<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, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-21198
ZONAGEN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 76-0233274
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2408 Timberloch Place, Suite B-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 8, 1998 there were outstanding 11,310,987 shares of Common Stock, par
value $.001 per share, of the Registrant.
<PAGE>
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 1998
INDEX
PAGE
----
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 4
Consolidated Balance Sheets: March 31, 1998 (Unaudited)
and December 31, 1997 5
Consolidated Statements of Operations: For the three
months ended March 31, 1998 and 1997 and from Inception
(August 20, 1987) through March 31, 1998 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three
months ended March 31, 1998 and 1997 and from Inception
(August 20, 1987) through March 31, 1998 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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. These risks and uncertainties include risks
associated with the Company's early stage of development, uncertainties related
to clinical trial results and FDA approval, the Company's substantial dependence
on one product and early stage of development of other products, the Company's
history of operating losses and accumulated deficit, the Company's future
capital needs and uncertainty of additional funding, uncertainty of protection
for the Company's patents and proprietary technology, the effects of government
regulation of and lack of assurance of regulatory approval for the Company's
products, the Company's limited sales and marketing experience and dependence on
collaborators, manufacturing uncertainties and the Company's reliance on third
parties for manufacturing, competition and technological change, product
liability and availability of insurance, the Company's reliance on contract
research organizations, and other risks and uncertainties described in the
Company's filings with the Securities and Exchange Commission. For additional
discussion of such risks, uncertainties and assumptions, see "Item 1.
Description of Business - Business Risks" and "Item 3. Legal Proceedings"
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997 and "Part I. Financial Information - Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" and "Part II. Other Information - Item 1. Legal Proceedings"
included elsewhere in this quarterly report on Form 10-Q.
3
<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, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1998. 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, 1997.
4
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------------ ------------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 62,332,372 $ 73,761,823
Accounts receivable 642,440 514,734
Product inventory 203,240 206,913
Deposits and other current assets 579,434 270,407
------------------ ------------------
Total current assets 63,757,486 74,753,877
LAB EQUIPMENT, FURNITURE AND LEASEHOLD
IMPROVEMENTS, net of accumulated depreciation
and amortization of $878,797 and $827,688, respectively 537,660 557,199
EXCESS OF COST OVER FAIR VALUE OF TANGIBLE ASSETS ACQUIRED,
net of accumulated amortization of $707,957 and
$655,582, respectively 741,452 793,827
OTHER ASSETS, net of accumulated amortization of
$181,385 and $168,317, respectively 983,244 835,577
------------------ ------------------
Total assets $ 66,019,842 $ 76,940,480
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,168,585 $ 3,285,031
Accrued expenses 2,350,777 2,662,849
Current portion of notes payable 11,906 14,160
------------------ ------------------
Total current liabilities 4,531,268 5,962,040
------------------ ------------------
LONG TERM NOTES PAYABLE 1,066 2,639
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value,
3,075,000 shares authorized, none issued and
outstanding - -
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,591,836 and 11,541,923 shares issued,
respectively; 11,303,536 and 11,480,423 shares
outstanding, respectively 11,592 11,542
Additional paid-in capital 113,606,543 113,236,136
Deferred compensation (1,246,601) (1,401,389)
Cost of Treasury Stock, 288,300 and 61,500 shares, respectively (5,309,060) (1,286,728)
Deficit accumulated during the development stage (45,574,966) (39,583,760)
------------------ ------------------
Total stockholders' equity 61,487,508 70,975,801
------------------ ------------------
Total liabilities and stockholders' equity $ 66,019,842 $ 76,940,480
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
5
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED MARCH 31, (AUGUST 20, 1987)
---------------------------------- TO
1998 1997 MARCH 31, 1998
------------ ------------ -------------
<S> <C> <C> <C>
Revenues
Product sales $ 929,120 $ 821,353 $ 11,046,215
Licensing fee - - 10,250,000
Interest income 1,067,174 121,362 3,920,318
------------ ------------ -------------
Total revenues 1,996,294 942,715 25,216,533
Costs and Expenses
Cost of products sold 619,420 571,246 7,750,599
Research and development 6,344,159 4,012,089 47,411,182
Selling, general and administrative 968,018 597,874 14,127,558
Interest expense and amortization
of intangibles 55,903 53,942 1,138,777
------------ ------------ -------------
Total costs and expenses 7,987,500 5,235,151 70,428,116
Loss from continuing operations (5,991,206) (4,292,436) (45,211,583)
Loss from discontinued operations - - (288,104)
Loss on disposal - - (75,279)
------------ ------------ -------------
Net loss $ (5,991,206) $ (4,292,436) $ (45,574,966)
============ ============ =============
Loss per share: $ (0.53) $ (0.62)
============ ============
Shares used in loss per share calcuation: 11,322,142 6,887,156
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
6
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED MARCH 31, (AUGUST 20, 1987)
------------------------------- THROUGH
1998 1997 MARCH 31, 1998
----------- ------------- ----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (5,991,206) $ (4,292,436) $ (45,574,966)
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 116,553 93,464 1,718,607
Noncash expenses related to stock-based transactions 154,788 13,692 1,235,914
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 effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables (127,706) 2,349 (437,475)
(Increase) decrease in inventory 3,673 10,841 78,288
(Increase) decrease in prepaid expenses and other
current assets (309,027) 45,285 (437,970)
(Decrease) increase in accounts payable and
accrued expenses (1,428,520) 822,258 4,302,047
------------ ----------- ------------
Net cash used in operating activities (7,581,445) (3,304,547) (38,506,296)
Cash Flows from Investing Activities
Capital expenditures (31,570) (18,714) (1,309,712)
Purchase of technology rights and other assets (160,734) (73,187) (1,132,611)
Cash acquired in purchase of FTI - - 2,695
Proceeds from sale 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 (192,304) (91,901) (2,514,907)
Cash Flows from Financing Activities
Proceeds from issuance of common stock 370,457 104,893 83,856,307
Proceeds from issuance of preferred stock - - 23,688,522
Purchase of treasury stock (4,022,332) - (5,309,060)
Proceeds from issuance of notes payable - - 2,838,681
Principal payments on notes payable (3,827) (3,469) (1,720,875)
------------ ----------- ------------
Net cash provided by (used in) financing activities (3,655,702) 101,424 103,353,575
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,429,451) (3,295,024) 62,332,372
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 73,761,823 11,074,902 -
------------ ----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 62,332,372 $ 7,779,878 $ 62,332,372
============ =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ - $ 93,812 $ 93,812
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
7
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc., a Delaware corporation (together with its subsidiary, the
"Company"), was organized on August 20, 1987 (Inception) and is a
biopharmaceutical company in the development stage engaged in the research,
development and marketing of products which address conditions and diseases
associated with the human reproductive system. In addition to its proprietary
development activities, the Company markets and distributes a variety of third-
party fertility-related products to obstetrics/gynecology, urology and fertility
specialists through its wholly-owned subsidiary, Fertility Technologies, Inc.
("FTI"). From Inception through March 31, 1998, the Company has been
primarily engaged in research and development and is still in a development
stage.
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 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 believes that its existing
capital resources will be sufficient to fund its operations through at least the
end of 1999. The Company's capital 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
clinical and preclinical activities; the progress of the Company's collaborative
agreements with Schering-Plough and costs associated with any 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 the development and regulatory approval of the Company's products can be
completed at projected costs and that product approvals and introductions will
be timely and successful. 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.
NOTE 2 -- STOCKHOLDERS' EQUITY
Common Stock
On July 25, 1997, the Company completed a public offering of Common Stock
in which it sold 2,587,500 shares of Common Stock (including the shares issued
pursuant to the exercise of the underwriters' over-allotment option) at a price
of $30.00 per share. The net proceeds of the public offering were approximately
$72.2 million.
8
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
Warrants
As of December 31, 1997 and March 31, 1998 there were (i) 18,391 Series A
Preferred Stock warrants outstanding exercisable for an aggregate of 50,734
shares of Common Stock, (ii) 84,523 Series B Preferred Stock warrants
outstanding exercisable for an aggregate of 129,320 shares of Common Stock and
(iii) Common Stock warrants outstanding exercisable for an aggregate of 22,000
shares of Common Stock. No warrants were exercised during the quarter ended
March 31, 1998.
NOTE 3 -- STOCK OPTIONS
The Company records and amortizes over the related vesting periods deferred
compensation representing the difference between the exercise price of options
granted and the deemed fair market value of the Common Stock at the time of
grant. The Company recorded deferred compensation of $69,500 in the quarter
ending March 31, 1998 relating to options granted under the 1996 Non-employee
Director Stock Option Plan.
During the first quarter of 1998, the Company issued an aggregate 44,913
shares of Common Stock to current and former consultants and employees upon the
exercise of stock options, at prices ranging from $0.43 to $22.25 per share, for
total proceeds of approximately $268,000.
NOTE 4 -- AGREEMENTS
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation, a major U.S.-based
pharmaceutical company (including such affiliates, "Schering-Plough"), with
respect to the exclusive license of the Company's Vasomax product for the
treatment of male erectile dysfunction. Under the agreement, Schering-Plough
paid Zonagen an up-front payment of $10 million and agreed to make subsequent
milestone payments upon the achievement of specified regulatory goals. Zonagen
will receive escalating royalties on all product sales under the Schering-Plough
agreements.
On June 12, 1997, the Company entered into an exclusive supply agreement
with a contract manufacturer under which the Company has agreed to purchase all
of its bulk phentolamine from the contract manufacturer for a period of five
years. The agreement will continue after the initial five-year term for
consecutive one year periods until terminated by either party. The agreement
obligates the Company to purchase specified minimum quantities of phentolamine
and the manufacturer to manufacture phentolamine exclusively for the Company.
During 1996, the Company entered into several agreements with contract
research organizations and other organizations for services relating to the
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.
9
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
In December 1993, the Company entered into an agreement with Schering AG (a
pharmaceutical company based in Germany that is not affiliated with Schering-
Plough), pursuant to which the Company and Schering AG agreed to jointly
research, develop and test zona pellucida-based human contraceptive vaccines.
Under the agreement, the Company is required to bear all costs of the
development of all such products until the Company has developed a "lead
compound" that meets certain specified standards for use in clinical trials. The
agreement provides for Schering AG to make payments to the Company upon certain
research and development milestones, none of which has yet been achieved, and to
bear all costs of the development of the vaccine after formulation of a lead
compound. Schering AG must purchase $2.5 million of Common Stock on or before
June 9, 1998 to retain its rights under the agreement beyond such date. Although
Schering AG has not yet delivered a notice definitively foregoing its rights
under the agreement, it has advised the Company that it does not intend to
extend the collaboration agreement and, accordingly, that it will not purchase
the shares of the Company's Common Stock required to maintain its rights under
the agreement. The Company therefore expects that the agreement with Schering AG
will terminate on or before June 9, 1998. Following such termination, Schering
AG will have no further obligations under the agreement with respect to
milestone payments or the further development of products. Upon termination of
the agreement, all product rights under the agreement will revert to the Company
and both parties will be relieved of any further obligations.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
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., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants (collectively, the "Dunbar
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, the intellectual property
rights to which were assigned to the Company in 1987. 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 Dunbar
Defendants. The court granted partial summary judgment in favor of the Company
and the other Dunbar Defendants in connection with the 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 regarding the Company's alleged conversion of
her ideas relating to endometriosis and ovarian cancer. Such ancillary claims
are subject to a motion to sever and abate pending Dunbar's appeal of the
court's orders granting the motion for summary judgment. The Company believes
the ancillary claims are without merit.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the
10
<PAGE>
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(Unaudited)
Southern District of Texas in Houston, Texas. The plaintiffs assert that the
defendants made materially false and misleading statements and failed to
disclose material facts about the patents and patent applications of the Company
relating to Vasomax and ImmuMax, and about the Company's clinical trials of
Vasomax. As a result, the complaints allege, the price of the Company's Common
Stock was artificially inflated during periods beginning as early as April 1,
1996 and extending as late as January 5, 1998. In each of these lawsuits, the
plaintiff seeks a determination that the suit is a proper class action,
certification of the plaintiff as a class representative and damages in an
unspecified amount on behalf of all purchasers of the Company's stock during the
class period, together with costs of litigation including attorney's fees. The
Company and the individual defendants believe that these actions are without
merit and intend to defend against them vigorously. No estimate of loss or range
of estimate of loss, if any, can be made at this time.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Such statements reflect the
Company's current views with respect to future events and financial performance
and are subject to certain risks, uncertainties and assumptions. Should one or
more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
anticipated in such forward-looking statements. See "Statement Regarding
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
OVERVIEW
Zonagen, Inc. (the "Company") is a biopharmaceutical company in the
development stage engaged in the research, development and marketing of products
which address conditions and diseases associated with the human reproductive
system. In addition to its proprietary development activities, the Company
markets and distributes a variety of third-party fertility-related products to
obstetrics/gynecology, urology and fertility specialists through its wholly
owned subsidiary, Fertility Technologies, Inc. ("FTI"). The Company's objective
is to become a leading provider of innovative products and services for the
management of reproductive health.
During the second quarter 1997, the Company completed two pivotal Phase 3
clinical trials in the United States of its lead product candidate, Vasomax(TM),
an oral treatment for male erectile dysfunction. The Company has dedicated a
substantial portion of its resources over the last several years to the
development of Vasomax(TM). The Company's future prospects are substantially
dependent on approval by the FDA and the successful commercialization of
Vasomax(TM).
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation (including such affiliates,
"Schering-Plough") with respect to the exclusive worldwide license to market and
sell the Company's Vasomax product for the treatment of male erectile
dysfunction. In March 1998, Schering-Plough filed a Product Registration
Application in Mexico for Vasomax(TM) for the treatment of male erectile
dysfunction.
The Company presently intends to submit a New Drug Application (an "NDA")
to the United States Food and Drug Administration ("FDA") for Vasomax(TM) during
the second quarter of 1998. There can be no assurance, however, that the NDA
for Vasomax(TM) will be filed on a timely basis or that it will ultimately be
approved by the FDA. Certain risks and uncertainties associated with the filing
and FDA review of the NDA are described or referenced in "Statement Regarding
Forward-Looking Statements" included elsewhere in this Quarterly Report on Form
10-Q.
12
<PAGE>
Substantially all of the Company's revenues are derived from sales of
third-party fertility-related products by FTI and interest income. The Company
acquired FTI in 1994 to enter the market for female reproductive healthcare
products and services. Revenues from FTI will not be sufficient to fund the
Company's planned operations.
As of March 31, 1998, the Company had an accumulated deficit of $45.6
million. There can be no assurance that the Company will be able to complete
successfully, the transition from a development stage company to the successful
introduction of commercially viable products. The Company's ability to achieve
profitability will depend, among other things, on successfully completing the
development of its products, obtaining regulatory approvals, establishing
marketing, sales and manufacturing capabilities or collaborative arrangements
with others which possess such capabilities, and raising sufficient funds to
finance its activities. There can be no assurance that the Company will be able
to achieve profitability or that profitability, if achieved, can be sustained.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenues. Total revenues increased 112% to $2.0 million for the quarter
ended March 31, 1998 as compared to $943,000 for the same period in the prior
year. Product sales, substantially all of which were derived from FTI,
increased 13% to $929,000 in the quarter ended March 31, 1998 as compared to
$821,000 for the same period in the prior year. The increase was due to
continued growth in a new product line and an increase in the instruments and
lab disposables product lines. Interest revenues increased to $1,067,000 for
the quarter ended March 31, 1998 as compared to $121,000 for the same period in
the prior year. The increase was due to increased cash balances as a result of a
public offering completed in July 1997 and the completion of a licensing
agreement with Schering-Plough in November 1997.
Cost of Products Sold. Cost of products sold increased 8% to $619,000 for
the quarter ended March 31, 1998 as compared to $571,000 for the same period in
the prior year. The increase was due to increased product sales by FTI. Gross
margin from product sales increased to 33% during the first quarter of 1998 as
compared to 30% for the same period in the prior year due to the continued
growth of higher margin product lines.
Research and Development Expenses. Total research and development ("R&D")
expenses increased 58% to $6.3 million for the quarter ended March 31, 1998 as
compared to $4.0 million for the same period in the prior year. 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
64% to approximately $5.4 million during the quarter ended March 31, 1998 as
compared to approximately $3.3 million during the same period in the prior year.
General R&D expenses increased 38% to approximately $944,000 as compared to
$684,000 during the same period in the prior year. This increase was primarily
due to new hires and an increase in research facility space to expand the
Company's research and drug screening capabilities. The Company expects its
research and development expenses to increase during the remainder of 1998 and
for at least the next several years.
13
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 62% to $968,000 during the quarter ended
March 31, 1998 from $598,000 in the first quarter of 1997. The increase was
primarily due to deferred compensation relating to options granted under the
1996 Non-employee Director Stock Option Plan, additional legal expenses relating
to recently filed litigation and additional professionals to strengthen its
current management team and to assist in achieving the Company's goals.
Interest Expense and Amortization of Intangibles. Interest expense and
amortization of intangibles remained relatively constant in the first quarter of
1998 as compared to 1997. The Company recorded $56,000 of amortization during
the first quarter of 1998 related to the excess of cost over fair value of
tangible assets associated with the acquisition of FTI.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operation primarily with
proceeds from the private placement and public offering of equity securities.
In April 1993, the Company received net proceeds of approximately $7.0 million
from its initial public offering. In December 1993, the Company received net
proceeds of $2.5 million from the sales of Common Stock to an affiliate of
Schering AG in connection with the Company's collaboration with Schering AG. In
October 1995, the Company received net proceeds of $5.3 million from the private
placement of Series A Preferred Stock. In September and October 1996, the
Company received aggregate net proceeds of $14.4 million from the private
placement of Series B Preferred Stock. In July 1997, the Company received net
proceeds of approximately $72.2 million from a public offering of Common Stock.
In December 1997, the Company received a $10.0 million up-front license fee from
Schering-Plough for the right to market and sell Vasomax for the treatment of
male erectile dysfunction.
The Company used net cash of approximately $7.6 million for operating
activities in the three months ended March 31, 1998 as compared to approximately
$3.3 million in the three months ended March 31, 1997. The Company had cash and
cash equivalents of approximately $62.3 million at March 31, 1998. The
increased use of cash for the three months ended March 31, 1998 was primarily
due to the increase in expenses related to the clinical development of
Vasomax(TM).
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 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 believes that its existing
capital resources will be sufficient to fund its operations through at least the
end of 1999. The Company's capital 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
clinical and preclinical activities; the progress of the Company's collaborative
agreements with Schering-Plough and costs associated with any 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 the development and regulatory approval of the Company's products can be
completed at projected costs and that product approvals and introductions will
be timely and successful. 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
14
<PAGE>
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.
15
<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., Fulbright & Jaworski, L.L.P., The Woodlands
Venture Capital Company and the Company as defendants (collectively, the "Dunbar
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, the intellectual property
rights to which were assigned to the Company in 1987. 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 Dunbar
Defendants. The court granted partial summary judgment in favor of the Company
and the other Dunbar Defendants in connection with the 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 regarding the Company's alleged conversion of
her ideas relating to endometriosis and ovarian cancer. Such ancillary claims
are subject to a motion to sever and abate pending Dunbar's appeal of the
court's orders granting the motion for summary judgment. The Company believes
the ancillary claims are without merit.
Certain purported class action complaints alleging violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder
have been filed against the Company and certain of its officers and directors.
These complaints were filed in the United States District Court for the Southern
District of Texas in Houston, Texas. The plaintiffs assert that the defendants
made materially false and misleading statements and failed to disclose material
facts about the patents and patent applications of the Company relating to
Vasomax and ImmuMax, and about the Company's clinical trials of Vasomax. As a
result, the complaints allege, the price of the Company's Common Stock was
artificially inflated during periods beginning as early as April 1, 1996 and
extending as late as January 5, 1998. In each of these lawsuits, the plaintiff
seeks a determination that the suit is a proper class action, certification of
the plaintiff as a class representative and damages in an unspecified amount on
behalf of all purchasers of the Company's stock during the class period,
together with costs of litigation including attorney's fees. The Company and
the individual defendants believe that these actions are without merit and
intend to defend against them vigorously. No estimate of loss or range of
estimate of loss, if any, can be made at this time.
The Company is involved in certain other litigation matters which it
believes will not have a material adverse effect on the Company.
ITEM 5. OTHER INFORMATION
In December 1993, the Company entered into an agreement with Schering AG (a
pharmaceutical company based in Germany that is not affiliated with Schering-
Plough), pursuant to which the Company and Schering AG agreed to jointly
research, develop and test zona pellucida-based human contraceptive vaccines.
Under the agreement, the Company is required to bear all costs of the
development of all such products until the Company has developed a "lead
compound" that meets certain specified standards for use in clinical trials. The
agreement provides for Schering AG to make payments to the Company upon certain
research and development milestones, none of which has yet been achieved, and to
bear all costs of the development of the vaccine after formulation of a lead
compound. Schering AG must purchase $2.5 million of Common
16
<PAGE>
Stock on or before June 9, 1998 to retain its rights under the agreement beyond
such date. Although Schering AG has not yet delivered a notice definitively
foregoing its rights under the agreement, it has advised the Company that it
does not intend to extend the collaboration agreement and, accordingly, that it
will not purchase the shares of the Company's Common Stock required to maintain
its rights under the agreement. The Company therefore expects that the agreement
with Schering AG will terminate on or before June 9, 1998. Following such
termination, Schering AG will have no further obligations under the agreement
with respect to milestone payments or the further development of products. Upon
termination of the agreement, all product rights under the agreement will revert
to the Company and both parties will be relieved of any further obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
Exhibit No. Identification of Exhibit
----------- -------------------------
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
-------------------
None.
17
<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, 1998 By: /s/ Joseph S. Podolski
-----------------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 15, 1998 By: /s/ Louis Ploth
-----------------------------------------
Louis Ploth
Vice President of Business Development and
Chief Financial Officer
(Principal Financial and Accounting Officer)
18
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 1998
- ---------------------------------
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
$5,991,206 (divided by) 11,322,142 = $0.53
<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 5 and 6 of the Company's 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 62,332,372
<SECURITIES> 0
<RECEIVABLES> 642,440
<ALLOWANCES> 0
<INVENTORY> 203,240
<CURRENT-ASSETS> 63,757,486
<PP&E> 1,416,457
<DEPRECIATION> 878,797
<TOTAL-ASSETS> 66,019,842
<CURRENT-LIABILITIES> 4,531,268
<BONDS> 0
0
0
<COMMON> 11,592
<OTHER-SE> 61,475,916
<TOTAL-LIABILITY-AND-EQUITY> 66,019,842
<SALES> 929,120
<TOTAL-REVENUES> 1,996,294
<CGS> 619,420
<TOTAL-COSTS> 619,420
<OTHER-EXPENSES> 7,312,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,903
<INCOME-PRETAX> (5,991,206)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,991,206)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,991,206)
<EPS-PRIMARY> (.53)
<EPS-DILUTED> (.53)
</TABLE>
