UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Amendment No. 1
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 (I.R.S. Employer
or organization) 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
April 30, 1999: 44,537,048
<PAGE>
EXPLANATORY NOTE
This Form 10/A constitutes Amendment No. 1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999, originally filed by
the Registrant on May 17, 1999, and is being filed to restate the statement of
operations for the three months ended March 31, 1999 for the presentation of the
restructuring costs.
2
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
March 31, 1999
PAGE
NUMBER
-------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of March 31, 1999 (unaudited)
and December 31, 1998 4
Condensed Statements of Operations for the three months
ended March 31, 1999 and March 31, 1998 (unaudited) 5
Condensed Statements of Cash Flows for the three months
ended March 31, 1999 and March 31, 1998 (unaudited) 6
Notes to Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Qualitative and Quantitative Disclosures About Market Risk 13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults in Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 27
3
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
March 31, December 31,
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
A S S E T S (in thousands)
Current assets:
Cash and cash equivalents $ 1,707 $ 5,887
Short-term investments 1,004 3,277
Amounts due from related parties 200 209
Prepaid expenses and other current assets 658 284
--------- ---------
Total current assets 3,569 9,657
Property and equipment, net 2,386 3,114
Other assets 368 368
--------- ---------
Total assets $ 6,323 $ 13,139
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and other accrued expenses $ 1,309 $ 1,515
Accrued clinical trial costs 1,088 2,051
Accrued professional fees 897 948
Accrued compensation 225 327
Accrued restructuring costs 1,715 -
Advances - contract research 969 969
Current installments of long-term obligations 2,897 2,804
--------- ---------
Total current liabilities 9,100 8,614
Long-term obligations, excluding current installments 1,390 2,415
Stockholders' equity:
Preferred Stock - -
Common Stock 39 30
Additional paid-in capital 154,954 152,699
Deferred compensation and other adjustments (116) (185)
Accumulated deficit (159,044) (150,434)
--------- ---------
Total stockholders' equity (net capital deficiency) (4,167) 2,110
--------- ---------
Total liabilities and stockholders' equity (net capital deficiency) $ 6,323 $ 13,139
========= =========
</TABLE>
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.
4
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
---------- ---------
(in thousands, except per share data)
<S> <C> <C>
Revenue from collaborative agreements $ 0 $ 875
Operating expenses:
Research and development 2,468 7,513
General and administrative 1,494 1,276
Restructuring Costs 2,189 -
---------- ----------
Total operating expenses 6,151 8,789
---------- ----------
Loss from operations (6,151) (7,914)
Interest income 73 232
Interest expense (259) (807)
---------- ----------
Net loss (6,337) (8,489)
Deemed dividend on Preferred Stock (2,273) -
---------- ----------
Net loss applicable to Common Stockholders $ (8,610) $ (8,489)
========== ==========
Basic and diluted net loss per common share $ (0.26) $ (0.48)
========== ==========
Shares used in calculation of basic and diluted net loss per common share 33,255 17,836
========== ==========
</TABLE>
See Notes to condensed financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Three Months Ended March 31,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities: (in thousands)
Net loss applicable to Common Stockholders $ (8,610) $ (8,489)
Adjustments to reconcile net loss applicable to Common Stockholders
to net cash used in operating activities:
Depreciation 171 381
Amortization of warrants and deferred equity costs 109 270
Loss on disposal of fixed assets 122 27
Deemed dividend on Preferred Stock 2,273 -
Payment of interest in Common Stock 15 289
Changes in operating assets and liabilities:
Prepaid expenses, current assets and other assets (95) (120)
Accounts payable, accrued professional fees, accrued compensation,
accrued clinical trial costs and contract research advances 393 850
----------- -----------
Net cash used in operating activities (5,622) (6,792)
----------- -----------
Investing activities:
Purchases of available-for-sale investments - (1,999)
Maturities of available-for-sale investments - 4,959
Sales of available-for-sale investments 2,289 899
Proceeds on sale of fixed assets due to restructuring 236 -
Capital expenditures (81) (33)
Employee loans, net of repayments and forgiveness of interest 9 -
----------- -----------
Net cash provided by investing activities 2,453 3,826
----------- -----------
Financing activities:
Other Preferred Stock costs (25) -
Proceeds from issuance of Common Stock, net - 12
Principal payments on long-term obligations (986) (644)
Proceeds from asset financing arrangements - 211
----------- -----------
Net cash used in financing activities (1,011) (421)
----------- -----------
Net (decrease) in cash and cash equivalents (4,180) (3,387)
Cash and cash equivalents at beginning of period 5,887 11,340
----------- -----------
Cash and cash equivalents at end of period $ 1,707 $ 7,953
=========== ===========
</TABLE>
See Notes to condensed financial statements.
6
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
March 31, 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.
We intend to develop and commercialize our Shaman-branded products through our
recently established botanicals division. 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 focused solely 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 (single-pivotal trial) 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 March 31, 1999, we had cash, cash equivalents and
short-term investment balances of approximately $2.7 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
botanicals products, the success of any marketing efforts related to the
botanicals products, the success of any out-licensing efforts with respect to
the pharmaceuticals programs, and the extent and timing of additional costs
associated with patents and other intellectual property rights. Our projections
show that cash on hand plus approximately $1.0 million available under the
Credit Agreement (see Note 3) will be sufficient to fund operations at the
current level through mid-August, 1999. 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 mid-August, 1999. In addition, unless we are
successful in our efforts to raise additional capital through our proposed
rights offering or other 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 may 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
7
<PAGE>
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.
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 when needed. 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, 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 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 the Company's restructuring activities as of March
31, 1999.
<TABLE>
<CAPTION>
Total
Restructuring Spending/ Balance at
Category Charges Charges March 31, 1999
-------------- --------------- ----------- ----------------
(in thousands)
<S> <C> <C> <C>
Severance and related charges $ 467 $ 352 $ 115
Write-off impaired assets 122 122 0
Cancellation of contracts 1,200 0 1,200
Other 400 0 400
------- ------- --------
$ 2,189 $ 474 $ 1,715
======= ======= =======
</TABLE>
In addition, we have approximately $969,000 recorded as deferred revenue
which we have not yet earned. We are currently in negotiations with Lipha/Merck
for the discontinuation of the research and development agreement.
3. Subsequent Events
In April 1999, directors of our company holding stock options to purchase
an aggregate of 3,634,345 shares of common stock agreed to surrender these
options to us for cancellation.
On April 5, 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors (the "Credit Agreement"), pursuant to which we may borrow
approximately $1.0 million at any time commencing on May 14, 1999 and until the
earlier of the completion of a registered public offering of our equity
securities, or September 1, 1999 (the "Convertible Promissory Notes"). The
Convertible Promissory Notes will be due and payable on the earlier of (i) 30
days subsequent to the completion of the public offering, or (ii) December 31,
1999. Interest on the Convertible Promissory Notes will accrue at an annual rate
of 12%. The Convertible Promissory Notes, when issued, will be secured by
certain assets of our company and will be convertible into shares of the class
8
<PAGE>
and series of equity securities offered by us in the first registered public
offering effected by us after the date of the Credit Agreement, or into common
stock if no such offering occurs prior to December 31, 1999. In connection with
the Credit Agreement, we issued warrants to purchase shares of the same class
and series of equity securities as those into which the debt is convertible. The
number of shares subject to these warrants is equal to 50% of the debt amount
divided by the per share sale price of the shares sold in the public offering.
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 is equal to the per share offering price in the public offering. If
a public offering is not completed prior to December 31, 1999, then the
conversion price of the Convertible Promissory Notes and the exercise price of
the warrants will be the lower of $0.05 per share of our common stock, or 1/3 of
the five-day weighted average trading price of our common stock for the period
ending three trading days prior to conversion or exercise.
In April 1999, we entered into an amendment agreement with an existing
lender to permit the issuance by us of the Convertible Promissory Notes. In
connection with the amendment, we issued a warrant to purchase shares of the
class and series of equity securities offered by us in the first registered
public offering effected by us after the date of the loan amendment, or into
common stock if no such offering occurs prior to December 31, 1999. The number
of shares subject to these warrants is equal to $592,685 divided by the per
share sale price of the shares sold in the above offering. This warrant is
exercisable, on a cashless basis, commencing on April 30, 1999 and through the
seventh anniversary date of the earlier to occur of (i) December 31, 1999, or
(ii) the date of the above offering. The per share exercise price will be equal
to the per share offering price of the above offering, or, if no offering is
completed by December 31, 1999, then the lower of $0.05 per share of our common
stock, or 1/3 of the five-day weighted average trading price of our common stock
for the period ending three trading days prior to conversion or exercise.
In May 1999, we filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in connection with a proposed rights
offering. We intend to sell up to 7,500,000 shares of our Series R Convertible
Preferred Stock at $2.00 per share to all persons who are owners of our common
stock on the record date for the offering, which is anticipated to be
immediately prior to the effective date of the registration statement and the
commencement of the rights offering. 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) 10% of the average closing sales
price of our common stock as reported on the OTC Bulletin Board for the 10
trading days ending three trading days prior to the effective date, or (ii) 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.
9
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
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.
We intend to develop and commercialize our Shaman-branded products through our
recently established botanicals division. 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 focused solely 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 (single-pivotal trial) 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 March 31, 1999 and 1998
The results of operations for the quarter ended March 31, 1998 relate to
our pharmaceutical operations. Since we ceased operations of our pharmaceutical
business and focused our efforts in our botanical business in February 1999, our
results of operations for the quarter ended March 31, 1999 and future periods
are not comparable to the same periods last year.
We recorded collaborative revenues of $0 and $875,000 for the quarters
ended March 31, 1999 and 1998, respectively. Revenues for the first quarter of
1998 resulted from research funding from Lipha S.A., a wholly-owned subsidiary
of Merck KGaA, Darmstadt, Germany ("Lipha/Merck") and research funding from our
collaboration with Ono Pharmaceutical Co. Ltd. of Osaka, Japan ("Ono"), which
expired in May 1998.
In December 1998, we renegotiated the terms of the existing agreement with
Lipha/Merck. 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 remains recorded as deferred revenue that we have not
yet earned) and a $1.0 million equity investment. We are currently in
negotiations with Lipha/Merck for the discontinuation of this agreement. There
will be no further research payments from Lipha/Merck.
We incurred research and development expenses of $2.3 million of which
$149,000 was related to the research and development of the botanicals division
and $7.5 million for the quarters ended March 31, 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 decrease in 1999 as we focus our efforts in our
botanicals business, effective February 1, 1999.
General and administrative expenses were $1.5 million and $1.3 million for
the quarters ended March 31, 1999 and 1998, respectively. This increase was
primarily attributable to legal dispute costs. General and administrative
expenses are expected to decrease in 1999 since we have ceased operations in our
pharmaceutical business and focused our efforts in our botanicals business,
effective February 1, 1999.
Interest income was $73,000 and $232,000 for the quarters ended March 31,
1999 and 1998, respectively. Interest income decreased for the period ended
March 31, 1999, compared with the period ended March 31, 1998, due to lower
average cash and investment balances as we continue to fund our operations.
Interest expense was $259,000 and $807,000 for the quarters ended March 31, 1999
and 1998, respectively. Interest expense decreased for the period ended March
31, 1999, compared with the period ended March 31, 1998 due to lower average
debt balances.
10
<PAGE>
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.
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 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 the Company's restructuring activities as of March
31, 1999.
<TABLE>
<CAPTION>
Total
Restructuring Spending/ Balance at
Category Charges Charges March 31, 1999
-------------- --------------- ----------- ----------------
(in thousands)
<S> <C> <C> <C>
Severance and related charges $ 467 $ 352 $ 115
Write-off impaired assets 122 122 0
Cancellation of contracts 1,200 0 1,200
Other 400 0 400
------- ------- -------
$ 2,189 $ 474 $ 1,715
======= ======= =======
</TABLE>
In addition, we have approximately $969,000 recorded as deferred revenue
for which we have not yet earned. We are currently in negotiations with
Lipha/Merck for the discontinuation of the research and development agreement.
Liquidity and Capital Resources
As of March 31, 1999, our cash, cash equivalents, and investments totaled
approximately $2.7 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.
11
<PAGE>
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 (the "Credit Agreement"), pursuant to which we may borrow
up to $1.0 million at any time commencing on May 14, 1999 and until the earlier
of the completion of a registered public offering of our equity securities, or
September 1, 1999 (the "Convertible Promissory Notes"). The Convertible
Promissory Notes will be due and payable on the earlier of (i) 30 days
subsequent to the completion of the public offering, or (ii) December 31, 1999.
Interest on the Convertible Promissory Notes will accrue at an annual rate of
12%. The Convertible Promissory Notes, when issued, will be secured by certain
assets of Shaman and will be convertible into shares of the class and series of
equity securities offered by us in the first registered public offering effected
by us after the date of the Credit Agreement, or into common stock if no such
offering occurs prior to December 31, 1999. In connection with the Credit
Agreement, we issued warrants to purchase shares of the same class and series of
equity securities as those into which the debt is convertible. The number of
shares subject to these warrants is equal to 50% of the debt amount divided by
the per share sale price of the shares sold in the public offering. 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 is
equal to the per share offering price in the public offering. If a public
offering is not completed prior to December 31, 1999, then the conversion price
of the Convertible Promissory Notes and the exercise price of the warrants will
be the lower of $0.05 per share of our common stock, or 1/3 of the five-day
weighted average trading price of our common stock for the period ending three
trading days prior to conversion or exercise.
We have incurred substantial additional costs in the first quarter of 1999
relating to our restructuring in February 1999. We expect to continue to incur
losses at least through 1999. We need substantial working capital to fund our
operations. As of March 31, 1999, we had cash, cash equivalents and short-term
investment balances of approximately $2.7 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 botanicals
products, the success of any marketing efforts related to the botanicals
products, the success of any out-licensing efforts with respect to the
pharmaceuticals programs, and the extent and timing of additional costs
associated with patents and other intellectual property rights. Our projections
show that cash on hand plus approximately $1.0 million available under the
Credit Agreement (see Note 3) will be sufficient to fund operations at the
current level through mid-August, 1999. 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 mid-August, 1999. In addition, unless we are
successful in our efforts to raise additional capital through our proposed
rights offering or other 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 may 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 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 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
12
<PAGE>
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 when needed. 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, 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 be required
to certify portions of our software and certain hardware so that those systems
will properly utilize dates beyond December 31, 1999. We presently believe that
with modifications or replacements of existing software and certain hardware,
the Year 2000 issue can be mitigated. We believe that such modification and
replacements are not significant, and should such modification and replacements
be delayed there would be no material impact on our operations.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, all
assessments have been preformed by our employees, therefore, we have not
incurred any costs related to this assessment project. We estimate that upgrades
for those systems not in compliance will total approximately $200,000. After the
assessment phase is completed, we will have to purchase, install and test the
upgrades to ensure they meet internal Year 2000 compliance. We expect to
complete our internal Year 2000 readiness program in the third quarter of 1999.
We are also in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. 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. We plan to evaluate the status of
completion in second quarter of 1999 and determine whether such a plan is
necessary.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
None.
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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. The Company'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.
We will need significant additional capital to fund continuing operations
We need substantial working capital to fund our operations. As of March 31,
1999, we had cash, cash equivalents and short-term investment balances of
approximately $2.7 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 botanicals products, the success of any
marketing efforts related to the botanicals products, the success of any
out-licensing efforts with respect to the pharmaceuticals programs, and the
extent and timing of additional costs associated with patents and other
intellectual property rights. Our projections show that cash on hand plus
approximately $1.0 million available under the Credit Agreement (see Note 3)
will be sufficient to fund operations at the current level through mid-August,
1999. 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 mid-August, 1999. In addition, unless we are successful in our efforts to
raise additional capital through our proposed rights offering or other 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 may 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 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 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 when needed. 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, which would have a material adverse effect on our business, financial
condition and results of operations.
Possible inability to continue as a going concern increases investment risk
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. As a result, 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 beyond December 31, 1999. If we are to
remain as a going concern, we will need to become and remain profitable and will
also need additional financing. We may not be successful in obtaining new
financing or in achieving profitability.
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We have a history of operating losses, expect continuing losses and may never
achieve profitability
We have incurred significant operating losses in each year since our
founding in 1989 and expect to continue to incur net losses for the foreseeable
future. We incurred a net loss of approximately $6.3 million for the quarter
ended March 31, 1999 and additional non-cash expense of $2.3 million incurred in
connection with the issuance of the Control Notice to holders of Series D
Preferred Stock. As of March 31, 1999, our accumulated deficit was approximately
$159 million.
If we are to become and remain profitable, we will need to, among other
things, generate product revenues. We have not generated any 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. Our botanical
dietary supplement products are being prepared for commercial introduction. In
order to generate revenues or profits, we must successfully market these
products or enter into collaborative agreements with others who can successfully
market them. Even if our products are introduced, they may not achieve market
acceptance or 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 and may not achieve market
acceptance or we may not achieve profitability.
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 A
Preferred Stock, the Series C Preferred Stock and the Series D 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 commencing in
August 1999, the Series C Preferred Stock will be convertible at a price equal
to 85% of the market price of the common stock and may be freely resold on the
market. The common stock issued upon conversion of the Series C and Series D
Preferred Stock will substantially dilute the common stock and will likely
depress the price of the common stock if large amounts are offered for sale in
the open market. In our proposed rights offering, we intend to sell up to
7,500,000 shares of Series R Convertible Preferred Stock that will be
convertible into shares of common stock at an effective per share price of 10%
of the market price of the common stock. Any issuances of Series R Preferred
Stock will therefore substantially dilute holders of common stock who do not
participate. In addition, assuming the completion of the rights offering, there
will be outstanding warrants to purchase 548,344 shares of Series R Preferred
Stock. The exercise of these warrants and the sales of common stock underlying
the Series R Preferred Stock will also dilute the common stock.
We have no experience in the business of botanical dietary supplements and may
not be successful in transitioning into this new business
We are in the process of transitioning 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. We may not be successful in these activities.
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
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.
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The failure or loss of third parties on which we rely to manufacture our
products and to perform other services could adversely affect our future
operations and financial results
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. If we are
required to manufacture our own products, we will be required to build or
purchase a manufacturing facility, will be subject to manufacturing requirements
and to similar risks regarding delays or difficulties encountered in
manufacturing any such products, and we will require substantial additional
capital. We may be unable to manufacture any such products successfully or in a
cost-effective manner.
We have only a limited marketing staff and may be unable to launch our products
in the marketplace
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan, we may
not achieve a successful product entry into the marketplace. Such failure would
have a material adverse effect on our business, financial condition and results
of operations.
Our success will depend on entering into strategic partnership relationships
Our ability to develop, commercialize, market and sell our botanical
supplement products will depend on our entering into strategic partner
relationships. We are currently searching for strategic partners for development
and commercialization. Our success in the botanicals market depends in part upon
our ability to attract, retain and motivate key strategic partners in each major
sales and distribution channel. We may not be successful in negotiating or
entering into such agreements on terms favorable to us, or at all, and any
agreement, if entered into, may be unsuccessful. We may never derive any
significant revenues from any of our existing or future collaborations.
We also intend to seek collaborative agreements to develop and
commercialize our pharmaceutical product candidates. We may not be successful in
negotiating or entering into such agreements on terms favorable to us or at all,
and any agreement, if entered into, may be unsuccessful.
We may incur costs in connection with the termination of prior research and
development agreement
The research and development efforts in our discontinued diabetes program
were dependent upon arrangements with Lipha/Merck. We are currently in
negotiations with Lipha/Merck for the discontinuation of their research
agreement. Lipha/Merck will make no further research payments, and may have a
claim against Shaman in connection with the termination of the agreement. We may
never derive any significant revenues from any of our existing or future
collaborations and may incur a loss in connection with the termination of
existing collaborations.
We are subject to intense competition in the botanical dietary supplement
industry
The dietary supplement business is highly competitive and is characterized
by short product life cycles, significant pressure on pricing and heavy
commitment of marketing resources. Many of our existing competitors are
substantially larger and have greater financial, research and development,
production, marketing, sales and other resources than we do. Such companies
offer a variety of competitive products and services and much broader product
lines. We face actual and potential competition not only from these established
companies, but also from start-up companies developing and marketing new
commercial products. Our failure to successfully compete for customers could
adversely affect our future growth, revenues and profitability.
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Government regulation
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 (i.e., 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.
Environmental regulation
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 have a
material adverse effect on our business, financial condition and results of
operations.
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Product liability claims asserted against us in the future could adversely
affect our business
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 suffer a material adverse effect on our business, financial condition
and results of operations.
Negative publicity regarding the safety or quality of our products could
adversely impact our business
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
business 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 and materially adversely affect our business.
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 have a material adverse effect on our business.
Our dependence on raw plant material from Latin and South America, Africa and
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
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 materially and
adversely affect our business, financial condition and results of operations.
The failure to protect our intellectual property rights could adversely impact
our business
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
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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
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 Shaman 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 Shaman 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.
We may be subject to infringement claims by third parties
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.
We have no experience in marketing products over the Internet and may
not succeed
We intend to market our first product, SB-300, directly to consumers
through the Internet on our web site. We have no experience in marketing any
product on the Internet, and we have no market visibility or brand name
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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. We may not be successful in using
the Internet as a direct marketing and distribution channel for our products.
The failure of third party internet access providers to keep our web site
operational could adversely affect our business
We will rely entirely or in part 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 could have a material adverse effect on our business, financial
condition and results of operations.
We will only be able to execute our business plan if internet usage grows
The success of our first product launch and a portion of our future
business is highly dependent on the adoption of the Internet as a widely-used
medium for commercial activities, including advertising, direct marketing and
other commerce. The Internet market is at a very early stage of development, is
rapidly evolving and is characterized by an increasing number of entrants that
are introducing or developing competing products and services. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and amount of traffic. However, the Internet infrastructure
may not be able to support the demands placed on it by this continued growth. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols to handle increased levels of
Internet activity or due to increased governmental regulation. Moreover,
critical issues concerning the commercial use of the Internet, including
security, reliability, cost, ease of use, accessibility and quality of service,
remain unresolved. Such issues may negatively affect the growth of Internet use
or the attractiveness of commerce and communication on the Internet. Our
business, financial condition and operating results will be materially adversely
affected if critical issues concerning the commercial use of the Internet are
not favorably resolved, the necessary infrastructure is not developed, or the
Internet does not become a viable commercial marketplace.
Failure of the web infrastructure would harm our business
The success of our first product launch and a portion of our future
business will substantially depend, among other things, upon the continued
expansion and maintenance of the web infrastructure as a reliable network
backbone. This requires the necessary speed, capacity, security, and timely
development of enabling products such as high speed modems, for providing
reliable web access and services. We do not know whether the web infrastructure
will continue to be able to support the growing demands placed upon it as the
web continues to grow in terms of the number of users, the frequency of users
and the increased bandwidth requirements. The performance or reliability of the
web could be adversely affected by these demands. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet activity
or due to increased governmental regulation. Changes in, or insufficient
availability of, telecommunications services to support the Internet could also
result in slower response times and adversely affect usage of the web. The web
has experienced a number of outages and other delays due to damage to portions
of its web infrastructure. Any such outages or any other failure of the Internet
infrastructure to effectively support the expected growth could delay the growth
of the Internet and adversely affect our business.
On-line security breaches could harm our business
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. This could have a material adverse effect on our business, results of
operations and financial condition.
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
expose us to a risk of loss or litigation and possible liability. Our security
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measures may not be sufficient to prevent security breaches, and the failure to
prevent such security breaches could have a material adverse effect on our
business, results of operations and financial condition.
Legal and regulatory uncertainties regarding the Internet could harm our
business
There is an increasing number of laws and regulations pertaining to the
Internet. In addition, a number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, online content regulation, user privacy, taxation, pricing and quality
of products and services. The growth and development of the market for online
commerce may prompt more stringent consumer protection laws that may impose
additional burdens on conducting business online. Moreover, the applicability to
the Internet of existing laws governing issues such as intellectual property
ownership and infringement, copyright, trademark, trade secret, obscenity,
libel, employment and personal privacy is uncertain and developing. Any new
legislation or regulation, or the application or interpretation of existing
laws, may decrease the growth in the use of the Internet, increase our cost of
doing business or otherwise have a material adverse effect on our business,
operations and financial condition. In addition, since we expect that our
products will be available over the Internet in multiple states, and as we
expect to have consumers residing in such states, these jurisdictions may claim
that we are required to qualify to do business as a foreign corporation in each
such state. We are currently qualified to do business only in California, and
failure to qualify as an out-of-state or foreign corporation in a jurisdiction
where we are required to do so could subject us to taxes and penalties for the
failure to qualify.
Our executive officers and key personnel are critical to our business and may
not remain with Shaman in the future
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 have a material adverse effect on
our business, financial condition and results of operations.
Potential Year 2000 computer software problems could adversely impact future
operations
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 be required
to certify portions of our internal operating systems software and certain
hardware so that those systems will properly utilize dates beyond December 31,
1999. We presently believe that with modifications or replacements of existing
software and certain hardware, the year 2000 issue can be mitigated. We believe
that such modification and replacements are not significant, and should such
modification and replacements be delayed there would be no material impact on
our operations. We cannot, however, be certain that we have identified all of
the potential risks to our business that could result from matters related to
the year 2000.
We are approximately 85% complete with the assessment of all internal
systems that could be significantly affected by the Year 2000. To date, all
assessments have been preformed by our employees, therefore, we have not
incurred any costs related to this assessment project. We estimate that upgrades
for those systems not in compliance will total approximately $200,000. After the
assessment phase is completed, we will have to purchase, install and test the
upgrades to ensure they meet internal Year 2000 compliance. We expect to
complete our internal Year 2000 readiness program in the third quarter of 1999.
We are also in the process of asking our significant suppliers and
subcontractors that do not share information systems with us (external agents)
whether their systems are Year 2000 compliant. 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 our year 2000 program. We plan to evaluate the status of
completion in the second quarter of 1999 and determine whether such a plan is
necessary.
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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 (generally, such investors 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.
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 2/3% of the outstanding shares are required to
call a special meeting of stockholders. Assuming the stockholders approve the
amendment to our certificate of incorporation that are described in our proxy
statement for the annual stockholders meeting to be held on June 11, 1999, our
board will also have the authority to issue up to 11,393,715 additional shares
of preferred stock, which includes 10,000,000 shares of Series R Preferred Stock
that may be issued in our proposed rights offering and pursuant to exercise of
warrants to purchase Series R Preferred Stock and to fix the price, rights,
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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.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) A Special Meeting of Stockholders of Shaman Pharmaceuticals,
Inc. was held on February 1, 1999.
(b) The matters voted upon at the meeting and voting of the
stockholders with respect thereto are as follows:
(i) To approve an amendment and restatement to our Amended and
Restated Certificate of Incorporation to (a) increase the number of authorized
shares of our Common Stock thereunder from 40,000,000 shares to 70,0000,000
shares and (b) increase the number of authorized shares of our Preferred Stock
by 1,000,000 shares, from 1,000,000 to 2,000,000 shares (This proposal was
adjourned to March 8, 1999 at the February 1, 1999 Special Meeting of
Stockholders.)
For: 15,597,501 Against: 3,725,813
Abstain: 178,311
(ii) To approve an amendment to our 1992 Stock Option Plan (the
"1992 Plan") to increase the maximum number of shares of our Common Stock
authorized for issuance under the 1992 Plan by an additional 2,000,000 shares
and change the limitation on the maximum number of shares for which any one
individual may be granted stock options and separately exercisable stock
appreciation rights under the Plan from 750,000 shares over the term of the
1992 Plan to 2,500,000 shares per calendar year.
For: 11,394,957 Against: 3,836,201
Abstain: 440,538
(iii) To approve the option grant for 1,500,000 shares of our
Common Stock made from the 1992 Plan to Lisa A. Conte, our President and Chief
Executive Officer, on September 18, 1998 with an exercise price of $1.281 per
share.
For: 10,465,149 Against: 4,690,194
Abstain: 516,353
Item 5. Other information
On April 5, 1999, we entered into a credit facility and note purchase
agreement with certain investors, stockholders, key executives and members of
the board of directors (the "Credit Agreement"), pursuant to which we may borrow
approximately $1.0 million at any time commencing on May 14, 1999 and until the
earlier of the completion of a registered public offering of our equity
securities, or September 1, 1999 (the "Convertible Promissory Notes"). The
Convertible Promissory Notes will be due and payable on the earlier of (i) 30
days subsequent to the completion of the public offering, or (ii) December 31,
1999. Interest on the Convertible Promissory Notes will accrue at an annual rate
of 12%. The Convertible Promissory Notes, when issued, will be secured by
certain assets of our company and will be convertible into shares of the class
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and series of equity securities offered by us in the first registered public
offering effected by us after the date of the Credit Agreement, or into common
stock if no such offering occurs prior to December 31, 1999. In connection with
the Credit Agreement, we issued warrants to purchase shares of the same class
and series of equity securities as those into which the debt is convertible. The
number of shares subject to these warrants is equal to 50% of the debt amount
divided by the per share sale price of the shares sold in the public offering.
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 is equal to the per share offering price in the public offering. If
a public offering is not completed prior to December 31, 1999, then the
conversion price of the Convertible Promissory Notes and the exercise price of
the warrants will be the lower of $0.05 per share of our common stock, or 1/3 of
the five-day weighted average trading price of our common stock for the period
ending three trading days prior to conversion or exercise.
In April 1999, we entered into an amendment agreement with an existing
lender to permit the issuance by us of the Convertible Promissory Notes. In
connection with the amendment, we issued a warrant to purchase shares of the
class and series of equity securities offered by us in the first registered
public offering effected by us after the date of the loan amendment, or into
common stock if no such offering occurs prior to December 31, 1999. The number
of shares subject to these warrants is equal to $592,685 divided by the per
share sale price of the shares sold in the above offering. This warrant is
exercisable, on a cashless basis, commencing on April 30, 1999 and through the
seventh anniversary date of the earlier to occur of (i) December 31, 1999, or
(ii) the date of the above offering. The per share exercise price will be equal
to the per share offering price of the above offering, or, if no offering is
completed by December 31, 1999, then the lower of $0.05 per share of our common
stock, or 1/3 of the five-day weighted average trading price of our common stock
for the period ending three trading days prior to conversion or exercise.
In May 1999, we filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission in connection with a proposed rights
offering. We intend to sell up to 7,500,000 shares of our Series R Convertible
Preferred Stock at $2.00 per share to all persons who are owners of our common
stock on the record date for the offering, which is anticipated to be
immediately prior to the effective date of the registration statement and the
commencement of the rights offering. 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) 10% of the average closing sales
price of our common stock as reported on the OTC Bulletin Board for the 10
trading days ending three trading days prior to the effective date, or (ii) 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.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------------------------------------
4.1* Form of Warrant, dated April 5, 1999, issued to certain
investors of the Registrant.
4.2* Form of Warrant, dated April 30, 1999, issued to MMC/GATX
Partnership No. 1.
10.30C* Amendment No. 2 to Loan and Security Agreement, dated as
of April 30, 1999, by and between the Registrant and
MMC/GATX Partnership No.1.
10.47* Form of Credit Facility and Note Purchase Agreement,
dated as of April 5, 1999, by and between the Registrant
and the Investors named therein.
10.47A* Amendment No. 1 to Form of Credit Facility and Note
Purchase Agreement, dated as of April 13, 1999, by and
between the Registrant and the Investors named in the
Credit Facility and Note Purchase Agreement.
10.47B* Amendment No. 2 to Form of Credit Facility and Note
Purchase Agreement, dated as of April 30, 1999, by and
between the Registrant and the Investors named in the
Credit Facility and Note Purchase Agreement.
27* Financial Data Schedule
- ------------------
* Previously filed
(b) Current reports on Form 8-K that were filed during the quarter ended
March 31, 1999.
A current report on Form 8-K was filed on January 11, 1999, regarding
the resignation of Ms. Stephanie Diaz, Vice President, Chief Financial
Officer, effective on January 4, 1999.
- ------------------------------------------------
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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: June 1, 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)
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