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 March 31, 1999
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
and zip code)
(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 April 29, 1999 there were outstanding 11,244,966 shares of Common
Stock, par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 1999
INDEX
PAGE
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: March 31, 1999 (Unaudited)
and December 31, 1998 5
Consolidated Statements of Operations: For the three months ended
March 31, 1999 and 1998 and from Inception (August 20, 1987)
through March 31, 1999 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
March 31, 1999 and 1998, and from Inception (August 20, 1987)
through March 31, 1999 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
FACTORS AFFECTING 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 trial results and FDA approval, the Company's substantial dependence
on one product and early stage of development of other products, the Company's
history of operating losses and accumulated deficit, the Company's future
capital needs and uncertainty of additional funding, uncertainty of protection
for the Company's patents and proprietary technology, the effects of government
regulation of and lack of assurance of regulatory approval for the Company's
products, the Company's limited sales and marketing experience and dependence on
collaborators, manufacturing uncertainties and the Company's reliance on third
parties for manufacturing, 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.
Description of Business - Business Risks" and "Item 3. Legal Proceedings"
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998 and "Part I. Financial Information - Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Part II. Other Information - Item 1. Legal Proceedings"
included elsewhere in this quarterly report on Form 10-Q.
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 three month
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1999. 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, 1998.
4
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 48,150 $ 51,640
Accounts receivable - 318
Product inventory 2,642 3,139
Prepaid expenses and other current assets 972 1,032
-------- --------
Total current assets 51,764 56,129
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 945 907
GOODWILL, net - 584
OTHER ASSETS, net 1,161 1,022
-------- --------
Total assets $ 53,870 $ 58,642
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,821 $ 3,317
Accrued expenses 2,120 1,935
Current portion of long-term notes payable - 3
-------- --------
Total current liabilities 3,941 5,255
-------- --------
LONG-TERM NOTES PAYABLE - -
-------- --------
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding - -
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,636,603 and 11,621,140 shares issued,
respectively; 11,221,303 and 11,205,840 shares
outstanding, respectively 12 12
Additional paid-in capital 113,763 113,717
Deferred compensation (870) (958)
Cost of treasury stock, 415,300 and 415,300 shares, respectively (7,484) (7,484)
Deficit accumulated during the development stage (55,492) (51,900)
-------- --------
Total stockholders' equity 49,929 53,387
-------- --------
Total liabilities and stockholders' equity $ 53,870 $ 58,642
======== ========
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 and in thousands except per share amounts)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED MARCH 31, THROUGH
--------------------------- MARCH 31,
1999 1998 1999
------------ ------------ --------
(unaudited)
REVENUES
Licensing fees $ - $ - $ 20,250
Product royalties - - 163
Interest income 629 1,067 6,687
------------ ----------- --------
Total revenues 629 1,067 27,100
COSTS AND EXPENSES
Research and development 4,353 6,344 67,858
General and administrative 933 765 13,457
Interest expense and amortization
of intangibles 8 3 388
------------ ----------- --------
Total costs and expenses 5,294 7,112 81,703
------------ ----------- --------
Loss from continuing operations (4,665) (6,045) (54,603)
Income (loss) from discontinued operations 59 54 (1,828)
Gain on disposal 1,014 - 939
------------ ----------- --------
NET LOSS $ (3,592) $ (5,991) $ (55,492)
============ =========== =========
Loss per share - basic and diluted:
Loss from continuing operations $ (0.42) $ (0.53)
Income from discontinued operations 0.01 -
Gain on disposal 0.09 -
------------ -----------
NET LOSS $ (0.32) $ (0.53)
============ ===========
Shares used in income (loss) per share calculation:
Basic and diluted 11,214,502 11,322,142
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 and in thousands)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED MARCH 31, THROUGH
---------------------------- MARCH 31,
1999 1998 1999
-------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (3,592) $ (5,991) $ (55,492)
Gain on disposal of discontinued operations (1,014) - (939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs - - 316
Depreciation and amortization 146 116 2,101
Noncash expenses related to stock-based
transactions 87 155 1,645
Common stock issued for agreement not to
compete - - 200
Series B Preferred Stock issued for consulting
services - - 18
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables (85) (128) (198)
(Increase) decrease in inventory 184 4 (2,673)
(Increase) decrease in prepaid expenses and other
current assets 34 (309) (857)
(Decrease) increase in accounts payable and
accrued expenses (1,217) (1,428) 3,818
-------- -------- --------
Net cash used in operating activities (5,457) (7,581) (52,061)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (179) (31) (2,029)
Purchase of technology rights and other assets (150) (161) (1,229)
Cash acquired in purchase of FTI - - 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period - - 138
Proceeds from sale of the assets of Fertility 2,250 - 2,250
Technologies, Inc., subsidiary
Increase in net assets held for disposal - - (213)
-------- -------- --------
Net cash provided by (used in) investing activities 1,921 (192) (1,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 47 370 83,980
Proceeds from issuance of preferred stock - - 23,688
Purchase of treasury stock - (4,022) (7,484)
Proceeds from issuance of notes payable - - 2,839
Principal payments on notes payable (1) (4) (1,732)
-------- -------- --------
Net cash provided by (used in) financing activities 46 (3,656) 101,291
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,490) (11,429) 48,150
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 51,640 73,762 -
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 48,150 $ 62,333 $ 48,150
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
7
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 1 -- Organization and Operations
Zonagen, Inc., a Delaware corporation, (the Company), was organized on
August 20, 1987 (Inception), and is a biopharmaceutical company engaged in the
development of pharmaceutical products for the reproductive system, including
sexual dysfunction, urology, contraception and infertility. Until the sale of
substantially all the assets of Fertility Technologies, Inc. (FTI), its wholly
owned subsidiary, in March 1999, Zonagen also sold devices, instruments and
supplies to fertility specialists, obstetricians and gynecologists. From
inception through March 31, 1999, the Company has been primarily engaged in
research and development and clinical development and is still in a development
stage.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity financings
and corporate collaborations. The Company will continue to require substantial
funds to continue research and development, including preclinical studies and
clinical trials of its existing and future product candidates, and to commence
sales and marketing efforts, if appropriate, if the U.S. Food and Drug
Administration ("FDA") or 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 2000. 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 clinical and preclinical activities; the progress of
the Company's collaborative agreements with affiliates of Schering-Plough
Corporation ("Schering-Plough") and costs associated with any future
collaborative research, manufacturing, marketing or other funding arrangements;
the costs and timing of seeking regulatory approvals of Vasomax(R), the
Company's oral treatment for male erectile dysfunction, and the Company's other
future product candidates; the Company's ability to obtain regulatory approvals;
the success of the Company's potential 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 Vasomax(R)
is not successfully commercialized, if necessary regulatory approvals are not
obtained when expected and if the results of 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
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
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 -- Sale of Fertility Technologies, Inc.
On March 11, 1999, the Company sold substantially all of the assets related
to its wholly-owned subsidiary, FTI. These assets included the company name,
accounts receivable, inventory, property and equipment, and certain Zonagen
assets relating to the operation of FTI, for $2.25 million cash and the
assumption of certain specified liabilities. The sales agreement provided for a
purchase price adjustment relating to the fluctuation in working capital,
excluding cash, from December 31, 1998 as compared to February 28, 1999. During
the quarter ended March 31, 1999, the Company recorded a gain on the sale of FTI
of $1.0 million.
The results of FTI have been reported separately as discontinued operations
in the accompanying consolidated financial statements. Prior period consolidated
financial statements have been restated to present FTI as discontinued. Revenues
for FTI were approximately $558,000 for the two months ended February 28, 1999
as compared to $929,000 for the period ended March 31, 1998.
The components of assets and liabilities of discontinued operations
included in the consolidated balance sheet for the year ended December 31, 1998
are as follows (in thousands):
DECEMBER 31,
1998
-------
Current assets:
Accounts receivable.................... $ 318
Inventory.............................. 350
Other current assets................... 23
-------
Total current assets................... 691
Furniture and equipment, net............. 70
Goodwill, net............................ 584
-------
Total Assets............................. 1,345
-------
Accounts payable and other............... 275
-------
Net assets............................... $ 1,070
=======
9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
NOTE 3 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine which is the active
ingredient in Vasomax(R), the Company's oral treatment for male erectile
dysfunction. Currently, Schering-Plough is manufacturing and marketing in Mexico
under the brand name Z-MAX and expects to launch the product in other Latin
American countries. Schering-Plough purchases bulk phentolamine from the
Company. As of March 31, 1999, the fair market value of this bulk raw material
inventory was approximately $2.6 million. Prior to the sale of FTI the Company's
inventory also consisted of products manufactured by others for resale to
obstetrics/gynecologists, urologists and fertility clinics. There was no
finished goods inventory at March 31, 1999.
The Company entered into a purchase order with the contract manufacturer of
phentolamine and has an obligation to purchase $1,500,000 of bulk phentolamine
during 1999, of which the Company has already paid a deposit of $375,000 against
that purchase. Under the terms of the agreement, the Company has already met
minimum purchase requirements for the year ended December 31, 1999. See "NOTE 7
- -- Agreements."
NOTE 4 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
During the three months ended March 31, 1999, prepaid expenses and other
current assets decreased to approximately $972,000. As of March 31, 1999,
prepayments held by the phentolamine contract manufacturer were $375,000. Other
prepaid expenses and other current assets, substantially all of which were
relating to phentolamine resale, other expenses for which the Company expects
reimbursement and interest receivable, totaled $597,000 as of March 31, 1999.
NOTE 5 -- STOCKHOLDERS' EQUITY
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 first quarter of 1999, the Company issued an aggregate 5,184
shares of Common Stock upon the cashless exercise of 5,850 stock warrants.
Additionally, warrants to purchase an aggregate 536 shares of Common Stock were
exercised for total proceeds of $3,850 at a price of $7.18 per common share. As
of March 31, 1999, there were a total of 109,269 warrants outstanding,
convertible into 181,031 shares of common stock. All warrants outstanding
contain a
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
cashless exercise provision. The Company would receive cash proceeds up to
approximately $1.1 million if the cashless exercise provision was not utilized.
Treasury Stock
On December 12, 1997 the Company announced a stock buyback of the Company's
Common Stock. The purchases are to be made from time to time in the open market
at prevailing market prices. As of December 31, 1998 the Company had purchased
an aggregate of 415,300 shares of Common Stock under the stock buyback program
at an aggregate purchase price of $7.5 million, representing an average purchase
price of $18.021 per share. The Company did not purchase any shares of Common
Stock in the current fiscal year through May 12, 1999.
NOTE 6 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods deferred
non-cash 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. The Company recorded compensation expense of approximately $69,500 in
the quarter ending March 31, 1999 related to the amortization of deferred
compensation recorded in connection with options granted under the 1996 Non-
employee Director Stock Option Plan (the "Director Plan"). Amortization of
deferred compensation recorded in connection with other option grants totaled
approximately $18,000 in the quarter ending March 31, 1999.
During the three month period ended March 31, 1999, the Company granted
options, to directors, employees and consultants, of 86,500 shares of Common
Stock at exercise prices ranging from $19.75 to $29.00. During the three months
ended March 31, 1999, the Company issued an aggregate of 9,743 shares of Common
Stock upon the exercise of stock options, at prices ranging from $0.64 to $6.13.
NOTE 7 -- AGREEMENTS
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation, a major U.S.-based
pharmaceutical company (including such affiliates, "Schering-Plough"), with
respect to the exclusive license of the Company's Vasomax(R) product for the
treatment of male erectile dysfunction. Under the agreement, Schering-Plough
paid Zonagen an up-front payment of $10.0 million and agreed to make subsequent
aggregate milestone payments up to $47.5 million upon the successful achievement
of specified regulatory goals. Zonagen will receive escalating royalties on all
product sales under the Schering-Plough agreements.
On June 30, 1998 the Company received an accelerated milestone payment of
$5.0 million from Schering-Plough that was
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
paid at the completion of the clinical program that was used in support of the
New Drug Application ("NDA") for Vasomax(R). The payment was due upon the
submission of a NDA for Vasomax(R) with the Food and Drug Administration
("FDA"). The Company submitted the NDA on July 14, 1998.
On September 30, 1998 the Company received a milestone payment of $5.0
million from Schering-Plough that was paid upon FDA acceptance for filing of the
NDA for Vasomax(R).
During 1996, the Company entered into agreements with two contract research
organizations to which the Company made cash payments aggregating to
approximately $1.8 million and $4.8 million during the quarters ended March 31,
1999 and 1998, respectively, and recorded payables and accrued expenses of $1.7
million as of March 31, 1999.
On June 12, 1997, the Company entered into an exclusive supply agreement
with a contract manufacturer under which the Company has agreed to purchase all
of its bulk phentolamine from the contract manufacturer for a period of five
years. The agreement will continue after the initial five-year term for
consecutive one year periods until terminated by either party. The agreement
obligates the Company to purchase specified minimum quantities of phentolamine
and the manufacturer to manufacture phentolamine exclusively for the Company.
The Company has already met minimum purchase requirements through the year ended
December 31, 1999. The value of the specified minimum quantities of phentolamine
for the years ended December 31, 2000 and 2001 are $540,000 and $540,000,
respectively.
In February 1999, Schering-Plough notified the Company that it has
exercised its right to begin manufacturing finished product for Vasomax(R).
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
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 Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants. The lawsuit has been
dismissed without the right of Dunbar to re-file and with no monetary
consideration paid by the Company.
12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the Southern
District of Texas in Houston, Texas and were consolidated on May 29, 1998. The
plaintiffs purport to bring the suit on behalf of all purchasers of Zonagen
common stock between February 7, 1996 and January 9, 1998. The plaintiffs
assert that the defendants made materially false and misleading statements and
failed to disclose material facts about the patents and patent applications of
the Company relating to Vasomax(R) and ImmuMax(TM), and about the Company's
clinical trials of Vasomax(R). The plaintiffs seek to have the action declared
to be a class action, and to have rescissionary or compensatory damages in an
unstated amount, along with interest and attorney's fees. On March 30, 1999, the
Court granted the defendants' motion to dismiss, and dismissed the case with
prejudice. The plaintiffs have filed an appeal. The Company and the individual
defendants believe that these actions are without merit and intend to defend
against them vigorously. No estimate of loss or range of estimate of loss, if
any, can be made at this time.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
NOTE 9 - SUBSEQUENT EVENTS
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that
the companies have decided to forego a June FDA Advisory Panel review of the New
Drug Application (NDA) for Vasomax(R) until the results of additional clinical
studies being conducted by Schering-Plough can be submitted to the FDA. As a
result of this decision, Zonagen expects that the FDA will issue a non-
approvable letter for the NDA. Vasomax(R) is Zonagen's oral treatment for
erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the
basis of the NDA for Vasomax(R). Zonagen and Schering-Plough believe that
inclusion of the new data from the ongoing studies should enhance the regulatory
filing and the commercial product profile for Vasomax(R). Both companies are
committed to obtaining approval of Vasomax(R) with the optimal safety and
efficacy product profile.
Zonagen expects to submit the data to the FDA as an amendment to the NDA.
It was not possible to extend the deadline for completion of the FDA review
therefore it was decided to accept a non-approvable letter.
Schering-Plough is continuing to seek regulatory approvals for Vasomax(R)
in countries outside the United States, having launched the product in Mexico in
June 1998 and Brazil in April 1999. A regulatory application was filed in the
United Kingdom in August 1998 as the first step in a mutual recognition
procedure for the European Union.
13
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 of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. 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 "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
OVERVIEW
Zonagen, Inc. ("Zonagen" or the "Company") is a biopharmaceutical company
engaged in the development of pharmaceutical products for the reproductive
system, including sexual dysfunction, urology, contraception and infertility.
On March 11, 1999, the Company sold for cash the assets of its wholly owned
subsidiary, Fertility Technologies, Inc. ("FTI") to SAGE BioPharma, Inc., a
subsidiary of Counsel Corporation (Nasdaq: CXSN). The sale of FTI allows the
Company to focus all of its attention on its core business, the development of
pharmaceutical products for conditions associated with the reproductive system.
See "Item 1. Financial Statements - Note 2 - Sale of Fertility Technologies,
Inc. of Notes to Consolidated Financial Statements (Unaudited)."
In 1997, Zonagen entered into a worldwide sales and marketing agreement
with Schering-Plough Corporation for Vasomax(R), the Company's rapidly
disintegrating oral formulation of phentolamine mesylate for Male Erectile
Dysfunction ("MED"). In March 1998, Schering-Plough submitted a Product
Registration Application in Mexico for Vasomax(R) and subsequently began product
sales in May 1998, following approval by the Mexican regulatory authorities.
Schering-Plough expects to launch the product in other Latin American countries.
On July 14, 1998, Zonagen submitted its first New Drug Application ("NDA") to
the U.S. Food and Drug Administration ("FDA") for Vasomax(R) for the treatment
of MED. In August 1998, Schering-Plough submitted a Marketing Approval
Application for Vasomax(R) with the Medicines Control Agency in the United
Kingdom. In February 1999, Schering-Plough notified the Company that it has
exercised its right to begin manufacturing finished product for Vasomax(R).
Schering-Plough intends to file Marketing Authorization Applications for
Vasomax(R) in all other countries in the European Union ("EU") using the EU
Mutual Recognition Procedure following approval in the U.K.
On May 10, 1999, Zonagen, Inc. and Schering-Plough jointly announced that
the companies have decided to forego a June FDA Advisory Panel review of the New
Drug Application (NDA) for Vasomax(R) until the results of additional clinical
studies being conducted by Schering-Plough can be submitted to the FDA. As a
result of this decision, Zonagen expects that the FDA will issue a non-
approvable letter for the NDA. Vasomax(R) is Zonagen's oral treatment for
erectile dysfunction.
Zonagen completed two positive pivotal clinical trials that formed the
basis of the NDA for Vasomax(R). Zonagen and Schering-Plough believe that
inclusion of the new data from the ongoing studies should enhance the regulatory
filing and the commercial product profile for Vasomax(R). Both companies are
committed to obtaining approval of Vasomax(R) with the optimal safety and
efficacy product profile.
Zonagen expects to submit the data to the FDA as an amendment to the NDA.
It was not possible to extend the deadline for completion of the FDA review
therefore it was decided to accept a non-approvable letter.
Schering-Plough is continuing to seek regulatory approvals for Vasomax(R)
in countries outside the United States, having launched the product in Mexico in
June 1998 and Brazil in April 1999. A regulatory application was filed in the
United Kingdom in August 1998 as the first step in a mutual recognition
procedure for the European Union.
There can be no assurance, however, that the FDA will consider such studies
satisfactory for approval of the NDA submission or whether additional studies
will be required; nor can there be any assurance that the FDA will ultimately
approve Vasomax(R). Certain risks and uncertainties associated with the filing
and the FDA review of the NDA are described or referenced in "Factors Affecting
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
14
In December 1998, the Company initiated a U.S. Phase I clinical trial of
Vasofem, a vaginal form of phentolamine mesylate, for the treatment of Female
Sexual Dysfunction ("FSD").
The Company has several preclinical development programs for the treatment
of MED, including an oral combination treatment and a multi-component injection
for second-line therapy. In addition to sexual dysfunction, the Company has
ongoing research and development programs for other diseases and disorders of
the reproductive system, including several new approaches to contraception and
new treatments for urological diseases such as benign prostate hyperplasia
("BPH") and prostate cancer.
As of March 31, 1999, the Company had an accumulated deficit of
approximately $55.5 million. There can be no assurance that the Company will be
able to successfully complete 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.
IMPACT OF YEAR 2000
Certain companies may face problems if the computer processors and software
upon which they directly or indirectly rely are unable to process date values
correctly upon the turn of the millennium ("Year 2000"). Such a system failure
and corruption of data of the Company or its customers or suppliers could
disrupt the Company's operations, including, among other things a temporary
inability to process transactions or engage in other business activities or to
receive information or services from suppliers.
The Company has appointed a Year 2000 committee to address the issues and
assess the potential impact of the Year 2000 problem. The committee is
evaluating the Company's financial systems, computers, software and other
equipment and anticipates that the programs and systems should be Year 2000
compliant. The Company presently believes that its computer systems, software
and other equipment should be Year 2000 compliant by December 1999. The Company
estimates that it will spend approximately $100,000 to $150,000 in capital for
replacement of computers, equipment and software upgrades. The Company will
incur another $50,000 to $100,000 for costs of implementation.
The Company is in the process of surveying its third party suppliers and is
requesting that they represent that their products and services are to be Year
2000 compliant and that they have a program to test for compliance.
Additionally, the Company will assess those vendors that are not Year 2000
compliant and will find alternative vendors that are compliant.
Because the Company currently anticipates that it will achieve Year 2000
compliance, it has not formulated a contingency plan. However, should the
Company determine there is
15
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
significant risk that it may be unable to adhere to its compliance timetable, it
will assess reasonably likely scenarios resulting from noncompliance and
establish a contingency plan to address such scenarios.
The Company's ability to achieve Year 2000 compliance is subject to various
uncertainties including the Company's ability to successfully identify systems
and programs not Year 2000 compliant, the nature and amount of programming
required to correct or replace affected programs, the availability and magnitude
of labor and consulting costs and the success of the Company's business
partners, vendors and clients in addressing the Year 2000 issue. Therefore,
while the financial impact of implementing Year 2000 compliance remediation has
not been and is not anticipated to be material to the Company's business,
financial position or results of operations, the Company can make no assurances
with respect to the costs of remediation efforts not yet incurred.
Additionally, the Company cannot be certain that it will achieve adequate Year
2000 compliance in a timely manner or that any impact of a failure to achieve
such compliance will not have a material adverse effect on the Company's
business, financial condition or results of operation.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
Revenues. Total revenues decreased 43% to $629,000 for the quarter ended
March 31, 1999 as compared to $1.1 million for the same period in the prior
year. The decrease is due primarily to decreased cash balances as a result of
the Company's net cash used in operating activities and stock repurchases during
the year ended December 31, 1998. Schering-Plough commenced sales of Vasomax(R)
in Mexico under the brand name of Z-MAX in May 1998. Under the terms of the
license agreement, the Company receives quarterly royalty payments based on net
product sales by Schering-Plough. These quarterly payments may lag current
quarter sales by up to sixty days. There were no product royalties received for
the quarter ended March 31, 1999. Until Vasomax(R) is approved and launched on a
broader basis, the Company expects royalty payments to reflect fluctuations due
to inventory stocking and promotional activities.
Research and Development Expenses. Research and development ("R&D")
expenses include internal and contracted research and regulatory affairs
activities. R&D expenses decreased 31% to $4.4 million for the quarter ended
March 31, 1999 as compared to $6.3 million for the same period in the prior
year. The decrease was due primarily to a decline in contracted costs associated
with the development of Vasomax(R). These contracted costs decreased 41% to
approximately $3.2 million during the quarter ended March 31, 1999 as compared
to approximately $5.4 million during the same period in the prior year. The
reduction in contracted costs associated with the development of Vasomax(R) is a
result of a reduction in contract research and regulatory activity following the
July 14, 1998 NDA submission to the FDA for Vasomax(R) and the completion of
Phase III and open label clinical trials. The Company will continue to incur
costs in connection with the further development of Vasomax(R) until the
regulatory process is complete. General R&D expenses increased 20% to
approximately $1.1 million for the quarter ended March 31, 1999 as compared to
$913,000 during the same period in the prior year. This increase was primarily
due to expenses associated with hiring additional personnel and expanding the
Company's research and drug screening capabilities. The
16
ZONAGEN, INC. AND SUBSIDIARY
(A development stage companyy)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
Company expects its research and development expenses to increase during the
remainder of 1999 and for at least the next several years as the Company
progresses with clinical trial programs for future product candidates.
General and Administrative Expenses. General and administrative expenses
increased 22% to $933,000 during the quarter ended March 31, 1999 from $765,000
in the first quarter of 1998. The increase was primarily due to expenses
associated with hiring and relocating several new members of the management
team.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily with
proceeds from the private placement and public offering of equity securities and
with funds received under collaborative agreements. 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 sale 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. In December 1997, the Company
received a $10.0 million up-front license fee from Schering-Plough for the right
to market and sell Vasomax(R) for the treatment of male erectile dysfunction. On
June 30, 1998, the Company received an accelerated $5.0 million milestone
payment from Schering-Plough with respect to Vasomax(R). On September 30, 1998,
the Company received an additional $5.0 million milestone payment from Schering-
Plough with respect to Vasomax(R).
The Company used net cash of approximately $5.5 million for operating
activities in the three months ended March 31, 1999 as compared to approximately
$7.6 million for the same period in the prior year. The Company had cash and
cash equivalents of approximately $48.1 million at March 31, 1999. The decrease
for the three months ended March 31, 1999 was due primarily to a decline in
contracted costs associated with the development of Vasomax(R). The reduction in
contracted costs associated with the development of Vasomax(R) is a result of a
reduction in contract research and regulatory activity following the July 14,
1998 NDA submission to the FDA for Vasomax(R) and the completion of Phase III
and open label clinical trials.
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity financings
and corporate collaborative agreements. 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 2000. 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 clinical and preclinical activities; the progress of
the Company's collaborative agreements with affiliates of Schering-Plough and
costs associated with any future collaborative research, manufacturing,
marketing or other funding arrangements; the costs and timing of seeking
regulatory approvals of Vasomax(R) and the Company's other future
17
ZONAGEN, INC. AND SUBSIDIARY
(A development stage companyy)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
product candidates; 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, the regulatory approval process, and
the commercialization of Vasomax(R) are not favorable or timely. 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 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.
18
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
Technologies, Inc., Fulbright & Jaworski, L.L.P., The Woodlands Venture Capital
Company and the Company as defendants. The lawsuit has been dismissed without
the right of Dunbar to re-file and with no monetary consideration paid by the
Company.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the Southern
District of Texas in Houston, Texas and were consolidated on May 29, 1998. The
plaintiffs purport to bring the suit on behalf of all purchasers of Zonagen
common stock between February 7, 1996 and January 9, 1998. The plaintiffs
assert that the defendants made materially false and misleading statements and
failed to disclose material facts about the patents and patent applications of
the Company relating to Vasomax(R) and ImmuMax(TM), and about the Company's
clinical trials of Vasomax(R). The plaintiffs seek to have the action declared
to be a class action, and to have rescissionary or compensatory damages in an
unstated amount, along with interest and attorney's fees. On March 30, 1999, the
Court granted the defendants' motion to dismiss, and dismissed the case with
prejudice. The plaintiffs have filed an appeal. The Company and the individual
defendants believe that these actions are without merit and intend to defend
against them vigorously. No estimate of loss or range of estimate of loss, if
any, can be made at this time.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
19
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Asset Purchase Agreement between Zonagen, Inc.,
Fertility Technologies, Inc. and Sage BioPharma, Inc.
dated as of March 1, 1999
10.2 Employment Agreement between the Company and F. Scott
Reding
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
(1) Current Report on Form 8-K dated March 12, 1999
reporting under Item 5.
20
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: May 12, 1999
By: /s/ Joseph S. Podolski
-------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 1999
By /s/ F. Scott Reding
-------------------------------
F. Scott Reding
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
21