<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.
6,692,572 shares of Common stock, $.001 par value, issued and outstanding at
April 5, 1999
Transitional Small Business Disclosure Format (check one): Yes [ ] No X]
<PAGE> 2
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 March 31, 1999 .............................................2
Statements of Operations - Three Months and Nine Months Ended March 31,
1998 and 1999 and Cumulative from Inception to March 31, 1999................................3
Statements of Cash Flows - Nine Months Ended March 31, 1998 and 1999
and Cumulative from Inception to March 31, 1999..............................................4
Notes to Financial Statements..................................................................5
Item 2. Management's Discussion and Analysis or Plan of Operations.....................................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................19
Item 2. Changes in Securities and Use of Proceeds.....................................................19
Item 3. Defaults Upon Senior Securities...............................................................20
Item 4. Submission of Matters to a Vote of Security Holders...........................................20
Item 5. Other Information.............................................................................20
Item 6. Exhibits and Reports on Form 8-K..............................................................20
SIGNATURES..................................................................................................21
</TABLE>
1
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ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,112,552 $ 1,106,665
Marketable securities, available-for-sale 16,409,932 9,417,196
Inventory 2,307,544 4,244,283
Prepaid insurance and other 203,548 440,637
------------ ------------
Total current assets 21,033,576 15,208,781
Property, equipment and leasehold improvements, net 555,191 613,265
Proprietary technology and other intangibles, net 97,023 82,172
------------ ------------
Total assets $ 21,685,790 $ 15,904,218
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707,132 $ 799,690
Accrued salaries, benefits and other 247,508 308,093
------------ ------------
Total current liabilities 954,640 1,107,783
Long term obligations--
Note payable to stockholder due after one year 319,884 343,925
Deferred lease rentals 197,680 278,078
Stockholders' equity:
Redeemable preferred stock $.001 par value - Series B (none issued or
outstanding at June 30, 1998 or March 31, 1999) -- --
Common stock $.001 par value; 30,000,000 shares authorized
(6,636,880 and 6,687,880 issued and outstanding at June 30, 1998 and
March 31, 1999, respectively) 6,637 6,687
Additional paid-in capital 33,497,843 33,548,793
Deficit accumulated during the development stage (13,297,780) (19,393,873)
Accumulated other comprehensive income -
Unrealized holding gains on marketable securities available for sale 6,886 12,825
------------ ------------
Total stockholders' equity 20,213,586 14,174,432
------------ ------------
Total liabilities and stockholders' equity $ 21,685,790 $ 15,904,218
============ ============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 4
ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31, MARCH 31,
1998 1999 1998 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales $ 1,306 $ 251,213 $ 9,142 $ 517,952 $ 595,082
Allowance for Returns -- 27,366 -- (91,000) (91,000)
Other -- -- -- -- 1,303
------------ ------------ ------------ ------------ ------------
Total revenues 1,306 278,579 9,142 426,952 505,385
Operating expenses:
Research and development 338,802 375,529 769,435 986,599 3,417,973
Product development 248,447 511,388 946,770 891,155 2,486,567
Provision for Loss on Inventory -- 730,761 -- 730,761 730,761
Cost of sales 325 148,054 1,485 242,601 272,751
Sales and marketing 481,793 864,770 906,272 2,757,381 3,978,540
Acquired technology and patent costs
from OMRF -- -- -- -- 1,108,505
General and administrative 330,934 475,947 881,926 1,454,285 3,550,230
------------ ------------ ------------ ------------ ------------
Total operating expenses 1,400,301 3,106,449 3,505,888 7,062,782 15,545,327
------------ ------------ ------------ ------------ ------------
Loss from operations (1,398,995) (2,827,870) (3,496,746) (6,635,830) (15,039,942)
Other income (expense):
Interest and dividend income 284,446 149,411 563,073 589,278 1,521,468
Interest expense (14,924) (16,914) (42,640) (49,541) (179,135)
------------ ------------ ------------ ------------ ------------
Total other income 269,522 132,497 520,433 539,737 1,342,333
------------ ------------ ------------ ------------ ------------
Net loss (1,129,473) (2,695,373) (2,976,313) (6,096,093) (13,697,609)
Preferred stock dividend--Series B -- -- 3,211 -- 11,815
Preferred stock dividend--Series C -- -- 5,684,449 -- 5,684,449
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stock $ (1,129,473) $ (2,695,373) $ (8,663,973) $ (6,096,093) $(19,393,873)
============ ============ ============ ============ ============
Basic and diluted net loss per common
share $ (0.17) $ (.40) $ (2.17) $ (.92) $ (7.76)
============ ============ ============ ============ ============
Weighted average common shares
outstanding 6,625,963 6,679,422 4,000,726 6,657,065 2,497,500
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 5
ZymeTx, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (2,976,313) $ (6,096,093) $(13,697,609)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 73,787 119,089 291,282
Provision for loss on inventory -- 730,761 730,761
Acquired technology and patent costs from OMRF -- -- 336,422
Accretion of interest 42,640 24,041 139,268
Deferred lease rentals 96,106 80,398 278,078
Changes in operating assets and liabilities:
Interest receivable on marketable securities (285,712) 311,841 (148,082)
Prepaid insurance and other (90,296) (237,089) (441,819)
Inventory (2,211,625) (2,667,500) (4,908,756)
Accounts payable (102,453) 92,558 799,690
Other liabilities 214,942 60,585 296,278
------------ ------------ ------------
Total adjustments (2,262,611) (1,485,316) (2,626,878)
------------ ------------ ------------
Net cash used by operating activities (5,238,924) (7,581,409) (16,324,487)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities (18,966,735) (18,492,711) (41,007,782)
Proceeds from maturities of marketable securities 1,572,744 25,179,545 31,751,493
Purchase of property, equipment and leasehold
improvements (269,912) (162,312) (849,298)
Purchase of inventory, proprietary technology and other
intangibles -- -- (202,917)
------------ ------------ ------------
Net cash provided (used) by investing activities (17,663,903) 6,524,522 (10,308,504)
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 23,295,232 -- 27,591,572
Exercise of employee stock options -- 51,000 67,250
------------ ------------ ------------
Net cash provided by financing activities 23,294,827 51,000 27,739,656
------------ ------------ ------------
Net increase (decrease) in cash 392,000 (1,005,887) 1,106,665
Cash and cash equivalents at beginning of period 226,312 2,112,552 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 618,312 $ 1,106,665 $ 1,106,665
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 6
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
MARCH 31, 1999
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 March 31, 1999, 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 571,074
shares outstanding at March 31, 1999. 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 nine month
period ended March 31, 1998 or 1999, since the effect would be anti-dilutive.
NOTE 3 - EMPLOYEE STOCK PURCHASE PLAN
The Company adopted an Employee Stock Purchase Plan (the "Plan") effective
January 1, 1999. 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.
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<PAGE> 8
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
has authorized 50,000 shares for issuance under the Plan. For the quarter ended
March 31, 1999, 4,692 shares of stock were purchased though the Employee Stock
Purchase Plan for a total of $8,973, or $1.91 per share.
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 nine month periods ended March 31,
1998 and 1999, is detailed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(1,129,473) $(2,695,373) $(8,663,973) $(6,096,093)
Unrealized gains (losses) on
investments available for sale (651) 8,510 (11,800) 5,939
----------- ----------- ----------- -----------
Comprehensive loss $(1,130,124) $(2,686,863) $(8,675,773) $(6,090,154)
=========== =========== =========== ===========
</TABLE>
NOTE 5- RIGHTS PLAN
In February, the Company announced that its Board of Directors had adopted a
rights plan designed to protect the long-term interest of ZymeTx and its
stockholders in the event of an unsolicited takeover attempt. On February 3,
1999, the Company declared, under the Plan, a tax-free dividend distribution of
one share purchase right for each outstanding share of Common Stock to
stockholders of record as of the close of business. Each Right entitles the
holder to buy 1/1000 of a share of Series A Junior Preferred Stock of the
Company at an exercise price of $47.50. The terms of the plan provide that the
Rights will be exercisable for Preferred Shares only if a person or group
acquires beneficial ownership of 20% or more of the Company's common shares or
commences an offer that would result in such person or group owning 20% or more
of the Common Shares, without approval of the Board of Directors. The holders of
the Rights, other than the acquiring person(s) would then have the right to
receive upon exercise the Company's common stock having a value equal to two
times the exercise price. The Company will be entitled to redeem the Rights at
$.001 per Right at any time prior to the tenth day following a public
announcement that a person or group has acquired 20% or more of the Company's
Common Shares. The Rights will expire on February 3, 2009.
7
<PAGE> 9
NOTE 6 - LOSS ON PROVISION FOR INVENTORY
A provision for loss on inventory of $.7 million was recognized during the
quarter ended March 31, 1999. After improving the ZstatFlu point-of-care
influenza test from a 60-minute to a 30-minute format in fiscal 1999, the
Company wrote down inventory relating to the 60-minute format. In addition,
certain components of the current 30-minute format had an "Intended Use"
labeling change, which resulted in a write down of raw materials and an
allowance for reworking certain finished components.
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.
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.
8
<PAGE> 10
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 January, the Company and its Canadian manufacturing partner, Diagnostic
Chemicals Limited, announced receipt of the Canadian medical device license to
market ZstatFlu in Canada.
In February, the Company announced that its Board of Directors had adopted a
rights plan designed to protect the long-term interest of ZymeTx and its
stockholders in the event of an unsolicited takeover attempt. See Note 5 of
Notes to Financial Statements for additional discussion of the Rights Plan.
Also in February, the Company's National Flu Surveillance Network (NFSN)
announced the addition of 35 surveillance sites, pushing the total nationwide to
336 sites. NFSN now covers all 50 states and is the first network able to
detect, monitor and track flu outbreaks across the United States in virtual
real-time. The NFSN functions as a network of outbreak or "epicenter"
surveillance sites across the country that have trained physicians and
technicians using the ZstatFlu technology to identify and track influenza in
their patients and communities.
In March, the Company announced it had received clearance from the United States
Food and Drug Administration (FDA) for laboratory tests that are able to
distinguish between influenza A and B. The cleared products, which are
FITC-labeled monoclonal antibodies, will speed up the development process for
other applications. These products have increased stability and shelf life, and
results are easier to interpret under the microscope.
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. If the Company
does not substantially increase revenues from operations to a level which will
result in a positive cash flow from operations, the Company will be required to
significantly reduce its expenditures in the areas of research and development,
sales and marketing and general administration for fiscal 2001.
The Company will purchase equipment in connection with the expansion of its
research program. The anticipated amount of equipment purchases through June 30,
1999, is $.2 million, and will 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.
9
<PAGE> 11
RESULTS OF OPERATIONS
NET LOSS
For the three months and nine months ended March 31, 1999, the Company
recognized a net loss of $2.7 million and $6.1 million, respectively. Net loss
applicable to common stock was $.40 per basic and diluted share compared to a
net loss of $.17 per basic and diluted share for the third quarter of fiscal
1998. The principal factor involved in such losses was the inability to
establish substantial revenues from the sale of ZstatFlu for the 1999 influenza
season, which occurred for the most part during the third quarter of fiscal
1999.
PRODUCT SALES
For the three months and nine months ended March 31, 1999, the Company
recognized increased revenues from sales of ZstatFlu as compared to the three
months and nine months ended March 31, 1998. This is the result of the Company
implementing several ongoing marketing programs which began during fiscal 1998
and which continued in fiscal 1999 to educate physicians as to the medical,
financial and practical economic benefits from the use of ZstatFlu. In addition
to marketing directly to physicians, the Company continued to market to the
managed care segment (HMO/PPO/PPM). Also, during fiscal 1999, the Company
initiated a nationwide sampling program through the Company's distributors, in
addition to direct sampling from the Company. This program increased physician
awareness of ZstatFlu during the 1998 -1999 influenza season and is expected to
benefit product sales in the 1999 - 2000 influenza season.
Although the Company substantially increased its sales and marketing activities,
and the Company recognized more than $.4 million in sales of ZstatFlu, the
adoption of ZstatFlu by physicians has been slower than anticipated. The Company
believes, however, that opinion leaders in the medical profession have
demonstrated the effectiveness of ZstatFlu in the diagnosis and treatment of
influenza and in the economics of the practice of medicine. While the Company
believes that the influence of such opinion leaders will contribute to a greater
interest in the Company's customer market base and potential sales increases in
the next influenza season, there can be no assurance that increases in demand
or future sales will be realized.
RESEARCH AND DEVELOPMENT
Research and development spending for the three months and nine months ended
March 31, 1999, totaled $.4 million and $1.0 million, respectively, which
represents an increase of 11% and 28%, respectively, from the three months and
nine months ended March 31, 1998. 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.
10
<PAGE> 12
Because the Company's budgets for fiscal 2000 have been predicated on greater
revenues for such fiscal year, the Company must reassess its current commitments
and budget for research and development for fiscal 2000.
PRODUCT DEVELOPMENT
Product development costs expended in the manufacturing and production of
diagnostic products totaled $.5 million and $.9 million, respectively, for the
three months and nine months ended March 31, 1999, compared to costs totaling
$.2 million and $.9 million, respectively, for the three and nine months ended
March 31, 1998. These costs were incurred for improving scaled-up manufacturing
processes and re-engineering improvements in current FDA cleared diagnostic
products.
PROVISION FOR LOSS ON INVENTORY
A provision for loss on inventory of $.7 million was recognized during the
quarter ended March 31, 1999. After improving the ZstatFlu point-of-care
influenza test from a 60-minute to a 30-minute format in fiscal 1999, the
Company wrote down inventory relating to the 60-minute format. In addition,
certain components of the current 30-minute format had an "Intended Use"
labeling change, which resulted in a write down of raw materials and an
allowance for reworking certain finished components.
SALES AND MARKETING
Sales and marketing expenses totaled $.9 million and $2.8 million, respectively,
for the three months and nine months ended March 31, 1999. This expenditure
represents a 79% and 204% increase, respectively, from the three months and nine
months ended March 31, 1998. 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. Because the Company utilized the
services of a contract sales organization for the marketing of ZstatFlu during
fiscal 1999, the sales activities of that firm are substantially complete and,
therefore, sales and marketing expenses for the fourth quarter of fiscal 1999
will be significantly lower. The Company will reassess its use of a contract
sales force for fiscal 2000, in an effort to determine the cost effectiveness of
its sales and marketing operations.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.5 million and $1.5 million,
respectively, for the three months and nine months ended March 31, 1999,
representing a 44% and 65% increase, respectively, from the three months and
nine months ended March 31, 1998. The increase was principally due to increased
consulting fees, securities and patent legal fees and increased
11
<PAGE> 13
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 $.1 million and $.6 million, respectively,
for the three month and nine months ended March 31, 1999, compared to $.3
million and $.6 million for the three months and nine months ended March 31,
1998, 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 March 31, 1999, was $14.1 million,
as compared to $20.1 million at June 30, 1998. The decrease is due to losses
from operating activities during fiscal 1999.
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 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 raw materials and
finished goods inventory to supply anticipated sales for the 1999-2000 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
12
<PAGE> 14
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 continuing to assess 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 has completed
implementation of most major modules of a new integrated accounting and
financial reporting system which is Year 2000 compliant. This implementation is
expected to be completed by June 30, 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 accounting software was
replaced in fiscal 1999. Accordingly, the costs of the accounting software were
capitalized. The total cost to replace the accounting software and determine the
Year 2000 project's effect on operating equipment was 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
13
<PAGE> 15
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
Because the adoption rate by physicians of the Company's ZstatFlu
product has been slow, there can be no assurance that ZstatFlu or other
diagnostic products will achieve market acceptance. This slow rate of
adoption, compounded by a truncated seasonal selling period
corresponding with the annual influenza season, has complicated the
Company's ability to firmly establish the benefits of using ZstatFlu as
an integral component in the detection and treatment of influenza. 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.
14
<PAGE> 16
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.
15
<PAGE> 17
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
16
<PAGE> 18
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.
17
<PAGE> 19
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.
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<PAGE> 20
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 indirect
equity securities of the issuer; payments to
and 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:
19
<PAGE> 21
<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 class of equity Direct or
securities of the issuer; indirect
and to affiliates of the payments to
Registrant others
------------------------------ -----------
<S> <C> <C>
Temporary investments $ -- $ 9,400,000
Inventory 2,608,000
Equipment and Furniture 162,000
Operating expenses 6,167,000
</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 l0-QSB submitted to the
Securities and Exchange Commission).
b. Reports on Form 8-K: On February 5, 1999, the Company filed a
Current Report on Form 8-K, reporting the adoption of a
shareholder rights plan under "Item 5. Other Events."
20
<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: May 14, 1999
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 1,106,665
<SECURITIES> 9,417,196
<RECEIVABLES> 335,218
<ALLOWANCES> 0
<INVENTORY> 4,244,283
<CURRENT-ASSETS> 15,208,781
<PP&E> 849,298
<DEPRECIATION> 236,033
<TOTAL-ASSETS> 15,904,218
<CURRENT-LIABILITIES> 1,107,783
<BONDS> 622,003
0
0
<COMMON> 6,687
<OTHER-SE> 33,548,793
<TOTAL-LIABILITY-AND-EQUITY> 15,904,218
<SALES> 426,952
<TOTAL-REVENUES> 426,952
<CGS> 242,601
<TOTAL-COSTS> 242,601
<OTHER-EXPENSES> 6,089,420
<LOSS-PROVISION> 730,761
<INTEREST-EXPENSE> 49,541
<INCOME-PRETAX> (6,096,093)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,096,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,096,093)
<EPS-PRIMARY> (0.92)
<EPS-DILUTED> (0.92)
</TABLE>
