain or will be able to obtain product liability insurance
for any future clinical trials; (11) the failure to meet the American Stock
Exchange's ("AMEX") listing guidelines may result in the Common Stock of the
Company no longer being eligible for listing on the AMEX, which would make it
more difficult for investors to dispose of, or to obtain accurate quotations as
to the market value of the Company's Common Stock; (12) announcements of
developments in the medical field generally, or in the Company's research areas
or by the Company's competitors specifically, may result in having a materially
adverse effect on the market price of the Company's Common Stock; (13) the
exercise of options and outstanding warrants, the conversion of the Company's
currently outstanding convertible securities, or conversion of convertible
securities issuable in the future, may significantly dilute the market price of
shares of the Company's Common Stock, and could impair the Company's ability to
raise capital through the future sale of its equity securities.
Readers are also directed to other risks and uncertainties discussed, as well as
to further discussion of the risks described above, in other documents filed by
the Company with the Securities and Exchange Commission. The Company
specifically disclaims any obligation to update or revise any forward-looking
information, whether as a result of new information, future developments, or
otherwise.
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<PAGE> 12
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
An annual Meeting of Stockholders was held on May 9, 2000. All
management's nominees for director, as listed in the Proxy Statement
for the Annual Meeting, were elected. Listed below are the matters
voted on by Stockholders and the number of votes cast at the Annual
Meeting.
(a) Election of members of the Board of Directors.
<TABLE>
<CAPTION>
Broker Non-Votes
Name Voted for Voted Against Votes Withheld and Abstentions
---- ---------- ------------- -------------- ---------------
<S> <C> <C> <C> <C>
Thomas M. Fitzgerald 23,878,371 -- 43,725 --
Loren G. Peterson 23,863,371 -- 58,725 --
John M. Bailey 23,878,371 -- 43,725 --
Digby W. Barrios 23,878,371 -- 43,725 --
Todd C. Davis 23,878,371 -- 43,725 --
Roberto Rettani 23,878,371 -- 43,725 --
</TABLE>
(b) Ratification of Ernst & Young LLP as independent public
accountant for fiscal year ending December 31, 2000.
<TABLE>
<S> <C>
Voted For: 23,210,678
Voted Against: 506,300
Votes Abstained: 205,118
Broker Non-Votes: --
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30,
2000.
Exhibits
No. Description
27 Financial Data Schedule.
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<PAGE> 13
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, 2000 /s/ Loren G. Peterson
---------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: August 11, 2000 /s/ Scott A. Hoffmann
---------------------
Scott A. Hoffmann
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
13
