<PAGE>
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, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission filed number: 1-11824
ZONAGEN, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive office)
(713) 367-5892
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----- -----
As of May 8, 1996 there were outstanding 4,853,216 shares of Common Stock,
par value $.001 per share, of the issuer.
<PAGE>
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 1996
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements 3
Balance Sheets: March 31, 1996 (Unaudited)
and December 31, 1995 4
Statements of Operations: For the three months
ended March 31, 1996 and 1995 and from
Inception (August 20, 1987) through
March 31, 1996 (Unaudited) 5
Statements of Cash Flows: For the three months
ended March 31, 1996 and 1995 and from
Inception (August 20, 1987) through
March 31, 1996 (Unaudited) 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION 12
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to form 10-Q and Rule
10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all necessary adjustments (which include only normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1996. 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, 1995.
3
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
MARCH 31, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,531,045 $ 4,189,858
Accounts receivable 483,932 327,975
Accrued interest receivable 14,806 20,185
Product inventory 244,756 230,380
Deposits and other current assets 100,494 49,047
------------- ------------
Total Current Assets 4,375,033 4,817,445
Lab equipment, furniture and leasehold improvements, net
of accumulated depreciation and amortization of $623,705
and $601,792, respectively 281,407 233,315
Excess of cost over fair value of tangible assets
acquired, net of accumulated amortization of $290,660
and $240,845, respectively 1,104,124 1,153,939
Other assets, net of accumulated amortization of
$76,909 and $67,532, respectively 459,557 446,856
------------- ------------
$ 6,220,121 $ 6,651,555
------------- ------------
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 792,832 $ 660,673
Accrued expenses 594,899 499,631
------------- ------------
Total Current Liabilities 1,387,731 1,160,304
------------- ------------
Long term notes payable 66,125 66,125
------------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value, 4,300,000
shares authorized, none issued and outstanding - -
Series A Preferred Stock, $.001 par value, 700,000
shares authorized 354,636 and 504,850 shares issued
and outstanding, respectively 355 505
Common Stock, $.001 par value, 20,000,000 shares
authorized, 4,753,769 and 4,098,124 shares issued and
outstanding, respectively 4,754 4,098
Additional paid-in capital 23,388,348 22,473,074
Deferred compensation (136,041) (112,500)
Deficit accumulated during the development stage (18,491,151) (16,940,051)
------------- ------------
4,766,265 5,425,126
------------- ------------
$ 6,220,121 $ 6,651,555
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
THREE MONTHS ENDED FROM INCEPTION
--------------------------- (AUGUST 20,
MARCH 31, MARCH 31, 1987) TO
1996 1995 MARCH 31, 1996
----------- ----------- --------------
<S> <C> <C> <C>
REVENUES
Product sales $ 739,085 $ 857,562 $ 4,378,364
Licensing fee - - 250,000
Interest income 51,357 25,720 673,150
----------- ----------- ------------
Total Revenues 790,442 883,282 5,301,514
COSTS AND EXPENSES
Cost of products sold 517,360 623,665 3,249,530
Research and development 1,163,263 704,825 11,994,999
Sales, general and administrative 607,334 623,444 7,495,060
Interest expense and amortization
of intangibles 53,584 57,649 689,693
----------- ----------- ------------
Total Costs & Expenses 2,341,541 2,009,583 23,429,282
Loss from continuing operations (1,551,099) (1,126,301) (18,127,768)
Loss from discontinued operations - - (288,104)
Loss on disposal - - (75,279)
----------- ----------- ------------
NET LOSS $(1,551,099) $(1,126,301) $(18,491,151)
----------- ----------- ------------
----------- ----------- ------------
Loss Per Common and
Common Equivalent Share: $ (0.35) $ (0.29)
----------- -----------
----------- -----------
Weighted Average Common
and Common Equivalent Shares 4,432,383 3,825,940
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
FROM INCEPTION
THREE MONTHS ENDED MARCH 31, (AUGUST 20, 1987)
---------------------------- THROUGH
1996 1995 MARCH 31, 1996
----------- ----------- -----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,551,099) $(1,126,301) $(18,491,151)
Loss on disposal of discontinued operations - - 75,279
Adjustments to reconcile net loss to net cash
used in operating activities
Financing costs - - 315,984
Depreciation and amortization 81,105 84,704 941,741
Options granted 25,834 85,359 100,854
Series B Preferred Stock issued for
consulting services - - 17,999
Changes in operating assets and liabilities
(net effects of purchase of businesses in
1988 and 1994):
(Increase) decrease in receivables (150,578) 46,058 (184,647)
(Increase) decrease in inventory (14,376) (76,259) 36,772
(Increase) decrease in prepaid expenses and
other current assets (51,447) (11,609) (68,155)
(Decrease) increase in accounts payable
and accrued expenses 227,428 106,712 1,142,732
----------- ----------- ------------
Net cash used in operating activities (1,433,133) (891,336) (16,112,592)
INVESTING ACTIVITIES
Capital expenditures (70,005) (6,434) (798,367)
Purchase of technology rights and other
assets (22,078) (26,027) (489,449)
Cash acquired in purchase of FTI - - 2,695
Proceeds from sales of subsidiary, less
$12,345 for operating losses during 1990
phase-out period - - 137,646
Increase in net assets held for disposal - - (212,925)
----------- ----------- ------------
Net cash used in investing activities (92,083) (32,461) (1,360,400)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 866,403 13,018 10,538,616
Proceeds from issuance of Series A
Preferred Stock - - 9,320,962
Proceeds from issuance of notes payable - - 2,838,681
Principal payments on notes payable - - (1,694,222)
----------- ----------- ------------
Net cash provided by financing activities 866,403 13,018 21,004,037
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents (658,813) (910,779) 3,531,045
Cash and cash equivalents at beginning
of period 4,189,858 2,447,770 -
----------- ----------- ------------
Cash and cash equivalents at end of period $ 3,531,045 $ 1,536,991 $ 3,531,045
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
6
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc. (the "Company") was organized on August 20, 1987
("Inception") and is engaged in the development of technologies targeting
conditions or diseases associated with the human reproductive system. These
technologies include the development of products for the oral treatment of
male impotency (VASOMAX-TM-), alleviation of urological diseases such as
benign prostatic hyperplasia ("BPH") and prostrate cancer, and the treatment
of female conditions such as endometriosis. The Company is also active in
the research of improved methodologies to enhance fertility as well as new
approaches to contraception and prophylaxis of sexually transmitted disease.
The Company currently has sales through its subsidiary, Fertility
Technologies, Inc. ("FTI"), a marketing and distribution organization focused
on obstetrics/gynecology and fertility specialists. The Company's goal is to
become a leader in the area of human reproductive healthcare management by
providing a full array of innovative products and services. The Company's
growth strategy is to develop products based on its own research as well as
in-licensing existing and late stage development products and technologies
focused in the area of human reproductive healthcare. From Inception through
March 31, 1996, the Company has been primarily engaged in research and
development and is still in a development stage.
The Company requires substantial capital for research, product
development and market development activities. The ability of the Company to
successfully develop, manufacture and market its proprietary products is
dependent upon many factors. The Company's business is subject to
significant risks consistent with biotechnology companies that are developing
products for human therapeutic use. These risks include, but are not limited
to, uncertainties regarding research and development, access to capital,
obtaining and enforcing patents, receiving regulatory approval and
competition with other biotechnology and pharmaceutical companies. Other than
through FTI, the Company has not generated revenues from operations nor is
there any assurance of significant revenues in the future.
The Company has incurred losses since its inception in 1987 and expects
to continue to incur losses for the next several years. The Company
anticipates that its existing capital resources will be sufficient to fund
its research and development activities through 1996 at approximately the
same level as 1995, including the initiation of Phase III clinical
development of VASOMAX-TM-. The Company may be required to accelerate the
clinical development of VASOMAX-TM-during 1996 due to competition. If this
acceleration occurs the Company would be required to secure additional
capital, as the capital requirements for Phase III clinical trials are
significantly greater than that of Phase II clinical trials. Should such
financing not be obtained, the Company would need to adjust its plan for the
accelerated clinical development of VASOMAX-TM- or its current research
programs. The Company can make no assurance that even if additional funds
are secured, that it will receive approval from the Food and Drug
Administration ("FDA") to continue development of VASOMAX-TM-. In addition,
even if such approval is received, there can be no assurance that VASOMAX-TM-
will ever be approved by the FDA for commercialization or that the Company
can secure the funds necessary to commercialize this technology or that it
will have the ability to commercialize this technology.
7
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
There can be no assurance that the Company will be able to obtain
financing on favorable terms in the public or private capital markets in the
foreseeable future. The Company is attempting to develop additional
corporate collaborations, but has not entered into any letters of intent or
agreements in principal with respect to any collaborations. There can be no
assurance that the Company will be able to consummate any corporate
collaborations on terms favorable to the Company 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.
NOTE 2 -- STOCKHOLDERS' EQUITY
PREFERRED STOCK
Through March 31, 1996, 150,214 shares of Series A Preferred Stock had
been converted into 414,370 shares of Common Stock.
COMMON STOCK
During the first quarter of 1996 the Company issued an aggregate 16,500
shares of Common Stock to an employee, a consultant and a former board member
for the exercise of stock options for total proceeds of $68,200 at prices
ranging from $0.43 to $5.88 per share.
On January 12, 1996 the Company issued 5,000 shares of Common Stock to a
consultant as compensation for services through June 1996. At that date, the
Company's stock was trading at $9.875 per share. As a result, the Company
has recorded this transaction as deferred compensation and will record an
expense of approximately $49,000 on a pro rata basis over the service period.
WARRANTS
During the first quarter of 1996, 219,776 warrants were exercised for
total proceeds of $798,000.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
Except for the historical information contained herein, the following
discussion contains forward-statements that involve risks and uncertainties.
The Company's actual results could differ materially from those discussed
here.
Zonagen, Inc. (the "Company") was organized on August 20, 1987
("Inception") and is engaged in the development of technologies targeting
conditions or diseases associated with the human reproductive system. These
technologies include the development of products for the oral treatment of
male impotency, alleviation of urological diseases such as benign prostatic
hyperplasia and prostrate cancer, and the treatment of female conditions such
as endometriosis. The Company is also active in the research of improved
methodologies to enhance fertility as well as new approaches to contraception
and prophylaxis of sexually transmitted disease. The Company currently has
sales through its subsidiary, Fertility Technologies, Inc. ("FTI"), a
marketing and distribution organization focused on obstetrics/gynecology and
fertility specialists. The Company's goal is to become a leader in the area
of human reproductive healthcare management by providing a full array of
innovative products and services. The Company's growth strategy is to
develop products based on its own research as well as in-licensing existing
and late stage development products and technologies focused in the area of
human reproductive healthcare. From Inception through March 31, 1996, the
Company has been primarily engaged in research and development and is still
in a development stage.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Product sales were generated through the Company's wholly owned
subsidiary, FTI. Revenue from product sales for the quarter ended March 31,
1996 was $739,000, a 14% decrease from $858,000 for the same period in the
previous fiscal year. This decrease was primarily due to a change in the
relationship with a manufacturer from a distribution relationship whereby FTI
recognized 100% of revenue and related cost of goods sold to a sales agent
relationship whereby only commissions are recognized.
Interest income was $51,000 for the quarter ended March 31, 1996, an
increase of $25,000, or 99%, from $26,000 for the same period in the previous
fiscal year. This increase was due to the Company carrying higher average
cash balances resulting from the sale of Series A Preferred Stock in 1995 and
exercise of stock warrants and stock options in the first quarter of 1996.
Research and development expenses increased by $458,000 or 65% to
$1,163,000 in the first quarter of 1996 compared with $705,000 for the same
period in the prior fiscal year. This increase is primarily due to expenses
associated with the Phase II human clinical trials for VASOMAX-TM- which
were initiated in Europe during the first quarter of 1995 and completed in
the first quarter of 1996 and initial expenses associated with the
manufacturing development of phentolamine, the active ingredient in
VASOMAX-TM-.
9
<PAGE>
Sales, general and administrative expenses decreased by $3,000, or 1%,
from $623,000 in the first quarter of 1995 to $620,000 in the first quarter
of 1996.
Interest expense, financing costs and amortization of intangibles
decreased from $58,000 in the first quarter of 1995 to $54,000 in the first
quarter of 1996. Interest expense relates to the debt assumed through the
acquisition of FTI by Zonagen. The Company also recorded $50,000 of
amortization related to the excess of cost over fair value of tangible net
assets acquired during the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash expenditures for the three months ended March 31, 1996 were
$1,433,000 compared to $891,000 for the three months ended March 31, 1995.
The Company had cash reserves of $3,531,000 at March 31, 1996. The increased
use of cash was primarily due to the increase in expenses related to the
clinical development of the Company's oral treatment for male impotency
("VASOMAX-TM-") and capital expenditures of approximately $70,000 for tenant
improvements to 3,600 square feet of additional space that the Company leased
in March 1996 and additional research and administrative equipment purchases.
The Company has incurred losses since its inception in 1987 and expects
to continue to incur losses for the next several years. The Company
anticipates that its existing capital resources will be sufficient to fund
its research and development activities through 1996 at approximately the
same level as 1995, including the initiation of Phase III clinical
development of VASOMAX-TM-. The Company may be required to accelerate the
clinical development of VASOMAX-TM-during 1996 due to competition. If this
acceleration occurs the Company would be required to secure additional
capital, as the capital requirements for Phase III clinical trials are
significantly greater than that of Phase II clinical trials. Should such
financing not be obtained, the Company would need to adjust its plan for the
accelerated clinical development of VASOMAX-TM- or its current research
programs. The Company can make no assurance that even if additional funds
are secured, that it will receive approval from the Food and Drug
Administration ("FDA") to continue development of VASOMAX-TM-. In addition,
even if such approval is received, there can be no assurance that VASOMAX-TM-
will ever be approved by the FDA for commercialization or that the Company
can secure the funds necessary to commercialize this technology or that it
will have the ability to commercialize this technology.
There can be no assurance that the Company will be able to obtain
financing on favorable terms in the public or private capital markets in the
foreseeable future. The Company is attempting to develop additional
corporate collaborations, but has not entered into any letters of intent or
agreements in principal with respect to any collaborations. There can be no
assurance that the Company will be able to consummate any corporate
collaborations on terms favorable to the Company 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.
During the first quarter of 1996 the Company received $866,000 from the
exercise of stock warrants for 219,776 shares of Common Stock and the
exercise of stock options for 16,500 shares of Common Stock.
10
<PAGE>
Current liabilities were $1,388,000 at March 31, 1996 compared with
$1,160,000 at March 31, 1995. This increase of $339,000 is primarily due to
accrued expenses associated with the development of VASOMAX-TM-.
11
<PAGE>
ZONAGEN, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
None.
b. REPORTS ON FORM 8-K
None.
12
<PAGE>
ZONAGEN, INC.
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, 1996
By: /s/ Joseph S. Podolski
---------------------------------
Joseph S. Podolski
President and Chief Executive
Officer (Principal Executive
Officer)
Date: May 14, 1996
By /s/ Louis Ploth
---------------------------------
Louis Ploth
Vice President of Business
Development and Chief Financial
Officer (Principal Financial and
Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 3 AND 4 ON THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,531,045
<SECURITIES> 0
<RECEIVABLES> 498,738
<ALLOWANCES> 0
<INVENTORY> 244,756
<CURRENT-ASSETS> 4,375,033
<PP&E> 905,112
<DEPRECIATION> 623,705
<TOTAL-ASSETS> 6,220,121
<CURRENT-LIABILITIES> 1,387,781
<BONDS> 0
0
355
<COMMON> 4,754
<OTHER-SE> 4,761,156
<TOTAL-LIABILITY-AND-EQUITY> 6,220,121
<SALES> 739,085
<TOTAL-REVENUES> 790,442
<CGS> 517,360
<TOTAL-COSTS> 517,360
<OTHER-EXPENSES> 1,770,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,584
<INCOME-PRETAX> (1,551,099)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,551,099)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,551,099)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> 0
</TABLE>
