UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
incorporation or organization) No.)
2408 Timberloch Place, Suite B-1
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 August 11, 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 June 30, 2004
INDEX
PAGE
----
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: June 30, 2004 (Unaudited)
and December 31, 2003 5
Consolidated Statements of Operations: For the three months ended
June 30, 2004 and 2003, six months ended June 30, 2004 and 2003
and from Inception (August 20, 1987) through June 30, 2004 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
June 30, 2004 and 2003, six months ended June 30, 2004 and 2003
and from Inception (August 20, 1987) through June 30, 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 21
Item 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 25
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 Progenta(TM) and Androxal(TM), uncertainty relating to
the Company's patent portfolio, approval of the Company's products by the Food
and Drug Administration ("FDA") and regulatory bodies in 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 SmallCap Market, the Company's ability to obtain
value from its other technologies 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 six-month period ended June 30, 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. AND SUBSIDIARY
(A development stage company)
BALANCE SHEET
(Unaudited)
JUNE 30, DECEMBER 31,
2004 2003
--------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,215 $ 20,946
Marketable securities 6,350 2,000
Prepaid expenses and other current assets 224 235
--------- ---------
Total current assets 7,789 23,181
FIXED ASSETS, NET 12 -
OTHER ASSETS, NET 637 847
--------- ---------
Total assets $ 8,438 $ 24,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 203 $ 126
Accrued expenses 215 415
--------- ---------
Total current liabilities 418 541
--------- ---------
COMMITMENTS AND 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 (21,487) (7,533)
Deficit accumulated during the development stage (84,570) (83,057)
--------- ---------
Total stockholders' equity 8,020 23,487
--------- ---------
Total liabilities and stockholders' equity $ 8,438 $ 24,028
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
5
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
STATEMENTS OF OPERATIONS
(Unaudited)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, THROUGH
--------------------------- ------------------------ JUNE 30,
2004 2003 2004 2003 2004
--------- --------- --------- --------- ---------
REVENUES
Licensing fees $ - $ - $ - $ - $ 28,755
Product royalties - - - - 627
Research and development grants 53 217 117 337 1,214
Interest income 22 74 48 186 13,070
Gain on disposal of fixed assets - 102 - 102 102
Other Income - - 35 - 35
--------- --------- --------- --------- ---------
Total revenues and other income 75 393 200 625 43,803
EXPENSES
Research and development 508 579 985 1,143 92,774
General and administrative 294 490 728 1,102 25,868
Interest expense and amortization
of intangibles - - - - 388
--------- --------- --------- --------- ---------
Total expenses 802 1,069 1,713 2,245 119,030
--------- --------- --------- --------- ---------
Loss from continuing operations (727) (676) (1,513) (1,620) (75,227)
Income (loss) from discontinued operations - - - - (1,828)
Gain on disposal - - - - 939
--------- --------- --------- --------- ---------
Net loss before cumulative effect of
change in accounting principle (727) (676) (1,513) (1,620) (76,116)
Cumulative effect of change in accounting
principle - - - - (8,454)
--------- --------- --------- --------- ---------
NET LOSS $ (727) $ (676) $ (1,513) $ (1,620) $ (84,570)
========= ========= ========= ========= =========
INCOME (LOSS) PER SHARE - BASIC AND DILUTED: $ (0.15) $ (0.06) $ (0.29) $ (0.14)
========= ========= ========= =========
Shares used in loss per share calculation:
Basic 4,993 11,484 5,242 11,494
Diluted 4,993 11,484 5,242 11,494
The accompanying notes are an integral part of these consolidated
financial statements.
6
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
STATEMENTS OF CASH FLOWS
(Unaudited)
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, THROUGH
--------------------------- ------------------------- JUNE 30,
2004 2003 2004 2003 2004
--------- --------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (727) $ (676) $ (1,513) $ (1,620) (84,570)
Gain on disposal of discontinued operations - - - - (939)
Gain on disposal of assets - (102) - (102) (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 20 - 20 - 1,051
Noncash decrease in accounts payable - - - - (1,308)
Depreciation and amortization 3 28 5 73 3,769
Noncash expenses related to stock-based
transactions - 11 - 14 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 (250) (10,334) (4,350) (4,241) 22,185
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 55 (322) 11 (100) 75
(Decrease) increase in accounts payable and
accrued expenses 22 (157) (123) (142) 1,613
Decrease (increase) in other assets - - 284 - -
-------- -------- -------- -------- --------
Net cash used in operating activities (877) (11,552) (5,666) (6,118) (55,349)
CASH FLOWS FROM INVESTING ACTIVITIES
Maturities (purchases) of marketable securities - - - - (28,723)
Capital expenditures (9) - (12) - (2,280)
Purchase of technology rights and other assets (46) (14) (99) (15) (2,368)
Decrease in note receivable - 1,000 - 1,000 -
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 (55) 986 (111) 985 (30,968)
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 - (49) (13,954) (49) (21,487)
Proceeds from issuance of notes payable - - - - 2,839
Principal payments on notes payable - - - - (1,732)
-------- -------- -------- -------- --------
Net cash provided by (used by) financing activities - (49) (13,954) (49) 87,532
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (932) (10,615) (19,731) (5,182) 1,215
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,147 14,116 20,946 8,683 -
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,215 $ 3,501 $ 1,215 $ 3,501 $ 1,215
======== ======== ======== ======== ========
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
JUNE 30, 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
endometriosis, and Androxal(TM), an oral formulation being developed for the
treatment of testosterone deficiency. During the quarter ended June 30, 2004,
the Company continued early development activities of Progenta(TM) as an oral
treatment for endometriosis, which was funded under an $836,441 Phase II, Small
Business Innovative Research ("SBIR") grant which was essentially depleted as of
June 30, 2004.
The Company will continue its efforts to out-license, namely Vasomax(R)
and the related phentolamine-based products, its adjuvants and prostate cancer
vaccine technologies and its hCG and zona pellucida immuno-contraceptive
vaccines. In the future the Company may do additional clinical development
relating to its phentolamine-based product candidates as a means to increase
their out-licensing value. The Company will no longer maintain its current
patent portfolio for both its hCG or zona pellucida immuno-contraceptive
vaccines. This decision resulted in the write-off of approximately $20,000
during the quarter ended June 30, 2004 relating to its hCG vaccine patent
portfolio. The Company had previously written-off its zona pellucida patent
portfolio in December 2001 but continued to maintain that portfolio. There can
be no assurance that the Company will be able to create any value from
out-licensing activities of its prior development programs.
On June 29, 2004 the Company announced that it would initiate a European
Phase I/II study of its lead product candidate, Progenta(TM), for the treatment
of uterine fibroids which is being conducted in Warsaw, Poland. As of August 10,
2004, eight patients have entered this clinical study. All eight patients have
either entered or are about to enter the second phase of the study, which is the
efficacy testing phase. To date, the drug has been both well absorbed and well
tolerated at all dose levels administered. The Company believes it may have top
level reportable data from this trial by year-end 2004.
On July 1, and July 15, 2004, the Company released results from a
randomized clinical trial comparing the Company's Androxal(TM) product candidate
to placebo and to Androgel(R) in testosterone deficient men, a condition also
known as hypogonadism. Androgel(R) is the current drug treatment of choice for
this indication. Androxal(TM) is an orally administered medication that induces
increased production of testosterone. This study consisted of 62 eligible
subjects which were randomized and dosed into 6 different arms, three doses of
Androxal(TM), placebo, and both
8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
high and low doses of Androgel(R).
As of June 30, 2004, the Company had an accumulated deficit of $84.6
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.
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.
NASDAQ SMALL CAP MARKET LISTING
On July 8, 2004 Zonagen's stock transferred from the Nasdaq National
Market to the Nasdaq SmallCap Market after Nasdaq had approved the Company's
application for this transfer. The Company applied for a Nasdaq SmallCap Market
listing after Nasdaq had informed the Company that it no longer met the
$10,000,000 minimum stockholders' equity listing requirement for the Nasdaq
National Market. This shortfall was a result of the previously concluded,
January 2004, self-tender offer.
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" as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS
123/148") 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. 123/148, 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
JUNE 30, 2004
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ----------- ----------- ------------
Net loss, as reported.......... $ (727) $ (676) $ (1,513) $ (1,620)
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects -- 11 -- 14
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects (98) (163) (118) (362)
--------- ---------- ---------- -----------
Pro forma net loss........... $ (825) $ (828) $ (1,631) $ (1,968)
========= ========== ========== ===========
Loss per share -
Basic - as reported.......... $ (0.15) $ (0.06) $ (0.29) $ (0.14)
Basic - pro forma (0.17) (0.07) (0.31) (0.17)
Diluted - as reported (0.15) (0.06) (0.29) (0.14)
Diluted - pro forma.......... (0.17) (0.07) (0.31) (0.17)
Under SFAS No. 123/148, the fair value of each option grant was estimated
on the date of grant using the Black-Scholes option-pricing model. There were no
options granted in the three-month periods ended June 30, 2004 and 2003. The
following weighted average assumptions were used for grants in the six-month
periods ended June 30, 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; and
expected volatility of 87% and 90%. The weighted average fair value of options
granted at market for the six-month periods ended June 30, 2004 and 2003 was
$1.89 and $1.06 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
10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
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 and are calculated using the specific
identification method. Any other securities are classified as "available for
sale." At June 30, 2004 all securities were classified as trading securities.
The cost basis including purchased premium, which approximates fair value, for
these securities was $6.4 million and $2.0 million at June 30, 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 June 30, 2004, consist
of only short-term investments totaling $6.4 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 June 30, 2004, the Company had approximately $637,000 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 endometriosis; $204,000 relates to vaccine adjuvant
technologies; $98,000 relates to Androxal(TM), which is being developed as an
oral treatment for testosterone deficiency; $81,000 relates to prostate cancer
vaccine technologies; and $14,000 relates to various other technologies. The
Company will no longer maintain its current patent portfolio for both its hCG
and zona pellucida immuno-contraceptive vaccines. This decision resulted in the
write-off of approximately $20,000 during the quarter ended June 30, 2004
relating to its hCG vaccine patent portfolio. The Company had previously
written-off its zona pellucida patent portfolio in December 2001 but continued
to maintain that portfolio. 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.
The following table presents information necessary to calculate earnings
per share for the
11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
three-month and six-month periods ended June 30, 2004 and 2003 (in thousands,
except per share amounts):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- --------- ---------- -----------
Net Loss $ (727) $ (676) $ (1,513) $ (1,620)
Average common shares outstanding 4,993 11,484 5,242 11,494
--------- -------- --------- ----------
Basic loss per share $ (0.15) $ (0.06) $ (0.29) $ (0.14)
========= ======== ========= ==========
Diluted loss per share $ (0.15) (0.06) $ (0.29) $ (0.14)
========= ======== ========= ==========
Common stock equivalents of 1,290,382 and 1,437,064 for the periods ended
June 30, 2004 and 2003, respectively, were excluded from the above calculation
of diluted EPS since they were antidilutive.
NOTE 6 -- STOCKHOLDERS' EQUITY
In January 2004, Zonagen purchased 6,547,635 shares of its common stock
(approximately 57% of its 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 $289,000 in costs associated with the offer. As of June 30, 2004,
the Company had 4,992,901 shares outstanding. Shares purchased are included at
cost as treasury stock in the accompanying balance sheet.
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 (which concluded on January 14,
2004) 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 directors 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
12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
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 Option Plan (the "1993 Plan") in May 2003, the
Company's Board of Directors approved the 2004 Employee and Consultant Stock
Option Plan ("2004 Plan") on February 24, 2004. The 2004 Plan is subject to
stockholder approval at the 2004 Annual Meeting of Stockholders.
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 monthly 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 2004 Plan. All of the options granted under the 1994 Plan
are immediately valid while all of the options granted under the 2004 Plan are
subject to stockholder approval at the Company's 2004 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 2004 Plan (listed above) will be determined based on the
closing price of the Company's common stock on the date that the shareholders
approve the 2004 Plan.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
13
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2004
(Unaudited)
LITIGATION
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 (the "District Court") 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 District
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 (the "Fifth Circuit") affirmed the
dismissal of all claims except one; the Fifth Circuit reversed the District
Court's dismissal of a claim concerning the Company's disclosure about a patent
relating to VASOMAX(R). On June 13, 2003, the District 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 filed an
appeal. On June 16, 2004, the Fifth Circuit affirmed the June 13, 2003 judgment
of the District Court . In addition, on July 15, 2004, the Fifth Circuit denied
the plaintiff's request for a rehearing. The time for the plaintiff to file a
writ of certiorari with the United States Supreme Court has not yet expired.
OFFICE LEASE
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 replaces its prior 2,518 square foot facility
which was under a lease that expired on June 30, 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
endometriosis, and Androxal(TM), an oral formulation being developed for the
treatment of testosterone deficiency. During the quarter ended June 30, 2004,
the Company continued early development activities of Progenta(TM) as an oral
treatment for endometriosis, which was funded under an $836,441 Phase II, Small
Business Innovative Research ("SBIR") grant which was essentially depleted as of
June 30, 2004.
The Company will continue its efforts to out-license, namely Vasomax(R)
and the related phentolamine-based products, its adjuvants and prostate cancer
vaccine technologies and its hCG and zona pellucida immuno-contraceptive
vaccines. In the future, the Company may do additional clinical development
relating to its phentolamine-based product candidates as a means to increase
their out-licensing value. The Company will no longer maintain its current
patent portfolio for both its hCG or zona pellucida immuno-contraceptive
vaccines. This decision resulted in the write-off of approximately $20,000
during the quarter ended June 30, 2004 relating to its hCG vaccine patent
portfolio. The Company had previously written-off its zona pellucida patent
portfolio in December 2001 but continued to maintain that portfolio. There can
be no assurance that the Company will be able to create any value from
out-licensing activities of its prior development programs.
The primary focus of the company's existing financial resources will be on
the clinical development of Progenta(TM) for uterine fibroids and for
Androxal(TM) for the treatment of testosterone deficiency. 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 European Phase I/II clinical study of
Progenta(TM) for the oral treatment of uterine fibroids and to complete the data
management portion of its recently completed U.S. Phase I/II clinical study of
Androxal(TM) for the oral treatment of men with testosterone deficiency but the
Company will require substantial additional capital to further develop both
Progenta(TM) and Androxal(TM). We intend to raise additional funds through the
sale of shares of the Company's
15
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 June 30, 2004, the Company had an accumulated deficit of $84.6
million. Losses have resulted principally from costs incurred in conducting
clinical trials for VASOMAX(R), the Company's previous lead product candidate
for the 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.
PROGENTA(TM)
On June 29, 2004, the Company announced that it would initiate a
30-patient, randomized European Phase I/II clinical trial comparing Progenta(TM)
to placebo and to a positive control group consisting of an approved
gonadotropin releasing hormone agonist ("GnRHa") in treating women that were
previously diagnosed with uterine fibroids. As of August 10, 2004, eight
patients have entered this clinical study. All eight patients have entered or
are about to enter the second phase of the study, which is the efficacy testing
phase. To date, Progenta(TM) has been both well absorbed and well tolerated at
all dose levels administered. The Company anticipates top-level data from this
trial to be available by the year-end 2004. This clinical trial is being
conducted in Warsaw, Poland. Progenta(TM) is an orally-active Selective
Progesterone Receptor Modulator ("SPRM") that blocks the progesterone receptor.
Progenta(TM) was one of several compounds licensed from the National Institutes
of Health ("NIH") in 1999 and was selected as a lead candidate following
numerous studies conducted by both the NIH and Zonagen.
Although this study is the first human experience with Progenta(TM),
several animal studies, including a long-term (9-month) primate study, had been
previously conducted exploring both the safety and activity of the drug.
Patients will be referred to the trial by several gynecological practices in
Warsaw, Poland. They will be randomized into one of five parallel groups;
placebo, three different doses of Progenta(TM), and a positive control group
consisting of an approved GnRHa. Currently, GnRHa's are the gold standard of
drug therapy for the indication and used most frequently prior to hysterectomy.
The placebo and Progenta(TM) groups will be blinded. The study consists of three
phases. Day 1 dosing will be followed for both initial safety and
pharmacokinetics. Following a one week washout and safety assessment, women will
take the drug for an additional 30 days after which time they will be readmitted
into the clinic to evaluate steady state pharmacokinetics, effects on fibroid
size, bone mineral density and hemoglobin. Women showing positive effects on
fibroid volume and hemoglobin without adverse reactions will be allowed to
continue in the trial for an additional two months. Women not experiencing a
benefit with the study drug will be allowed to switch to the GnRHa for the
duration of the study. At the end of the study, women on Progenta(TM) will be
evaluated for changes in bone mineral density, hemoglobin levels and fibroid
size and compared against the changes experienced by the positive control group
dosed with the GnRHa.
16
Uterine fibroids are common benign tumors of the uterus. They grow from
the muscular wall of the uterus and are made up of muscle and fibrous tissue and
may cause heavy bleeding, pelvic discomfort and pain, and create pressure on
other organs. As many as 70% of all women have uterine fibroids. While the
majority usually have no symptoms, 1 in 4 end up with symptoms severe enough to
require treatment. In the United States, roughly 200,000 hysterectomies are
performed annually due to uterine fibroids.
Zonagen has also engaged a clinical research organization ("CRO") to
prepare for a pre-Investigational New Drug ("IND") meeting it plans to hold with
the Food and Drug Adminstration ("FDA") later this year to discuss a U.S.
program for Progenta(TM). At a later date, and depending on available funds,
Zonagen also plans to test the potential of Progenta(TM) in the treatment of
endometriosis. The safety data from this first study should be directly
applicable to the endometriosis program.
ANDROXAL(TM)
We are developing Androxal(TM) for the treatment of men with abnormally
low testosterone levels, a condition also known as hypogonadism. This condition
is associated with a host of physical and mental conditions experienced by the
aging male, including loss of muscle tone, reduction of libido and deterioration
of memory and certain cognitive functions. Androxal(TM) is an orally
administered compound that results in increased production of testosterone by
the body. Between four and five million men are estimated to have low
testosterone in the United States alone.
Current testosterone replacement therapies deliver additional testosterone
either orally, transdermally or via injection. However, current products have
two significant limitations. First, the use of oral androgens, injectable or
transdermal testosterone results in abnormal spikes and drops in testosterone
blood levels, instead of naturally-occurring circadian variation of testosterone
levels. The leading testosterone replacement product in the United States,
Androgel(R), is a topical gel formulation of testosterone. While transdermal
drugs can produce more constant drug levels than other products, Androgel(R)
causes abnormal spikes after application, which can produce side effects such as
excitation, aggressive behavior, sleeplessness, anxiety, depression and
headache. Androgel(R) sales in 2003 were approximately $282 million. Further,
transdermal delivery of testosterone results in elevated levels of
dihydrotestosterone ("DHT"), a conversion product of testosterone. The effects
of these high levels are not well known, and we hope that the FDA will respond
favorably to the relatively lower levels of DHT produced by Androxal(TM), as
described below. We believe that Androxal(TM) could be the first oral therapy
approved in this market without the side effects caused by unnatural peaks and
troughs in hormone blood levels.
In July 2004, we released results from a randomized clinical trial
comparing Androxal(TM) to placebo and to Androgel(R) in hypogonadal men. The
trial enrolled 62 clinically diagnosed hypogonadal men with testosterone levels
less than 300 ng/dL, whereas normal levels range from 298 to 1034 ng/dL.
Patients were randomized into six different arms, three doses of Androxal(TM),
placebo, and both high and low doses of Androgel(R). The placebo and
Androxal(TM) doses were
17
administered in a double-blind fashion, and Androgel(R) was administered as an
open label treatment. Following a two week drug treatment, patients were
followed for an additional seven to 10 days to evaluate their testosterone
levels. There were no side effects noted in either the Androxal(TM) or
Androgel(R) arms of the study that were statistically different than placebo.
Furthermore, all three doses produced statistically significant changes in
testosterone from baseline testosterone levels. The low, mid and high doses of
Androxal(TM) achieved mean increases of 169, 247 and 294 ng/dL, respectively
(p=0.0053, 0.0002 and 0.0005) as compared to baseline. There were no
statistically significant changes within the placebo group (mean decrease from
baseline of -1 ng/dL, p=0.96). Seven of 10 men in the low dose group, 10 of 11
in the mid dose group and 10 of 10 men in the high dose group had restoration of
normal testosterone levels.
Comparing average testosterone levels during the trial period, all three
doses of Androxal(TM) achieved blood levels of total testosterone that were
statistically indistinguishable from the highest dose of Androgel(R) 10G. In
each patient studied, Androxal(TM) also produced average testosterone levels
below 1000 ng/dL at day 14, whereas several Androgel(R) patients had average
testosterone levels far above the normal range. In the subset of men whose blood
testosterone levels were measured six times over a 24-hour period, three of five
men on the higher Androgel(R) dose had multiple measurements above the normal
range. In contrast, only one man out of 15 on Androxal(TM) had a single
measurement above the normal range.
Our Androxal(TM) product candidate is covered by pending patent
applications that cover its use for the treatment of hypogonadism in the United
States and the major foreign markets. A third party holds an issued patent
covering the use of the parent compound in Androxal, for use in the treatment of
hypogonadism. As it stands, this patent may block our use of Androxal(TM) for
this indication. However, following our request for reexamination of the cited
patent in light of several prior art arguments, the U.S. Patent and Trademark
Office ("PTO") has begun reexamination proceedings of the patent. We can not be
certain that the existing patent will be reversed.
For a detailed discussion regarding the development, scientific rationale
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.
CLASS ACTION LAWSUIT UPDATE
On June 16, 2004, the United States Court of Appeals for the Fifth Circuit
affirmed the June 13, 2003 judgment of the United States District Court for the
Southern District of Texas dismissing the one claim remaining from the
consolidated class action lawsuit described in the Company's SEC filings. In
addition, on July 15, 2004, the Court of Appeals denied the plaintiff's request
for a rehearing. The time for the plaintiff to file a writ of certiorari with
the United States Supreme Court has not yet expired.
NASDAQ SMALLCAP MARKET LISTING
18
In January 2004, Zonagen purchased of 6,547,635 shares of its common stock
(approximately 57% of its 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
June 30, 2004, the Company had 4,992,901 shares outstanding.
On July 8, 2004 Zonagen's stock transferred from the Nasdaq National
Market to the Nasdaq SmallCap Market after Nasdaq had approved the Company's
application for this transfer. The Company applied for a Nasdaq SmallCap Market
listing after Nasdaq had informed the Company that it no longer met the
$10,000,000 minimum stockholders' equity listing requirement for the Nasdaq
National Market. This shortfall was a result of the previously concluded,
January 2004, self tender offer.
OFFICE LEASE
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 replaces its prior 2,518 square foot facility
which was under a lease that expired on June 30, 2004.
RESULTS OF OPERATIONS
Three Month and Six Month Periods Ended June 30, 2004 and 2003
Revenues. Total revenues for the three month period ended June 30, 2004
decreased to $75,000 as compared with $393,000 for the same period in the prior
year and were approximately $200,000 for the six-month period ended June 30,
2004 as compared to $625,000 for the same period in the prior year.
Research and development grant revenues for the three-month period ended
June 30, 2004 were $53,000 as compared to $217,000 for the same period in the
prior year and were $117,000 for the six-month period ended June 30, 2004 as
compared to $337,000 for the same period in the prior year. 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 grant during the three-month
period ended June 30, 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
has essentially been depleted during the second quarter ended June 30, 2004.
Interest income decreased 70% to $22,000 for the three-month period ended
June 30, 2004, as compared to $74,000 for the same period in the prior year and
was $48,000 for the six-month period ended June 30, 2004 as compared to $186,000
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
self 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.
19
In the three-month period ended June 30, 2003 the Company sold
substantially all of its fixed assets, in preparation of an anticipated
potential strategic alternative transaction, for approximate net proceeds of
$225,000, which was $102,000 over their book value. At that time management felt
that these assets were not required to redeploy the Company's overall assets.
Other revenue included in the six-month period ended June 30, 2004 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 12% to $508,000 for
the three-month period ended June 30, 2004 as compared to $579,000 for the same
period in the prior year and decreased 14% to $985,000 for the six-month period
ended June 30, 2004 as compared to $1.1 million for the same period in the prior
year. Reimbursed R&D expenses relating to the Company's SBIR grants were
$166,000 less for the three-month period ended June 30, 2004 as compared to the
same period in the prior year and were $209,000 less for the six-month period
ended June 30, 2004 as compared to the same period in the prior year. In
addition, during the six-month period ended June 30, 2003, the Company reduced
its research staff and incurred a $122,000 severance charge. During the three
and six-month periods ended June 30, 2004 the Company prepared for the start of
its Progenta(TM) European Phase I/II clinical study and also continued working
toward the completion of its U.S. Phase I/II human clinical study with
Androxal(TM). The Company also continued its early development work with
Progenta(TM) as an oral treatment for endometriosis, which was funded under a
Phase II $836,441 SBIR grant that was essentially depleted by June 30, 2004.
General and Administrative Expenses. General and administrative ("G&A")
expenses decreased 40% to $294,000 for the three-month period ended June 30,
2004, as compared to $490,000 for the same period in the prior year and
decreased 34% to $728,000 for the six-month period ended June 30, 2004 as
compared to $1.1 million for the same period in the prior year. The decrease in
expenses for the three-month and six-month periods ended June 30, 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.
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, with funds received under
collaborative agreements and SBIR grants. 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 European Phase I/II human safety and efficacy study
of Progenta(TM) and to complete its ongoing data management of its U.S. Phase
I/II clinical study with Androxal(TM). The Company believes that its existing
capital
20
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.
In January 2004, Zonagen purchased 6,547,635 shares of its common stock
(approximately 57% of its 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
June 30, 2004, the Company had 4,992,901 shares outstanding.
The Company had cash, cash equivalents and marketable securities of
approximately $7.6 million at June 30, 2004, as compared to $22.9 million at
December 31, 2003. Excluding maturities and purchases of marketable securities
of ($250,000) and ($10.3) million in the three-month period ended June 30, 2004
and 2003, respectively, net cash of approximately $628,000 was used in operating
activities during the three-month period ended June 30, 2004 as compared to $1.2
million used for the same period in the prior year. The decreased use of cash
for the three-month period ended June 30, 2004 as compared to the same period in
the prior year is primarily due to a decrease in research and development costs
associated with Androxal(TM), a decrease in costs associated with potential
strategic alternatives, a decrease in D&O insurance costs and a reduction in
facility related costs due to facility downsizing.
Excluding maturities and purchases of marketable securities of ($4.4)
million and ($4.3) million in the six-month period ended June 30, 2004 and 2003,
respectively, net cash of approximately $1.3 million was used in operating
activities during the six-month period ended June 30, 2004 as compared to $1.9
million used for the same period in the prior year. The decreased use of cash
for the six-month period ended June 30, 2004 as compared to the same period in
the prior year is primarily due to a decrease in costs associated with potential
strategic alternatives, a decrease in D&O insurance costs, a decrease in
research and development costs associated with Androxal(TM) and a reduction in
facility related costs due to facility downsizing offset by an increase in
research and development costs associated with Progenta(TM).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
21
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 June 30, 2004 that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
22
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 (the "District Court") 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 District
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 (the "Fifth Circuit") affirmed the
dismissal of all claims except one; the Fifth Circuit reversed the District
Court's dismissal of a claim concerning the Company's disclosure about a patent
relating to VASOMAX(R). On June 13, 2003, the District 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 filed an
appeal. On June 16, 2004, the Fifth Circuit affirmed the June 13, 2003 judgment
of the District Court . In addition, on July 15, 2004, the Fifth Circuit denied
the plaintiff's request for a rehearing. The time for the plaintiff to file a
writ of certiorari with the United States Supreme Court has not yet expired.
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).
23
b Reports on Form 8-K
The Company filed five current reports on Form 8-K, three of which
were filed under Item 5 on April 1, June 28 and June 29, 2004 and
two of which were filed under Item 12 on April 1 and May 10, 2004.
24
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ZONAGEN, INC.
Date: August 12, 2004
By: /s/ Joseph S. Podolski
----------------------------------------------
Joseph S. Podolski
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: August 12, 2004
By: /s/ Louis Ploth, Jr.
----------------------------------------------
Louis Ploth, Jr.
Vice President Business Development, Chief
Financial Officer, Director and Secretary
(Principal Financial and Accounting Officer)
25