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, 2002
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 Identification No.)
organization)
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 May 8, 2002 there were outstanding 11,381,925 shares of Common
Stock, par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 2002
INDEX
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: March 31, 2002 (Unaudited)
and December 31, 2001 5
Consolidated Statements of Operations: For the three months ended
March 31, 2002 and 2001 and from Inception (August 20, 1987) through
March 31, 2002 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
March 31, 2002 and 2001 and from Inception (August 20, 1987) through
March 31, 2002 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
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 "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, 2001 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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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 accounting principles generally
accepted in the United States 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, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002. 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, 2001.
4
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
MARCH 31, DECEMBER 31,
2002 2001
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,227 $ 1,521
Marketable securities - short term 27,869 28,535
Product inventory 0 4,417
Prepaid expenses and other current assets 595 787
--------- ---------
Total current assets 29,691 35,260
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 290 340
MARKETABLE SECURITIES - LONG TERM -- --
INVENTORY - LONG TERM 4,417 --
OTHER ASSETS, net 1,353 1,314
--------- ---------
Total assets $ 35,751 $ 36,914
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,349 $ 1,723
Accrued expenses 398 394
Deferred revenue - short term 2,114 2,114
--------- ---------
Total current liabilities 3,861 4,231
--------- ---------
DEFERRED REVENUE - LONG TERM 1,585 2,114
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, 11,797,225 and 11,765,516 shares issued,
respectively; 11,381,925 and 11,350,216 shares
outstanding, respectively 12 12
Additional paid-in capital 113,922 113,898
Deferred compensation (8) (11)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (76,137) (75,846)
--------- ---------
Total stockholders' equity 30,305 30,569
--------- ---------
Total liabilities and stockholders' equity $ 35,751 $ 36,914
========= =========
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,
2002 2001 2002
-------- -------- -----------------
REVENUES
Licensing fees $ 528 $ 536 $ 25,055
Product royalties -- 49 627
Research and development grants -- 99 187
Interest income 234 491 12,227
-------- -------- ---------
Total revenues 762 1,175 38,096
EXPENSES
Research and development 610 742 83,818
General and administrative 443 557 20,684
Interest expense and amortization
of intangibles -- -- 388
-------- -------- ---------
Total expenses 1,053 1,299 104,890
-------- -------- ---------
Loss from continuing operations (291) (124) (66,794)
Loss from discontinued operations -- -- (1,828)
Gain on disposal -- -- 939
-------- -------- ---------
Net loss before cumulative effect of
change in accounting principle (291) (124) (67,683)
Cumulative effect of change in accounting
principle -- -- (8,454)
-------- -------- ---------
NET LOSS $ (291) $ (124) $ (76,137)
======== ======== =========
LOSS PER SHARE - BASIC AND DILUTED:
Loss from continuing operations $ (0.03) $ (0.01)
Net loss before cumulative effect of
change in accounting principle (0.03) (0.01)
Cumulative effect of change in accounting
principle -- --
-------- --------
NET LOSS $ (0.03) $ (0.01)
======== ========
Shares used in loss per share calculation:
Basic 11,358 11,329
Diluted 11,358 11,329
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,
2002 2001 2002
------- ------- -----------------
Cash Flows from Operating Activities
Net loss $ (291) $ (124) $ (76,137)
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 50 78 3,509
Noncash expenses related to stock-based
transactions 3 65 2,426
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):
Decrease in receivables -- -- (199)
Decrease (increase) in inventory -- 1 (4,447)
Decrease (increase) in prepaid expenses and other
current assets 192 384 (292)
(Decrease) increase in accounts payable and
accrued expenses (370) 85 1,624
(Decrease) increase in deferred revenue (529) (536) 3,700
------- ------- ---------
Net cash used in operating activities (945) (47) (70,221)
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities (purchase) of marketable securities 666 1,828 (28,057)
Capital expenditures -- -- (2,219)
Purchase of technology rights and other assets (39) (74) (1,983)
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 FTI -- -- 2,250
Increase in net assets held for disposal -- -- (213)
------- ------- ---------
Net cash provided by (used in) investing activities 627 1,754 (30,081)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 24 5 84,218
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 24 5 101,529
------- ------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (294) 1,712 1,227
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,521 2,511 --
------- ------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,227 $ 4,223 $ 1,227
======= ======= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ -- $ -- $ --
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, 2002
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc. ("Zonagen" or the "Company"), a Delaware corporation, was
organized on August 20, 1987 ("Inception") and is a development stage company.
Zonagen is engaged in the development of pharmaceutical products that address
diseases and conditions associated with the human reproductive system. From
Inception through March 31, 2002, the Company has been primarily engaged in
research and development and clinical development.
On April 29, 2002, Zonagen announced that it had been informed by
Schering-Plough Corporation ("Schering-Plough"), the worldwide licensee of
VASOMAX(R), that the Marketing Authorization Application ("MAA") for VASOMAX(R)
which was submitted to the United Kingdom Medicines Control Agency ("MCA") by
Schering-Plough in December 2001 would be withdrawn. This decision was made
following their review of the comments received from the Committee on Safety of
Medicines regarding the VASOMAX(R) submission. VASOMAX(R) is an oral therapy for
the treatment of male erectile dysfunction ("MED"). The Company is still
assessing the ramifications associated with this decision and is focused on
developing the greatest value possible for its shareholders, given this recent
event.
The Company has incurred several delays relating to the regulatory
approval of its lead product VASOMAX(R). In August 1999, the U.S. Food and Drug
Administration ("FDA") placed the Company's phentolamine mesylate
("phentolamine") based products, which include both VASOMAX(R) and Vasofem(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. This study
was initiated in November 2000. In December 2001, the Company released
information pertaining to the preliminary interim results from the mechanistic
rat study. The interim results of this mechanistic study showed that the gross
necropsies of both old and young rats exposed to various doses of phentolamine
suggest that phentolamine does not induce or promote brown fat proliferations in
rats. No gross brown fat proliferations were observed during the entire one-year
period that the animals were administered the drug. The Company plans to submit
the final results from the assessment of the data from this study to the FDA
during the middle of 2002. Having the U.S. partial clinical hold lifted is one
of several critical factors in the approval process for VASOMAX(R) in the U.S.
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
If VASOMAX(R) is not taken off partial clinical hold in the U.S. or is
not approved for use in some major territories, or if Schering-Plough terminates
its exclusive worldwide agreements ("Schering Agreements") to market and sell
VASOMAX(R) for the treatment of MED, the results from any of these events could
have a material adverse effect on the Company. 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, 2001 for a more complete description of the
Company's risks.
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 products, and to commence sales and marketing
efforts if appropriate, if the 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 2004.
The Company's capital requirements will depend on many factors,
including whether the FDA will lift its partial clinical hold on VASOMAX(R) and
the Company's other product candidates that contain phentolamine; whether
Schering-Plough terminates the Schering Agreements; 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 the Company's phentolamine-based products and
other products; 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.
NOTE 2 -- 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"). 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
9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
treatment of MED. Included in licensing fees for the three-month periods ended
March 31, 2002 and 2001 is approximately $528,000 of revenue that was recognized
in prior years relating to the adoption of SAB 101. Deferred revenue at March
31, 2002, is $3.7 million. If the Schering-Plough Agreements were terminated the
remaining deferred revenue would be recognized as revenue in the period of
termination.
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 which
approximates market. 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), the Company's oral treatment for MED. As of
March 31, 2002, the recorded amount of this bulk raw material inventory on hand
was approximately $4.4 million, which is the same value that the Company had at
December 31, 2001. This inventory is stated at the lower of cost or market using
the first-in, first-out method and has a finite shelf life. Any further delays
in the approval of VASOMAX or the Company's inability to have the U.S. partial
clinical hold removed would cause the Company to write-off a portion or all of
the remaining inventory on hand.
NOTE 5 -- LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
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, 2001 under the caption "accounts
payable" was an obligation to Schering-Plough of approximately $1.6 million.
This obligation was originally $2.4 million prior to any repayments made by the
Company to Schering-Plough and is for a portion of a shared clinical development
program regarding the Company's VASOMAX(R) product. During April 2001,
Schering-Plough agreed to accept payment of the Company's $2.4 million
obligation to Schering-Plough via cash
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
payments aggregating $1 million, a transfer of $933,000 in bulk phentolamine
inventory and a $467,000 reduction in future royalties and milestone payments
payable to the Company. In March 2002, the Company settled its $ 1 million cash
obligation with a payment of approximately $309,000. As of March 31, 2002, the
Company had a remaining obligation to Schering-Plough of approximately $1.3
million which the Company and Schering-Plough have agreed will be satisfied
through the transfer of bulk phentolamine and a reduction in future royalty and
milestone payments as described above.
NOTE 6 -- STOCK OPTIONS
In March 2002 the Company granted incentive stock options to purchase
225,000 shares of common stock to a key executive.
NOTE 7 -- Commitments and Contingencies
Certain purported class action complaints alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 thereunder were 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 purported to bring the suit on behalf of all
purchasers of Zonagen common stock between February 7, 1996 and January 9, 1998.
The plaintiffs asserted 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 Chito-ZN (formerly named
ImmuMax(TM)) and about the Company's clinical trials of VASOMAX(R). The
plaintiffs sought 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 filed an
appeal. On September 25, 2001, the United States Fifth Circuit Court of Appeals
affirmed the dismissal of all claims except one; the court reversed the trial
court's dismissal of a claim concerning the Company's disclosure about a patent
relating to VASOMAX(R). The defendants have filed a motion to dismiss that one
remaining claim, and that motion is still pending. 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. Management believes there will be no
material adverse effect related to this matter.
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002
(Unaudited)
NOTE 8 -- SUBSEQUENT EVENT
On April 29, 2002, Zonagen announced that it had been informed by
Schering-Plough Corporation ("Schering-Plough"), the worldwide licensee of
VASOMAX(R), that the Marketing Authorization Application ("MAA") for VASOMAX(R)
which was submitted to the United Kingdom Medicines Control Agency ("MCA") by
Schering-Plough in December 2001 would be withdrawn. This decision was made
following their review of the comments received from the Committee on Safety of
Medicines regarding the VASOMAX(R) submission. VASOMAX(R) is an oral therapy for
the treatment of erectile dysfunction. The Company is still assessing the
ramifications associated with this decision and is focused on developing the
greatest value possible for its shareholders, given this recent event.
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
Zonagen, Inc. ("Zonagen" or the "Company"), a Delaware corporation, was
organized on August 20, 1987 ("Inception") and is a development stage company.
Zonagen is engaged in the development of pharmaceutical products that address
diseases and conditions associated with the human reproductive system. From
Inception through March 31, 2002, the Company has been primarily engaged in
research and development and clinical development.
On April 29, 2002, Zonagen announced that it had been informed by
Schering-Plough Corporation ("Schering-Plough"), the worldwide licensee of
VASOMAX(R), that the Marketing Authorization Application ("MAA") for VASOMAX(R)
which was submitted to the United Kingdom Medicines Control Agency ("MCA") by
Schering-Plough in December 2001 would be withdrawn. This decision was made
following their review of the comments received from the Committee on Safety of
Medicines regarding the VASOMAX(R) submission. VASOMAX(R) is an oral therapy for
the treatment of male erectile dysfunction ("MED"). The Company is still
assessing the ramifications associated with this decision and is focused on
developing the greatest value possible for its shareholders, given this recent
event.
The Company has incurred several delays relating to the regulatory
approval of its lead product VASOMAX(R). In August 1999, the U.S. Food and Drug
Administration ("FDA") placed the Company's phentolamine mesylate
("phentolamine") based products, which include both VASOMAX(R) and
Vasofem(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. This study was initiated in November 2000. In December 2001,
the Company released information pertaining to the preliminary interim results
from the mechanistic rat study. The interim results of this mechanistic study
showed that the gross necropsies of both old and young rats exposed to various
doses of phentolamine suggest that phentolamine does not induce or promote brown
fat proliferations in rats. No gross brown fat proliferations were observed
during the entire one-year
13
period that the animals were administered the drug. The Company plans to submit
the final results from the assessment of the data from this study to the FDA
during the middle of 2002. Having the U.S. partial clinical hold lifted is one
of the critical factors in the approval process for VASOMAX(R) in the U.S.
If VASOMAX(R) is not taken off partial clinical hold in the U.S. or is
not approved for use in some major territories, or if Schering-Plough terminates
its exclusive worldwide agreements ("Schering Agreements") to market and sell
VASOMAX(R) for the treatment of MED, the results from any of these events could
have a material adverse effect on the Company. 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, 2001 for a more complete description of the
Company's risks.
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 products, and to commence sales and marketing
efforts if appropriate, if the 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 2004.
The Company's capital requirements will depend on many factors,
including whether the FDA will lift its partial clinical hold on VASOMAX(R) and
the Company's other product candidates that contain phentolamine; whether
Schering-Plough terminates the Schering Agreements; 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 the Company's phentolamine-based and other
products; 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.
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 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.
14
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 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.
As of March 31, 2002, the Company had an accumulated deficit of $76.1
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 Company's 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, obtaining
regulatory approvals, establishing marketing, sales and manufacturing
capabilities or collaborative arrangements with others that possess such
capabilities, the Company's and its partners' 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 the Company will be able to achieve profitability or that
profitability, 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" and "Note 1. Organization and Operations" of Notes to Consolidated
Financial Statements in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 2001.
Results of Operations
During 2000, the Company adopted U.S. Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). 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 years ended December 31,
2001 and 2000, the Company recognized $2.2 million and $2.1 million,
respectively, in licensing fee revenue that was included in the cumulative
effect adjustment as of January 1, 2000. The balance of the deferred revenue
from this adjustment, $4.2 million, will be recognized ratably in the future
over the performance period of the agreement, which is estimated to be the
period ending December 31, 2003. Included in licensing fees for the three-month
periods ended March 31, 2002 and 2001 is approximately $528,000 of revenue that
was recognized in prior years relating to the adoption of SAB 101. If the
Schering Agreements are terminated the remaining deferred revenue will be
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recognized as revenue in the period of termination.
Comparison of Three-month periods ended March 31, 2002 and 2001
Revenues. Total revenues for the three-month period ended March 31,
2002 were $762,000 as compared to $1.2 million for the same period in the prior
year. Licensing fees for the three-month period ended March 31, 2002 were
$528,000 as compared to $536,000 for the same period in the prior year. Included
in licensing fees for both three-month periods ended March 31, 2002 and 2001 was
approximately $528,000 of revenue recognized as a result of the change in
accounting principle under SAB 101 from the Schering Agreements. Research and
development grants for the three-month period ended March 31, 2002 were zero as
compared to $99,000 for the same period in the prior year relating to the
Company's SBIR grants. The Company did not receive any milestone payments from
Schering-Plough during the three-month periods ended March 31, 2002 or 2001 for
VASOMAX(R). Product royalties from sales of VASOMAX(R) in Latin America were
zero for the three-month period ended March 31, 2002 as compared to $49,000 for
the same period in the prior year. 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 minimal if any.
Interest income decreased 52% to $234,000 for the three-month period
ended March 31, 2002 as compared with $491,000 for the same period in the prior
year primarily due to a reduction in interest rate yields and lower cash
balances.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D expenses decreased 18% to $610,000 for
the three-month period ended March 31, 2002 as compared to $742,000 for the same
period in the prior year. The reduction is primarily due to the reduction in
clinical trial expenses and continued cost reductions made during the two
periods. As a result of the partial clinical hold surrounding the Company's
phentolamine-based products in the U.S., the Company has substantially reduced
all clinical development of these products until a satisfactory resolution can
be reached with the FDA. The Company incurred approximately $195,000 of
contracted research expenses for the three-month period ended March 31, 2002 as
compared to $367,000 for the same period in the prior year primarily for the
clinical development of VASOMAX(R). The Company will continue to incur costs in
connection with the ongoing regulatory review of VASOMAX(R), although at a
substantially reduced level compared to costs in prior years incurred while the
Company was engaged in Phase III and open label studies. The Company anticipates
that clinical development expenses could increase in the future, if the
Company's phentolamine-based products are taken off partial clinical hold by the
FDA. There can be no assurance that the FDA will remove the partial clinical
hold on the Company's phentolamine-based products or that it will be approved in
any regulatory jurisdiction.
General and Administrative Expenses. General and administrative ("G&A")
expenses decreased 21% to $443,000 for the three-month period ended March 31,
2002 as compared to $557,000 for the same period in the prior year. This
decrease is primarily due to the discontinuation of expenses associated with the
prior activities relating to the review of strategic
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alternative opportunities that occurred in the first quarter ended March 31,
2001 and the completion of a quarterly amortization relating to a non-cash
compensation charge for stock options previously issued in December 1996. The
Company does not anticipate a major increase in G&A expenses unless and until
VASOMAX(R) is approved in a major market.
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, 2001.
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 March 31, 2002 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 G&A expenses required to support those activities. Net cash
of approximately $945,000 was used in operating activities during the
three-month period ended March 31, 2002 as compared to $47,000 for the same
period in the prior year. Included in the $945,000 net cash used in operating
activities is a payment of approximately $309,000 which was made to
Schering-Plough as reimbursement for prior shared clinical development costs for
VASOMAX(R). The Company had cash, cash equivalents and marketable securities of
approximately $29.1 million at March 31, 2002 as compared to approximately $30.1
million at December 31, 2001. The increased use of cash for the three-month
period ended March 31, 2002 was primarily due to reducing the Company's accounts
payable liabilities by $370,000, a decrease in interest yield on the Company's
investment portfolio of $257,000, and the lack of R&D grant revenues and royalty
income of $148,000. The Company's actual expenses for the three-month period
ended March 31, 2002 were approximately $1.1 million as compared to $1.3 million
for the same period in the prior year.
The Company believes that its existing capital resources will be
sufficient to fund its operations through at least the end of 2004, 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 whether the FDA lifts its partial clinical hold on VASOMAX(R) and the
Company's other product candidates that contain 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 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,
17
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, 2001.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Certain purported class action complaints alleging violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and
Rule 10b-5 thereunder were 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 purported to bring the suit on behalf of all
purchasers of Zonagen common stock between February 7, 1996 and January 9, 1998.
The plaintiffs asserted 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 Chito-ZN (formerly named
ImmuMax(TM)) and about the Company's clinical trials of VASOMAX(R). The
plaintiffs sought 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 filed an
appeal. On September 25, 2001, the United States Fifth Circuit Court of Appeals
affirmed the dismissal of all claims except one; the court reversed the trial
court's dismissal of a claim concerning the Company's disclosure about a patent
relating to VASOMAX(R). The defendants have filed a motion to dismiss that one
remaining claim, and that motion is still pending. 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. Management believes there will be no
material adverse effect related to this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
The Company filed a current report on Form 8-K on April 30,
2002 reporting an event under Item 5.
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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 14, 2002
By: /s/ Joseph S. Podolski
----------------------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 14, 2002
By: /s/ Louis Ploth, Jr.
----------------------------------------------
Louis Ploth, Jr.
Vice President Business Development and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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