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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from ______ to _______
Commission file number 0-23145
ZYMETX, INC.
(Exact name of registrant as specified in its charter)
Delaware 73-1444040
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
800 Research Parkway, Suite 100 73104
Oklahoma City, Oklahoma (Zip Code)
(Address of principal executive offices)
Issuer's telephone number, including area code: 405-271-1314
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
6,835,175 shares of common stock, $.001 par value, issued and outstanding at
April 5, 2000
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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ZYMETX, INC.
FORM 10-QSB
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 30, 1999 and March 31, 2000.............................................. 2
Statements of Operations - Three Months and Nine Months Ended March 31,
1999 and 2000 and Cumulative from Inception to March 31, 2000.................................. 3
Statements of Cash Flows - Nine Months Ended March 31,
1999 and 2000 and Cumulative from Inception to March 31, 2000.................................. 4
Notes to Financial Statements.................................................................. 5
Item 2. Management's Discussion and Analysis or Plan of Operations..................................... 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................................................... 17
Item 6. Exhibits and Reports on Form 8-K............................................................... 17
SIGNATURES................................................................................................ 18
</TABLE>
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ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
(Information at March 31, 2000 is unaudited)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 10,565 $ 2,871,178
Marketable securities, available-for-sale 8,735,430 1,993,116
Accounts receivable, net 192,038 212,602
Inventory 1,500,000 1,840,767
Prepaid expenses and other 46,563 264,223
------------ ------------
Total current assets 10,484,596 7,181,886
Inventory not expected to be realized within one year 1,789,931 1,622,636
Property, equipment and leasehold improvements, net 673,934 602,442
Proprietary technology and other intangibles, net 77,220 62,370
------------ ------------
Total assets $ 13,025,681 $ 9,469,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 435,178 $ 409,253
Accrued salaries, wages and benefits 225,065 186,738
Accrued sales returns 66,164 23,199
Taxes payable and other 52,261 169,846
Current portion of note payable to stockholder 100,000 53,376
------------ ------------
Total current liabilities 878,668 842,412
Long term obligations--
Note payable to stockholder due after one year 227,390 103,627
Deferred lease rentals 241,173 311,179
Stockholders' equity:
Preferred stock $.001 par value; 12,000,000 shares authorized (none issued
or outstanding at June 30, 1999 or March 31, 2000) -- --
Common stock $.001 par value; 30,000,000 shares authorized (6,692,572 shares
and 6,827,862 issued and outstanding at June 30, 1999 and March 31, 2000,
respectively) 6,693 6,828
Additional paid-in capital 33,557,761 34,163,758
Deficit accumulated during the development stage (21,893,966) (25,961,806)
Unrealized holding gains on marketable securities available for sale 7,962 3,336
------------ ------------
Total stockholders' equity 11,678,450 8,212,116
------------ ------------
Total liabilities and stockholders' equity $ 13,025,681 $ 9,469,334
============ ============
</TABLE>
See accompanying notes to financial statements.
2
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31, MARCH 31,
1999 2000 1999 2000 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Sales, net $ 278,579 $ 441,135 $ 426,952 $ 1,244,963 $ 1,866,386
Other -- -- -- -- 1,303
------------ ------------ ------------ ------------ ------------
Total revenues 278,579 441,135 426,952 1,244,963 1,867,689
Cost of sales 148,054 205,565 242,601 627,217 922,150
------------ ------------ ------------ ------------ ------------
Gross Profit 130,525 235,570 184,351 617,746 945,539
Operating expenses:
Research and development (net of
research and development grants in
2000) 375,529 347,563 986,599 872,583 4,725,895
Product development 511,388 174,026 891,155 662,059 3,846,524
Inventory write-down 730,761 -- 730,761 -- 1,341,761
Sales and marketing 864,770 542,977 2,757,381 1,442,068 5,793,529
Acquired (returned) technology from
(to) OMRF -- -- -- (150,000) 958,505
General and administrative 475,947 460,414 1,454,285 2,110,042 6,229,983
------------ ------------ ------------ ------------ ------------
Total operating expenses 2,958,395 1,524,980 6,820,181 4,936,752 22,896,197
------------ ------------ ------------ ------------ ------------
Loss from operations (2,827,870) (1,289,410) (6,635,830) (4,319,006) (21,950,658)
Other income (expense):
Interest and dividend income 149,411 67,952 589,278 278,963 1,908,815
Interest expense (16,914) (8,953) (49,541) (27,797) (223,699)
------------ ------------ ------------ ------------ ------------
Total other income 132,497 58,999 539,737 251,166 1,685,116
------------ ------------ ------------ ------------ ------------
Net loss (2,695,373) (1,230,411) (6,096,093) (4,067,840) (20,265,542)
Preferred stock dividend--Series B -- -- -- -- 11,815
Preferred stock dividend--Series C -- -- -- -- 5,684,449
------------ ------------ ------------ ------------ ------------
Net loss applicable to common stock $ (2,695,373) $ (1,230,411) $ (6,096,093) $ (4,067,840) $(25,961,806)
============ ============ ============ ============ ============
Basic and diluted net loss per common
share $ (.40) $ (.18) $ (.92) $ (.60) $ (8.14)
============ ============ ============ ============ ============
Weighted average common shares
outstanding 6,679,422 6,775,858 6,657,065 6,724,620 3,190,898
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
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ZymeTx, Inc.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
CUMULATIVE
FROM
NINE MONTHS ENDED INCEPTION TO
MARCH 31, MARCH 31,
1999 2000 2000
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (6,096,093) $ (4,067,840) $(20,265,542)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 119,089 148,995 487,276
Provision for doubtful accounts and sales returns -- 112,365 112,365
Inventory write-down 730,761 -- 1,341,761
Acquired (returned) technology and patent costs from (to)
OMRF -- (160,110) 176,312
Accretion of interest 24,041 14,866 162,599
Awards of stock or stock warrants -- 260,819 260,819
Deferred lease rentals 80,398 70,005 311,178
Changes in operating assets and liabilities:
Accounts receivable (294,581) (132,929) (324,967)
Interest receivable on marketable securities 311,841 130,838 (11,530)
Prepaid expenses and other 57,492 (6,489) (54,234)
Inventory (2,667,500) (173,472) (4,738,876)
Accounts payable 92,558 (25,925) 409,253
Accrued salaries, benefits and other (53,900) (38,327) (38,327)
Other liabilities 114,485 74,620 406,295
------------ ------------ ------------
Total adjustments (1,485,316) 275,256 (1,500,076)
------------ ------------ ------------
Net cash used by operating activities (7,581,409) (3,792,584) (21,765,618)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities (18,492,711) (9,112,565) (50,894,730)
Proceeds from maturities of marketable securities 25,179,545 15,719,415 48,916,480
Purchase of property, equipment and leasehold improvements
(162,312) (62,655) (1,014,669)
Purchase of inventory, proprietary technology and other
intangibles -- -- (202,917)
------------ ------------ ------------
Net cash provided (used) by investing activities 6,524,522 6,544,195 (3,195,836)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- 392,510
Payments on notes payable -- (25,143) (361,414)
Purchase of fractional shares of preferred stock -- -- (405)
Proceeds from issuance of common and preferred stock, net of
offering costs -- -- 27,591,572
Exercise of employee stock options 51,000 117,365 184,615
Stock purchased through employee stock purchase plan -- 16,780 25,754
------------ ------------ ------------
Net cash provided by financing activities 51,000 109,002 27,832,632
------------ ------------ ------------
Net increase (decrease) in cash (1,005,887) 2,860,613 2,871,178
Cash and cash equivalents at beginning of period 2,112,552 10,565 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,106,665 $ 2,871,178 $ 2,871,178
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
4
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ZYMETX, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
ZymeTx, Inc. (the "Company" or "ZymeTx") is a development stage biotechnology
company engaged in the discovery, development and commercialization of unique
products for the diagnosis and treatment of viruses. The scientific foundation
for our business is based upon the role of enzymes in the process of viral
infection. Our strategy is to:
o develop diagnostic and therapeutic products for a range of viral diseases;
and
o earn revenues from marketing diagnostic products, continue our diagnostic
research and development program and sustain a comprehensive viral
therapeutic research and development program.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in
accordance with the instructions to Form 10-QSB as prescribed by the Securities
and Exchange Commission ("SEC"). Such financial statements, in the opinion of
management, include all adjustments (consisting only of normal, recurring
items) necessary for their fair presentation in conformity with generally
accepted accounting principles. These financial statements should be read in
conjunction with the financial statements and notes included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1999, for an expanded
discussion of the Company's financial disclosures and accounting policies.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the SEC rules and regulations.
Interim results are not necessarily indicative of results for the full year. As
long as the U.S. influenza market remains the principal market for the
Company's products, the Company's revenues may be concentrated in the second
and third quarters of each fiscal year.
NOTE 2 - NET LOSS PER SHARE
For the three and nine month periods ended March 31, 2000 (and for the
cumulative from inception to March 31, 2000), all unexercised stock options and
warrants granted were antidilutive for purposes of calculating diluted net loss
per share. At March 31, 2000, there were warrants outstanding for the purchase
of an aggregate of 955,925 shares of the Company's common stock exercisable at
prices ranging from $2.31 to $12.40 (an average of $5.10 per share) (Note 3).
The Company has allocated 1,000,000 shares of common stock for issuance under
the
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Employees' and Directors' stock option plans, 801,769 of which remain
unexercised at March 31, 2000 (exercise prices ranging from $1.00 - $6.00 per
share). In the second quarter of fiscal 2000, the Company's Board of Directors
amended the employee's stock option plan. The amended plan provides that future
options granted will vest 25% immediately, 25% after one year and the final 50%
vest after two years. On November 17, 1999, the Board of Directors approved the
ZymeTx, Inc. Consultants Stock Option Plan, and a total of 100,000 options are
reserved for issuance under the plan, pending approval at the next shareholders
meeting. Thirty thousand of these options were outstanding at March 31, 2000
(Note 3).
For additional disclosures regarding the stock option plans, see Note 6 to the
June 30, 1999 financial statements filed on Form 10-KSB.
NOTE 3 - STOCK OPTIONS, WARRANTS AND AWARDS
During the nine month period ended March 31, 2000, the Company issued 165,000
warrants and 30,000 Consultant Stock options (collectively, the "Service
Awards") to third parties in exchange for certain marketing and administrative
services. The Company expensed approximately $112,000 of the fair value related
to the Service Awards for services received by the Company during the third
quarter (approximately $171,000 expensed for the nine months ended March 31,
2000) and deferred approximately $188,000 of the fair value of the service
awards at March 31, 2000. The deferred value of the Service Awards will be
amortized to marketing expenses over the term that services are received by the
Company. Under the terms of the grants, the Service Awards generally have a
contractual life of 5 to 6 years and vest 50% on the date of grant and 50%
after one year.
In conjunction with the issuance of the warrants described above, the Company
entered into an agreement with the provider of marketing services. Under the
terms of the contract, the marketer may earn up to $260,000 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
March 31, 2000, no expense has been recognized associated with this contingent
marketing provision of the agreement as it is not presently probable that such
contingent consideration will be earned.
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 the fiscal quarter ended December 31,
1999. 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
established by the Board of Directors, $25,000 of which has been recognized in
the nine month period ended March 31, 2000.
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NOTE 4 - NOTE PAYABLE TO STOCKHOLDER
In the three months ended December 31, 1999, the Company returned certain
technology to OMRF. In exchange for the returned technology, OMRF reduced the
outstanding principal balance of the note payable from the Company. The
reduction in the outstanding note payable balance was based on the original
costs of the in-process technology of $150,000 and certain patent costs
incurred since the acquisition.
NOTE 5 - COMPREHENSIVE INCOME (LOSS)
The Company presents comprehensive income in accordance with Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
The provisions of SFAS 130 require the Company to classify items of other
comprehensive income in the financial statements and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. Other
comprehensive loss for the three and nine month periods ended March 31, 1999
and 2000, are detailed below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(2,695,373) $(1,230,411) $(6,096,093) $(4,067,840)
Unrealized gains (losses) on
investments available for sale 8,510 4,661 5,939 (4,626)
----------- ----------- ----------- -----------
Comprehensive loss $(2,686,863) $(1,125,750) $(6,090,154) $(4,072,466)
=========== =========== =========== ===========
</TABLE>
NOTE 6 - COMMITMENTS
In September 1999, the Company amended its lease agreement related to its
office space. As a result of the amendment, the Company was released from the
rental liability related to approximately 10,000 square feet over the remaining
lease term. In connection with this amendment, the Company expensed a total of
$78,267 in the three months ended September 30, 1999.
In November 1999, the Company subleased a portion of its office space to a
third party. In connection with this sublease which began in February 2000, the
Company realized a reduction of net rental expense totaling $16,310. In May
2000, the Company subleased additional space to the same tenant beginning July
2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
From time to time, we may publish forward-looking statements relating to
certain matters, including anticipated financial performance, business
prospects, and the progress and goals for our research and development program,
marketing strategies and other similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. To comply with the terms of that safe harbor, a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements. In addition, we disclaim any intent or obligation to update those
forward-looking statements.
When used in this discussion, the words "believes," "anticipated" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements that speak only
as of the date hereof. We undertake no obligation to publicly release the
result of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
OVERVIEW
ZymeTx, Inc. is a development stage biotechnology company engaged in the
discovery, development and commercialization of unique products for the
diagnosis and treatment of viruses. The scientific foundation for our business
is based upon the role of enzymes in the process of viral infection. Our
strategy is to:
o develop diagnostic and therapeutic products for a range of viral diseases;
and
o earn revenues from marketing diagnostic products, continue our diagnostic
research and development program and sustain a comprehensive viral
therapeutic research and development program.
ViraZyme(R), our core technology, exploits the subtle structural differences
and characteristics of enzymes to create viral diagnostic and therapeutic
products. Our diagnostic technology is a platform for proprietary two-part
compounds that will split when the compound contacts a specific viral target
site (an enzyme). As a result of this split, one part of the compound reveals
itself in formats easily detected without instrumentation, permitting the user
to determine whether the virus is present. For therapeutic products, the
technology platform uses modified versions of the diagnostic compounds that
bind to specific viral enzymes to interrupt the replication cycle.
The initial viral targets of our diagnostic products are respiratory infections
including influenza A and influenza B (point of care diagnostic ZstatFlu),
respiratory syncytial virus (commonly called RSV), parainfluenza (laboratory
diagnostic ViraStat) and adenovirus. There are three genera of influenza virus,
A, B, and C; A and B are most common to humans, while C rarely causes
significant infection. RSV infects humans, usually children, which is an
important cause of acute respiratory disease. Adenovirus can cause respiratory
disease, keratoconjunctivitis, diarrhea, cystitis and other diseases.
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ZymeTx was incorporated under the laws of the State of Delaware in 1994.
ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM) are trademarks owned or licensed by
ZymeTx.
CURRENT EVENTS
In January 2000, the following items were reported:
o We announced that RJ Falkner & Company had been retained to develop and
implement a pro-active investor relations program.
o The National Flu Surveillance Network (NFSN) announced it had enrolled
more than 800 physician surveillance sites, which encompasses more than
3,600 physicians participating though these sites.
o We announced that Physician Sales & Service Inc. (PSS), the nation's
leading national physician-office medical supply distributor, had entered
into an agreement with us to market ZstatFlu in the United States.
o The NFSN announced that it had collaborated with The Weather Channel(R)
website, weather.com, to report influenza outbreaks across the United
States via the weather.com site.
o We reported that fiscal year-to-date revenues had exceeded $1 million,
derived from the rapid growth in sales of ZstatFlu
o We announced the signing of an exclusive distribution agreement which
authorized Launch Diagnostics Ltd to sell ZstatFlu in the United Kingdom
and the Republic of Ireland.
o We announced operating results for the second quarter and first half of
fiscal year 2000.
In February 2000 the following items were reported:
o The NFSN reported a significant number of states in the U.S. were
continuing to see a strong increase in new influenza cases.
o The NFSN unveiled a new version of its www.fluwatch.com with the
capability of pinpointing and tracking influenza outbreaks on a
county-by-county level in every state.
o We announced that Provider Select, representing over 41,000 physicians
across the country, had added ZstatFlu to its nationwide program.
In March 2000 the following items were reported:
o We announced the signing of an exclusive distribution agreement which
authorized Nichirei Corporation to sell ZstatFlu in Japan.
PLAN OF OPERATIONS
Our plan of operations for the current year is to market ZstatFlu to the point
of care, acute care and hospital markets. Product development expenses will be
focused toward further improvement to ZstatFlu.
We believe we have adequate cash and marketable securities available for sale,
which with the fiscal 2000 level of net sales contributions are expected to fund
the planned operations at least through March 31, 2001. We believe that the
introduction of influenza therapeutics by other pharmaceutical companies have
enhanced our sales of ZstatFlu for the fiscal 2000
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influenza season. Diagnostic sales this year contributed to a decrease in
losses from operations through the third quarter of fiscal 2000. We expect
fiscal 2001 diagnostic sales to increase significantly given the expected
growth of influenza therapeutics and the companion need for an accurate and
rapid diagnostic. However, should fiscal 2001 diagnostic sales not
significantly increase, we will likely require additional working capital to
sustain operations beyond March 31, 2001.
RESULTS OF OPERATIONS
NET LOSS
For the three and nine months ended March 31, 2000, we recognized a net loss of
$1.2 million and $4.1 million, respectively. Net loss applicable to common
stock for the three and nine months ended March 31, 2000 was $.18 and $.60 per
basic and diluted share, respectively. Sales of ZstatFlu increased
significantly during the 1999/2000 influenza season. The decrease in net loss
compared to the prior year's net loss is due primarily to increased sales and a
reduction in expenses as discussed below.
PRODUCT SALES
For the three and nine months ended March 31, 2000, we recognized significantly
increased revenues from sales of our primary diagnostic product as compared to
the comparable three and nine months ended March 31, 1999. This increase is
attributed to increased usage of ZstatFlu by physicians and expansion of our
national influenza surveillance program as well as the complementary
introduction of influenza therapeutics by third parties.
RESEARCH AND DEVELOPMENT
Research and development spending for the three and nine months ended March 31,
2000, totaled $.3 million and $.9 million, respectively. This represents a
decrease of 7% and 12%, respectively, from the comparable three and nine months
ended March 31, 1999. This decrease is due primarily to decreased contract
research costs and the reimbursement of research expenditures of $105,549
during the nine months ended March 31, 2000, from the Oklahoma Center for the
Advancement of Science and Technology.
PRODUCT DEVELOPMENT
Product development costs expended in the manufacturing and production of our
diagnostic product totaled $.2 million and $.7 million for the three and nine
months ended March 31, 2000, respectively. This represents a 66% decrease and a
26% decrease, respectively, from the comparable three and nine months ended
March 31, 1999. The decrease is due primarily to reduced personnel costs.
SALES AND MARKETING
Sales and marketing expenses totaled $.5 million and $1.4 million for the three
and nine months ended March 31, 2000, respectively. These expenditures
represent a 37% and 48% decrease, respectively, from the comparable three and
nine months ended March 31, 1999. This decrease is due to the elimination of
costs related to a contract sales organization leased in fiscal year 1999
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as well as reduced advertising costs, partially offset by costs (cash and
non-cash) of employing a contract marketing company in fiscal 2000.
GENERAL AND ADMINISTRATIVE
General and administrative costs totaled $.5 million and $2.1 million for the
three and nine months ended March 31, 2000, which represents a 3% decrease and
45% increase, respectively, from the comparable three and nine months ended
March 31, 1999. The increase was principally due to severance and other
compensation expense totaling $.3 million related to an executive services
agreement for the Company's former Chief Executive Officer entered into in the
first quarter of fiscal 2000 and salary expense in the second quarter of fiscal
2000 due to a stock award totaling $.2 million granted to the Company's current
Chief Executive Officer.
OTHER INCOME (EXPENSE)
Interest and dividend income totaled $.1 million and $.3 million, respectively,
for the three and nine months ended March 31, 2000, compared to $.2 million and
$.6 million for the comparable three and nine months ended March 31, 1999. This
decrease of 55% and 53% for the three and nine months ended March 31, 2000,
compared to the comparable periods in 1999, respectively, resulted from reduced
earnings on cash and cash equivalents.
LIQUIDITY AND CAPITAL RESOURCES
We have relied principally on equity financing to fund our operations and
capital expenditures. Working capital at March 31, 2000, was $6.3 million, as
compared to $9.6 million at June 30, 1999. The decrease in working capital is
principally due to cash losses from operating activities during the nine months
ended March 31, 2000.
Although our sales of diagnostic products were higher in fiscal 2000 versus
fiscal year 1999 and our comparative net loss was reduced, the company is still
sustaining net losses. It is expected that the net loss will be greater than
that reported through March 31, 2000 for the fiscal year ending June 30, 2000
given the seasonal lack of influenza product sales in the fourth quarter.
Management expects that the trend of increasing diagnostic sales will continue
at greater rate in fiscal 2001 due to the advent of influenza therapeutics and
the corresponding need for a highly accurate, rapid influenza diagnostic.
Should fiscal 2001 diagnostic sales not increase significantly to a level that
would realize gross profits necessary to offset operating expenses, we will
likely require additional financing to meet operational needs beyond March 31,
2001. Such needs would include the expenditure of substantial funds to continue
and expand research and development activities, conduct existing and planned
pre-clinical studies and human clinical trials and to support the increasing
working capital requirements of a growing commercial infrastructure including
manufacturing, sales and marketing. As a result, we anticipate pursuing various
financing alternatives such as collaborative arrangements and a secondary
public offering or private placements of our securities. If such alternatives
are not available, we may be required to defer or restrict certain commercial
activities, delay or eliminate expenditures for certain of our potential
products under development or to license third parties to commercialize
products or technologies that we would otherwise seek to develop or
commercialize in-house.
The Company has a promissory note outstanding relating to a license of
intellectual property from OMRF. The note had an initial principal amount of
$.4 million bearing interest at 8% per year. In July, 1999, we reached an
agreement with OMRF to reduce the outstanding balance to reflect OMRF's
reimbursement of the license fee and other specific expenses related to the
return of a technology license and re-amortize the remaining face amount of the
note totaling $215,258
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over the same term and interest rate as the original note (see Note 4 - Note
Payable to Stockholder). The new terms require quarterly principal and interest
payments, which began November 15, 1999, of $16,753 and continuing thereafter
until the note is repaid in full.
Future manufacturing expenses for the Company's diagnostic products will depend
on market acceptance of such products. Currently, the Company has sufficient
raw materials and finished goods inventory to supply anticipated sales for the
2000/2001 North American influenza season.
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS (NON-IT)
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of our computer
programs or hardware that have data-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operation, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company has not experienced any significant problems related to the Year
2000 issue and we continue to assess our software and hardware systems to
evaluate if they are properly utilizing dates beyond December 31, 1999. In
addition, we believe that the Year 2000 does not present a material exposure as
it relates to our products.
We currently have no system interfaces directly with our significant
third-party vendors. We have queried our significant suppliers and
subcontractors that do not share information systems with us (external agents).
To date, we have gathered information from our external agents and are not
aware of any external agent with a Year 2000 issue that would materially impact
our results of operations, liquidity, or capital resources.
12
<PAGE> 14
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; WORKING CAPITAL NEEDS
For fiscal 1998 and fiscal 1999, we incurred net losses of $4.6 million and $8.6
million respectively. For the nine months ended March 31, 2000, we incurred a
net loss of $4.1 million. As of March 31, 2000, our working capital was $6.3
million. We believe that our existing working capital and net sales
contributions similar to fiscal 2000 will meet our needs for at least the next
12 months and we have implemented cost reductions in an effort to preserve our
working capital. We anticipate that the remaining resources will be dedicated to
the enhancement of the ZstatFlu diagnostic product.
We believe the introduction of influenza therapeutics by other pharmaceutical
companies have enhanced and will continue to enhance the sales of ZstatFlu.
However, should expected increases in sales not occur, we will likely require
additional working capital to sustain operations beyond March 31, 2001. If at
that time 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. Additionally, our ability to conduct research and
development beyond that planned for fiscal 2000 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, make improvements in our existing
product line, or sustain operations beyond March 31, 2001.
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, while not using the Company's technology, each
have introduced influenza diagnostic products during 1999 that are similar in
performance and compete directly with ZstatFlu.
NO ASSURANCE OF MARKET ACCEPTANCE
Although we have recognized substantial sales of ZstatFlu during this fiscal
year, we cannot assure that ZstatFlu or our other diagnostic products will
continue to achieve higher levels of market acceptance during the 2000/2001
influenza season. In addition, there can be no assurance that any of our other
potential products, if approved or cleared by the FDA, will achieve market
acceptance. The degree of market acceptance of our products will depend upon a
number of factors, including the receipt and timing of regulatory approvals or
clearances of companion therapeutic products, the availability of third-party
reimbursement and the establishment and demonstration in the medical community
of the clinical safety, efficacy and cost-effectiveness of our products and
their advantages over existing technologies and products. We cannot assure we
will be able to successfully market our potential products even if such
products perform successfully in clinical trials. Furthermore, we cannot assure
that physicians or the medical community in general will accept and utilize
ZstatFlu or any other products currently cleared or under development by
ZymeTx.
13
<PAGE> 15
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF THE COMPANY'S 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 2000, we have concentrated our efforts on
completing developments of improvements to ZstatFlu. We plan to devote greater
efforts to the development of our therapeutic and other diagnostic products in
fiscal 2001 and beyond if capital resources are available to justify
expenditures for those products.
NO MANUFACTURING CAPABILITY; RELIANCE ON THIRD-PARTY MANUFACTURERS
We have limited experience in product manufacturing and currently have no
internal facility capable of manufacturing products on the scale necessary for
adequate market penetration. Because we do not currently have a 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 for future influenza seasons could have a material adverse
effect on ZymeTx.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY
Our success will depend, in part, on our ability to obtain patents and license
patent rights, to maintain trade secret protection and to operate without
infringing on the rights of other patent holders. The patent position of
biotechnology firms for such types of patents generally is highly uncertain and
involves complex legal and factual issues. Certain of our competitors may have
filed applications for or have been issued patents and may obtain additional
patents and other proprietary rights relating to virus substrates, chromogens,
inhibitors or processes competitive with our patents. The ultimate scope and
validity of such patents are presently unknown. If the courts uphold existing
or future patents obtained by competitors as valid, we may be required to
obtain licenses from such competitors. The extent to which such licenses will
be available to us and the costs thereof 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 at such time as 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 certain standard or to a prior cleared methodology. The testing,
manufacturing, labeling, distribution,
14
<PAGE> 16
marketing and advertising of therapeutic products are subject to extensive
regulation by governmental regulatory authorities in the U.S. and other
countries. The FDA and comparable agencies in foreign countries impose
substantial requirements on the introduction of new pharmaceutical products
through lengthy and detailed clinical testing procedures and other costly and
time-consuming compliance procedures. 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. ZymeTx and its third-party manufacturers
are subject to Good Manufacturing Practices (GMP) 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 GMP regulations. Although our employees have experience with
GMP 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 GMP 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, entails 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 secured
limited 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 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
15
<PAGE> 17
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.
16
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS:
Use of Proceeds. On November 3, 1997, the Company closed an initial
public offering (the "Initial Public Offering") of 2,645,000 shares (the
"Shares") of Common Stock (inclusive of the sale of Shares pursuant to the
exercise of an underwriter overallotment option to purchase 345,000 Shares).
The Shares were offered for sale at a price of $8.00 per share pursuant to a
Registration Statement on Form SB-2 (No. 333-33563) (the "Registration
Statement") which was declared effective October 29, 1997. Capital West
Securities, Inc., Millennium Financial Group, Inc. and ComVest Partners, Inc.
(the "Underwriters") acted as the managing underwriters of the Offering.
Proceeds were used by the Registrant for each of the purposes
indicated below:
<TABLE>
<S> <C>
Direct or indirect payments to directors,
officers, general partners of the Registrant
or their associates; to persons owning ten Direct or
percent or more of any class of equity indirect
securities of the issuer; and to affiliates of payments to
the Registrant others
-------------------------------------------------- ------------
Temporary investments $- $ 4,864,000
Inventory 3,463,000
Equipment and Furniture 1,015,000
Operating expenses 8,995,000
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
b. Reports on Form 8-K: None.
17
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ZYMETX, INC., a Delaware Corporation
------------------------------------
(Registrant)
/s/ G. Carl Gibson
------------------------------------
G. Carl Gibson
Principal Financial and Accounting Officer
Date: May 12, 2000
18
<PAGE> 20
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule. (Exhibit 27 is submitted as
an exhibit only in the electronic format of this
Quarterly Report on Form l0-QSB submitted to the
Securities and Exchange Commission).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,871,178
<SECURITIES> 1,993,116
<RECEIVABLES> 267,932
<ALLOWANCES> 55,330
<INVENTORY> 3,463,403
<CURRENT-ASSETS> 7,181,886
<PP&E> 1,014,669
<DEPRECIATION> 412,227
<TOTAL-ASSETS> 9,469,334
<CURRENT-LIABILITIES> 842,412
<BONDS> 414,806
0
0
<COMMON> 6,828
<OTHER-SE> 34,163,758
<TOTAL-LIABILITY-AND-EQUITY> 9,469,334
<SALES> 1,244,963
<TOTAL-REVENUES> 1,244,963
<CGS> 627,217
<TOTAL-COSTS> 627,217
<OTHER-EXPENSES> 4,936,752
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,797
<INCOME-PRETAX> (4,067,840)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,067,840)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,067,840)
<EPS-BASIC> (0.60)
<EPS-DILUTED> (0.60)
</TABLE>
