<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number: 000-23145
ZYMETX, INC.
(Name of small business issuer in its charter)
DELAWARE 75-731444040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 RESEARCH PARKWAY, SUITE 100
OKLAHOMA CITY, OKLAHOMA 73104
(Address of principal executive offices) (Zip Code)
(405) 271-1314
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $.001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 at least the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.
Issuer's revenues for its most recent fiscal year were $1,224,820.
As of September 12, 2000 the aggregate market value of voting stock
held by non-affiliates of the issuer was $21,376,344 (based on the closing price
for the common stock on the Nasdaq National Market System on such date of $3.13
per share). As of September 12, 2000 there were 6,840,430 shares of common
stock, $.001 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of documents incorporated by reference and the Part
of the Form 10-KSB into which the document is incorporated:
The Company's Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on November 14, 2000 is incorporated by
reference in Part III, Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE> 2
ZYMETX, INC.
FORM 10-KSB
For the fiscal year ended June 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I .........................................................................................................2
Item 1. Description of Business..................................................................................2
Item 2. Description of Properties................................................................................8
Item 3. Legal Proceedings........................................................................................8
Item 4. Submission of Matters to a Vote of Security Holders......................................................8
PART II...........................................................................................................8
Item 5. Market for Common Equity and Related Stockholder Matters.................................................8
Item 6. Management's Discussion and Analysis or Plan of Operation................................................9
Item 7. Financial Statements....................................................................................15
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................15
PART III.........................................................................................................15
Item 13. Exhibits and Reports on Form 8-K........................................................................15
Signatures.......................................................................................................18
Index to Financial Statements...................................................................................F-1
</TABLE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
ZymeTx, Inc. is a biotechnology company engaged in the discovery,
development and commercialization of 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.
ViraZyme(R), our core technology, exploits the subtle structural
differences and characteristics of enzymes to create products used to diagnose
and treat viral diseases. Our diagnostic technology is a proprietary two-part
compound that splits when the compound contacts a specific target enzyme. As a
result of this split, one part of the compound becomes visible to the naked eye
in the testing device, permitting the user to determine whether the virus
targeted by the test is present. For therapeutic products, we use a modified
version of the diagnostic compound that binds to a specific enzyme and prevents
the enzyme from contributing to the infection process.
The initial viral targets of our diagnostic products are respiratory
infections including influenza A and influenza B, respiratory syncytial virus or
RSV, parainfluenza and adenovirus. RSV infects humans, usually children, and is
an important cause of acute respiratory disease. Adenovirus can cause
respiratory disease, keratoconjunctivitis, diarrhea, cystitis and other
diseases.
ZymeTx was incorporated under Delaware law in 1994. We own or license
the trademarks ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM).
ZYMETX TECHNOLOGY
SCIENTIFIC BACKGROUND. Our ViraZyme technology focuses on the
development of highly specific/selective molecules that will interact only with
an enzyme of specific origin such as viral, mammalian or bacterial origin. This
permits interaction with one enzyme while preventing activity with a similar
enzyme of different origin. We can identify the fingerprint of critical enzymes
and then build molecules having great preference for only the targeted form of
the enzyme. We build these molecules using proprietary assays supported by X-ray
crystallography. The enzyme structure is analyzed with 3-dimensional computer
aided designs, and by "rational design" which is a method of designing a
molecule based upon knowledge of the desired structural characteristics.
The core of the ViraZyme approach is to identify essential target
sites of viral enzymes and synthetically produce molecules that act selectively
upon an identified target site. We believe that this approach can be used to
develop both diagnostic and therapeutic programs.
We select viral diseases other than influenza to be targeted for
commercialization of our products based on the following criteria:
o potential market size;
o the viral disease's incidence, morbidity/mortality;
o the availability of diagnostics and therapeutics for the viral
disease; and
o the existence of possible corporate partners.
During fiscal 1999 and fiscal 2000, we incurred research and
development expenses of approximately $1.4 million and $1.6 million,
respectively. Developing any additional products will require significant
ongoing research and development and capital resources not currently available
to us.
ZSTATFLU(R)
BACKGROUND. Our flagship product, ZstatFlu(R), permits physicians to
detect both influenza types A and B virus directly from a patient specimen while
in the physician's office. The unique patented technology of ZstatFlu(R)
2
<PAGE> 4
targets the influenza neuraminidase enzyme . The ViraZyme technology
incorporates patented substrate molecules which react with the influenza
neuraminidase enzyme to generate a visible color exposing the presence of the
virus.
PRODUCT STATUS. The FDA cleared the original ZstatFlu(R) test in
September 1997. Each subsequent year we have introduced an FDA cleared
improvement to this product. These improvements have made the test easier to use
and have improved the test's performance.
One such improvement made the test "portable." A specimen may be
transported from the collection point such as a patient's room in a nursing home
to a remote regional testing site such as a centralized reference laboratory or
hospital laboratory without the use of special packaging. In early fiscal 2000
we reduced the test time from 30 minutes to 20 minutes, making it more
convenient for results to be obtained while patients wait in a doctor's office.
OTHER CURRENT PRODUCTS CLEARED BY THE FDA
We have a history of successfully gaining FDA 510(k) clearances;
however, we have chosen not to expend resources to market the products described
below, and we cannot assure you we will ever market these products or that
marketing such products would generate significant income.
VIRAZYME CULTURE SCREEN. ViraZyme Culture Screen, cleared by the FDA
in June 1996, detects influenza and parainfluenza viruses and is a product
available to clinical labs, in contrast to the use of ZstatFlu(R), which is used
both in physician office laboratories and clinical labs. We believe the Culture
Screen product reduces labor-intensive procedures in the clinical laboratory and
reduces costs.
VIRASTAT PARAINFLUENZA 1, 2 AND 3. ViraSTAT Parainfluenza 1, 2 and 3,
cleared by the FDA in 1995, is the first of a series of clinical lab products we
developed using monoclonal antibody technology. Monoclonal antibodies are highly
specific for a particular part of an organism and are homogeneous in that they
all arise from a single cell clone. This product has several distinct advantages
over time and labor-intensive tests of other clinical lab products currently
available. We intend to develop other monoclonal antibody-based products for the
detection of adenovirus and RSV, and the influenza type A and B products which
comprise a panel test detecting multiple viruses.
VIRASTAT INFLUENZA TYPES A AND B. ViraSTAT Influenza types A and B
were produced and cleared by the FDA in 1999, and are the follow-on products
developed toward completion of a respiratory virus panel of monoclonal
antibodies.
OTHER DIAGNOSTIC PRODUCTS IN DEVELOPMENT
ADVANCED VIRAL TESTING PLATFORM TECHNOLOGY. In fiscal 2000, we were
awarded a $213,000, three-year grant from Oklahoma Center for the Advancement of
Science & Technology for the commercial development and clinical testing of an
advanced viral testing platform technology. This technology, which has completed
laboratory testing, is being developed as a highly sensitive and highly specific
platform with broad application to detect multiple viral disease organisms.
VIRASTAT FITC LABELED MONOCLONAL ANTIBODIES. We have developed an
improved proprietary method for directly labeling monoclonal antibodies with a
commonly used fluorescent dye. This method represents the currently accepted
method employed by clinical laboratories to culture and identify viruses. These
antibodies may be marketed separately or in a panel with other monoclonal
antibodies for detection of respiratory viruses. ViraSTAT monoclonal antibodies
have been found superior to commercially available antibodies in our tests.
THERAPEUTIC RESEARCH PROGRAM
During fiscal 2000 we reallocated our financial resources to focus on
the further development and enhancement of our ZstatFlu(R) diagnostic product.
We expect to devote greater resources to therapeutic development in fiscal 2002,
provided that we have the financial ability to do so. Despite this reallocation,
we continue to conduct pre-clinical research in the following areas:
INFLUENZA THERAPEUTIC DEVELOPMENT. We currently have an antiviral
compound, ZX-2401 and are completing in-vitro studies comparing its efficacy to
reference antiviral compounds. We are expanding the in-vitro testing for
confirmation at outside laboratories and to have this compound included in
testing against other viruses.
3
<PAGE> 5
RESPIRATORY SYNCYTIAL VIRUS THERAPEUTIC DEVELOPMENT. We have been
awarded a $100,000 Small Business Innovative Research Phase 1 grant by the
National Institutes of Health to continue studies toward the development of
several compounds that show potential antiviral activity against RSV. Currently
these compounds are in preclinical studies. RSV is a major, highly infectious
pediatric respiratory tract disease occurring worldwide. RSV infects children by
2 years of age and is the leading cause of bronchiolitis and pneumonia in
infants, and can be a significant cause of disease in immunocompromised adults
and the elderly.
SALES AND MARKETING
INFLUENZA MARKET. Our primary market is the seasonal disease
influenza. Influenza is caused by a virus spread from person to person generally
through physical contact or contact with respiratory fluids. Each year the
disease affects 30 million to 60 million people in the United States depending
on the length and severity of the season. In a typical year, the disease results
in approximately 130,000 hospitalizations and 30,000 to 40,000 deaths. Direct
and indirect costs due to influenza are estimated at $12 billion.
Historically, the use of diagnostic testing follows the availability
of therapeutic products. During the 1999-2000 influenza season a new family of
antiviral therapeutic products became available to treat influenza.
GlaxoWellcome's influenza therapeutic Relenza(TM) and Roche Laboratories
influenza therapeutic TamiFlu(TM) were introduced during the 1999/2000 influenza
season. We believe that the presence of these therapeutics has enhanced the
marketability of all influenza diagnostic products, including ZstatFlu.
MARKET STRATEGY. To maximize the market opportunity created by the
introduction of influenza therapeutics, we have implemented an influenza total
disease management program. This program includes informing physicians and
consumers about the importance of vaccination, disease surveillance, rapid
diagnosis and treatment. Our marketing program involves several distinct
components:
o National Flu Surveillance Network. The cornerstone of our total
disease management program is the National Flu Surveillance Network,
which is the first real time influenza reporting service. This service
operates as an influenza surveillance and diagnosis network through
the use of ZstatFlu and reporting of results by participating
physicians. During the 1999-2000 influenza season our National Flu
Surveillance Network at www.fluwatch.com included over 850 sites that
had in excess of 4,000 reporting physicians. We believe that our
disease surveillance coverage is the most comprehensive in the United
States and that real time reporting of influenza outbreaks through our
National Flu Surveillance Network improves the use of diagnostics as a
complement to the growing use of influenza therapeutics.
o Hospital Market. In the hospital market we are sponsoring direct
comparisons of our product with our competitors' products and have
contracted with distribution companies that target this market
segment.
o Physician Office Laboratories. For physician office laboratories and
commercial/reference laboratories we continue to enlist product users
through our National Flu Surveillance Network in addition to
traditional distribution channels. We believe that managed care has
not adopted influenza testing due to the lack of definitive
information on cost savings and outcome improvements. We have
developed a proprietary economic model based on third party validation
that depicts potential cost savings through the use of a comprehensive
disease management protocol featuring our rapid diagnostic. This model
is being presented to managed care companies in anticipation of
adoption.
MANUFACTURING ARRANGEMENTS; SOURCES OF RAW MATERIAL
We have contracted with two manufacturers to produce the chemical
compounds used to manufacture ZstatFlu for the 2000-2001 influenza season in the
event we need more product than we have in inventory. One of the manufacturers
also assembles, packages and ships the product. We may, however, establish our
own production facility located in Oklahoma if production costs per unit would
not increase and the availability of the principal chemical compound for
ZstatFlu does not make outsourcing more advantageous than our production;
however, we presently have no intent to relocate this manufacturing process for
the 2000-2001 influenza season.
We believe we have adequate quantities of the chemical compounds
necessary for the 2000-2001 influenza season production requirements, and other
material is currently available in quantities and within delivery schedules to
meet our fiscal year requirements.
4
<PAGE> 6
We have the technical capability to produce the chemical for ZstatFlu
in the event we establish our own production facility. Additional technicians,
facilities and equipment would be required, however, for us to conduct our own
production operation.
EUROPEAN AND OTHER FOREIGN MARKETS
Requirements for marketing a diagnostic product in Europe are
generally less stringent than in the United States. Once an application for
marketing clearance is submitted to the FDA, the product covered by such
application may be marketed in some European countries. We received clearances
to market ZstatFlu in Switzerland, New Zealand, Canada and Australia. Without
specific registration we can market our diagnostic in the European Union, Hong
Kong, Singapore, Mexico, Spain and Middle Eastern countries. A large majority of
our product is allocated to the growing United States market. We are evaluating
opportunities for foreign sales with emphasis on the two largest markets, Europe
and Japan.
COMPETITION
Competition in our markets is intense. We compete with a large number
of companies ranging from very small businesses to large diagnostic, healthcare,
pharmaceutical, biomedical and chemical companies, many of which have
substantially greater financial, manufacturing, marketing and product research
resources than we have. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and may commercialize products on their own or through joint
ventures. We intend to compete primarily on the basis of the clinical utility,
accuracy, speed, ease of use and other performance characteristics of our
products and, to a lesser degree, on the price of our products.
DIAGNOSTICS. Other companies have developed influenza diagnostics
which may compete with our products. The existence of these and other competing
products or procedures that may be developed in the future may adversely affect
the marketability of products which we develop.
Although our existing licensed patent rights cover a broad field of
enzyme based viral diagnostics, others have developed traditional antibody based
diagnostics for viral disease. Quidel and Biostar marketed their influenza A and
B diagnostic in the 1999-2000 influenza season. In addition, Becton Dickenson
continued to sell its influenza A laboratory diagnostic in hospital markets.
Becton Dickenson has recently been cleared to market a new influenza A and B
diagnostic. We believe the methods used by these competitors are substantially
different than our methods and do not offer the anticipated market advantages of
the ViraZyme system. We cannot assure that we will be successful in developing
our products to realize the expected marketing advantages or that the advantages
of our competitors' products will not exceed those of our products.
THERAPEUTICS. During the 1999-2000 influenza season GlaxoWellcome and
Roche introduced their influenza therapeutics. R.W. Johnson Pharmaceutical
Research Institute and Ortho-McNeil Pharmaceuticals, Inc., both Johnson &
Johnson companies, have an influenza program in later stage clinical research.
Programs underway at GlaxoWellcome, Roche and Johnson & Johnson involve
inhibition of enzymes in a manner similar to our approach. These three
competitors are further advanced in the development of influenza therapeutics
than we are, with two coming to the market with a therapeutic product earlier
than we have, which could be a barrier to market acceptance of our therapeutic
products, if developed. In addition these companies have substantially greater
financial resources and marketing capabilities than we do. In the event we
develop a therapeutic product, we plan to contract with large pharmaceutical
companies. We cannot assure that such a contract can be secured on terms
satisfactory to us, or at all.
Our competitive position will also depend on our ability to:
o attract and retain qualified scientific and other personnel,
o develop effective proprietary products,
o implement production and marketing plans,
o obtain patent protection and
o obtain adequate capital resources.
INTELLECTUAL PROPERTY
LICENSES FROM OMRF. Oklahoma Medical Research Foundation has granted
us an exclusive, perpetual, worldwide license covering all of the patents which
comprise the ViraZyme technology and all foreign patents and
5
<PAGE> 7
patent applications corresponding to those patent applications. The licensed
United States patents expire in the United States from 2010 to 2013 and relate
to methods for using naturally occurring viral enzymes to detect the presence of
a specific virus by a visible reaction, and patents on specific novel compounds,
synthesis pathways and composition of matter. The license grants us the
perpetual, exclusive worldwide right to manufacture, use or sell products made
under those patent rights. In consideration for the OMRF license, we:
o paid OMRF a license fee of $825,000,
o executed a note in the principal amount of $425,000,
o granted OMRF a 2.0% royalty on net sales of products derived
from patents held by OMRF and covered by the license,
o granted to OMRF a warrant to purchase 5,667 shares of our
common stock at $3.20 per share and
o issued OMRF 165,130 shares of common stock.
OTHER PROPRIETARY RIGHTS. In addition to patent rights, we rely on
trade secrets, trademarks and nondisclosure agreements to establish and protect
our proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to utilize our technology or to obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect our proprietary rights in our processes and products to the same
extent as United States laws.
We rely substantially on technologies which are not patentable or
proprietary and therefore may be available to our competitors. In addition, many
of the processes and much of the know-how of importance to our technology are
dependent upon the skills, knowledge and experience of our scientific and
technical personnel, which are not patentable. To protect our rights in these
areas, we require all employees, significant consultants and advisors, and
collaborators to enter into confidentiality agreements. We cannot assure that
these agreements will provide meaningful protection for our trade secrets,
know-how or other proprietary information if there is unauthorized use or
disclosure. We may have competitors who independently develop substantially
equivalent technology or who gain access to our trade secrets, knowledge or
other proprietary information. ViraZyme and ViraSTAT are trademarks registered
to OMRF and licensed to us under the terms of the OMRF license.
GOVERNMENT REGULATION
The following summarizes principal areas of governmental regulation
which affect our operations. Any change in governmental regulations or their
interpretation could have a material adverse effect on us.
REGULATION OF DIAGNOSTIC PRODUCTS. The manufacture, distribution and
sale of our diagnostic products in the U.S require prior authorization by the
FDA. The FDA and similar agencies in foreign countries, especially Japan, have
promulgated substantial regulations which apply to the testing, marketing,
export and manufacturing of diagnostic products. We will usually be required to
submit proof of the safety and efficacy of a new diagnostic product to obtain
FDA clearance. This proof typically requires clinical and laboratory tests. The
testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming.
The clinical testing required by our diagnostic products is expected
to be significantly less extensive than that required for the development of a
drug or therapeutic product or for an invasive procedure. Clinical testing may
take several months or even years to complete, depending on the nature of the
filing. We cannot assure that the FDA will act favorably or quickly in making
its review, and we may encounter significant difficulties and costs in obtaining
FDA clearances. The FDA may request the development of additional data after the
original submission. The FDA may also limit the scope of the labeling or
permitted use of the product or deny the application altogether. Delays imposed
by the patent approval process may materially reduce the period during which we
will have the exclusive right to exploit those products or technologies.
The marketability of our diagnostic products may also be affected by
state and Federal legislation covering the use of diagnostic tests in physician
offices. CLIA, the Clinical Laboratory Improvement Act of 1988, established
quality standards for all laboratory testing regardless of where the tests are
performed. This act also requires physicians' offices conducting tests with
sophisticated instruments or specially trained personnel to be certified or
licensed.
Our currently contemplated diagnostic products are regulated as
medical devices. All medical devices must undergo FDA review under either a
Section 510(k) pre-market notification or a pre-market approval application
prior to commercial distribution. A 510(k) is submitted to demonstrate that the
product in question is "substantially
6
<PAGE> 8
equivalent" to another legally marketed device. If our diagnostic products do
not qualify for clearance under the 510(k) procedure, we may be required to file
a pre-market approval application which shows:
o the product is safe and effective based on extensive
clinical testing among several diverse testing sites and
population groups; and
o the product has acceptable sensitivity and specificity.
Sensitivity is the measure of actual positives versus the sum of false
positives and false negatives in a diagnostic test. A high value indicates that
the test detects even low levels of the desired target. A low value indicates
that detection occurs at higher levels of infection. Specificity is the measure
of actual negatives versus the sum of actual negatives and false positives in a
diagnostic test. A high value indicates that the test detects only the desired
target. A low value is indicative of detection of similar but not targeted
entities.
A pre-market approval application requires much more extensive testing
than the 510(k) procedure and has a longer filing review period. In response to
a pre-market approval application, the FDA may:
o grant marketing clearance,
o request additional information,
o set restrictive limits on claims for use, or
o deny the application all together.
Product clearance may be withdrawn after it is received if regulatory
standards are not maintained or if problems occur after the product reaches the
market. The FDA may require surveillance programs to monitor the effect of
products which have been commercialized. It can prevent or limit further
marketing of products based on the results of these post-marketing programs. The
FDA must also, under the pre-market approval application guidelines, approve the
manufacturing facilities and procedures for the product. The FDA inspects
diagnostic companies on a routine basis for regulatory compliance with quality
system requirements, which is a set of standards required by the FDA for an
organization to sell its products to consumers. We believe that the use of our
diagnostic products will not be restricted in physician office laboratories
located within our target markets.
REGULATION BY FOREIGN GOVERNMENTS. Sales of our products outside the
United States are also subject to regulatory requirements imposed by foreign
governments. Regulatory requirements for diagnostic products vary significantly
from country to country. Regulations in Western Europe, Canada, Australia, Japan
and other developed countries are often less stringent than are the regulatory
requirements in the United States The time to meet such regulatory requirements
outside the United States may be longer or shorter than that required to achieve
United States clearance.
OTHER GOVERNMENT REGULATION. In addition to regulations enforced by
the FDA, we also are or will be subject to regulation under CLIA, the
Occupational Safety and Health Act, the Environmental Protection Act, the
Resource Conservation and Recovery Act and other present and future Federal,
state or local regulations. Our research and development activities involve the
controlled use of hazardous materials, chemicals and viruses. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standard prescribed by state and Federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. We could be held liable for any damages that result from an
accident, and the liability could exceed our resources.
EMPLOYEES
We had 25 full time employees as of September 12, 2000, comprising ten
laboratory/laboratory support personnel, three manufacturing employees, five
marketing employees and seven employees in administration and finance. Nine
employees have doctorate degrees. We believe that our relations with our
personnel are excellent. Our future success will depend in large part upon our
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense.
7
<PAGE> 9
ITEM 2. DESCRIPTION OF PROPERTIES.
We lease approximately 35,600 square feet of laboratory and office
space located at 800 Research Parkway, Suite 100, Oklahoma City, Oklahoma, from
Presbyterian Health Foundation. This lease expires March 1, 2007, with annual
rent payable at the rate of $15.00 per square foot. As additional consideration
for the lease, in 1997 we issued to Presbyterian warrants to purchase 20,000
shares of our common stock at an exercise price of $3.20 per share. The
Presbyterian lease warrant expires March 1, 2002.
In February and June, 2000, we subleased approximately 13,500 square
feet of our available space to a third party. The sublease runs through January,
2002. We believe that the facilities available under the Presbyterian lease are
in superior condition and will be adequate to meet our foreseeable space
requirements.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims
arising out of our normal business operation. We do not have any material legal
proceedings pending against us, or any of our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during our
fourth quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock trades on the Nasdaq National Market under the symbol
"ZMTX." The following table shows the high and low closing sales prices per
share for the last two fiscal years.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1999
First Quarter $ 8.81 $ 3.13
Second Quarter $ 5.38 $ 3.00
Third Quarter $ 5.63 $ 2.19
Fourth Quarter $ 2.81 $ 1.67
FISCAL 2000
First Quarter $ 2.69 $ 1.75
Second Quarter $ 2.69 $ 1.75
Third Quarter $ 6.38 $ 1.94
Fourth Quarter $ 3.19 $ 1.81
</TABLE>
The minimum listing requirements of Nasdaq include, among other
things, that we maintain net tangible assets of at least $2 million, market
capitalization of $35 million or net income of $500,000 in the latest fiscal
year, and maintain a minimum stock trading price of $1.00 per share. At June 30,
2000, we had net tangible assets of approximately $5.4 million and we incurred a
net loss of $8.6 million in fiscal 2000. At September 12, 2000, our common
stock's closing price on the Nasdaq was $3.13 and our market capitalization was
approximately $21.4 million. Although we do not presently expect to fall below
these minimum listing requirements in the near term, we cannot be sure we will
continue to meet the applicable requirements.
8
<PAGE> 10
STOCKHOLDERS
As of September 12, 2000, there were 114 holders of record of common
stock according to the records maintained by our transfer agent. As of that
date, we had approximately 2,321 stockholders, including beneficial owners
holding shares in street or nominee names.
DIVIDENDS
We have not paid dividends on our common stock and do not intend to
pay any dividends in the foreseeable future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
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 June 30, 2000, we have paid the
net proceeds to others for the purposes indicated below:
<TABLE>
<S> <C>
Temporary investments $ 3,816,000
Inventory $ 2,527,000
Other expenses $ 265,000
Operating expenses $11,729,000
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
From time to time, we may publish forward-looking statements relating
to matters, including anticipated financial performance, business prospects, 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,"
"expected," "assumes" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to 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 of this report. 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 of this report or to reflect the occurrence of unanticipated
events.
RESULTS OF OPERATIONS
PRODUCT SALES. In fiscal 2000 we generated significant revenues for
the first time. We began shipping ZstatFlu to distributors late in the second
quarter of fiscal 2000.
We had revenues of $1.2 million and $0.5 million in fiscal 2000 and
fiscal 1999, respectively. Fiscal 2000 revenues consisted mainly of ZstatFlu
sales from orders resulting from the national influenza surveillance program, as
well as distributor and other sales activity initiated during the North American
influenza season.
We intend to market ZstatFlu during fiscal 2001 through third party
marketing groups to the point of care, acute care and hospital markets.
Additional distributors have been added that increase the product distribution
channels to the hospital and laboratory markets which are expected to be primary
consumers of our ZstatFlu diagnostic product.
RESEARCH AND DEVELOPMENT. Research and development spending for fiscal
2000 and fiscal 1999 totaled $1.6 and $1.4 million respectively. Increases in
research spending consisted of additional contract research and other laboratory
operating expenses which focused on the development of new diagnostic formats
and limited pre-clinical therapeutic research. In fiscal 2001 our resources will
be allocated primarily to diagnostics development.
9
<PAGE> 11
Our antiviral therapeutic research expenditures will be increased in fiscal 2001
if we have available financial resources.
PRODUCT DEVELOPMENT. Product development costs were expended to
improve the sensitivity, portability and incubation time of ZstatFlu, totaling
$.9 and $ 1.6 million for fiscal 2000 and fiscal 1999, respectively. These costs
also included ZstatFlu scale-up manufacturing processes, technology transfer and
the development of improved diagnostic delivery platforms. Product development
expenditures decreased mainly due to a decrease in salaries and benefits.
INVENTORY WRITE-DOWN. Inventory write-downs totaled $.9 and $1.3
million for fiscal year 2000 and fiscal 1999, respectively. The fiscal 2000
write-downs were primarily due to improvements in ZstatFlu incubation times from
one hour to twenty minutes and other qualitative test improvements. The
improvements required write-downs of obsolete materials, additional labor costs
for reworking kit components, repackaging costs, and additional quality
assurance costs.
SALES AND MARKETING. Sales and marketing expenses totaled $1.7 and
$3.1 million for fiscal 2000 and fiscal 1999 respectively. The decrease in
expenditures resulted from the elimination of a contract sales organization
which was employed during fiscal 1999, whose contract costs totaled $1.3
million.
GENERAL AND ADMINISTRATIVE. General and administrative costs totaled
$2.7 and $2.0 million for fiscal 2000 and fiscal 1999, respectively. The
increase was principally due to increased consulting costs, non-cash stock,
warrant and option grants, and severance costs associated with the termination
of a high-level executive.
RETURN OF IN-PROCESS TECHNOLOGY. In fiscal 2000, we returned certain
in-process technology to OMRF, a stockholder, which we had acquired from OMRF in
fiscal 1998, because we did not find the technology to have the properties
warranted by OMRF. OMRF refunded our purchase price by offsetting the
outstanding note payable to it. The gain recognized in the accompanying 2000
statements of operations represents the change in the fair value of the note.
OTHER INCOME (EXPENSE). Interest and dividend income for fiscal 2000
totaled $.3 million compared with $.6 million for fiscal 1999. The decrease is
due to decreases in short term cash investments resulting from our use of funds
for operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $4.8 million in fiscal 2000
compared to $9.2 million in fiscal 1999. This decrease in cash used in operating
activities in fiscal 2000 compared to fiscal 1999 was primarily due to the
reduced net loss in fiscal 2000 and the reduced cash expenditures for inventory
in fiscal 2000. At June 30, 2000 we had cash and marketable securities available
for sale aggregating approximately $3.8 million. Working capital at June 30,
2000 was $4.6 million compared to $9.6 million at June 30, 1999.
In fiscal 2000 and fiscal 1999, the cash used by operating activities
has been funded with net proceeds from the sale of marketable securities
available for sale of $6.1 million and $7.4 million respectively. At June 30,
2000 marketable securities available for sale aggregated $2.5 million.
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 $1.8 million of net
proceeds raised from the sale of the senior secured convertible debentures
in October 2000 as described below, working capital will 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,
10
<PAGE> 12
expenditures approximating those budgeted and $1.8 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
million. This would require us to secure additional working capital to fund
operations in fiscal 2002. If sales are substantially less than 200,000, we may
not have sufficient working capital to sustain operations for the fourth quarter
of fiscal 2001 without securing additional working capital beyond that presently
available.
The market for influenza therapeutics did not exist before the
1999-2000 influenza season. This fact makes it difficult to project the usage of
therapeutics for the 2000-2001 influenza season. For this reason it is also
difficult to predict the number of influenza diagnostic products which will be
sold to detect influenza in the patients for whom the drug is prescribed. We
believe that there are a number of factors which indicate that we have an
opportunity to sell 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
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 considered by us in
making assumptions about sales in fiscal 2001 may not result in increased sales
of ZstatFlu. Even though the market potential for influenza therapeutics may be
substantial over a long term, there may not be an increase in sales of influenza
therapeutics for the 2000-2001 influenza season on the level we anticipate. In
addition, we may not increase our market share 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 sale of the company, sale of
significant assets of the company or dissolution of the company.
As of June 30, 2000, we have Federal and state income tax net
operating loss carryforwards of approximately $20.1 million, which expire
between 2010 and 2020. We also have Federal and state research tax credit
carryforwards of approximately $500,000. The Federal credits expire between 2012
and 2014; the state credits have no expiration date. Realization of these
carryforwards and credits are subject to us generating taxable income in future
periods.
FISCAL 2001 FINANCING ACTIVITY
On October 13, 2000, we closed the sale of $2.0 million of senior
secured convertible debentures to a private investor, resulting in net proceeds
of approximately $1.8 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 investor based on a conversion price based on the
weighted average price of our common stock for ten 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 the Company's 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 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
11
<PAGE> 13
shares, the debentures are convertible into common stock at our option if the
closing bid price of our common stock trades at 150% of the initial conversion
price ($4.69 per share) for 15 consecutive days. We have 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 we sell 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:
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 investor does 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 investor may
declare the debentures immediately due and payable. An event of default
includes, among other things,
o the nonpayment of interest when due,
o failure to perform under related agreements and/or other
agreements in an amount exceeding $25,000, and
o becoming insolvent
In conjunction with the issuance of the debentures to the investor, we
issued warrants to the investor for the purchase of 180,000 shares of common
stock at a price of $3.17, exercisable for a period of five years following
closing. We also issued approximately 45,000 warrants to a placement agent
involved in the transaction which are exercisable at $3.43 per share for a
period of five years following closing. The fair value of these warrants will be
recognized as debt discount. If the investor converts the debentures into common
stock when the closing bid price of our common stock is greater than $4.00 per
share, then for every ten 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.
The agreement also allows the investor, 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. Within 30 days from closing we have the option to sell an
additional $1 million of debenture, at the same terms, to other investors that
may include related parties.
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 consumers.
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. As of June 30, 2000, our working capital was $4.6 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
12
<PAGE> 14
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, 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.
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
13
<PAGE> 15
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.
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.
14
<PAGE> 16
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item are set forth beginning
on page F-l.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
In accordance with General Instruction E(3), a presentation of
information required in response to Items 9, 10, 11 and 12 shall appear in our
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein when
filed.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The exhibits listed below are included with this report.
All employment contracts and compensatory plans or arrangements are marked with
an asterisk (*).
Exhibit
Number Name of Exhibit
------- ---------------
3.1 Amended and Restated Certificate of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Form SB-2 Registration
Statement No. 333-33563 (the "Registration Statement").
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.2 to the Registration Statement.
4.1 5% Senior Secured Convertible Debenture Due October 13, 2002
(filed electronically herewith).
4.2 Form of Warrant Agreement between ZymeTx and Capital West
Securities, Inc. incorporated herein by reference to Exhibit 4.2
to the Registration Statement.
4.3 ZymeTx, Inc. Stock Option Plan, incorporated herein by reference
to Exhibit 4.3 to the Registration Statement.
4.4 ZymeTx, Inc. Directors Stock Option Plan, incorporated herein by
reference to Exhibit 4.4 to the Registration Statement.
4.5 ZymeTx, Inc. Employee Stock Purchase Plan incorporated by
reference to Exhibit 4.5 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
4.6 Rights Agreement dated February 3, 1999, by and between ZymeTx,
Inc. and American Stock Transfer and Trust Company incorporated
herein by reference to Exhibit 99.1 of the ZymeTx Current Report
on Form 8-K filed February 5, 1999.
10.1 Form of Common Stock Purchase Warrant issued in connection with
Bridge Loan Agreement, incorporated herein by reference to
Exhibit 10.5 to the Registration Statement.
10.2 Placement Agent Warrant Agreement dated July 29, 1996, by and
between ZymeTx and Spencer Trask, incorporated herein by
reference to Exhibit 10.7 to the Registration Statement.
15
<PAGE> 17
10.3 License Agreement dated as of May 1, 1996, by and between ZymeTx
and OMRF, incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
10.4 Promissory Note dated May 15, 1996, in the principal amount of
$425,000, issued in favor of OMRF, incorporated herein by
reference to Exhibit 10.9 to the Registration Statement.
10.5 Common Stock Purchase Warrant dated May 15, 1996, granted to
OMRF, incorporated herein by reference to Exhibit 10.10 to the
Registration Statement.
10.6 Executive Services Agreement dated July 1, 1997 by and between
ZymeTx and Peter G. Livingston, incorporated herein by reference
to Exhibit 10.15 to the Registration Statement.
10.7 Placement Agent Warrant Agreement dated August 5, 1997, by and
between ZymeTx and Spencer Trask, incorporated herein by
reference to Exhibit 10.17 to the Registration Statement.
10.8 License Agreement dated May 22, 1998, by and between ZymeTx and
OMRF incorporated herein by reference to Exhibit 10.17 of the
ZymeTx Annual Statement on Form 10-KSB for the fiscal year ended
June 30, 1998.
10.9 Lease Agreement (the "Lease Agreement") dated May 10, 1996, by
and between ZymeTx and Presbyterian Health Foundation,
incorporated by reference to Exhibit 10.22 to the Registration
Statement.
10.10 Non-Competition Agreement between ZymeTx and Craig D. Shimasaki,
Ph.D., incorporated by reference to Exhibit 10.21 to the
Registration Statement.
10.11 Amendment to Lease Agreement dated effective December 1, 1998,
incorporated herein by reference to Exhibit 10.20 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June
30, 1999.
10.12 Amendment No. 1 to Executive Services Agreement, dated as of July
1, 1999, by and between ZymeTx and Peter G. Livingston,
incorporated herein by reference to Exhibit 10.21 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June
30, 1999.
10.13 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Peter G. Livingston, incorporated herein by
reference to Exhibit 10.22 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.14 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Craig D. Shimasaki, incorporated herein by
reference to Exhibit 10.23 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.15 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Charles E. Seeney, incorporated herein by
reference to Exhibit 10.24 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.16 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Gary W. Pedersen, incorporated herein by
reference to Exhibit 10.25 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.17 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Robert Hudson, M.D. , incorporated herein by
reference to Exhibit 10.26 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
16
<PAGE> 18
10.18 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and G. Carl Gibson, incorporated herein by
reference to Exhibit 10.27 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.19 Executive Services Agreement, dated as of January 1, 2000, by and
between ZymeTx and Norman R. Proulx (filed electronically
herewith).
10.20 Purchase Agreement dated October 13, 2000, by and between ZymeTx
and investors identified therein (filed electronically herewith).
10.21 Form of Common Stock Purchase Warrant dated October 13, 2000,
issued in connection with the Purchase Agreement (filed
electronically herewith).
10.22 Registration Rights Agreement dated October 13, 2000, issued in
connection with the Purchase Agreement (filed electronically
herewith).
10.23 Security Agreement dated October 13, 2000 issued in connection
with the Purchase Agreement (filed electronically herewith).
27.1 Financial Data Schedule (filed electronically herewith).
(b) REPORTS ON FORM 8-K. During the last quarter of fiscal 1999 ZymeTx filed no
Current Reports on Form 8-K.
17
<PAGE> 19
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REGISTRANT: ZYMETX, INC.
Date: October 13, 2000 By: /s/ Norman R. Proulx
-------------------------------------
Norman R. Proulx
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Norman R. Proulx President; Chief Executive October 13, 2000
------------------------------------------- Officer; Director
Norman R. Proulx
Principal Executive Officer
/s/ G. Carl Gibson V.P., Controller; Secretary; October 13, 2000
------------------------------------------- Treasurer
G. Carl Gibson
Principal Financial and Accounting Officer
/s/ James R. Tolbert, III Chairman of the Board; October 13, 2000
------------------------------------------- Director
James R. Tolbert, III
/s/ William I. Bergman Director October 13, 2000
-------------------------------------------
William I. Bergman
/s/ Christopher M. Salyer Director October 13, 2000
-------------------------------------------
Christopher M. Salyer
/s/ J. Vernon Knight, M.D. Director October 13, 2000
-------------------------------------------
J. Vernon Knight, M.D.
/s/ David E. Rainbolt Director October 13, 2000
-------------------------------------------
David E. Rainbolt
/s/ Gilbert M. Schiff, M.D. Director October 13, 2000
-------------------------------------------
Gilbert M. Schiff, M.D.
/s/ William G. Thurman, M.D. Director October 13, 2000
-------------------------------------------
William G. Thurman, M.D.
/s/ Rand Mulford Director October 13, 2000
-------------------------------------------
Rand Mulford
</TABLE>
18
<PAGE> 20
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors..................................................................................F-2
Balance Sheets at June 30, 1999 and 2000........................................................................F-3
Statements of Operations for the years ended June 30, 1999 and 2000.............................................F-4
Statements of Stockholders' Equity for the years ended June 30, 1999 and 2000...................................F-5
Statements of Cash Flows for the years ended June 30, 1999 and 2000.............................................F-6
Notes to Financial Statements...................................................................................F-7
</TABLE>
F-1
<PAGE> 21
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZymeTx, Inc.
We have audited the accompanying balance sheets of ZymeTx, Inc. as of June 30,
1999 and 2000, and the related statements of operations, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ZymeTx, Inc. at June 30, 1999
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
October 13, 2000
F-2
<PAGE> 22
ZymeTx, Inc.
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,565 $ 1,357,509
Marketable securities, available-for-sale 8,735,430 2,458,801
Accounts receivable 192,038 8,801
Inventory 1,500,000 1,900,642
Prepaid insurance and other 46,563 155,940
------------ ------------
Total current assets 10,484,596 5,881,693
Inventory not expected to be realized within one year 1,789,931 628,022
Property, equipment and leasehold improvements, net 673,934 584,463
Proprietary technology and other intangibles, net 77,220 57,419
------------ ------------
Total assets $ 13,025,681 $ 7,151,597
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 435,178 $ 603,211
Accrued salaries, wages and benefits 225,065 314,753
Other accrued liabilities 118,425 290,940
Current portion of notes payable 100,000 56,880
------------ ------------
Total current liabilities 878,668 1,265,784
Long term obligations:
Note payable to stockholder 227,390 94,270
Deferred lease rentals 241,173 303,300
Other -- 16,348
Commitments (Note 3)
Stockholders' equity:
Preferred stock $.001 par value; 12,000,000 shares authorized (none issued
or outstanding at June 30, 1999 or 2000) -- --
Common stock $.001 par value; 30,000,000 shares authorized (6,692,572
shares and 6,837,175 issued and outstanding at June 30, 1999 and June 30,
2000, respectively) 6,693 6,837
Additional paid-in capital 33,557,761 34,141,203
Accumulated deficit (21,893,966) (28,672,807)
Unrealized holding gains (losses) on marketable securities
available for sale 7,962 (3,338)
------------ ------------
Total stockholders' equity 11,678,450 5,471,895
------------ ------------
Total liabilities and stockholders' equity $ 13,025,681 $ 7,151,597
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 23
ZymeTx, Inc.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
Revenues $ 544,293 $ 1,224,820
Cost of goods sold 264,784 643,935
----------- -----------
Gross Profit 279,509 580,885
Operating expenses:
Research and development 1,421,938 1,562,387
Product development 1,589,053 920,399
Inventory write-down 1,341,761 913,861
Sales and marketing 3,130,302 1,747,620
General and administrative 2,023,995 2,676,547
Return of in-process technology -- (150,000)
----------- -----------
Total operating expenses 9,507,049 7,670,814
----------- -----------
Loss from operations (9,227,540) (7,089,929)
Other income (expense):
Interest and dividend income 697,662 347,261
Interest expense (66,308) (36,173)
----------- -----------
Total other income 631,354 311,088
----------- -----------
Net loss $(8,596,186) $(6,778,841)
=========== ===========
Basic and diluted net loss per common share $ (1.29) $ (1.00)
=========== ===========
Weighted average common shares outstanding 6,665,883 6,752,274
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 24
ZymeTx, Inc.
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
---------------------------- PAID-IN ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT INCOME (LOSS) EQUITY
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 6,636,880 $ 6,637 $ 33,497,843 $(13,297,780) $ 6,886 $ 20,213,586
Stock options exercised by
employees and non-employee
directors 51,000 51 50,949 -- -- 51,000
Stock purchased through
Employee Stock Purchase 4,692 5 8,969 -- -- 8,974
Plan
Unrealized holding gains on
marketable securities
available for sale -- -- -- -- 1,076 1,076
Net loss -- -- -- (8,596,186) -- (8,596,186)
------------
Total comprehensive loss -- -- -- -- (8,595,110)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 1999 6,692,572 $ 6,693 $ 33,557,761 $(21,893,966) $ 7,962 $ 11,678,450
Stock options exercised by
employees and non-employee
directors 75,333 75 117,290 -- -- 117,365
Stock purchased through
Employee Stock Purchase Plan 15,652 15 26,144 -- -- 26,159
Warrants issued for services -- -- 327,562 -- -- 327,562
Stock issued as compensation
for services 53,618 54 112,446 -- -- 112,500
Unrealized holding losses on
marketable securities
available for sale -- -- -- -- (11,300) (11,300)
Net loss -- -- -- (6,778,841) -- (6,778,841)
------------
Total comprehensive loss -- -- -- -- -- (6,790,141)
------------ ------------ ------------ ------------ ------------ ------------
Balance at June 30, 2000 6,837,175 $ 6,837 $ 34,141,203 $(28,672,807) $ (3,338) $ 5,471,895
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 25
ZymeTx, Inc.
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
Cash flow from operating activities
Net loss $ (8,596,186) $ (6,778,841)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 166,088 186,576
Provision for doubtful accounts and sales returns -- 77,146
Inventory write-down 1,341,761 913,861
Return of in-process technology to OMRF -- (150,000)
Accretion of interest 32,506 19,526
Awards of stock and stock warrants -- 256,682
Deferred lease rentals 43,493 62,127
Changes in operating assets and liabilities:
Accounts receivable (151,401) 106,091
Interest receivable on marketable securities 317,555 122,190
Prepaid insurance and other 116,348 74,005
Inventory (2,324,148) (152,594)
Accounts payable (271,954) 168,033
Accrued salaries, benefits and other (27,888) 4,125
Other liabilities 123,870 258,074
------------ ------------
Total adjustments (633,770) 1,945,842
------------ ------------
Net cash used by operating activities (9,229,956) (4,832,999)
Cash flow from investing activities
Purchase of marketable securities available for sale (19,267,094) (11,554,525)
Proceeds from sale of marketable securities available for sale 26,625,117 17,697,665
Purchase of property, equipment and leasehold improvements (265,028) (67,867)
------------ ------------
Net cash provided by investing activities 7,092,995 6,075,273
Cash flow from financing activities
Payments on notes payable (25,000) (38,854)
Exercise of employee stock options 51,000 117,365
Stock purchased through employee stock purchase plan 8,974 26,159
------------ ------------
Net cash provided by financing activities 34,974 104,670
------------ ------------
Net increase (decrease) in cash (2,101,987) 1,346,944
Cash and cash equivalents at beginning of period 2,112,552 10,565
------------ ------------
Cash and cash equivalents at end of period $ 10,565 $ 1,357,509
============ ============
Supplemental disclosure of interest paid $ 32,583 $ 32,452
============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 26
ZymeTx, Inc.
Notes to Financial Statements
June 30, 1999 and 2000
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
ZymeTx, Inc. ("the Company"), a Delaware corporation, is a biotechnology company
engaged in the discovery, development and commercialization of unique products
for the diagnosis and treatment of viruses. The scientific foundation of the
Company is based upon the role of enzymes in the process of viral infection. The
year ended June 30, 2000 was the first year the Company had significant revenues
from its primary commercial diagnostic product, ZstatFlu. The Company was
presented as a Development Stage Company in all periods prior to the year ended
June 30, 2000.
The Company has initiated early stages of research regarding therapeutics
utilizing its ViraZyme technology for enzymes associated with certain viral
diseases; however, the Company will concentrate its efforts during fiscal 2001
on completing developments of improvements to and marketing its influenza
diagnostic product, ZstatFlu. The Company expects to devote greater efforts to
therapeutic development in fiscal 2002 and beyond, depending upon capital
resource availability. These projects which will involve experimental and
unproven technology, may require many years and substantial expenditures to
complete, and may ultimately be unsuccessful.
F-7
<PAGE> 27
ZymeTx, Inc.
Notes to Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANAGEMENT'S PLANS
In establishing the Company's operating plans for fiscal 2001 including the
amount of inventory of ZstatFlu products to produce for the 2000-2001 influenza
season, the Company has assumed that the availability of influenza therapeutics
will significantly improve the market opportunity for influenza diagnostic
products such as ZstatFlu. The Company estimates that it 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 the Company 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 the Company is otherwise meeting budgeted
expenditures for fiscal 2001, the Company will utilize cash in its operating and
investing activities of $.8 million in fiscal 2001. Assuming this level of unit
sales, expenditures approximating those budgeted and $1.8 million of net
proceeds raised from the sale of the senior secured convertible debentures in
October 2000 (Note 9), working capital will be sufficient to continue operations
at least into fiscal 2002.
Unit sales at a level less than 500,000 will cause the Company to use more of
its existing working capital to finance operations. Based upon the same unit
sales price and compliance with budgeted expenditures, if the Company sells
200,000 units, revenue from diagnostic sales would approximate $2.7 million.
Assuming this level of unit sales, expenditures approximating those budgeted and
$1.8 million of net proceeds from the sale of the senior secured convertible
debentures, the Company's cash and marketable securities position at June 30,
2001, is expected to be less than $1 million. This would require the Company to
secure additional working capital to fund operations in fiscal 2002. If sales
are substantially less than 200,000, the Company may not have sufficient working
capital to sustain operations for the fourth quarter of fiscal 2001 without
securing additional working capital beyond that presently available.
The market for influenza therapeutics did not exist before the 1999-2000
influenza season. This fact makes it is difficult to project the usage of
therapeutics for the 2000-2001 influenza season. For this reason it is also
difficult to predict the number of influenza diagnostic products which will be
sold to detect influenza in the patients for whom the drug is prescribed. The
Company believes that there are a number of factors which indicate that the
Company has an opportunity to sell 500,000 units of ZstatFlu in fiscal 2001
including the following:
1. The Company estimates that approximately .8 million
prescriptions of therapeutics were dispensed while .8 million
tests of influenza diagnostics, such as ZstatFlu, were sold.
F-8
<PAGE> 28
2. Market studies for the influenza therapeutics indicate that
influenza therapeutic sales could reach 20 million
prescriptions by the year 2004.
3. 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, the Company has estimated 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. The Company has 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 the
Company's market share in the 2000-2001 influenza season from the 1999-2000
influenza season. The Company has assumed an increase in market share will
result from retargeting their marketing efforts more towards hospitals where the
Company believes the majority of the diagnostic units were consumed in the
1999-2000 influenza season.
There are a number of reasons why the factors considered by the Company in
making assumptions about sales in fiscal 2001 may not result in increased sales
of ZstatFlu. Even though the market potential for influenza therapeutics may be
substantial over a long term, there may not be an increase in sales of influenza
therapeutics for the 2000-2001 influenza season on the level anticipated by the
Company. In addition, the Company may not increase its market share despite an
increase in the market for influenza diagnostics.
If additional working capital is required, the Company cannot assure that
financing will be available on terms satisfactory to the Company, or that such
financing will be available at all. If the Company has significant losses and is
unsuccessful in securing financing to provide the Company with operating
capital, then the Company will be required to consider other options, including
sale of the Company, sale of significant assets of the Company or dissolution of
the Company.
In order to provide additional working capital should unit sales be less than
500,000 units, on October 13, 2000, the Company closed the sale of $2.0 million
of Senior Secured Convertible Debentures (the "Debentures"). These Debentures
are due in October 2002 if not earlier converted to common stock and assuming no
events occur which provide the buyer the opportunity to exercise put options
provided for in the instruments. See Note 9.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid debt investments
with maturities of 90 days or less when purchased.
F-9
<PAGE> 29
ZymeTx, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Based on the nature of the assets held by the Company and management's
investment strategy, the Company's investments in marketable securities have
been classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The securities mature within one year
and the amortized cost basis, aggregate fair value, and unrealized holding gains
at June 30, 1999 and 2000 are summarized below:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR HOLDING
BASIS VALUE GAINS
----------- ----------- ------------
<S> <C> <C> <C>
1999:
Corporate debt securities $ 7,962,401 $ 7,970,363 $ 7,962
U.S. states and political subdivision debt securities 765,067 765,067 --
----------- ----------- -----------
$ 8,727,468 $ 8,735,430 $ 7,962
=========== =========== ===========
2000:
Corporate debt securities $ 1,970,404 $ 1,969,650 $ (754)
Bankers Acceptance 491,735 489,151 (2,584)
----------- ----------- -----------
$ 2,462,139 $ 2,458,801 $ (3,338)
=========== =========== ===========
</TABLE>
F-10
<PAGE> 30
ZymeTx, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventories are carried at the lower of cost (first-in, first-out) or market.
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1999 2000
---------- ----------
<S> <C> <C>
Raw Materials $2,052,534 $1,503,431
Work in process 976,441 248,443
Finished goods 260,956 776,790
---------- ----------
3,289,931 2,528,664
Less amounts not expected to be
realized in one year 1,789,931 628,022
---------- ----------
$1,500,000 $1,900,642
========== ==========
</TABLE>
Inventory not expected to be realized in one year is primarily comprised of the
raw material used in ZstatFlu, which is expected to be realized for unit sales
in fiscal 2002 and 2003.
The inventory in the accompanying balance sheet at June 30, 2000, consists of
costs related to ZstatFlu. The market for influenza diagnostics grew during
fiscal year 2000, largely due to the introduction of influenza therapeutics
produced by other companies during the year. However, there are no assurances
that this market will continue to develop and accordingly, there are no
assurances that the Company's investment in its ZstatFlu inventory will be
recoverable. In addition, improvements in the delivery of the Company's
diagnostic as a result of its research and development program or new products
from competitors may render a portion of the inventory on hand at June 30, 2000,
obsolete in the near term. In fiscal 2000 the carrying value of inventory was
written down as a result of new packaging designs and improvements to the
Company's influenza diagnostic which rendered certain existing inventory
unsaleable. Fiscal year 2000 inventory write-downs totaled $913,861 ($1,341,761
in 1999).
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over three to seven years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the remaining lease term.
F-11
<PAGE> 31
ADVERTISING COSTS
Advertising campaign costs are expensed the first time the target of the
campaign is contacted. Total advertising and promotion expenses were $497,190
and $27,765 for the years ended June 30, 1999 and 2000, respectively.
PROPRIETARY TECHNOLOGY AND OTHER INTANGIBLES
Amortization of proprietary technology and other intangibles acquired is
computed using the straight-line method over periods of between five and ten
years. Accumulated amortization aggregated $59,409 and $79,212 as of June 30,
1999 and 2000, respectively.
F-12
<PAGE> 32
ZymeTx, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not less than the
estimated fair value of the underlying stock on the date of grant, no
compensation is recorded.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt instruments of the U.S. Government
and its agencies, institutions and other short-term investments with strong
credit ratings. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any realized losses
on its marketable securities.
USE OF ESTIMATES AND OTHER UNCERTAINTIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for the fixed-rate note
payable has been discounted and approximates its fair value inasmuch as the
Company believes the discount rate
F-13
<PAGE> 33
ZymeTx, Inc.
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
approximates its incremental borrowing rate at June 30, 2000 (Note 4 -- Related
Party Transactions). Other financial instruments have a fair value approximating
their carrying amount due to the short maturity of those instruments or due to
the criteria used to determine carrying value in the financial statements.
REVENUE RECOGNITION
The Company utilizes independent distributors in the dissemination of ZstatFlu.
The independent distributors specify the quantities which they hold for
dissemination, assume the liability for damage or loss of merchandise and retain
the right of return of such merchandise at the original purchase price less a
restocking charge. Inasmuch as the Company cannot estimate the amount of future
returns, the merchandise shipped to and held by the independent distributors is
not reported as revenue until it is shipped from the independent distributors'
warehouses to the end users.
NET LOSS PER SHARE
Net loss per share applicable to common stock is computed by adjusting net loss
by the amount of preferred stock dividends, if any. Basic loss per common share
is based upon the weighted average number of common shares outstanding during
each period after giving appropriate effect to preferred stock dividends, if
any. Diluted loss per share is based on the weighted average number of common
shares and dilutive common equivalent shares outstanding and the assumed
conversion of dilutive convertible securities outstanding, if any. All
potentially dilutive securities were antidilutive for all periods presented and
have thus, been excluded from diluted loss per share. See Note 4 -- Related
Party Transactions, Note 5 -- Stockholders' Equity, and Note 6 -- Stock Option
and Purchase Plans for a full description of securities which may have a
dilutive effect in future periods.
F-14
<PAGE> 34
ZymeTx, Inc.
Notes to Financial Statements (continued)
2. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, stated at cost, are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
----------- -----------
<S> <C> <C>
Laboratory equipment $ 334,566 $ 277,308
Manufacturing equipment 225,913 328,278
Computer equipment 243,944 285,262
Office furniture, equipment and leasehold improvements 147,591 148,578
----------- -----------
952,014 1,039,426
Less accumulated depreciation (278,080) (454,963)
----------- -----------
$ 673,934 $ 584,463
=========== ===========
</TABLE>
3. COMMITMENTS
OPERATING LEASES
In January 1997, the Company consolidated substantially all of its operations,
research, marketing and administrative functions into newly constructed
facilities leased from a stockholder of the Company. This lease provided for no
rent payable the first two years and a fixed rate thereafter for the remaining
eight years ("Base Rent"). The Company incurred certain leasehold improvements
that exceeded the defined tenant improvement allowance (the "Tenant Allowance
Overage") provided for under the lease. This Tenant Allowance Overage bears
interest at a rate of 10% over the repayment term of 60 months, with interest
only due for the first 24 months and principal and interest due monthly over the
final 36 months of the repayment term. The Tenant Allowance Overage payments are
due in addition to the Base Rent. The Company is recognizing the total facility
lease payments, including the Tenant Allowance Overage, on a straight-line
method over the entire term of the lease agreement. Accordingly, as of June 30,
1999 and 2000, the Company has accrued a deferred lease rental liability of
$241,173 and $303,300, respectively. As additional consideration for the lease,
this stockholder received warrants to purchase 27,706 shares of Common Stock at
an exercise price of $2.31 per share.
F-15
<PAGE> 35
ZymeTx, Inc.
Notes to Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
In April 1998, the Company signed an amendment to the lease agreement with an
effective date of December 1, 1998. The amendment increased the amount of leased
space at the current facilities up to approximately 46,000 rentable square feet.
In September 1999, the Company signed an amendment effective November 1, 1999,
reducing rentable square feet by 9,988 to 35,645. In February, 2000, the Company
subleased a portion of this additional space to a third party. Income from this
sublease totaled $40,775 in fiscal 2000.
Net rental expense related to the leased facilities during 1999 and 2000 was
$157,918 and $285,281, respectively.
Future minimum lease commitments as of June 30, 2000 are as follows.
<TABLE>
<S> <C>
Year ended June 30:
2001 (A) $ 82,961
2002 (A) 163,394
2003 286,104
2004 286,104
2005 286,104
Thereafter (laboratory and office space to 2007) 476,840
----------
Total minimum lease payments, net $1,581,507
==========
</TABLE>
(A) Net of sublease rentals of $203,143 and $122,710 in 2001 and 2002,
respectively.
LICENSE AGREEMENT COMMITMENTS
In connection with license agreements with a related party, the Company has
committed to make royalty and other technology product development progress
payments. See Note 4 -- Related Party Transactions.
F-16
<PAGE> 36
ZymeTx, Inc.
Notes to Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
OTHER
In April 1999, the Company entered into severance agreements with certain of its
executive officers that become effective after the occurrence of a change in
control, as defined, if the Company terminates the officer's employment or if
the officer terminates employment with the Company for good reason, as defined.
These agreements require the Company to make a severance payment to the
executive officers up to 2 times their Base Compensation, as defined, upon
termination. A provision for these benefits will not be made until a change in
control is probable. The Company incurred a charge of approximately $175,000 in
2000 related to the severance of its former President and Chief Executive
Officer.
In 1999, the Company established a severance plan for certain other employees.
Employees are qualified for a severance payment based on their annual salary
exceeding the specified annual salary in the plan and involuntary termination.
Due to the uncertainty of future involuntary terminations, there is no accrual
at June 30, 1999 or 2000 for future payments by the Company under this plan, if
any. The Company incurred a charge of approximately $117,000 related to
employees terminated under this plan in 1999 (none in 2000).
On October 1, 1999, the Board of Directors approved the employment agreement of
Norman Proulx, the Company's Chief Executive Officer. A component of the
employment agreement included the award of 50,000 common shares of stock and
reimbursement of all Federal and state taxes associated with the stock award.
The value of the stock award and the related taxes ($198,000) was charged to
general and administrative expense in fiscal 2000. In February 2000, the Board
of Directors extended Mr. Proulx's employment agreement through June 2001. Terms
of the employment agreement include, among other things, the payment of cash
bonuses based on obtaining certain goals including e-commerce sales, cash flow
objectives, diagnostic test unit sales and the average daily common stock price.
During fiscal 2000, the Company recognized a charge to operations related to the
bonus provisions of $50,000.
In conjunction with the issuance of certain stock warrants described in Note 5,
the Company entered into an agreement with a provider of marketing services.
Under the terms of the agreement, the marketer may earn up to $280,000 cash and
160,000 additional warrants with an exercise price of $2.31 based on the number
of diagnostic product units sold by the marketer during the contract term. The
contract is cancelable by the Company after one year with 90 days notice. As of
June 30, 2000, no expense has been recognized associated with this contingent
marketing provision of the agreement.
F-17
<PAGE> 37
ZymeTx, Inc.
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS
During 1999 and prior years OMRF, a stockholder, provided on a marginal cost
basis, significant support and collaborative resources permitting the Company to
access state-of-the-art facilities, equipment, services and personnel. For the
year ended June 30, 1999, OMRF charged the Company $137,153 related to such
arrangement. Substantially all of such costs have been charged to research and
development and general and administrative expenses. During 1999 the Company
internalized much of this expense, thus eliminating expenditures to OMRF.
In connection with a fiscal 1997 license agreement covering all of the patents
which comprise the ViraZyme technology, the Company executed a note (the "Note")
with OMRF, a stockholder. The Note had a face value of $425,000 and provided for
an interest free period of 24 months following execution and interest at 8%
thereafter. The Note was discounted to its estimated fair value at the date of
issuance.
In fiscal 2000, the Company returned certain warranted in-process technology
acquired in fiscal 1998 from OMRF and reached an agreement with them for a
refund of approximately $186,000. After the refund was applied against the Note,
the Company recognized a gain of $150,000 which was equal to the change in the
fair value of the Note resulting from this transaction. This gain is reflected
in the accompanying fiscal 2000 statement of operations.
Imputed interest for the years ended June 30, 1999 and 2000 included in the
accompanying statements of operations aggregated $32,506 and $19,526,
respectively.
Following the Note restructuring, quarterly principal and interest payments have
been reduced to $16,753 for the remaining term of the Note which runs through
May 2003. Principal Note payments as of June 30, 2000 for the remaining term are
as follows: 2001 - $56,880; 2002 - $49,292; and 2003 - $44,978.
F-18
<PAGE> 38
ZymeTx, Inc.
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company leases certain facilities from a stockholder, as discussed in Note 3
- Commitments. The Company recognized net rent expense totaling $157,918 and
$285,281 in 1999 and 2000, respectively, related to its facilities that are
leased from this stockholder. In management's opinion, these license and lease
transactions were conducted on no less favorable terms than those which could
have been obtained from unrelated third parties.
5. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
In July 1997, the stockholders approved an amendment to the Company's
Certificate of Incorporation increasing the number of authorized shares of
Common Stock from 16,500,000 shares to 30,000,000 shares and increasing the
number of authorized shares of Preferred Stock from 10,000,000 shares to
12,000,000 shares. The Preferred Stock may be issued in one or more series, with
such voting powers, designations, preferences, rights, qualifications,
limitations and restrictions as shall be set forth in a resolution of the
Company's Board of Directors providing for the issue thereof.
WARRANTS
During fiscal 2000, the Company entered into several agreements for services in
exchange for common stock warrants aggregating 165,000 shares at the exercise
price of $2.31 per share. Additionally, certain of these agreements provide for
the issuance of additional common stock warrants of up to 160,000 additional
shares at an exercise price of $2.31 upon achieving certain minimum unit sales
benchmarks. For the fiscal year ended June 30, 2000, $129,032 was charged to
operations related to these common stock warrants.
F-19
<PAGE> 39
ZymeTx, Inc.
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
At June 30, 2000, there were warrants outstanding and shares of the Company
common stock reserved for the purchase of an aggregate of 997,727 shares of the
Company's common stock exercisable at prices ranging from $2.31 to $12.40 (a
weighted average of $4.86 per share) which expire from November 2001 through
October 2005 (Notes 3 and 4).
In early fiscal 2001 the Company entered into several agreements for such
services as marketing, information technology and public relations for which
common stock warrants aggregating 136,000 shares were granted at an exercise
price of $2.00. Under the terms of the grants, these awards generally have a
contractual life of five to ten years and vest over periods ranging from nine
months to three years. Additionally, in fiscal 2001, 230,000 common stock
warrants with an exercise price of $3.43 per share were issued to underwriters
involved with the Company's initial public offering. These warrants include a
call feature (at $3.43 per share) exercisable by the Company if the common stock
exceeds $5.50 for five consecutive days.
RIGHTS PLAN
In February 1999, the Company's Board of Directors adopted a rights plan (the
"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 Rights Plan, a tax-free dividend
distribution of one share purchase right ("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 (a total of 20,000 shares of the
Company's Preferred Stock have been designated under the Rights Plan). The terms
of the Rights 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.
F-20
<PAGE> 40
ZymeTx, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is generally recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for options granted prior to the initial public offering were estimated at the
date of grant using a minimum value option pricing model. The fair value of
options granted subsequent to the initial public offering was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1999 and 2000, respectively: risk free interest
rate of 6.0% and 6.3%; no dividend yield; a volatility factor of the expected
market price of the Company's stock of .93 and .92; and a weighted average
expected life of the option of seven years and six years.
Because option valuation models require the input of subjective assumptions
including the expected stock price volatility, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the qualified
and non-qualified options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
Net loss applicable to common stock $(8,766,828) $(7,243,258)
Net loss per common and common equivalent share (1.32) (1.07)
</TABLE>
F-21
<PAGE> 41
ZymeTx, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
In 1997, the Company adopted stock option plans for employees, the ZymeTx, Inc.
Stock Option Plan (the "Employees' Plan") as well as for non-employees, the
ZymeTx, Inc. Director Stock Option Plan (the "Directors' Plan") (collectively,
the "Plans"). During fiscal 2000, the Company established the Consultant Stock
Option Plan, which has been approved by the Board of Directors and is awaiting
shareholder approval. If the plan is approved, it will provide for the issuance
of up to 100,000 options to non-employees. During fiscal year 2000, the Company
granted 55,000 options under the Consultant Stock Option Plan, exercisable at a
weighted average price of $2.41 per share. As of June 30, 2000, there are 38,148
shares of common stock available for issuance under both the Employees' Plan and
the Directors' Plan. There are two forms of options: options intended to qualify
as incentive stock options ("ISO Options") under the Employees' Plan and the
Internal Revenue Code of 1986, as amended (the "Code"), and nonqualified options
under the Directors' Plan (the "Nonqualified Options"). Options granted under
the Employees' Plan prior to October 1, 1999, become exercisable 25% per year
and are fully vested after four years. For those options granted on or after
October 1, 1999, ISO Options become exercisable 50% on each of the first two
anniversary dates for executive officers and 25% on the date of grant and 25 %
and 50% on the first and second anniversary dates for non-executive employees of
the Company. Nonqualified options generally become exercisable 33% per year and
are fully vested after three years. All options under the Plans lapse 10 years
from the date of grant.
Activity in the Company's Employees' Plan during 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
1999 2000
------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 364,250 $ 1.65 393,974 $ 2.30
Granted 72,824 4.94 304,387 2.26
Exercised (26,000) 1.00 (75,333) 1.56
Surrendered, forfeited or expired (17,100) 3.45 (288,759) 1.76
------- --------
Outstanding options at end of period 393,974 2.30 334,269 2.89
======= ========
Exercisable at end of period 199,125 1.24 49,376 3.31
======= ========
Weighted average fair value of options
granted during period $ 2.69 $ 1.53
</TABLE>
F-22
<PAGE> 42
ZymeTx, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
Outstanding options to acquire 279,929 shares of stock at June 30, 2000 had
exercise prices ranging from $1.00 - $2.63 per share (29,292 of which are
exercisable at a weighted average price of $1.90 per share) and had a weighted
average exercise price of $2.18 and remaining contractual life of 9.1 years. The
balance of ISO Options outstanding at June 30, 2000 had exercise prices ranging
from $4.22 - $6.00 per share (20,084 of which are exercisable at a weighted
average price of $5.36 per share) and had a weighted average exercise price of
$5.25 and remaining contractual life of 7.7 years.
Activity in the Company's Directors' Plan during 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
1999 2000
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 115,000 $1.42 200,000 $2.79
Granted 115,000 3.82 285,000 2.53
Exercised (25,000) 1.00 -- --
Surrendered, forfeited or expired (5,000) 4.22 -- --
------- -------
Outstanding options at end of period 200,000 2.79 485,000 2.63
======= =======
Exercisable at end of period 60,832 1.13 134,165 2.07
======= =======
Weighted average fair value of options granted
during period $2.68 $1.69
</TABLE>
Outstanding options to acquire 430,000 shares of stock at June 30, 2000 had
exercise prices ranging from $1.00 - $2.88 per share (103,333 of which were
exercisable at a weighted average exercise price of $1.30 per share) and had a
weighted average exercise price of $2.19 and remaining contractual life of 8.9
years. The balance of the options outstanding at June 30, 2000 had exercise
prices ranging from $4.22 - $4.94 per share (30,832 of which were exercisable at
a weighted average exercise price of $4.65 per share) and had a weighted average
exercise price of $4.69 and a remaining contractual life of 8.8 years.
F-23
<PAGE> 43
ZymeTx, Inc.
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
STOCK PURCHASE PLAN
Effective July 1, 1998, the Company reserved 50,000 shares of its Common Stock
for issuance to employees under an employee stock purchase plan (the "ESPP").
Under the ESPP, eligible employees can purchase, through payroll deductions, a
specified number of shares of the Company's Common Stock at the lesser of (a)
85% of the official closing price of the Common Stock on the Offering
Termination Date, as defined, or (b) 85% of the official closing price of the
Common Stock on the Offering Commencement Date, as defined. The options will be
continually granted and automatically exercised each quarter in which the Plan
is in effect. For the years ended June 30, 1999 and 2000, 4,692 and 15,652
shares of stock were purchased though the Employee Stock Purchase Plan. Proceeds
received by the Company for the years ended June 30, 1999 and 2000 totaled
$8,974 and $26,159 or $1.91 and $1.67 per share, respectively.
F-24
<PAGE> 44
ZymeTx, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES
The provision for income taxes differs from the expected income tax using the
federal statutory rate on loss before income taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
--------------- ---------------
<S> <C> <C>
Benefit at federal statutory rate $ (2,922,703) $ (2,304,806)
Other (33,207) (48,647)
State tax benefit (321,729) (243,354)
Operating loss not benefited 3,277,639 2,596,807
-------------- --------------
$ -- $ --
============== ==============
</TABLE>
Deferred tax assets and liabilities, resulting from differences in the timing of
recognition of revenues and expenses, consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1999 2000
------------ ------------
<S> <C> <C>
Deferred tax liability:
Tax depreciation in excess of financial $ 62,353 $ 70,034
Deferred tax assets:
Net operating loss carryforward 5,247,590 7,591,190
Research and development credits 408,363 496,693
Capitalization of certain costs as inventory for
tax Purposes 733,036 829,289
Other 32,964 109,269
------------ ------------
6,421,953 9,026,441
Valuation allowance (6,359,600) (8,956,407)
------------ ------------
Net deferred tax assets 62,353 70,034
------------ ------------
Net deferred tax liability $ -- $ --
============ ============
</TABLE>
F-25
<PAGE> 45
ZymeTx, Inc.
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
As of June 30, 2000, the Company had a federal net operating loss carryforward
of approximately $20.1 million. The net operating loss carryforward will expire
from 2010 through 2020, if not utilized.
Because of the Company's lack of earnings history, the net deferred tax asset
comprised of its net operating loss carryforward has been fully offset by a
valuation allowance. The valuation allowance increased by $3.3 million and $2.6
million in 1999 and 2000, respectively.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a retirement plan under Section 401(k) of the Internal
Revenue Code under which participation is available to substantially all
full-time employees. Company contributions are made at the discretion of the
compensation committee. The Company matched 2% of employee contributions
amounting to $9,369 and $15,459 in 1999 and 2000, respectively.
9. SUBSEQUENT EVENT
On October 13, 2000, the Company closed the sale of $2.0 million of Senior
Secured Convertible Debentures (the "Debentures") to a private investor (the
"Investor"), resulting in net proceeds to the Company of approximately $1.8
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 the Investor based on a conversion price based on the weighted average
price of the Company's common stock for ten 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 Investor 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
trades at 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
F-26
<PAGE> 46
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 Debentures has not
been declared effective within one year following closing, ii) following
registration of the Company's common stock underlying the Debentures, the
Investor does 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 agreements in an amount
exceeding $25,000, and becoming insolvent) occurs and is continuing, the
Investor may declare the Debentures immediately due and payable.
In conjunction with the issuance of the Debentures to the Investor, the Company
issued warrants to the Investor for the purchase of 180,000 shares of common
stock at a price of $3.17, exercisable for a period of five years following
closing. The Company also issued approximately 45,000 warrants to a placement
agent involved in the transaction which are exercisable at $3.43 per share for a
period of five years following closing. The fair value of these warrants will be
recognized as debt discount. Further, if the Investor converts the Debentures
into the Company's common stock when the closing bid price of the common stock
is greater than $4.00 per share, then for every ten shares received upon
conversion, the Investor 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 agreement also allows the Investor, 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 the Company's
common stock. Within 30 days from closing, the Company has the option to sell an
additional $1 million of debentures, at the same terms, to other investors that
may include related parties.
F-27
<PAGE> 47
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Form SB-2 Registration
Statement No. 333-33563 (the "Registration Statement").
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.2 to the Registration Statement.
4.1 5% Senior Secured Convertible Debenture Due October 13, 2002
(filed electronically herewith).
4.2 Form of Warrant Agreement between ZymeTx and Capital West
Securities, Inc. incorporated herein by reference to Exhibit 4.2
to the Registration Statement.
4.3 ZymeTx, Inc. Stock Option Plan, incorporated herein by reference
to Exhibit 4.3 to the Registration Statement.
4.4 ZymeTx, Inc. Directors Stock Option Plan, incorporated herein by
reference to Exhibit 4.4 to the Registration Statement.
4.5 ZymeTx, Inc. Employee Stock Purchase Plan incorporated by
reference to Exhibit 4.5 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
4.6 Rights Agreement dated February 3, 1999, by and between ZymeTx,
Inc. and American Stock Transfer and Trust Company incorporated
herein by reference to Exhibit 99.1 of the ZymeTx Current Report
on Form 8-K filed February 5, 1999.
10.1 Form of Common Stock Purchase Warrant issued in connection with
Bridge Loan Agreement, incorporated herein by reference to
Exhibit 10.5 to the Registration Statement.
10.2 Placement Agent Warrant Agreement dated July 29, 1996, by and
between ZymeTx and Spencer Trask, incorporated herein by
reference to Exhibit 10.7 to the Registration Statement.
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
10.3 License Agreement dated as of May 1, 1996, by and between ZymeTx
and OMRF, incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
10.4 Promissory Note dated May 15, 1996, in the principal amount of
$425,000, issued in favor of OMRF, incorporated herein by
reference to Exhibit 10.9 to the Registration Statement.
10.5 Common Stock Purchase Warrant dated May 15, 1996, granted to
OMRF, incorporated herein by reference to Exhibit 10.10 to the
Registration Statement.
10.6 Executive Services Agreement dated July 1, 1997 by and between
ZymeTx and Peter G. Livingston, incorporated herein by reference
to Exhibit 10.15 to the Registration Statement.
10.7 Placement Agent Warrant Agreement dated August 5, 1997, by and
between ZymeTx and Spencer Trask, incorporated herein by
reference to Exhibit 10.17 to the Registration Statement.
10.8 License Agreement dated May 22, 1998, by and between ZymeTx and
OMRF incorporated herein by reference to Exhibit 10.17 of the
ZymeTx Annual Statement on Form 10-KSB for the fiscal year ended
June 30, 1998.
10.9 Lease Agreement (the "Lease Agreement") dated May 10, 1996, by
and between ZymeTx and Presbyterian Health Foundation,
incorporated by reference to Exhibit 10.22 to the Registration
Statement.
10.10 Non-Competition Agreement between ZymeTx and Craig D. Shimasaki,
Ph.D., incorporated by reference to Exhibit 10.21 to the
Registration Statement.
10.11 Amendment to Lease Agreement dated effective December 1, 1998,
incorporated herein by reference to Exhibit 10.20 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June
30, 1999.
10.12 Amendment No. 1 to Executive Services Agreement, dated as of July
1, 1999, by and between ZymeTx and Peter G. Livingston,
incorporated herein by reference to Exhibit 10.21 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June
30, 1999.
10.13 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Peter G. Livingston, incorporated herein by
reference to Exhibit 10.22 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.14 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Craig D. Shimasaki, incorporated herein by
reference to Exhibit 10.23 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.15 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Charles E. Seeney, incorporated herein by
reference to Exhibit 10.24 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.16 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Gary W. Pedersen, incorporated herein by
reference to Exhibit 10.25 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.17 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Robert Hudson, M.D. , incorporated herein by
reference to Exhibit 10.26 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
</TABLE>
<PAGE> 49
<TABLE>
<S> <C>
10.18 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and G. Carl Gibson, incorporated herein by
reference to Exhibit 10.27 of the ZymeTx Annual Statement on Form
10-KSB for the fiscal year ended June 30, 1999.
10.19 Executive Services Agreement, dated as of January 1, 2000, by and
between ZymeTx and Norman R. Proulx (filed electronically
herewith).
10.20 Purchase Agreement dated October 13, 2000, by and between ZymeTx
and investors identified therein (filed electronically herewith).
10.21 Form of Common Stock Purchase Warrant dated October 13, 2000,
issued in connection with the Purchase Agreement (filed
electronically herewith).
10.22 Registration Rights Agreement dated October 13, 2000, issued in
connection with the Purchase Agreement (filed electronically
herewith).
10.23 Security Agreement dated October 13, 2000 issued in connection
with the Purchase Agreement (filed electronically herewith).
27.1 Financial Data Schedule (filed electronically herewith).
</TABLE>
(b) REPORTS ON FORM 8-K. During the last quarter of fiscal 1999 ZymeTx filed no
Current Reports on Form 8-K.
