UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
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 (IRS Employer Identification Number)
incorporation or organization)
213 East Grand Avenue, South San Francisco, California 94080
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: 650-952-7070
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock, $.001 par value, outstanding as of
November 13, 2000: 97,413,049
<PAGE>
SHAMAN PHARMACEUTICALS, INC.
INDEX FOR FORM 10-Q
SEPTEMBER 30, 2000
PAGE
NUMBER
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
Condensed Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 3
Condensed Statements of Operations for the three months and
nine months ended September 30, 2000 and September 30, 1999
(unaudited) 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2000 and September 30, 1999 (unaudited) 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities; Use of Proceeds 18
Item 3. Defaults in Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
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All information contained in this Report on Form 10-Q reflects a 1-for-20
reverse stock split of the common stock effected on June 22, 1999 and a 1-for-50
reverse stock split of the common stock effected on January 31, 2000.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements and Notes
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
September 30, December 31,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
A S S E T S
Current assets:
Cash and cash equivalents .................................................... $ 514,589 $ 1,171,798
Restricted cash .............................................................. 214,186 --
Accounts receivable (net allowance for uncollectible accounts of $266,000
as of September 30, 2000 and $116,000 as of December 31,1999)............... 48,738 337,537
Other accounts receivable .................................................... 229,000 --
Inventory (net of reserves of $168,800 at September 30, 2000)................. 1,541,394 1,718,491
Amounts due from employees .................................................. 132,095 153,392
Prepaid debt issuance cost ................................................... 747,641 --
Prepaid expenses and other current assets .................................... 248,715 127,662
------------- -------------
Total current assets .................................... 3,676,358 3,508,880
Property and equipment, net .................................................... 1,323,998 1,818,712
Other assets ................................................................... 248,080 308,080
------------- -------------
Total assets ............................................................. $ 5,248,436 $ 5,635,672
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and other accrued expenses .................................. $ 1,284,930 $ 1,528,746
Accrued clinical trial costs ................................................. 592,722 585,040
Accrued professional fees .................................................... 717,685 888,553
Accrued compensation ......................................................... 166,784 202,207
Accrued interest ............................................................. 521,819 334,863
Accrued restructuring costs .................................................. 1,010,000 1,010,000
Current installments of long-term obligations ................................ 2,017,969 1,927,366
------------- -------------
Total current liabilities ................................................ 6,311,909 6,476,775
Long-term obligations, excluding current installments ......................... 998,589 1,194,991
Stockholders' equity (net capital deficiency):
Preferred Stock .............................................................. 22 877
Common Stock ................................................................ 94,815 1,584
Additional paid-in capital ................................................... 195,236,086 176,594,549
Deferred compensation and other adjustments .................................. (846,588) (14,691)
Accumulated deficit .......................................................... (196,546,397) (178,618,413)
------------- -------------
Total stockholders' equity (net capital deficiency)....................... (2,062,062) (2,036,094)
------------- -------------
Total liabilities and stockholders' equity (net capital deficiency)....... $ 5,248,436 $ 5,635,672
============= =============
</TABLE>
--------------------------------------------------------------------------------
NOTE: The balance sheet at December 31, 1999 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.
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<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues:
Product sales ............................................... $ 69,447 $ 12,608 $ 152,073 $ 12,608
Collaborative agreements .................................... -- 350,000 -- 350,000
------------ ------------ ------------ ------------
Total revenues .......................................... 69,447 362,608 152,073 362,608
Operating expenses:
Cost of goods sold .......................................... 190,618 3,965 212,484 3,965
Research and development .................................... 619,894 1,555,604 2,495,197 5,204,926
Marketing, general and administrative........................ 1,793,284 1,869,505 5,453,595 4,688,244
Restructuring costs -- 985,379 -- 3,038,037
------------ ------------ ------------ ------------
Total operating expense ................................. 2,603,796 4,414,453 8,161,276 12,935,172
Loss from operations .......................................... (2,534,349) (4,051,845) (8,009,203) (12,572,564)
Interest income ............................................. 6,204 29,640 48,828 119,973
Interest expense (cash) ..................................... (73,518) (121,089) (343,322) (449,500)
Interest expense (non-cash) ................................. (342,159) (59,155) (7,144,228) (200,402)
------------ ------------ ------------ ------------
Net (loss)...................................................... (2,943,822) (4,202,449) (15,447,925) (13,102,493)
Preferred Stock dividends ...................................... -- (2,720,894) (2,480,059) (4,994,508)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders ..................... $ (2,943,822) $ (6,923,343) $(17,927,984) $(18,097,001)
============ ============ ============ ============
Basic and diluted net loss per common share..................... (0.03) (82.33) (0.31) (328.37)
============ ============ ============ ============
Shares used in the calculation of basic
and diluted net loss per common share........................ 89,174,794 84,092 58,463,671 55,112
` ============ ============ ============ ============
</TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
<TABLE>
<CAPTION>
SHAMAN PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
(Unaudited)
Nine Months Ended September 30,
------------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Operating activities:
Net Loss ..................................................................... $(15,447,925) $(13,102,493)
Adjustments to reconcile net loss applicable to Common Stockholders to net
cash used in operating activities:
Depreciation ............................................................. 496,154 573,405
Non-cash interest expense on amortization of debt discounts and
beneficial conversions ................................................. 7,130,280 277,751
Payment of interest in Common Stock ...................................... 13,947 38,401
(Gain) on disposal of fixed assets ........................................ (36,025) (43,025)
Other stock-based compensation ........................................... 287,072 --
Payment of consulting expenses in Common Stock ........................... 1,293,470 --
Payment of consulting expenses in Preferred Stock ........................ -- 2,639,520
Payment of termination of claim in Preferred Stock ....................... -- 2,000,010
Payment of settlement of claim in Preferred Stock ........................ -- 250,005
Issuance of Series R Preferred Stock in connection with the conversion
with the conversion of convertible promissory notes .................... -- 649,275
Changes in operating assets and liabilities:
Restricted cash .......................................................... (214,186) --
Trade accounts receivable ................................................ 288,493 (12,641)
Other accounts receivable ................................................ (228,694) --
Inventory ................................................................ 177,097 (1,029,659)
Prepaid expenses, current assets and other assets ........................ 625,126 (804,932)
Accounts payable, accrued professional fees, accrued compensation,
accrued clinical trial costs and contract research advances............. (167,688) (651,048)
------------ ------------
Net cash (used in) operating activities ........................................ (5,782,879) (9,215,431)
------------ ------------
Investing activities:
Sales of available-for-sale investments ...................................... -- 3,289,612
Proceeds on sale of fixed assets due to restructuring ........................ 43,806 694,284
Capital expenditures ......................................................... (9,221) (96,062)
Employee loans, net of repayments and forgiveness of interest................. 21,297 45,870
------------ ------------
Net cash provided by investing activities ...................................... 55,882 3,933,704
------------ ------------
Financing activities:
Other Preferred Stock costs .................................................. (18,143) (420,747)
Other Common Stock costs ..................................................... (47,682) (24,934)
Proceeds from issuance of Preferred Stock .................................... -- 6,117,705
Proceeds from exercise of stock options and warrants ......................... 1,778,638 --
Principal payments on long-term obligations .................................. (877,461) (2,286,298)
Proceeds from the issuance of convertible promissory notes.................... 4,234,436 --
------------ ------------
Net cash provided by financing activities ...................................... 5,069,788 3,385,726
------------ ------------
Net (decrease) in cash and cash equivalents .................................... (657,209) (1,896,001)
Cash and cash equivalents at beginning of period ............................... 1,171,798 5,887,496
------------ ------------
Cash and cash equivalents at end of period ..................................... $ 514,589 $ 3,991,495
============ ============
</TABLE>
See Notes to Condensed Financial Statements.
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<PAGE>
SHAMAN PHARMACEUTICALS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
1. BASIS OF PRESENTATION
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 and 10-K/A for the fiscal year ended December 31, 1999.
These unaudited interim financial statements have been prepared assuming
that we will continue as a going concern. We need substantial working capital to
fund our operations. As of September 30, 2000, we had cash and cash equivalents
of approximately $515,000. Our short and long-term capital requirements will
depend on numerous factors, including among others, our ability to generate cash
from new subleases at market rates, convert some debt to equity, the extent and
progress of additional development activities related to the botanicals
products, the success of any marketing efforts related to the botanicals
products and the success of any out-licensing efforts with respect to the
pharmaceuticals programs. Our projections show that cash on hand plus the
additional $100,000 from the sale of products to General Nutrition Corporation
("GNC") and a $250,000 bridge loan received in November 2000 will be sufficient
to fund operations at the current level through late November 2000.
Additionally, we expect to raise approximately $1.0 million from the sublease of
our excess space to current subtenants which will allow us to fund our current
operations through January 2001. Unless we are successful in these we will be
unable to fund our current operations beyond late November 2000. In addition,
unless we are successful in our efforts to sell or out-license our
pharmaceutical products, to sell or establish collaborative agreements to sell
our botanical products, and/or convert some of our debt to equity, our cash
resources will be used to satisfy our existing liabilities, including a payment
in default of $540,000 and an additional payment of $540,000 due in December
2000 on a leasehold improvement financing, 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.
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. ISSUANCE OF CONVERTIBLE PROMISSORY NOTES AND WARRANTS
In February 2000, Shaman and a wholly-owned subsidiary of Shaman (the
"Subsidiary") entered into a convertible note and warrant purchase agreement
(the "Note Agreement") with certain investors (the "Note Holders") in connection
with a bridge loan financing raising cash proceeds of approximately $3.0
million. Interest on the convertible notes (the "Notes") was accrued at a rate
of 12% per annum. The principal amount and accrued interest was to automatically
convert at the sole election of the Note Holders on April 30, 2000 into (i)
shares of Shaman's Common Stock with a conversion price of $0.497 per share or
(ii) capital stock of the Subsidiary sold in the first equity financing raising
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at least $5.0 million. Note Holders were issued warrants to purchase shares of
Shaman's Common Stock equal to 40% of the dollar value of each Note Holders'
loan participation divided by $0.15. The exercise price of the warrants is $0.15
per share. These warrants are exercisable through April 2005. In March 2000,
Shaman and the Note Holders amended the Note Agreement to increase the amount of
the Notes to be issued from $3.0 million to $4.0 million. In consideration for
amending the Note Agreement, we amended the conversion price of the Notes into
Shaman's Common Stock from a conversion price of $0.497 to the lower of (i)
$0.497 per share or (ii) 10 days weighted average price, with a floor of $0.30
per share. In April 2000, Shaman further amended the Note Agreement to increase
the amount of the Notes to be issued from $4.0 million to a total of $5.5
million. In consideration for such amendment, we further reduced the conversion
price of the Notes such that the unpaid principal and accrued interest
automatically converted into Shaman's Common Stock at a conversion price of
$0.15 per share. The Note Holders were issued additional warrants ("Second
Warrants") to purchase shares of Common Stock equal to 50% of the dollar value
of their loan participation divided by $0.15. The exercise price of the Second
Warrants was $0.10 per share and were exercisable through August 30, 2000. Of
the $5.5 million raised, we issued approximately $3.5 million to investors for
cash and approximately $2.0 million to creditors and consultants of Shaman in
exchange for services rendered. The initial sale and subsequent sale of such
Notes and warrants gave rise to a total of $5.5 million non-cash interest
expense due to the value of the warrants and beneficial conversion features. In
May 2000, the Notes and all accrued interest thereon, a total of $5,587,781,
were converted into 37,251,874 shares of Shaman's Common Stock. In the third
quarter of 2000, Shaman received a total of $1,011,675 upon the exercise of
10,016,748 warrants at an exercise price of $0.10 per share. The remaining
8,216,582 shares of the Second Warrants expired at the end of August 2000,
without exercise.
In February 2000, Shaman and the Subsidiary entered into a convertible
promissory note agreement with an existing stockholder in connection with a
bridge loan financing raising cash proceeds of $500,000. Interest was accrued at
a rate of 12% per annum. The principal amount and accrued interest was to be
automatically converted at a 40% discount on April 30, 2000 into capital stock
of the Subsidiary sold in the first equity financing raising at least $5.0
million. In April 2000, Shaman and the stockholder amended the agreement to
extend payment terms by an additional 12 months. In consideration for amending
the agreement, we issued warrants to this stockholder to purchase 5,000,000
shares of Shaman's Common Stock at an exercise price of $0.10 per share. These
warrants are exercisable through April 30, 2001. The sale of such note and
warrant gave rise to a total of $1.8 million in financing costs due to the value
of the warrants and beneficial conversion features, of which $1,000,000 was
amortized to interest expense as of September 30, 2000.
3. WORLDWIDE LICENSING AGREEMENT
In July 2000, Shaman entered into an exclusive worldwide licensing
agreement with GNC to market our Normal Stool Formula ("NSF") as an
anti-diarrheal dietary supplement product in the health and specialty retail
store channels. GNC also markets NSF through its alliance with Rite Aid
Corporation in 500 plus store-in-store locations and through Drugstore.com.
Shaman will retain the right to sell, market and distribute NSF under its own
brand through direct sell channels. Shaman made its first shipment of NSF to GNC
in October 2000, and will record net sales of $107,000 for this initial
transaction in the fourth quarter of 2000.
4. SUBSEQUENT EVENT
SHORT-TERM BRIDGE LOAN
In November 2000, Shaman received a $250,000 bridge loan from an existing
stockholder ("lender"). The loan is due and payable on November 20, 2000. In
consideration of the loan, Shaman issued warrants to the lender to purchase
312,500 shares of Shaman's Common Stock at an exercise price of $0.01 per share.
These warrants are exercisable through April 2005.
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SHAMAN PHARMACEUTICALS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Shaman was incorporated in Delaware in December, 1992. Our principal
executive offices are located at 213 East Grand Avenue, South San Francisco,
California 94080-4812. Our telephone number is (650) 952-7070.
We are focused on the discovery, development and marketing of novel,
proprietary botanical dietary supplements derived from tropical plant sources.
By isolating active compounds from tropical plants with a history of medicinal
use, we have identified, and have available, a number of candidates for
botanical dietary supplements and pharmaceutical products, some with potentially
novel mechanisms of actions. We launched our first product in September 1999.
Our current products are:
o Normal Stool Formula, referred to as NSF. NSF normalizes excess water
flow in the bowel and promotes normal stool formation. This product is
directed at the more than 100 million individuals in the U.S. who
suffer from recurrent diarrhea, including irritable bowel syndrome
("IBS") and cancer patients who may need to manage the side effects of
cancer treatments among others; hundreds of millions of sufferers of
travelers and/or occasional watery diarrhea.
o NSF-IB (ion balance), which controls diarrhea without causing
constipation. This product is a line extension of NSF and is primarily
promoted to recurrent diarrhea sufferers.
o Syndrome X Bar. A brownie-type food bar directed at the potential
one-third of the U.S. population that may show symptoms of Syndrome X,
a cluster of metabolic disorders that can lead to a heart attack. The
Syndrome X Bar assists consumers in managing the specialized diet
recommended to combat Syndrome X including the targeted populations of
consumers with Type II Diabetes, CHD risk factors, PCOS,
post-menopausal symptoms, and HIV/AIDS.
Future products may include:
o A proprietary weight loss product that contains no laxatives or
stimulants, such as ephedrine or caffeine. This product may also work
as an insulin sensitizer.
o A pediatric formula of NSF formulated to combat the
sometimes-devastating consequences of diarrhea in babies and young
children.
o Additional nutrition-based food bars aimed at Syndrome X consumers,
infused with proprietary dietary supplements to manage one of the risk
factors of Syndrome X, such as elevated triglyceride.
The direct marketing of our current and planned products are targeted at
specific communities of consumers. Our commercialization plans include outreach
efforts to these existing communities as well as the identification and building
of new and additional communities among potential consumers. Our outreach
efforts can include presentations in medical journals, attendance at peer group
sessions and direct marketing to physicians, case managers, nutritionists and
other healthcare providers.
We are also actively involved in seeking corporate partners for the
further commercialization of our products. Such collaboration may take the form
of a partnership, licensing relationship, distribution agreement or other
marketing arrangements. We recently granted an exclusive license to General
Nutrition Corporation ("GNC") to market and distribute NSF under their health
and specialty retail store channels. The product will also identify Shaman on
the label.
RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2000 AND 1999
Net sales from our botanical dietary supplement products were
approximately $70,000 and $13,000 for the quarters ended September 30, 2000 and
1999, respectively. These sales were predominantly direct sales by Shaman. In
July 2000, Shaman entered into a worldwide licensing agreement with GNC to
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distribute NSF in the health and specialty retail store channels. The first
shipment of NSF was shipped to GNC in October 2000. We plan to turn inventory
through sales to GNC and other distribution channels. NSF was available via
Internet and 800 telephone channels starting July 30, 1999, but limited
promotional support for NSF did not begin until late September 1999. Cost of
goods sold were approximately $191,000, including $169,000 reserve for inventory
allowance and $4,000 for the quarters ended September 30, 2000 and 1999,
respectively.
We incurred research and development expenses of $620,000 and $1.6 million
for the quarters ended September 30, 2000 and 1999, respectively, and $2.5
million and $5.2 million for the nine months ended September 30, 2000 and 1999,
respectively. The decrease comparing the quarter ended September 30, 2000 to
September 30, 1999 was primarily due to a decrease in labor and benefits of
$189,000 and lower consulting expenses of $480,000. The decrease for the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999 was primarily attributable to $3.0 million in costs associated with the
development of NSF. We believe research and development expenses will vary in
2000 as we develop and commercialize new botanical products. We plan to
introduce a new weight loss product containing a proprietary ingredient from our
library of 2,600 plant species.
Marketing, general and administrative expenses were $1.8 million and $1.9
million for the quarters ended September 30, 2000 and 1999, respectively and
$5.5 million and $4.7 million for the nine months ended September 30, 2000 and
1999, respectively. The decrease comparing the quarter ended September 30, 2000
to September 30, 1999 was primarily due to a decrease in expenditures related to
investor relations activities in the amount of $88,000 and website development
in the amount of $199,000, partially offset by an increase in deferred
compensation costs of $215,000. The increase comparing the nine months ended
September 30, 2000 to September 30, 1999 was primarily due to marketing efforts
of $1.7 million, including expenses attributable to production of the
direct-sell cable program for the NSF-IB product in the amount of $707,000,
partially offset by a decrease in expenditures related to investor relations
activities of $156,000, website development of $201,000 and legal fees of
$753,000. Marketing, general and administrative expenses are expected to
increase in 2000 as we continue to focus our efforts on our botanicals business
and continue to promote NSF and other future product candidates.
Interest income was $6,000 and $30,000 for the quarters ended September
30, 2000 and 1999, respectively, and $49,000 and $120,000 for the nine months
ended September 30, 2000 and 1999, respectively. Cash interest expense was
$74,000 and $121,000 for the quarters ended September 30, 2000 and 1999,
respectively, and $343,000 and $500,000 for the nine months ended September 30,
2000 and 1999, respectively. An additional $342,000 and $7.1 million in non-cash
interest expense was incurred in connection with the issuance of convertible
promissory notes and warrants for the quarter and nine months ended September
30, 2000.
RESTRUCTURING EXPENSES
On February 1, 1999, we initiated a restructuring plan in which we
wound-up the operations of our pharmaceutical business. We now intend to
out-license worldwide marketing rights to all of our pharmaceutical compounds
and focus our efforts on the development and commercialization of botanical
dietary supplements. The restructuring plan included: 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 the
sub-lease of 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
September 30, 2000.
<TABLE>
<CAPTION>
Accrued
Total Net Cash Balance at
Restructuring Outflow Non-Cash September 30,
Category Charges (Inflow) Items 2000
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Severance and related charges...................... $ 325 $ 325 $ -- $ --
Cancellation of contracts ......................... 1,310 300 -- 1,010
Lipha S.A. settlement of claims.................... 1,031 1,031 -- --
Gain on disposal of fixed assets................... (38) (38) -- --
Reversal of estimated liabilities
related to pharmaceutical operations............. (450) -- (450) --
-------- -------- ------- -------
$ 2,178 $ 1,618 $ (450) $ 1,010
======== ======== ======= =======
</TABLE>
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, our cash and cash equivalents totaled
approximately $515,000, compared with $1.2 million at December 31, 1999. We
invest excess cash according to our investment policy which provides guidelines
with regard to liquidity, type of investment, credit ratings and concentration
limits.
In February 2000, Shaman and a wholly-owned subsidiary of Shaman (the
"Subsidiary") entered into a convertible note and warrant purchase agreement
(the "Note Agreement") with certain investors (the "Note Holders") in connection
with a bridge loan financing raising cash proceeds of approximately $3.0
million. Interest on the convertible notes (the "Notes") was accrued at a rate
of 12% per annum. The principal amount and accrued interest was to automatically
convert at the sole election of the Note Holders on April 30, 2000 into (i)
shares of Shaman's Common Stock with a conversion price of $0.497 per share or
(ii) capital stock of the Subsidiary sold in the first equity financing raising
at least $5.0 million. Note Holders were issued warrants to purchase shares of
Shaman's Common Stock equal to 40% of the dollar value of each Note Holders'
loan participation divided by $0.15. The exercise price of the warrants is $0.15
per share. These warrants are exercisable through April 2005. In March 2000,
Shaman and the Note Holders amended the Note Agreement to increase the amount of
the Notes to be issued from $3.0 million to $4.0 million. In consideration for
amending the Note Agreement, we amended the conversion price of the Notes into
Shaman's Common Stock from a conversion price of $0.497 to the lower of (i)
$0.497 per share or (ii) 10 days weighted average price, with a floor of $0.30
per share. In April 2000, Shaman further amended the Note Agreement to increase
the amount of the Notes to be issued from $4.0 million to a total of $5.5
million. In consideration for such amendment, we further reduced the conversion
price of the Notes such that the unpaid principal and accrued interest
automatically converted into Shaman's Common Stock at a conversion price of
$0.15 per share. The Note Holders were issued additional warrants ("Second
Warrants") to purchase shares of Common Stock equal to 50% of the dollar value
of their loan participation divided by $0.15. The exercise price of the Second
Warrants was $0.10 per share and were exercisable through August 30, 2000. Of
the $5.5 million raised, we issued approximately $3.5 million to investors for
cash and approximately $2.0 million to creditors and consultants of Shaman in
exchange for services rendered. The initial sale and subsequent sale of such
Notes and warrants gave rise to a total of $5.5 million non-cash interest
expense due to the value of the warrants and beneficial conversion features. In
May 2000, the Notes and all accrued interest thereon, a total of $5,587,781,
were converted into 37,251,874 shares of Shaman's Common Stock. In the third
quarter of 2000, Shaman received a total of $1,011,675 upon the exercise of
10,016,748 warrants at an exercise price of $0.10 per share. The remaining
8,216,585 shares of the Second Warrants expired at the end of August 2000,
without exercise.
In February 2000, Shaman and the Subsidiary entered into a convertible
promissory note agreement with an existing stockholder in connection with a
bridge loan financing raising cash proceeds of $500,000. Interest was accrued at
a rate of 12% per annum. The principal amount and accrued interest was to be
automatically converted at a 40% discount on April 30, 2000 into capital stock
of the Subsidiary sold in the first equity financing raising at least $5.0
million. In April 2000, Shaman and the stockholder amended the agreement to
extend payment terms by an additional 12 months. In consideration for amending
the agreement, we issued warrants to this stockholder to purchase 5,000,000
shares of Shaman's Common Stock at an exercise price of $0.10 per share. These
warrants are exercisable through April 30, 2001. The sale of such note and
warrant gave rise to a total of $1.8 million non-cash interest charge due to the
value of the warrants and beneficial conversion features, of which $1.0 million
was amortized to interest expense as of September 30, 2000.
In April 2000, Cardinal Distribution provided Shaman with a $214,000
Marketing Loan to provide incremental market support for sales of Shaman's
Normal Stool Formula at Medicine Shoppe pharmacies across the country. The loan
is due November 2000 at an interest rate of ten percent (10%) per annum. The
loan is secured by a Certificate of Deposit and is classified on the balance
sheet as restricted cash.
We expect to continue to incur losses through 2000. We need substantial
working capital to fund our operations. As of September 30, 2000, we had cash
and cash equivalents of approximately $515,000. Our short and long-term capital
requirements will depend on numerous factors, including among others, our
ability to generate cash from new subleases at market rates, convert some debt
to equity, the extent and progress of additional development activities related
to the botanicals products, the success of any marketing efforts related to the
botanicals products and the success of any out-licensing efforts with respect to
the pharmaceuticals programs. Our projections show that cash on hand plus the
additional $100,000 from the sale of products to General Nutrition Corporation
("GNC") and a $250,000 bridge loan received in November 2000 will be sufficient
to fund operations at the current level through late November 2000.
Additionally, we expect to raise approximately $1.0 million from the sublease of
our excess space to current subtenants which will allow us to fund our current
operations through January 2001. Unless we are successful in these we will be
unable to fund our current operations beyond late November 2000.
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In addition, unless we are successful in our efforts to sell or out-license
our pharmaceutical products, to sell or establish collaborative agreements to
sell our botanical products, and/or convert some of our debt to equity, our cash
resources will be used to satisfy our existing liabilities, including a payment
in default and an additional payment due in December 2000 on a leasehold
improvement financing, 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. Our auditors have included a paragraph in their report on the audited
financial statements as of and for the year ended December 31, 1999, indicating
that substantial doubt exists as to our ability to continue as a going concern.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms 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.
PER SHARE DATA
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. The impact of stock options and other common stock
equivalents have been excluded from the computation in all years presented as
they are antidilutive. At September 30, 2000, we had substantial options,
convertible preferred stock and convertible warrants outstanding which will
further dilute our stockholders' loss per share.
YEAR 2000 COMPLIANCE
We have completed the assessment of all internal information technology
and non-information technology systems that could be significantly affected by
Year 2000 issues. We have incurred approximately $10,000 related to Year 2000
issue compliance and completed our internal Year 2000 readiness program in
December 1999. We also completed the querying of our significant suppliers and
subcontractors regarding their Year 2000 remediation activities. To date, we are
not aware of any external agent with a Year 2000 Issue that would materially
impact our results of operations, liquidity or capital resources. However, we
have no means of ensuring that external agents were 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 did not experience nor do we currently anticipate any material adverse
effects on our business, results of operations or financial condition as a
result of Year 2000 issues involving its internal use systems, third party
products nor any of its software products. Costs incurred in readying for Year
2000 uncertainties, including contingency planning and remediation efforts were
expensed as incurred. We do not anticipate any material costs remaining in
connection with Year 2000 uncertainties.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our primary market risks include fluctuations in interest rates,
variability in interest rate spread relationships (i.e., Prime to LIBOR
spreads).
We believe that fluctuations in interest rates and currency exchange rates
in the near term would not materially affect our consolidated operating results,
financial position or cash flows as we have limited risks related to interest
rate fluctuations.
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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 and Form 10-K/A for the fiscal year ended December 31, 1999.
RISKS ASSOCIATED WITH OUR BUSINESS
IF WE DO NOT RAISE SIGNIFICANT ADDITIONAL CAPITAL, WE WILL BE UNABLE TO FUND
CONTINUING OPERATIONS AND WILL LIKELY BE FORCED TO CEASE OPERATIONS
We need substantial working capital to fund our operations. As of September
30, 2000, we had cash and cash equivalents of approximately $515,000. Our short
and long-term capital requirements will depend on numerous factors, including
among others, our ability to generate cash from new subleases at market rates,
convert some debt to equity, the extent and progress of additional development
activities related to the botanicals products, the success of any marketing
efforts related to the botanicals products and the success of any out-licensing
efforts with respect to the pharmaceuticals programs. Our projections show that
cash on hand plus the additional $100,000 from the sale of products to General
Nutrition Corporation ("GNC") and a $250,000 bridge loan received in November
2000 will be sufficient to fund operations at the current level through late
November 2000. Additionally, we expect to raise approximately $1.0 million from
the sublease of our excess space to current subtenants which will allow us to
fund our current operations through January 2001. Unless we are successful in
these we will be unable to fund our current operations beyond late November
2000. In addition, 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, and/or convert some of our debt to
equity, our cash resources will be used to satisfy our existing liabilities,
including a payment in default and an additional payment due in December 2000 on
a leasehold improvement financing, 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.
We will need to obtain additional funding through public or private equity
or debt financing, collaborative agreements or from other sources to continue
our research and development activities, fund operating expenses and prepare for
commercialization of products. If we raise additional funds by issuing equity
securities, current stockholders may experience significant dilution. If we
obtain additional funds through collaborative agreements, we may be required to
relinquish rights to certain of our technologies, product candidates, products
or marketing territories that we would otherwise seek to develop or
commercialize ourselves. We may be unable to obtain adequate financing on
acceptable terms, if at all. If we are unable to obtain adequate funds, we may
be required to reduce significantly our spending and delay, scale back or
eliminate one or more of our research, development or commercialization
programs, or cease operations altogether, which would have a material adverse
effect on our business, financial condition and results of operations. Our
auditors have included a paragraph in their report indicating that substantial
doubt exists as to our ability to continue as a going concern.
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER
ACHIEVE PROFITABILITY
We have incurred significant losses in each year since our founding in
1989 and expect to continue to incur losses for the foreseeable future. We
incurred a net loss of approximately $15.4 million (of which $7.1 million was
non-cash interest expense) for the nine months ended September 30, 2000 and an
additional deemed dividends of $2.5 million incurred in connection with the
issuance of Series R Preferred Stock and issuance of convertible promissory
notes and warrants. As of September 30, 2000, our accumulated deficit was
approximately $196.5 million.
If we are to become and remain profitable, we will first need to, among
other things, generate product revenues. We have not generated any significant
product sales to date. We are also exploring other botanical dietary supplement
products for development and commercial introduction. In order to generate
revenues or profits, we must successfully market NSF and other products or enter
into collaborative agreements with others who can successfully market them. NSF
and any other products we may introduce may not achieve market acceptance and we
may not achieve profitability. Our auditors have included a paragraph in their
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report on our financial statements included in our annual report on Form 10-K
indicating that substantial doubt exists as to our ability to continue as a
going concern.
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 our licensees or we may not obtain
required regulatory approvals. Even if our product candidates are developed and
introduced, they may not be successfully marketed or may not achieve market
acceptance or we may not achieve profitability.
IF WE ARE NOT SUCCESSFUL IN TRANSITIONING INTO THE BOTANICAL DIETARY BUSINESS,
WE MAY NEVER ACHIEVE REVENUES OR PROFITABILITY
We have transitioned our operations from pharmaceutical product
development to botanical dietary supplement development and commercialization.
We have no experience in this new industry segment and must create a new
business model. Some skills and relationships developed over time may not be
transferable to our new business. While we have been working with natural
products since our inception, we have no prior experience manufacturing or
marketing dietary supplements. We have no experience running a business with
product sales. We may not be successful in these activities and may never
generate revenues or profitability from our botanical business.
Our botanical products are at various stages of development, ranging from
initial research to final formulation. We will need to conduct additional
research and development to move our product candidates toward
commercialization. Our research and development efforts on potential products
may not lead to development of products that we can successfully commercialize.
In addition, we may not be able to produce our products in commercial quantities
at acceptable costs or to market and sell our products successfully. Our
products may also prove to have undesirable or unintended side effects that may
prevent or limit their commercial use. Accordingly, we may curtail, redirect,
suspend or eliminate our product development or commercialization at any time.
IF THIRD PARTY MANUFACTURERS ON WHOM WE RELY FAIL TO PERFORM THEIR SERVICES, OUR
SUPPLY OF PRODUCTS WOULD BE DELAYED AND POSSIBLY DISRUPTED
We currently produce products only in pilot scale quantities and do not
have the staff or facilities necessary to manufacture products in commercial
quantities. Therefore, we must rely on collaborative partners or third party
manufacturing facilities. We may not be successful in entering into third party
manufacturing arrangements on acceptable terms, if at all. In addition, should
our third party manufacturers or we encounter delays or difficulties in
producing, packaging and distributing our finished products, our market
introduction and subsequent sales of our products could be adversely affected.
Contract manufacturers must conform to certain Good Manufacturing
Practices regulations for foods on an ongoing basis. Our dependence on third
parties for the manufacture of our products may adversely affect our ability to
develop and deliver products on a timely and competitive basis.
SINCE WE HAVE ONLY A LIMITED MARKETING STAFF, WE MAY NEVER ACHIEVE ADEQUATE
SALES AND REVENUES TO ACHIEVE PROFITABILITY
We currently have minimal marketing staff. If we are unable to
successfully establish, execute and finance a complete marketing plan for our
first product, NSF, or subsequent products, we may not achieve a successful
product entry into the marketplace and may fail to achieve adequate sales and
revenues from our botanical products to achieve profitability. It is unlikely we
would ever achieve profitability if our first product is not successfully
marketed and sold.
IF WE FAIL TO COMPETE IN THE INTENSELY COMPETITIVE BOTANICAL DIETARY SUPPLEMENT
INDUSTRY, WE MAY NEVER ACHIEVE PROFITABILITY
The dietary supplement business is highly competitive and is characterized
by significant pressure on pricing and heavy commitment of marketing resources
for commodity products. Although our products are proprietary, we may face
competition from companies developing and marketing new commercial products that
have or claim to have similar functionality. Our failure to successfully compete
for customers would inhibit our future growth, revenues and profitability.
GOVERNMENT REGULATION OF DIETARY SUPPLEMENTS COULD INCREASE OUR COSTS OR
PROHIBIT OR LIMIT SALES OF OUR PRODUCTS
The manufacturing, processing, formulating, packaging, labeling and
advertising of our botanical dietary supplement products are subject to
regulation in the United States by several federal agencies, including the Food
and Drug Administration, the Federal Trade Commission, the Consumer Product
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Safety Commission, the Department of Agriculture and the Environmental
Protection Agency. Our activities are also regulated by various agencies of the
states and localities where we will distribute and sell our products.
The composition and labeling of dietary supplements is most actively
regulated by the FDA under the provisions of the Federal Food, Drug and Cosmetic
Act. The FFDC Act has been revised in recent years by the Nutrition Labeling and
Education Act of 1990 and by the Dietary Supplement Health and Education Act of
1994.
Our botanical product candidates are generally regulated as dietary
supplements under the 1994 Dietary Supplement Health and Education Act and are,
therefore, generally not subject to pre-market approval by the FDA. However,
these product candidates are subject to FDA regulation, particularly relating to
adulteration and misbranding. For instance, we are responsible for ensuring that
all dietary ingredients in a supplement are safe and must notify the FDA in
advance of putting a product containing a new dietary ingredient, defined as an
ingredient not marketed in the United States before October 15, 1994, on the
market and furnish adequate information to provide reasonable assurance of the
ingredient's safety. Currently, we are only pursuing products that are old
dietary ingredients and are therefore not subject to this procedure. Further, if
we make statements about a supplement's effects on the structure or function of
the body, we must, among other things, substantiate that the statements are
truthful and not misleading. In addition, our product labels must bear proper
ingredient and nutritional labeling and we must manufacture our supplements in
accordance with current Good Manufacturing Practices regulations for foods. A
product can be removed from the market if it is shown to pose a significant or
unreasonable risk of illness or injury. Moreover, if the FDA determines that the
"intended use" of any of our products is for the diagnosis, cure, mitigation,
treatment or prevention of disease, the product would meet the definition of a
drug and would require pre-market approval of safety and effectiveness prior to
its manufacture and distribution. Our failure to comply with applicable FDA
regulatory requirements may result in, among other things, injunctions, product
withdrawals, recalls, product seizures, fines and criminal prosecution.
In March 1999, new FDA regulations governing the labeling of dietary
supplements took effect. The new rules require that information such as the
complete list of ingredients and levels of vitamins and minerals be included on
product labels. While in our judgment these regulatory changes are generally
favorable to the dietary supplements industry, in the future we may be subject
to additional laws or regulations that could have an adverse effect on the
industry and on our business. In addition, existing laws and regulations may be
repealed and applicable regulatory authorities may interpret them stringently or
unfavorably.
We cannot predict the nature of future laws, regulations, interpretations
or applications, nor can we determine what effect either additional government
regulations or administrative orders, when and if promulgated or disparate
federal, state and local regulatory schemes would have on our business in the
future. Any change could materially and adversely affect our results of
operations and financial condition.
Governmental regulations in foreign countries where we may commence or
expand sales may prevent or delay entry into the market or prevent or delay the
introduction or require the reformulation of our products. Compliance with such
foreign governmental regulations is generally the responsibility of our partners
or distributors in those countries, which distributors are independent
contractors over whom we have limited or no control.
The costs of compliance with environmental laws and regulations, or our
inability or failure to comply with environmental laws and regulations, could
substantially increase our costs of doing business or result in liability that
could use substantial amounts of our cash resources
In connection with our research and development activities and
manufacturing of materials, we are subject to federal, state and local laws,
rules, regulations and policies governing the use, generation, manufacture,
storage, air emission, effluent discharge, handling and disposal of certain
materials and wastes. Although we believe we comply with these laws and
regulations in all material respects and have not been required to take any
action to correct any noncompliance, we may be required to incur significant
costs to comply with environmental and health and safety regulations in the
future. Our research, development and manufacturing activities involve the
controlled use of hazardous materials and chemicals. Although we believe that
our safety procedures for handling and disposing of such materials comply with
the standards prescribed by state and federal regulations, we cannot eliminate
the risk of accidental contamination or injury from these materials completely.
In the event of an accident, we could be held liable for any resulting damages.
Although we have secured insurance to mitigate such expense, any such liability
could exceed our insurance coverage and resources. Such liability could require
us to use a large amount of cash, which would then not be available for funding
operations or development and commercialization of our products.
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PRODUCT LIABILITY CLAIMS ASSERTED AGAINST US IN THE FUTURE COULD EXCEED OUR
INSURANCE COVERAGE AND RESULT IN SUBSTANTIAL LIABILITY TO SHAMAN
Our business exposes us to potential product liability risks that are
inherent in the development, testing, manufacture, marketing and sale of
pharmaceutical and dietary supplement products. Product liability insurance for
the pharmaceutical and dietary supplement industries generally is expensive. Our
present product liability insurance coverage, which includes coverage for acts
by third parties, including manufacturers of our product candidates, may not be
adequate. We will also need to increase our insurance coverage as we further
develop our products and we may be unable to obtain adequate insurance coverage
against all potential claims at a reasonable cost. Some of our development and
manufacturing agreements contain insurance and indemnification provisions
pursuant to which we could be held accountable for certain occurrences. If we
are subject to product liability claims for which we have inadequate insurance,
we could be required to use a large amount of cash, which would then not be
available for funding operations or development and commercialization of our
products.
SINCE THE DIETARY SUPPLEMENT INDUSTRY IS PARTICULARLY SUSCEPTIBLE TO PUBLIC
PERCEPTION OF ITS PRODUCTS, NEGATIVE PUBLICITY REGARDING THE SAFETY OR QUALITY
OF OUR PRODUCTS COULD ADVERSELY IMPACT OUR SALES OF THESE PRODUCTS
Because we depend on consumers' perception of the safety and quality of
our products as well as similar products distributed by other companies, which
may not adhere to the same quality standards as ours, if our products or a
competitor's similar products were asserted to be harmful to consumers, our
sales and our ability to market our products could be adversely affected by that
negative publicity. In addition, because we depend on perceptions, adverse
publicity associated with illness or other adverse effects resulting from
consumers' failure to use our products as we suggest, other misuse or abuse of
our products or any similar products distributed by other companies could affect
the market acceptance of our products, decrease sales and make it more difficult
to market and sell our products.
Furthermore, we believe the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain dietary supplements and other nutritional products. This
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary and in the
future scientific results and media attention may contain unfavorable or
inconsistent findings that could decrease sales and make it more difficult to
market and sell our products.
OUR DEPENDENCE ON RAW PLANT MATERIAL FROM LATIN AND SOUTH AMERICA, AFRICA AND
SOUTHEAST ASIA MAKES US PARTICULARLY SUSCEPTIBLE TO THE RISKS OF INTERRUPTIONS
IN OUR SUPPLIES.
We currently import all of the plant materials for our products from
countries in Latin and South America, Africa and Southeast Asia. We are
dependent upon a supply of raw plant material to make our products. We do not
have formal agreements in place with all of our suppliers. Continued source of
plant supply risks include:
o unexpected changes in regulatory requirements;
o exchange rates, tariffs and barriers;
o difficulties in coordinating and managing foreign operations;
o political instability; and
o potentially adverse tax consequences.
Interruptions in supply or material increases in the cost of supply could
disrupt or delay sales of our products, inhibit our ability to market our
products and have a material adverse effect on our business, financial condition
and results of operations. If the prices of raw materials rise, we may not be
able to raise prices quickly enough to offset the effect of these increased raw
material costs, if at all.
In addition, tropical rainforests and irreplaceable plant resources found
only in such rainforests are currently threatened with destruction. The
destruction of portions of the rainforests, which contain the source material
from which our current or future products are derived, could disrupt supplies,
cause the cost of supplies to increase dramatically and materially and adversely
affect our business, financial condition and results of operations.
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IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WE COULD LOSE OUR
ABILITY TO STOP COMPETITORS FROM USING OUR TRADEMARKS OR SELLING OUR PRODUCTS
Our success will be substantially dependent on our proprietary technology.
We rely primarily on a combination of patent, copyright and trademark laws,
trade secrets, confidentiality procedures and contractual provisions to protect
our intellectual property. These means of protecting our proprietary rights may
not be adequate. Our trademarks are valuable assets that are very important to
the marketing of our products. Our policy is to pursue registrations for all of
the trademarks associated with our key products. We currently have 21 U.S.
patents issued, 12 U.S. patent applications pending and one international
application filed. The pending patents may never be approved or issued. Any
issued patents may not provide sufficiently broad protection or may not prove
valid or enforceable in actions against alleged infringers. Others may
independently develop similar products, duplicate any of our products or design
around any of our patents. In addition, many foreign countries may not protect
our products and intellectual property rights to the same extent as the laws of
the United States and there is considerable variation between countries as to
the level of protection afforded under patents and other proprietary rights.
Such differences may expose us to increased risks of commercialization in each
foreign country in which we may sell products. We also depend on unpatented
trade secrets. All of our employees have entered into confidentiality
agreements. However, others may independently develop substantially equivalent
information and techniques or otherwise gain access to our trade secrets. Our
trade secrets may be disclosed or we may be unable to effectively protect our
rights to unpatented trade secrets. To the extent that we or our consultants or
research collaborators use intellectual property owned by others in their work
for us, disputes also may arise as to the rights in related or resulting
know-how and inventions. Litigation may be necessary in the future to enforce
our intellectual property rights, protect our trade secrets or to determine the
validity and scope of the intellectual property rights of others. In the event
of litigation to determine the validity of any third party's claims, we could be
required to expend significant resources and divert the efforts of our technical
and management personnel, whether or not such litigation is determined in our
favor.
Our success in outlicensing our pharmaceutical assets depends in large
part on our ability to obtain and maintain patents, protect trade secrets and
operate without infringing upon the proprietary rights of others. The patent
position of companies in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions and has recently been
the subject of much litigation. No consistent policy has emerged from the U.S.
Patent and Trademark Office or PTO or the courts regarding the breadth of claims
allowed or the degree of protection afforded under pharmaceutical patents.
We are currently in a dispute in Europe regarding a patent for our
proanthocyanidin polymer composition, which covers the active ingredient in
SP-303/Provir. The European Patent Office, the French Patent Office, the German
Patent Office and the Australian Patent Office have each granted a patent
containing broad claims to proanthocyanidin polymer compositions and methods of
use of such compositions, which are similar to our specific composition, to Leon
Cariel and the Institut des Substances Vegetales. The effective filing date of
these patents is prior to the effective filing date of our foreign pending
patent application in Europe. Certain of the foreign patents have been granted
in jurisdictions where examination is not rigorous. We have instituted an
Opposition in the European Patent Office against granted European Patent No.
472531 owned by Leon Cariel and Institut des Substances Vegetales. We believe
that the granted claims are invalid and intend to vigorously prosecute the
Opposition. In the United States, the Patent and Trademark Office awarded
judgment to us in an Interference regarding this patent dispute.
We may be unsuccessful in having the granted European patent revoked or
the claims sufficiently narrowed so that our proanthocyanidin polymer
composition and methods of use are not potentially covered. The holders of the
granted European patent may assert against us claims relating to this patent. If
they are successful, we may not be able to obtain a license to this patent at
all or at reasonable cost or be able to develop or obtain alternative technology
to use in Europe or elsewhere. If we cannot obtain licenses to the patent, we
may not be able to introduce or sell our SP-303/Provir product in Europe. The
earlier effective filing date of this patent could limit the scope of the
patents, if any, that we may be able to obtain or result in the denial of our
patent applications in Europe or elsewhere.
IF A THIRD PARTY WERE TO BRING AN INFRINGEMENT CLAIM AGAINST US, WE WOULD NEED
TO EXPEND SIGNIFICANT RESOURCES IN OUR DEFENSE; IF THE CLAIM WERE SUCCESSFUL, WE
WOULD NEED TO OBTAIN LICENSES OR DEVELOP NON-INFRINGING TECHNOLOGY
The pharmaceutical industry and, to a lesser extent, the dietary
supplement industry, is subject to frequent litigation regarding patent and
other intellectual property rights. Leading companies and organizations in these
industries have numerous patents that protect their intellectual property rights
in these areas. Third parties may assert claims against us with respect to our
existing and future products. In the event of litigation to determine the
validity of any third party's claims, we could be required to expend significant
resources and divert the efforts of our technical and management personnel
whether or not such litigation is determined in our favor. In the event of an
adverse result of any such litigation, among other requirements, we could be
required to develop non-infringing technology or to obtain licenses to the
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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.
"PENNY STOCK" REGULATIONS MAY IMPOSE RESTRICTIONS ON MARKETABILITY OF OUR STOCK
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be any equity security that is not traded on a
national securities exchange or NASDAQ and that has a market price of less than
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Since our securities that are currently included on the OTC
Bulletin Board are trading at less than $5.00 per share at any time, our stock
may become subject to rules that impose additional sales practice requirements
on broker-dealers who sell such securities to persons other than established
customers and accredited investors. Accredited investors generally include
investors that have assets in excess of $1,000,000 or an individual annual
income exceeding $200,000, or, together with the investor's spouse, a joint
income of $300,000. For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require, among other things, the delivery, prior
to the transaction, of a risk disclosure document mandated by the SEC relating
to the penny stock market and the risks associated therewith. The broker-dealer
must also disclose the commission payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the penny stock rules may restrict the ability of broker-dealers
to sell our securities and may affect the ability of stockholders to sell our
securities in the secondary market.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE HIGHLY VOLATILE
The price of our common stock has been particularly volatile and will
likely continue to fluctuate in the future. Announcements of technological
innovations, regulatory matters or new commercial products by us or our
competitors, developments or disputes concerning patent or proprietary rights,
publicity regarding actual or potential product results relating to products
under development by us or our competitors, regulatory developments in both the
United States and foreign countries, public concern as to the safety of
pharmaceutical or dietary supplement products, and economic and other external
factors, as well as period-to-period fluctuations in financial results, may have
a significant impact on the market price of our common stock. In addition, from
time to time, the stock market experiences significant price and volume
fluctuations that may be unrelated to the operating performance of particular
companies or industries. The market price of our common stock, like the stock
prices of many publicly traded smaller companies, has been and may continue to
be highly volatile.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT
POTENTIAL ACQUISITION BIDS FOR SHAMAN, WHICH MAY ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK AND THE VOTING RIGHTS OF THE HOLDERS OF THE COMMON
STOCK
Certain provisions of our charter documents and Delaware law make it more
difficult for a third party to acquire and may discourage a third party from
attempting to acquire us, even if a change in control would be beneficial to our
stockholders. These provisions could also limit the price that certain investors
might be willing to pay in the future for shares of the Common Stock. The
provisions include the division of our board of directors into two separate
classes, the ability of the board to elect directors to fill vacancies created
by an expansion of the board, the power of the board to amend our bylaws and the
requirement that at least 66% of the outstanding shares are required to call a
special meeting of stockholders. Our board also has the authority to issue up to
1,800,000 additional shares of preferred stock and to fix the price, rights,
preferences, privileges and restrictions of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any preferred stock that may be issued in the future. The issuance of
preferred stock with voting rights could make it more difficult for a third
party to acquire a majority of the outstanding voting stock. Certain provisions
of Delaware law applicable to us could also delay or make more difficult a
merger, tender offer or proxy contest involving Shaman, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years unless certain conditions are met.
-17-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
In the third quarter of 2000, Shaman issued an aggregate of 10,016,748
shares of Common Stock upon the exercise of the same number of warrants at an
exercise price of $0.10 per share. The warrants and the underlined shares of
common stock were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-3 (Registration No. 333-36024). The proceeds
from the exercise of warrants were used as working capital. (See Note 2 to
Condensed Financial Statements).
Item 3. Defaults in Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders...
1. (a) An Annual Meeting of Stockholders of Shaman Pharmaceuticals, Inc.
was held on July 14, 2000.
(b) The following Class I Directors were elected to serve as directors
for two years or until their successors are elected and qualified:
Name Position
--------------------- ------------------
Lisa A. Conte Class I Director
Nezam Tooloee Class I Director
The following Directors were elected to serve as directors for one
year or until their successors are elected and qualified:
Name Position
--------------------- ------------------
Lisa A. Conte Class I Director
Nezam Tooloee Class I Director
G. Kirk Raab Chairman of the Board
M. David Titus Class II Director
Loren D. Israelsen Class II Director
(c) The matters voted upon at the meeting and voting of the
stockholders with respect thereto are as follows:
(i) The election of Class I directors to serve on the Board of
Directors for two years or until their successors ar duly
elected and qualified pursuant to the classified board
provisions of the Company's Amended and Restated Certificate
of Incorporation. In addition, in accordance with Section 2115
of the California General Corporation Law, the Company is
permitting the stockholders of the Company to vote to elect
all five directors of the Company to serve until the next
annual meeting or until their respective successors are
elected and qualified. Accordingly, there will be two separate
votes regarding the election of directors;
Nominees for a Two-Year Term Expiring at 2002 Annual Meeting
Lisa A. Conte
For: 58,239,612 Withheld: 837,398
Nazam Tooloee
For: 58,272,035 Withheld: 804,975
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<PAGE>
Nominees for a One-Year Term Expiring at 2001 Annual Meeting
Lisa A. Conte
For: 58,292,772 Withheld: 784,238
Nezam Tooloee
For: 58,320,437 Withheld: 756,573
G. Kirk Raab
For: 58,321,411 Withheld: 755,599
M. David Titus
For: 58,320,096 Withheld: 756,914
Loren D. Israelsen
For: 58,320,101 Withheld: 756,909
(ii) To ratify the appointment of BDO Seidman LLP as the Company's
independent auditors for the year ending December 31, 2000.
For: 58,771,037 Against: 200,758
Abstain: 105,215
Item 5. Other Information
On August 16, 2000, the Board of Directors accepted the regination
of Mr. G. Kirk Raab, Chairman of the Board and a Class I director.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------------------
10.52 + License Agreement dated as of July 18, 2000, by and
between Registrant and General Nutrition Corporation.
5. Financial Data Schedule
(b) Form 8-K
None.
-----------------------
+ We have sought confidential treatment with the Securities and Exchange
Commission for the selected portion of this exhibit. The omitted portion will be
separately filed with the Securities and Exchange Commission pursuant to Rule
24b-2.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 14, 2000
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)
-20-
<PAGE>
