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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
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.
6,870,728 shares of common stock, $.001 par value, issued and outstanding at
November 10, 2000
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ZYMETX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 2000 and September 30, 2000................................2
Statements of Operations - Three Months Ended September 30, 1999 and 2000............3
Statements of Cash Flows - Three Months Ended September 30, 1999 and 2000............4
Notes to Financial Statements........................................................5
Item 2. Management's Discussion and Analysis or Plan of Operation............................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.....................................................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....................................................19
SIGNATURES........................................................................................20
</TABLE>
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ZymeTx, Inc.
Balance Sheets
(Information at September 30, 2000 is unaudited)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
2000 2000
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,357,509 $ 702,620
Marketable securities, available-for-sale 2,458,801 1,483,001
Accounts receivable, net 8,801 61,541
Inventory 1,900,642 2,073,301
Prepaid expenses and other 155,940 484,151
------------ ------------
Total current assets 5,881,693 4,804,614
Inventory not expected to be realized within one year 628,022 573,944
Property, equipment and leasehold improvements, net 584,463 569,884
Proprietary technology and other intangibles, net 57,419 52,468
------------ ------------
Total assets $ 7,151,597 $ 6,000,910
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities:
Accounts payable $ 603,211 $ 626,267
Accrued salaries, wages and benefits 314,753 223,559
Other accrued liabilities 290,940 142,416
Current portion of long term debt 56,880 58,028
------------ ------------
Total current liabilities 1,265,784 1,050,270
Long term obligations--
Note payable to stockholder due after one year 94,270 84,305
Deferred lease rentals 303,300 270,389
Other 16,348 15,701
Stockholders' equity:
Preferred stock $.001 par value; 12,000,000 shares authorized (none issued
or outstanding at June 30, 2000 or September 30, 2000) -- --
Common stock $.001 par value; 30,000,000 shares authorized (6,837,175 shares
and 6,865,430 issued and outstanding at June 30, 2000 and September 30,
2000, respectively) 6,837 6,866
Additional paid-in capital 34,141,203 34,667,266
Deficit accumulated (28,672,807) (30,094,895)
Unrealized holding gains (losses) on marketable securities available for
sale (3,338) 1,008
------------ ------------
Total stockholders' equity 5,471,895 4,580,245
------------ ------------
Total liabilities and stockholders' equity $ 7,151,597 $ 6,000,910
============ ============
</TABLE>
See accompanying notes to financial statements.
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ZymeTx, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 2000
--------------- ---------------
<S> <C> <C>
Revenues:
Sales, net $ 9,773 $ 64,780
Cost of sales 2,455 33,384
--------------- ---------------
Gross Profit 7,318 31,396
Operating expenses:
Research and development, net 329,884 209,103
Product development 296,843 224,369
Sales and marketing 308,740 503,944
General and administrative 913,931 556,244
--------------- ---------------
Total operating expenses 1,849,398 1,493,660
--------------- ---------------
Loss from operations (1,842,080) (1,462,264)
Other income (expense):
Interest and dividend income 121,993 49,417
Interest expense (15,803) (9,241)
--------------- ---------------
Total other income 106,190 40,176
--------------- ---------------
Net loss $ (1,735,890) $ (1,422,088)
=============== ===============
Basic and diluted net loss per common
share $ (.26) $ (.21)
=============== ===============
Weighted average common shares
outstanding 6,695,774 6,840,125
=============== ===============
</TABLE>
See accompanying notes to financial statements.
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ZymeTx, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 2000
--------------- ---------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (1,735,890) $ (1,422,088)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 48,118 51,556
Provision for doubtful accounts and sales returns 100,000 --
Accretion of interest 8,133 4,333
Compensation related to common stock warrants outstanding -- 218,266
Deferred lease rentals 43,156 (32,911)
Changes in operating assets and liabilities:
Accounts receivable 120,186 (52,740)
Interest receivable on marketable securities 92,818 (8,617)
Prepaid expenses and other (2,848) (51,956)
Inventory (198,613) (118,581)
Accounts payable (94,340) 23,056
Accrued salaries, benefits and other 86,987 (91,194)
Other liabilities 41,028 (148,524)
--------------- ---------------
Total adjustments 244,625 (207,312)
--------------- ---------------
Net cash used by operating activities (1,491,265) (1,629,400)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities (5,648,805) (483,975)
Proceeds from maturities of marketable securities 8,585,100 1,472,737
Purchase of property, equipment and leasehold improvements (43,593) (32,026)
--------------- ---------------
Net cash provided by investing activities 2,892,702 956,736
CASH FLOW FROM FINANCING ACTIVITIES
Payments on notes payable and other -- (13,797)
Exercise of employee stock options -- 25,000
Stock purchased through employee stock purchase plan 6,435 6,572
--------------- ---------------
Net cash provided by financing activities 6,435 17,775
--------------- ---------------
Net increase (decrease) in cash 1,407,872 (654,889)
--------------- ---------------
Cash and cash equivalents at beginning of period 10,565 1,357,509
--------------- ---------------
Cash and cash equivalents at end of period $ 1,418,437 $ 702,620
=============== ===============
</TABLE>
See accompanying notes to financial statements.
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ZYMETX, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
ZymeTx, Inc. (the "Company" or "ZymeTx") is engaged in the discovery,
development and commercialization of unique products used to diagnose and treat
viruses. The scientific foundation for our business is based upon the role of
enzymes in the process of viral infection. Our strategy is to:
o develop products that may be used to diagnose and treat a range of viral
diseases
o earn revenues from marketing ZstatFlu, our first diagnostic product;
o continue our diagnostic research and development program; and
o sustain a viral therapeutic research and development program.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with the instructions to Form 10-QSB as prescribed by the Securities and
Exchange Commission ("SEC"). Such financial statements, in the opinion of
management, include all adjustments (consisting only of normal, recurring items)
necessary for their fair presentation in conformity with generally accepted
accounting principles. These financial statements should be read in conjunction
with the financial statements and notes included in the Company's Annual Report
on Form 10-KSB for the year ended June 30, 2000, 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
For the three month period ended September 30, 2000 all unexercised stock
options and warrants granted were antidilutive for purposes of calculating
diluted net loss per share. At September 30, 2000, there were warrants
outstanding for the purchase of an aggregate of approximately 1,200,000 shares
of the Company's common stock exercisable at prices ranging from $2.00 to $4.00
(an average of $2.98 per share) (Note 3). The Company has allocated 1,250,000
shares of common stock (including 250,000 additional shares approved at the
September 7, 2000 board meeting subject to shareholder approval) for issuance
under the Employees' and Directors' stock option plans, 788,644 of which remain
unexercised at September 30, 2000 (exercise prices ranging from $1.00 - $6.00
per share). On November 17, 1999, the Board of Directors approved the ZymeTx,
Inc. consultants stock
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option plan, and a total of 100,000 options are reserved for issuance under the
plan, pending approval at the next shareholders meeting. Fifty-five thousand of
these options were outstanding at September 30, 2000 (Note 3).
For additional disclosures regarding the stock option plans, see Note 6 to the
June 30, 2000 financial statements filed on Form 10-KSB.
NOTE 3 - STOCK OPTIONS, WARRANTS AND AWARDS
During the three month period ended September 30, 2000, the Company issued
136,000 warrants and 25,000 Consultant Stock options (collectively, the "Service
Awards") to third parties in exchange for certain marketing and administrative
services. The Company expensed approximately $119,000 and increased additional
paid in capital by $494,520 related to the fair value of service awards for
services received by the Company during the first quarter ended September 30,
2000 and has deferred approximately $421,000 of the fair value of the service
awards at September 30, 2000. The deferred value of the Service Awards will be
amortized to marketing expenses over the term that services are received by the
Company. Under the terms of the grants, the Service Awards generally have a
contractual life of 3 to 10 years and have various vesting schedules.
In addition, the Company repriced 230,000 warrants issued to underwriters in
conjunction with the Company's 1997 initial public offering. These warrants were
initially issued with a five year term and an exercise price of $12.40. Under
the new terms the warrants have an exercise price of $3.43 with an additional
call feature that allows the Company to force exercise of the warrants should
the share price exceed $5.50 for five consecutive trading days. The Company
expensed approximately $99,000 representing the fair value of the warrants, as
adjusted, for the first quarter ended September 30, 2000.
NOTE 4 - COMPREHENSIVE INCOME (LOSS)
The Company presents comprehensive income in accordance with Financial
Accounting Standards 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. Other
comprehensive loss for the three month periods ended September 30, 1999 and
2000, are detailed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
1999 2000
--------------- ---------------
<S> <C> <C>
Net loss $ (1,735,890) $ (1,422,088)
Unrealized gains on investments
available for sale 4,346 2,042
--------------- ---------------
Comprehensive loss $ (1,733,848) $ (1,417,742)
=============== ===============
</TABLE>
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NOTE 5 - SUBSEQUENT EVENTS
On October 13, 2000, the Company closed the sale of $2.0 million of 5% Senior
Secured Convertible Debentures (the "Debentures") to two private investors (the
"Investors"), resulting in net proceeds to the Company of approximately $1.9
million. The Debentures bear interest at 5%, which is payable May 1 and November
1 of each year, at the option of the Company, in cash or common stock or by
adding the interest to the outstanding principal due under the Debenture, and
mature in October 2002. The Debentures are convertible to common stock at the
option of each Investor based on a conversion price based on the weighted
average price of the Company's common stock for 10 days prior to certain
periodic anniversaries of the issuance of the Debentures, and are secured by a
first priority interest in substantially all of the Company's assets. The
Debentures prohibit the Company from declaring and paying dividends on its
common stock so long as these Debentures remain outstanding and limit the
Company's ability to incur new indebtedness senior to the Debentures to $1
million. The initial conversion price at the date of closing was $3.12 per
share. The Company is required to reserve for future issuance 200% of the shares
and warrants to be issued upon conversion and exercise of the Debentures and
associated warrants by the Investors and register the Company's common stock
underlying the Debentures and warrants. The agreements provide for certain
penalties ranging from $60,000 to $100,000 per month for each month or partial
month after 120 days from the closing in which the registration of these shares
is not declared effective by the Securities and Exchange Commission. Following
the registration of such shares, the Debentures are convertible into the
Company's common stock at the option of the Company if the closing bid price of
the Company's common stock equals 150% of the Initial Conversion Price ($4.69
per share) for 15 consecutive days. The Company has the option, following
registration and assuming no event of default has occurred, to redeem the
Debentures if the conversion price at any subsequent periodic anniversary date
is lower than the initial conversion price, at their liquidation value plus 12%.
The Debentures include certain anti-dilution and put features. The features
provide for keep-whole provisions in the event that the Company sells equity at
less than market prices and put options at the discretion of the Investor, which
allow the Investor to demand repayment of the Debentures at their carrying value
plus 20%. These put options become available to the Investor upon the occurrence
of certain events, including the following: i) the registration statement of the
common stock underlying the Debentures has not been declared effective within
one year following closing, ii) following registration of the Company's common
stock underlying the Debentures, the Investors do not have the ability to
"freely trade" the underlying common stock, or iii) if a change of control
occurs. Further, if an event of default (which includes, among other things, the
nonpayment of interest when due, failure to perform under related agreements
and/or other agreement in an amount exceeding $25,000, and becoming insolvent)
occurs and is continuing, the Investors may declare the Debentures immediately
due and payable.
In conjunction with the issuance of the Debentures to the Investors, the Company
issued warrants to the Investors for the purchase of 180,000 shares of common
stock at an exercise price of $3.17 per share, exercisable for a period of five
years following closing. The fair value of these warrants will be recognized as
debt discount. Further, if the Investors convert the Debentures into the
Company's
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common stock when the closing bid price of the common stock is greater than
$4.00 per share, then for every 10 shares received upon conversion, the
Investors will receive one warrant to purchase one share of the Company's common
stock at $4.00 per share, exercisable for a period of five years following
conversion.
The Company issued to Granite Financial Group, Inc. Debentures in an aggregate
principal amount of $112,000 and 54,244 warrants (44,164 with an exercise price
of $3.43 and 10,080 with an exercise price of $3.17) as compensation for its
services as our placement agent in connection with the offering. The Company
also issued to Rand P. Mulford, one of the Company's directors, in his capacity
as a representative of Granite, $48,000 in Debentures and 4,320 warrants. All of
the warrants issued to Mr. Mulford have an initial exercise price of $3.17 per
share, and all of the Debentures, including Granite's, have an initial
conversion price of $3.12 per share.
The agreement also allows the Investors, for 270 days following the closing, to
purchase up to an aggregate $1.0 million worth of additional Debentures at the
initial purchase price, with warrants for an additional 90,000 shares of the
Company's common stock. The Company has the option to sell an additional $1.0
million of Debentures, at the same terms, to other investors who are approved by
the original investors.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
From time to time, we may publish forward-looking statements relating to certain
matters, including anticipated financial performance, business prospects, and
the progress and goals for our research and development program, marketing
strategies and other similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. To comply
with the terms of that safe harbor, a variety of factors could cause our actual
results and experience to differ materially from the anticipated results or
other expectations expressed in our forward-looking statements. In addition, we
disclaim any intent or obligation to update those forward-looking statements.
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. We undertake no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect events
or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
ZymeTx, Inc. is engaged in the discovery, development and commercialization of
unique products used to diagnose and treat viruses. The scientific foundation
for our business is based upon the role of enzymes in the process of viral
infection. Our strategy is to:
o develop products that may be used to diagnose and treat a range of viral
diseases
o earn revenues from marketing ZstatFlu, our first diagnostic product;
o continue our diagnostic research and development program; and
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o sustain a viral therapeutic research and development program.
ViraZyme(R), our core technology, exploits the subtle structural differences and
characteristics of enzymes to create products to diagnose and treat viruses.
Our diagnostic technology is a platform for proprietary two-part compounds that
will split when the compound contacts a specific enzyme which is the viral
target site. As a result of this split, one part of the compound reveals itself
in formats easily detected by the naked eye, permitting the user to determine
whether the virus is present. For therapeutic products, the technology platform
uses modified versions of the diagnostic compounds that bind to specific viral
enzymes to interrupt the replication cycle.
The initial viral targets of our diagnostic products are respiratory infections
including influenza A and influenza B, respiratory syncytial virus,
parainfluenza and adenovirus. There are three genera of influenza virus, A, B,
and C; A and B are most common to humans, while C rarely causes significant
infection. Respiratory syncital virus infects humans, usually children, which is
an important cause of acute respiratory disease. Adenovirus can cause
respiratory disease, keratoconjunctivitis, diarrhea, cystitis and other
diseases.
ZymeTx was incorporated under the laws of the State of Delaware in 1994.
ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM) are trademarks owned or licensed by
ZymeTx.
CURRENT EVENTS
In July we announced that we would apply more than $300,000 in research grants
to advance the commercial development of established viral diagnostics
scientific initiatives.
In September, ZymeTx and Dade Behring, Inc., announced the signing of a
nationwide distribution agreement for ZstatFlu.
Also in September we reported that the New South Wales health officials had
announced that influenza had reached epidemic levels in Australia, prompting
physicians attending U.S. Olympic athletes to take precautions to minimize the
risk of the virus to athletes.
PLAN OF OPERATIONS
Our plan of operations for the current year is to market ZstatFlu to the point
of care, acute care and hospital markets. We will focus our product development
spending toward further improvement to our technology platform.
We believe we have adequate cash and marketable securities available for sale,
which with the planned fiscal 2001 level of net sales contribution, are expected
to fund the planned operations at least through June 30, 2001. We believe that
the introduction of influenza therapeutics by other pharmaceutical companies in
fiscal 2000 has enhanced and will continue to enhance our sales of ZstatFlu for
the fiscal 2001 influenza season. We expect fiscal 2001 diagnostic sales to
increase significantly given the expected growth of influenza therapeutics and
the companion need for an accurate and rapid diagnostic. However, in the event
fiscal 2001 diagnostic sales do not significantly increase, we will likely
require additional working capital to sustain operations beyond June 30, 2001.
We cannot assure that any such additional working capital will be available to
us upon acceptable terms, or at all.
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RESULTS OF OPERATIONS
NET LOSS
For the three months ended September 30, 1999 and 2000, we recognized a net loss
of $1.7 million and $1.4 million, respectively. Net loss for the three months
ended September 30, 2000 was $.21 per basic and diluted share, compared to a net
loss of $.26 per share for the first quarter of fiscal 2000. The 18% decrease in
net loss compared to the comparable period in 1999 is due primarily to increased
sales and a reduction in expenses as discussed below.
PRODUCT SALES
For the three months ended September 30, 2000, we recognized revenues totaling
$65,000 from sales of our primary diagnostic product compared to $10,000 for
the three months ended September 30, 1999. This increase is attributed to
increased usage of ZstatFlu by physicians and expansion of our national
influenza surveillance program as well as the complementary introduction of
influenza therapeutics by third parties. Significant sales were not expected
until the second or third fiscal quarters.
RESEARCH AND DEVELOPMENT
Research and development spending for the three months ended September 30, 2000,
totaled $.2 million. This represents a decrease of $120,000, or 37%, from the
comparable three months ended September 30, 1999. This decrease is due primarily
to reimbursement of research expenditures of approximately $60,000 during the
three months ended September 30, 2000, from the Oklahoma Center for the
Advancement of Science and Technology.
PRODUCT DEVELOPMENT
Product development costs expended in the manufacturing and production of our
diagnostic product totaled $.2 million for the three months ended September 30,
2000 compared to $.3 million for the three months ended September 30, 1999, a
24% decrease. The decrease is due primarily to reduced personnel costs
resulting from attrition.
SALES AND MARKETING
Sales and marketing expenses totaled $.3 million and $.5 million for the three
months ended September 30, 1999 and 2000, respectively. This 63% increase is due
to an increase in marketing efforts and promotional sales programs. In addition
we issued common stock warrants to marketers of our product.
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GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.6 million for the three months ended
September 30, 2000, which represents a 39% decrease from $.9 million for the
comparable three months ended September 30, 1999. The decrease was principally
due to the following items which were booked in the first quarter of fiscal year
2000: (i) severance and other compensation expense totaling $.2 million related
to an executive services agreement for our former chief executive officer; (ii)
a rent buyout of $.1 million; and (iii) $.1 million for product return and
doubtful account allowance.
OTHER INCOME (EXPENSE)
Interest and dividend income totaled $50,000 for the three months ended
September 30, 2000, compared to $122,000 for the three months ended September
30, 1999. This decrease of 59% for the three months ended September 30, 2000,
compared to the three months ended September 30, 1999 resulted from reduced
levels of marketable securities available for investment as cash is consumed by
operations.
LIQUIDITY AND CAPITAL RESOURCES
We have relied principally on equity financing to fund our operations and
capital expenditures. Working capital at September 30, 2000, was $3.8 million,
as compared to $4.6 million at June 30, 2000. The decrease in working capital is
principally due to cash losses from operating activities during the three months
ended September 30, 2000. To supplement available operating capital, on October
13, 2000, we issued senior secured convertible debentures resulting in net
proceeds of $1.9 million. The sale of these debentures is discussed in more
detail below.
In establishing our operating plans for fiscal 2001 including the amount of
inventory of ZstatFlu products to produce for the 2000-2001 influenza season, we
have assumed that the availability of influenza therapeutics will significantly
improve the market opportunity for influenza diagnostic products such as
ZstatFlu. We estimate that we will expend approximately $1.1 million to produce
500,000 units of ZstatFlu for sale in fiscal 2001. This level of production
represents approximately 400,000 more units than we sold in fiscal 2000.
Assuming a unit sales price of $13.70, revenues from 500,000 unit sales would
approximate $6.9 million and, if we are otherwise meeting budgeted expenditures
for fiscal 2001, we will utilize cash in our operating and investing activities
of $.8 million in fiscal 2001. Assuming this level of unit sales, expenditures
approximating those budgeted and $1.9 million of net proceeds raised from the
sale of the senior secured convertible debentures in October 2000 as described
below, working capital should be sufficient to continue operations at least into
fiscal 2002.
Unit sales at a level less than 500,000 will cause us to use more of our
existing working capital to finance operations. Based upon the same unit sales
price and compliance with budgeted expenditures, if we sell 200,000 units,
revenue from diagnostic sales would approximate $2.7 million. Assuming this
level of unit sales, expenditures approximating those budgeted and $1.9 million
of net proceeds from the sale of the senior secured convertible debentures, our
cash and marketable securities position at June 30, 2001, is expected to be less
than $1.0 million. This would require us to secure additional working capital to
fund operations in fiscal 2002. If sales are substantially less than 200,000
units, we may not have sufficient working capital to sustain operations
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for the fourth quarter of fiscal 2001 without securing additional working
capital beyond that presently available. We cannot be sure that we will be able
to secure such additional working capital.
The market for influenza therapeutics did not exist before the 1999-2000
influenza season. Accordingly, it is difficult to project the usage of
diagnostics, or therapeutics for the 2000-2001 influenza season. We believe that
there are a number of factors which indicate that we have an opportunity to sell
up to 500,000 units of ZstatFlu in fiscal 2001 including the following:
o We estimate that approximately .8 million prescriptions of
therapeutics were dispensed while .8 million tests of influenza
diagnostics, such as ZstatFlu, were sold.
o Market studies for the influenza therapeutics indicate that
influenza therapeutic sales could reach 20 million prescriptions
by the year 2004.
o A recent warning by the Food and Drug Administration was issued
to all health care professionals regarding the danger of
prescribing a therapeutic based simply on clinical interpretation
without a definitive influenza diagnosis.
Based on these and other factors, we estimate that the market for influenza
therapeutics for the 2000-2001 influenza season will range from 2.5 million to
4.0 million prescriptions, representing an increase ranging from 300% to 500% of
1999-2000 sales. We have assumed that the sales increases of ZstatFlu would
parallel that of influenza therapeutics, resulting in sales of 500,000 to
750,000 units in fiscal 2001, which also reflects an increase in our market
share in the 2000-2001 influenza season from the 1999-2000 influenza season. We
have also assumed an increase in market share will result from retargeting our
marketing efforts more towards hospitals where we believe the majority of the
diagnostic units were consumed in the 1999-2000 influenza season.
There are a number of reasons why the factors we considered in making
assumptions about sales in fiscal 2001 may not reflect what will actually occur.
Even though the market potential for influenza therapeutics may be substantial
over a long term, the increase in sales of influenza therapeutics for the
2000-2001 influenza season may be less than we anticipate. In addition, our
market share may not increase despite an increase in the market for influenza
diagnostics.
If additional working capital is required, we cannot assure that financing will
be available on terms satisfactory to us, or that such financing will be
available at all. If we have significant losses and are unsuccessful in securing
financing to provide us with operating capital, then we will be required to
consider other options, including the sale or dissolution of the company, or a
sale of significant portion of its assets.
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SALE OF DEBENTURES
On October 13, 2000, we closed the sale of $2.0 million of 5% senior secured
convertible debentures to two private investors, resulting in net proceeds of
approximately $1.9 million. The debentures bear interest at 5%, which is payable
May 1 and November 1 of each year, in cash or common stock or by adding the
interest to the outstanding principal due under the debenture at our option. The
debentures mature in October 2002. The debentures are convertible to common
stock at the option of the investors based on a conversion price based on the
weighted average price of our common stock for 10 days prior to periodic
anniversaries of the issuance of the debentures. The debentures are secured by a
first priority interest in substantially all of our assets. The debentures
prohibit us from declaring and paying dividends on our common stock so long as
these debentures remain outstanding and limit our ability to incur new
indebtedness senior to the debentures. The initial conversion price at the date
of closing was $3.12 per share.
We are required to reserve for future issuance 200% of the shares and warrants
to be issued upon conversion and exercise of the debentures and associated
warrants by the investor, and to register the common stock underlying the
debentures and warrants. The agreements provide for certain penalties ranging
from $60,000 to $100,000 per month for each month or partial month after 120
days from the closing in which the registration of these shares is not declared
effective by the Securities and Exchange Commission.
Following the registration of the shares, the debentures are convertible into
common stock at our option if the closing bid price of our common stock equals
150% of the initial conversion price ($4.69 per share) for 15 consecutive days.
Following registration and assuming no event of default has occurred, we have
the option to redeem the debentures at their liquidation value plus 12%, if the
conversion price at any subsequent periodic anniversary date is lower than the
initial conversion price.
The debentures also include certain anti-dilution and put features. The features
provide for keep-whole provisions in the event we sell equity at less than
market prices and put options at the discretion of the investors, which allow
the investors to demand repayment of the debentures at their carrying value plus
20%. These put options become available to the investors in the event:
o the registration statement of the debentures has not been declared
effective within one year following closing,
o following registration of the common stock underlying the debentures,
the investors do not have the ability to "freely trade" the
underlying common stock, or
o if a change of control occurs.
If an event of default occurs and is continuing, the investors may declare the
debentures immediately due and payable. An event of default includes, among
other things,
o our nonpayment of interest when due,
o our failure to perform under related agreements and/or other
agreements in an amount exceeding $25,000, and
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<PAGE> 15
o our insolvency.
In conjunction with the issuance of the debentures, we also issued to the
investors warrants for the purchase of an aggregate 180,000 shares of common
stock at a price of $3.17, exercisable for a period of five years following
closing. The fair value of these warrants will be recognized as debt discount.
If the investors convert the debentures into common stock when the closing bid
price of our common stock is greater than $4.00 per share, then for every 10
shares received upon conversion, the investor will receive one warrant to
purchase one share of our common stock at $4.00 per share, exercisable for a
period of five years following conversion.
We issued to Granite Financial Group, Inc. debentures in the principal amount of
$112,000 and 54,244 warrants (44,164 with an exercise price of $3.43 and 10,080
with an exercise price of $3.17) as compensation for its services as our
placement agent in connection with the offering. We also issued to Rand P.
Mulford, one of the company's directors, in his capacity as a representative of
Granite, $48,000 in debentures and 4,320 warrants. All of the warrants issued to
Mr. Mulford have an initial exercise price of $3.17 per share, and all of the
debentures, including those issued to Granite, have an initial conversion price
of $3.12 per share.
The agreement also allows the investors, for 270 days following the closing, to
purchase up to $1.0 million worth of additional debentures at the initial
purchase price, with warrants for an additional 90,000 shares of our common
stock. We have the option to sell an additional $1.0 million of debentures at
the same terms, to other investors who are approved by the original investors.
OMRF PROMISSORY NOTE
We have a promissory note outstanding relating to a license of intellectual
property from OMRF which has an outstanding balance at September 30, 2000 of $.2
million. The terms of the note, as amended, require quarterly principal and
interest payments of $16,753 and continuing thereafter until the note is repaid
in full.
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<PAGE> 16
FACTORS AFFECTING OPERATIONS
The following is a discussion of factors that we believe could have an
impact on future operations and financial performance:
HISTORY OF OPERATING LOSSES AND WORKING CAPITAL NEEDS. For fiscal 1999 and
fiscal 2000, we incurred net losses of $8.6 million and $6.8 million
respectively. For the three months ended September 30, 2000, we incurred a net
loss of $1.4 million. As of September 30, 2000, our working capital was $3.8
million. Although we believe our plan for fiscal 2000 will provide for continued
operation for at least the next 18 months, it is possible that our existing
working capital may not meet our needs beyond June 30, 2001. To support our
working capital position at June 30, 2000, in October 2000 we closed the sale of
$2.0 million of debentures.
Although we believe that our working capital is adequate to sustain our
operations for fiscal 2001, if we incur comparable losses to prior fiscal years,
we will require significant amounts of equity financing to sustain operations
through fiscal 2002. We cannot assure that financing will be available on terms
satisfactory to us, or that such financing will be available at all.
Additionally, our ability to conduct research and development beyond that
planned for fiscal 2001 will be dependent on our ability to generate cash flow
from operations adequate to finance these activities. The lack of adequate
capital resources to conduct research and development could limit our ability to
introduce new products or make improvements in our existing product line. Also,
if our net tangible assets are less than $2,000,000 our stock will not be
eligible for listing on the Nasdaq National Market or SmallCap Market.
If additional working capital is required, we cannot assure that financing
will be available on terms satisfactory to us, or that such financing will be
available at all. If we have significant losses and are unsuccessful in securing
financing to provide us with operating capital, then we will be required to
consider other options, including sale of the company, sale of significant
assets of the company or dissolution of the company.
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 our products becoming
obsolete before we recoup a significant portion of related research, development
and commercialization expenses. Quidel and Biostar each introduced influenza
diagnostic products during 1999 that compete directly with ZstatFlu.
NO ASSURANCE OF MARKET ACCEPTANCE. During the 1998-1999 influenza season we
had limited success in realizing sales of ZstatFlu, due principally to the lack
of therapeutic products to treat influenza. With the introduction of
therapeutics during the 1999-2000 influenza season we saw significantly
increased sales of ZstatFlu. There can be no assurance that sales of ZstatFlu
will increase during the next influenza season, which is not expected to
commence until the second quarter of fiscal 2001. The degree of market
acceptance of ZStatFlu will depend upon a number of factors, including the
availability of third-party reimbursement on an economically advantageous basis
to care providers,
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<PAGE> 17
the establishment of cost-effectiveness of ZstatFlu and its advantages over
existing technologies and products.
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF OUR THERAPEUTIC OR OTHER
DIAGNOSTIC PRODUCTS. Our business strategy involves the discovery and
development of products in addition to our 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, we
cannot assure that such products will perform in the manner we anticipate, be
commercially viable or even if commercially viable, that such products will
receive FDA clearance.
We may experience delays in the commercial introduction of these products,
and such delays could be significant. The proposed development schedules for our
other diagnostic and therapeutic products may be affected by a variety of
factors, many of which will not be within our control, 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 our 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.
For fiscal 2001, we will be concentrating our efforts on developing new
diagnostic products and completing developments of improvements to ZstatFlu. We
plan to devote greater efforts to the development of our therapeutic and other
diagnostic products in fiscal 2002 and beyond if capital resources are available
to justify expenditures for those products. Due to our present working capital
constraints, we plan to reduce research and development expenditures during
fiscal 2001 which may further delay or eliminate the development and acceptance
of our therapeutic or other diagnostic products.
RELIANCE ON THIRD-PARTY MANUFACTURERS. We have limited experience in product
manufacturing and currently have no facility capable of manufacturing products
on the scale necessary for adequate market penetration. Because we do not
currently have a large scale manufacturing facility, we have engaged third-party
manufacturers to produce finished units of ZstatFlu. Delays by third-party
manufacturers in delivering finished products in time could have a material
adverse effect on us.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY. Our success will
depend, in part, on our ability to:
o obtain patents and license patent rights,
o to maintain trade secret protection, and
o to operate without infringing on the rights of other patent
holders.
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<PAGE> 18
The patent position of biotechnology firms for such types of patents
generally is highly uncertain and involves complex legal and factual issues. Our
competitors 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 our patents.
The ultimate scope and validity of such patents are presently unknown. If the
courts uphold existing or future patents obtained by competitors as valid, we
may be required to obtain licenses from such competitors. The extent to which
these licenses will be available to us and their cost cannot currently be
determined.
GOVERNMENT REGULATION. Regulation by Federal, state, local and foreign
governmental authorities of our research and development activities, as well as
the use and sale of our products when they are commercially viable, is
currently, and is expected to remain, significant. The introduction of our
products is governed by strict FDA rules and regulations. Our diagnostic
products are governed by FDA 510(k) application requiring a clinical trial that
compares our products to a 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 United States 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.
Our 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, we
do 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 our business and results of operations. We and our
third-party manufacturers are subject to quality regulations promulgated by the
FDA. The FDA will also inspect our manufacturing facilities and the facilities
of our third-party manufacturers on a routine basis for regulatory compliance
with quality regulations. Although our employees have experience with quality
protocols, there can be no assurance that we or our third-party manufacturers
can satisfy these requirements. We would not be allowed to manufacture our
approved or cleared products in the event such quality protocols could not be
met.
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<PAGE> 19
MANAGEMENT OF GROWTH AND INCREASING PRODUCTION REQUIREMENTS. Our success
will depend on our ability to expand and manage our operations and facilities.
There can be no assurance that we will be able to manage our growth, meet the
staffing requirements of manufacturing scale-up or for current or additional
collaborative relationships or successfully assimilate and train our new
employees. In addition, to manage our growth effectively, we will be required to
expand our management base and enhance our operating and financial systems. If
we continue to grow, there can be no assurance that the management skills and
systems currently in place will be adequate or that we will be able to manage
any additional growth effectively. Failure to achieve any of these goals could
have a material adverse effect on our 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, entail an
inherent risk of adverse effects and/or medical complications to patients and,
as a result, product liability claims may be asserted against us. A product
liability claim or product recall could have a material adverse effect on our
financial condition. We have product liability insurance in the aggregate amount
of $11.0 million for products that we market. There can be no assurance that
liability will not exceed the insured amount. In the event of a successful suit
against us, insufficient insurance or lack of insurance would have a material
adverse effect on us.
UNCERTAINTIES RELATING TO CLINICAL TRIALS. We must demonstrate through
preclinical studies and clinical trials that our proposed therapeutic products
are safe and effective for use in each target indication before we 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 conduct 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.
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<PAGE> 20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS: NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
Our initial public offering became effective on October 29, 1997 pursuant
to a Registration Statement on Form SB-2 (File No. 333-33563). The net proceeds
of our initial public offering were approximately $18,337,000. From the
effective date of our registration statement to September 30, 2000, we have
paid the net proceeds to others for the purposes indicated below:
<TABLE>
<S> <C>
Temporary investments $ 1,483,000
Inventory 2,647,000
Other expenses 1,071,000
Operating expenses 13,136,000
</TABLE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES: NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE
ITEM 5. OTHER INFORMATION: NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
27.1 Financial Data Schedule. (Exhibit 27 is submitted as an
exhibit only in the electronic format of this Quarterly
Report on Form 10-QSB submitted to the Securities and
Exchange Commission).
99.1 5% Senior Secured Convertible Debenture (incorporated
by reference to Exhibit 4.1 of our Form 10-KSB for
fiscal year ended June 30, 2000).
99.2 Purchase agreement dated October 13, 2000 by and
between ZymeTx and the investors identified therein
(incorporated by reference to Exhibit 10.2 of our Form
10-KSB for fiscal year ended June 30, 2000).
99.3 Form of Common Stock Purchase warrant dated October 13,
2000 issued in connection with the Purchase Agreement
(incorporated by reference to Exhibit 10.21 of our Form
10-KSB for fiscal year ended June 30, 2000).
99.4 Registration Rights Agreement dated October 13, 2000
issued in connection with the Purchase Agreement
(incorporated by reference to Exhibit 10.22 of our Form
10-KSB for fiscal year ended June 30, 2000).
99.5 Security Agreement dated October 13, 2000 entered into
in connection with the Purchase Agreement (incorporated
by reference to Exhibit 10.23 of our Form 10-KSB for
fiscal year ended June 30, 2000).
b. Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Exchange Act the registrant caused this
report to be signed on its behalf by the undersigned thereunto duly authorized.
ZYMETX, INC., a Delaware Corporation
------------------------------------------
(Registrant)
/s/ G. Carl Gibson
------------------------------------------
G. Carl Gibson
Principal Financial and Accounting Officer
Date: November 14, 2000
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<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule. (Exhibit 27 is submitted as an exhibit
only in the electronic format of this Quarterly Report on Form
10-QSB submitted to the Securities and Exchange Commission).
99.1 5% Senior Secured Convertible Debenture (incorporated by
reference to Exhibit 4.1 of our Form 10-KSB for fiscal year
ended June 30, 2000).
99.2 Purchase agreement dated October 13, 2000 by and between ZymeTx
and the investors identified therein (incorporated by reference
to Exhibit 10.2 of our Form 10-KSB for fiscal year ended
June 30, 2000).
99.3 Form of Common Stock Purchase warrant dated October 13, 2000
issued in connection with the Purchase Agreement (incorporated
by reference to Exhibit 10.21 of our Form 10-KSB for fiscal
year ended June 30, 2000).
99.4 Registration Rights Agreement dated October 13, 2000 issued in
connection with the Purchase Agreement (incorporated by reference
to Exhibit 10.22 of our Form 10-KSB for fiscal year ended
June 30, 2000).
99.5 Security Agreement dated October 13, 2000 entered into in
connection with the Purchase Agreement (incorporated by reference
to Exhibit 10.23 of our Form 10-KSB for fiscal year ended
June 30, 2000).
</TABLE>
