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, 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 file number: 1-11824
ZONAGEN, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or No.)
Organization)
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 July 30, 1996 there were outstanding 4,996,469 shares of Common Stock, par
value $.001 per share, of the issuer.
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<PAGE>
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended June 30, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements................................................3
Consolidated Balance Sheets: June 30, 1996 (Unaudited)
and December 31, 1995...............................................4
Consolidated Statements of Operations: (Unaudited)
For the three months ended June 30, 1996 and 1995,
six months ended June 30, 1996 and 1995 and from
Inception (August 20, 1987) through June 30, 1996...................5
Consolidated Statements of Cash Flows:(Unaudited)
For the three months ended June 30, 1996 and 1995,
six months ended June 30, 1996 and 1995
and from Inception (August 20, 1987) through
June 30, 1996.......................................................6
Notes to Consolidated Financial Statements..........................7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................11
PART II. OTHER INFORMATION..................................................15
-----------------
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<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 periods ended
June 30, 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.
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<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30 December 31
1996 1995
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 2,339,500 $ 4,189,858
Accounts receivable 318,904 327,975
Accrued interest receivable 8,754 20,185
Product inventory 244,330 230,380
Deposits and other current assets 222,926 49,047
--------------- --------------
Total Current Assets 3,134,414 4,817,445
Lab equipment, furniture and leasehold
improvements, net of accumulated depreciation
and amortization of $647,997 and $601,792, respectively 288,203 233,315
Excess of cost over fair value of tangible assets acquired,
net of accumulated amortization of $341,329 and
$240,845,
respectively 1,108,080 1,153,939
Other assets, net of accumulated amortization of
$87,649 and $67,532, respectively 733,333 446,856
--------------- --------------
$ 5,264,030 $ 6,651,555
=============== ==============
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
Current Liabilities
Accounts payable $ 1,196,281 $ 660,673
Accrued expenses 492,324 499,631
Notes payable 13,525 --
--------------- --------------
Total Current Liabilities 1,702,130 1,160,304
--------------- --------------
Long term notes payable 91,801 66,125
--------------- --------------
Commitments and Contingencies
Stockholders' Equity
Undesignated Preferred Stock, $.001 par value,
5,000,000 shares authorized, none
issued and outstanding -- --
Series A Preferred Stock, $.001 par value,
700,000 shares authorized, 300,884
and 504,850 shares issued and outstanding,
respectively 300 505
Common Stock, $.001 par value,
20,000,000 shares authorized, 4,925,725 and
4,098,124 shares issued and outstanding, respectively 4,926 4,098
Additional paid-in capital 23,639,978 22,473,074
Deferred compensation (148,985) (112,500)
Deficit accumulated during the development stage (20,026,120) (16,940,051)
---------------- ---------------
3,470,099 5,425,126
--------------- --------------
$ 5,264,030 $ 6,651,555
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
From Inception
(August 20, 1987)
Three Months Ended Six Months Ended to
-------------------- ------------------
June 30, June 30, June 30, June 30, June 30,
1996 1995 1996 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues
Product Sales $ 640,437 $ 683,607 $ 1,379,777 $ 1,541,170 $ 5,019,056
Licensing Fee -- -- -- -- 250,000
Interest Income 35,986 15,505 87,088 41,225 708,881
----------- ---------- ----------- ----------- ------------
Total Revenues 676,423 699,112 1,466,865 1,582,395 5,977,937
Costs and Expenses
Cost of Products Sold 438,756 537,882 956,115 1,161,547 3,688,284
Research and Development 1,090,00 590,979 2,253,263 1,295,804 13,084,999
Sales, General and Administrative 628,057 475,607 1,235,391 1,099,050 8,123,117
Interest Expense & Financing Costs
and amortization of intangibles 54,581 57,688 108,165 115,336 744,274
----------- ---------- ----------- ----------- ------------
Total Costs & Expenses 2,211,394 1,662,156 4,552,934 3,671,737 25,640,674
(1,534,971) (963,044) (3,086,069) (2,089,342) (19,662,737)
Loss from Discontinued Operations -- -- -- -- (288,104)
Loss on Disposal -- -- -- -- (75,279)
----------- ---------- ----------- ----------- ------------
Net Loss $(1,534,971) $ (963,044) $(3,086,069) $(2,089,342) $(20,026,120)
----------- ---------- ----------- ----------- ------------
Loss Per Common and
Common Equivalent Share:
From Continuing Operations $ (0.32) $(0.25) $(0.66) $(0.55)
Discontinued Operations -- -- -- --
----------- ----------- ------------ ------------
Net Loss $ (0.32) $(0.25) $ 0.66) $(0.55)
=========== =========== ============ ===========
Weighted Average Common
and Common Equivalent Shares 4,857,549 3,838,734 4,644,966 3,832,372
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
ZONAGEN, INC.
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
From Inception
(August 20, 1987)
Three Months Ended June 30, Six Months Ended June 30, through
1996 1995 1996 1995 June 30, 1996
---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
Operating Activities
Net Loss $(1,534,971) $ (963,044) $(3,086,069) $(2,089,342) $(20,026,120)
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 87,701 85,283 168,806 169,989 1,029,442
Options granted 238,804 9,375 264,638 94,734 339,658
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 171,080 121,950 20,502 163,334 (13,567)
(Increase) decrease in inventory 426 (2,749) (13,950) (79,008) 37,198
(Increase) decrease in prepaid expenses
and other current assets (122,432) (2,234) (173,879) (9,169) (190,587)
(Decrease) increase in accounts payable
and accrued expenses 300,875 151,802 528,302 258,344 1,443,605
----------- ---------- ----------- ----------- ------------
Net cash used in operating activities (858,517) (599,617) (2,291,650) (1,491,118) (16,971,109)
Investing Activities
Capital expenditures (31,088) (8,417) (101,093) (14,841) (829,455)
Purchase of technology rights and
other assets (341,141) (59,524) (363,219) (85,394) (830,590)
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 (372,229) (67,941) (464,312) (100,235) (1,732,629)
Financing Activities
Proceeds from issuance of Common Stock -- 923 866,403 13,939 10,538,616
Proceeds from issuance of Preferred Stock -- -- -- -- 9,320,962
Proceeds from issuance of notes payable 39,625 -- 39,625 -- 2,878,306
Principal payments on notes payable (424) (125,000) (424) (125,000) (1,694,646)
----------- ---------- ----------- ----------- ------------
Net cash provided by financing activities 39,201 (124,077) 905,604 (111,061) 21,043,238
Net increase (decrease) in cash and cash
equivalent (1,191,545) (791,635) (1,850,358) (1,702,414) 2,339,500
Cash and cash equivalents at beginning of 3,531,045 1,536,991 4,189,858 2,447,770 --
period ----------- ---------- ----------- ----------- ------------
Cash and cash equivalents at end of period $ 2,339,500 $ 745,356 $ 2,339,500 $ 745,356 $ 2,339,500
=========== ========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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
prosthetic hyperplasia ("BPH") and prostate 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 June 30, 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
previously anticipated that its existing capital resources would 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). Management's previous plans indicated that if the
Phase III clinical development of VASOMAX(TM) was accelerated, the Company would
be required to secure additional capital, as the capital requirements of Phase
III clinical trials are significantly greater than that of Phase II clinical
trials. On July 31, 1996, the Board of Directors authorized management, based on
encouraging early data from the Company's current in-process clinical trial in
Mexico and existing competition, to accelerate the Phase III clinical
development of VASOMAX(TM) prior to obtaining additional financing. As the
Company's existing capital resources will not be sufficient to fund this
accelerated activity through 1996, management's new plans and projections raise
substantial doubt about the Company's ability to continue as a going concern
absent securing additional financing. Although the unaudited financial
statements for the six months ended June 30, 1996 have not been audited or
reviewed by the Company's independent public
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<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
accountants, they have informed the Company that if the conditions described
above continue to exist at the time of their audit of the financial statements
for the year ended December 31, 1996, their report on those statements will
include an explanatory fourth paragraph because of the substantial doubt about
the Company's ability to continue as a going concern.
The Company is currently in negotiations to license European rights to
VASOMAX(TM) for up-front and milestone payments and future royalties and is also
pursuing other funding options, including a private placement. The
unavailability of such financing could delay or prevent the development and
marketing of some or all of the Company's proposed products or cause the Company
to cease operations. There can be no assurance that the Company will be
successful in obtaining additional capital in amounts sufficient to continue to
fund its operations and product development. 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 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.
NOTE 2 -- STOCKHOLDERS' EQUITY
Preferred Stock
Through June 30, 1996, 297,966 shares of Series A Preferred Stock had
been converted into 821,969 shares of Common Stock. As of June 30, 1996, 300,884
shares of Series A Preferred Stock were outstanding and convertible into 830,018
shares of Common Stock.
-8-
<PAGE>
ZONAGEN, INC.
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Unaudited)
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.
On April 13, 1996, the Company issued 19,512 shares of unregistered
Common Stock to Gamogen, Inc. ("Gamogen") for the second and final purchase
payment relating to the original Assignment Agreement entered into on April 13,
1994 in order to retain the rights for the Company's treatment for male
impotency, VASOMAX(TM). The Common Stock issued by the Company is included in
other assets and is amortized over an estimated expected life of 17 years.
Warrants
During the first quarter of 1996, 219,776 warrants were exercised for
total proceeds of $798,000.
During the second quarter of 1996, 4,186 shares of Common Stock were
issued in exchange for a cashless exercise of a warrant originally issued with
the Company's private placement closed in October 1995.
NOTE 3 -- AGREEMENTS
On June 7, 1996, Fertility Technologies, Inc. ("FTI"), the Company's
wholly owned subsidiary, purchased all of the assets of Zygotek Systems, Inc.
("Zygotek"), a Massachusetts-based company that manufactures and distributes
proprietary products and distributes products manufactured by others to diagnose
and facilitate the treatment of reproductive disorders. The purchase price
consisted of a lump sum payment of $15,000 at the time of closing and the
execution of two notes payable. The first note payable is for $17,179 payable in
36 monthly installments at an interest rate of 8%. The second note payable is
for $22,446 payable in 30 monthly installments at an interest rate of 11%. The
Company accounted for this transaction as a purchase. The excess of
consideration paid over the estimated fair value of tangible assets acquired has
been recorded as "excess of cost over fair value of tangible assets acquired."
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<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here.
Description of Business
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 and prostate 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 June 30, 1996, the Company
has been primarily engaged in research and development and is still in a
development stage.
The Company has implemented certain changes in the way that its
administrative function is handled by consolidating the administration
requirements of its subsidiary, FTI with its corporate headquarters. These
changes occurred primarily in the quarter ended June 30, 1996. Included in this
change was the reduction of rental space and approximate two year lease
extension of its East coast rental office and the elimination of a second rental
property on the West coast whose lease expired in the first quarter of 1996. In
addition, the Company expanded its existing corporate rental space to
accommodate the administrative consolidation and extended the lease on this
space for approximately three years.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1996 and 1995
Product sales were generated through the Company's wholly owned
subsidiary, FTI. Revenue from product sales for the quarter ended June 30, 1996
was $640,000, a 6% decrease from $684,000 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 $36,000 for the quarter ended June 30, 1996, an
increase of $20,000, or 132%, from $16,000 for the same period in the previous
fiscal year. This increase was due to the
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<PAGE>
Company carrying higher average cash balances resulting from the sale of Series
A Preferred Stock in the fourth quarter of 1995 and exercise of stock warrants
and stock options in the first quarter of 1996.
Cost of sales as a percentage of sales for the quarter ended June 30,
1996 was 69% as compared to the same period in the previous year of 79%. This
decrease is primarily due to the elimination of certain less profitable products
and the change in the relationship of a specific product line 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.
Research and development expenses increased by $499,000 or 84% to
$1,090,000 in the second quarter of 1996 compared with $591,000 for the same
period in the prior fiscal year. This increase is primarily due to expenses
associated with the clinical development of VASOMAX(TM) and associated expenses
with the manufacturing development of phentolamine, the active ingredient in
VASOMAX(TM) , the Company's oral treatment for male impotency.
Sales, general and administrative expenses increased by $152,000, or
32%, in the second quarter of 1996 to $628,000 as compared to $476,000 in the
second quarter of 1995. In an effort to increase efficiency and reduce future
administrative operating expenses the Company consolidated the administrative
functions of its subsidiary FTI into its corporate headquarters. In addition,
the Company reduced the office space of FTI by approximately 67% in
Massachusetts and closed its sales office in California. The expenses associated
with the consolidation, such as moving, breaking a lease, brokers fees, etc.,
are included in the operating expenses for the quarter ended June 30, 1996. In
addition, the Company engaged a new public/investor relations firm during the
first quarter of 1996 and increased its spending on these activities during the
first six months of 1996 as compared to the same period in the prior fiscal
year. During the first quarter ended March 31, 1996 the Company also hired a
Vice President of Corporate Development to be responsible for the operations of
its subsidiary, FTI.
Interest expense, financing costs and amortization of intangibles
decreased from $58,000 in the second quarter of 1995 to $55,000 in the second
quarter of 1996. Interest expense relates to the debt assumed through the
acquisition of FTI by Zonagen.
Six Months Ended June 30, 1996 and 1995
Product sales for the six months ended June 30, 1996 were $1,380,000, a
10% decrease from $1,541,000 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 $87,000 for the six months ended June 30, 1996, an
increase of $46,000, or 111%, from $41,000 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 the fourth
quarter of 1995 and exercise of stock warrants and stock options in the first
quarter of 1996.
Cost of sales as a percentage of product sales for the first six
months ended June 30, 1996 was 69% as compared to the similar period in the
previous year of 75%. This decrease is primarily due to the elimination of
certain less profitable products and the change in the relationship of a
specific product line
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<PAGE>
with the 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.
Research and development expenses increased by $957,000 or 74% to
$2,253,000 for the six months ended June 30, 1996 compared with $1,296,000 for
the same period in the prior fiscal year. This increase is primarily due to
expenses associated with the clinical development and manufacturing development
of phentolamine, the active ingredient in VASOMAX(TM) .
Sales, general and administrative expenses increased by $136,000, or
12%, from $1,099,000 in the first six months ended June 30, 1995 to $1,235,000
for the same period in 1996. This increase was primarily due to the
administrative consolidation which was completed in the second quarter ended
June 30, 1996, the increase in public/investor relations activities and the
hiring of a Vice President of Corporate Development.
Interest expense, financing costs and amortization of intangibles
decreased from $115,000 in the first six months of 1995 to $108,000 for the same
period in 1996. Interest expense relates to the debt assumed through the
acquisition of FTI by Zonagen.
LIQUIDITY AND CAPITAL RESOURCES
Net cash for operating activities for the three months ended June 30,
1996 was $859,000 compared to $600,000 for the three months ended June 30, 1995,
and for the six month period was $2,292,000 compared to $1,491,000 for the same
period in the prior year. The Company had cash and cash equivalents of
$2,339,000 at June 30, 1996. The increased use of cash for the six months ended
June 30, 1996 was primarily due to the increase in expenses related to the
clinical development of the Company's oral treatment for male impotency and
capital expenditures of approximately $101,000 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
previously anticipated that its existing capital resources would 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). Management's previous plans indicated that if the
Phase III clinical development of VASOMAX(TM) was accelerated, the Company would
be required to secure additional capital, as the capital requirements of Phase
III clinical trials are significantly greater than that of Phase II clinical
trials. On July 31, 1996, the Board of Directors authorized management, based on
encouraging early data from the Company's current in-process clinical trials in
Mexico and current competition, to accelerate the Phase III clinical development
of VASOMAX(TM) prior to obtaining additional financing. As the Company's
existing capital resources will not be sufficient to fund this accelerated
activity through 1996, management's new plans and projections raise substantial
doubt about the Company's ability to continue as a going concern absent securing
additional financing. Although the unaudited financial statements for the six
months ended June 30, 1996 have not been audited or reviewed by the Company's
independent public accountants, they have informed the company that if the
conditions described above continue to exist at the time of their audit of the
financial statements for the year ended December 31, 1996, their report on those
statements will include an explanatory fourth paragraph because of the
substantial doubt about the Company's ability to continue as a going concern.
-12-
<PAGE>
The Company is currently in negotiations to license European rights to
VASOMAX(TM) for up-front and milestone payments and future royalties and is also
pursuing other funding options, including a private placement. The
unavailability of such financing could delay or prevent the development and
marketing of some or all of the Company's proposed products or cause the Company
to cease operations. There can be no assurance that the Company will be
successful in obtaining additional capital in amounts sufficient to continue to
fund its operations and product development. 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 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 $798,000 from the
exercise of stock warrants for 219,776 shares of Common Stock and $68,200 from
the exercise of stock options for 16,500 shares of Common Stock.
Current liabilities were $1,702,000 at June 30, 1996 compared with
$1,160,000 at December 31, 1995. This increase of $542,000 is primarily due to
accrued expenses associated with the development of VASOMAX(TM).
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 "anticipate," "believe," "expect," "estimate," "project" 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 or projected. For additional discussion of such
risks, uncertainties and assumptions, see "Item 1. Business - Patents and
Proprietary Information," "- Manufacturing Plans," "- Competition," "-
Governmental Regulations" and "Item 3. Legal Proceedings" included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
amended, and "- Liquidity and Capital Resources" included elsewhere in this
report.
-13-
<PAGE>
ZONAGEN, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed in the 270th
District Court of Harris County, Texas, naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc. ("BCMT"), Fulbright and Jaworski, The Woodlands
Venture Capital Company ("Woodlands"), and Zonagen as defendants (collectively
the "Defendants"). Dunbar is a cellular and molecular biologist who has been
employed by BCM as a teacher and research scientist since 1981. During the
course of her employment at BCM, Dunbar developed technologies relating to the
use of certain recombinant zona pellucida peptides that were assigned to
Zonagen. Dunbar claimed, among other things, that her assignment of the patent
rights was induced by statutory and constructive fraud and a civil conspiracy on
the part of the Defendants, seeking damages and rescission of the assignment.
Dunbar also included a separate claim against Zonagen alleging that Zonagen had
converted certain of her endometriosis research, seeking unspecified damages in
connection with this conversion claim.
BCM, BCMT, Fulbright & Jaworski, and Woodlands filed motions for
summary judgement on all of Dunbar's claims and received a favorable ruling from
the Court. Zonagen filed a motion for partial summary judgement on all of
Dunbar's claims with the exception of the conversion claim and received a
favorable ruling from the Court. As a result of these rulings, Dunbar is unable
to rescind the assignment, and is left only with her conversion claim. The
conversion claim has been severed from the remainder of the lawsuit and abated
pending Dunbar's appeal of the Court's Orders granting Defendants' motions for
summary judgement. Dunbar's appeal of the Court's order granting Defendants'
motions for summary judgement has been perfected. Dunbar's appellate brief is
expected during the month of August, 1996. The Company believes the conversion
claim is groundless.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 19, 1996, the Company held its annual meeting of stockholders
in The Woodlands, Texas and submitted the following matters to a vote of the
stockholders: (i) the election of the six directors listed below, and (ii) to
consider and act on such other business as may properly be presented at the
meeting.
-14-
<PAGE>
ELECTION OF DIRECTORS
The following nominees were elected as the Company's Directors until
the next annual meeting of stockholders, with the following numbers of shares
voting in favor of or abstaining from the election of such persons:
<TABLE>
<CAPTION>
Name of Nominee Voted For Votes Against Withheld
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Martin P. Sutter 3,827,178 -0- 12,120
Joseph S. Podolski 3,826,978 -0 12,320
David B. McWilliams 3,827,178 -0- 12,120
Steven Blasnik 3,827,178 -0- 12,120
David W. Ortlieb 3,827,178 -0- 12,120
Allan D. Rudzik 3,826,978 -0- 12,320
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
None.
b. Reports on Form 8-K
None.
-15-
<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: August 1, 1996
By: /s/ Joseph S. Podolski
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 1, 1996
By: /s/ Louis Ploth
Louis Ploth
Vice President of Business
Development and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
-16-
<PAGE>
ZONAGEN, INC.
INDEX TO EXHIBITS
Sequentially
Numbered
Exhibit Identification of Exhibits Page
- ------- -------------------------- ----
Number
------
11.1 Statement regarding computation of net loss per share 18
27.1 Financial Data Schedule
-17-
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
Three Months Ended
June 30, 1996
Net Loss Weighted Average Shares Outstanding Loss per Share
$1,534,971 divided by 4,857,549 equals $0.32
Six Months Ended
June 30, 1996
Net Loss Weighted Average Shares Outstanding Loss per Share
$3,086,069 divided by 4,644,966 equals $0.66
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary fiancial information extracted from the
consolidated balance sheets and consolidated statements of operations found on
pages (4) and (5) 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>
<CIK> 0000897075
<NAME> Zonagen, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Jun-30-1996
<EXCHANGE-RATE>
<CASH> 2,339,500
<SECURITIES> 0
<RECEIVABLES> 327,658
<ALLOWANCES> 0
<INVENTORY> 244,330
<CURRENT-ASSETS> 3,134,414
<PP&E> 936,200
<DEPRECIATION> 647,997
<TOTAL-ASSETS> 5,264,030
<CURRENT-LIABILITIES> 1,702,130
<BONDS> 0
0
300
<COMMON> 4,926
<OTHER-SE> 3,464,873
<TOTAL-LIABILITY-AND-EQUITY> 5,264,030
<SALES> 1,379,777
<TOTAL-REVENUES> 1,466,865
<CGS> 956,115
<TOTAL-COSTS> 956,115
<OTHER-EXPENSES> 3,488,654
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 108,165
<INCOME-PRETAX> (3,086,069)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,086,069)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,086,069)
<EPS-PRIMARY> (0.66)
<EPS-DILUTED> (0.66)
</TABLE>
