<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 December 31, 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)
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.
6,620,630 shares of Common stock, $.001 par value, issued and outstanding at
February 6, 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 December 31, 1997...........................................2
Statements of Operations - Three Months and Six Months Ended December 31,
1996 and 1997 and Cumulative from Inception to December 31,1997................................3
Statements of Cash Flows - Six Months Ended December 31,
1996 and 1997 and Cumulative from Inception to December 31, 1997...............................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, DECEMBER 31,
1997 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 226,312 $ 2,346,365
Marketable securities, available-for-sale 1,594,382 19,640,317
Inventory 99,107 1,249,953
Prepaid insurance and other 9,210 92,616
------------ ------------
Total current assets 1,929,011 23,329,251
Property, equipment and leasehold improvements, net 295,393 408,449
Proprietary technology and other intangibles, net 116,827 110,460
Deferred offering costs and other, net 41,746 --
------------ ------------
Total assets $ 2,382,977 $ 23,848,160
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 540,025 $ 432,840
Accrued salaries, benefits and other 9,929 80,489
------------ ------------
Total current liabilities 549,954 513,329
Long term obligations--
Note payable to stockholder due after one year 265,836 293,552
Deferred lease rentals 69,029 133,100
Redeemable preferred stock--Series B (156,250 shares issued and outstanding at
June 30, 1997; none at December 31, 1997) 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 December
31, 1997) 6,318 --
Common stock $.001 par value; 30,000,000 shares authorized (919,568 shares
and 6,620,630 shares issued and outstanding at June 30, 1997 and December
31, 1997, respectively) 920 6,621
Additional paid-in capital 4,410,198 33,500,089
Deficit accumulated during the development stage (3,050,890) (10,593,994)
Unrealized holding gains (losses) on marketable securities available for sale 6,612 (4,537)
------------ ------------
Total stockholders' equity 1,373,158 22,908,179
------------ ------------
Total liabilities and stockholders' equity $ 2,382,977 $ 23,848,160
============ ============
</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 SIX MONTHS ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1996 1997 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,152 $ 5,807 $ 5,628 $ 7,837 $ 33,286
Other -- -- -- -- 1,303
------------ ------------ ------------ ------------ ------------
Total revenues 1,152 5,807 5,628 7,837 34,589
Operating expenses:
Research and development 241,064 202,330 392,318 430,633 1,807,972
Product development -- 541,489 -- 698,324 698,324
Cost of sales 100 985 487 1,160 3,360
Sales and marketing -- 292,937 -- 424,478 424,478
Acquired technology and patent costs
from OMRF -- -- 958,505 -- 958,505
General and administrative 122,485 349,232 210,862 550,992 1,316,339
------------ ------------ ------------ ------------ ------------
Total operating expenses 363,649 1,386,973 1,562,172 2,105,587 5,208,978
------------ ------------ ------------ ------------ ------------
Loss from operations (362,497) (1,381,166) (1,556,544) (2,097,750) (5,174,389)
Other income (expense):
Interest and dividend income 31,892 223,780 46,336 278,626 375,672
Interest expense (12,243) (14,201) (33,327) (27,716) (99,013)
------------ ------------ ------------ ------------ ------------
Total other income 19,649 209,579 13,009 250,910 276,659
------------ ------------ ------------ ------------ ------------
Net loss (342,848) (1,171,587) (1,543,535) (1,846,840) (4,897,730)
Preferred stock dividend--Series B 2,344 867 3,917 3,211 11,815
Preferred stock dividend--Series C -- 5,684,449 -- 5,684,449 5,684,449
Net loss applicable to common stock $ (345,192) $ (6,856,903) $ (1,547,452) $ (7,534,500) $(10,593,994)
============ ============ ============ ============ ============
Basic and diluted net loss per common
share - Note 2 $ (.38) $ (1.52) $ (1.68) $ (2.77) $ (9.17)
============ ============ ============ ============ ============
Weighted average common shares
outstanding 919,568 4,513,716 919,568 2,716,642 1,154,747
============ ============ ============ ============ ============
</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
SIX MONTHS ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,543,535) $ (1,846,840) $ (4,897,730)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 25,092 44,800 112,680
Acquired technology and patent costs from OMRF 336,422 -- 336,422
Accretion of interest 29,818 27,716 88,895
Deferred lease rentals -- 64,071 133,100
Changes in operating assets and liabilities:
Interest receivable on marketable securities -- (139,327) (155,149)
Prepaid insurance and other (31,200) (83,795) (94,187)
Inventory 487 (1,150,846) (1,183,665)
Accounts payable 127,605 (107,185) 432,840
Other liabilities -- 100,102 110,031
------------ ------------ ------------
Total adjustments 488,224 (1,244,464) (219,033)
------------ ------------ ------------
Net cash used by operating activities (1,055,311) (3,091,304) (5,116,763)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities -- (18,966,735) (20,538,683)
Proceeds from maturities of marketable securities -- 1,048,978 1,048,978
Purchase of property, equipment and leasehold improvements (33,347) (150,713) (493,392)
Purchase of inventory, proprietary technology and other
intangibles (202,917) -- (202,917)
------------ ------------ ------------
Net cash used by investing activities (236,264) (18,068,470) (20,186,014)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- 392,510
Payments on notes payable (274,179) -- (311,271)
Purchase of fractional shares of preferred stock -- (175) (175)
Proceeds from issuance of common stock 3,000 18,355,000 18,360,000
Proceeds from issuance of preferred stock--Series A 4,334,592 -- 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) -- (100,262)
------------ ------------ ------------
Net cash provided by financing activities 4,057,373 23,279,827 27,649,142
------------ ------------ ------------
Net increase in cash 2,765,798 2,120,053 2,346,365
Cash and cash equivalents at beginning of period 39,469 226,312 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,805,267 $ 2,346,365 $ 2,346,365
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
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ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
December 31, 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. 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.
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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 December 31, 1997, there were warrants outstanding for the purchase of an
aggregate of 580,222 shares of the Company's common stock exercisable at an
average of $3.52 per share. The Company also had 482,000 common stock options
outstanding at December 31, 1997 at a weighted average price exercise of $1.44
per share under the Employees' and Directors' stock option plans. 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 three month period ended 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 warrantholders 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 three and six month periods ended December 31, 1997.
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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.
NOTE 4 - FOREIGN CURRENCY FORWARDS
The Company utilizes foreign exchange contracts to manage its exposure against
foreign currency fluctuations on raw material purchase transactions denominated
in foreign currencies (Such instruments are not used for speculative purposes).
Forward exchange contracts related to raw material purchases are recognized as
adjustments to inventory. Deferred gains or loses from the forward contracts are
recognized as an adjustment to the cost of sales in the period the related
inventory is sold. The Company will recognize in its results of operations the
deferred gain or loss in the forward contracts should it determine that the
forward contracts no longer serve as an effective hedge against the fluctuations
in foreign currencies. Effectiveness of the forward contracts is primarily
determined by the existence and timing of the Company's raw material purchase
commitments relative to the terms of the forward contracts. At December 31,
1997, the Company had $150,000 of forward currency exchange contracts maturing
in less than 60 days. Deferred losses on such contracts are not material as of
December 31, 1997.
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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
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) 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.
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.
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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 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 began shipping ZStatFlu(TM) to
distributors late in the second quarter of 1997. 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 December 31, 1997, the Company did not recognize
significant revenues from the sale of ZstatFlu. This was due to the fact that
the U.S. influenza season did not reach significance until the second week of
January 1998, which is approximately a month later than usual. Consequently, the
Company expects revenues to be concentrated in the third and fourth quarters of
the fiscal year ending June 30, 1998.
The Company believes that the late beginning of the influenza season does not
necessarily mean that there will be a shorter season. Many health officials have
predicted that the influenza season may extend beyond normal, possibly into
April; however, whether the influenza season will be normal, protracted or
shortened is not subject to prediction.
Since the commencement of sales activity in the third fiscal quarter, the
Company has observed that in its initial marketing efforts, the adoption rate
among physicians has been slower than expected. The Company believes that
because the test is a new paradigm for the detection
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and treatment of upper respiratory illness, there is a multi-step education
process needed to demonstrate the effectiveness and cost-benefits of the test.
To accelerate the adoption rate, additional measures, including broadened sample
programs, specific geographic blitz marketing and general media programs have
been implemented to establish patient awareness. The Company believes that where
the product has been adopted, physicians are pleased with the results that lead
to improvement in the quality of patient care and the economics of their
practices.
Although the Company intends to produce 1,000,000 units of ZstatFlu for sale in
fiscal 1998, the ability of the Company to sell all of those units will depend
on the influenza season not being shorter than normal, as well as improvement in
the ZstatFlu adoption rate. If the influenza season is short and the more
aggressive marketing and customer education programs do not improve the adoption
rate, then sales would be negatively impacted.
RESEARCH AND DEVELOPMENT
Research and development spending for the quarter ended December 31, 1997
totaled $.2 million which represents a decrease of 16% from prior years
comparable quarter. The decrease was due to a temporary reallocation of
personnel to support product development and manufacturing activities for the
initial roll out of the ZStatFlu(TM) diagnostic product. Research and
development expenditures for the six months ended December 31, 1997 total $.4
million representing a 10% increase over the comparable period in the prior
year. It is anticipated that research and development spending will approximate
$1.5 million for fiscal 1998.
PRODUCT DEVELOPMENT
Product development costs were expended in manufacturing scale-up processes for
the production of ZStatFlu(TM) totaling $.5 million for the quarter ended
December 31, 1998 and were higher than anticipated. These additional costs were
incurred for the purchase of additional raw materials, evaluation of process
separation methods, and the use of purified materials in product testing
applications viable for scaled-up manufacturing processes. These expenditures
have resulted in the development of a higher yield process method that in the
future may reduce total unit manufacturing costs of ZStatFlu(TM). Product
development costs for the six months ended December 31, 1997 total $.7 million.
It is anticipated that product development expenditures will exceed $1.7 million
for fiscal 1998.
SALES AND MARKETING
Sales and marketing expenses totaled $.3 million for the quarter and $.4 million
for the six months ended December 31, 1997. The expenditures were for
ZStatFlu(TM) market preparation. It is anticipated that sales and marketing
expenses will approximate $1.0 million for fiscal 1998.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.3 million for the quarter and $.6
million for the six months ended December 31, 1997 representing a 185% and 261%
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
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Company's investor relations and public relations programs. 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 quarter and six months ended December 31,
1997 totaled $.2 million and $.3 million, respectively compared with $32,000 and
$46,000 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 December 31, 1997, was $22.8
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 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 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 FY 1998 price per unit to distributors
is expected to be approximately $12 to $15. The Company is planning on producing
4 million ZStatFlu(TM) units for fiscal 1999.
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
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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 was required to recognize a
preferred non-cash dividend. The amount of the preferred dividend was $5.7
million or $1.26 per share for the quarter ended December 31, 1997 and $2.09 per
share for the six months ended December 31, 1997. 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 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
12
<PAGE> 14
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.
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
13
<PAGE> 15
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 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.
14
<PAGE> 16
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. Although the
Company intends to produce 1,000,000 units of ZstatFlu for sale in
fiscal 1998, the ability of the Company to sell all of those units will
depend on the influenza season not being shorter than normal, as well
as an improvement in the ZstatFlu adoption rate. If the influenza
season is short and the more aggressive marketing and customer
education programs do not improve the adoption rate, then sales would
be negatively impacted. See "-Results of Operations - Product Sales."
The degree of market acceptance of the Company's other 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 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.
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.
15
<PAGE> 17
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 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>
16
<PAGE> 18
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
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).
b. Reports on Form 8-K: None
17
<PAGE> 19
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: February 11, 1998
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,346,365
<SECURITIES> 19,640,317
<RECEIVABLES> 3,841
<ALLOWANCES> 0
<INVENTORY> 1,249,953
<CURRENT-ASSETS> 23,329,251
<PP&E> 408,449
<DEPRECIATION> 44,641
<TOTAL-ASSETS> 23,848,160
<CURRENT-LIABILITIES> 513,329
<BONDS> 0
0
0
<COMMON> 6,621
<OTHER-SE> 22,901,558
<TOTAL-LIABILITY-AND-EQUITY> 23,848,160
<SALES> 7,837
<TOTAL-REVENUES> 286,463
<CGS> 1,160
<TOTAL-COSTS> 424,478
<OTHER-EXPENSES> 1,679,949
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,716
<INCOME-PRETAX> (1,846,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,846,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,846,840)
<EPS-PRIMARY> (2.77)
<EPS-DILUTED> (2.77)
</TABLE>
