<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 SEPTEMBER 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 28,125,293
shares as of November 1, 2000.
<PAGE> 2
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
FORM 10-Q
For the Quarter Ended September 30, 2000
Table of Contents
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999.................................................................3
Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999 and for the
period from October 17, 1986 (inception) to September 30, 2000 ........................4
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency) for the period from October 17, 1986
(inception) to September 30, 2000 .....................................................5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999 and for the period from
October 17, 1986 (inception) to September 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 2. Changes in Securities and Use of Proceeds........................................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
<TABLE>
<CAPTION>
ASSETS September 30, December 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................................... $ 1,644,434 $ 3,874,437
Marketable equity securities ................................................... 921,091 519,387
Prepaid expenses and other current assets ...................................... 369,274 145,237
------------ ------------
Total current assets ........................................................ 2,934,799 4,539,061
------------ ------------
Property and equipment:
Laboratory equipment ........................................................... 432,356 407,624
Office equipment ............................................................... 208,347 178,797
Leasehold improvements ......................................................... 18,320 15,000
------------ ------------
Total at cost ............................................................... 659,023 601,421
Less accumulated depreciation and amortization ................................. (392,673) (311,752)
------------ ------------
Property and equipment, net ................................................. 266,350 289,669
------------ ------------
Patent costs, net of accumulated amortization of $15,700 and $0, respectively ...... 215,947 204,283
Other assets ....................................................................... 50,330 15,642
------------ ------------
Total assets ................................................................... $ 3,467,426 $ 5,048,655
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities ....................................... $ 476,243 $ 773,206
Sponsored research payable ..................................................... 348,629 421,681
------------ ------------
Total current liabilities ................................................... 824,872 1,194,887
Convertible promissory note ........................................................ 2,000,000 2,000,000
Unearned revenue ................................................................... 1,000,000 1,000,000
Other long-term liabilities ........................................................ 337,240 182,695
Commitments and contingencies ...................................................... -- --
------------ ------------
Total liabilities .............................................................. 4,162,112 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; 13,472 and 12,780 shares issued and outstanding at September
30, 2000 and December 31, 1999, respectively .............................. 135 128
Series D cumulative convertible exchangeable preferred stock, authorized
21,000 shares; 12,435 and 12,015 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively .................... 124 120
Series E cumulative convertible non-exchangeable preferred stock,
authorized 9,000 shares; 1,000 and 0 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively..................... 10 --
Series F convertible non-exchangeable preferred stock, 5,000 shares
authorized; 5,000 shares issued and outstanding at September 30, 2000
and December 31, 1999 ................................................... 50 50
Common stock, $.01 par value, authorized 60,000,000 shares; issued and
outstanding 28,105,293 and 27,308,846 shares at September 30, 2000 and
December 31, 1999, respectively ............................................ 281,053 273,088
Additional paid-in capital ..................................................... 77,090,280 73,638,128
Other comprehensive income ..................................................... 616,102 169,387
Deficit accumulated during development stage ................................... (78,682,440) (73,409,828)
------------ ------------
Total stockholders' equity (net capital deficiency) ...................... (694,686) 671,073
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) ................ $ 3,467,426 $ 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 Nine Months Ended September 30, 2000 and 1999 and for the
Period from October 17, 1986 (inception) to September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended October 17, 1986
September 30, September 30, (inception) to
---------------------------- ---------------------------- September 30,
2000 1999 2000 1999 2000
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Contract research revenue ................... $ 46,109 $ 135,740 $ 291,784 $ 229,449 $ 691,162
Sublicense revenue .......................... -- -- -- -- 1,360,000
------------ ------------ ------------ ------------ ------------
Total revenues ........................... 46,109 135,740 291,784 229,449 2,051,162
Expenses:
Acquisition of research and development
in-process technology ....................... -- -- -- -- 29,975,000
Research and development .................... 892,411 1,055,458 2,677,189 2,640,121 27,702,613
General and administrative .................. 521,060 498,734 1,907,205 1,631,090 23,424,755
------------ ------------ ------------ ------------ ------------
Total expenses ........................... 1,413,471 1,554,192 4,584,394 4,271,211 81,102,368
------------ ------------ ------------ ------------ ------------
Loss from operations .......................... (1,367,362) (1,418,452) (4,292,610) (4,041,762) (79,051,206)
Interest income ............................... 21,193 6,696 115,685 46,049 721,726
Interest expense .............................. (57,267) (43,186) (164,424) (108,895) (737,779)
Realized gain (loss) on sale of marketable
securities ................................ 67,031 -- 119,645 -- (205,270)
Minority interest in loss of subsidiary ....... 18,264 -- 62,663 -- 3,047,663
------------ ------------ ------------ ------------ ------------
Loss before extraordinary item ................ (1,318,141) (1,454,942) (4,159,041) (4,104,608) (76,224,866)
Extraordinary item ............................ -- -- -- -- 42,787
------------ ------------ ------------ ------------ ------------
Net loss ...................................... $ (1,318,141) $ (1,454,942) $ (4,159,041) $ (4,104,608) $(76,182,079)
============ ============ ============ ============ ============
Accretion of mandatorily redeemable
preferred stock ............................. -- -- -- -- (103,400)
------------ ------------ ------------ ------------ ------------
Net loss - attributable to common shares ...... $ (1,318,141) $ (1,454,942) $ (4,159,041) $ (4,104,608) $(76,285,479)
============ ============ ============ ============ ============
Weighted average common shares
outstanding-basic and diluted ............... 28,100,673 27,296,346 27,888,877 27,216,481 8,991,323
Net loss per share of common stock - basic and
diluted:
Loss before extraordinary item ............ $ (0.05) $ (0.05) $ (0.15) $ (0.15) $ (8.48)
Extraordinary item ........................ -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net loss per share ........................ $ (0.05) $ (0.05) $ (0.15) $ (0.15) $ (8.48)
============ ============ ============ ============ ============
</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 September 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 .............................. -- 8,875 -- 1,587,450
Repurchase and retirement of common stock ........ -- (910) -- (312,279)
Series C preferred stock dividends ............... 7 -- -- 691,993
Series D preferred stock dividends ............... 4 -- -- 419,996
Series E preferred stock issued .................. 10 -- -- 999,990
Common stock warrants issued ..................... -- -- -- 65,002
Comprehensive income (loss):
Unrealized gain on marketable securities .... -- -- -- --
Net loss .................................... -- -- -- --
Comprehensive income (loss) ................. -- -- -- --
------------ ------------ ------------ ------------
Balance at September 30, 2000 .................... $ 319 $ 281,053 $ -- $ 77,090,280
============ ============ ============ ============
<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 .............................. -- -- 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 .............................. -- -- 1,596,325
Repurchase and retirement of common stock ........ -- -- (313,189)
Series C preferred stock dividends ............... -- (693,046) (1,046)
Series D preferred stock dividends ............... -- (420,525) (525)
Series E preferred stock issued .................. -- -- 1,000,000
Common stock warrants issued ..................... -- -- 65,002
Comprehensive income (loss):
Unrealized gain on marketable securities .... 446,715 -- --
Net loss .................................... -- (4,159,041) --
Comprehensive income (loss) ................. -- -- (3,712,326)
------------ ------------ ------------
Balance at September 30, 2000 .................... $ 616,102 $(78,682,440) $ (694,686)
============ ============ ============
</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 Nine Months Ended September 30, 2000 and
1999 and for the Period from October 17, 1986 (inception) to
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 17, 1986
September 30, (inception) to
--------------------------------- September 30,
2000 1999 2000
------------- ------------- ----------------
<S> <C> <C> <C>
Cash outflows from operating activities:
Net loss ........................................................... $ (4,159,041) $ (4,104,608) $(76,182,079)
Adjustments to reconcile net loss to net cash used by
development stage activities:
Issuance of common stock, stock options/warrants for
services ........................................................ 77,002 129,692 2,562,427
Non-cash acquisition of research and development
in-process technology ........................................... -- -- 1,650,000
Depreciation and amortization ..................................... 96,622 67,867 576,181
(Gain) loss realized on sale of marketable securities ............. (119,645) -- 205,270
Increase in prepaid expenses & other current assets ............... (224,037) (266,807) (428,315)
Decrease (increase) in other assets ............................... (62,054) (15,642) (222,938)
Decrease in accounts payable and accrued liabilities .............. (235,167) (44,735) (49,301)
(Decrease) increase in sponsored research payable ................. (73,052) -- 925,699
Increase in unearned revenue ...................................... -- 1,000,000 1,000,000
Other ............................................................. 95,918 102,072 333,994
------------ ------------ ------------
Net cash used by development stage activities .......................... (4,603,454) (3,132,161) (69,629,062)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities ......................... 164,656 -- 339,741
Acquisition of laboratory and office equipment, and
leasehold improvements......................................... (57,602) (71,652) (643,314)
Other ............................................................. -- 10,000 (57,087)
------------ ------------ ------------
Net cash provided (used) by investing activities ....................... 107,054 (61,652) (360,660)
------------ ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases ............................... (4,739) (4,087) (840,913)
Net proceeds from issuance of:
Debt ........................................................... -- 1,600,000 5,050,000
Common stock ................................................... -- -- 21,418,035
Preferred stock ................................................ 1,000,000 -- 33,741,117
Proceeds from exercise of warrants/stock options .................. 1,584,325 74,375 13,078,046
Repurchase and retirement of common stock ......................... (313,189) -- (313,189)
Other ............................................................. -- (104,145) (500,024)
------------ ------------ ------------
Net cash provided by financing activities .............................. 2,266,397 1,566,143 71,633,072
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents ................... (2,230,003) (1,627,670) 1,643,350
Cash and cash equivalents at beginning of period ....................... 3,874,437 2,456,290 1,084
------------ ------------ ------------
Cash and cash equivalents at end of period ............................. $ 1,644,434 $ 828,620 $ 1,644,434
============ ============ ============
Noncash investing and financing activities:
Common stock, stock options/warrants issued for services........... $ 77,002 $ 129,692 $ 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 ................................................... 1,112,000 643,664 2,522,824
Supplemental disclosure of cash flow information: Interest paid ........ $ 1,777 $ 5,078 $ 278,097
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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
September 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 nine months ended September 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%). 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.
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 to Zambon by the Company. Zambon and the Company are having
discussions regarding the possible modification of their agreement, including
the future marketing arrangements for the MSI respiratory products in the
United States.
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 third
quarter of 2000 and 1999 were $46,109 and $135,740, respectively. For the first
nine months of 2000 and 1999, contract research revenues were $291,784 and
$229,449, respectively. The decrease of $89,631 for the third quarter of 2000
primarily reflects certain nonrecurring MSI device development work and testing
completed by the Company during the third quarter of 1999, partially offset by
three additional respiratory programs in development in 2000 as compared to
1999. The increase for the first nine months of 2000 is primarily due to the
research performed by the Company on the three additional respiratory programs,
partially offset by the nonrecurring development work completed in the third
quarter of 1999 as previously discussed. 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 $892,411 and $1,055,458 for the
third quarter of 2000 and 1999, respectively. For the nine months ended
September 30, 2000 and 1999, R&D costs were $2,677,189 and $2,640,121,
respectively. The decrease of $163,047 in the third quarter of 2000 was
primarily due to lower development costs on the Company's two systemic programs,
and costs associated with decreased contract research revenue as discussed
above, partially offset by higher expenses related to the development by RSD of
three steroid products initiated during the fourth quarter of 1999, and
formulation work begun during 2000 on an undisclosed respiratory product to be
delivered via the ADDS. The slight increase for the first nine months of 2000 of
$37,068 primarily reflects 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 for the nine month
period 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 $521,060 and $498,734 for the quarters
ended September 30, 2000, and 1999, respectively, and $1,907,205 and $1,631,090
for the first nine months of 2000 and 1999, respectively. The increase for both
the third quarter and the first nine months of 2000 was primarily due to higher
consulting costs and legal fees associated with expanded business development
activity.
Interest
Interest income was $21,193 and $6,696 for the quarter ended September 30, 2000
and 1999, respectively, and $115,685 and $46,049 for the first nine months of
2000 and 1999, respectively. The increase in interest income for both the third
quarter and first nine months of 2000 was primarily due to larger balances of
cash available for investment and higher average yields on those investments.
Interest expense was $57,267 and $43,186 for the third quarter of 2000, and
1999, respectively, and $164,424 and $108,895 for the first nine months of 2000
and 1999, respectively. The increase in both the third quarter and first nine
months 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.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $1,644,434 in cash and cash equivalents
compared to $3,874,437 at December 31, 1999. The decrease of $2,230,003
primarily reflects $4,603,454 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 $1,584,325 in net proceeds from the
exercise of common stock options and warrants and $1,000,000 from the issuance
of 1,000 shares of the Company's Series E Cumulative Convertible Preferred Stock
("Series E Preferred Stock").
During the first nine months of 2000, the Company sold 75,000 shares of its
investment in Lorus Therapeutics, Inc. ("Lorus") for proceeds of $164,656,
resulting in a gain of $119,645. At September 30, 2000, the value of the
Company's remaining Lorus investment of 508,188 shares was $921,091.
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 are being 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
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 September 30, 2000, $1,000,000 of Series E Preferred Stock has been purchased
by Elan.
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 Company's use
of the proceeds from this advance are not restricted. 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 $73.3 million through September 30, 2000, of which
approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $27.7 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) the Company may not be able to obtain
additional financing on acceptable terms, or at all, to continue to fund its
operations, 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,
10
<PAGE> 11
product candidates or products that the Company would otherwise seek to develop;
(2) the Company's product opportunities may 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 acceptable terms; (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 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.
11
<PAGE> 12
PART II: OTHER INFORMATION
Item 2. Changes in Securities
On September 29, 2000, the Company sold 1,000 shares of Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock") to
Elan International Services, Ltd. for an aggregate offering price of $1
million. The Company incurred no underwriting discounts or commissions
with the sale of these securities. These securities are convertible
into shares of Common Stock of the Company at $3.89 per Common Share.
The Series E Preferred Stock earns cumulative dividends payable in
shares of Series E Preferred Stock at an annual rate of 9% on the
stated value of each outstanding share of Series E Preferred Stock on
the dividend date. These securities were issued under section 4(2) of
the Securities Act of 1933, as amended, as a transaction not involving
a public offering, and accordingly, were exempt from registration.
Item 6. Exhibits and Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
Exhibits
No. Description
27 Financial Data Schedule.
12
<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: November 3, 2000 /s/ Loren G. Peterson
---------------------
Loren G. Peterson
President & Chief Executive Officer
Dated: November 3, 2000 /s/ Scott A. Hoffmann
---------------------
Scott A. Hoffmann
Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
13
