1
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 June 30, 2001
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 August 10, 2001 there were outstanding 11,334,090 shares of
Common Stock, par value $.001 per share, of the Registrant.
2
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended June 30, 2001
INDEX
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: June 30, 2001 (Unaudited)
and December 31, 2000 5
Consolidated Statements of Operations: For the three months ended
June 30, 2001 and 2000, six months ended June 30, 2001 and 2000
and from Inception (August 20, 1987) through June 30, 2001 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
June 30, 2001 and 2000, six months ended June 30, 2001 and 2000 and
from Inception (August 20, 1987) through June 30, 2001 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
2
3
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 "may," "anticipate," "believe," "expect," "estimate," "project,"
"suggest," "intend" 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, projected, suggested or intended. These risks and uncertainties
include risks associated with the Company's early stage of development,
uncertainties related to the pending mechanistic study and the partial clinical
hold imposed by the Food and Drug Administration (FDA) on the Company's
phentolamine based products, approval of the Company's products by the FDA and
other jurisdictions, 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, inventory accumulation, competition and technological
change, product liability and availability of insurance, the Company's reliance
on contract research organizations, no assurance of adequate third party
reimbursement 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, 2000 and
"Part I. Financial Information - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
included elsewhere in this quarterly report on Form 10-Q.
3
4
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 six-month period
ended June 30, 2001 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2001. 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, 2000.
4
5
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
JUNE 30, DECEMBER 31,
2001 2000
---- ----
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,768 $ 2,511
Marketable securities - short term 16,741 24,417
Product inventory 4,524 4,525
Prepaid expenses and other current assets 632 767
--------- ---------
Total current assets 28,665 32,220
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 443 556
MARKETABLE SECURITIES - LONG TERM 8,096 6,023
OTHER ASSETS, net 1,615 1,575
--------- ---------
Total assets $ 38,819 $ 40,374
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,977 $ 2,641
Accrued expenses 588 284
Deferred revenue - short term 2,146 2,146
--------- ---------
Total current liabilities 4,711 5,071
--------- ---------
DEFERRED revenue - long term 3,170 4,243
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, 11,749,390 and 11,742,152 shares issued,
respectively; 11,334,090 and 11,326,852 shares
outstanding, respectively 12 12
Additional paid-in capital 113,792 113,780
Deferred compensation (121) (241)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (75,261) (75,007)
--------- ---------
Total stockholders' equity 30,938 31,060
--------- ---------
Total liabilities and stockholders' equity $ 38,819 $ 40,374
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
6
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)
THROUGH
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, JUNE 30,
--------------------------- --------------------------- ---------
2001 2000 2001 2000 2001
--------- --------- --------- --------- ---------
REVENUES
Licensing fees $ 537 $ 528 $ 1,073 $ 1,056 $ 23,438
Product royalties 10 11 59 30 628
Research and development grants 17 -- 116 -- 188
Interest income 399 560 890 1,119 11,357
--------- --------- --------- --------- ---------
Total revenues 963 1,099 2,138 2,205 35,611
EXPENSES
Research and development 657 1,122 1,399 2,518 81,579
General and administrative 436 731 993 1,571 19,562
Interest expense and amortization
of intangibles -- -- -- -- 388
--------- --------- --------- --------- ---------
Total expenses 1,093 1,853 2,392 4,089 101,529
--------- --------- --------- --------- ---------
Loss from continuing operations (130) (754) (254) (1,884) (65,918)
Loss from discontinued operations -- -- -- -- (1,828)
Gain on disposal -- -- -- -- 939
--------- --------- --------- --------- ---------
Net loss before cumulative effect of
change in accounting principle (130) (754) (254) (1,884) (66,807)
Cumulative effect of change in accounting
principle -- -- -- (8,454) (8,454)
--------- --------- --------- --------- ---------
NET LOSS $ (130) $ (754) $ (254) $ (10,338) $ (75,261)
========= ========= ========= ========= =========
LOSS PER SHARE - BASIC AND DILUTED:
Loss from continuing operations $ (0.01) $ (0.07) $ (0.02) $ (0.17)
Net loss before cumulative effect of
change in accounting principle (0.01) (0.07) (0.02) (0.17)
Cumulative effect of change in accounting
principle -- -- -- (0.75)
--------- --------- --------- ---------
NET LOSS $ (0.01) $ (0.07) $ (0.02) $ (0.92)
========= ========= ========= =========
Shares used in loss per share calculation:
Basic 11,332 11,307 11,330 11,289
Diluted 11,332 11,307 11,330 11,289
The accompanying notes are an integral part of these consolidated financial
statements.
6
7
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
FROM INCEPTION
(AUGUST 20, 1987)
THROUGH
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, JUNE 30,
--------------------------- ------------------------- ---------
2001 2000 2001 2000 2001
--------- --------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (130) $ (754) $ (254) $ (10,338) $ (75,261)
Gain on disposal of discontinued operations -- -- -- -- (939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs -- -- -- -- 316
Depreciation and amortization 76 116 154 273 2,948
Noncash expenses related to stock-based
transactions 55 84 120 142 2,243
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 -- -- -- -- (199)
(Increase) decrease in inventory -- -- 1 (523) (4,555)
(Increase) decrease in prepaid expenses and other
current assets (249) (302) 135 (238) (516)
(Decrease) increase in accounts payable and
accrued expenses (445) (1,814) (360) (1,019) 2,442
(Decrease) increase in deferred revenue (537) (528) (1,073) 7,398 5,316
--------- --------- --------- --------- ---------
Net cash used in operating activities (1,230) (3,198) (1,277) (4,305) (67,987)
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchase) maturities of marketable securities 3,775 4,823 5,603 4,840 (24,837)
Capital expenditures -- (27) -- (43) (2,218)
Purchase of technology rights and other assets (7) (77) (81) (146) (1,838)
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
Technologies, Inc., subsidiary -- -- -- -- 2,250
Increase in net assets held for disposal -- -- -- -- (213)
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities 3,768 4,719 5,522 4,651 (26,715)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 7 14 12 113 84,159
Proceeds from issuance of preferred stock -- -- -- -- 23,688
Purchase of treasury stock -- -- -- -- (7,484)
Proceeds from issuance of notes payable -- -- -- -- 2,839
Principal payments on notes payable -- -- -- -- (1,732)
--------- --------- --------- --------- ---------
Net cash provided by financing activities 7 14 12 113 101,470
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,545 1,535 4,257 459 6,768
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,223 3,030 2,511 4,106 --
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,768 $ 4,565 $ 6,768 $ 4,565 $ 6,768
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ -- $ -- $ -- $ -- $ 94
The accompanying notes are an integral part of these consolidated financial
statements.
7
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc., a Delaware corporation, (the "Company" or "Zonagen"),
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, vaccine adjuvants, fertility and female
health as well as urological applications, specifically prostate cancer. From
Inception through June 30, 2001, the Company has been primarily engaged in
research and pre-clinical and clinical development and is still in a development
stage.
The Company has incurred several delays relating to the regulatory
approval of its lead product VASOMAX(R), which is being developed for the
treatment of male erectile dysfunction ("MED"). In August 1999, the Food and
Drug Administration ("FDA") placed the Company's phentolamine mesylate
(phentolamine) based products which include VASOMAX(R), Vasofem(TM), Bimexes(TM)
and ERXin(TM) on clinical hold in the U.S. based on a finding of brown fat
proliferations in a two-year rat study. However, the FDA allowed Schering-Plough
Corporation ("Schering-Plough") to complete an ongoing human study of VASOMAX(R)
that was already underway. In addition, the Medicines Control Agency ("MCA")
followed the FDA's lead in placing any further studies of phentolamine on
clinical hold. In May 2000, the FDA upgraded the status of VASOMAX(R) to a
partial clinical hold pending additional animal data and in August 2000, the MCA
lifted the clinical hold on phentolamine in the United Kingdom. In October 2000,
the FDA allowed Zonagen to conduct a mechanistic study to address their concerns
regarding the brown fat findings in the earlier two-year rat study. Zonagen
believes that having the U.S. partial clinical hold lifted is an important
factor in the approval process for VASOMAX(R) in the U.S. The Company
anticipates that final data from the study will not be available for FDA
submission until the first half of 2002. As a result of these delays, in July
2000 the Company's Board of Directors elected to engage Deutsche Banc Alex.
Brown to review the Company's strategic alternatives for redeploying its assets,
which is still ongoing. At that time, the Board also elected to reduce cash
expenditures and conserve resources as part of the redeployment strategy. As a
result of this decision, Zonagen pared headcount to the minimum required to
maintain existing technologies and commitments and laid-off more than one half
of the Company's employees. Currently, the Company has 10 full-time employees.
Due to the July 2000 reductions in employee headcount and cash expenditures, the
Company has substantially reduced its research and development, clinical and
regulatory and corporate activities. The Company believes that its existing
capital resources will be sufficient to fund its operations through at least the
end of 2003, assuming no material changes occur regarding the current
development plans of the Company's products.
There can be no assurance that changes in the Company's current
strategic plans or other events will not result in accelerated or unexpected
expenditures. To satisfy its capital
8
9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
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 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 the Company on favorable terms or at
all. 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.
The Company's capital requirements will depend on many factors,
including whether the FDA lifts its partial clinical hold on VASOMAX(R) the
Company's oral treatment for MED and the Company's other product candidates that
contain the active ingredient phentolamine; 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 products; the
Company's ability to obtain regulatory approvals; the success of the Company's
sales and marketing programs; the cost of filing, prosecuting, 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. See "Item 1. Description of Business -- Business Risks" in the
Company's annual report on Form 10-K for the fiscal year ended December 31,
2000.
NOTE 2 -- NEW ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
During 2000, the Company adopted U.S. Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") which requires up-front, non-refundable license fees to
be deferred and recognized over the performance period. In situations where the
Company receives payment in advance of the performance of services, such amounts
are deferred and recognized as revenue as the related services are performed.
The Company recognizes revenue from non-refundable, up-front license and
milestone payments, not specifically tied to a separate earnings process,
ratably over the
9
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
performance period of the agreement. When payments are specifically tied to a
separate earnings process, revenue is recognized when earned. Prior to January
1, 2000, the Company had recognized revenue from non-refundable fees when the
Company had no obligations to refund the fees under any circumstances, and there
were no additional contractual services to be provided or costs to be incurred
by the Company in connection with the non-refundable fees.
The cumulative effect of adopting SAB 101 at January 1, 2000 resulted
in a one-time, non-cash charge of $8.5 million, with a corresponding increase to
deferred revenue that will be recognized in future periods. The $8.5 million
represents portions of 1997 and 1998 payments received from Schering-Plough in
consideration for the exclusive license of the Company's VASOMAX(R) product for
the treatment of MED. For the year ended December 31, 2000, the Company
recognized $2.1 million of licensing fees revenue that was included in the
cumulative effect adjustment as of January 1, 2000. The balance of the deferred
revenue from this adjustment, $6.4 million, will be recognized in the future
over the performance period of the agreement. Included in licensing fees for the
three month period ended June 30, 2001 is $528,000 of revenue that was
recognized in prior years relating to the adoption of SAB 101.
NOTE 3 -- MARKETABLE SECURITIES-SHORT AND LONG TERM
Short term marketable securities have a remaining maturity of less than
twelve months and long term marketable securities have a remaining maturity of
greater than twelve months. All investments are stated at amortized cost.
Marketable securities - short term were approximately $16.7 million and
marketable securities - long term were approximately $8.1 million as of June 30,
2001, totaling $24.8 million as compared to marketable securities - short term
of $24.4 million and marketable securities - long term of $6.0 million at
December 31, 2000, totaling $30.4 million. The Company invests some of its
excess funds in longer maturities to secure a higher yield. These investments
include corporate bonds and notes, Euro-dollar bonds, taxable auction securities
and asset-backed securities. The Company's policy is to hold investments to
maturity, to require minimum credit ratings of A1/P1 and A2/A and to make no
investments with maturities more than three years. The average life of the
investment portfolio may not exceed 24 months.
NOTE 4 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine which is the
active ingredient in VASOMAX(R), Vasofem(TM), Bimexes(TM) and Erxin. As of June
30, 2001 and December 31, 2000, the cost of this bulk raw material inventory on
hand was approximately $4.5 million. The Company believes that its phentolamine
mesylate inventory shelf life will be sufficient until the product launch date.
Although the Company believes that it will realize the full value of this
inventory upon approval of VASOMAX(R), any further delays in the approval of
VASOMAX(R), or
10
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001
(Unaudited)
the failure to obtain approval, would force the Company to attempt to liquidate
a portion or all of its phentolamine inventory position. A large sale of this
bulk inventory could drive the market price down due to an oversupply of
phentolamine.
NOTE 5 -- LICENSE, RESEARCH AND DEVELOPMENT AGREEMENT
Schering-Plough Corporation
In November 1997, the Company entered into exclusive license agreements
with Schering-Plough, a major U.S.-based pharmaceutical company, with respect to
the Company's VASOMAX(R) product for the treatment of MED. Included in the
Company's balance sheet as of December 31, 2000 under the caption accounts
payable is an obligation to Schering-Plough of approximately $2.4 million. This
obligation represents the Company's portion of a shared clinical development
program with Schering-Plough regarding the Company's VASOMAX(R) product. During
April 2001, Schering-Plough agreed to accept payment of the Company's obligation
to Schering-Plough via two cash payments aggregating $1 million, a transfer of
$933,000 in bulk phentolamine inventory and a $467,000 reduction in future
royalties and milestone payments due to the Company. During April 2001, the
Company made its first cash payment to Schering-Plough in the amount of $600,000
reducing the total obligation to Schering-Plough to $1.8 million.
11
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 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
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, vaccine adjuvants,
fertility and female health as well as urological applications, specifically
prostate cancer. From Inception through June 30, 2001, the Company has been
primarily engaged in research and pre-clinical and clinical development and is
still in a development stage.
The Company has incurred several delays relating to the regulatory
approval of its lead product VASOMAX(R), which is being developed for the
treatment of MED. In August 1999, the FDA placed the Company's phentolamine
based products which include VASOMAX(R), Vasofem(TM), Bimexes(TM) and Erxin(TM)
on clinical hold in the U.S. based on a finding of brown fat proliferations in a
two-year rat study. However, the FDA allowed Schering-Plough to complete an
ongoing human study of VASOMAX(R) that was already underway. In addition, the
MCA followed the FDA's lead in placing any further studies of phentolamine on
clinical hold. In May 2000, the FDA upgraded the status of VASOMAX(R) to a
partial clinical hold pending additional animal data and in August 2000 the MCA
lifted the clinical hold on phentolamine in the United Kingdom. In October 2000,
the FDA allowed Zonagen to conduct a mechanistic study to address their concerns
regarding the brown fat findings in the earlier two-year rat study. Zonagen
believes that having the U.S. partial clinical hold lifted is an important
factor in the approval process for VASOMAX(R) in the U.S. The Company
anticipates that final data from the study will not be available for FDA
submission until the first half of 2002. As a result of these delays, in July
2000 the Company's Board of Directors elected to engage Deutsche Banc Alex.
Brown to review the Company's strategic alternatives for redeploying its assets,
which is still ongoing. At that time, the Board also elected to reduce cash
expenditures and conserve resources as part of the redeployment strategy. As a
result of this decision, Zonagen pared headcount to the minimum required to
maintain existing technologies and commitments and laid-off more than one half
of the Company's employees. Currently, the Company has 10 full-time employees.
Due to the July 2000 reductions in employee headcount and cash expenditures, the
Company has substantially reduced its research and development, clinical and
regulatory and corporate activities.
Zonagen's results of operations may vary significantly from year to
year and quarter to quarter, and depend, among other factors, on the regulatory
approval process in the United States
12
13
and other foreign jurisdictions, the signing of new licenses and product
development agreements, the timing of revenues recognized pursuant to license
agreements, the achievement of milestones by licensees or the Company, the
progress of clinical trials conducted by the licensees and the Company and the
levels of research, marketing and administrative expense. The timing of the
Company's revenues may not match the timing of the Company's associated product
development expenses. To date, research and development expenses have generally
exceeded revenue in any particular period and/or fiscal year.
There can be no assurances that the FDA will accept the data generated
from the ongoing alternative mechanistic study as adequate to lift the partial
clinical hold on the Company's phentolamine based products or that the products
will ultimately be approved for marketing. Additionally, there can be no
assurance that the FDA or other similar regulatory authorities will approve
VASOMAX(R) for commercial sale. See "Part 1. Item 1. Description of Business -
Business Risks - Uncertainties Related to Clinical Trial Results and FDA
Approval" in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 2000.
As of June 30, 2001, the Company had an accumulated deficit of $75.3
million. Losses have resulted principally from costs incurred conducting
clinical trials for VASOMAX(R) and Vasofem(TM), in research and development
activities related to efforts to develop the Company's products and from the
associated administrative costs required to support those efforts. 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 ability to achieve profitability will depend,
among other things, on successfully completing the development of its products
in a reasonable time frame and at a reasonable cost, including the obtaining of
a timely lifting of the FDA's partial clinical hold on the Company's
phentolamine based products, regulatory approvals, establishing marketing, sales
and manufacturing capabilities or collaborative arrangements with others that
possess such capabilities, the ability to realize value from the Company's
research and development programs through the commercialization of those
products and raising sufficient funds to finance its activities. There can be no
assurance that profitability can be achieved or if achieved, can be sustained.
See "Item 1. Description of Business -- Business Risks -- Uncertainties Related
to Early Stage of Development," " -- Business Risks -- History of Operating
Losses; Accumulated Deficit" in the Company's annual report on Form 10-K for the
fiscal year ended December 31, 2000.
RESULTS OF OPERATIONS
THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AND 2000
Revenues. During 2000, the Company adopted U.S. Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101") which requires up-front, non-refundable license fees to
be deferred and recognized over the performance period. In situations where the
Company receives payment in advance of the performance of services, such amounts
are deferred and recognized as revenue as the related services are performed.
The Company recognizes revenue from non-refundable, up-front license and
milestone payments, not specifically tied to a separate earnings process,
ratably over the
13
14
performance period of the agreement. When payments are specifically tied to a
separate earnings process, revenue is recognized when earned. Prior to January
1, 2000, the Company had recognized revenue from non-refundable fees when the
Company had no obligations to refund the fees under any circumstances, and there
were no additional contractual services to be provided or costs to be incurred
by the Company in connection with the non-refundable fees.
The cumulative effect of adopting SAB 101 at January 1, 2000
resulted in a one-time, non-cash charge of $8.5 million, with a corresponding
increase to deferred revenue that will be recognized in future periods. The $8.5
million represents portions of 1997 and 1998 payments received from
Schering-Plough in consideration for the exclusive license of the Company's
VASOMAX(R) product for the treatment of MED. For the year ended December 31,
2000, the Company recognized $2.1 million of licensing fees revenue that was
included in the cumulative effect adjustment as of January 1, 2000. The balance
of the deferred revenue from this adjustment, $6.4 million, will be recognized
in the future over the performance period of the agreement.
Total revenues remained relatively constant at approximately $1.0
million for the three month period ended June 30, 2001 as compared with $1.1
million for the same period in the prior year and were approximately $2.1
million for the six month period ended June 30, 2001 as compared to $2.2 million
for the same period in the prior year. Total revenues reflect the adoption of
SAB 101 effective January 1, 2000.
Licensing fees for the three month period ended June 30, 2001 were
$537,000 as compared to $528,000 for the same period in the prior year.
Licensing fees for the two six month periods ended June 30, 2001 and June 30,
2000 were approximately $1.1 million. Included in licensing fees for the three
month period ended June 30, 2001 were $528,000 as a result of the change in
accounting principle under SAB 101 from the Company's agreements with
Schering-Plough. Research and development grants for the three month period
ended June 30, 2001 were $17,000 as compared to none for the same period in the
prior year. Research and Development grants were $116,000 for the six month
period ended June 30, 2001 as compared to none for the same period in the prior
year relating to the Company's SBIR grants.
Product royalties from sales of VASOMAX(R) in Latin America were
approximately $10,000 for the three month period ended June 30, 2001 as compared
to $11,000 for the same period in the prior year. Product royalties were $59,000
for the six month period ended June 30, 2001 as compared to $30,000 for the same
period in the prior year. Schering-Plough commenced sales of VASOMAX(R) in
Mexico, under the brand name Z-MAX(R), in May 1998 and in Brazil in May 1999.
Under the terms of the Agreements, the Company receives quarterly royalty
payments based on net product sales by Schering-Plough. These quarterly payments
are expected to lag current quarter sales by up to sixty days. Until the partial
clinical hold on VASOMAX(R) is lifted in the United States and the product is
ultimately approved in the United States or other major countries, the Company
expects royalty payments from sales to be nominal.
Interest income decreased 29% to $399,000 for the three month period
ended June 30, 2001 as compared to $560,000 for the same period in the prior
year and decreased 19% to $890,000 for the six month period ended June 30, 2001
as compared to approximately $1.1 million for the same
14
15
period in the prior year. The decrease is primarily attributable to declining
interest rates and lower cash balances.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted clinical development, internal clinical development
and general internal and contracted research and development expenses. R&D
expenses decreased 40% to $657,000 for the three month period ended June 30,
2001 as compared to approximately $1.1 million for the same period in the prior
year. R&D expenses decreased 44% to approximately $1.4 million for the six month
period ended June 30, 2001 as compared to approximately $2.5 million for the
same period in the prior year. This decrease was primarily due to the July 2000
cost reduction program and the associated reduction in contracted clinical
development, internal clinical development and general internal and contracted
research and development activities. The Company continues to run its
mechanistic study required to alleviate the FDA's concerns regarding the
Company's phentolamine based products and also continues to run other small
off-shore pilot studies. Although at a reduced level subsequent to the July 2000
cost reduction program, the Company continues to advance its other research
product candidates. The Company does not anticipate a major increase in R&D
expenses until VASOMAX(R) is approved in a major market.
General and Administrative Expenses. General and administrative ("G&A")
expenses decreased by 40% to $436,000 for the three month period ended June 30,
2001 as compared to $731,000 for the same period in the prior year. G&A expenses
decreased by 38% to $993,000 for the six month period ended June 30, 2001 as
compared to approximately $1.6 million for the same period in the prior year.
This decrease was primarily due to the July 2000 cost reduction program and the
associated reduction in activities. The Company does not anticipate a major
increase in G&A expenses until VASOMAX(R) is approved in a major market.
LIQUIDITY AND CAPITAL RESOURCES
Since Inception, the Company has financed its operations primarily with
proceeds from private placements and public offerings of equity securities and
with funds received under collaborative agreements. Zonagen has received a total
of $20.0 million from Schering-Plough from inception of its collaboration
through June 30, 2001 and has received only nominal royalty payments from the
sale of VASOMAX(R) in Mexico and Brazil.
The Company's primary use of cash to date has been in operating
activities to fund research and development, including preclinical studies and
clinical trials, and general and administrative expenses required to support
those activities. Net cash of approximately $1.2 million was used in operating
activities during the three month period ended June 30, 2001 as compared to $3.2
million for the same period in the prior year. Net cash of approximately $1.3
million was used in operating activities during the six month period ended June
30, 2001 as compared to $4.3 million for the same period in the prior year.
Included in the $1.2 million net cash used in operating activities for the three
month period ended June 30, 2001 is a payment which was made to Schering-Plough
of $600,000 as reimbursement for prior shared clinical development costs for
VASOMAX(R). The Company had cash, cash equivalents and marketable securities of
approximately $31.6 million at June 30, 2001 as compared to approximately $32.9
15
16
million at December 31, 2000. The decreased use of cash for the quarter ended
June 30, 2001 was primarily due to the Company's implementation of a cost
reduction program in July 2000, which involved a significant headcount reduction
and other cost cutting measures and substantially reducing its research and
development, clinical and regulatory and corporate activities, due to the
regulatory approval delays associated with the Company's phentolamine based
products, which include VASOMAX(R), and Vasofem(TM), Bimexes(TM) and Erxin(TM).
The Company pared headcount to the minimum required to maintain existing
technologies and commitments and laid-off more than one half of the Company's
employees.
Based on the decision to engage Deutsche Banc Alex. Brown to review
strategic alternatives for the redeployment of the Company's assets and to
reduce cash expenditures and conserve resources as part of the redeployment
strategy, the Company believes that its existing capital resources will be
sufficient to fund its operations through at least the end of 2003, assuming no
material changes occur regarding the current development plans of the Company's
products. 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 or any future collaborators and
costs associated with any of those collaborative research, manufacturing,
marketing or other funding arrangements; the costs and timing of seeking
regulatory approvals of VASOMAX(R) and the Company's other products; the
Company's ability to obtain regulatory approvals including the obtaining of the
timely lifting of the FDA's partial clinical hold on the Company's phentolamine
based products; 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. 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 its remaining 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. See "Item 1. Description of Business -- Business Risks"
in the Company's annual report on Form 10-K for the fiscal year ended December
31, 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
16
17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Stockholders was held on July 10,
2001 to consider and vote upon the following proposals:
(i) Election of Directors. The following individuals were
nominated and elected as directors, with the
following number of shares voted for and withheld
with respect to each director.
For Withheld
--- --------
Martin P. Sutter 9,469,276 246,682
Joseph S. Podolski 9,632,508 83,450
Steven Blasnik 9,620,281 95,677
Lloyd M. Bentsen, III 9,622,851 93,107
Timothy McInerney 9,622,481 93,477
(ii) Approval of the appointment of Arthur Andersen LLP as
the Company's independent public accountants for 2000
For 9,656,960 Against 35,079 Abstain 23,919
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
11.1* Statement Regarding Computation of Net Loss Per Share
* filed herewith
b. Reports on Form 8-K
The Company filed a current report on Form 8-K on
July 12, 2001 reporting an event under Item 9.
17
18
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: August 14, 2001
By: /s/ Joseph S. Podolski
-----------------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 14, 2001
By: /s/ Louis Ploth, Jr.
-----------------------------------------
Louis Ploth, Jr.
Vice President Business Development
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
19
EXHIBIT INDEX
Exhibit No. Identification of Exhibit
- ----------- -------------------------
11.1 Statement Regarding Computation of Net Loss Per Share