UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
or
[ ] 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: 1-11824
ZONAGEN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive office)
(281) 367-5892
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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
the past 90 days.
Yes X No
----- -----
As of November 8, 1996 there were outstanding 5,151,730 shares of Common Stock,
par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended September 30, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
---------------------
Item 1 Financial Statements................................................................. 3
Consolidated Balance Sheets: September 30, 1996 (Unaudited)
and December 31, 1995................................................................ 4
Consolidated Statements of Operations: (Unaudited) For the three months
ended September 30, 1996 and 1995, nine months ended September 30, 1996
and 1995 and from Inception (August 20, 1987) through September 30, 1996............. 5
Consolidated Statements of Cash Flows: (Unaudited) For the three months
ended September 30, 1996 and 1995, nine months ended September 30, 1996
and 1995 and from Inception (August 20, 1987) through September 30, 1996............. 6
Notes to Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 12
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.................................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................................... 16
SIGNATURES......................................................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further information, refer to
the financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
3
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 9,934,104 $ 4,189,858
Accounts receivable 420,439 327,975
Accrued interest receivable 1,980 20,185
Product inventory 170,500 230,380
Deposits and other current assets 645,337 49,047
------------- ------------
Total Current Assets 11,172,360 4,817,445
Lab equipment, furniture and leasehold
improvements, net of accumulated depreciation
and amortization of $676,256 and $601,792, respectively 313,642 233,315
Excess of cost over fair value of tangible assets acquired,
net of accumulated amortization of $393,704 and $240,845,
respectively 1,055,705 1,153,939
Other assets, net of accumulated amortization of
$102,668 and $67,532, respectively 563,858 446,856
------------- ------------
$ 13,105,565 $ 6,651,555
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,740,742 $ 660,673
Accrued expenses 386,749 499,631
Notes payable 14,604 -
------------- ------------
Total Current Liabilities 2,142,095 1,160,304
------------- ------------
Long term notes payable 86,106 66,125
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
2,305,000 and 4,230,000 shares authorized respectively,
non issued and outstanding - -
Series A Convertible Preferred Stock, $.001 par value,
770,000 shares authorized, 227,034
and 504,850 shares issued and outstanding,
respectively 227 505
Series B Convertible Preferred Stock, $.001 par value,
1,925,000 and no shares authorized respectively,
1,137,750, and no shares issued and outstanding,
respectively 1,138 -
Common Stock, $.001 par value,
20,000,000 shares authorized, 5,130,446 and
4,098,124 shares issued and outstanding, respectively 5,130 4,098
Additional paid-in capital 33,382,844 22,473,074
Deferred compensation (128,793) (112,500)
Deficit accumulated during the development stage (22,383,182) (16,940,051)
------------- ------------
10,877,364 5,425,126
------------- ------------
$ 13,105,565 $ 6,651,555
============= ============
The accompanying notes ae an integral part of these consolidated financial statements.
4
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, THROUGH
1996 1995 1996 1995 SEPTEMBER 30, 1996
------------- ------------- ------------- ------------- ------------------
REVENUES
Product sales $ 686,045 $ 715,199 $ 2,065,565 $ 2,256,368 $ 5,704,844
Licensing fee - - - - 250,000
Interest income 18,810 4,929 106,155 46,154 727,948
------------- ------------- ------------- ------------- ------------------
Total Revenues 704,855 720,128 2,171,720 2,302,522 6,682,792
COST AND EXPENSES
Cost of products sold 463,706 514,073 1,419,821 1,693,389 4,151,990
Research and development 1,916,249 516,894 4,169,515 1,812,698 15,001,251
Sales, general and administrative 629,584 441,796 1,864,975 1,535,762 8,752,701
Interest expense, financing costs
and amortization of intangibles 52,375 49,068 160,540 164,404 796,649
------------- ------------- ------------- ------------- ------------------
Total Costs and Expenses 3,061,914 1,521,831 7,614,851 5,206,253 28,702,591
Loss from continuing operations (2,357,059) (801,703) (5,443,131) (2,903,731) (22,019,799)
Loss from discontinued operations - - - - (288,104)
Loss on disposal - - - - (75,279)
------------- ------------- ------------- ------------- ------------------
Net Loss $ (2,357,059) $ (801,703) $ (5,443,131) $ (2,903,731) $ (22,383,182)
------------- ------------- ------------- ------------- ------------------
Loss per common and common
equivalent share $ (0.47) $ (0.21) $ (1.14) $ (0.76)
============= ============= ============= =============
Weighted average common
and common equivalent shares 5,031,243 3,838,816 4,780,686 3,834,544
The accompanying notes are an integral part of these consolidated
financial statements.
5
ZONAGEN, INC
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, THROUGH
1996 1995 1996 1995 SEPTEMBER 30, 1996
------------ ------------- ------------ ------------ ------------------
Operating Activities
Net loss $ (2,357,059) $ (801,703) $ (5,443,131) $ (2,903,731) $ (22,383,182)
Loss on disposal of
discontinued operations - - - - 75,279
Adjustments to reconcile
net loss to net cash
used in
operating activities
Financing costs - - - - 315,984
Depreciation and
amortization 95,653 69,769 262,459 239,731 1,123,095
Noncash expenses related
to option transactions 20,192 9,375 284,805 104,109 359,825
Series B Preferred Stock
issued for consulting
services - - - - 17,999
Changes in operating
assets and liabilities
(net of effects of
purchase of businesses in
1988 and 1994):
(Increase) decrease in
receivables (94,761) (128,867) (74,259) 42,772 (108,328)
(Increase) decrease in
product inventory 73,830 57,861 59,880 (21,147) 111,028
(Increase) in deposits
and other
current assets (422,411) (101,788) (596,290) (119,262) (612,998)
Increase in accounts
payable and
accrued expenses 438,886 267,870 967,187 509,386 1,882,490
------------ ------------- ------------ ------------ ------------------
Net cash used in operating
activities (2,245,670) (627,483) (4,539,349) ( 2,148,142) (19,218,808)
Investing Activities
Capital expenditures (53,698) (24,709) (154,791) ( 15,041) (883,153)
Purchase of technology
rights and other
assets 154,455 - (206,760) (85,148) (674,131)
Cash acquired in purchase
of FTI - - - - 2,695
Proceeds from sales of
subsidiary, less $12,345
for operating losses during
1990 phase-out period - - - - 137,646
Increase in net assets
held for disposal - - - - (212,925)
------------ ------------- ------------ ------------ ------------------
Net cash provided by (used
in) investing
activities 100,757 (24,709) (361,551) (100,189) (1,629,868)
Financing Activities
Proceeds from issuance of
Common Stock 4,073 - 870,706 13,939 10,542,919
Proceeds from issuance of
Preferred Stock 9,740,060 - 9,739,855 - 19,060,817
Proceeds from issuance of
notes payable - - 39,625 - 2,878,306
Principal payments on
notes payable (4,616) - (5,040) (120,214) (1,699,262)
------------ ------------- ------------ ------------ ------------------
Net cash provided by (used
in) financing
activities 9,739,517 - 10,645,146 (106,275) 30,782,780
Net increase (decrease) in
cash and cash equivalents 7,594,604 (652,192) 5,744,246 (2,354,606) 9,934,104
Cash and cash equivalents
at beginning of
period 2,339,500 745,356 4,189,858 2,447,770 -
------------ ------------- ------------ ------------ ------------------
Cash and cash equivalents
at end of period $ 9,934,104 $ 93,164 $ 9,934,104 $ 93,164 $ 9,934,104
============ ============= ============ ============ ==================
The accompanying notes are an integral part of these consolidated financial statements.
6
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc. (the "Company") was organized on August 20, 1987 ("Inception") and
is engaged in the development of technologies targeting conditions or diseases
associated with the human reproductive system. These technologies include the
development of products for the oral treatment of male impotency
("Vasomax(TM)"), alleviation of urological diseases such as benign prosthetic
hyperplasia ("BPH") and prostate cancer, and the diagnosis and treatment of
female conditions such as endometriosis. The Company is also active in the
research of improved methodologies to enhance fertility as well as new
approaches to contraception and prophylaxis of sexually transmitted disease. The
Company currently has sales through its subsidiary, Fertility Technologies, Inc.
("FTI"), a marketing and distribution organization focused on
obstetrics/gynecology, fertility specialists and urologists. The Company's goal
is to become a leader in the area of human reproductive healthcare management by
providing a full array of innovative products and services that improve patient
outcomes and cost management. The Company's growth strategy is to develop
products based on its own research as well as in-licensing existing and late
stage development products and technologies focused in the area of human
reproductive healthcare. From Inception through September 30, 1996, the Company
has been primarily engaged in research and development and is still in the
development stage.
The Company requires substantial capital for research, product development and
market development activities. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon many
factors. The Company's business is subject to significant risks consistent with
biotechnology companies that are developing products for human therapeutic use.
These risks include, but are not limited to, uncertainties regarding research
and development, access to capital, obtaining and enforcing patents, receiving
regulatory approval and competition with other biotechnology and pharmaceutical
companies. Other than through FTI, the Company has not generated revenues from
operations nor is there any assurance of significant revenues in the future.
In September 1996, the Company authorized and designated 1,925,000 shares of
Series B Convertible Preferred Stock ("Series B Preferred Stock"). On September
30, 1996, the Company completed an initial closing of a private placement of its
Series B Preferred Stock in which it sold 1,137,750 shares at a price of $10.00
per share. Net proceeds to the Company from the initial closing of the private
placement were approximately $9.7 million. On October 11, 1996, the Company
completed the final closing of its private placement of Series B Preferred
Stock, in which it sold an additional 554,750 shares of Series B Preferred Stock
at a price of $10.00 per share. Net proceeds from the final closing of the
private placement were approximately $4.8 million. The aggregate offering
consisted of 1,692,500 shares of Series B Preferred Stock with net proceeds of
approximately $14.5 million.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical
7
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
studies and clinical trials of its products, and to commence sales and marketing
efforts if FDA and other regulatory approvals are obtained. The Company expects
that its existing capital resources will be sufficient to fund its capital
requirements through 1997, based on its current clinical development plan for
Vasomax(TM), its oral treatment for male impotency. The Company will need to
raise substantial additional capital to fund its operations. The Company's
capital requirements will depend on many factors, including the problems,
delays, expenses and complications frequently encountered by development stage
companies; the progress of the Company's research, development and clinical
trial programs; the extent and terms of any future collaborative research,
manufacturing, marketing or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and marketing
programs; the cost of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions or the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to the Company's products can be conducted at projected
costs. There can be no assurance that changes in the Company's research and
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no assurance
that any such funding will be available to the Company on favorable terms or at
all. If adequate funds are not available, the Company may be required to certain
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.
NOTE 2 -- STOCKHOLDERS' EQUITY
Preferred Stock
Series A Convertible Preferred Stock
Through September 30, 1996, holders of Series A Convertible Preferred Stock
("Series A Preferred Stock") had converted 371,819 shares of Series A Preferred
Stock into 1,025,675 shares of Common Stock. As of September 30, 1996, there
were 227,034 shares of Series A Preferred Stock outstanding and convertible into
626,275 shares of Common Stock. On November 1, 1996, the Company
8
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
exercised its right to cause the mandatory conversion of the Series A Preferred
Stock, with the result that all such shares not previously converted will be
converted into Common Stock effective November 25, 1996.
Series B Convertible Preferred Stock
In September 1996, the Company authorized and designated 1,925,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock"). On
September 30, 1996, the Company completed an initial closing of a private
placement for its Series B Preferred Stock in which it sold 1,137,750 shares at
a price of $10.00 per share. Net proceeds to the Company from the initial
closing of the private placement were approximately $9.7 million. On October 11,
1996, the Company completed the final closing of its private placement of Series
B Preferred Stock, in which it sold an additional 554,750 shares of Series B
Preferred Stock at a price of $10.00 per share. Net proceeds from the final
closing of the private placement were approximately $4.8 million. The aggregate
offering consisted of 1,692,500 shares of Series B Preferred Stock with net
proceeds of approximately $14.5 million. In connection with the closing of the
private placement, the Company issued warrants for 169,250 shares of Series B
Preferred Stock to the placement agent for the private placement.
Each share of Series B Preferred Stock is convertible at the option of the
holder into shares of Common Stock at an initial conversion price of $6.625 per
share. The conversion price is subject to adjustment on October 11, 1997 (the
"Reset Date") if the average daily trading price of the Common Stock for 30 days
immediately preceding the Reset Date (the "Twelve Month Trading Price") is less
than 130% of the conversion price (a "Reset Event"). Upon a Reset Event, the
then applicable conversion price of the Series B Preferred Stock will be reduced
to equal the greater of (i) the Twelve Month Trading Price divided by 1.3 and
(ii) 50% of the then-applicable conversion price. The Company has the right at
any time after the Reset Date to cause the Series B Preferred Stock to be
converted into Common Stock if the closing price of the Common Stock exceeds
150% of the conversion price for at least 20 days on any 30 consecutive trading
day period. Holders of the Series B Preferred Stock are entitled to a
liquidation preference of $13.00 per share upon the liquidation of the Company,
the disposition of all or substantially all of its assets and certain mergers or
consolidations in which the Company is not the surviving entity. Holders of
Series B Preferred Stock are entitled to vote as if their shares had been
converted into Common Stock and are entitled to approve (i) additional
securities of the Company that are senior to or on parity with the Series B
Preferred Stock, (ii) changes to the rights and preferences of the Series B
Preferred Stock and (iii) declaration of dividends on junior stock or
repurchases of securities of the Company.
Through November 14, 1996, no shares of Series B Preferred Stock had been
converted into shares of Common Stock.
9
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
Common Stock
During the third quarter of 1996, the Company issued an aggregate of 1,000
shares of Common Stock to former employees upon the exercise of stock options
for total proceeds of $4,000 at a price of $4.00 per share. During the first
quarter of 1996, the Company issued an aggregate 16,500 shares of Common Stock
to an employee, a consultant and a former board member upon the exercise of
stock options for total proceeds of $68,200 at prices ranging from $0.43 to
$5.88 per share.
On January 12, 1996 the Company issued 5,000 shares of Common Stock to a
consultant as compensation for services through June 1996. At that date, the
Company's stock was trading at $9.875 per share. As a result, the Company has
recorded this transaction as deferred compensation and will record an expense of
approximately $49,000 on a pro rata basis over the service period.
On April 13, 1996, the Company issued 19,512 shares of unregistered Common Stock
to Gamogen, Inc. ("Gamogen") for the second and final purchase payment relating
to the original Assignment Agreement entered into on April 13, 1994 in order to
retain the rights for the Company's treatment for male impotency, Vasomax(TM).
The Company recorded a research and development expense of approximately
$200,000 in the Company's financial statements in connection with the issuance
of such shares.
Warrants
During the first quarter of 1996, 219,776 warrants were exercised for total
proceeds of $798,000.
During the second quarter of 1996, 4,186 shares of Common Stock were issued in
exchange for the cashless exercise of a warrant originally issued with the
Company's private placement of Series A Preferred Stock closed in October 1995.
NOTE 3 _ AGREEMENTS
On June 7, 1996, Fertility Technologies, Inc. ("FTI"), the Company's wholly
owned subsidiary, purchased all of the assets of Zygotek Systems, Inc.
("Zygotek"), a Massachusetts-based company that manufactures and distributes
proprietary products and distributes products manufactured by others to diagnose
and facilitate the treatment of reproductive disorders. The aggregate purchase
price of such assets was approximately $55,000.
10
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 4 -- SUBSEQUENT EVENT
The Company exercised its right to cause the mandatory conversion of the Series
A Preferred Stock on November 1, 1996, with the result that all such shares not
previously converted will be converted into Common Stock effective November 25,
1996. See Note 2.
The Company completed the final closing of its private placement of Series B
Preferred Stock on October 11, 1996. See Note 2.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here.
DESCRIPTION OF BUSINESS
Zonagen, Inc. (the "Company") was organized on August 20, 1987
("Inception") and is engaged in the development of technologies targeting
conditions or diseases associated with the human reproductive system. These
technologies include the development of products for the oral treatment of male
impotency ("Vasomax(TM)"), alleviation of urological diseases such as benign
prostatic hyperplasia and prostate cancer, and the treatment of female
conditions such as endometriosis. The Company is also active in the research of
improved methodologies to enhance fertility as well as new approaches to
contraception and prophylaxis of sexually transmitted disease. The Company
currently has sales through its subsidiary, Fertility Technologies, Inc.
("FTI"), a marketing and distribution organization focused on
obstetrics/gynecology and fertility specialists. The Company's goal is to become
a leader in the area of human reproductive healthcare management by providing a
full array of innovative products and services that improve patient outcome and
cost management. The Company's growth strategy is to develop products based on
its own research as well as in-licensing existing and late stage development
products and technologies focused in the area of human reproductive healthcare.
From Inception through September 30, 1996, the Company has been primarily
engaged in research and development and is still in a development stage.
The Company has implemented certain changes in the way that its
administrative function is handled by consolidating the administration
requirements of its subsidiary, FTI with its corporate headquarters. These
changes occurred primarily in the quarter ended June 30, 1996. Included in this
change was the reduction of rental space and approximate two year lease
extension of its East coast rental office and the elimination of a second rental
property on the West coast whose lease expired in the first quarter of 1996. In
addition, the Company expanded its existing corporate rental space to
accommodate the administrative consolidation and extended the lease on this
space for approximately three years.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996 and 1995
Product sales were generated through the Company's wholly owned
subsidiary, FTI. Revenue from product sales for the quarter ended September 30,
1996 was $686,000, a 4% decrease from $715,000 for the same period in the
previous fiscal year. This decrease was primarily due to a change in the
relationship with a manufacturer from a distribution relationship whereby FTI
recognized 100% of revenue and related cost of goods sold to a sales agent
relationship whereby only commissions are recognized and an increase in
backorders expected to be shipped in the fourth quarter as compared to the
corresponding prior year period.
12
Interest income was $18,800 for the quarter ended September 30, 1996, an
increase of $13,900 from $4,900 for the same period in the previous fiscal year.
This increase was due to the Company carrying higher average cash balances
resulting from the sale of Series A Preferred Stock in the fourth quarter of
1995 and exercise of stock warrants and stock options in the first quarter of
1996.
Cost of sales as a percentage of sales for the quarter ended September
30, 1996 was 68% as compared to 72% the corresponding prior year period. This
decrease is primarily due to the elimination of certain less profitable products
and the change in the relationship of a specific product line with a
manufacturer from a distribution relationship whereby FTI recognized 100% of
revenue and related cost of goods sold to a sales agent relationship whereby
only commissions are recognized.
Research and development expenses increased by $1,399,000 to $1,916,000
in the third quarter of 1996 compared with $517,000 for the same period in the
prior fiscal year. This increase is primarily due to expenses associated with
the clinical development of Vasomax(TM) and associated expenses for the
manufacturing development of phentolamine, the active ingredient in Vasomax(TM),
the Company's oral treatment for male impotency.
Sales, general and administrative expenses increased by $188,000, or
43%, in the third quarter of 1996 to $630,000 as compared to $442,000 in the
third quarter of 1995. This increase was primarily due to the increase in
public/investor relations activities, the hiring of a Vice President of
Corporate Development and additional sales support personnel and activities.
Interest expense, financing costs and amortization of intangibles
increased from $49,000 in the third quarter of 1995 to $52,000 in the third
quarter of 1996. Interest expense relates to the debt assumed through the
acquisition of FTI by Zonagen and the issuance of debt for the acquisition of
Zygotek Systems, Inc.
Nine Months Ended September 30, 1996 and 1995
Product sales for the nine months ended September 30, 1996 were
$2,066,000, an 8% decrease from $2,256,000 for the same period in the previous
fiscal year. This decrease was primarily due to a change in the relationship
with a manufacturer from a distribution relationship whereby FTI recognized 100%
of revenue and related cost of goods sold to a sales agent relationship whereby
only commissions are recognized and an increase in backorders expected to be
shipped in the fourth quarter as compared to the corresponding prior year
period.
Interest income was $106,000 for the nine months ended September 30,
1996, an increase of $60,000, or 130%, from $46,000 for the same period in the
previous fiscal year. This increase was due to the Company carrying higher
average cash balances resulting from the sale of Series A Preferred Stock in the
fourth quarter of 1995 and exercise of stock warrants and stock options in the
first quarter of 1996.
Cost of sales as a percentage of product sales for the nine months ended
September 30, 1996 was 69% as compared to 75% the corresponding prior year
period. This decrease is primarily due to the elimination of certain less
profitable products and the change in the relationship of a specific product
line with the manufacturer from a distribution relationship whereby FTI
recognized 100% of revenue and related cost of goods sold to a sales agent
relationship whereby only commissions are recognized.
13
Research and development expenses increased by $2,357,000 to $4,170,000
for the nine months ended September 30, 1996 compared with $1,813,000 for the
same period in the prior fiscal year. This increase is primarily due to expenses
associated with the clinical development of Vasomax(TM) and associated expenses
for the manufacturing development of phentolamine, the active ingredient in
Vasomax(TM).
Sales, general and administrative expenses increased by $329,000, or
21%, from $1,536,000 in the nine months ended September 30, 1995 to $1,865,000
for the same period in 1996. This increase was primarily due to the increase in
public/investor relations activities and the hiring of a Vice President of
Corporate Development and additional sales support personnel and activities.
Interest expense, financing costs and amortization of intangibles
decreased from $164,000 in the nine months ended September 30, 1995 to $161,000
for the same period in 1996. Interest expense relates to the debt assumed
through the acquisition of FTI by Zonagen.
LIQUIDITY AND CAPITAL RESOURCES
The Company used net cash of $2,246,000 for operating activities in the
three months ended September 30, 1996 as compared to $627,000 for the three
months ended September 30, 1995, and net cash of $4,539,000 for operating
activities in the nine month period ended September 30, 1996 as compared to
$2,148,000 for the same period in the prior year. The Company had cash and cash
equivalents of $9,934,000 at September 30, 1996. The increased use of cash for
the nine months ended September 30, 1996 was primarily due to the increase in
expenses related to the clinical development of the Company's oral treatment for
male impotency and capital expenditures of approximately $101,000 for tenant
improvements to 3,600 square feet of additional space that the Company leased in
March 1996 and additional research and administrative equipment purchases.
The Company has experienced negative cash flows from operations since
its inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require, substantial
funds to continue research and development, including preclinical studies and
clinical trials of its products, and to commence sales and marketing efforts if
FDA and other regulatory approvals are obtained. The Company expects that its
existing capital resources will be sufficient to fund its capital requirements
through 1997, based on its current development plan for Vasomax(TM). Thereafter,
the Company will need to raise substantial additional capital to fund its
operations. The Company's capital requirements will depend on many factors,
including the problems, delays, expenses and complications frequently
encountered by development stage companies; the progress of the Company's
research, development and clinical trial programs; the extent and terms of any
future collaborative research, manufacturing, marketing or other funding
arrangements; the costs and timing of seeking regulatory approvals of the
Company's products; the Company's ability to obtain regulatory approvals; the
success of the Company's sales and marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other intellectual
property rights; and changes in economic, regulatory or competitive conditions
or the Company's planned business. Estimates about the adequacy of funding for
the Company's activities are based on certain assumptions, including the
assumption that testing and regulatory procedures relating to the Company's
products can be conducted at projected costs. There can be no assurance that
changes in the Company's research and development plans, acquisitions or other
events will not result in accelerated or unexpected expenditures. To satisfy its
capital requirements, the Company may seek to raise additional funds in
14
the public or private capital markets. The Company's ability to raise additional
funds in the public or private markets will be adversely affected if the results
of its current or future clinical trials are not favorable. The Company may seek
additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms or at all. If adequate funds are not available,
the Company may be required to curtain significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
During the first quarter of 1996 the Company received $798,000 from the
exercise of stock warrants for 219,776 shares of Common Stock. During the first
nine months of 1996, the Company received $72,200 from the exercise of stock
options for 17,500 shares of Common Stock.
In September 1996, the Company authorized and designated 1,925,000
shares of Series B Convertible Preferred Stock ("Series B Preferred Stock"). On
September 30, 1996, the Company completed an initial closing of a private
placement of its Series B Preferred Stock in which it sold 1,137,750 shares at a
price of $10.00 per share. Net proceeds to the Company from the initial closing
of the private placement were approximately $9.7 million. On October 11, 1996,
the Company completed the final closing of its private placement of Series B
Preferred Stock, in which it sold an additional 554,750 shares of Series B
Preferred Stock at a price of $10.00 per share. Net proceeds from the final
closing of the private placement were approximately $4.8 million. The aggregate
offering consisted of 1,692,500 shares of Series B Preferred Stock with net
proceeds of approximately $14.5 million.
Current liabilities were $2,142,000 at September 30, 1996 compared with
$1,160,000 at December 31, 1995. This increase of $982,000 is primarily due to
accrued expenses associated with the development of Vasomax(TM).
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words
"anticipate," "believe," "expect," "estimate," "project" and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks, uncertainties and assumptions. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
expected, estimated or projected. For additional discussion of such risks,
uncertainties and assumptions, see "Item 1. Business - Patents and Proprietary
Information," "- Manufacturing Plans," "- Competition," "- Governmental
Regulations" and "Item 3. Legal Proceedings" included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995, as amended, and "-
Liquidity and Capital Resources" included elsewhere in this report.
15
ZONAGEN, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Cause No. 94-021991; Bonita S. Dunbar v. Baylor College of Medicine, et al.; In
the 270th Judicial District Court of Harris County, Texas. Briefly, on May 16,
1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in Harris County, Texas,
naming Baylor College of Medicine ("BCM"), BCM Technologies, Inc. ("BCMT"),
Fulbright and Jaworski, the Woodlands Venture Capital Company ("Woodlands"), and
Zonagen as defendants (collectively the "Defendants"). Dunbar is a cellular and
molecular biologist who has been employed by BCM as a teacher and research
scientist since 1981. During the course of her employment at BCM, Dunbar
developed technologies relating to the use of certain recombinant zona pellucida
peptides that were assigned to Zonagen. Dunbar claimed, among other things, that
her assignment of the patent rights was induced by statutory and constructive
fraud and a civil conspiracy on the part of the defendants, seeking damages and
rescission of the assignment. Dunbar also included a separate claim against
Zonagen alleging that Zonagen had converted certain of her endometriosis
research, seeking unspecified damages in connection with this conversion claim.
all of Dunbar's claims have been dismissed except for her conversion claim.
Dunbar has appealed such dismissals.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
4.1 Certificate of Designation of the Series B
Convertible Preferred Stock.
4.2 Form of Subscription Agreement between the
Company and the purchasers of the Company's
Series B Convertible Preferred Stock.
4.3 Form of Warrant issued to the Placement Agent
for the Company's Series B Convertible
Preferred Stock.
11.1 Statement regarding computation of net loss
per share.
27.1 Financial data schedule
b. Reports on Form 8-K
None.
16
ZONAGEN, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: November 14, 1996
By:/s/ Joseph S. Podolski
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1996
By /s/ Louis Ploth
---------------------
Louis Ploth
Vice President of Business Development and
Chief Financial Officer
(Principal Financial and Accounting Officer)
17
ZONAGEN, INC.
INDEX TO EXHIBITS
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
- ------ -------------------------
4.1 Certificate of Designation of the Series B Convertible Preferred
Stock
4.2 Form of Subscription Agreement between the Company and the
Purchasers of the Company's Series B Convertible Preferred Stock
4.3 Form of Warrant issued to the Placement Agent for the Company's
Series B Convertible Preferred Stock
11.1 Statement regarding computation of net loss per share
27.1 Financial Data Schedule
18