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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ______ to _______
Commission file number 0-23145
ZYMETX, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1444040
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Research Parkway, Suite 100 73104
Oklahoma City, Oklahoma (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: 405-271-1314
Check whether the issuer (1) 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 No X
----- -----
(Not subject to filing)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,620,630 shares of Common stock, $.001 par value, issued and outstanding at
November 18, 1997
Transitional Small Business Disclosure Format (check one): Yes No X
---- ----
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ZYMETX, INC.
FORM 10-QSB
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and September 30, 1997................ 2
Statements of Operations - Three Months Ended September 30,
1996 and 1997 and Cumulative from Inception to September 30, 1997.... 3
Statements of Cash Flows - Three Months Ended September 30,
1996 and 1997 and Cumulative from Inception to September 30, 1997.... 4
Notes to Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis or Plan of Operations........... 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................17
Item 2. Changes in Securities................................................17
Item 3. Defaults Upon Senior Securities......................................18
Item 4. Submission of Matters to a Vote of Security Holders..................18
Item 5. Other Information....................................................20
Item 6. Exhibits and Reports on Form 8-K.....................................21
SIGNATURES......................................................................22
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------------
PRO FORMA FOR
JUNE 30, THE OFFERING
1997 ACTUAL (NOTE 3)
------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 226,312 $ 4,101,300 $ 22,694,399
Marketable securities, available-for-sale 1,594,382 1,069,704 1,069,704
Inventory 99,107 596,562 596,562
Prepaid insurance and other 9,210 81,330 81,330
------------ ------------ ------------
Total current assets 1,929,011 5,848,896 24,441,995
Property, equipment and leasehold improvements, net 295,393 351,740 351,740
Proprietary technology and other intangibles, net 116,827 112,087 112,087
Deferred offering costs and other, net 41,746 181,124 --
------------ ------------ ------------
Total assets $ 2,382,977 $ 6,493,847 $ 24,905,822
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 540,025 $ 326,614 $ 326,614
Other 9,929 26,486 83,461
------------ ------------ ------------
Total current liabilities 549,954 353,100 410,075
Long term obligations--
Note payable to stockholder due after one year 265,836 279,350 279,350
Deferred lease rentals 69,029 118,438 118,438
Redeemable preferred stock--Series B (156,250 shares
issued and outstanding at June 30 and September 30,
1997; none after giving effect to the Offering) 125,000 125,000 --
Stockholders' equity:
Preferred stock $.001 par value; 9,843,750 Series A shares authorized
(6,318,125 shares issued and outstanding at June 30 and September 30, 1997;
none after giving effect to the Offering) 6,318 6,318 --
Preferred stock $.001 par value; 1,750,000 Series C shares authorized
(1,437,504 shares issued and outstanding at September 30, 1997; none after
giving effect to the Offering) -- 1,438 --
Common stock $.001 par value; 16,500,000 shares authorized (919,568 shares
issued and outstanding at June 30 and September 30, 1997; 6,620,630 after
giving effect to the Offering) 920 920 6,621
Additional paid-in capital 4,410,198 9,333,762 33,500,266
Deficit accumulated during the development stage (3,050,890) (3,726,143) (9,410,592)
Unrealized holding gains on marketable securities
available for sale 6,612 1,664 1,664
------------ ------------ ------------
Total stockholders' equity 1,373,158 5,617,959 24,097,959
------------ ------------ ------------
Total liabilities and stockholders' equity $ 2,382,977 $ 6,493,847 $ 24,905,822
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
2
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Sales $ 4,476 $ 2,030 $ 27,479
Other -- -- 1,303
----------- ----------- -----------
Total revenues 4,476 2,030 28,782
Operating expenses:
Research and development 151,254 228,303 1,605,642
Product development -- 156,835 156,835
Cost of sales 387 175 2,375
Sales and marketing -- 131,541 131,541
Acquired technology and patent costs from OMRF 958,505 -- 958,505
General and administrative 88,377 201,760 967,107
----------- ----------- -----------
Total operating expenses 1,198,523 718,614 3,822,005
----------- ----------- -----------
Loss from operations (1,194,047) (716,584) (3,793,223)
Other income (expense):
Interest and dividend income 14,444 54,845 151,891
Interest expense (21,084) (13,514) (84,811)
----------- ----------- -----------
Total other income (expense) (6,640) 41,331 67,080
----------- ----------- -----------
Net loss (1,200,687) (675,253) (3,726,143)
Preferred stock dividends 1,573 2,344 10,948
----------- ----------- -----------
Net loss applicable to common stock $(1,202,260) $ (677,597) $(3,737,091)
=========== =========== ===========
Net loss per common and common equivalent share $ (.82) $ (.46) $ (2.56)
=========== =========== ===========
Weighted average common and common equivalent shares
outstanding 1,460,592 1,460,626 1,460,578
=========== =========== ===========
Supplemental net loss per common and common equivalent
share $ (.27) $ (.15) $ (.83)
=========== =========== ===========
Supplemental weighted average common and common equivalent
shares outstanding 4,516,654 4,516,688 4,516,640
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
3
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,200,687) $ (675,253) $(3,726,143)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 12,546 21,268 89,148
Acquired technology and patent costs from OMRF 336,422 -- 336,422
Accretion of interest 18,172 13,514 74,693
Deferred lease rentals -- 49,409 118,438
Changes in operating assets and liabilities:
Interest receivable on marketable securities -- (8,278) (24,100)
Prepaid insurance and other (31,200) (72,120) (82,512)
Inventory 387 (497,455) (530,274)
Accounts payable 109,490 (213,411) 326,614
Other liabilities -- 16,557 26,486
----------- ----------- -----------
Total adjustments 445,817 (690,516) 334,915
----------- ----------- -----------
Net cash used by operating activities (754,870) (1,365,769) (3,391,228)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities -- -- (1,571,948)
Proceeds from maturities of marketable securities -- 528,008 528,008
Purchase of property, equipment and leasehold improvements
(20,857) (72,487) (415,166)
Purchase of inventory, proprietary technology and other
intangibles (202,917) -- (202,917)
----------- ----------- -----------
Net cash used by investing activities (223,774) 455,521 (1,662,023)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- 392,510
Payments on notes payable (271,692) -- (311,271)
Proceeds from issuance of common stock 3,000 -- 5,000
Proceeds from issuance of preferred stock--Series A 3,377,447 -- 4,383,338
Proceeds from issuance of preferred stock--Series C -- 4,925,002 4,925,002
Deferred offering costs of preferred stock and initial public
offering (6,040) (139,766) (240,028)
----------- ----------- -----------
Net cash provided by financing activities 3,102,715 4,785,236 9,154,551
----------- ----------- -----------
Net increase (decrease) in cash 2,124,071 3,874,988 4,101,300
Cash and cash equivalents at beginning of period 39,469 226,312 --
----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,163,540 $ 4,101,300 $ 4,101,300
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ 9,173 $ -- $ 16,379
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
4
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ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
September 30, 1997
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
ZymeTx, Inc. (the "Company" or "ZymeTx"), is a development stage biotechnology
company engaged in the discovery and development of unique products for the
diagnosis and treatment of viruses. The scientific foundation for the Company's
plan of operations is based upon the role of enzymes in the process of viral
infection. The Company's strategy is: (i) to develop therapeutic and diagnostic
products for a broad range of viral diseases; and (ii) to use revenues from
marketing "ZstatFlu(TM)," the Company's first diagnostic product, to sustain a
comprehensive viral therapeutic research and development program and to continue
the Company's diagnostic research and development program.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB as prescribed by the Securities and
Exchange Commission ("SEC"). Such financial statements, in the opinion of
management, include all adjustments (consisting only of normal, recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. These financial statements should be read in conjunction
with the financial statements and notes thereto included in the filing on Form
SB-2 (No. 333-33563) dated October 22, 1997 for an expanded discussion of the
Company's financial disclosures and accounting polices. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the SEC rules and regulations. Interim results are not
necessarily indicative of results for the full year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
related disclosures as of the date of the financial statements. Actual results
could differ from such estimates.
5
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INVENTORIES
The components of inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
-------- -------------
<S> <C> <C>
Raw materials $ 35,019 $226,032
Work in process -- 306,617
Finished goods 64,088 63,913
-------- --------
$ 99,107 $596,562
======== ========
</TABLE>
NET LOSS PER SHARE
Except as noted below, historical net loss per share is computed using the
weighted average number of common shares outstanding. Common equivalent shares
from stock options, convertible preferred stock and warrants are excluded from
the computation as their effect is antidilutive, except that, pursuant to the
SEC Staff Accounting Bulletins, common and common equivalent shares issued
during the period beginning 12 months prior to the initial filing of the public
offering at prices substantially below the public offering price ("Cheap Stock")
have been included in the calculation as if they were outstanding for all
periods presented (using the treasury stock method and the assumed public
offering price for stock options and warrants and the if-converted method for
convertible preferred stock).
Supplemental net loss per share is computed as noted above except that it also
includes the common stock equivalent shares related to convertible preferred
stock which automatically converted to common stock in connection with the
closing of the initial public offering.
Historical net loss per share information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED CUMULATIVE
SEPTEMBER 30, FROM
1996 1997 INCEPTION
-------- -------- --------
<S> <C> <C> <C>
Net loss per common share $ (1.37) $ (.74) $ (10.82)
======== ======== ========
Weighted average common shares outstanding 877,089 919,568 345,312
======== ======== ========
</TABLE>
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which is required to be adopted by the Company in the
reporting period ending December 31, 1997. At that time, the Company will be
required to change the method currently used to compute net loss per share.
Under the new requirements for calculating basic earnings per share, the effect
of stock options will be excluded. The Company has determined the impact of SFAS
128 on the calculation of net loss per share, exclusive of the Cheap Stock rules
of the SEC, would not be material.
6
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NOTE 2 - STOCKHOLDERS' EQUITY
In July 1997, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation for the purpose of: (i) increasing the number of
authorized shares of Common Stock from 16,500,000 shares to 30,000,000 shares
and increasing the number of authorized shares of Preferred Stock from
10,000,000 shares to 12,000,000 shares; (ii) providing for a one-for-four
reverse stock split; and (iii) the establishment and designation of 1,750,000
shares of Series C Convertible Preferred Stock ("Series C Preferred Stock"). As
a consequence of the reverse stock split, the rate of conversion of the Series A
Convertible Preferred Stock ("Series A Preferred Stock") and Series B Redeemable
Convertible Preferred Stock ("Series B Preferred Stock") was adjusted to reflect
the split. All historical financial information included in the accompanying
financial statements has been adjusted retroactively to give effect to the
reverse stock splits.
In August 1997 the Company closed a private placement of 1,437,504 shares of
Series C Preferred Stock (the "1997 Private Placement") at a price of $4.00 per
share which, net of costs and expenses, resulted in net proceeds of $4,925,002.
NOTE 3 - PUBLIC OFFERING
On November 3, 1997, the Company closed an initial public offering of 2,300,000
shares of common stock, $.001 par value ("Common Stock"). Concurrent with the
closing, an underwriter overallotment option was exercised to purchase 345,000
shares of Common Stock. In the offering, the Company issued a total of 2,645,000
shares at a price of $8.00 per share which resulted in proceeds of approximately
$18.4 million, net of offering expenses and underwriter discounts and
nonaccountable expense allowances. As a consequence of the closing of the
offering, all of the Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock outstanding were automatically converted into shares of
Common Stock.
In the second quarter of fiscal 1998, the Company will be required to recognize
as a charge to retained earnings a noncash dividend related to the Series C
Preferred Stock converted to Common Stock and related outstanding warrants to
acquire Common Stock. The noncash dividend of approximately $5.7 million
represents the difference in the price received per share for the Series C
Preferred Stock and the price received per share for the Common Stock issued in
such public offering. Such dividend will also reduce net income applicable to
Common Stock and, accordingly, reduce earnings per share in the period the
offering was consummated. Such noncash dividend has been reflected in the
accompanying unaudited pro forma balance sheet as of September 30, 1997.
7
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The accompanying unaudited pro forma balance sheet as of September 30, 1997
reflects the historical financial position of the Company as of that date
adjusted to give pro forma effect to the public offering and the related
conversion of the Series A, B, C Preferred Stock into Common Stock and the sale
of 2,645,000 shares of the Company's Common Stock at the offering price of $8.00
per share, net of commissions and expenses as if these transactions had occurred
as of September 30, 1997.
<TABLE>
<S> <C>
Offering proceeds $ 21,160,000
Less:
Commissions (1,692,800)
Expenses (1,112,200)
------------
Net proceeds $ 18,355,000
============
</TABLE>
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
When used in this discussion, the words "believes," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Readers are cautioned not to place
undue reliance on these forward-looking statements that speak only as of the
date hereof. The Company undertakes no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
ZymeTx, Inc. (the "Company" or "ZymeTx"), is a development stage biotechnology
company engaged in the discovery, development, and commercialization of unique
products for the diagnosis and treatment of viruses. The scientific foundation
for the Company's plan of operations is based upon the role of enzymes in the
process of viral infection. The Company's strategy is: (i) to develop
therapeutic and diagnostic products for a broad range of viral diseases; and
(ii) to use revenues from marketing "ZstatFlu(TM)," the Company's first
diagnostic product, to sustain a comprehensive viral therapeutic research and
development program and to continue the Company's diagnostic research and
development program.
Because the Company's initial products are expected to be in the area of
influenza diagnostics and the Company's near term therapeutic research emphasis
is in the area of influenza, the Company's future revenues are likely to be
seasonal, concurrent with the times of the year in which influenza is active.
Consequently, so long as the U.S. influenza market remains the principal market
for the Company's products, the Company's revenues will be concentrated in the
second and third quarters of each fiscal year.
In September 1997, the Company received clearance from the FDA to market
ZstatFlu(TM) in the United States. The Company is currently manufacturing for
sale 1,000,000 units of ZstatFlu(TM). Manufacturing of the units is performed
through a number of subcontractors. Distributor agreements have been entered
into with Bergen Brunswig and McKessen General Medical. It is anticipated that
these two distributors will distribute a majority of the units manufactured in
fiscal 1998.
"ViraZyme," "ViraSTAT," and ZstatFlu are trademarks owned by or licensed to the
Company.
PLAN OF OPERATIONS
The Company's plan of operations for the next 12 months is to: (i) establish
distribution channels and market ZstatFlu(TM); and (ii) continue viral
therapeutic and diagnostic research and development.
The Company believes it has adequate cash and securities available for sale to
fund the planned operations for the next 12 months. Additional capital is needed
to fund larger inventories for planned sales in fiscal year 2000 and future
periods, and for scaled-up research and development programs.
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<PAGE> 11
Research will center on continued development of compounds for the treatment of
influenza and extension of ViraZyme technology to additional disease targets.
The extent to which the Company increases research and development expense in
fiscal 1999 is dependent upon revenues generated in fiscal 1998 from
ZstatFlu(TM).
The Company will purchase equipment in connection with the expansion of its
research program. The anticipated amount of equipment purchases during the next
12 months is $.8 million, to be funded from existing working capital. Additional
equipment will be required if the Company establishes its own full-scale
production facility; the Company expects to finance the equipment for such a
facility through debt or lease financing. The Company may lease a manufacturing
facility; however, if purchase terms were favorable the Company would finance
such a purchase through debt financing.
RESULTS OF OPERATIONS
PRODUCT SALES
Since its inception the Company has been a development stage company engaged
primarily in research and product development activities, and has not generated
any significant revenues. The Company expects to recognize revenues from the
sale of ZstatFlu(TM) in the 1997-1998 influenza season, due to the receipt of
FDA clearance of ZstatFlu(TM) in September 1997, the completion of manufacturing
scale-up and securing distribution agreements with medical distributors.
RESEARCH AND DEVELOPMENT
Research and development spending increased by approximately 51% from first
quarter 1997 to first quarter 1998 due an increase in research and development
relating to ViraZyme(R) technology, which was concentrated principally in
securing FDA clearance for ZstatFlu(TM). During the first quarter of fiscal
1998, additional staff was hired to support increased research activities, and
this increase in personnel has continued into the second quarter of fiscal 1998.
It is anticipated that research and development expenditures will exceed $1.5
million for fiscal 1998.
PRODUCT DEVELOPMENT
Product development costs were expended in manufacturing scale-up processes for
the production of ZstatFlu(TM). A majority of these costs were expended for
development of internal manufacturing capability and monitoring of subcontracted
manufacturers. It is anticipated that product development expenditures will
exceed $.8 million for fiscal 1998.
SALES AND MARKETING
The Company has increased sales activities given the planned sales of
ZstatFlu(TM). This consists of additional sales managers and marketing
personnel. In addition, distributors training and marketing expenses relating to
ZstatFlu(TM) were recognized in the period. It is anticipated that sales and
marketing expenses will exceed $1.0 million for fiscal 1998.
10
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GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs have increased substantially from
first quarter 1997 to first quarter 1998 due principally to increasing staff
levels mainly in the accounting, finance and human resources area. The Company
anticipates that total, general and administrative expenses will exceed $1.3
million in fiscal 1998.
OTHER INCOME (EXPENSE)
Interest and dividend income for the first quarter of fiscal 1998 has increased
by 280% compared to the first quarter of 1997 due to the increase in average
investable funds following the closing of the Company's private placement of
Series C Preferred Stock in the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied principally on equity financing to fund its operations
and capital expenditures. Working capital at September 30, 1997, was $5.5
million, as compared to $1.4 million at June 30, 1997. This increase was the
result of the closing of the 1997 private placement during the first quarter of
fiscal 1998, which resulted in net proceeds to the Company of approximately $4.9
million.
Subsequent to the end of the first quarter of fiscal 1998, the Company closed an
initial public offering, which resulted in net proceeds of approximately $18.4
million. The proceeds will be used for fiscal 1999 ZstatFlu(TM) unit production
beginning in the third quarter fiscal 1998. The Company is planning on producing
4 million ZstatFlu(TM) units for fiscal 1999.
The Company believes that additional financing may be required to meet the
planned operating needs beyond fiscal 1999 if significant positive cash flows
are not generated from commercial activities on a timely basis. Such needs would
include the expenditure of substantial funds to continue and expand research and
development activities, conduct existing and planned pre-clinical studies and
human clinical trials and to support the increasing working capital requirements
of a growing commercial infrastructure including manufacturing, sales and
marketing. As a result, the Company anticipates pursuing various financing
alternatives such as collaborative arrangements and additional public offerings
or private placements of Company securities. If such alternatives are not
available, the Company may be required to defer or restrict certain commercial
activities, delay or eliminate expenditures for certain of its potential
products under development or to license third parties to commercialize products
or technologies that the Company would otherwise seek to develop or
commercialize itself.
The Company has an outstanding note relating to a license of intellectual
property from OMRF. The License Note has a principal amount of $.4 million
(discounted to $.3 million) and bears no interest until May 15, 1998;
thereafter, unpaid principal bears interest at 8% per year. This obligation
requires quarterly installments of interest commencing May 15, 1998, and
commencing May 15, 1999, a principal payment of $25,000 per quarter until the
License Note is repaid.
Manufacturing expenses for ZstatFlu(TM) are estimated to be approximately $5.0
million for fiscal 1998. The Company's business plan contemplates the production
and marketing of approximately
11
<PAGE> 13
1.0 million units of ZstatFlu(TM). The Company expects to produce an additional
200,000 units which will be used for demonstration and marketing purposes. The
price per unit to distributors is expected to be approximately $12 to $15.
In addition to the Company's working capital needs for fiscal 1998, the Company
will require significantly larger amounts of capital for production of inventory
for the 1998-99 influenza season. If the Company sells substantially all of the
1.0 million units of ZstatFlu(TM) produced for sale in the 1997-98 influenza
season, the Company estimates that production of ZstatFlu(TM) will be
approximately 4.0 million units for the 1998-99 influenza season. It is
anticipated that $8 million in working capital will be required to produce a
flow of units for the 1999 U.S. influenza season. The Company can give no
assurance that actual manufacturing costs will fall within the described
estimates.
To the extent that sales of ZstatFlu(TM) in fiscal 1998 do not reach 1.0 million
units, the Company will be required to reduce planned research and development
expenditures in fiscal 1999 or secure additional equity or debt capital beyond
that required for meeting fiscal 1999 inventory needs. There is no assurance
that the Company will sell all of these units.
As a consequence of the difference between the price received per share of
Common Stock in the initial public offering and the effective price received per
share in the 1997 Private Placement, the Company will be required to recognize a
preferred non-cash dividend equal to such price difference. The Company
estimates that the amount of such dividend approximates $5.7 million or $3.44
per share on 1,653,129 shares (inclusive of warrants to purchase 215,625 shares
of the Company's common stock) and will reduce net income applicable to Common
Stock and earnings per share. The recognition of the preferred dividend will be
made in the second quarter ended December 31, 1997. Recognition of a preferred
dividend will not, however, reduce cash flow from operations, reduce net income
of the Company in that quarter or increase any net loss.
12
<PAGE> 14
FACTORS AFFECTING FUTURE OPERATIONS
The following is a discussion of factors that the Company believes could have an
impact on its future operations and financial performance:
No Assurance of Successful or Timely Development of the Company's
Therapeutic or Other Diagnostic Products
The Company's business strategy involves the discovery and development
of products other than ZstatFlu(TM), particularly therapeutic
products. These products are in early stages of research and
development and further research, development and extensive testing
will be required to determine their technical feasibility and
commercial viability. Until the development process for these products
is complete, there can be no assurance that such products will perform
in the manner anticipated by the Company, be commercially viable or
even if commercially viable, that such products will receive FDA
clearance. The Company may experience delays in the commercial
introduction of these products, and such delays could be significant.
The proposed development schedules for the Company's other diagnostic
and therapeutic products may be affected by a variety of factors, many
of which will not be within the control of the Company, including
technological difficulties, proprietary technology of others, possible
changes in government regulation and the availability of funding
sources. Any delay in the development, introduction and marketing of
the Company's products could result either in such products being
marketed at a time when their cost and performance characteristics
would not be competitive in the marketplace or in the shortening of
their commercial lives.
No Manufacturing Capability; Reliance on Third-Party Manufacturers
The Company has limited experience in product manufacturing and
currently has no facility capable of manufacturing products on the
scale necessary for adequate market penetration. Because the Company
does not currently have a manufacturing facility, the Company has
engaged third-party manufacturers to produce finished units of
ZstatFlu(TM). Delays by third-party manufacturers in delivering
finished products in time for each influenza season could have a
material adverse effect on the Company.
Limitations on Protection of Intellectual Property
The Company's success will depend, in part, on its ability to obtain
patents and license patent rights, to maintain trade secret protection
and to operate without infringing on the rights of other patent
holders. The patent position of biotechnology firms for such types of
patents generally is highly uncertain and involves complex legal and
factual issues. Certain competitors of the Company may have filed
applications for or have been issued patents and may obtain additional
patents and other proprietary rights relating to virus substrates,
chromogens, inhibitors or processes competitive with those of the
Company. The ultimate scope and validity of such patents are presently
unknown. If the courts uphold existing or future patents obtained by
competitors as valid, the Company may be required to obtain licenses
from such competitors. The extent to which such licenses will be
available to the Company, and the costs thereof, cannot currently be
determined.
13
<PAGE> 15
Government Regulation
Regulation by Federal, state, local and foreign governmental
authorities of the Company's research and development activities, as
well as the use and sale of the Company's products at such time as they
are commercially viable, is currently, and is expected to remain,
significant.
The introduction of the Company's products is governed by strict FDA
rules and regulations. The Company's diagnostic products are governed
by FDA 510(k) application requiring a clinical trial that compares the
Company's products to a certain standard or to a prior cleared
methodology.
The testing, manufacturing, labeling, distribution, marketing and
advertising of therapeutic products are subject to extensive regulation
by governmental regulatory authorities in the U.S. and other countries.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through
lengthy and detailed clinical testing procedures and other costly and
time-consuming compliance procedures. The Company's therapeutic
compounds will require substantial clinical trials and FDA review as
new drugs and such products are in the discovery stage of development,
requiring significant further research, development, clinical testing
and regulatory clearances. Due to the extended testing and regulatory
review process required for therapeutic products before marketing
clearance can be obtained, the Company does not expect to be able to
commercialize any therapeutic drug for at least several years, either
directly or through any potential corporate partners or licensees. A
delay in obtaining or failure to obtain such approvals could have a
material adverse effect on the Company's business and results of
operations.
The Company and its third-party manufacturers such as DCL are subject
to Good Manufacturing Practices ("GMP") regulations promulgated by the
FDA. The FDA will also inspect the Company's manufacturing facilities
and the facilities of its third-party manufacturers on a routine basis
for regulatory compliance with GMP regulations. Although the Company's
employees have experience with GMP protocols, there can be no assurance
that the Company or its third-party manufacturers can satisfy these
requirements. The Company would not be allowed to manufacture its
approved or cleared products in the event such GMP protocols could not
be met.
Management of Growth and Increasing Production Requirements
The Company's success will depend on its ability to expand and manage
its operations and facilities. There can be no assurance that the
Company will be able to manage its growth, meet the staffing
requirements of manufacturing scale-up or for current or additional
collaborative relationships or successfully assimilate and train its
new employees. In addition, to manage its growth effectively, the
Company will be required to expand its management base and enhance its
operating and financial systems. If the Company continues to grow,
there can be no assurance that the management skills and systems
currently in place will be adequate or that the Company will be able to
manage any
14
<PAGE> 16
additional growth effectively. Failure to achieve any of these goals
could have a material adverse effect on the Company's business,
financial condition or results of operations.
Product Liability and Insurance
The testing, marketing and sale of therapeutic products and, to a
lesser degree, diagnostic products, entails an inherent risk of
adverse effects and/or medical complications to patients and, as a
result, product liability claims may be asserted against the Company.
A product liability claim or product recall could have a material
adverse effect on the Company. The Company has secured limited product
liability insurance in the aggregate amount of $11.0 million for
products that the Company markets. There can be no assurance that
liability will not exceed the insured amount. In the event of a
successful suit against the Company, insufficient insurance or lack of
insurance would have a material adverse effect on the Company.
Uncertainties Relating to Clinical Trials
The Company must demonstrate through preclinical studies and clinical
trials that its proposed therapeutic products are safe and effective
for use in each target indication before the Company can obtain
regulatory approvals for the commercial sale of those products. These
studies and trials may be very costly and time-consuming.
The rate of completion of clinical trials for either diagnostic or
therapeutic products is dependent upon, among other factors, the rate
of enrollment of patients. Failure to enroll an adequate number of
clinical patients during the appropriate season could cause
significant delays and increased costs.
The cost to the Company of conducting human clinical trials for any
potential product can vary dramatically based on a number of factors,
including whether the product is a diagnostic or a therapeutic
product, the order and timing of clinical indications pursued and the
extent of development and financial support, if any, from corporate
partners.
No Assurance of Market Acceptance
There can be no assurance that ZstatFlu(TM) or any of the Company's
potential products, if approved or cleared by the FDA and other
regulatory authorities, will achieve market acceptance. The degree of
market acceptance will depend upon a number of factors, including the
receipt and timing of regulatory approvals or clearances, the
availability of third-party reimbursement and the establishment and
demonstration in the medical community of the clinical safety,
efficacy and cost-effectiveness of the Company's products and their
advantages over existing technologies and products. There can be no
assurance that the Company will be able to successfully market its
potential products even if they perform successfully in clinical
trials. Furthermore, there can be no assurance that physicians or the
medical community in general will accept and utilize any products that
may be developed by the Company.
15
<PAGE> 17
Dependence on Corporate Collaborations for Therapeutic Products
The Company's strategy for the research, development and
commercialization of its potential therapeutic products may require the
Company to enter into various arrangements with corporate and academic
collaborators, licensors, licensees and others. The Company may,
therefore, be dependent upon the subsequent success of these third
parties in performing their responsibilities. There can be no assurance
that the Company will be able to enter into collaborative, license or
other arrangements that the Company deems necessary or appropriate to
develop and commercialize its potential therapeutic products, or that
any or all of the contemplated benefits from such collaborative,
license or other arrangements will be realized.
Technology and Competition
The viral diagnostic and therapeutic field is rapidly evolving, and the
pace of technological advancement is expected to continue. Rapid
technological development may result in the Company's products becoming
obsolete before the Company recoups a significant portion of related
research, development and commercialization expenses.
16
<PAGE> 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings: None
Item 2. Changes in Securities:
(a) Modifications in Instruments Defining the Rights of Stockholders.
As a consequence of the closing of the Company's initial public offering on
November 3, 1997, all outstanding shares of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock were converted into an aggregate of
3,056,062 shares of Common Stock. The holders of such series' of preferred stock
held preferences in the payment of dividends and distributions on liquidation,
were entitled to vote with the holders of Common Stock on all matters presented
to stockholders for approval, and had preemptive rights under certain
conditions. On November 7, 1997, the Company filed an amendment to the Company's
Certificate of Incorporation that removed the designation of such series' of
preferred stock. Consequently, the Company has no outstanding shares of
preferred stock. The Company is authorized to issue 12,000,000 shares of
preferred stock which may be issued in one or more series, with such voting
powers, designations, preferences, rights, qualifications, limitations and
restrictions as shall be set forth in a resolution of the Company's Board of
Directors providing for the issue thereof. There are no authorized series of
preferred stock for which there are rights, privileges or preferences
designated.
(b) Limitations or Qualifications of Other Securities. None.
(c) Sales of Unregistered Securities. On August 7, 1997, the Company
completed the 1997 Private Placement, in which 1,437,504 shares of Series C
Preferred Stock were issued. The 1997 Private Placement was conducted in
accordance with Regulation D. The total proceeds from such offering were
$5,750,000. There were 181 purchasers in such offering, all of whom were
"accredited investors," as such term is defined in Regulation D. The Company
paid $690,000 in cash to its placement agent in the offering for agent's fees
and expense reimbursement in connection with the 1997 Private Placement and
issued to such placement agent warrants to purchase 215,625 shares of Common
Stock at $4.00 per share.
During the first quarter of fiscal 1998, the Company granted stock
options under the ZymeTx, Inc. Stock Option Plan to five persons to purchase an
aggregate of 32,000 shares of Common Stock at an exercise price of $6.00 per
share. Such options were granted, and the exercise of such options will be made,
pursuant to Rule 701 promulgated under the Securities Act.
(d) Use of Proceeds. On November 3, 1997, the Company closed an
initial public offering (the "Initial Public Offering") of 2,645,000 shares (the
"Shares") of Common Stock (inclusive of the sale of Shares pursuant to the
exercise of an underwriter overallotment option to purchase 345,000 Shares). The
Shares were offered for sale at a price of $8.00 per share pursuant to a
Registration Statement on Form SB-2 (No. 333-33563) (the "Registration
Statement") which was declared effective October 29, 1997. Capital West
Securities, Inc., Millennium Financial Group, Inc. and ComVest Partners, Inc.
(the "Underwriters") acted as the managing underwriters of the Offering.
17
<PAGE> 19
An aggregate of 3,105,000 shares of Common Stock (including
345,000 shares of Common Stock subject to the Underwriters' overallotment option
and 230,000 shares of Common Stock issuable upon exercise of the Underwriters'
Warrants, as such term is hereafter defined), and 230,000 common stock purchase
warrants (the "Underwriters' Warrants") issued to the Underwriters at a price of
$.001 per warrant, were registered pursuant to the Registration Statement. The
aggregate offering price of the Shares, the Underwriters' Warrants, the Common
Stock issuable upon exercise of the Underwriters' Warrants and the Common Stock
subject to the Underwriters' over-allotment option was $21,160,230.
The proceeds of the Offering were subject to the following
actual expenses:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the Registrant or their
associates; to persons owning ten
percent or Direct or more of any Direct or
class of equity securities of the indirect
indirect issuer; and to affiliates payments to
of the Registrant payments to others
----------------------------------- ----------
<S> <C> <C>
Underwriting discounts and commissions $- $1,692,800
Finders' Fees - -
Expenses paid to or for underwriters
- 634,800
Other Expenses - 477,400
-- ----------
Total Expenses $- $2,805,000
== ==========
</TABLE>
The net proceeds of the Offering after deducting the expenses
described above were approximately $18,355,000. Since the closing of the
Offering, such proceeds were used by the Registrant for each of the purposes
indicated below:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the Registrant or their
associates; to persons owning ten
percent or Direct or more of any Direct or
class of equity securities of the indirect
indirect issuer; and to affiliates payments to
of the Registrant payments to others
----------------------------------- ----------
<S> <C> <C>
Temporary investments $- $18,355,230
</TABLE>
Item 3. Defaults Upon Senior Securities: None.
Item 4. Submission of Matters to a Vote of Security Holders: None
(a) On July 17, 1997, the Company held its Annual Meeting of
Stockholders (the "Annual Meeting").
18
<PAGE> 20
(b) At the Annual Meeting, the following directors were elected:
William I. Bergman
William A. Hagstrom
J. Vernon Knight, M.D.
Peter G. Livingston
David E. Rainbolt
Gilbert M. Schiff, M.D.
(c) The number of votes cast for, against or withheld as to each of the
matters voted upon at the Annual Meeting, and a brief description of each such
matter, were as follows:
(i) A proposal to adopt an Amended and Restated
certificate of Incorporation, pursuant to which the
Certificate of Incorporation would be amended to
provide as follows:
A) to increase the number of authorized shares
of capital stock from 26,500,000 to
42,000,000 and to designate 30,000,000 of
such shares as Common Stock, and 12,000,000
of such shares as Preferred Stock, and to
effect a reverse stock split where each one
outstanding share of Common Stock
("Pre-Split Common Stock") is reclassified
and converted into .25 shares of Common
Stock ("Post-Split Common Stock");
B) to divide the Board of Directors into three
classes;
C) to prohibit action by written consent unless
the taking of such action has been approved
in advance by the Board of Directors; and
D) to require the vote of 66-2/3% of the
stockholders to amend or repeal the Bylaws
other than an amendment or repeal by the
Board of Directors.
For 7,222,714
Against 2,634
Abstain 0
(ii) A proposal to adopt Amended and Restated Bylaws of
the Company, pursuant to which the Company's Bylaws
would be amended to provide as follows:
A) To require, unless otherwise proscribed by
law, special meetings of stockholders can
only be held pursuant to a resolution of the
Board of Directors or upon the request of
stockholders holding a majority of the
issued and outstanding shares of Common
Stock.
19
<PAGE> 21
B) To require an advance notice procedure for
the nomination, other than by or at the
direction of the Board of Directors or a
committee thereof, of candidates for
election as directors as well as for other
stockholder proposals to be considered at
stockholders' meetings.
For 7,066,464
Against 158,884
Abstain 0
(iii) Election of Directors. The following nominees for
election as a director received the number of votes
set forth opposite their respective names:
Name For Withheld
-------------------------------------------------
William I. Bergman 7,225,348 0
William A. Hagstrom 7,225,348 0
J. Vernon Knight, M.D 7,225,348 0
Peter G. Livingston 7,225,348 0
David E. Rainbolt 7,225,348 0
Gilbert M. Schiff, M.D 7,225,348 0
(iv) Appointment of Auditors. The following votes were
cast in connection with the approval of the
appointment of Ernst & Young, LLP, as the independent
auditors of the Company:
For 7,225,348
Against 0
Abstain 0
(v) Increase in Common Stock subject to Stock Option
Plans. The following votes were cast in connection
with the approval of an increase in the number of
shares of Common Stock subject to the ZymeTx, Inc.
Stock Option Plan and the ZymeTx, Inc. Directors
Stock Option Plan from an aggregate of 450,000 shares
to 618,750 shares (giving effect to the reverse stock
split):
For 7,144,098
Against 81,250
Abstain 0
d) Settlements in Connection With Proxy Solicitation Terminations.
None.
Item 5. Other Information:
William G. Thurman, M.D. was elected to the board at the August 1997
board meeting. He serves as President Emeritus of Oklahoma Medical Research
Foundation (OMRF) with
20
<PAGE> 22
responsibilities in the area of technology transfer activities. He joined OMRF
in 1979 as President and Scientific Director and retired in September 1997. From
1975 to 1979 he also served as Provost of the University of Oklahoma Health
Sciences Center.
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
11.1 Computation of Earnings (Loss) Per Share.
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form 10-QSB submitted to the
Securities and Exchange Commission).
b. Reports on Form 8-K: None
21
<PAGE> 23
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.
ZYMETX, INC.
------------------------
(Registrant)
/s/ G. Carl Gibson
------------------------
G. Carl Gibson
Principal Financial and
Accounting Officer
Date: December 12, 1997
22
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
11.1 Computation of Earnings (Loss) Per Share.
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form 10-QSB submitted to the
Securities and Exchange Commission).
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------------
1996 1997
---- ----
(Unaudited)
<S> <C> <C>
Net loss $(1,200,687) $ (675,253)
Preferred stock dividend requirements (1,573) (2,344)
----------- -----------
Net loss applicable to common stockholders $(1,202,260) $ (677,597)
=========== ===========
Calculation of shares outstanding for computing net loss per common and common
equivalent share:
Weighted average common shares outstanding 877,089 919,568
Adjustments to reflect requirements of the Securities and Exchange
Commission (effect of SAB 83) 583,503 541,058
----------- -----------
Weighted average common and common equivalent shares outstanding 1,460,592 1,460,626
=========== ===========
Net loss per common and common equivalent share $ (.82) $ (.46)
=========== ===========
Calculation of shares outstanding for computing supplemental net loss per common
and common equivalent share:
Weighted average common shares outstanding 877,089 919,568
Effect of assumed conversion of preferred shares 3,056,062 3,056,062
Adjustments to reflect requirements of the Securities and Exchange
Commission (effect of SAB 83) 583,503 541,058
----------- -----------
Supplemental weighted average common and common equivalent shares
outstanding 4,516,654 4,516,688
=========== ===========
Supplemental net loss per common and common equivalent share $ (.27) $ (.15)
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> SEP-30-1996 SEP-30-1997
<CASH> 2,163,540 4,101,300
<SECURITIES> 0 1,069,704
<RECEIVABLES> 174 0
<ALLOWANCES> 0 0
<INVENTORY> 65,901 596,562
<CURRENT-ASSETS> 2,260,815 5,848,896
<PP&E> 46,209 351,740
<DEPRECIATION> 7,397 21,268
<TOTAL-ASSETS> 2,504,632 6,493,847
<CURRENT-LIABILITIES> 234,680 353,100
<BONDS> 0 0
125,000 125,000
4,947 7,756
<COMMON> 920 920
<OTHER-SE> 1,889,275 5,609,283
<TOTAL-LIABILITY-AND-EQUITY> 2,504,632 6,493,847
<SALES> 4,476 2,030
<TOTAL-REVENUES> 18,920 56,875
<CGS> 387 175
<TOTAL-COSTS> 387 131,716
<OTHER-EXPENSES> 1,198,360 586,898
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 21,084 13,515
<INCOME-PRETAX> (1,200,687) (675,253)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,200,687) (675,253)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,200,687) (675,253)
<EPS-PRIMARY> (0.82) (0.46)
<EPS-DILUTED> (0.27) (0.15)
</TABLE>
