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, 1997
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: 0-21198
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 offices)
(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 7, 1997 there were outstanding 11,542,603 shares of Common Stock,
par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
For the Quarter Ended September 30, 1997
INDEX
Page
----
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 4
Consolidated Balance Sheets: September 30, 1997 (Unaudited)
and December 31, 1996 5
Consolidated Statements of Operations: For the three months
ended September 30, 1997 and 1996, nine months ended
September 30, 1997 and 1996 and from Inception (August 20, 1987)
through September 30, 1997 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
September 30, 1997 and 1996, nine months ended September 30, 1997
and 1996 and from Inception (August 20, 1987) through
September 30, 1997 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
STATEMENT REGARDING 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. These risks and uncertainties include risks
associated with the Company's early stage of development, uncertainties related
to clinical trail results, the Company's substantial dependence on one product
and early stage of development of other products, the Company's history of
operating losses, accumulated deficit and future capital needs, uncertainty of
additional funding, uncertainty of protection for patents and proprietary
technology, government regulations of and no assurance of regulatory approval
for the Company's products, the Company's limited sales and marketing experience
and dependence on future collaborators, manufacturing uncertainties and the
Company's reliance on third parties, competition and technological change,
product liability and availability of insurance, the Company's reliance on
contract research organizations and other risks and uncertainties described in
the Company's filings with the Securities and Exchange Commission. For
additional discussion of such risks, uncertainties and assumptions, see "Item 1.
Business - Patents and Proprietary Information," "- Manufacturing Plans," "-
Competition," "- Governmental Regulation" and "- Additional Business Risks", and
"Item 3. Legal Proceedings" included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as amended, and "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources" included elsewhere in this report.
3
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 nine month
period ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. 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, 1996,
as amended.
4
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
---------------- ----------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 70,188,963 $ 11,074,902
Accounts receivable 493,178 420,149
Accrued interest receivable 285,961 47,904
Product inventory 195,793 174,073
Deposits and other current assets 174,826 93,319
------------ ------------
Total current assets 71,338,721 11,810,347
LAB EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, net of accumulated depreciation
and amortization of $794,780 and $706,351, respectively 427,316 311,093
EXCESS OF COST OVER FAIR VALUE OF TANGIBLE ASSETS ACQUIRED,
net of accumulated amortization of $603,206 and
$446,080, respectively 846,203 1,003,329
OTHER ASSETS, net of accumulated amortization of
$155,250 and $116,048, respectively 758,392 586,991
------------ ------------
Total assets $ 73,370,632 $ 13,711,760
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $2,201,401 $1,169,999
Accrued expenses 1,381,440 867,459
Current portion of notes payable 15,501 80,526
------------ ------------
Total current liabilities 3,598,342 2,117,984
------------ ------------
LONG TERM NOTES PAYABLE 5,031 16,799
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
3,075,000 shares authorized, none issued and
outstanding - -
Series B Preferred Stock, $.001 par value,
1,925,000 shares authorized, 183,498 and
1,514,906 shares issued and outstanding, respectively 183 1,515
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,253,295 and 6,033,396 shares issued
and outstanding, respectively 11,253 6,033
Additional paid-in capital 113,613,564 38,124,532
Deferred compensation (2,394,409) (144,718)
Deficit accumulated during the development stage (41,463,332) (26,410,385)
------------ ------------
Total stockholders' equity 69,767,259 11,576,977
------------ ------------
Total liabilities and stockholders' equity $ 73,370,632 $ 13,711,760
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
5
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, (AUGUST 20, 1987)
------------------------------ -------------------------------- TO
1997 1996 1997 1996 SEPTEMBER 30, 1997
------------ ------------ ------------- ------------- -------------
REVENUES
Product sales $ 855,312 $ 686,045 $ 2,457,147 $ 2,065,565 $ 9,118,366
Licensing fee - - - - 250,000
Interest income 734,116 18,810 922,004 106,155 1,814,703
------------ ------------ ------------- ------------- -------------
Total revenues 1,589,428 704,855 3,379,151 2,171,720 11,183,069
COSTS AND EXPENSES
Cost of products sold 584,720 463,706 1,652,563 1,419,821 6,471,739
Research and development 6,084,613 1,916,249 14,580,030 4,169,515 33,347,954
Selling, general and administrative 720,117 629,584 2,035,626 1,864,975 11,438,861
Interest expense and amortization
of intangibles 55,290 52,375 163,879 160,540 1,024,464
------------ ------------ ------------- ------------- -------------
Total costs and expenses 7,444,740 3,061,914 18,432,098 7,614,851 52,283,018
Loss from continuing operations (5,855,312) (2,357,059) (15,052,947) (5,443,131) (41,099,949)
Loss from discontinued operations - - - - (288,104)
Loss on disposal - - - - (75,279)
------------ ------------ ------------- ------------- -------------
NET LOSS $ (5,855,312) $ (2,357,059) $ (15,052,947) $ (5,443,131) $ (41,463,332)
------------ ------------ ------------- ------------- -------------
Loss Per Common Share: ($0.57) ($0.47) ($1.82) ($1.14)
============ ============ ============= =============
Weighted Average Common Shares
used in computing loss per
Common Share 10,307,576 5,031,243 8,270,676 4,780,686
The accompanying notes are an integral part of these consolidated financial
statements.
6
ZONAGEN, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
From Inception
Three Months Ended September 30, Nine Months Ended September 30, (August 20, 1987)
-------------------------------- ------------------------------- through
1997 1996 1997 1996 September 30, 1997
------------- -------------- -------------- ------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (5,855,312) $ (2,357,059) $ (15,052,947) $ (5,443,131) $ (41,463,332)
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 95,946 95,653 284,756 262,459 1,503,702
Options granted 135,094 20,192 178,439 284,805 406,236
Common stock issued for agreement
not to compete - - - - 199,997
Series B Preferred Stock issued for
consulting service - - - - 17,999
Changes in operating assets and liabilities
(net effects of purchase of businesses in
1988 and 1994):
(Increase) decrease in receivables (399,240) (94,761) (311,086) (74,259) (465,048)
(Increase) decrease in inventory (34,831) 73,830 (21,720) 59,880 85,735
(Increase) decrease in prepaid expenses
and other current assets 163,104 (422,411) (81,507) (596,290) (142,488)
(Decrease) increase in accounts payable
and accrued expenses 444,717 438,886 1,573,070 967,187 3,365,528
------------- -------------- -------------- -------------- --------------
Net cash used in operating activities (5,450,522) (2,245,670) (13,430,995) (4,539,349) (36,100,408)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (93,884) (53,698) (210,602) (154,791) (1,121,301)
Purchase of technology rights and other
assets (154,318) 154,455 (204,652) (206,760) (875,674)
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 (248,202) 100,757 (415,254) (361,551) (2,069,559)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 72,830,894 4,073 72,970,978 870,706 83,545,042
Proceeds from issuance of Preferred Stock - 9,740,060 - 9,739,855 23,688,522
Proceeds from issuance of notes payable - - - 39,625 2,838,681
Principal payments on notes payable (3,644) (4,616) (10,668) (5,040) (1,713,315)
------------- -------------- -------------- -------------- --------------
Net cash provided by financing activities 72,827,250 9,739,517 72,960,310 10,645,146 108,358,930
NET INCREASE IN CASH AND CASH EQUIVALENTS 67,128,526 7,594,604 59,114,061 5,744,246 70,188,963
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 3,060,437 2,339,500 11,074,902 4,189,858 -
------------- -------------- -------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,188,963 $ 9,934,104 $ 70,188,963 $ 9,934,104 $ 70,188,963
============= ============== ============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment,
in stock, of FTI Acquisition $ - $ - $ 93,812 $ -
Excess of FMV over Grant Price of Options
Granted to Directors $ 2,428,125 $ - $ 2,428,125 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
7
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE 1 -- Organization and Operations
Zonagen, Inc., a Delaware corporation (together with its subsidiary, the
"Company"), was organized on August 20, 1987 (Inception) and is a
biopharmaceutical company in the development stage engaged in the research,
development and marketing of products which address conditions and diseases
associated with the human reproductive system. The products under development
include VasomaxTM, an oral treatment for male erectile dysfunction, and products
for the treatment of urological diseases such as benign prostatic hyperplasia
and prostate cancer. The Company is also engaged in the research and
development of a therapy for female sexual dysfunction, new approaches to
contraception, including zona pellucida-based vaccines in collaboration with
Schering AG, and an adjuvant to enhance the effectiveness of vaccines. In
addition to its proprietary development activities, the Company markets and
distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly-
owned subsidiary, Fertility Technologies, Inc. ("FTI"). From Inception through
September 30, 1997, the Company has been primarily engaged in research and
development and is still in the development stage.
The Company is a development stage company. Problems, delays, expenses and
complications are typically encountered by companies in the development stage,
many of which may be beyond the Company's control. These include, but are not
limited to, unanticipated problems and costs relating to the development,
testing, production and marketing of its products, regulatory approvals and
compliance, availability of adequate financing and competition. There can be no
assurance that the Company will complete successfully the transition from a
development stage company to the successful introduction of commercially viable
products. The Company has generated only limited revenue from product sales
since inception.
On July 25, 1997, the Company completed a public offering of Common Stock
in which it sold 2,587,500 shares of Common Stock (including the shares issued
pursuant to the exercise of the underwriters' over allotment option) at a price
of $30.00 per share. The net proceeds of the public offering were approximately
$72.2 million. The Company received further proceeds of $789,000 during the nine
months ended September 30, 1997 from the issuance of Common Stock as a result of
stock option and warrant exercises.
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 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 believes that its existing
capital resources will be sufficient to fund its operations through at least the
end of 1998. 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
8
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
Company's preclinical and clinical activities; whether the Company is able to
successfully conclude a collaborative agreement for the marketing of VasomaxTM;
the progress of the Company's 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 of 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 the development and regulatory
approval of the Company's products can be completed at projected costs and that
product approvals and introductions will be timely and successful. 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 is seeking a collaborative agreement with respect to
VasomaxTM and may seek additional funding through other corporate collaborations
and financing vehicles. There can be no assurance that the Company will
successfully enter into such an agreement with respect to VasomaxTM or that any
other 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 curtail
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
Series B Convertible Preferred Stock
In September 1996, the Company authorized 1,925,000 shares of Series B
Convertible Preferred Stock ("Series B Preferred Stock"). The Company sold an
aggregate of 1,692,500 shares of Series B Preferred Stock in September and
October 1996 at a price of $10.00 per share, from which it received net proceeds
of approximately $14.4 million.
From the original issuance of the Series B Preferred Stock through
September 30, 1997, an aggregate of 1,509,002 shares of Series B Preferred Stock
were converted into 2,282,574 shares of Common Stock. From January 1, 1997,
through September 30, 1997, 1,331,408 shares of Series B Preferred Stock were
converted into 2,014,516 shares of Common Stock. During the third quarter of
1997, 421,886 shares of Series B Preferred Stock were converted into 641,733
shares of Common
9
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
Stock. An aggregate of 183,498 shares of Series B Preferred Stock, convertible
in to 280,752 shares of Common Stock, remained outstanding as of September 30,
1997.
Effective July 25, 1997, the conversion rate of the Series B Preferred
Stock was adjusted to 1.53 shares of Common Stock from 1.5094 shares of Common
Stock for each share of Series B Preferred Stock that remained outstanding as of
such date. The adjustment was required under the terms of the Certificate of
Designation of the Preferred Stock because the price at which shares of Common
Stock were sold to the public in the July 25, 1997 Offering ($30.00 per share)
was less than the closing bid price of Common Stock on such date ($31.50 per
share).
On October 6, 1997, the Company exercised its right to cause the mandatory
conversion of the Series B Preferred Stock, with the result that all such shares
not previously converted were converted into Common Stock effective October 31,
1997.
Common Stock
On July 25, 1997, the Company completed a public offering of Common Stock
in which it sold 2,587,500 shares of Common Stock (including the shares issued
pursuant to the exercise of the underwriters' over allotment option) at a price
of $30.00 per share. The net proceeds of the public offering were approximately
$72.2 million.
Warrants
During the third quarter of 1997, the Company issued an aggregate of 2,510
shares of Common Stock upon the cashless exercise of Series A Preferred Stock
warrants to purchase an aggregate of 2,891 shares of Common Stock. Also, during
the third quarter of 1997, (i) warrants to purchase an aggregate of 10,140
shares of Common Stock were exercised for total proceeds of $31,123 at a price
of $3.07 per share, and (ii) 10,000 Series B Preferred Stock warrants were
exercised and converted to purchase an aggregate of 15,094 shares of Common
Stock for total proceeds of $110,000. As of September 30, 1997 there were (i)
18,391 Series A Preferred Stock warrants outstanding exercisable for an
aggregate of 50,734 shares of Common Stock, (ii) 153,500 Series B Preferred
Stock warrants outstanding exercisable for an aggregate of 234,855 shares of
Common Stock and (iii) Common Stock warrants outstanding exercisable for an
aggregate of 22,000 shares of Common Stock
NOTE 3 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of the Common Stock at the time of
grant. In December 1996, the Company established a new nonemployee director
stock option plan under which the Company's nonemployee directors were granted
options to purchase and aggregate of 175,000 shares of
10
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
Common Stock at an exercise price of $8.38 per share, the closing price on the
date the plan was approved. The grant of such options was made contingent upon
stockholder approval of the new nonemployee director option plan. For purposes
of determining the amount of any deferred compensation, such options were deemed
granted upon stockholder approval, which was received at the Company's Annual
Meeting of Stockholders on June 18, 1997. The Company recorded deferred
compensation of $2.4 million in the quarter ending September 30, 1997 based upon
the difference between the fair market value of the Common Stock of $22.25 per
share (the last sale price of the Common Stock as reported by The Nasdaq Small
Cap Market) on the deemed grant date and the exercise price of the options. The
deferred compensation will be amortized and recorded as compensation expense
over the five year vesting period. In addition, options to purchase an aggregate
of 12,500 shares granted to an employee and a consultant at a weighted average
exercise price of $6.64 per share vest based upon the achievement of certain
performance criteria. The Company will record compensation expense to the extent
the fair market value of such options at the time such performance criteria are
met exceeds the exercise price. Compensation expense related to the options for
10,000 shares granted to the employee will be recorded at each reporting period
prior to the achievement of milestones based on the vesting period of the
options and the amount by which the fair market value exceeds the exercise price
on the financial statement date.
During the third quarter of 1997, the Company issued an aggregate 139,072
shares of Common Stock to current and former consultants and employees, upon the
exercise of stock options for total proceeds of $504,923 at prices ranging from
$0.04 to $22.25 per share.
NOTE 4 -- AGREEMENTS
In April 1994, the Company entered into an assignment agreement (the
"Gamogen Agreement") with Gamogen, Inc. ("Gamogen") and Dr. Adrian Zorgniotti
pursuant to which the Company acquired the rights to a technology for the
treatment of male impotence, including the assignment of rights to a U.S. patent
application. In consideration for the assignment of the subject technology, the
Company provided Gamogen with a cash payment of $100,000 in 1994. As
consideration for Gamogen's agreement not to compete, the Company agreed to
deliver shares of Common Stock in April 1996 valued at $200,000, which resulted
in the issuance of 19,512 shares of the Company's Common Stock based on the fair
market value of the Common Stock when such shares were delivered. Under the
original terms of the Gamogen Agreement, Gamogen was to receive a predetermined
royalty, based on the aggregate net sales of any product developed from the
subject technology. In addition, the Company was required to conduct $100,000
per year of research through 1997 in the area of male impotency. The Company has
a right of first negotiation to purchase or exclusively license improvements to
any royalty-bearing product or competing product developed by Gamogen.
11
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
On January 24, 1997, the Company signed an amendment to the Gamogen
Agreement. The amendment provided the Company with an option, exercisable until
January 24, 2000, to purchase Gamogen's rights to receive royalties under the
Gamogen Agreement upon payment of a specified option price. The Company made an
initial payment of $75,000 upon execution of the amendment and was required to
make additional payments to maintain the option of $150,000 each year through
1999 or until the final purchase was completed. The final option price,
inclusive of amended payments previously made, ranged from $750,000 due by
January 24, 1998 up to $1,750,000 due by January 24, 2000, depending upon when
the option was exercised. During July 1997, the Company made its second payment
of $75,000 to maintain the option under the amendment. On September 30, 1997,
the Company exercised the option early, resulting in the termination of its
obligations with respect to royalties under the original Gamogen Agreement,
pursuant to an agreement with Gamogen whereby the Company made a final cash
payment of $558,000 (reduced from the $600,000 payment originally contemplated
by the amendment).
During 1996, the Company entered into several agreements with contract
research organizations and other organizations that will provide the Company
with services relating to the U.S. clinical development of VasomaxTM, the
Company's oral treatment for male impotency. The Company may terminate these
agreements upon written notification and payment of expenses incurred prior to
termination.
NOTE 5 -- NET LOSS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share". Zonagen will
adopt the provisions of the new statement, changing from its current method of
accounting for net loss per share as set forth in APB Opinion No. 15, for
interim and annual periods ending after December 15, 1997. Adoption of
Statement No. 128 will require retroactive revision of the presentation of net
loss per share in historical financial statements. The Company's net loss per
share presented in the accompanying financial statements as calculated under the
provisions of APB Opinion No. 15 are the same as those had basic net loss per
share under Statement No. 128 been presented. Additionally, net loss per share
as presented herein are also the same as those had diluted net loss per share
under the provisions of Statement No. 128 been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
NOTE 6 -- SUBSEQUENT EVENT
On October 6, 1997, the Company exercised its right to cause the mandatory
conversion of its Series B Preferred Stock, with the result that all such shares
not previously converted were converted into Common Stock effective October 31,
1997.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial performance
and 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 in such forward-looking statements. See "Statement Regarding
Forward-Looking Statements" included elsewhere in this Quarterly Report on
Form 10-Q.
OVERVIEW
Zonagen, Inc. (the "Company") is a biopharmaceutical company in the
development stage engaged in the research, development and marketing of products
which address conditions and diseases associated with the human reproductive
system. In addition to its proprietary development activities, the Company
markets and distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly
owned subsidiary, Fertility Technologies, Inc. ("FTI"). The Company's objective
is to become a leading provider of innovative products and services for the
management of reproductive health.
During the second quarter 1997, the Company completed two pivotal Phase 3
clinical trials in the United States of its lead product candidate, VasomaxTM,
an oral treatment for male erectile dysfunction. The Company has dedicated a
substantial portion of its resources over the last several years to the
development of VasomaxTM. The Company's future prospects are substantially
dependent on approval by the FDA and the successful commercialization of
VasomaxTM.
Substantially all of the Company's revenues are derived from sales of
third-party fertility-related products by FTI and interest income. The Company
acquired FTI in 1994 to enter the market for female reproductive healthcare
products and services. Revenues from FTI will not be sufficient to fund the
Company's planned operations.
As of September 30, 1997, the Company had an accumulated deficit of $41.5
million. There can be no assurance that the Company will be able to complete
successfully, the transition from a development stage company to the successful
introduction of commercially viable products. The Company's ability to achieve
profitability will depend, among other things, on successfully completing the
development of its products, obtaining regulatory approvals, establishing
marketing, sales and manufacturing capabilities or collaborative arrangements
with others which possess such capabilities, and raising sufficient funds to
finance its activities. There can be no assurance that the Company will be able
to achieve profitability or that profitability, if achieved, can be sustained.
13
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Total revenues increased 127% to $1.6 million for the quarter
ended September 30, 1997 as compared to $705,000 for the same period in the
prior year. Product sales, substantially all of which were derived from FTI,
increased 25% to $855,000 in the quarter ended September 30, 1997 as compared to
$686,000 for the same period in the prior year. The increase was due to
continued growth in a new product line and an increase in the instruments
product line. Interest revenues increased to $734,000 for the quarter ended
September 30, 1997 as compared to $19,000 for the same period in the prior year.
The increase was due to increased cash balances as a result of a public offering
completed in July 1997.
Cost of Products Sold. Cost of products sold increased 26% to $585,000 for
the quarter ended September 30, 1997 as compared to $464,000 for the same period
in the prior year. The increase was due to increased product sales by FTI. Gross
margin from product sales remained relatively constant at approximately 32%.
Research and Development Expenses. Total research and development ("R&D")
expenses increased 221% to $6.1 million for the quarter ended September 30, 1997
as compared to $1.9 million for the same period in the prior year. The increase
was due primarily to the additional costs associated with the development of
VasomaxTM. Expenses associated with the development of VasomaxTM increased 300%
to approximately $5.6 million during the quarter ended September 30, 1997 as
compared to approximately $1.4 million during the same period in the prior year.
General R&D expenses decreased 10% to approximately $489,000 as compared to
$544,000 during the same period in the prior year. This decrease was primarily
due to the increased emphasis on the development of VasomaxTM. The Company
expects its research and development expenses to increase during the remainder
of 1997 and for at least the next several years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 14% to $720,000 during the quarter ended
September 30, 1997 from $630,000 in the second quarter of 1996. The increase
was primarily due to nonemployee directors' stock option compensation expense
recognized during the third quarter of 1997. The Company expects its selling,
general and administrative expenses to increase in the forth quarter of 1997 and
thereafter as it hires additional professionals to strengthen its current
management team and to assist in achieving the Company's goals.
Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles remained relatively constant in the third quarter
1997 as compared to 1996. The Company recorded $55,000 of amortization during
the third quarter of 1997 related to the excess of cost over fair value of
tangible assets associated with the acquisition of FTI.
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Total revenues increased 54% to $3.4 million for the nine months
ended September 30, 1997 as compared to $2.2 million for the same period in the
prior year. Product sales, substantially all of which were derived from FTI,
increased 19% to $2.5 million in the nine
14
months ended September 30, 1997 as compared to $2.1 million for the same period
in the prior year. The increase was due primarily to increased sales efforts of
the Company's instruments product line as well as continued growth in other
product lines. Interest revenues increased to $922,000 for the nine months ended
September 30, 1997 as compared to $106,000 for the same period in the prior
year. The increase was due to additional cash on hand from the Company's public
offering completed in July 1997.
Cost of Products Sold. Cost of products sold increased 21% to $1.7 million
for the quarter ended September 30, 1997 as compared to $1.4 million for the
same period in the prior year. This increase was due to increased product
revenues. Gross margin from product sales increased approximately 2% to 33%.
Research and Development Expenses. Total research and development ("R&D")
expenses increased 247% to $14.6 million for the nine months ended September 30,
1997 as compared to $4.2 million for the same period in the prior year. The
increase was due primarily to the additional costs associated with the
development of VasomaxTM. Expenses associated with the development of VasomaxTM
increased 481% to approximately $12.8 million during the nine months ended
September 30, 1997 as compared to approximately $2.2 million during the same
period in the prior year. General R&D expenses decreased 15% to $1.7 million
for the nine months ended September 30, 1997 as compared to $2.0 million for the
same period in the prior year. This decrease was primarily due to the increased
emphasis on the development of VasomaxTM. The Company expects its research and
development expenses to increase during the remainder of 1997 and for at least
the next several years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 5% to $2.0 million for the nine months ended
September 30, 1997 as compared to $1.9 million for the same period in the prior
year. The increase was primarily due to payments made for financial advisory
services in addition to nonemployee directors' stock option compensation expense
recognized.
Interest and Amortization of Intangibles. Interest expense and amortization
of intangibles remained relatively constant in the nine months ended September
30, 1997 as compared to the same period in 1996. The Company recorded
approximately $164,000 of amortization during the nine months ended September
30, 1997 related to the excess of cost over fair value of tangible assets
associated with the acquisition of FTI.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operation primarily with
proceeds from the private placement and public offering of equity securities. In
April 1993, the Company received net proceeds of approximately $7.0 million from
its initial public offering. In December 1993, the Company received net proceeds
of $2.5 million from the sales of Common Stock to an affiliate of Schering AG in
connection with the Company's collaboration with Schering AG. In October 1995,
the Company received net proceeds of $5.3 million from the private placement of
Series A Preferred Stock. In September and October 1996, the Company received
aggregate net proceeds of $14.4 million from the private placement of Series B
Preferred Stock. In July 1997, the Company received net proceeds of
approximately $72.2 million from a public offering of Common Stock.
15
The Company used net cash of approximately $5.5 million for operating
activities in the three months ended September 30, 1997 as compared to
approximately $2.2 million in the three months ended September 30, 1996. The
Company used net cash of approximately $13.5 million for operating activities
for the nine months ended September 30, 1997 as compared to approximately $4.5
million for the nine months ended September 30, 1996. The Company had cash and
cash equivalents of approximately $70.2 million at September 30, 1997. The
increased use of cash for the three months and nine months ended September 30,
1997 was primarily due to the increase in expenses related to the clinical
development of VasomaxTM. The Company currently anticipates spending in excess
of $15.0 million in connection with its U.S. clinical development program for
VasomaxTM during 1997.
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 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 believes that its existing
capital resources, including the proceeds of the public offering completed in
July 1997, will be sufficient to fund its operations through at least the next
twelve months. 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
preclinical and clinical activities; whether the Company is able to successfully
conclude a collaborative agreement for the marketing of VasomaxTM; the progress
of the Company's 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
of 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 the development and regulatory approval of the Company's
products can be completed at projected costs and that product approvals and
introductions will be timely and successful. 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 is
seeking a collaborative agreement with respect to VasomaxTM and may seek
additional funding through other corporate collaborations and financing
vehicles. There can be no assurance that the Company will successfully enter
into such an agreement with respect to VasomaxTM or that any other 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 curtail 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.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris, County, Texas naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc. ("BCMT"), Fulbright & Jaworski, L.L.P., and the
Company 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 the Company and which are the subject of the BCM
Patent. 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.
The trial court granted partial summary judgment in favor of the Company
and the other defendants in connection with the action, and appeal by Dunbar is
presently pending. As a result of the rulings, in the trial court, Dunbar is
unable to rescind the assignment of the patent rights and is left only with
ancillary claims regarding the Company's alleged conversion of her ideas
relating to endometriosis and ovarian cancer. The Company believes the ancillary
claims are without merit, and that Dunbar's appeal of the summary judgment will
be unsuccessful.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
ITEM 5. OTHER INFORMATION
The Company intends to submit a New Drug Application (an "NDA") to the
United States Food and Drug Administration ("FDA") for Vasomax as promptly as
practicable. The timing of the filing of the NDA will depend, in part, upon the
results of discussions with the FDA and with potential corporate partners for
Vasomax. There can be no assurance that the NDA for Vasomax will be filed on a
timely basis or that it will ultimately be approved by the FDA. Certain risks
and uncertainties associated with the filing and FDA review of the NDA are
described or referenced in "Statement Regarding Forward-Looking Statements"
included elsewhere in this Quarterly Report on Form 10-Q.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Amendment No. 2 to Assignment Agreement, dated
as of September 30, 1997, between Zonagen, Inc.
and Gamogen, Inc.
11.1 Statement Regarding Computation of Net Loss Per
Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
-------------------
None.
18
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, 1997
By: /s/ JOSEPH S. PODOLSKI
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 1997
By: /s/ Louis Ploth
----------------------------
Louis Ploth
Vice President of Business
Development and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
19