UNITED STATES
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 QUARTERLY PERIOD ENDED SEPTEMBER 30,
1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-21022
SHAMAN PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3095806
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification Number)
213 East Grand Avenue, CA 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
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 of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $.001 par value, outstanding as of
November 10, 1999: 12,807,945
SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
September 30, 1999
PAGE
NUMBER
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30,
1999 (unaudited) and December 31, 1998 3
Condensed Statements of Operations for the
three and nine months ended September 30, 1999 4
and September 30, 1998 (unaudited)
Condensed Statements of Cash Flows for the
nine months ended September 30, 1999 and 5
September 30, 1998 (unaudited)
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About 12
Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults in Senior Securities 21
Item 4. Submission of Matters to a Vote of Security 21
Holders
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
1999 1998
---------- -----------
(Unaudited
A S S E T S (in thousands)
Current assets:
Cash and cash equivalents $ 3,991 $ 5,887
Short-term investments - 3,277
Accounts receivable 13 -
Inventory 1,030 -
Amounts due from related parties 163 209
Prepaid expenses and other current assets 1,149 284
------- -----------
Total current assets 6,346 9,657
Property and equipment, net 1,985 3,114
Other assets 308 368
---------- -----------
Total assets $ 8,639 $ 13,139
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 1,514 $1,515
Accrued clinical trial costs 970 2,051
Accrued professional fees 1,214 948
Accrued compensation 184 327
Accrued restructuring costs 1,277 -
Advances - contract research - 969
Current installments of long-term obligations 1,838 2,804
---------- -----------
Total current liabilities 6,997 8,614
Long-term obligations, excluding current 1,257 2,415
installments
Stockholders' equity:
Preferred Stock 1 -
Common Stock 6 30
Additional paid-in capital 168,936 152,699
Deferred compensation and other adjustments (27) (185)
Accumulated deficit (168,531) (150,434)
---------- -----------
Total stockholders' equity 385 2,110
---------- -----------
Total liabilities and stockholders'
equity $ 8,639 $ 13,139
========== ===========
NOTE: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to condensed financial statements.
3
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Sept 30, Nine Months Ended Sept 30,
---------------------------- ---------------------------
1999 1998 1999 1998
------------ ----------- ------------ -----------
(in thousands, except per share data)
Revenues:
Product sales $ 13 $ - 13 -
Collaborative agreements 350 560 $ 350 $ 2,285
--------- --------- -------- --------
Total revenues 363 560 363 2,285
Operating expenses:
Cost of goods sold 4 - 4 -
Research and development 1,556 8,537 5,205 24,277
Marketing, General and administrative 1,870 1,589 4,688 4,273
Restructuring costs 985 - 3,038 -
---------- ---------- ---------- ----------
Total operating expenses 4,415 10,126 12,935 28,550
---------- ---------- ---------- ----------
Loss from operations (4,052) (9,566) (12,572) (26,265)
Other Income (expense):
Interest income 30 87 120 444
Interest expense (180) (488) (650) (1,799)
---------- ---------- ---------- ----------
Net loss $ (4,202) $ (9,967) $ (13,102) $ (27,620)
Deemed dividend on Preferred Stock (2,721) (678) (4,995) (678)
---------- ---------- ---------- ----------
Net loss applicable to Common Stockholders $ (6,923) $ (10,645) $ (18,097) $ (28,298)
========== ========== ========== ==========
Basic and diluted net loss per common share $ (1.65) $ (11.05) $ (6.57) $ (30.76)
========== ========== ========== ==========
Shares used in calculation of net loss per share 4,205 963 2,756 920
========== ========== ========== ==========
See Notes to condensed financial statements.
4
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
September 30, September 30,
1999 1998
---------- -----------
(Unaudited)
(in thousands)
Operating activities:
Net loss applicable to Common Stockholders $ (18,097) $ (28,298)
Adjustments to reconcile net loss applicable
to Common Stockholders to net cash used in
operating activities:
Depreciation 573 986
Amortization of warrants and deferred
equity costs 2,891 493
(Gain) loss on disposal of fixed assets (43) 20
Deemed dividend on Preferred Stock 2,381 -
Issuance of Series R Preferred Stock to
consultants and contractors for service rendered 2,640 -
Issuance of Series R Preferred Stock in
connection with settlement of litigation 250 -
Issuance of Series R Preferred Stock to
Lipha S.A. in partial settlement of claims 2,000 -
Series C Preferred Stock issuance expense - 678
Payment of interest in Common Stock 38 569
Other compensation - 72
Changes in operating assets and liabilities:
Trade accounts receivable (13) -
Inventory (1,030) -
Prepaid expenses, current assets and other assets (804) (547)
Accounts payable, accrued professional
fees, accrued compensation, accrued clinical
trial costs, accrued restructuring costs and
contract research advances (651) 1,860
---------- -----------
Net cash used in operating activities (9,865) (24,167)
Investing Activities:
Purchases of available-for-sale investments - (1,999)
Maturities of available-for-sale investments - 5,059
Sales of available-for-sale investments 3,290 6,030
Proceeds on sale of fixed assets due to
restructuring 694 -
Capital expenditures (96) (228)
Employee loans, net of repayment and
forgiveness of interest 46 -
---------- -----------
Net cash provided by investing activities 3,934 8,862
Financing activities:
Proceeds from issuance of Preferred Stock, net 5,672 13,052
Proceeds from issuance of Common Stock, net - 1,494
Issuance of Series R Preferred Stock in
connection with the conversion of convertible
promissory notes 649 -
Principal payments on long-term obligations (2,286) (1,590)
Proceeds from asset financing arrangements - 511
---------- -----------
Net cash used in financing activities 4,035 13,467
Net (decrease) in cash and cash equivalents (1,896) (1,838)
Cash and cash equivalents at beginning of period 5,887 11,341
---------- -----------
Cash and cash equivalents at end of the period $ 3,991 $ 9,503
============ ===========
See Notes to condensed financial statements.
5
SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
1. Basis of Presentation
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
In September 1999, we began our commercialization efforts through our botanicals
division, which we have named ShamanBotanicals.com. Our commercialization plan
includes the use of community building initiatives on the Internet and other
distribution channels, and is based on marketing our exclusive access to our
proprietary branded products. We also have available for out-licensing a
pipeline of botanical product candidates, as well as novel pharmaceutical
products for major human diseases developed by isolating active compounds from
tropical plants with a history of medicinal use.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for a
fair presentation have been included. The results of operations for the interim
periods shown herein are not necessarily indicative of operating results for the
entire year. This unaudited financial data should be read in conjunction with
the audited financial statements and notes thereto included in our Annual Report
on Form 10-K for the fiscal year ended December 31, 1998, filed with the
Securities and Exchange Commission on March 31, 1999.
Until December 1998, we were solely focused on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir, and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.
These unaudited interim financial statements have been prepared assuming
that we will continue as a going concern. We need substantial working capital to
fund our operations. As of September 30, 1999, we had cash, cash equivalents and
short-term investment balances of approximately $4.0 million. Our short and
long-term capital requirements will depend on numerous factors, including among
others, the extent and progress of additional development activities related to
the botanical products, the success of any marketing efforts related to the
botanicals products, the success of any out-licensing efforts with respect to
the pharmaceutical programs, and the extent and timing of additional costs
associated with patents and other intellectual property rights. Our projections
show that cash on hand as of September 30, 1999 should be sufficient to fund
operations at the current level only through the first quarter of 2000. Unless
we are successful in our efforts to sell or out-license our pharmaceutical
products, or to sell or establish collaborative agreements to sell our botanical
products, we will be unable to fund our current operations beyond the first
quarter of 2000. Sales of our first product, SB-NSF, have not resulted in any
significant revenues or earnings to date. Although the product was available
starting July 30, 1999, Shaman did not start promoting this product until late
September 1999. In addition, unless we are successful in our efforts to raise
additional capital through offerings of equity securities, to sell or
out-license our pharmaceutical products, or to sell or establish collaborative
agreements to sell our botanical products, our cash resources will be used to
satisfy our existing liabilities, and we will be unable to fund our operations,
which may result in significant delay of our planned activities or the cessation
of all operations. Even if we are successful in these efforts to raise
additional funds, such funds may not be adequate to fund our operations on a
long-term basis.
In addition, we will likely need additional capital to fund the redemption
of our Series D Preferred Stock or to pay accumulated dividends. The delisting
of our common stock from The Nasdaq National Market on February 2, 1999
constituted an optional redemption event for our Series D Preferred Stock. Since
we do not have adequate resources to pay to redeem the Series D Preferred Stock,
we have issued a notice to the holders of the Series D Preferred Stock as
required under our charter that prevented the redemption of the Series D
Preferred Stock. Under the terms of our charter, the effect of preventing this
redemption event by issuing the notice was to increase the annual cumulative
dividend payable to the Series D Preferred Stock holders to $180 per share and
to adjust the conversion price of the Series D Preferred Stock to 72% of the
lowest trading price of our common stock for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
6
or the New York Stock Exchange. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999. We do not believe we will be listed on any of these markets or
exchanges in the foreseeable future.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and
commercialize products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, or cease operations altogether, which would have a material adverse
effect on our business, financial condition and results of operations.
2. Restructuring Expenses
On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all of our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees (65% of workforce); sale or disposal of all of our
fixed assets that are not needed for our botanicals business; and sub-leasing a
portion of our facility.
The termination of 60 employees occurred on February 1, 1999. The
following table summarizes Shaman's restructuring activities as of September 30,
1999.
Total
Restructuring Balance at
Category Charges Spending September
30, 1999
----------------- ------------ ----------- -----------
(in thousands)
Severance and
related charges $ 467 $ 4 $ 0
Cancellation of
contracts 1,200 0 1,200
Other 1,414 1,337 77
Gain on disposal
of fixed assets (43) (43) 0
--------- --------- ---------
$ 3,038 $ 1,761 $ 1,277
========== ============ ==========
At June 30, 1999, we had approximately $969,000 recorded as deferred
revenue, which we had not yet earned. In August 1999, we issued 133,334 shares
of Series R Preferred Stock, having a value of $2.0 million, to Lipha S.A. in
partial settlement of claims made by Lipha S.A. in connection with the
pharmaceutical research and development agreement between Shaman and Lipha S.A.
Out of the $2.0 million, we applied $969,000 to deferred revenue and the balance
to restructuring expenses. We are currently in negotiations with Lipha S.A. for
the discontinuation of the pharmaceutical research and development agreement
between Shaman and Lipha S.A.
3. Series R Preferred Stock Financing
In August 1999, Shaman completed the Series R Preferred Stock rights
offering. In the rights offering, Shaman sold 717,149 shares of Series R
Convertible Preferred Stock at $15.00 per share to Shaman's common stockholders
of record on July 14, 1999, raising net proceeds of approximately $5.7 million.
Each share of Series R Preferred Stock will automatically convert on February 1,
2000 into shares of common stock at a conversion price equal to the lesser of
(i) $0.10 or (ii) the price that is equal to 10% of the average closing sales
price of our common stock for the 10 trading days ending three trading days
prior to February 1, 2000.
4. License and Sale Agreement
In August 1999, we entered into a License and Sale Agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and an additional $55,000 for an option fee to a specific piece of
technology. Shaman will receive royalties on any resulting products
commercialized. Metabolix, Inc. also has an option to license further technology
for additional up-front payments over the next four months. In October 1999, we
received an additional $250,000 up-front payment from Metabolix, for which
Metabolix exercised its option to license other technology.
7
5. Convertible Promissory Notes
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement were due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
the convertible promissory notes was accrued at an annual rate of 12%. The
convertible promissory notes were secured by certain assets of Shaman and were
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurred prior to December 31, 1999. In connection with the
credit agreement, we issued warrants to purchase shares of Series R Preferred
Stock. The number of shares subject to these warrants is equal to 50% of the
debt amount divided by $15, which was the per share sale price of the Series R
Preferred Stock. These warrants are exercisable, on a cashless basis, commencing
on April 5, 1999, and through the third anniversary date of the public offering.
The conversion price of the convertible promissory notes and the exercise price
of the warrants was $15, which was the per share offering price of the Series R
Preferred Stock. In September 1999, a total of $649,275 of principal and
interest under these notes was converted into 43,285 shares of Series R
Preferred Stock and a total of $374,816 of principal and interest under these
notes was repaid to the note holders.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are focused on the discovery, development, and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
In September 1999, we began implementing our commercialization efforts through
our botanicals division, which we have named ShamanBotanicals.com. Our
commercialization plan includes the use of community building initiatives on the
Internet and other distribution channels, and is based on marketing our
exclusive access to our proprietary branded products. We also have available for
out-licensing a pipeline of botanical product candidates, as well as novel
pharmaceutical products for major human diseases developed by isolating active
compounds from tropical plants with a history of medicinal use.
Until December 1998, we were solely focused on developing pharmaceutical
products derived from tropical plant sources. Our pharmaceutical business model
was dependent upon our ability to launch our first pharmaceutical product in
1999. As a result of the U.S. Food and Drug Administration response to our
proposed fast-track New Drug Application package for our leading pharmaceutical
product candidate, SP-303/Provir, and insufficient resources to continue the
costly process of conducting a second pivotal trial which would have created
significant delays, we restructured our business to focus on the development and
marketing of dietary supplements.
Results of Operations for the Quarters Ended September 30, 1999 and 1998
The results of operations for the quarter and nine months ended September
30, 1998 were related to our pharmaceutical operations. Since we ceased
operations of our pharmaceutical business and focused our efforts in our
botanical business starting February 1999, our results of operations for the
nine months ended September 30, 1999 and future periods are not comparable to
the same periods last year.
The sales of our first product, SB-NSF, have not resulted in any
significant revenues or earnings to date. For the quarter ended September 30,
1999, product revenues were $13,000. Although the product was available starting
July 30, 1999, Shaman did not start promoting this product until late September
1999.
We recorded collaborative revenues of $350,000 and $560,000 for the
quarters ended September 30, 1999 and 1998, respectively, and $350,000 and
$2,285,000 for the nine months ended September 30, 1999 and 1998, respectively.
Revenues for the quarter and nine months ended September 30, 1999 resulted from
the License Agreement with Metabolix, Inc. Revenues for the quarter and nine
months ended September 30, 1998 resulted from Shaman's collaboration with Lipha
S.A. and research funding from Ono Pharmaceutical Co., Ltd., which expired in
May 1998.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha S.A. Under the new terms, we forgave $6.0 million in aggregate payments
due over the remaining term of the original agreement in exchange for a one-time
up-front payment of an aggregate of $2.0 million, consisting of a $1.0 million
research payment (which as of June 30, 1999 was recorded as deferred revenue
that we had not yet earned) and a $1.0 million equity investment. We are
currently in negotiations with Lipha S.A. for the discontinuation of this
agreement. There will be no further research payments from Lipha/Merck. In
August 1999, we issued 133,334 shares of Series R Preferred Stock, having a
value of $2.0 million, to Lipha S.A. in partial settlement of claims made by
Lipha S.A. in connection with the pharmaceutical research and development
agreement between Shaman and Lipha S.A. Out of the $2.0 million, we applied
$969,000 to deferred revenue and the balance to restructuring expenses.
We incurred research and development expenses of $1.6 million and $8.5
million for the quarters ended September 30, 1999 and 1998, respectively, and
$5.2 million, of which $3.0 million was related to the research and development
of the botanicals division, and $24.3 million for the nine months ended
September 30, 1999 and 1998, respectively. This decrease was primarily
attributable to the closing down of our pharmaceutical business as of February
1, 1999. Research and development expenses are expected to continue to decrease
in 1999 as we focus our efforts in our botanicals business.
Marketing, general and administrative expenses were $1.9 million and $1.6
million for the quarters ended September 30, 1999 and 1998, respectively, and
$4.7 million and $4.3 million for the nine months ended September 30, 1999 and
1998, respectively. This increase was primarily attributable to the marketing
expenses related to the launch our of first botanical product, SB-NSF. General
and administrative expenses are expected to decrease in 1999 as we focus our
efforts on our botanicals business, partially offset by marketing expenses.
Interest income was $30,000 and $88,000 for the quarters ended September
30, 1999 and 1998, respectively, and $120,000 and $444,000 for the nine months
ended September 30, 1999 and 1998, respectively. Interest income decreased for
the quarter and nine months ended September 30, 1999, compared with the quarter
and nine months ended September 30, 1998, due to lower average cash and
investment balances as we continue to fund our operations. Interest expense was
$180,000 and $488,000 for the quarters ended September 30, 1999 and 1998,
respectively, and $650,000 and $1,799,000 for the nine months ended September
9
30, 1999 and 1998, respectively. Interest expense decreased for the period ended
September 30, 1999, compared with the period ended September 30, 1998 due to
lower average debt balances.
Restructuring Expenses
On February 1, 1999, we initiated a restructuring plan in which we closed
down the operations of our pharmaceutical business. We now intend to out-license
worldwide marketing rights to all of our pharmaceutical compounds and will focus
our efforts on the development and commercialization of botanical dietary
supplements. The restructuring plan includes: cessation of pharmaceutical
research and development activities and related operations; outlicensing of all
of our current pharmaceutical research programs; reduction in force of
approximately 60 employees (65% of workforce; sale or disposal of all of our
fixed assets that are not needed for our botanicals business; and sub-leasing a
portion of our facility.
The termination of 60 employees occurred on February 1, 1999. The
following table summarizes Shaman's restructuring activities as of September 30,
1999.
Total
Restructuring Balance at
Category Charges Spending September
30, 1999
----------------- ------------ ----------- -----------
(in thousands)
Severance and
related charges $ 467 $ 4 $ 0
Cancellation of
contracts 1,200 0 1,200
Other 1,414 1,337 77
Gain on disposal
of fixed assets (43) (43) 0
--------- --------- ---------
$ 3,038 $ 1,761 $ 1,277
========== ============ ==========
At June 30, 1999 we had approximately $969,000 recorded as deferred
revenue, which we had not yet earned. In August 1999, we issued 133,334 shares
of Series R Preferred Stock, having a value of $2.0 million, to Lipha S.A. in
partial settlement of claims made by Lipha S.A. in connection with the
pharmaceutical research and development agreement between Shaman and Lipha S.A.
Out of the $2.0 million, we applied $969,000 to deferred revenue and the balance
to restructuring expenses. We are currently in negotiations with Lipha S.A for
the discontinuation of the pharmaceutical research and development agreement
between Shaman and Lipha S.A.
Delisting of our common stock from Nasdaq National Market
The delisting of our common stock from The Nasdaq National Market on
February 2, 1999 constituted an optional redemption event for our Series D
Preferred Stock. Since we do not have adequate resources to pay to redeem the
Series D Preferred Stock, we have issued a notice to the holders of the Series D
Preferred Stock as required under our charter that prevented the redemption of
the Series D Preferred Stock. Under the terms of our charter, the effect of
preventing this redemption event by issuing the notice was to increase the
annual cumulative dividend payable to the Series D Preferred Stock holders to
$180 per share and to adjust the conversion price of the Series D Preferred
Stock to 72% of the lowest trading price for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999.
10
Liquidity and Capital Resources
As of September 30, 1999, our cash, cash equivalents, and investments
totaled approximately $4.0 million, compared with $9.2 million at December 31,
1998. We invest excess cash according to our investment policy that provides
guidelines with regard to liquidity, type of investment, credit ratings and
concentration limits.
In August 1999, Shaman completed the Series R Preferred Stock rights
offering. In the rights offering, Shaman sold 717,149 shares of Series R
Convertible Preferred Stock at $15.00 per share to Shaman's common stockholders
of record on July 14, 1999, raising net proceeds of approximately $5.7 million.
In August 1999, we entered into a License and Sale Agreement with
Metabolix, Inc. whereby Metabolix, Inc. has licensed certain rights to Shaman's
library of extracts and compounds for research, development, and
commercialization purposes. We have received an up-front license payment of
$350,000 and an additional $55,000 for an option fee to specific piece of
technology. We will receive royalties on any resulting products commercialized.
Metabolix, Inc. also has an option to license further technology for additional
up-front payments over the next four months. In October 1999, we received an
additional $250,000 up-front payment from Metabolix, for which Metabolix
exercised its option to license other technology.
In April 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors, pursuant to which we borrowed approximately $1.0 million
in July 1999. The convertible promissory notes issued pursuant to the credit
agreement were due and payable on the earlier of (i) 30 days subsequent to the
completion of the public rights offering, or (ii) December 31, 1999. Interest on
the convertible promissory notes was accrued at an annual rate of 12%. The
convertible promissory notes were secured by certain assets of Shaman and were
convertible into shares of Series R Preferred Stock, or into common stock if no
public offering occurs prior to December 31, 1999. In connection with the credit
agreement, we issued warrants to purchase shares of Series R Preferred Stock.
The number of shares subject to these warrants is equal to 50% of the debt
amount divided by $15, which was the per share sale price of the Series R
Preferred Stock. These warrants are exercisable, on a cashless basis, commencing
on April 5, 1999, and through the third anniversary date of the public offering.
The conversion price of the convertible promissory notes and the exercise price
of the warrants was $15, which was the per share offering price of the Series R
Preferred Stock. In September 1999, a total of $649,275of principal and interest
under these notes was converted into 43,285 shares of Series R Preferred Stock
and a total of $374,816 of principal and interest under these notes was repaid
to the note holders.
We expect to continue to incur losses through 2000. We need substantial
working capital to fund our operations. As of September 30, 1999, we had cash,
cash equivalents and short-term investment balances of approximately $4.0
million. Our short and long-term capital requirements will depend on numerous
factors, including among others, the extent and progress of additional
development activities related to the botanical products, the success of any
marketing efforts related to the botanical products, the success of any
out-licensing efforts with respect to the pharmaceutical programs, and the
extent and timing of additional costs associated with patents and other
intellectual property rights. Our projections show that cash on hand as of
September 30, 1999 should be sufficient to fund operations at the current level
only through the first quarter of 2000. Unless we are successful in our efforts
to sell or out-license our pharmaceutical products, or to sell or establish
collaborative agreements to sell our botanical products, we will be unable to
fund our current operations beyond the first quarter of 2000. Sales of our first
botanical product, SB-NSF, have not resulted in any significant revenues or
earnings to date. Although the product was available starting July 30, 1999,
Shaman did not start promoting this product until late September 1999. In
addition, unless we are successful in our efforts to raise additional capital
through offerings of equity securities, to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, our cash resources will be used to satisfy our
existing liabilities, and we will be unable to fund our operations, which may
result in significant delay of our planned activities or the cessation of
operations. Even if we are successful in these efforts to raise additional
funds, such funds may not be adequate to fund our operations on a long-term
basis.
In addition, we will likely need additional capital to fund the redemption
of our Series D Preferred Stock or to pay accumulated dividends. The delisting
of our common stock from The Nasdaq National Market on February 2, 1999
constituted an optional redemption event for our Series D Preferred Stock. Since
we do not have adequate resources to pay to redeem the Series D Preferred Stock,
we have issued a notice to the holders of the Series D Preferred Stock as
required under our charter that prevented the redemption of the Series D
Preferred Stock. Under the terms of our charter, the effect of preventing this
redemption event by issuing the notice was to increase the annual cumulative
dividend payable to the Series D Preferred Stock holders to $180 per share and
to adjust the conversion price of the Series D Preferred Stock to 72% of the
lowest trading price of our common stock for a designated period prior to the
conversion. The notice preventing the redemption of the Series D Preferred Stock
will remain in effect for as long as our securities are not listed on any of The
Nasdaq National Market, The Nasdaq SmallCap Market, the American Stock Exchange
or the New York Stock Exchange. In connection with the issuance of such notice,
we recorded a deemed dividend charge in the amount of $2,273,614 in the first
quarter of 1999. We do not believe we will be listed on any of these markets or
exchanges in the foreseeable future.
11
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, or cease operations altogether, which would have a material adverse
effect on our business, financial condition and results of operations.
Year 2000 Compliance
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of our computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in similar normal business activities.
Based on recent assessments, we have determined that we will not be
required to modify or replace significant portions of our software and hardware
to insure that those systems will properly utilize dates beyond December 31,
1999. We presently believe that with achievable modifications and modest
replacement of existing software and certain hardware, the Year 2000 issue can
be mitigated. However, if such modifications and replacements are not made, or
are not completed on a timely basis, the Year 2000 Issue could have an impact on
our operations.
We have completed the assessment of all internal information technology
and non-information technology systems that could be significantly affected by
the Year 2000. To date, we have incurred approximately $9,000 related to the
Year 2000 compliance and we estimate that upgrades for those systems not in
compliance will total approximately $10,000. We expect to complete our internal
Year 2000 readiness program by November 30, 1999. We are in the process of
querying our significant suppliers and subcontractors regarding their Year 2000
remediation activities. To date, we are not aware of any external agent with a
Year 2000 Issue that would materially impact our results of operations,
liquidity, or capital resources. However, we have no means of ensuring that
external agents will be Year 2000 ready. The inability of external agents to
complete their Year 2000 resolutions to process in a timely fashion could
materially impact us.
We currently have no contingency plans in place in the event we do not
complete all phases of the Year 2000 program but we are developing a plan based
on the information obtained from third parties and an on-going evaluation of our
systems. We anticipate having a contingency plan in place by November 30, 1999,
which will include development of backup procedures and identification of
alternate suppliers.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
No significant change in market risk has occurred since we filed our
Annual Report on Form 10-K for the year ended December 31, 1998. Reference is
made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market
Risk, in our Annual Report on Form 10-K for the year ended December 31, 1998.
12
Certain Factors that May Affect Future Results
This Form 10-Q contains, in addition to historical information,
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, that involve risks and uncertainties. Shaman's actual results could
differ materially from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include those
discussed below and also in "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and elsewhere in our
Form 10-K for the fiscal year ended December 31, 1998, filed with the Securities
and Exchange Commission on March 31, 1999.
If we do not raise significant additional capital, we will be unable to fund
continuing operations, and will likely be forced to cease operations
We need substantial working capital to fund our operations. As of
September 30, 1999, we had cash, cash equivalents and short-term investment
balances of approximately $4.0 million. Our long-term capital requirements will
depend on numerous factors, including among others, the extent and progress of
additional development activities related to the botanical products, the success
of any marketing efforts related to the botanical products, the success of any
out-licensing efforts with respect to the pharmaceutical programs. Our
projections show that cash on hand as of September 30,1999, should be sufficient
to fund operations at the current level only through the first quarter of 2000.
Unless we are successful in our efforts to sell or out-license our
pharmaceutical products, or to sell or establish collaborative agreements to
sell our botanical products, we will be unable to fund our current operations
beyond the first quarter of 2000. Sales of our first botanical product, SB-NSF,
have not resulted in any significant revenues or earnings to date. Although the
product was available starting July 30, 1999, Shaman did not start promoting
this product until late September 1999. In addition, unless we are successful in
our efforts to raise additional capital through offerings of equity securities,
to sell or out-license our pharmaceutical products, or to sell or establish
collaborative agreements to sell our botanical products, our cash resources will
be used to satisfy our existing liabilities, and we will therefore be unable to
fund our operations, which may result in significant delay of our planned
activities or the cessation of operations. Even if we are successful in these
efforts to raise additional funds, such funds may not be adequate to fund our
operations on a long-term basis.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development, or commercialization
programs, or cease operations altogether, which would have a material adverse
effect on our business, financial condition and results of operations.
If we are unable to continue as a going concern, stockholders will lose
their investment
We have suffered recurring and significant losses from operations. We have
also relied upon debt and equity financing to fund these losses and cash flow
deficits. Cash flows from future operations, if any, may not be sufficient to
enable us to continue our current level of operations, or to meet our debts as
they come due. Sales of our first botanical product, SB-NSF, have not resulted
in any significant revenues or earnings to date. Although the product was
available starting July 30, 1999, Shaman did not start promoting this product
until late September 1999. As a result of these factors, we may not be able to
continue as a going concern. For the year ended December 31, 1998, our
independent auditors have issued a report, which contains explanatory language
for the uncertainty related to our ability to continue as a going concern. If we
are to remain as a going concern, we will need to become and thereafter remain
profitable and may also need financing in addition to the funds raised in rights
offering. We may not be successful in achieving profitability or in obtaining
new financing and may have to curtail or cease operations, which could cause our
stockholders to lose their investment.
We have a history of operating losses, expect continuing losses and may
never achieve profitability
We have incurred significant losses in each year since our founding in
1989 and expect to continue to incur losses for the foreseeable future. We
incurred a net loss of approximately $13.1 million for the nine months ended
September 30, 1999 and additional non-cash expense of $ 5.0 million incurred in
connection with the issuance of the control notice to holders of Series D
Preferred Stock and the issuance of Series R Preferred Stock in August 1999. As
of September 30, 1999, our accumulated deficit was approximately $168.5 million.
If we are to become and remain profitable, we will need to, among other things,
first generate product revenues. We have not generated any significant product
sales to date. We have changed the direction of our operations and are pursuing
a new business model in the botanical dietary supplement industry. In the third
quarter of 1999, we introduced our first product, SB-NSF, for commercial sale.
Sales of this product have not resulted in any significant revenues or earnings
to date. Although the product was available starting July 30, 1999, Shaman did
not start promoting this product until late September 1999. We are also
exploring other botanical dietary supplement products for development and
commercial introduction. In order to generate revenues or profits, we must
13
successfully market SB-NSF and other products or enter into collaborative
agreements with others who can successfully market them. SB-NSF and any other
products we may introduce may not achieve market acceptance and we may not
achieve profitability.
Our pharmaceutical product candidates and compounds are still in the
research and development stage and we have ceased all our pharmaceutical
operations. In order to generate revenues from these products, we must
out-license these product candidates. It is possible that our out-licensing
efforts may not be successful, and that we or our licensees may not obtain
required regulatory approvals. Even if our product candidates are developed and
introduced, they may not be successfully marketed or may not achieve market
acceptance or we may not achieve profitability.
If we do not have on February 1, 2000, an adequate number of common stock shares
authorized to effect the conversion of all of the preferred stock, all or a
portion of the Series R Preferred Stock may remain outstanding indefinitely or
until an adequate number of common stock shares are authorized, which could
adversely affect the liquidity and price of the Series R Preferred Stock
Each share of our outstanding Series R Preferred Stock will automatically
convert on February 1, 2000 into a number of shares of common stock equal to
$15.00 divided by the conversion price then in effect. The conversion price
shall be equal to the lesser of $0.10 per share, or the price that is equal to
10% of the average closing sales price of our common stock for the 10 trading
days ending three trading days prior to February 1, 2000. Our certificate of
incorporation provides that the Series R Preferred Stock will convert on
February 1, 2000 only to the extent that we have enough common stock shares
authorized to issue all shares of common stock needed to effect the conversion
of all outstanding shares of Series R Preferred Stock, after taking into account
the number of common stock shares necessary to effect the conversion of any then
outstanding shares of Series C Preferred Stock and Series D Preferred Stock. In
the event that we do not have enough shares authorized, only the portion of the
Series R Preferred Stock for which we have authorized shares of common stock,
will be converted, on a pro rata basis among the holders of the Series R
Preferred Stock. The remaining shares will remain outstanding until we have
amended our certificate of incorporation to authorize an adequate number of
common stock shares. Based on the current trading price of our common stock, we
do not have enough common stock available to issue common stock upon conversion
of the outstanding shares of Series R Preferred Stock and will need to authorize
additional shares of common stock to effect the conversion of all shares of our
outstanding preferred stock, which will require stockholder approval. We
anticipate submitting to the stockholders, prior to the conversion date of the
Series R Preferred Stock, a proposal to increase the number of shares of common
stock authorized to be issued to a number adequate to effect the conversion of
all of the outstanding preferred stock, including the Series R Preferred Stock.
If the stockholders do not approve such an increase in the authorized common
stock, all or a portion of the Series R Preferred Stock will likely not convert
on February 1, 2000 and may remain outstanding indefinitely after February 1,
2000 until we are able to amend our certificate of incorporation to authorize
additional shares of common stock to effect this conversion. The delay in
conversion of or the indefinite inability to convert all or a portion of the
Series R Preferred Stock, or the Series C or Series D Preferred Stock, may
decrease the liquidity and the market price of the preferred stock.
The ownership interests of our common stockholders will be substantially reduced
by future issuances of stock upon exercises and conversions of currently
outstanding options, warrants and preferred stock
We currently have outstanding many securities that are convertible into
shares of common stock. The holders of common stock will be diluted upon the
exercise of outstanding options and warrants and upon conversion of the Series C
Preferred Stock, the Series D Preferred Stock and Series R Preferred Stock. The
Series D Preferred Stock is currently convertible into common stock at a price
equal to 72% of the market price of the common stock, and the Series C Preferred
Stock is currently convertible at a price equal to 85% of the market price of
the common stock and may be freely resold on the public market. The Series R
Preferred Stock will automatically convert on February 1, 2000 at a price equal
to 10% of the market price of our common stock and may be freely resold on the
public market. The common stock issued upon conversion of the Series C, Series D
and Series R Preferred Stock will substantially dilute the existing common stock
and will likely depress the price of the common stock if large amounts are
offered for sale in the open market.
If we are not successful in transitioning into the botanical dietary supplements
business, we may never achieve revenues or profitability
We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization.
We have no experience in this new industry segment and must create a new
business model. Some skills and relationships developed over time may not be
transferable to our new business. While we have been working with natural
products since our inception, we have no prior experience manufacturing or
marketing dietary supplements. Our marketing efforts for our first product,
SB-NSF, have not resulted in any significant sales to date. Although the product
was available starting July 30, 1999, we did not start promoting this product
until late September 1999. We have no experience running a business with product
sales. We may not be successful in these activities and may never generate
revenues or profitability from our botanicals business.
Our botanical products are at various stages of development, ranging from
initial research to final formulation. We will need to conduct additional
research and development to move our product candidates toward
commercialization. Our research and development efforts on potential products
may not lead to development of products that we can successfully commercialize.
In addition, we may not be able to produce our products in commercial quantities
at acceptable costs, or to market and sell our products successfully. Our
14
products may also prove to have undesirable or unintended side effects that may
prevent or limit their commercial use. Accordingly, we may curtail, redirect,
suspend or eliminate our product development or commercialization at any time.
If third party manufacturers on whom we rely fail to perform their services, our
supply of products would be delayed and possibly disrupted
We currently produce products only in pilot scale quantities and do not
have the staff or facilities necessary to manufacture products in commercial
quantities. Therefore, we must rely on collaborative partners or third party
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should
we or our third party manufacturers encounter delays or difficulties in
producing, packaging and distributing our finished products, our clinical trials
and market introduction and subsequent sales of our products could be adversely
affected.
Contract manufacturers must conform to certain Good Manufacturing
Practices regulations for foods on an ongoing basis. Our dependence on third
parties for the manufacture of our products may adversely affect our ability to
develop and deliver products on a timely and competitive basis.
Since we have only a limited marketing staff, we may never achieve adequate
sales and revenues to achieve profitability
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan for our
first product, SB-NSF, or subsequent products, we may not achieve a successful
product entry into the marketplace and may fail to achieve adequate sales and
revenues from our botanical products to achieve profitability. Our marketing
efforts for SB-NSF have not resulted in any significant sales to date. It is
unlikely we would ever achieve profitability if our first product is not
successfully marketed and sold.
If we fail to compete in the intensely competitive botanical dietary supplement
industry, we may never achieve profitability
The dietary supplement business is highly competitive and is characterized
by significant pressure on pricing and heavy commitment of marketing resources
for commodity products. Although our products are proprietary, we may face
competition from start-up companies developing and marketing new commercial
products that have or claim to have similar functionality. Our failure to
successfully compete for customers would inhibit our future growth, revenues and
profitability.
If we do not succeed in marketing our botanical products over the Internet, we
may be unable to sell adequate volumes of our products or generate revenues
adequate to achieve profitability
We are currently marketing our first product, SB-NSF, directly to
consumers through the Internet on our web site and through a toll-free customer
service line. We have no experience in marketing any product on the Internet,
and we have no market visibility or brand name awareness on the Internet.
Although Internet sites marketing dietary supplements do exist, the Internet may
never develop as a strong or viable marketing and distribution channel for
dietary supplements. Our Internet marketing efforts for SB-NSF have not resulted
in any significant sales to date. Although the product was available starting
July 30, 1999, Shaman did not start promoting this product until late September
1999.We may not be successful in using the Internet as a direct marketing and
distribution channel for our products, and if we do not succeed, we may be
unable to generate adequate revenues to achieve profitability.
Since our business plan relies substantially on marketing our future products
over the Internet, if our third party Internet access providers fail to keep our
web site operational, sales of our products would be disrupted and our marketing
efforts would be harmed.
We are currently marketing our first product primarily over the Internet,
and rely on third parties to provide us with access to the Internet and to
enable commerce over our web site, including providing adequate security of
information provided over the web site. Any failure by such third party
providers to provide uninterrupted access by our customers to our web site and
to ensure that commerce can be conducted on our web site would disrupt sales and
discourage use of our web site by customers, which would have a material adverse
effect on our revenues and profits.
On-line security breaches of our web site could harm our business by
substantially increasing our costs, exposing us to liability and harming our
sales and marketing efforts
A significant barrier to electronic commerce and communications is the
secure transmission of confidential information over public networks. We plan to
rely on encryption and authentication technology licensed from third parties to
provide the security and authentication necessary to effect secure transmission
of confidential information to and from our web site. It is possible that
advances in computer capabilities, new discoveries or other developments will
result in a compromise or breach of the algorithms that we select for this
purpose. We may be required to expend significant capital and other resources to
protect against the threat of such security breaches or to alleviate problems
caused by such breaches. The public's concern over the security of Internet
transactions and the privacy of users may also inhibit the growth of the web as
a means of conducting commercial transactions. To the extent that our activities
or those of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
15
expose us to a risk of loss or litigation and possible liability. Our security
measures may not be sufficient to prevent security breaches, and the failure to
prevent such security breaches could increase our costs, disrupt our sales and
marketing efforts and result in costly liability to Shaman.
Government regulation of dietary supplements could increase our costs or
prohibit or limit sales of our products
The manufacturing, processing, formulating, packaging, labeling and
advertising of our botanical dietary supplement products are subject to
regulation in the United States by several federal agencies, including the Food
and Drug Administration, the Federal Trade Commission, the Consumer Product
Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states and localities where we will distribute and sell our products.
The composition and labeling of dietary supplements is most actively
regulated by the FDA under the provisions of the Federal Food, Drug, and
Cosmetic Act. The FFDC Act has been revised in recent years by the Nutrition
Labeling and Education Act of 1990 and by the Dietary Supplement Health and
Education Act of 1994.
Our botanical product candidates are generally regulated as dietary
supplements under the 1994 Dietary Supplement Health and Education Act, and are,
therefore, generally not subject to pre-market approval by the FDA. However,
these product candidates are subject to FDA regulation, particularly relating to
adulteration and misbranding. For instance, we are responsible for ensuring that
all dietary ingredients in a supplement are safe, and must notify the FDA in
advance of putting a product containing a new dietary ingredient, defined as an
ingredient not marketed in the United States before October 15, 1994, on the
market and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Currently, we are only pursuing products that are old
dietary ingredients and are therefore not subject to this procedure. Further, if
we make statements about a supplement's effects on the structure or function of
the body, we must, among other things, substantiate that the statements are
truthful and not misleading. In addition, our product labels must bear proper
ingredient and nutritional labeling and we must manufacture our supplements in
accordance with current Good Manufacturing Practices regulations for foods. A
product can be removed from the market if it is shown to pose a significant or
unreasonable risk of illness or injury. Moreover, if the FDA determines that the
"intended use" of any of the our products is for the diagnosis, cure,
mitigation, treatment or prevention of disease, the product would meet the
definition of a drug and would require pre-market approval of safety and
effectiveness prior to its manufacture and distribution. Our failure to comply
with applicable FDA regulatory requirements may result in, among other things,
injunctions, product withdrawals, recalls, product seizures, fines, and criminal
prosecution.
In March 1999, new FDA regulations governing the labeling of dietary
supplements took effect. The new rules require that information such as the
complete list of ingredients and levels of vitamins and minerals be included on
product labels. While in our judgment these regulatory changes are generally
favorable to the dietary supplements industry, in the future we may be subject
to additional laws or regulations that could have an adverse effect on the
industry and on our business. In addition, existing laws and regulations may be
repealed and applicable regulatory authorities may interpret them stringently or
unfavorably.
We cannot predict the nature of future laws, regulations, interpretations
or applications, nor can we determine what effect either additional government
regulations or administrative orders, when and if promulgated, or disparate
federal, state and local regulatory schemes would have on our business in the
future. Any change could materially and adversely affect our results of
operations and financial condition.
Governmental regulations in foreign countries where we may commence or
expand sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of our products. Compliance with
such foreign governmental regulations is generally the responsibility of our
partners or distributors in those countries, which distributors are independent
contractors over whom we have limited or no control.
The costs of compliance with environmental laws and regulations, or our
inability or failure to comply with environmental laws and regulations, could
substantially increase our costs of doing business or result in liability that
could use substantial amounts of our cash resources
In connection with our research and development activities and
manufacturing of materials, we are subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. Although we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research, development, and manufacturing activities involve the
controlled use of hazardous materials and chemicals. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, we cannot eliminate
the risk of accidental contamination or injury from these materials completely.
In the event of an accident, we could be held liable for any resulting damages.
Although we have secured insurance to mitigate such expense, any such liability
could exceed our insurance coverage and resources. Such liability could require
us to use a large amount of cash, which would then not be available for funding
operations or development and commercialization of our products.
16
Product liability claims asserted against us in the future could exceed our
insurance coverage and result in substantial liability to Shaman
Our business exposes us to potential product liability risks that are
inherent in the development, testing, manufacture, marketing and sale of
pharmaceutical and dietary supplement products. Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance coverage, which includes coverage for acts
by third parties, including manufacturers of our product candidates, may not be
adequate. We will also need to increase our insurance coverage as we further
develop our products, and we may be unable to obtain adequate insurance coverage
against all potential claims at a reasonable cost. Some of our development and
manufacturing agreements contain insurance and indemnification provisions
pursuant to which we could be held accountable for certain occurrences. If we
are subject to product liability claims for which we have inadequate insurance,
we could be required to use a large amount of cash, which would then not be
available for funding operations or development and commercialization of our
products.
Since the dietary supplement industry is particularly susceptible to public
perception of its products, negative publicity regarding the safety or quality
of our products could adversely impact our sales of these products
Because we depend on consumers' perception of the safety and quality of
our products as well as similar products distributed by other companies, which
may not adhere to the same quality standards as ours, if our products or a
competitor's similar products were asserted to be harmful to consumers, our
sales and our ability to market our products could be adversely affected by that
negative publicity. In addition, because we depend on perceptions, adverse
publicity associated with illness or other adverse effects resulting from
consumers' failure to use our products as we suggest, other misuse or abuse of
our products or any similar products distributed by other companies could affect
the market acceptance of our products, decrease sales, and make it more
difficult to market and sell our products.
Furthermore, we believe the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain dietary supplements and other nutritional products. This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and in the
future scientific results and media attention may contain unfavorable or
inconsistent findings that could decrease sales and make it more difficult to
market and sell our products.
Our dependence on raw plant material from Latin and South America, Africa and
Southeast Asia makes us particularly susceptible to the risks of interruptions
in our supplies
We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. We are
dependent upon a supply of raw plant material to make our products. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply risks include:
~ unexpected changes in regulatory requirements,
~ exchange rates, tariffs and barriers,
~ difficulties in coordinating and managing foreign operations,
~ political instability, and
~ potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could
disrupt or delay sales of our products, inhibit our ability to market our
products, and have a material adverse effect on our business, financial
condition and results of operations. If the prices of raw materials rise, we may
not be able to raise prices quickly enough to offset the effect of these
increased raw material costs, if at all.
In addition, tropical rainforests and irreplaceable plant resources found
only in such rainforests are currently threatened with destruction. The
destruction of portions of the rainforests which contain the source material
from which our current or future products are derived could disrupt supplies,
cause the cost of supplies to increase dramatically, and materially and
adversely affect our business, financial condition and results of operations.
If we fail to protect our intellectual property rights, we could lose our
ability to stop competitors from using our trademarks or selling our products
Our success will be substantially dependent on our proprietary technology.
We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property. These means of protecting our proprietary rights may
not be adequate. Our trademarks are valuable assets that are very important to
the marketing of our products. Our policy is to pursue registrations for all of
the trademarks associated with our key products. We currently have 20 U.S.
patents issued, 12 U.S. patent applications pending, and one international
application filed. The pending patents may never be approved or issued. Any
issued patents may not provide sufficiently broad protection or may not prove
valid or enforceable in actions against alleged infringers. Others may
independently develop similar products, duplicate any of our products or design
17
around any of our patents. In addition, many foreign countries may not protect
our products and intellectual property rights to the same extent as the laws of
the United States, and there is considerable variation between countries as to
the level of protection afforded under patents and other proprietary rights.
Such differences may expose us to increased risks of commercialization in each
foreign country in which we may sell products. We also depend on unpatented
trade secrets. All of our employees have entered into confidentiality
agreements. However, others may independently develop substantially equivalent
information and techniques or otherwise gain access to our trade secrets, our
trade secrets may be disclosed or we may be unable to effectively protect our
rights to unpatented trade secrets. To the extent that we or our consultants or
research collaborators use intellectual property owned by others in their work
for us, disputes also may arise as to the rights in related or resulting
know-how and inventions. Litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the
validity and scope of the intellectual property rights of others. In the event
of litigation to determine the validity of any third party's claims, we could be
required to expend significant resources and divert the efforts of our technical
and management personnel, whether or not such litigation is determined in our
favor.
Our success in outlicensing our pharmaceutical assets depends in large
part on our ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. The patent
position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office, or PTO, or the courts regarding the breadth of
claims allowed or the degree of protection afforded under pharmaceutical
patents.
We are currently in a dispute in Europe regarding a patent for our
proanthocyanidin polymer composition, which covers the active ingredient in
SP-303/Provir. The European Patent Office, the French Patent Office, the German
Patent Office and the Australian Patent Office have each granted a patent
containing broad claims to proanthocyanidin polymer compositions and methods of
use of such compositions, which are similar to our specific composition, to Leon
Cariel and the Institut des Substances Vegetales. The effective filing date of
these patents is prior to the effective filing date of our foreign pending
patent application in Europe. Certain of the foreign patents have been granted
in jurisdictions where examination is not rigorous. We have instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. We believe
that the granted claims are invalid and intend to vigorously prosecute the
Opposition. In the United States, the Patent and Trademark Office awarded
judgment to us in an Interference regarding this patent dispute.
We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. The holders of the
granted European patent may assert against us claims relating to this patent. If
they are successful, we may not be able to obtain a license to this patent at
all, or at reasonable cost, or be able to develop or obtain alternative
technology to use in Europe or elsewhere. If we cannot obtain licenses to the
patent, we may not be able to introduce or sell our SP-303/Provir product in
Europe. The earlier effective filing date of this patent could limit the scope
of the patents, if any, that we may be able to obtain or result in the denial of
our patent applications in Europe or elsewhere.
If a third party were to bring an infringement claim against us, we would need
to expend significant resources in our defense; if the claim were successful, we
would need to obtain licenses or develop non-infringing technology
The pharmaceutical industry and, to a lesser extent, the dietary
supplement industry, is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in these
industries have numerous patents that protect their intellectual property rights
in these areas. Third parties may assert claims against us with respect to our
existing and future products. In the event of litigation to determine the
validity of any third party's claims, we could be required to expend significant
resources and divert the efforts of our technical and management personnel,
whether or not such litigation is determined in our favor. In the event of an
adverse result of any such litigation, among other requirements, we could be
required to develop non-infringing technology or to obtain licenses to the
technology that is the subject of the litigation. We may not be successful in
developing non-infringing technology or in obtaining a license to use the
technology on commercially reasonable terms.
If any of our executive officers and key personnel leave Shaman, our ability to
launch our first product or to market our products, and our ability to develop
any new products, could be delayed or disrupted; we could also need to expend
significant resources to hire new personnel
Our success depends in large part upon the continued contributions of our
key senior management. Our future performance also depends on our ability to
attract and retain qualified management and scientific personnel. Competition
for such personnel is intense, and we may be unable to continue to attract,
assimilate or retain other highly qualified technical and management personnel
in the future. The loss of key personnel or the failure to recruit additional
personnel or to develop needed expertise could delay and inhibit our ability to
launch and market our products, develop new products, or effectively manage our
business.
18
The recent delisting from the Nasdaq National Market may reduce the liquidity
and marketability of our stock and may depress the market price of our stock
On February 2, 1999, Nasdaq delisted our common stock from The Nasdaq
National Market and moved our stock to the National Association of Securities
Dealers, Inc.'s OTC Bulletin Board. Although our securities are included on the
OTC Bulletin Board, there can be no assurance that a regular trading market for
the securities will be sustained in the future. The OTC Bulletin Board is an
unorganized, inter-dealer, over-the-counter market which provides significantly
less liquidity than The Nasdaq Stock Market, and quotes for stocks included on
the OTC Bulletin Board are not listed in the financial sections of newspapers as
are those for The Nasdaq Stock Market. Therefore, prices for securities traded
solely on the OTC Bulletin Board may be difficult to obtain. The reduced
liquidity of our stock and the reduced public access to quotations for our stock
could depress the market price of our stock.
"Penny Stock" regulations may impose restrictions on marketability of our
stock
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or Nasdaq and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our stock
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. Accredited investors generally include
investors that have assets in excess of $1,000,000 or an individual annual
income exceeding $200,000, or, together with the investor's spouse, a joint
income of $300,000. For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require, among other things, the delivery, prior
to the transaction, of a risk disclosure document mandated by the SEC relating
to the penny stock market and the risks associated therewith. The broker-dealer
must also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell our securities and may affect the ability of stockholders to sell our
securities in the secondary market.
Our stock price has been and may continue to be highly volatile
The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. Announcements of technological
innovations, regulatory matters or new commercial products by us or our
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential product results relating to products
under development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical or dietary supplement products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of our common stock. In addition, from
time to time, the stock market experiences significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies or industries. The market price of our common stock, like the stock
prices of many publicly traded smaller companies, has been and may continue to
be highly volatile.
19
Anti-takeover provisions in our charter documents and Delaware law may inhibit
potential acquisition bids for Shaman, which may adversely affect the market
price of our common stock and the voting rights of the holders of the common
stock
Certain provisions of our charter documents and Delaware law make it more
difficult for a third party to acquire, and may discourage a third party from
attempting to acquire us, even if a change in control would be beneficial to our
stockholders. These provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the common stock. The
provisions include the division of our board of directors into two separate
classes, the ability of the board to elect directors to fill vacancies created
by an expansion of the board, the power of the board to amend our bylaws, and
the requirement that at least 66% of the outstanding shares are required to call
a special meeting of stockholders. Our board also has the authority to issue up
to 493,715 additional shares of preferred stock, and to fix the price, rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock with voting rights could make it more difficult for a third
party to acquire a majority of the outstanding voting stock. Certain provisions
of Delaware law applicable to us could also delay or make more difficult a
merger, tender offer or proxy contest involving Shaman, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
20
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
On various dates in September 1999, Shaman issued an aggregate of 43,285
shares of Series R Preferred Stock to 21 persons, including certain
stockholders, executive officers and directors of Shaman, upon conversion of
convertible promissory notes, each dated April 5, 1999, held by such persons.
The conversion price was $15 per share and an aggregate of $649,275 of principal
and interest was cancelled in payment of the conversion price for the shares.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other information
In August 1999, we completed the sale of 717,149 shares of Series R
Preferred Stock in the Series R Preferred Stock public rights offering. In the
offering, Shaman raised proceeds of approximately $5.7 million.
Each share of Series R Preferred Stock will automatically convert on
February 1, 2000 into a number of shares of common stock equal to $15.00 divided
by the conversion price then in effect. The conversion price shall be equal to
the lesser of $0.10 per share, or the price that is equal to 10% of the average
closing sales price of Shaman's common stock for the 10 trading days ending
three trading days prior to February 1, 2000. Shaman's certificate of
incorporation provides that the Series R Preferred Stock will convert on
February 1, 2000 only to the extent that Shaman has enough common stock shares
authorized to issue all shares of common stock needed to effect the conversion
of all outstanding shares of Series R Preferred Stock, after taking into account
the number of common stock shares necessary to effect the conversion of any then
outstanding shares of Series C Preferred Stock and Series D Preferred Stock. In
the event that Shaman does not have enough shares authorized, only the portion
of the Series R Preferred Stock for which Shaman has authorized shares of common
stock, will be converted, on a pro rata basis among the holders of the Series R
Preferred Stock. The remaining shares will remain outstanding until Shaman has
amended its certificate of incorporation to authorize an adequate number of
common stock shares. Based on the current trading price of the common stock,
Shaman does not have enough common stock available to issue common stock upon
conversion of the outstanding shares of Series R Preferred Stock and will need
to authorize additional shares of common stock to effect the conversion of all
shares of our outstanding preferred stock, which will require stockholder
approval. Shaman anticipates submitting to the stockholders, prior to the
conversion date of the Series R Preferred Stock, a proposal to increase the
number of shares of common stock authorized to be issued to a number adequate to
effect the conversion of all of the outstanding preferred stock, including the
Series R Preferred Stock. If the stockholders do not approve such an increase in
the authorized common stock, all or a portion of the Series R Preferred Stock
will likely not convert on February 1, 2000 and may remain outstanding
indefinitely after February 1, 2000 until Shaman is able to amend its
certificate of incorporation to authorize additional shares of common stock to
effect this conversion. The delay in conversion of or the indefinite inability
to convert all or a portion of the Series R Preferred Stock, or the Series C or
Series D Preferred Stock, may decrease the liquidity and the market price of the
preferred stock.
21
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
(b) Current reports on Form 8-K that were filed during the quarter ended
September 30, 1999.
None.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 15, 1999
SHAMAN PHARMACEUTICALS, INC.
(Registrant)
/s/ Lisa A. Conte
--------------------------------------
Lisa A. Conte
President, Chief Executive Officer and
Chief Financial Officer
(on behalf of the Company and as
principal executive officer and principal
financial officer)
23