<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, 1997
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 (IRS Employer
of Incorporation or Organization) Identification No.)
2408 Timberloch Place,
Suite B-4
The Woodlands, Texas
77380
(Address of principal executive offices)
(281) 367-5892
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
As of May 9, 1997 there were outstanding 7,565,097 shares of Common Stock, par
value $.001 per share, and 807,097 shares of Series B Convertible Preferred
Stock, par value $.001 per share, of the Registrant.
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
For the Quarter Ended March 31, 1997
INDEX
PAGE
----
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Consolidated Balance Sheets: March 31, 1997 (Unaudited)
and December 31, 1996 4
Consolidated Statements of Operations: For the three months
ended March 31, 1997 and 1996 and from Inception (August 20,
1987) through March 31, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows: For the three months
ended March 31, 1997 and 1996 and from Inception (August 20,
1987) through March 31, 1997 (Unaudited) 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
2
<PAGE>
STATEMENT REGARDING 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
Regulation" and "- Additional Business Risks", and "Item 3. Legal Proceedings"
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1996, as amended, and "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
included elsewhere in this report.
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, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. 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, 1996, as
amended.
3
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---------------- ----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 7,779,878 $ 11,074,902
Accounts receivable 432,065 420,149
Accrued interest receivable 33,639 47,904
Product inventory 163,232 174,073
Deposits and other current assets 48,034 93,319
---------------- --------------
Total current assets 8,456,848 11,810,347
Lab equipment, furniture and leasehold
improvements, net of accumulated depreciation
and amortization of $734,375 and $706,351, respectively 301,783 311,093
Excess of cost over fair value of tangible assets acquired,
net of accumulated amortization of $498,455 and
$446,080, respectively 950,954 1,003,329
Other assets, net of accumulated amortization of
$129,116 and $116,048, respectively 647,112 586,991
---------------- --------------
Total assets $ 10,356,697 $ 13,711,760
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,487,317 $ 1,169,999
Accrued expenses 344,712 867,459
Current portion of notes payable 14,759 80,526
---------------- --------------
Total current liabilities 2,846,788 2,117,984
---------------- --------------
Long term notes payable 12,972 16,799
---------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
2,305,000 shares authorized, none issued
outstanding, - -
Series B Preferred Stock, $.001 par value,
1,925,000 shares authorized, 910,701 and
1,514,906 shares issued and outstanding, respectively 911 1,515
Common Stock, $.001 par value, 20,000,000 shares
authorized, 7,377,106 and 6,033,396 shares issued
and outstanding, respectively 7,377 6,033
Additional paid-in capital 38,322,501 38,124,532
Deferred compensation (131,031) (144,718)
Deficit accumulated during the development stage (30,702,821) (26,410,385)
---------------- --------------
Total stockholders' equity 7,496,937 11,576,977
---------------- --------------
Total liabilities and stockholders' equity $ 10,356,697 $ 13,711,760
================ ==============
</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>
<CAPTION>
FROM INCEPTION
(AUGUST 20, 1987)
THREE MONTHS ENDED TO
-------------------------------------
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1997
-------------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
REVENUES
Product sales $ 821,353 $ 739,085 $ 7,482,572
Licensing fee - - 250,000
Interest income 121,362 51,357 1,014,061
-------------------- --------------- ----------------
Total Revenues 942,715 790,442 8,746,633
COSTS AND EXPENSES
Cost of products sold 571,246 517,360 5,390,422
Research and development 4,012,089 1,163,263 22,780,013
Sales, general and administrative 597,874 607,334 10,001,109
Interest expense and amortization -
of intangibles 53,942 53,584 914,527
-------------------- --------------- ----------------
Total Costs and Expenses 5,235,151 2,341,541 39,086,071
Loss from continuing operations (4,292,436) (1,551,099) (30,339,438)
Loss from discontinued operations - - (288,104)
Loss on disposal - - (75,279)
-------------------- --------------- ----------------
NET LOSS $(4,292,436) $(1,551,099) $(30,702,821)
-------------------- --------------- ----------------
Loss Per Common and
Common Equivalent Share: $(0.62) $(0.35)
==================== ===============
Weighted Average Common
and Common Equivalent Shares 6,887,156 4,432,383
==================== ===============
</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>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED MARCH 31, (AUGUST 20, 1987)
---------------------------- THROUGH
1997 1996 MARCH 31, 1997
----------- ------------- -------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net loss $(4,292,436) $(1,551,099) $(30,702,820)
Loss on disposal of discontinued operations - - 75,279
Adjustments to reconcile net loss to net cash used
in operating activities
Noncash financing costs - - 315,984
Depreciation and amortization 93,464 81,105 1,312,410
Noncash expenses related to stock-based transactions 13,692 25,834 241,489
Common stock issued for agreement not to compete - - 199,997
Series B Preferred Stock issued for consulting
services - - 17,999
Changes in operating assets and liabilities
(net of effects of purchase of businesses in 1988,
1994 and 1996)
(Increase) decrease in receivables 2,349 (150,578) (151,613)
(Increase) decrease in product inventory 10,841 (14,376) 118,296
(Increase) decrease in prepaid expenses and other
current assets 45,285 (51,447) (15,696)
(Decrease) increase in accounts payable and
accrued liabilities 822,258 227,428 2,614,715
----------- ----------- ------------
Net cash used in operating activities (3,304,547) (1,433,133) (25,973,960)
INVESTING ACTIVITIES
Capital expenditures (18,714) (70,005) (929,413)
Purchase of technology rights and other assets (73,187) (22,078) (744,209)
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 (91,901) (92,083) (1,746,206)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock 104,893 866,403 10,678,957
Proceeds from issuance of Preferred Stock - - 23,688,522
Proceeds from issuance of notes payable - - 2,838,681
Principal payments on notes payable (3,469) - (1,706,116)
----------- ----------- ------------
Net cash provided by financing activities 101,424 866,403 35,500,044
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (3,295,024) (658,813) 7,779,878
Cash and cash equivalents at beginning of period 11,074,902 4,189,858 -
----------- ----------- ------------
Cash and cash equivalents at end of period $ 7,779,878 $ 3,531,045 $ 7,779,878
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ 93,812 $ - $ 93,812
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(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, fertility specialists and urologists. 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 that improve patient
outcomes and cost management. 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, 1997, the Company has
been primarily engaged in research and development and is still in the
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 experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require,
substantial funds to continue research and development, including preclinical
studies and clinical trials of its products, and to commence sales and marketing
efforts if FDA and other regulatory approvals are obtained. The Company expects
to require additional capital to fund its research and development activities in
the third quarter 1997 if it maintains its currently planned clinical program.
The Company believes that it will be able to obtain funds sufficient to maintain
its currently planned clinical programs and other operations at least through
the end of 1997 if the results of its Phase III clinical trials of Vasomax(TM),
expected in the second quarter of 1997, are favorable. If sufficient cash
resources are not available, management intends to reduce expenditures for its
planned clinical program and other operations. If the results of its Phase III
trials are unfavorable, the Company intends to reduce its research and
7
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
development expenditures and focus on its remaining business, in which case the
Company expects that its existing capital resources will be sufficient to fund
its operations through the end of 1997. The Company's requirements will depend
on many factors, including the problems, delays, expenses and complications
frequently encountered by development stage companies; the progress of the
Company's future collaborative research, manufacturing, marketing, or other
funding arrangements; the costs and timing of seeking regulatory approvals of
the Company's products; the Company's ability to obtain regulatory approvals;
the success of the Company's sales and, marketing programs; the cost of filing,
prosecuting and defending and enforcing any patent claims and other intellectual
property rights; and changes in economic, regulatory or competitive conditions
of the Company's planned business. Estimates about the adequacy of funding for
the Company's activities are based on certain assumptions, including the
assumption that testing and regulatory procedures relating to the Company's
products can be conducted at projected costs. There can be no assurance that
changes in the Company's research and development plans, acquisitions or other
events will not result in accelerated or unexpected expenditures. To satisfy its
capital requirements, the Company may seek to raise additional funds in the
public or private capital markets. The Company's ability to raise additional
funds in the public or private markets will be adversely affected if the results
of its current or future clinical trials are not favorable. The Company may
seek additional funding through corporate collaborations and other financing
vehicles. There can be no assurance that any such funding will be available to
the Company on favorable terms or at all. If adequate funds are not available,
the Company may be required to curtail significantly one or more of its research
or development programs, or it may be required to obtain funds through
arrangements with future collaborative partners or others that may require the
Company to relinquish rights to some or all of its technologies or products. If
the Company is successful in obtaining additional financing, the terms of such
financing may have the effect of diluting or adversely affecting the holdings or
the rights of the holders of the Company's Common Stock.
The Company is currently in discussions to out-license domestic and
international rights to Vasomax(TM). The Company 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.
NOTE 2 -- STOCKHOLDERS' EQUITY
Series B Convertible Preferred Stock
- ------------------------------------
On October 11, 1996, the Company completed the final closing of its private
placement of Series B Convertible Preferred Stock ("Series B Preferred Stock").
The aggregate offering consisted of 1,692,500 shares of Series B Preferred Stock
at a price of $10.00 per share, with net proceeds of approximately $14.4
million.
8
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Through March 31, 1997, 781,799 shares of Series B Preferred Stock had been
converted into 1,180,019 shares of Common Stock. From January 1, 1997, through
March 31, 1997, 604,205 shares of Series B Preferred Stock have been converted
into 911,961 shares of Common Stock.
Common Stock
- ------------
During the first quarter of 1997, the Company issued an aggregate 19,473
shares of Common Stock to current and former consultants and employees, upon the
exercise of stock options for total proceeds of $60,511 at prices ranging from
$0.04 to $7.25 per share.
On February 5, 1997 the Company issued 5,000 shares of Common Stock to a
consultant, upon the exercise of stock options, granted during 1996.
The terms of the Company's acquisition of Fertility Technologies, Inc.
("FTI") required the Company to make a final purchase price payment dependent
upon the market price per share of Common Stock at January 31, 1997, and the
achievement of certain earnings milestones by FTI. On January 31, 1997, the
Company issued 305,095 shares of Common Stock in satisfaction of such final
payment obligations.
Warrants
- --------
During the first quarter of 1997, warrants to purchase an aggregate of
12,228 shares of Common Stock were exercised for total proceeds of $44,387 at a
price of $3.63 per share.
During the first quarter of 1997, the Company issued an aggregate of 70,112
shares of Common Stock upon the cashless exercise of warrants to purchase an
aggregate of 101,718 shares of Common Stock. Such warrants were originally
exercisable for shares of the Company's Series A Convertible Preferred Stock
("Series A Preferred Stock") and were issued in connection with the Company's
private placement of Series A Preferred Stock in October 1995. The warrants
became exercisable for shares of Common Stock in lieu of Series A Preferred
Stock as a result of the mandatory conversion of the Series A Preferred Stock
effected in November 1996.
9
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 3 -- AGREEMENTS
In April 1994, the Company entered into an assignment agreement (the
"Gamogen Agreement") with Gamogen, Inc. ("Gamogen") and Dr. Adrian Zorgniotti
pursuant to which the Company acquired the rights to a technology for the
treatment of male impotence, including the assignment of rights to a U.S. patent
application. In consideration for the assignment of the subject technology, the
Company provided Gamogen, Inc. ("Gamogen") with a cash payment of $100,000 in
1994. As consideration for Gamogen's agreement not to compete, the Company
delivered $200,000 or 19,512 shares of the Company's Common Stock in April 1996.
Pursuant to the Gamogen Agreement, Gamogen is to receive a predetermined
royalty, based on the aggregate net sales of any product developed from the
subject technology. In addition, the Company is required to conduct $100,000 per
year of research through 1997 in the area of male impotency. The Company has a
right of first negotiation to purchase or exclusively license improvements to
any royalty-bearing product or competing product developed by Gamogen.
On January 24, 1997, the Company signed an amendment to the Gamogen
Agreement. This amendment provides the Company with an option, exercisable until
January 24, 2000, to purchase Gamogen's rights to receive royalties under the
Gamogen Agreement upon payment of a specified option price. The Company made an
initial payment of $75,000 upon execution of the amendment and is required to
make additional payments to maintain the option of $150,000 each year through
1999 or until the final purchase is completed. The Company can cancel the
amendment at any time through nonpayment. The final option price, inclusive of
amended payments previously made, ranges from $750,000 up to $1,750,000
depending upon when the option is exercised.
During 1996, the Company entered into several agreements with contract
research organizations and other organizations that will provide the Company
with services relating to the U.S. clinical development of Vasomax(TM), the
Company's oral treatment for male impotency. The Company may terminate these
agreements upon written notification and payment of expenses incurred prior to
termination. Upon continued success of the U.S. Vasomax(TM) clinical program, it
is anticipated that the Company could spend in excess of $13,000,000 in 1997 to
continue the U.S. clinical development program. If sufficient cash resources are
not available, management intends to reduce expenditures under these agreements.
10
<PAGE>
ZONAGEN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 4 -- NET LOSS PER SHARE
In March, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". Zonagen will
adopt the provisions of the new statement, changing from its current method of
accounting for net loss per share as set forth in APB Opinion No. 15, for
interim and annual periods ending after December 15, 1997. Adoption of Statement
No. 128 will require retroactive revision of the presentation of net loss per
share in historical financial statements. The Company's net loss per share
presented in the accompanying financial statements as calculated under the
provisions of APB Opinion No. 15 are the same as those had basic net loss per
share under Statement No. 128 been presented. Additionally, net loss per share
as presented herein are also the same as those had diluted net loss per share
under the provisions of Statement No. 128 been presented, since the Company's
outstanding stock options would not have been included in the calculation
because their effect would have been anti-dilutive.
11
<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 disease 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 that improve patient outcome and
cost management. 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, 1997, the Company has been engaged in research
and development and is still in a development stage.
RESULTS OF OPERATIONS
Since its inception the Company has funded its operations through the sale
of equity securities and the formation of corporate partnerships. The Company
did not have product revenues until its acquisition of FTI in October 1994.
Revenues from FTI will not be adequate to fund the Company's operations.
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
Total revenues increased to $942,715 for the quarter ended March 31, 1997
as compared to $790,442 for the same period in the prior year. Product sales,
substantially all of which were derived from FTI, increased to $821,353 in the
quarter ended March 31, 1997 as compared to $739,085 for the same period in the
prior year, representing an increase of $82,268 or 11%. The increase was due
primarily to increased sales efforts of the Company's instruments product line.
Interest revenues increased to $121,362 for the quarter ended March 31, 1997 as
compared to $51,357 for the same period in the prior year, representing an
increase of $70,005 or 136%. The increase was due primarily to additional cash
on hand from the Company's private placement completed in October 1996.
12
<PAGE>
Total research and development ("R&D") expenses increased to $4,012,089 for
the quarter ended March 31, 1997 as compared to $1,163,263 for the same period
in the prior year. This represents an increase of $2,848,826 or 245%, over prior
year period. The increase was due primarily to the additional costs associated
with the development of Vasomax(TM). Expenses associated with the development of
Vasomax(TM) increased to approximately $3,328,000 during the quarter ended March
31, 1997 as compared to approximately $607,000 during the same period in prior
year, representing an increase of $2,721,000 or 448%. General R&D expenses
increased to approximately $684,000 as compared to $556,000, representing an
increase of $128,000 or 23% over the same period in the prior year. This
increase was primarily due to new hires and salary adjustments, the addition of
clinical trials product liability coverage and an initial payment of $75,000
upon execution of an amendment to the Gamogen Agreement. However, a decrease of
approximately $112,000 was realized during the first quarter 1997, due to one
time manufacturing scale-up expenses of phentolamine in the first quarter 1996.
Sales, general and administrative expenses decreased by $9,460 or 2% from
$607,334 in the first quarter 1996 to $597,874 during the quarter ended March
31, 1997.
Interest expense, financing costs and amortization of intangibles remained
relatively constant in the first quarter 1997 as compared to 1996. The Company
recorded $52,376 of amortization during the first quarter of 1997 related to the
excess of cost over fair value of tangible assets associated with the
acquisition of FTI.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the private and public sale of stock and through additional funds received from
out-licensing its proprietary technologies.
Cash expenditures for operating activities for the three months ended March
31, 1997 were $3,304,547 as compared to $1,433,133 for the three months ended
March 31, 1996. The Company had cash and cash equivalents of $7,779,878 at March
31, 1997. The increased use of cash, for the quarter ended March 31, 1997, was
primarily due to the increase in expenses associated with the development of
Vasomax(TM).
Current liabilities were $2,846,788 at March 31, 1997 compared with
$2,117,984 at March 31, 1996. This increase of $728,804 is primarily due to
accrued expenses associated with the development of Vasomax(TM).
During 1996, the Company entered into several agreements with contract
research organizations and other organizations that will provide the Company
with services relating to the U.S. clinical development of Vasomax(TM), the
Company's oral treatment for male impotency. The Company may terminate these
agreements upon written notification and payment of expenses incurred prior to
termination. Upon continued success of the U.S. Vasomax(TM) clinical program,
it is anticipated that the Company could spend in excess of $13,000,000 in 1997
to continue the U.S. clinical development program. If sufficient cash resources
are not available, management intends to reduce expenditures under these
agreements.
13
<PAGE>
The Company has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. The Company has expended, and will continue to require,
substantial funds to continue research and development, including preclinical
studies and clinical trials of its products, and to commence sales and marketing
efforts if FDA and other regulatory approvals are obtained. The Company expects
to require additional capital to fund its research and development activities in
the third quarter 1997 if it maintains its currently planned clinical program.
The Company believes that it will be able to obtain funds sufficient to maintain
its currently planned clinical programs and other operations at least through
the end of 1997 if the results of its Phase III clinical trials of
Vasomax(TM), expected in the second quarter of 1997, are favorable. If
sufficient cash resources are not available, management intends to reduce
expenditures for its planned clinical program and other operations. If the
results of its Phase III trials are unfavorable, the Company intends to reduce
its research and development expenditures and focus on its remaining business,
in which case the Company expects that its existing capital resources will be
sufficient to fund its operations through the end of 1997. The Company's
requirements will depend on many factors, including the problems, delays,
expenses and complications frequently encountered by development stage
companies; the progress of the Company's future collaborative research,
manufacturing, marketing, or other funding arrangements; the costs and timing of
seeking regulatory approvals of the Company's products; the Company's ability to
obtain regulatory approvals; the success of the Company's sales and, marketing
programs; the cost of filing, prosecuting and defending and enforcing any patent
claims and other intellectual property rights; and changes in economic,
regulatory or competitive conditions of the Company's planned business.
Estimates about the adequacy of funding for the Company's activities are based
on certain assumptions, including the assumption that testing and regulatory
procedures relating to the Company's products can be conducted at projected
costs. There can be no assurance that changes in the Company's research and
development plans, acquisitions or other events will not result in accelerated
or unexpected expenditures. To satisfy its capital requirements, the Company may
seek to raise additional funds in the public or private capital markets. The
Company's ability to raise additional funds in the public or private markets
will be adversely affected if the results of its current or future clinical
trials are not favorable. The Company may seek additional funding through
corporate collaborations and other financing vehicles. There can be no assurance
that any such funding will be available to the Company on favorable terms or at
all. If adequate funds are not available, the Company may be required to curtail
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require the Company to relinquish rights to some or all of
its technologies or products. If the Company is successful in obtaining
additional financing, the terms of such financing may have the effect of
diluting or adversely affecting the holdings or the rights of the holders of the
Company's Common Stock.
During the first quarter 1997, the Company received $44,387 from the
exercise of stock warrants for 12,228 shares of Common Stock. During this same
period, the Company received $60,511 from the exercise of stock options for
24,473 shares of Common Stock.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 16, 1994, Dr. Bonita Sue Dunbar ("Dunbar") filed suit in the 270th
District Court of Harris, County, Texas naming Baylor College of Medicine
("BCM"), BCM Technologies, Inc. ("BCMT"), Fulbright & Jaworski, L.L.P., and the
Company 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 the Company and which are the subject of the BCM
Patent. 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.
The court recently granted partial summary judgment in favor of the Company
and the other defendants in connection with this action. As a result of the
rulings, Dunbar is unable to rescind the assignment of the patent rights and is
left only with ancillary claims. Such ancillary claims are subject to a motion
to sever and abate pending Dunbar's appeal of the Court's orders granting the
Company's motion for summary judgment. The Company believes the ancillary claims
are without merit and will not have any material adverse effect on the Company's
financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1 Amendment No. 1 to Assignment Agreement,
dated January 24, 1997, between the Company
and Gamogen, Inc.
11.1 Statement regarding computation of net loss per
share.
27.1 Financial Data Schedule
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: May 15, 1997
By: /s/ Joseph S. Podolski
----------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1997
By /s/ Louis Ploth
----------------------------
Louis Ploth
Vice President of Business
Development and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE>
CONDITIONAL AMENDMENT NO. 1 TO
ASSIGNMENT AGREEMENT
This Conditional Amendment No. 1 to Assignment Agreement (this
"Amendment"), dated as of January 24, 1997, amends that certain Assignment
Agreement, dated as of April 13, 1994 (the "Assignment Agreement"), among
Zonagen, Inc., a Delaware corporation ("Zonagen"), Gamogen, Inc., a New York
corporation ("Gamogen"), and Dr. Adrian Zorgniotti ("Zorgniotti"). Capitalized
terms used without definition in this Amendment shall have the meanings ascribed
thereto in the Assignment Agreement.
WITNESSETH
----------
WHEREAS, Gamogen and Zorgniotti assigned certain technology (referred to in
the Assignment Agreement as the "Subject Technology") to Zonagen pursuant to the
Assignment Agreement; and
WHEREAS, Zonagen agreed in the Assignment Agreement to pay certain
royalties to Gamogen with respect to its sales of any Royalty-Bearing Product;
and
WHEREAS, Gamogen and Zonagen desire to amend the Assignment Agreement to
provide Zonagen with the option to terminate its obligations with respect to
royalties on Royalty-Bearing Products in exchange for payments by Zonagen;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and promises contained in this Amendment, the parties hereto agree as follows:
1. Grant of Option. Gamogen hereby grants Zonagen the right, exercisable in
the sole discretion of Zonagen in the manner set forth in this Amendment, (a) to
amend Section 2.1(b) of the Assignment Agreement by deleting subsection (iii)
thereof in its entirety and (b) to further amend Article II of the Assignment
Agreement by deleting Section 2.3 thereof in its entirety. Without limiting the
foregoing, Zonagen's exercise of the right granted hereby (referred to herein as
the "Option") in accordance with the terms of this Amendment shall terminate (x)
any and all obligations of Zonagen with respect to (i) the payment of royalties
on Royalty-Bearing Products and (ii) obtaining regulatory approval for and
marketing Royalty-Bearing Products, and (y) any and all rights whatsoever of
Gamogen under the Assignment Agreement; provided that such obligations of
Zonagen and rights of Gamogen shall remain in effect unless and until the Option
is exercised.
2. Term of Option. Zonagen shall have the right to exercise the Option at
any time prior to January 24, 2000 [third anniversary of Amendment], provided
that Gamogen shall have the right to terminate the Option prior to such date (as
provided below) if Zonagen fails to make any of the following payments
("Maintenance Payments") in cash to Gamogen:
<PAGE>
(a) $75,000 upon the execution of this Amendment;
(b) $75,000 on each July 24 and January 24 which occurs after the execution
of this Amendment and before Zonagen's exercise of the Option, with the final
such payment to be due on July 24, 1999.
If Zonagen fails to make any Maintenance Payment on the date indicated, Gamogen
shall have the right to terminate the Option by delivering written notice of
such termination to Zonagen; provided that the Option shall not terminate if
Zonagen pays such Maintenance Payment to Gamogen within 30 days after its
receipt of such termination notice. Zonagen shall have no obligation to make
any Maintenance Payment except for the payment due upon the execution of this
Amendment. The sole consequence of Zonagen's failure to make any Maintenance
Payment on the date indicated shall be the right of Gamogen to terminate the
Option as provided above.
3. Exercise of Option. Zonagen may exercise the Option by delivering to
Gamogen (a) notice of such exercise and (b) the payment in cash to Gamogen of
the amount (the "Option Price") specified below:
(i) if the Option is exercised on or before January 24, 1998, the Option
Price shall be $750,000;
(ii) if the Option is exercised after January 24, 1998 but on or before
January 24, 1999, the Option Price shall be $1,000,000;
(iii) if the Option is exercised after January 24, 1999 but on or before
July 24,1999, the Option Price shall be $1,500,000; and
(iv) if the Option is exercised after July 24, 1999 but before the
expiration of the Option, the Option Price shall be $1,750,000.
In determining the amount to be paid by Zonagen upon exercise of the Option,
Zonagen shall receive credit against the applicable Option Price in an amount
equal to the total of all Maintenance Payments previously made by Zonagen
pursuant to this Amendment. Upon Zonagen's exercise of the Option as
contemplated hereby, the Assignment Agreement shall automatically be amended as
reflected in Section 1 of this Amendment, without the necessity of any further
action by any party to this Amendment or the Assignment Agreement.
4. Representations and Warranties. Each party hereto represents and
warrants to the other party as follows:
(a) It is a corporation duly organized, validly existing, and in good
standing under the laws of jurisdiction of its incorporation, with the requisite
power to enter into and perform its obligations under this Amendment in
accordance with terms hereof.
<PAGE>
(b) It has the full right, power and authority to execute and deliver this
Amendment and to perform the terms hereof. It has taken all required corporate
actions to approve and adopt this Amendment. This Amendment has been duly
authorized by all necessary corporate action, and upon execution and delivery
thereof will be its valid and binding agreement enforceable against it in
accordance with the terms hereof, subject as to enforcement to bankruptcy,
insolvency and other laws of general applicability relating to or affecting
creditors' rights and to general principles of equity.
(c) Its execution and delivery of this Amendment and the consummation of
the transactions required hereby (i) do not and will not violate or conflict
with any statute, regulation, judgment, order, writ, decree, or injunction,
currently applicable to it, any of its subsidiaries or any of their respective
property or assets, and (ii) will not violate or conflict with any provision of
its articles of incorporation or bylaws or any existing mortgage, indenture,
contract, licensing agreement, financing statement, or other agreement binding
on it or any of its subsidiaries.
(d) No consent or approval of its stockholders or any third party is
required to be obtained by it in connection with the execution and delivery of
this Amendment or the performance of the transactions contemplated hereby. No
material contract or agreement to which it is a party restricts its ability to
fulfill its obligations and responsibilities under this Amendment or to carry
out the activities contemplated herein.
5. No Other Changes. The Assignment Agreement shall continue to be in full
force and effect in accordance with the terms thereof, except to the extent such
terms are amended by this Amendment upon exercise of the option by Zonagen.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first set forth above.
ZONAGEN, INC.
By: /s/ Joseph S. Podolski
---------------------------
Joseph S. Podolski
President and CEO
GAMOGEN, INC.
By: /s/ Jesse A. Garringer
---------------------------
Jesse A. Garringer
Executive Vice President
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 1997
- ---------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
$4,292,436 / 6,887,156 = $0.62
<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 4 AND 5 OF 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,779,878
<SECURITIES> 0
<RECEIVABLES> 465,704
<ALLOWANCES> 0
<INVENTORY> 163,232
<CURRENT-ASSETS> 8,456,848
<PP&E> 1,036,158
<DEPRECIATION> 734,375
<TOTAL-ASSETS> 10,356,697
<CURRENT-LIABILITIES> 2,846,788
<BONDS> 0
0
911
<COMMON> 7,377
<OTHER-SE> 7,488,649
<TOTAL-LIABILITY-AND-EQUITY> 10,356,697
<SALES> 821,353
<TOTAL-REVENUES> 942,715
<CGS> 571,246
<TOTAL-COSTS> 571,246
<OTHER-EXPENSES> 4,609,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,942
<INCOME-PRETAX> (4,292,436)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,292,436)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,292,436)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
