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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
of incorporation or organization) Identification No.)
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.
6,655,380 shares of Common stock, $.001 par value,
issued and outstanding at November 11, 1998
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ZYMETX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and September 30, 1998..................................2
Statements of Operations - Three Months Ended September 30, 1997 and 1998
and Cumulative from Inception to September 30, 1998.................................3
Statements of Cash Flows - Three Months Ended September 30,
1997 and 1998 and Cumulative from Inception to September 30, 1998....................4
Notes to Financial Statements..........................................................5
Item 2. Management's Discussion and Analysis or Plan of Operations.............................7
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, SEPTEMBER 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,112,552 $ 548,359
Marketable securities, available-for-sale 16,409,932 15,391,470
Inventory 2,307,544 2,978,568
Prepaid insurance and other 203,548 381,357
------------ ------------
Total current assets 21,033,576 19,299,754
Property, equipment and leasehold improvements, net 555,191 607,933
Proprietary technology and other intangibles, net 97,023 92,073
------------ ------------
Total assets $ 21,685,790 $ 19,999,760
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707,132 $ 457,245
Accrued salaries, benefits and other 247,508 164,148
------------ ------------
Total current liabilities 954,640 621,393
Long term obligations--
Note payable to stockholder due after one year 319,884 327,504
Deferred lease rentals 197,680 225,392
Stockholders' equity:
Redeemable preferred stock $.001 par value - Series B (none issued or
outstanding at June 30, 1998 or September 30, 1998) -- --
Common stock $.001 par value; 30,000,000 shares authorized 6,637 6,637
(6,636,880 issued and outstanding at June 30, 1998 and September 30, 1998)
Additional paid-in capital 33,497,843 33,497,843
Deficit accumulated during the development stage (13,297,780) (14,717,025)
Unrealized holding gains on marketable securities available for sale 6,886 38,016
------------ ------------
Total stockholders' equity 20,213,586 18,825,471
------------ ------------
Total liabilities and stockholders' equity $ 21,685,790 $ 19,999,760
============ ============
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998
---------- ------------ -------------
<S> <C> <C> <C>
Revenues:
Sales, net $ 2,030 $ 4,750 $ 81,880
Other -- -- 1,303
---------- ------------ -------------
Total revenues 2,030 4,750 83,183
Operating expenses:
Research and development 228,303 278,737 2,710,110
Product development 156,835 163,555 1,758,967
Cost of sales 175 149 30,299
Sales and marketing 131,541 739,556 1,960,715
Acquired technology and patent costs
from OMRF -- -- 1,108,505
General and administrative 201,760 471,568 2,567,513
---------- ------------ -------------
Total operating expenses 718,614 1,653,565 10,136,109
---------- ------------ -------------
Loss from operations (716,584) (1,648,815) (10,052,926)
Other income (expense):
Interest and dividend income 54,845 245,690 1,177,880
Interest expense (13,514) (16,120) (145,714)
---------- ------------ -------------
Total other income 41,331 229,570 1,032,166
---------- ------------ -------------
Net loss (675,253) (1,419,245) (9,020,760)
Preferred stock dividend--Series B 2,344 -- 11,815
Preferred stock dividend--Series C -- -- 5,684,450
---------- ------------ -------------
Net loss applicable to common stock $ (677,597) $ (1,419,245) $ (14,717,025)
========== ============ =============
Basic and diluted net loss per
common share $ (.74) $ (.21) $ (7.19)
========== ============ =============
Weighted average common shares
outstanding 919,568 6,636,880 2,045,506
========== ============ =============
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED INCEPTION TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1998
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (675,253) $ (1,419,245) $ (9,020,760)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 21,268 38,538 210,730
Acquired technology and patent costs from OMRF -- -- 336,422
Accretion of interest 13,514 7,620 122,847
Deferred lease rentals 49,409 27,712 225,392
Changes in operating assets and liabilities:
Interest receivable on marketable securities (8,278) 283,736 (176,187)
Prepaid insurance and other (72,120) (177,809) (382,539)
Inventory (497,455) (671,024) (2,912,280)
Accounts payable (213,411) (249,887) 457,245
Other liabilities 16,557 (83,360) 152,333
------------ ------------ ------------
Total adjustments (690,516) (824,474) (1,966,037)
------------ ------------ ------------
Net cash used by operating activities (1,365,769) (2,243,719) (10,986,797)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities -- (11,200,084) (33,715,155)
Proceeds from maturities of marketable securities 528,008 11,965,940 18,537,888
Purchase of property, equipment and leasehold improvements (72,487) (86,330) (773,316)
Purchase of inventory, proprietary technology and other
intangibles -- -- (202,917)
------------ ------------ ------------
Net cash provided (used) by investing activities 455,521 679,526 (16,153,500)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- 392,510
Payments on notes payable -- -- (311,271)
Purchase of fractional shares of preferred stock -- -- (405)
Proceeds from issuance of common stock -- -- 18,341,748
Proceeds from issuance of preferred stock, net 4,925,002 -- 9,249,824
Exercise of employee stock options -- -- 16,250
Deferred offering costs of preferred stock and initial public
offering (139,766) -- --
------------ ------------ ------------
Net cash provided by financing activities 4,785,236 -- 27,688,656
------------ ------------ ------------
Net increase (decrease) in cash 3,874,988 (1,564,193) 548,359
Cash and cash equivalents at beginning of period 226,312 2,112,552 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 4,101,300 $ 548,359 $ 548,359
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
September 30, 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.
ViraZyme, the Company's core technology, exploits the subtle structural
differences and characteristics of enzymes to create viral diagnostic and
therapeutic products. The Company's diagnostic technology is a proprietary
two-part compound that will split when the compound contacts a specific target
site (an enzyme). As a result of this split, one part of the compound becomes
visible to the naked eye when collected in the Company's testing device,
permitting the user to make a diagnosis regarding the presence of the virus
targeted by the test. For in-process therapeutic products, a modified version of
the diagnostic compound is used that the Company believes will bind to a
specific enzyme and prevent the enzyme's contribution to the infection process.
The Company's initial viral targets are respiratory infections including
influenza A and influenza B, RSV, parainfluenza and adenovirus, as well as the
non-respiratory infections HSV, CMV and HIV, which is the virus that causes
AIDS.
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 Company's Annual
Report on Form 10-KSB for the year ended June 30, 1998, for an expanded
discussion of the
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Company's financial disclosures and accounting policies. 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. As 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.
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 September 30, 1998, there were warrants outstanding for the purchase of an
aggregate of 795,847 shares of the Company's common stock exercisable at prices
ranging from $3.20 to $12.40 (an average of $6.08 per share). The Company also
has 1,000,000 shares of common stock available for issuance under the
Employees' and Directors' stock option plans (618,324 shares outstanding at
September 30, 1998). For additional disclosures regarding the stock option
plans, see Note 6 to the June 30, 1998 financial statements filed on Form SB-2.
The warrants and stock options were not included in the computation of diluted
net loss per share for the quarterly period ended September 30, 1997 or 1998,
since the effect would be anti-dilutive.
NOTE 3 - EMPLOYEE STOCK PURCHASE PLAN
The Company has adopted an Employee Stock Purchase Plan (the "Plan") effective
January 1, 1999. The Plan is subject to shareholder approval. The Plan provides
that each eligible employee may participate by making an election to have up to
10% of his compensation deducted from his pay during any quarter. An employee
must have completed at least one year of service with the Company before he is
eligible to participate in the Plan.
The option price under the Plan is the lesser of 85% of the price of the stock
on the first day of such quarter or 85% of the price of the stock on the last
day of such quarter. The options will be continually granted and automatically
exercised each quarter in which the Plan is in effect. The board of directors
have authorized 50,000 shares for issuance under the Plan (subject to
shareholder approval).
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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. 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 (Food and Drug
Administration) 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.
"ViraZyme," "ViraSTAT," "ZstatFlu", and "National Flu Awareness Month" are
trademarks owned by or licensed to the Company.
CURRENT EVENTS
In August 1998, the Company signed an agreement with WellCor America, a regional
managed care organization, which established a comprehensive influenza disease
management program based on the Company's ZstatFlu(TM) product. The Company
believes the inclusion of ZstatFlu in the influenza disease management
protocol will be a strong influence on physician product acceptance.
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In September 1998, the Company received clearance from the Food and Drug
Administration for two improvements to the Company's point-of-care influenza
diagnostic, ZstatFlu. The time required to obtain the test result has been cut
in half, from 60 to 30 minutes, significantly enhancing the product's ease of
use at the point-of-care. In addition, the sample stability has been extended to
24 hours from the time the sample is obtained. This stability clearance makes
the product highly portable, allowing any physician, including those without
on-site CLIA certified moderately complex office labs, to benefit from use of
the test.
PLAN OF OPERATIONS
The Company's plan of operations for the next 12 months is to: (i) establish
distribution channels and market ZstatFlu; 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.
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
For the three months ended September 30, 1998, the Company did not recognize
significant revenues from sales of ZstatFlu. This is due primarily to sales
being seasonal and coinciding with the influenza season, which generally occurs
in the second and third quarters of the Company's fiscal year. The Company has
implemented several marketing programs which began during fiscal 1998 and which
continue in fiscal 1999 to educate physicians as to the medical and practical
economic benefits from the use of ZstatFlu in the coming influenza season. In
addition to marketing directly to physicians, the Company will continue
marketing to the managed care segment (HMO/PPO/PPM). Also, during fiscal 1998,
the Company initiated a nationwide sampling program through the Company's
distributors, in addition to direct sampling from the Company. This program is
expected to build physician awareness of ZstatFlu for the 1998-1999 influenza
season. With the implementation of these programs the Company expects to
increase sales during the 1998 - 1999 influenza season.
In November, the Company and the American Lung Association kicked off National
Flu Awareness Month, a nationwide awareness campaign aimed at educating the
public about the prevention, diagnosis and treatment of influenza. National Flu
Awareness Month(TM) will encourage Americans to get flu shots as their first
line of defense and see their doctors at the earliest signs of flu-like
symptoms. Activities include promotion and distribution of patient education
materials to medical offices and hospital Emergency Rooms nationwide, and an
intensive publicity campaign.
RESEARCH AND DEVELOPMENT
Research and development spending for the three months ended September 30, 1998
totaled $.3 million which represents an increase of 22% from the three months
ended September 30, 1997. The increase was primarily due to an increase in the
scientific research staff and increased clinical testing expenses related to
improving diagnostic products and continued research in therapeutic compounds.
PRODUCT DEVELOPMENT
Product development costs expended in the manufacturing and production of
ZstatFlu totaled $.2 million for the three months ended September 30, 1998.
These costs were incurred for improving scaled-up manufacturing processes and
re-engineering improvements in current FDA cleared diagnostic products.
SALES AND MARKETING
Sales and marketing expenses totaled $.7 million for the three months ended
September 30, 1998. This expenditure represents a 462% increase from the three
months ended September 30, 1997. This increase is due to an increase in
personnel expense, advertising, conventions and
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travel, and the leasing of a contract sales organization designed to target
managed care organization, clinics, physicians and others in the medical
community.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.5 million for the three months ended
September 30, 1998, representing a 134% increase from the three months ended
September 30, 1997. The increase was principally due to increased consulting
fees, general and patent legal fees and increased personnel. Additional costs
were also incurred to support the Company's investor relations and public
relations programs.
OTHER INCOME (EXPENSE)
Interest and dividend income for the three months ended September 30, 1998
totaled $246,000 compared with $55,000 for the three months ended September 30,
1997. The increase is due to increases in cash investments resulting from the
November 1997 initial public offering which resulted in net proceeds of $18.3
million.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied principally on equity financing to fund its operations
and capital expenditures. Working capital at September 30, 1998, was $18.7
million, as compared to $20.1 million at June 30, 1998.
The Company believes that additional financing may be required to meet the
Company's planned operating needs beyond fiscal year 1999 if significant
positive cash flows are not generated from commercial activities during fiscal
1999. 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) with 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.
Future manufacturing expenses for ZstatFlu will depend on market acceptance of
the product. Currently, the Company has sufficient inventory to supply
anticipated sales for the 1998-1999
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North American influenza season. Also, ZstatFlu sample programs have
occurred in Southern Hemisphere countries. The extent of sampling activities in
conjunction with orders for the product will determine the production of
additional units.
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS (NON-IT)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company is currently assessing its software and hardware systems to evaluate
if they will properly utilize dates beyond December 31, 1999. The Company
presently believes that no significant modifications or replacements of existing
software or hardware except as noted below will be necessary to address the Year
2000 Issue.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing, and implementation. To date, the
Company has completed 100% of its assessment of all systems (IT and non-IT) that
could be significantly affected by the Year 2000. The Company is currently
implementing a new integrated accounting and financial reporting system which is
Year 2000 compliant. This implementation is expected to be completed by
December, 1998. The Company has determined that it's primary product line will
not require remediation to be Year 2000 compliant. Accordingly, the Company
believes that Year 2000 does not present a material exposure as it relates to
the Company's products. The Company is gathering information about the Year 2000
compliance status of its significant suppliers, distributors and subcontractors
and continues to monitor their compliance.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company currently has no system interfaces directly with significant third
party vendors.
The Company is in the process of querying its significant suppliers and
subcontractors that do not share information systems with the Company (external
agents). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 ready. The inability of external agents
to complete their Year 2000 resolution process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
Due to the Company's growth, scale up of product manufacturing, and increased
accounting transactions
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since inception, the Company's current accounting software was to be replaced
in fiscal 1999. Accordingly, the costs of the replacement accounting software
will be capitalized. The total cost to replace the accounting software and
determine the Year 2000 project's effect on operating equipment is estimated to
be less than $100,000.
Management of the Company believes it has an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, the Company has
not yet completed all necessary phases of the Year 2000 program. In the event
that the Company does not complete any additional phases, the Company or its
external agents may be unable to process customer orders, manufacture and ship
product, invoice customers or collect payments. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The amount of potential liability and lost revenue
cannot be reasonably estimated at this time.
It is anticipated that the Company will maintain a sufficient inventory of raw
material and packaged, salable product at a number of distributors, adequate to
overcome, in a reasonable period of time, any Year 2000 difficulty encountered
by its raw material manufacturer with respect to production for the 2000-2001
influenza season. The Company believes that it will have adequate time to
address its third party suppliers' and distributors' Year 2000 issues in
advance of the 2000-2001 influenza season. The Company intends to develop a
more detailed contingency plan for more likely Year 2000 concerns during 1999.
IMPACT OF INFLATION AND CHANGING PRICES
Though not significant, inflation continues to cause increases in product,
occupancy and operating expenses, as well as the cost of acquiring capital
assets. The effect of higher costs is minimized by achieving operating
efficiencies and passing vendor price increases along to the consumers.
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 will achieve market
acceptance during the upcoming 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
products and their advantages over existing
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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 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. The ultimate scope and validity of such patents are presently
unknown. If the courts
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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.
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
14
<PAGE> 16
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.
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
15
<PAGE> 17
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 and use of Proceeds:
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 issuer or their
associates; to persons owning
ten percent or more of any Direct or
class of equity securities of indirect
the issuer; and to affiliates payments to
of the issuer others
-------------------------------- --------------
<S> <C> <C>
Underwriting discounts and
commissions $ -- $ 1,692,800
Finders' Fees -- --
Expenses paid to or for
underwriters -- 634,800
Other Expenses -- 495,882
------- -----------
Total Expenses $ -- $ 2,823,482
======= ===========
</TABLE>
The net proceeds of the Offering after deducting the expenses described
above were approximately $18,337,000. Since the closing of the Offering, such
proceeds were used by the Registrant for each of the purposes indicated below:
17
<PAGE> 19
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the issuer or their
associates; to persons owning
ten percent or more of any Direct or
class of equity securities of indirect
the issuer; and to affiliates payments to
of the issuer others
-------------------------------- --------------
<S> <C> <C>
Temporary investments $ -- $ 15,940,000
Inventory 672,000
Equipment and Furniture 86,000
Operating expenses 1,639,000
</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 10-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., a Delaware Corporation
------------------------------------------
(Registrant)
/s/ G. Carl Gibson
------------------------------------------
G. Carl Gibson
Principal Financial and Accounting Officer
Date: November 16, 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 10-QSB submitted to the Securities and Exchange
Commission).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 548,359
<SECURITIES> 15,391,470
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 2,978,568
<CURRENT-ASSETS> 19,299,754
<PP&E> 773,315
<DEPRECIATION> 165,382
<TOTAL-ASSETS> 19,999,760
<CURRENT-LIABILITIES> 621,393
<BONDS> 552,896
0
0
<COMMON> 6,637
<OTHER-SE> 33,497,843
<TOTAL-LIABILITY-AND-EQUITY> 19,999,760
<SALES> 4,750
<TOTAL-REVENUES> 250,440
<CGS> 149
<TOTAL-COSTS> 149
<OTHER-EXPENSES> 1,653,416
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,120
<INCOME-PRETAX> (1,419,245)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,419,245)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,419,245)
<EPS-PRIMARY> (0.21)
<EPS-DILUTED> (0.21)
</TABLE>
