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, 2004
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 Identification No.)
incorporation or
organization)
2408 Timberloch Place, Suite B-10
The Woodlands, Texas 77380
(Address of principal executive
offices and zip code)
(281) 719-3400
(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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of April 28, 2004, there were outstanding 4,992,901 shares of Common
Stock, par value $.001 per share, of the Registrant.
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 2004
INDEX
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: March 31, 2004 (Unaudited)
and December 31, 2003 5
Consolidated Statements of Operations: For the three months ended
March 31, 2004 and 2003 and from Inception (August 20, 1987) through
March 31, 2004 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
March 31, 2004 and 2003 and from Inception (August 20, 1987) through
March 31, 2004 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
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 early
stage of development of the Company's proposed new Progenta(TM) technologies,
uncertainty relating to the Company's patent portfolio, approval of the
Company's products by the Food and Drug Administration ("FDA") and other
jurisdictions, the Company's ability to raise additional capital on acceptable
terms or at all, manufacturing uncertainties related to Progenta(TM), the
Company's ability to remain listed on the Nasdaq, the Company's ability to
obtain value from its technology portfolio 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, 2003 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, 2004 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2004. 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, 2003.
4
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
MARCH 31, DECEMBER 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 2,147 $ 20,946
Marketable securities 6,100 2,000
Prepaid expenses and other current assets 277 235
--------- ---------
Total current assets 8,524 23,181
FIXED ASSETS, net 3 -
OTHER ASSETS, net 614 847
--------- ---------
Total assets $ 9,141 $ 24,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 196 $ 126
Accrued expenses 200 415
--------- ---------
Total current liabilities 396 541
--------- ---------
COMMITMENTS & CONTINGENCIES
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, 11,989,936 and
11,929,048 shares issued, respectively, 4,992,901 and 11,479,648
shares outstanding, respectively 12 12
Additional paid-in capital 114,065 114,065
Cost of treasury stock, 6,997,035 and 449,400 shares, respectively (21,489) (7,533)
Deficit accumulated during the development stage (83,843) (83,057)
--------- ---------
Total stockholders' equity 8,745 23,487
--------- ---------
Total liabilities and stockholders' equity $ 9,141 $ 24,028
========= =========
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,
2004 2003 2004
--------- --------- -----------------
REVENUES AND OTHER INCOME
Licensing fees $ - $ - $ 28,755
Product royalties - - 627
Research and development grants 64 121 1,161
Interest income 26 112 13,048
Gain on disposal of fixed assets - - 102
Other Income 35 - 35
--------- --------- ---------
Total revenues and other income 125 233 43,728
--------- --------- ---------
EXPENSES
Research and development 477 564 92,266
General and administrative 434 613 25,574
Interest expense and amortization
of intangibles - - 388
--------- --------- ---------
Total expenses 911 1,177 118,228
--------- --------- ---------
Loss from continuing operations (786) (944) (74,500)
Income (loss) from discontinued operations - - (1,828)
Gain on disposal - - 939
--------- --------- ---------
Net loss before cumulative effect of
change in accounting principle (786) (944) (75,389)
Cumulative effect of change in accounting
principle - - (8,454)
--------- --------- ---------
NET LOSS $ (786) $ (944) $ (83,843)
========= ========= =========
--------- ---------
LOSS PER SHARE - BASIC AND DILUTED $ (0.14) $ (0.08)
========= =========
Shares used in loss per share calculation:
Basic 5,492 11,504
Diluted 5,492 11,504
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,
2004 2003 2004
-------- -------- -----------------
Cash Flows from Operating Activities
Net loss $ (786) $ (944) $(83,843)
Gain on disposal of discontinued operations - - (939)
Gain on disposal of fixed assets - (102)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs - - 316
Noncash inventory impairment - - 4,417
Noncash patent impairment - - 1,031
Noncash decrease in accounts payable - - (1,308)
Depreciation and amortization 2 44 3,766
Noncash expenses related to stock-based
transactions - 3 2,572
Common stock issued for agreement not to
compete - - 200
Series B Preferred Stock issued for consulting
services - - 18
Maturities (purchases) of marketable securities (4,100) 6,093 22,435
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
Decrease (increase) in receivables - - (199)
Decrease (increase) in inventory - - (4,447)
Decrease (increase) in prepaid expenses and other
current assets (42) 222 22
(Decrease) increase in accounts payable and
accrued expenses (145) 15 1,591
Decrease (increase) in other assets 284 - -
-------- -------- --------
Net cash provided by (used in) operating activities (4,787) 5,433 (54,470)
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities (purchases) of marketable securities - - (28,723)
Capital expenditures (3) - (2,271)
Purchase of technology rights and other assets (53) - (2,322)
Proceeds from sale of PP&E - - 225
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 (56) - (30,913)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock - - 84,224
Proceeds from issuance of preferred stock - - 23,688
Purchase of treasury stock (13,956) - (21,489)
Proceeds from issuance of notes payable - - 2,839
Principal payments on notes payable - - (1,732)
-------- -------- --------
Net cash provided by financing activities (13,956) - 87,530
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (18,799) 5,433 2,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,946 8,683 -
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,147 $ 14,116 $ 2,147
======== ======== ========
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, 2004
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc. (the "Company", Zonagen, or "we", "us" or "our") was
organized on August 20, 1987 and is a development stage company. The Company is
engaged in the development of pharmaceutical products that address diseases and
conditions associated with the treatment of hormonal and reproductive system
disorders. The Company's two lead product candidates are Progenta(TM), an oral
formulation being developed for the treatment of uterine fibroids, and
Androxal(TM), an oral formulation being developed for the treatment of
andropause. The Company is continuing early development activities of
Progenta(TM) as an oral treatment for endometriosis which is being funded under
an $836,441 Phase II, Small Business Innovative Research ("SBIR") grant which is
expected to be depleted during the second quarter ended June 30, 2004. The
Company also intends to out-license its prior product candidates, if an
appropriate opportunity is available.
In January 2004, Zonagen completed the purchase of 6,547,635 shares (57%
of our outstanding common stock) at a purchase price of $2.10 per share in
accordance with the terms of its self tender offer, which expired on January 7,
2004. This purchase included 60,888 shares issuable upon exercise of options for
a total aggregate purchase price of approximately $13.7 million, exclusive of
approximately $289,000 of costs associated with the offer. As of March 31, 2004,
the Company had 4,992,901 shares outstanding.
Nasdaq has established rules and policies with respect to the continued
listing of securities on Nasdaq. The Nasdaq National Market has a requirement
that a listed company have at least $10 million in stockholders' equity in order
to remain listed on the National Market. Due to the completion of the tender
offer in January 2004, the Company has fallen below that requirement. In the
event that Nasdaq notifies us that we are no longer in compliance with certain
of its listing requirements, we believe, but cannot assure, that Nasdaq may
permit us to move to the Nasdaq Small Cap Market without requiring that we meet
the Small Cap Market initial listing requirements. In such event, we intend to
move to the Small Cap Market if Nasdaq permits. Please see the Company's Form
10-K for the fiscal year ended December 31, 2003, for a description of the risks
associated with our Nasdaq listing.
As of March 31, 2004, the Company had an accumulated deficit of $83.8
million. Losses have resulted principally from costs incurred in conducting
clinical trials for VASOMAX(R), the Company's oral treatment for male erectile
dysfunction, and the related female sexual dysfunction product, in research and
development activities related to efforts to develop the Company's other
products and from the associated administrative costs required to support those
efforts. The Company has no current plans to further develop VASOMAX(R), or the
related female sexual dysfunction product or any of its other phentolamine-based
products.
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
Zonagen's results of operations may vary significantly from quarter to
quarter and year to year. The Company has experienced negative cash flows from
operations since inception and has funded its activities to date primarily from
equity financings and corporate collaborations. The Company believes that its
existing capital resources under its current operating plan will be sufficient
to fund the Company's operations through the end of June 2005. There can be no
assurance that changes in the Company's revised strategic plans or other events
will not result in accelerated or unexpected expenditures.
NOTE 2 -- STOCK-BASED COMPENSATION
The Company accounts for its stock option plans under APB No. 25
"Accounting for Stock Issued to Employees." Accordingly, deferred compensation
is recorded for stock options based on the excess of the market value of the
common stock on the measurement date over the exercise price of the options.
This deferred compensation is amortized over the vesting period of each option.
The Company has adopted the disclosure requirements of SFAS No. 123
"Accounting for Stock-Based Compensation" for employee stock-based compensation
and has elected not to record related compensation expense in accordance with
this statement. Had compensation expense for its stock option plans been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have been increased to the following pro forma amounts (in
thousands, except for per share amounts):
9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ----------
Net profit (loss), as reported ......... $ (786) $ (944)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects ............. - 3
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects ............. (20) (199)
--------- ----------
Pro forma net profit (loss) .......... $ (806) $ (1,140)
========= ==========
Profit (loss) per share -
Basic - as reported .................. $ (0.14) $ (0.08)
Basic - pro forma .................... (0.15) (0.10)
Diluted - as reported ................ (0.14) (0.08)
Diluted - pro forma .................. (0.15) (0.10)
Under SFAS No. 123, the fair value of each option grant was estimated on
the date of grant using the Black-Scholes option-pricing model. The following
weighted average assumptions were used for grants in the three-month periods
ended March 31, 2004 and 2003, respectively: risk-free interest rates of 3.9%
and 3.8%; no expected dividends; expected lives of 5.7 and 9.7 years; expected
volatility of 87% and 90%. The weighted average fair value of options granted at
market for the three-month periods ended March 31, 2004 and 2003 was $1.89 and
$0.87, respectively.
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options and changes in the subjective input assumptions can materially affect
the fair value estimate.
NOTE 3 -- MARKETABLE SECURITIES
Management determines the appropriate classification of investments in
debt and equity securities at the time of purchase and re-evaluates such
designation as of each subsequent balance sheet date. Securities which the
Company has the ability and intent to hold to maturity are classified as "held
to maturity". Securities classified as "trading securities" are recorded at fair
value. Gains and losses on trading securities, realized and unrealized, are
included in earnings
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
and are calculated using the specific identification method. Any other
securities are classified as "available for sale." At March 31, 2004 all
securities were classified as trading securities. The cost basis including
purchased premium, which approximates fair value, for these securities was $6.1
million and $2.0 million at March 31, 2004 and December 31, 2003, respectively.
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. Marketable securities as of March 31, 2004, consist
of only short-term investments totaling $6.1 million. The Company's investments
typically include corporate bonds and notes, Euro-dollar bonds, taxable auction
securities and asset-backed securities. The Company's policy is to require
minimum credit ratings of A2/A and A1/P1 with maturities of up to three years.
The average life of the investment portfolio may not exceed 24 months.
NOTE 4 -- PATENTS
As of March 31, 2004 , the Company had approximately $614,000 in
capitalized patents reflected on its balance sheet. Of this amount $240,000
relates to patents for Progenta(TM), which is being developed as an oral
treatment for uterine fibroids and is also being developed for endometriosis
through an SBIR grant; $198,000 relates to vaccine adjuvant technologies;
$73,000 relates to prostate cancer vaccine technologies; and $103,000 relates to
various other technologies. If Zonagen cannot out-license the technologies that
the Company is no longer developing to another entity, then part or all of the
value of such capitalized patents value could be impaired.
NOTE 5 -- EARNINGS (LOSS) PER SHARE
Basic EPS is computed by dividing net loss by the weighted average number
of shares of common stock outstanding during the year. Diluted EPS is computed
in the same manner as basic EPS, except that, among other changes, the average
share price for the period is used in all cases when applying the treasury stock
method of potentially dilutive outstanding options. Common stock equivalents of
1,316,582 and 1,479,319 for the periods ended March 31, 2004 and 2003,
respectively, were excluded from the calculation of diluted EPS since they were
antidilutive.
The following table presents information necessary to calculate earnings
per share for the three-month period ended March 31, 2004 and 2003 (in
thousands, except per share amounts):
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
--------- ----------
Net Profit (Loss) $ (786) $ (944)
Average common shares outstanding 5,492 11,504
Basic loss per share $ (0.14) $ (0.08)
Average common and dilutive potential
common shares outstanding:
Average common shares outstanding 5,492 11,504
Assumed exercise of stock options - -
Diluted earnings per share $ (0.14) $ (0.08)
NOTE 6 -- STOCKHOLDERS' EQUITY
In January 2004, Zonagen purchased 6,547,635 shares (57% of our
outstanding common stock) at a purchase price of $2.10 per share in accordance
with the terms of its tender offer, which expired on January 7, 2004. This
purchase included 60,888 shares issuable upon exercise of options for a total
aggregate purchase price of approximately $13.7 million, exclusive of $289,000
in costs associated with the offer. As of March 31, 2004, the Company had
4,992,901 shares outstanding.
Pursuant to the terms of the Company's 2000 Non-employee Directors Stock
Option Plan, each of the three new non-employee directors that were elected at
the Company's 2003 Annual Shareholder Meeting were automatically granted options
to purchase 40,000 shares of the Company's common stock at an exercise price of
$2.40, the closing price on January 14, 2004, the date of grant. On February 24,
2004, the Board of Directors approved an amendment to these options to provide
that such options vest in quarterly installments over a three-year period.
Under the terms of the 2000 Non-employee Directors' Stock Option Plan,
prior Board Members who did not stand for re-election at the Company's 2003
Annual Shareholder Meeting were automatically granted an extension to exercise
their fully vested options to January 14, 2006. These options consisted of
140,715 shares with exercise prices ranging from $1.70 to $5.65. In addition,
these Directors also received an extension to January 14, 2006 for any fully
vested options granted under other plans. These options consisted of 112,500
shares with exercise prices ranging from $4.00 to $22.25.
As a result of the expiration of the Company's Amended and Restated 1993
Employee and Consultant Stock Options Plan (the "1993 Plan") in May 2003, the
Company's Board of Directors
12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
approved the 2004 Employee and Consultant Stock Option Plan on February 24,
2004. The new plan is subject to stockholder approval at the next annual meeting
of stockholders to be held in 2004.
On March 29, 2004, the Compensation Committee approved grants to the
Company's executive officers of (i) incentive options to purchase 358,763 shares
of its common stock that vest quarterly over three years and (ii) incentive
options to purchase 79,486 shares of its common stock that vest in the event
certain milestones are attained by January 25, 2005. These options replace
grants of options to purchase an equal number of shares that were approved in
January 2004 under the Company's then-expired 1993 Plan, which grants have been
terminated as a result of the expiration of the 1993 Plan.
In addition, the following grants were approved on March 29, 2004 to
non-executive employees of the Company: (i) incentive options to purchase
123,350 shares that vest quarterly over three years, (ii) incentive options to
purchase 17,504 shares that vest upon the achievement of certain milestones and
(iii) incentive options to purchase 22,361 shares (granted in lieu of additional
increases in cash compensation) that vest in equal increments through December
31, 2004. All of the options to executive officers and the Company's employees
were granted at an exercise price of $2.72, the fair market value of the
Company's common stock on the date of grant.
Of all of the options granted to both executive officers and employees,
options to purchase 150,000 shares were granted under the Company's 1994
Employee and Consultant Stock Option Plan (of which, options to purchase 56,737
shares were granted to Mr. Podolski, 38,245 shares were granted to Mr. Ploth and
55,018 were granted to the Company's other employees) and the remaining options
were granted under the new 2004 Employee and Consultant Stock Option Plan. All
of the options granted under the 1994 plan are immediately valid while all of
the options granted under the new plan are subject to stockholder approval at
the Company's next annual meeting of stockholders to be held in 2004. The
measurement date for determining the amount of stock option compensation
expense, if any, to be recognized for the options granted under the new 2004
Employee and Consultant Stock Option Plan (listed above) will be determined
based on the closing price of the Company's stock on the date that the
shareholders approve this new plan.
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 in 1998. 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
13
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(Unaudited)
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 recessionary 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). On June 13, 2003, the court granted the defendants' motion for
summary judgment as to that last remaining claim, and entered a judgment
dismissing the case with prejudice. The plaintiffs have filed an appeal. The
Company's management 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 estimated loss, if any, can be made at this time.
NOTE 8 -- SUBSEQUENT EVENT
The Company executed a new 74 month lease effective May 1, 2004, for 4,800
square feet of laboratory and office space located in its current building in
The Woodlands, Texas. This space will replace its current 2,518 square foot
facility which is under a lease that was due to expire on July 31, 2004.
14
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. (the "Company", Zonagen, or "we", "us" or "our") was
organized on August 20, 1987 and is a development stage company. The Company is
engaged in the development of pharmaceutical products that address diseases and
conditions associated with the treatment of hormonal and reproductive system
disorders. The Company's two lead product candidates are Progenta(TM), an oral
formulation being developed for the treatment of uterine fibroids, and
Androxal(TM), an oral formulation being developed for the treatment of
andropause. The Company is completing early development of Progenta(TM) as an
oral treatment for endometriosis, which is being funded under an $836,441 Phase
II, Small Business Innovative Research ("SBIR") grant which is expected to be
depleted during the second quarter ended June 30, 2004. The Company also intends
to out-license its prior product candidates, if an appropriate opportunity is
available.
The primary focus of the company's financial resources will be on the
clinical development of Progenta(TM) for uterine fibroids. A Phase I/II human
efficacy and safety challenge clinical study is anticipated to begin outside of
the U.S. in a small population of patients in mid-year 2004. One arm of this
study will be a comparison of patients being treated with Progenta(TM) as
compared to patients being treated with Lupron as a means of obtaining
comparative safety and efficacy data. The Company anticipates the dosing portion
of this study to be completed by the end of 2004.
The Company also intends to complete its ongoing 60 patient, U.S. Phase
I/II, efficacy and safety challenge clinical study utilizing an oral formulation
of Androxal(TM) for the treatment of andropause. Andropause is associated with
aging and the subsequent decline of the male hormone testosterone. The Company
is completing the final arm of that study which is expected to be completed
during 2004.
For a detailed discussion regarding the development, scientific rational
and risks involving both Progenta(TM) and Androxal(TM) and a discussion of our
prior product candidates, see "Part I. Item 1. Business" included in the
Company's annual report on Form 10-K for the year ended December 31, 2003.
In January 2004, Zonagen completed the purchase of 6,547,635 shares (57%
of our outstanding common stock) at a purchase price of $2.10 per share in
accordance with the terms of its self tender offer, which expired on January 7,
2004. This purchase included 60,888 shares issuable upon exercise of options for
a total aggregate purchase price of approximately $13.7
15
million, exclusive of $289,000 in costs associated with the offer. As of March
31, 2004, the Company had 4,992,901 shares outstanding.
The Company concluded its 2003 Annual Shareholder Meeting on January 14,
2004. During this meeting four of Zonagen's five directors did not stand for
re-election. These same directors tendered all of their shares and in-the-money
options (except in-the-money options for 5,000 shares held by one director) in
the tender offer. Joseph S. Podolski, Zonagen's President and CEO, did not
tender any of his shares or options. During that meeting, four new directors
were elected, including three outside directors and the Company's Chief
Financial Officer.
Nasdaq has established rules and policies with respect to the continued
listing of securities on Nasdaq. The Nasdaq National Market has a requirement
that a listed company have at least $10 million in stockholders' equity in order
to remain listed on the National Market. Due to the completion of the tender
offer in January 2004, the Company has fallen below that requirement. In the
event that Nasdaq notifies us that we are no longer in compliance with certain
of its listing requirements, we believe, but cannot assure, that Nasdaq may
permit us to move to the Nasdaq Small Cap Market without requiring that we meet
the Small Cap Market initial listing requirements. In such event, we intend to
move to the Small Cap Market if Nasdaq permits. Please see the Company's Form
10-K for the fiscal year ended December 31, 2003, for a description of the risks
associated with our Nasdaq listing.
The Company has experienced negative cash flows from operations since
inception and has funded its activities to date primarily from equity financings
and corporate collaborations. The Company's management feels that its current
financial resources are adequate to complete the two clinical studies listed
above but the Company will require substantial additional capital to further
develop Progenta(TM) and Androxal(TM). We intend to raise additional funds
through the sale of shares of the Company's stock sometime in the future. We
cannot assure that additional funding will be available on acceptable terms, or
at all. The Company believes that its existing capital resources under its
current operating plan will be sufficient to fund the Company's operations
through the end of June 2005. There can be no assurance that changes in our
current strategic plans or other events will not result in accelerated or
unexpected expenditures.
As of March 31, 2004, the Company had an accumulated deficit of $83.8
million. Losses have resulted principally from costs incurred in conducting
clinical trials for VASOMAX(R) and the related female sexual dysfunction
product, in research and development activities related to efforts to develop
our products and from the associated administrative costs required to support
those efforts. The Company has no current plans to further develop VASOMAX(R),
or the related female sexual dysfunction product or any of its other
phentolamine-based products.
Zonagen's results of operations may vary significantly from year to year
and quarter to quarter, and depend, among other factors, on the Company's
ability to be successful in our clinical trials, the regulatory approval process
in the United States and other foreign jurisdictions and the ability to complete
new licenses and product development agreements. The timing of our revenues may
not match the timing of our associated product development expenses. To date,
research and development expenses have generally exceeded revenue in any
particular period and/or fiscal year.
16
CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the Company's financial statements and accompanying notes. Actual results could
differ materially from those estimates. The items in the Company's financial
statements requiring significant estimates and judgments are as follows:
- Management determines the appropriate short and long-term classification
of investments in debt and equity securities at the time of purchase and
re-evaluates such designation as of each subsequent balance sheet date.
Securities for which the Company has the ability and intent to hold to
maturity are recorded at amortized cost in the Company's consolidated
balance sheets, which approximates fair value. Securities classified as
"trading securities" are recorded at fair value. Gains and losses on
trading securities, realized and unrealized, are included in earnings and
are calculated using the specific identification method. The Company holds
no securities classified as "available for sale." 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. Marketable securities as of March 31, 2004 were all
classified as trading securities and consist of only short term
investments totaling $6.1 million.
- The Company is currently involved in a certain legal proceeding as
discussed in the "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements. The Company does not believe this legal
proceeding will have a material adverse effect on its consolidated
financial position, results of operations or cash flows. However, were an
unfavorable ruling to occur it could have a material adverse effect on the
Company.
- Research and development ("R&D") costs consist of direct and indirect
costs associated with specific projects as well as fees paid to various
entities that perform research on behalf of the Company. Expenses include
salaries and related employee costs, insurance coverage for clinical
trials and prior product sales, contracted research and consulting fees,
facility costs and direct costs associated with specific projects. The
Company expenses R&D costs in the period they are incurred.
RESULTS OF OPERATIONS
Three Month Periods Ended March 31, 2004 and 2003
Revenues. Total revenues for the three-month period ended March 31, 2004
were $125,000 as compared to $233,000 for the same period in the prior year.
Research and development grants for the three-month period ended March 31,
2004 were $64,000 as compared to $121,000 for the same period in the prior.
Grant revenue relates to three SBIR grants that were awarded to the Company in
the third quarter ended September 30, 2002. The Company performed a portion of
that paid research under its one existing $836,441 Phase II
17
grant during the three-month period ended March 31, 2004 as compared to the
research that was performed under three SBIR grants during the same period in
the prior year. Two of the awarded SBIR grants were depleted during 2003 and the
last existing grant for $836,441 is expected to be depleted during the second
quarter ended June 30, 2004. At this time, the Company may not continue
developing Progenta(TM) for the treatment of endometriosis should additional
grant funding not be available.
Interest income decreased 77% to $26,000 for the three-month period ended
March 31, 2004, as compared to $112,000 for the same period in the prior year.
This decrease is primarily due to the reduction in investment cash on hand as a
result of the Company completing its tender offer for an approximate aggregate
purchase price of $13.7 million, which was exclusive of approximately $289,000
of costs associated with the offer, that was completed in January 2004 and the
reduction in interest rate yields on the Company's cash investments.
Other revenue of $35,000 was from the sale of some of the Company's
preclinical phentolamine data that is to be used for a purpose that does not
compete with the Company's existing sexual dysfunction technologies.
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 15% to $477,000 for
the three-month period ended March 31, 2004 as compared to $564,000 for the same
period in the prior year. During the quarter ended March 31, 2003, the Company
reduced its research staff and incurred a $122,000 severance charge. Excluding
this charge, R&D expenses for the quarter ended March 31, 2003 would have been
$442,000. During the quarter ended March 31, 2004, the Company spent 71% of
total R&D spending on product development performed outside of the Company with
the majority of that spending being utilized for the preparation of the
Progenta(TM) Phase I/II human clinical trial that is anticipated to begin
outside of the U.S. in mid-year 2004. The Company also continued early
development work with Progenta(TM) as an oral treatment for endometriosis, which
is being funded under its current Phase II $836,441 SBIR grant. In addition, the
Company continued working toward the completion of its U.S. Phase I/II human
clinical study with Androxal(TM) as an oral treatment for andropause.
General and Administrative Expenses. General and administrative ("G&A")
expenses decreased 29% to $434,000 for the three-month period ended March 31,
2004, as compared to $613,000 for the same period in the prior year. The
decrease in expenses for the three-month period ended March 31, 2004 is
primarily due to a decrease in costs associated with the search for a potential
strategic alternative, a reduction in D&O insurance costs and a reduction in
facility related costs due to facility downsizing offset by an increase in legal
expenses to prepare the Company for current and future reporting requirements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred losses since its inception in 1987 and expects to
continue to incur losses for the foreseeable future. Since Inception, the
Company has financed its operations primarily with proceeds from private
placements and public offerings of equity securities and
18
with funds received under collaborative agreements. 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. The Company believes its current financial resources
are adequate to complete its Progenta(TM) Phase I/II human safety and efficacy
study (anticipated to begin mid-year 2004) and to complete its ongoing U.S.
Phase I/II clinical study with Androxal(TM) which is expected to be done in
2004. The Company believes that its existing capital resources under its current
operating plan will be sufficient to fund operations through the end of June
2005.
The Company will require substantial funds to continue the development of
Progenta(TM) and Androxal(TM). The ability of the Company to raise additional
funds will depend on many factors, including the progress of the Company's
clinical development programs. There can be no assurance that the Company will
be able to obtain financing on favorable terms in the public or private capital
markets, or at all. The failure or inability of the Company to obtain additional
financing on acceptable terms would have a material adverse effect on the
Company.
On October 17, 2003, the Company announced its proposed "Dutch Auction"
tender offer ("Tender Offer") to purchase up to 9,836,065 shares of its
outstanding stock at a purchase price per share no greater than $2.10 nor less
than $1.83 with an aggregate purchase value of no greater than $18 million. The
Tender Offer commenced on November 19, 2003. On December 17, 2003, the Company
amended its Tender Offer to, among other things, decrease the number of shares
to be purchased from 9,836,065 to 8,571,428 and extend the Tender Offer
expiration date from December 19, 2003 to January 7, 2004. The final results of
the Tender Offer are disclosed in the following chart.
MAXIMUM
NUMBER (OR
APPROXIMATE
TOTAL NUMBER OF DOLLAR VALUE)
SHARES OF SHARES THAT
PURCHASED AS MAY YET BE
PART OF PUBLICLY PURCHASED
TOTAL NUMBER OF ANNOUNCED UNDER THE
SHARES AVERAGE PRICE PLANS OR PLANS OR
PERIOD PURCHASED (1) PAID PER SHARE PROGRAMS PROGRAMS
- ------------ --------------- -------------- ---------------- --------------
January 2004 6,547,635 $2.10 6,547,635 --
(1) Per the terms of the Tender Offer, the Company purchased 6,547,635
shares of common stock (57% of our outstanding common stock) at a purchase
price of $2.10 per share which included 60,880 shares of in-the-money
options tendered by previous members of Zonagen's Board of Directors. The
total purchase price of the shares was approximately $13.7 million which
was exclusive of $289,000 of costs associated with the Tender Offer.
The Company had cash, cash equivalents and marketable securities of
approximately $8.2 million at March 31, 2004, as compared to $22.9 million at
December 31, 2003. This decrease is primarily due to the Company's Tender Offer
as described above.
19
Excluding maturities and purchases of marketable securities of ($4.1)
million and $6.1 million in the three-month period ended March 31, 2004 and
2003, respectively, net cash of approximately $687,000 was used in operating
activities during the three-month period ended March 31, 2004 as compared to
$660,000 used for the same period in the prior year. The increased use of cash
for the three-month period ended March 31, 2004 as compared to the same period
in the prior year is primarily due to an increase in research and development
costs associated with Progenta(TM), decreased interest income on the Company's
cash investments and a reduction in SBIR grant funding offset by a decrease in
costs associated with potential strategic alternatives and D&O insurance costs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) are effective in insuring that the information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the required
time periods.
In connection with the evaluation described above, the Company identified
no change in internal control over financial reporting that occurred during the
fiscal quarter ended March 31, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
20
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 in 1998. 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
recessionary 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). On June 13, 2003, the court granted the defendants'
motion for summary judgment as to that last remaining claim, and entered a
judgment dismissing the case with prejudice. The plaintiffs have filed an
appeal. The Company's management 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 estimated loss, if any, can be made at this time.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2003 Annual Meeting of the Company's Stockholders was called to order
on December 29, 2003 and adjourned to and concluded on January 14, 2004 to
consider and vote upon the following proposals:
(1) 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
--------- --------
Joseph S. Podolski 8,470,245 295,285
Louis Ploth, Jr. 8,474,645 290,885
Daniel F. Cain 8,501,950 263,580
Jean Fourcroy, M.D., Ph.D., M.P.H. 8,507,911 257,619
Zsolt Lavotha 8,480,201 285,329
(2) Approval of the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for 2004.
For 8,711,576 Against 36,091 Abstain 17,863
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
31.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Chief Executive Officer).
31.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Chief Financial Officer).
32.1 Certification furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).
32.2 Certification furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).
b. Reports on Form 8-K
The Company filed two current reports on Form 8-K with
reporting dates of March 30, 2004, reporting one event under
Item 5 and one event under Item 12.
22
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, 2004
By: /s/ Joseph S. Podolski
---------------------------------------
Joseph S. Podolski
President, Chief Executive Officer
and Director
(Principal Executive Officer)
Date: May 14, 2004
By: /s/ Louis Ploth, Jr.
---------------------------------------
Louis Ploth, Jr.
Vice President Business Development,
Chief Financial Officer, Director
and Secretary
(Principal Financial and Accounting
Officer)
23
Index to Exhibits
31.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Chief Executive Officer).
31.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (Chief Financial Officer).
32.1 Certification furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).
32.2 Certification furnished pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).