<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ______ to _______
Commission file number 0-23145
ZYMETX, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1444040
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Research Parkway, Suite 100 73104
Oklahoma City, Oklahoma (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: 405-271-1314
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,686,630 shares of Common stock, $.001 par value, issued and outstanding at
February 9, 1999
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> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1998 and December 31, 1998...............................2
Statements of Operations - Three Months and Six Months Ended December 31,
1997 and 1998 and Cumulative from Inception to December 31, 1998.................3
Statements of Cash Flows - Six Months Ended December 31, 1997 and 1998
and Cumulative from Inception to December 31, 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.................................................................18
Item 2. Changes in Securities and Use of Proceeds.........................................18
Item 3. Defaults Upon Senior Securities...................................................19
Item 4. Submission of Matters to a Vote of Security Holders...............................19
Item 5. Other Information.................................................................19
Item 6. Exhibits and Reports on Form 8-K..................................................20
SIGNATURES......................................................................................21
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,112,552 $ 1,856,221
Marketable securities, available-for-sale 16,409,932 10,897,456
Inventory 2,307,544 4,262,777
Prepaid insurance and other 203,548 519,362
------------ ------------
Total current assets 21,033,576 17,535,816
Property, equipment and leasehold improvements, net 555,191 596,782
Proprietary technology and other intangibles, net 97,023 87,123
------------ ------------
Total assets $ 21,685,790 $ 18,219,721
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707,132 $ 487,265
Accrued salaries, benefits and other 247,508 302,478
------------ ------------
Total current liabilities 954,640 789,743
Long term obligations--
Note payable to stockholder due after one year 319,884 335,511
Deferred lease rentals 197,680 265,672
Stockholders' equity:
Redeemable preferred stock $.001 par value - Series B (none issued or
outstanding at June 30, 1998 or December 31, 1998) -- --
Common stock $.001 par value; 30,000,000 shares authorized
(6,636,880 and 6,655,380 issued and outstanding at June 30, 1998 and December
31, 1998, respectively) 6,637 6,655
Additional paid-in capital 33,497,843 33,516,325
Deficit accumulated during the development stage (13,297,780) (16,698,500)
Accumulated other comprehensive income
Unrealized holding gains on marketable securities available for sale
6,886 4,315
------------ ------------
Total stockholders' equity 20,213,586 16,828,795
------------ ------------
Total liabilities and stockholders' equity $ 21,685,790 $ 18,219,721
============ ============
</TABLE>
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,
1997 1998 1997 1998 1998
------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 5,807 $ 261,989 $ 7,837 $ 266,739 $ 343,869
Allowance for Returns -- (118,366) -- (118,366) (118,366)
Other -- -- -- -- 1,303
------------ ----------- ------------ ------------ ------------
Total revenues 5,807 143,623 7,837 148,373 226,806
Operating expenses:
Research and development 202,330 332,333 430,633 611,070 3,042,444
Product development 541,489 216,212 698,324 379,767 1,975,179
Cost of sales 985 94,398 1,160 94,547 124,697
Sales and marketing 292,937 1,153,055 424,478 1,892,611 3,113,770
Acquired technology and patent costs
from OMRF -- -- -- -- 1,108,505
General and administrative 349,232 506,770 550,992 978,338 3,074,283
------------ ----------- ------------ ------------ ------------
Total operating expenses 1,386,973 2,302,768 2,105,587 3,956,333 12,438,878
------------ ----------- ------------ ------------ ------------
Loss from operations (1,381,166) (2,159,145) (2,097,750) (3,807,960) (12,212,072)
Other income (expense):
Interest and dividend income 223,780 194,177 278,626 439,867 1,372,057
Interest expense (14,201) (16,507) (27,716) (32,627) (162,221)
------------ ----------- ------------ ------------ ------------
Total other income 209,579 177,670 250,910 407,240 1,209,836
------------ ----------- ------------ ------------ ------------
Net loss (1,171,587) (1,981,475) (1,846,840) (3,400,720) (11,002,236)
Preferred stock dividend--Series B 867 -- 3,211 -- 11,815
Preferred stock dividend--Series C 5,684,449 -- 5,684,449 -- 5,684,449
------------ ----------- ------------ ------------ ------------
Net loss applicable to common stock $ (6,856,903) $(1,981,475) $ (7,534,500) $ (3,400,720) $(16,698,500)
============ =========== ============ ============ ============
Basic and diluted net loss per common
share $ (1.52) $ (.30) $ (2.77) $ (.51) $ (7.31)
============ =========== ============ ============ ============
Weighted average common shares
outstanding 4,513,716 6,655,380 2,716,642 6,646,130 2,284,980
============ =========== ============ ============ ============
</TABLE>
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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,
1997 1998 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,846,840) $ (3,400,720) $(11,002,236)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 44,800 78,681 250,874
Acquired technology and patent costs from OMRF -- -- 336,422
Accretion of interest 27,716 15,627 130,854
Deferred lease rentals 64,071 67,992 265,672
Changes in operating assets and liabilities:
Interest receivable on marketable securities (139,327) 233,693 (226,230)
Prepaid insurance and other (83,795) (315,814) (520,544)
Inventory (1,150,846) (1,955,233) (4,196,489)
Accounts payable (107,185) (219,867) 487,265
Other liabilities 100,102 54,970 290,663
------------ ------------ ------------
Total adjustments (1,244,464) (2,039,951) (3,181,513)
------------ ------------ ------------
Net cash used by operating activities (3,091,304) (5,440,671) (14,183,749)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities (18,966,735) (12,633,911) (35,148,982)
Proceeds from maturities of marketable securities 1,048,978 17,910,123 24,482,071
Purchase of property, equipment and leasehold improvements (150,713) (110,372) (797,358)
Purchase of inventory, proprietary technology and other
intangibles -- -- (202,917)
------------ ------------ ------------
Net cash provided (used) by investing activities (18,068,470) 5,165,840 (11,667,186)
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) -- (405)
Proceeds from issuance of common and preferred stock, net of
offering costs 23,280,232 -- 27,591,572
Exercise of employee stock options -- 18,500 34,750
------------ ------------ ------------
Net cash provided by financing activities 23,279,827 18,500 27,707,156
------------ ------------ ------------
Net increase (decrease) in cash 2,120,053 (256,331) 1,856,221
Cash and cash equivalents at beginning of period 226,312 2,112,552 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,346,365 $ 1,856,221 $ 1,856,221
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
DECEMBER 31, 1998.
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
ZymeTx, Inc. (the "Company" or "ZymeTx"), is a development stage biotechnology
company engaged in the discovery and development of unique products for the
diagnosis and treatment of viruses. The scientific foundation for the Company's
plan of operations is based upon the role of enzymes in the process of viral
infection. The Company's strategy is: (i) to develop therapeutic and diagnostic
products for a broad range of viral diseases and other information services;
(ii) utilize the Company's diagnostic products in the development of
international viral monitoring and reporting programs; and (iii) to use revenues
from diagnostic products and other information services 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 intends to use its diagnostic products to monitor viral infections
(initially influenza A and B). The real time information will be used internally
and marketed to pharmaceutical companies developing viral therapeutics.
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.
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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 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 may be concentrated in the second and third
quarters of each fiscal year.
NOTE 2 - NET LOSS PER SHARE
On December 31, 1997, the Company adopted 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.
At December 31, 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 has
allocated 1,000,000 shares of common stock for issuance under the Employees' and
Directors' stock option plans, granted 638,324 stock options, with 603,574
shares outstanding at December 31, 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 and six month period
ended December 31, 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 was approved during the board meeting held November
1998. The Plan provides that each eligible employee may participate by making an
election to have up to 10% of their compensation deducted from their pay during
any quarter. An employee must have completed at least three months of service
with the Company before being 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
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continually granted and automatically exercised each quarter in which the Plan
is in effect. The board of directors has authorized 50,000 shares for issuance
under the Plan.
NOTE 4 - COMPREHENSIVE INCOME
Effective June 30, 1998, the Company adopted Financial Accounting Standard No.
130 "Reporting Comprehensive Income" ("SFAS 130"). The provisions of SFAS 130
require the Company to classify items of other comprehensive income in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company has also made similar
reclassifications for all prior periods for comparative purposes. Other
comprehensive income for the three month and six month periods ended December
31, 1997 and 1998, is detailed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1997 1998 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,171,587) $(1,981,475) $(1,846,840) $(3,400,720)
Unrealized losses on investments
available for sale (6,201) (33,701) (11,149) (2,571)
----------- ----------- ----------- -----------
Comprehensive loss $(1,177,788) $(2,015,176) $(1,857,989) $(3,403,291)
=========== =========== =========== ===========
</TABLE>
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 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 other information services;
(ii) utilize the Company's diagnostic products in the development of
international viral monitoring and reporting programs; and (iii) to use revenues
from diagnostic products and other information services to sustain a
comprehensive viral therapeutic research and development program and to continue
the Company's diagnostic research and development program.
7
<PAGE> 9
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 intends to use its diagnostic products to monitor viral infections
(initially influenza A and B). The real time information will be used internally
and marketed to pharmaceutical companies developing viral therapeutics.
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.
CURRENT EVENTS
In October Medical Arts Laboratory announced an agreement with the Company which
exclusively designated Medical Arts Laboratory as the National Influenza
Laboratory, creating a national network of medical professionals with access to
overnight influenza diagnosis. Medical Arts Laboratory will be using the
portability of ZstatFlu to move the test from client to lab via pre-paid
overnight mailers.
In November the American Lung Association and the Company, with recommendations
from the Centers for Disease Control and Prevention (CDC), conducted National
Flu Awareness Month. National Flu Awareness Month was a nationwide awareness
campaign aimed at educating the public about the prevention, diagnosis and
treatment of influenza.
In November the Company announced that Christopher M. Salyer had been elected to
its Board of Directors during the November 11th board meeting. Mr. Salyer is
Chairman and Chief Executive Officer of Southwest Medical Holdings, Inc., a
medical reference laboratory company and the parent Company to Medical Arts
Laboratory. During the Board meeting Gilbert M. Schiff, M.D. was re-elected to
the Board.
In December the Company announced that it had filed a registration statement
with the Securities and Exchange Commission relating to 2,384,431 shares of its
common stock. This registration statement became effective December 29, 1998.
The shares owned by existing shareholders may now be offered in the open market
from time to time at prevailing prices. This offering was not underwritten and
does not represent a new financing. These shares had been subject to a lockup
since the Company's initial public offering on November 3, 1997.
In December the Company announced the Company's National Flu Surveillance
Network at the International Symposium on Influenza and Respiratory Viruses held
in Maui, Hawaii. The
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national Flu Surveillance Network is the first network to track and monitor
outbreaks of all known strains of influenza in virtual real-time.
In December the Company updated information on a range of diagnostic and
therapeutic programs under development for the detection and treatment of viral
diseases. In the diagnostic area the Company submitted two 510(k) filings to the
U.S. Food and Drug Administration for laboratory tests able to distinguish
between the two most common forms of influenza, A and B. On the therapeutic side
research continues into therapeutic compounds for the treatment of HIV,
influenza and herpes simplex virus. The lead compound from the ZX-0800 family of
antiviral compounds recently licensed from the Oklahoma Medical Research
Foundation (OMRF) is being evaluated for the treatment of HIV.
Also in December, the Company finalized a distribution agreement with Fisher
Scientific, a provider of more than 245,000 products and services to research,
healthcare, industrial, educational and government customers in 145 countries.
PLAN OF OPERATIONS
The Company's plan of operations for the next 12 months is to: (i) establish
distribution channels and market the Company's diagnostic products; (ii) utilize
the Company's diagnostic products to develop international viral disease
monitoring programs; and (iii) continue viral therapeutic and diagnostic
research and development.
The Company believes it has adequate cash and marketable securities available
for sale to fund the planned operations for the next 12 months. Additional
capital may be necessary to fund the purchase of additional inventory 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.
RESULTS OF OPERATIONS
PRODUCT SALES
For the three months and six months ended December 31, 1998, the Company
recognized increased revenues from sales of ZstatFlu as compared to the prior
three months and six months ended December 31, 1997. This is the result of the
Company implementing several ongoing 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 addition to
marketing directly to physicians, the Company is continuing to market to the
managed care
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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 was expected to build physician
awareness of ZstatFlu for the 1998-1999 influenza season. While revenues have
increased for the comparative six month period, revenues are lower than
anticipated due to the delayed onset of influenza in North America.
In November, the Company and the American Lung Association conducted National
Flu Awareness Month(TM), a nationwide awareness campaign aimed at educating the
public about the prevention, diagnosis and treatment of influenza. National Flu
Awareness Month encouraged Americans to get flu shots as their first line of
defense and see their doctors at the earliest signs of flu-like symptoms.
Activities included 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 and six months ended
December 31, 1998, totaled $.3 million and $.6 million, respectively, which
represents an increase of 64% and 42%, respectively, from the three months and
six months ended December 31, 1997. The increase was primarily due to an
increase in salaries and other expenses attributable to additional scientific
staff used as part of the Company's programs to improve diagnostic products and
continued research in therapeutic compounds.
PRODUCT DEVELOPMENT
Product development costs expended in the manufacturing and production of
diagnostic products totaled $.2 million and $.4 million, respectively, for the
three months and six months ended December 31, 1998, compared to costs totaling
$.5 million and $.7 million, respectively, for the three and six months ended
December 31, 1997. 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 $1.2 million and $1.9 million,
respectively, for the three months and six months ended December 31, 1998. This
expenditure represents a 294% and 346% increase, respectively, from the three
months and six months ended December 31, 1997. This increase is due to an
increase in personnel expense, advertising, conventions and travel, and the
leasing of a contract sales organization designed to target managed care
organizations, clinics, physicians and others in the medical community.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.5 million and $1.0 million,
respectively, for the three months and six months ended December 31, 1998,
representing a 45% and 78% increase, respectively, from the three months and six
months ended December 31, 1997. The increase was
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principally due to increased consulting fees, securities 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 totaled $.2 million and $.4 million, respectively,
for the three month and six months ended December 31, 1998, compared to $.2
million and $.3 million for the three months and six months ended December 31,
1997, representing earnings on liquid assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has relied principally on equity financing to fund its operations
and capital expenditures. Working capital at December 31, 1998, was $16.7
million, as compared to $20.1 million at June 30, 1998. The decrease is due to
net losses incurred by the company.
The Company believes that additional financing may be required to meet the
Company's planned operating needs beyond fiscal year 2000 if significant
positive cash flows are not generated from commercial activities during fiscal
2000. 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 a note outstanding relating to a license of intellectual
property from OMRF. The license Note has a principal amount of $.4 million
(discounted to $.3 million) that bears interest at 8% per year. This obligation
requires quarterly installments of interest, and commencing May 15, 1999, a
principal payment of $25,000 per quarter until the license Note is repaid.
Future manufacturing expenses for the Company's diagnostic products will depend
on market acceptance. Currently, the Company has sufficient finished goods
inventory to supply anticipated sales for the 1998-1999 North American influenza
season. Also, 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
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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 early in
1999. The Company has determined that its 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 has received information from these vendors that
they are cognizant of the Year 2000 problem and have addressed these issues or
are in the process of doing so. 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 since inception, the Company's current accounting
software is to be replaced in fiscal 1999. Accordingly, the costs of the
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
12
<PAGE> 14
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 or other diagnostic products
will achieve market acceptance. 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 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.
13
<PAGE> 15
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) or other diagnostic products.
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.
14
<PAGE> 16
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 are subject to Good
Manufacturing Practices ("GMP") regulations promulgated by the FDA. The
FDA will also inspect the Company's manufacturing facilities and the
facilities of its third-party manufacturers on a routine basis for
regulatory compliance with GMP regulations. Although the Company's
employees have experience with GMP protocols, there can be no assurance
that the Company or its third-party manufacturers can satisfy these
requirements. The Company would not be allowed to manufacture its
approved or cleared products in the event such GMP protocols could not
be met.
Management of Growth and Increasing Production Requirements
The Company's success will depend on its ability to expand and manage
its operations and facilities. There can be no assurance that the
Company will be able to manage its growth, meet the staffing
requirements of manufacturing scale-up or for current or additional
collaborative relationships or successfully assimilate and train its
new employees. In addition, to manage its growth effectively, the
Company will be required to expand its management base and enhance its
operating and financial systems. If the Company continues to grow,
there can be no assurance that the management skills and systems
currently in place will be adequate or that the Company will be able to
manage
15
<PAGE> 17
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 products, or that
any or all of the contemplated benefits from such collaborative,
license or other arrangements will be realized.
16
<PAGE> 18
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.
17
<PAGE> 19
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 Direct or
percent or more of any class of equity indirect
securities of the issuer; and to payments to
affiliates 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:
18
<PAGE> 20
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the Registrant or
their associates; to persons
owning ten percent or more of any Direct or
class of equity securities of the indirect
issuer; and to affiliates of the payments to
Registrant others
---------------------------------- -----------
<S> <C> <C>
Temporary investments $-- $10,900,000
Inventory 2,627,000
Equipment and Furniture 110,000
Operating expenses 4,700,000
</TABLE>
Item 3. Defaults Upon Senior Securities: None.
Item 4. Submission of Matters to a Vote of Security Holders.
a) The Company held its Annual Meeting of Stockholders on November 11,
1998.
b) The following matters were voted upon at the annual meeting:
1) Following are the directors elected at the annual meeting and the
tabulation of votes related to each nominee.
<TABLE>
<CAPTION>
Director Votes For Votes Against Votes Withheld
-------- --------- ------------- --------------
<S> <C> <C> <C>
Christopher M. Salyer 4,441,388 -0- 18,632
Gilbert M. Schiff, M.D. 4,441,388 -0- 10,820
</TABLE>
In addition to the foregoing, Peter G. Livingston, William I. Bergman,
J. Vernon Knight, M.D., David E. Rainbolt and William G. Thurman, M.D., are
directors whose terms of office continued after the meeting.
2) The stockholders approved an increase in shares of common stock
subject to the ZymeTx, Inc. Stock Option Plan and the ZymeTx, Inc. Directors
Stock Option Plan. Affirmative votes were 1,596,800; negative votes were
254,313; and abstentions were 29,210.
3) The stockholders approved an increase in shares of common stock
subject to the ZymeTx, Inc. Employee Stock Purchase Plan. Affirmative votes were
2,680,819; negative votes were 153,430; and abstentions were 63,135.
4) The stockholders ratified the appointment of Ernst & Young LLP as
independent public accountants for 1999. Affirmative votes were 4,344,603;
negative votes were 86,825; and abstentions were 9,960.
Item 5. Other Information: None
19
<PAGE> 21
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
<PAGE> 22
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: February 15, 1999
21
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,856,221
<SECURITIES> 10,897,456
<RECEIVABLES> 261,536
<ALLOWANCES> 0
<INVENTORY> 4,262,777
<CURRENT-ASSETS> 17,535,816
<PP&E> 797,358
<DEPRECIATION> 200,576
<TOTAL-ASSETS> 18,219,721
<CURRENT-LIABILITIES> 789,743
<BONDS> 601,183
0
0
<COMMON> 6,655
<OTHER-SE> 33,516,325
<TOTAL-LIABILITY-AND-EQUITY> 18,219,721
<SALES> 148,373
<TOTAL-REVENUES> 148,373
<CGS> 94,547
<TOTAL-COSTS> 94,547
<OTHER-EXPENSES> 3,861,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,627
<INCOME-PRETAX> (3,400,720)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,400,720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,400,720)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
