<PAGE> 1
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 March 31, 1998
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)
Delaware 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 X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,635,630 shares of Common stock, $.001 par value, issued and outstanding at
May 13, 1998
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ZYMETX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1997 and March 31, 1998..................2
Statements of Operations - Three Months and Nine Months Ended
March 31, 1997 and 1998 and Cumulative from Inception to
March 31, 1998..................................................3
Statements of Cash Flows - Nine Months Ended March 31,
1997 and 1998 and Cumulative from Inception to March 31, 1998......4
Notes to Financial Statements......................................5
Item 2. Management's Discussion and Analysis or Plan of Operations.........8
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.............................................18
Item 6. Exhibits and Reports on Form 8-K..............................18
SIGNATURES..................................................................19
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 226,312 $ 618,312
Marketable securities, available-for-sale 1,594,382 19,262,285
Inventory 99,107 2,310,732
Prepaid insurance and other 9,210 99,345
------------ ------------
Total current assets 1,929,011 22,290,674
Property, equipment and leasehold improvements, net 295,393 503,419
Proprietary technology and other intangibles, net 116,827 105,475
Deferred offering costs and other, net 41,746 --
------------ ------------
Total assets $ 2,382,977 $ 22,899,568
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 540,025 $ 437,572
Accrued salaries, benefits and other 9,929 195,329
------------ ------------
Total current liabilities 549,954 632,901
Long term obligations--
Note payable to stockholder due after one year 265,836 308,476
Deferred lease rentals 69,029 165,135
Redeemable preferred stock--Series B (156,250 shares issued and outstanding at
June 30, 1997; none at March 31, 1998) 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, 1997; none at March
31, 1998) 6,318 --
Common stock $.001 par value; 30,000,000 shares authorized (919,568 shares
and 6,635,630 shares issued and outstanding at June 30, 1997 and March 31,
1998, respectively) 920 6,636
Additional paid-in capital 4,410,198 33,515,075
Deficit accumulated during the development stage (3,050,890) (11,723,467)
Unrealized holding gains (losses) on marketable securities available for sale 6,612 (5,188)
------------ ------------
Total stockholders' equity 1,373,158 21,793,056
------------ ------------
Total liabilities and stockholders' equity $ 2,382,977 $ 22,899,568
See accompanying notes to financial statements ============ ============
</TABLE>
2
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31, MARCH 31,
1997 1998 1997 1998 1998
----------- ----------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 2,888 $ 1,306 $ 8,516 $ 9,142 $ 34,592
Other -- -- -- -- 1,303
---------- ----------- ---------- ----------- ------------
Total revenues 2,888 1,306 8,516 9,142 35,895
Operating expenses:
Research and development 249,385 338,802 641,703 769,435 2,146,774
Product development -- 248,447 -- 946,770 946,770
Cost of sales 1,713 325 2,200 1,485 3,685
Sales and marketing -- 481,793 -- 906,272 906,272
Acquired technology and patent costs
from OMRF -- -- 958,505 -- 958,505
General and administrative 219,243 330,934 430,105 881,926 1,647,273
---------- ----------- ---------- ----------- ------------
Total operating expenses 470,341 1,400,301 2,032,513 3,505,888 6,609,279
---------- ----------- ---------- ----------- ------------
Loss from operations (467,453) (1,398,995) (2,023,997) (3,496,746) (6,573,384)
Other income (expense):
Interest and dividend income 30,082 284,446 76,418 563,073 660,118
Interest expense (12,802) (14,924) (46,129) (42,640) (113,937)
---------- ----------- ---------- ----------- ------------
Total other income 17,280 269,522 30,289 520,433 546,181
---------- ----------- ---------- ----------- ------------
Net loss (450,173) (1,129,473) (1,993,708) (2,976,313) (6,027,203)
Preferred stock dividend--Series B 2,344 -- 6,261 3,211 11,815
Preferred stock dividend--Series C -- -- -- 5,684,449 5,684,449
---------- ----------- ---------- ----------- ------------
Net loss applicable to common stock $ (452,517) $(1,129,473) $(1,999,969) $(8,663,973) $(11,723,467)
========== =========== =========== =========== ============
Basic and diluted net loss per common
share - Note 2 $ (.49) $ (.17) $ (2.17) $ (2.17) $ (7.90)
========== =========== =========== =========== ============
Weighted average common shares
outstanding 919,568 6,625,963 919,568 4,000,726 1,483,898
========== =========== =========== =========== ============
</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
NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31,
1997 1998 1998
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $(1,993,709) $ (2,976,313) $ (6,027,203)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 37,638 73,787 141,667
Acquired technology and patent costs from OMRF 336,422 - 336,422
Accretion of interest 42,057 42,640 103,819
Deferred lease rentals 34,514 96,106 165,135
Changes in operating assets and liabilities:
Interest receivable on marketable securities (3,228) (285,712) (301,534)
Prepaid insurance and other (49,608) (90,296) (100,688)
Inventory 2,200 (2,211,625) (2,244,444)
Accounts payable 251,641 (102,453) 437,572
Other liabilities 4,965 214,942 224,871
----------- ------------ ------------
Total adjustments 656,601 (2,262,611) (1,237,180)
----------- ------------ ------------
Net cash used by operating activities (1,337,108) (5,238,924) (7,264,383)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities (1,621,335) (18,966,735) (20,538,683)
Proceeds from maturities of marketable securities - 1,572,744 1,572,744
Purchase of property, equipment and leasehold improvements
(280,200) (269,912) (612,591)
Purchase of inventory, proprietary technology and other
intangibles (202,917) - (202,917)
----------- ------------ ------------
Net cash used by investing activities (2,104,452) (17,663,903) (19,781,447)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable - - 392,510
Payments on notes payable (302,012) - (311,271)
Purchase of fractional shares of preferred stock - (175) (175)
Proceeds from issuance of common stock 3,000 18,370,000 18,375,000
Proceeds from issuance of preferred stock--Series A 4,383,338 - 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 (55,632) - (100,262)
----------- ------------ ------------
Net cash provided by financing activities 4,028,694 23,294,827 27,664,142
----------- ------------ ------------
Net increase in cash 587,134 392,000 618,312
Cash and cash equivalents at beginning of period 39,469 226,312 -
----------- ------------ ------------
Cash and cash equivalents at end of period $ 626,603 $ 618,312 $ 618,312
=========== ============ ============
</TABLE>
See accompanying notes to financial statements.
4
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ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
March 31, 1998
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
diagnostic products, 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. 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.
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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REVENUE RECOGNITION
The Company utilizes independent distributors in the dissemination of the
Company's diagnostic product, ZStatFlu(TM). The independent distributors specify
the quantities which they hold for dissemination, assume the liability for
damage or loss of merchandise and retain the right of return of such merchandise
at the original purchase price less a restocking charge. Inasmuch as the Company
cannot presently estimate the amount of future returns, this merchandise shipped
to and held by the independent distributors is not reported as revenue until it
is shipped from the independent distributors' warehouses to the end users.
NOTE 2 - NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, Earnings per Share. Statement 128 replaced the
previously reported primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where necessary, restated to conform to the
Statement 128 requirements.
At March 31, 1998, there were warrants outstanding for the purchase of an
aggregate of 795,846 shares of the Company's common stock exercisable at an
average of $6.31 per share. The Company also had 481,500 common stock options
outstanding at March 31, 1998 at a weighted average price exercise of $1.53 per
share under the Employees and Directors stock option plan. For additional
disclosures regarding the stock option plans, see Note 6 to the June 30, 1997
financial statements filed on Form SB-2. The warrants and stock options were not
included in the computation of diluted net loss per share, since the effect
would be anti-dilutive.
In the Company's second fiscal quarter ending December 31, 1997, (the period in
which the Company consummated its initial public offering), the Company
recognized, as a charge to retained earnings, a non-cash dividend related to the
automatic conversion of its Series C Preferred Stock to Common Stock and the
rights of certain warrant holders to acquire shares of the Company's Common
Stock. The non-cash dividend of $5,684,449 represents the difference between the
price received per share for the Series C Preferred Stock and the price received
per share for the Company's Common Stock issued in the public offering. The
dividend reduces net income applicable to Common Stock and, accordingly, reduces
earnings per share in the nine month period ended March 31, 1998.
6
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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, underwriter discounts and
nonaccountable expense allowances. As a consequence of the closing of the
offering, all of the Series A, B and C Preferred Stock outstanding were
automatically converted into shares of Common Stock.
7
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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 the Company's products, 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
quarters corresponding with the flu season, generally the second and third
quarters of each fiscal year.
In September 1997, the Company received clearance from the FDA to market
ZStatFlu(TM), the Company's first commercial diagnostic product, in the United
States. Manufacturing of the units is performed through a number of
subcontractors.
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, underwriter discounts and
non-accountable expense allowances. As a consequence of the closing of the
offering, all of the Series A, B and C Preferred Stock outstanding were
automatically converted into shares of Common Stock.
"ViraZyme," "ViraSTAT," and "ZstatFlu" are trademarks owned by or licensed to
the Company.
8
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CURRENT EVENTS
In February 1998, the Company received a composition-of-matter and methods
patent for the active compound in its new ZStatFlu(TM) test from the United
States Patent Office as "4,7-Dialkoxy N-Acetylneuraminic Acid Derivatives and
Methods for Detection of Influenza Type A and B Viruses in Clinical Specimens."
The patent, covering the molecule designed to detect Influenza A and B enzyme
neuraminindase, gives the Company protection on use of this molecule for the
detection and treatment of other viruses.
In March 1998, the Company established an independent Scientific Advisory Board
(the "SAB") comprised of leaders in enzymology and related fields to guide
biotechnology research and development initiatives. The SAB has four active
missions: (i) to provide counsel; (ii) to review, evaluate and impact the
direction of ZymeTx's research and development: (iii) to help prioritize
scientific projects based upon feasibility, novelty and success; (iv) to be
active participants in the growing vision of the research and development
program at ZymeTx. Also in March, the Company was allowed the U.S. patent, "Kit
for visually detecting the presence of virus in a clinical specimen," which
covers the Company's kit designed to work with proprietary compounds interacting
with specific viruses. The viruses include influenza, parainfluenza,
cytomegalovirus, adenovirus, herpes simplex and respiratory syncytial virus. The
Company also received a formal allowance of a patent from the Canadian Patent
Office to protect an active ingredient used to develop ViraZyme(R), a
specialized viral enzyme technology behind the Company's proprietary
ZStatFlu(TM) influenza test.
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 may be
necessary to fund larger inventories for planned sales beyond fiscal year 1999
and for scaled-up research and development programs. Research will center on
continued development of compounds for the treatment of influenza and extension
of ViraZyme(TM) technology to additional disease targets.
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.
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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
significant revenues. The Company began shipping ZStatFlu(TM) to distributors
late in the second quarter of fiscal 1998. The distribution agreements contain
right of return provisions for product meeting certain requirements. Inasmuch as
the Company cannot presently estimate the amount of future returns, this
merchandise shipped to and held by the distributors is not reported as revenue
until it is shipped from the distributors' warehouses to the end users.
For the quarter ended March 31, 1998, the Company did not recognize significant
revenues from sales of ZStatFlu(TM). There were two principal factors for the
lack of sales. First, was the desire of physicians to sample ZstatFlu(TM) prior
to making a purchase decision. Second, the U.S. influenza season was short in
1998, which limited the Company's ability to adequately penetrate the market and
gain physician acceptance of the product after an adequate sampling phase.
The Company intends to implement several marketing programs during the remainder
of fiscal 1998 to educate physicians as to the medical and practice economic
benefits from the use of ZStatFlu(TM) in the next influenza season. In addition
to marketing directly to physicians, the Company will continue marketing to the
managed care segment (HMO/PPO/PPM).
For the quarter ended March 31, 1998, the Company initiated a nationwide
sampling program through the Company's distributors, in addition to direct
sampling from the Company. While the physician trial uses of ZStatFlu(TM) are
proceeding as expected, the resulting reorders will not yield material sales in
fiscal 1998, but are expected to build physician awareness of ZStatFlu(TM) for
the 1998-1999 influenza season.
RESEARCH AND DEVELOPMENT
Research and development spending for the quarter ended March 31, 1998 totaled
$.3 million which represents an increase of 36% from the prior year's comparable
quarter. The increase was primarily due to an increase in the scientific
research staff and increased clinical testing expenses related to improved
diagnostic products and continued research in therapeutic compounds. Research
and development expenditures for the nine months ended March 31, 1998 total $.8
million representing a 20% increase over the comparable period in the prior
year. It is anticipated that research and development spending will approximate
$1.1 million for fiscal 1998.
PRODUCT DEVELOPMENT
Product development costs were expended in the manufacturing processes for the
production of ZStatFlu(TM) totaling $.2 million for the quarter ended March 31,
1998. These costs were incurred for improving scaled-up manufacturing processes.
Product development costs for the nine
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months ended March 31, 1998 total $.9 million. It is anticipated that product
development expenditures will approximate $1.2 million for fiscal 1998.
SALES AND MARKETING
Sales and marketing expenses totaled $.5 million for the quarter and $.9 million
for the nine months ended March 31, 1998. The expenditures were for increased
ZStatFlu(TM) marketing and product samples sent to physicians for the Company's
sample program and promotional expenses relating to the initial ZStatFlu(TM)
sales efforts. It is anticipated that sales and marketing expenses will
approximate $1.4 million for fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.3 million for the quarter and $.9
million for the nine months ended March 31, 1998 representing a 51% and 105%
increase, respectively from the comparable prior year periods. The increase was
principally due to increased staff levels in accounting, finance and human
resources, which replaced services previously supplied by Oklahoma Medical
Research Foundation. Additional costs were also incurred to support the
Company's investor relations and public relations programs. The Company
anticipates that total, general and administrative expenses will approximate
$1.2 million in fiscal 1998.
OTHER INCOME (EXPENSE)
Interest and dividend income for the quarter and nine months ended March 31,
1998 totaled $.3 million and $.6 million, respectively compared with $30,000 and
$76,000 for the comparable prior year periods. The increase is due to increases
in cash investments resulting from an initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied principally on equity financing to fund its operations
and capital expenditures. Working capital at March 31, 1998, was $21.7 million,
as compared to $1.4 million at June 30, 1997. This increase was the result of a
private placement closed in August 1997 netting the Company $4.9 million and the
Company's initial public offering closed in November 1997 netting the Company
$18.4 million.
The Company believes that additional financing may be required to meet the
planned operating needs beyond fiscal year 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
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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) will depend on market acceptance of the
product. Currently, the Company has sufficient inventory to support a broad
nationwide sampling program prior to the 1998-1999 North American influenza
season. Sample programs are currently in process in Southern Hemisphere
countries. The extent of sampling activities in conjunction with orders for the
product will determine the amount of production of additional units. Currently,
the Company has adequate substrate (the essential chemical compound for the
Company's principal diagnostic product) on hand to manufacture up to 1 million
units. The Company has an adequate number of kit components on hand to assemble
400,000 diagnostic kits to further augment finished goods inventory.
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 was required to recognize a
non-cash preferred dividend. The amount of the preferred dividend was $5.7
million. Recognition of this preferred dividend does not, however, reduce cash
flow from operations, reduce net income of the Company or increase any net loss.
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 Market Acceptance
There can be no assurance that ZStatFlu(TM) will achieve market
acceptance during the next influenza season, which will not be expected
to commence until the second quarter or third quarter of fiscal 1999.
During the 1997-98 influenza season, the Company was not successful in
realizing sales of that product, due principally to the desire of
physicians to sample the product prior to making a purchase decision
and the short influenza season in 1998. In addition, there can be no
assurance that any of the Company's other potential products, if
approved or cleared by the FDA, will achieve market acceptance. The
degree of market acceptance of the Company's products 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
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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
ZStatFlu(TM) or any other products currently cleared or under
development by the Company.
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 in addition to the Company's currently FDA cleared
diagnostic products, 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.
13
<PAGE> 15
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.
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.
14
<PAGE> 16
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 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.
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. None
(b) Limitations or Qualifications of Other Securities. None.
(c) Sales of Unregistered Securities. None
(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.
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 class of equity securities of the indirect
indirect issuer; and to affiliates of the payments to
Registrant 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>
17
<PAGE> 19
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 Direct or
percent or more of any class of equity indirect
securities of the issuer; and to affiliates payments to
of the Registrant others
-------------------------------------------- ------------
<S> <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
Item 5. Other Information: None
Item 6. Exhibits and Reports on Form 8-K:
a. Exhibits:
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
27.2 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
27.3 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
b. Reports on Form 8-K: None
18
<PAGE> 20
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: May 13, 1998
- -------------------------------------------------------------------------------
19
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
27.2 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
27.3 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1996 JUL-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1996 SEP-30-1997
<CASH> 2,805,267 2,163,540 4,101,300
<SECURITIES> 0 0 1,069,704
<RECEIVABLES> 174 174 0
<ALLOWANCES> 0 0 0
<INVENTORY> 65,801 65,901 596,562
<CURRENT-ASSETS> 2,902,441 2,260,815 5,848,896
<PP&E> 51,303 46,209 351,740
<DEPRECIATION> 32,492 7,397 21,268
<TOTAL-ASSETS> 3,137,479 2,504,632 6,493,847
<CURRENT-LIABILITIES> 252,795 234,680 353,100
<BONDS> 0 0 0
126,000 125,000 125,000
6,318 4,947 7,756
<COMMON> 3,678 920 920
<OTHER-SE> 2,490,719 1,889,275 5,609,283
<TOTAL-LIABILITY-AND-EQUITY> 3,137,479 2,504,632 6,493,847
<SALES> 5,628 4,476 2,030
<TOTAL-REVENUES> 51,964 18,920 56,875
<CGS> 487 387 175
<TOTAL-COSTS> 0 387 131,716
<OTHER-EXPENSES> 1,561,685 1,198,360 586,898
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 33,327 21,084 13,515
<INCOME-PRETAX> (1,543,535) (1,200,687) (675,253)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (1,543,535) (1,200,687) (675,253)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,543,535) (1,200,687) (675,253)
<EPS-PRIMARY> (1.68) (1.31) (0.74)
<EPS-DILUTED> (1.68) (1.31) (0.74)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 226,312 39,469
<SECURITIES> 1,594,382 0
<RECEIVABLES> 0 0
<ALLOWANCES> 0 0
<INVENTORY> 99,107 0
<CURRENT-ASSETS> 1,929,011 39,469
<PP&E> 342,679 50,447
<DEPRECIATION> 47,286 17,697
<TOTAL-ASSETS> 2,382,977 132,307
<CURRENT-LIABILITIES> 549,954 115,415
<BONDS> 265,836 0
125,000 0
6,318 0
<COMMON> 920 44
<OTHER-SE> 4,410,198 (372,664)
<TOTAL-LIABILITY-AND-EQUITY> 2,382,977 132,307
<SALES> 9,799 7,756
<TOTAL-REVENUES> 9,799 7,756
<CGS> 2,200 0
<TOTAL-COSTS> 2,200 0
<OTHER-EXPENSES> 2,721,925 368,068
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 58,989 9,338
<INCOME-PRETAX> (2,676,270) (369,650)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,676,270) (369,650)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,676,270) (369,650)
<EPS-PRIMARY> (2.92) (0.40)
<EPS-DILUTED> (2.92) (0.40)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1996 JUL-01-1997
<PERIOD-END> MAR-31-1997 MAR-31-1998
<CASH> 675,991 618,312
<SECURITIES> 1,571,948 19,262,285
<RECEIVABLES> 0 34,116
<ALLOWANCES> 0 0
<INVENTORY> 64,088 2,310,732
<CURRENT-ASSETS> 2,331,153 22,290,674
<PP&E> 364,536 503,419
<DEPRECIATION> 37,247 73,787
<TOTAL-ASSETS> 2,780,488 22,899,568
<CURRENT-LIABILITIES> 308,294 632,901
<BONDS> 0 0
125,000 0
6,316 0
<COMMON> 920 6,636
<OTHER-SE> 2,057,473 21,786,420
<TOTAL-LIABILITY-AND-EQUITY> 2,780,488 22,899,568
<SALES> 7,069 9,142
<TOTAL-REVENUES> 8,372 572,215
<CGS> 2,200 1,485
<TOTAL-COSTS> 0 906,272
<OTHER-EXPENSES> 2,014,566 2,598,131
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 46,129 42,640
<INCOME-PRETAX> (1,978,105) (2,976,313)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,978,105) (2,976,313)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,978,105) (2,976,313)
<EPS-PRIMARY> (2.15) (2.17)
<EPS-DILUTED> (2.15) (2.17)
</TABLE>
