<PAGE> 1
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, 2000
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
incorporation or organization) Identification No.)
2408 Timberloch Place, Suite B-4
The Woodlands, Texas 77380
(Address of principal executive offices and
zip code)
(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 August 9, 2000 there were outstanding 11,316,056 shares of Common
Stock, par value $.001 per share, of the Registrant.
<PAGE> 2
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended June 30, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements
Consolidated Balance Sheets: June 30, 2000 (Unaudited)
and December 31, 1999 5
Consolidated Statements of Operations: For the three months
ended June 30, 2000 and 1999, six months ended June 30, 2000
and 1999 and from Inception (August 20, 1987) through June 30,
2000 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months
ended June 30, 2000 and 1999, six months ended June 30, 2000
and 1999 and from Inception (August 20, 1987) through June 30,
2000 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE> 3
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
words "may," "anticipate," "believe," "expect," "estimate," "project,"
"suggest," "intend" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks,
uncertainties and assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated, believed, expected,
estimated, projected, suggested or intended. These risks and uncertainties
include risks associated with the Company's early stage of development,
uncertainties related to clinical trial results and FDA approval and approval in
other jurisdictions, 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, inventory accumulation, competition and technological
change, product liability and availability of insurance, the Company's reliance
on contract research organizations, no assurance of adequate third party
reimbursement 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, 1999 and
"Part I. Financial Information - Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
included elsewhere in this quarterly report on Form 10-Q.
3
<PAGE> 4
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 six-month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
4
<PAGE> 5
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,565 $ 4,106
Marketable securities - short term 24,162 31,146
Product inventory 4,525 4,003
Prepaid expenses and other current assets 1,038 800
--------- ---------
Total current assets 34,290 40,055
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 659 852
MARKETABLE SECURITIES - LONG TERM 6,028 3,884
OTHER ASSETS, net 1,605 1,496
--------- ---------
Total assets $ 42,582 $ 46,287
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,325 $ 3,561
Accrued expenses 1,193 976
--------- ---------
Total current liabilities 3,518 4,537
--------- ---------
STOCKHOLDERS' EQUITY
Undesignated Preferred Stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding -- --
Common Stock, $.001 par value, 20,000,000 shares
authorized, 11,731,356 and 11,681,324 shares issued,
respectively; 11,316,056 and 11,266,024 shares
outstanding, respectively 12 12
Additional paid-in capital 113,726 113,564
Deferred compensation (398) (490)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (66,792) (63,852)
--------- ---------
Total stockholders' equity 39,064 41,750
--------- ---------
Total liabilities and stockholders' equity $ 42,582 $ 46,287
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE> 6
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except per share amounts)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (AUGUST 20, 1987)
JUNE 30, JUNE 30, THROUGH
---------------------- ---------------------- JUNE 30,
2000 1999 2000 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
REVENUES
Licensing fees $ -- $ -- $ -- $ -- $ 20,250
Product royalties 11 22 30 22 435
Interest income 560 554 1,119 1,182 9,347
-------- -------- -------- -------- --------
Total revenues 571 576 1,149 1,204 30,032
EXPENSES
Research and development 1,122 3,560 2,518 7,913 78,203
General and administrative 731 940 1,571 1,873 17,344
Interest expense and amortization
of intangibles -- -- -- 8 388
-------- -------- -------- -------- --------
Total expenses 1,853 4,500 4,089 9,794 95,935
-------- -------- -------- -------- --------
Loss from continuing operations (1,282) (3,924) (2,940) (8,590) (65,903)
Income (loss) from discontinued operations -- -- -- 59 (1,828)
Gain on disposal -- -- -- 1,014 939
-------- -------- -------- -------- --------
NET LOSS $ (1,282) $ (3,924) $ (2,940) $ (7,517) $(66,792)
======== ======== ======== ======== ========
Income (loss) per share - basic and diluted:
Loss from continuing operations $ (0.11) $ (0.35) $ (0.26) $ (0.77)
Income from discontinued operations -- -- -- 0.01
Gain on disposal -- -- -- 0.09
-------- -------- -------- --------
NET LOSS $ (0.11) $ (0.35) $ (0.26) $ (0.67)
======== ======== ======== ========
Shares used in income (loss) per share calculation:
Basic 11,307 11,243 11,289 11,229
Diluted 11,307 11,243 11,289 11,229
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE> 7
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
FROM INCEPTION
THREE MONTHS ENDED SIX MONTHS ENDED (AUGUST 20, 1987)
JUNE 30, JUNE 30, THROUGH
---------------------- ---------------------- JUNE 30,
2000 1999 2000 1999 2000
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,282) $ (3,924) $(2,940) $ (7,517) $ (66,792)
Gain on disposal of discontinued operations -- -- -- (1,014) (939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Noncash financing costs -- -- -- -- 316
Depreciation and amortization 116 106 273 252 2,636
Noncash expenses related to stock-based
transactions 84 33 142 121 1,939
Common stock issued for agreement not to
compete -- -- -- -- 200
Series B Preferred Stock issued for consulting
services -- -- -- -- 18
Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):
(Increase) decrease in receivables -- -- -- (85) (199)
(Increase) decrease in inventory -- 140 (523) 324 (4,556)
(Increase) decrease in prepaid expenses and other
current assets (302) (141) (238) (107) (923)
(Decrease) increase in accounts payable and
accrued expenses (1,814) (944) (1,019) (2,161) 3,395
------- -------- ------- -------- ---------
Net cash used in operating activities (3,198) (4,730) (4,305) (10,187) (64,905)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities 4,823 -- 4,840 (257) (30,190)
Capital expenditures (27) (78) (43) (413) (2,204)
Purchase of technology rights and other assets (77) (263) (146) -- (1,746)
Cash acquired in purchase of FTI -- -- -- -- 3
Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period -- -- -- -- 138
Proceeds from sale of the assets of Fertility
Technologies, Inc., subsidiary -- -- -- 2,250 2,250
Increase in net assets held for disposal -- -- -- -- (213)
------- -------- ------- -------- ---------
Net cash provided by (used in) investing activities 4,719 (341) 4,651 1,580 (31,962)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 14 26 113 73 84,121
Proceeds from issuance of preferred stock -- -- -- -- 23,688
Purchase of treasury stock -- -- -- -- (7,484)
Proceeds from issuance of notes payable -- -- -- -- 2,839
Principal payments on notes payable -- -- -- (1) (1,732)
------- -------- ------- -------- ---------
Net cash provided by financing activities 14 26 113 72 101,432
------- -------- ------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,535 (5,045) 459 (8,535) 4,565
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,030 48,150 4,106 51,640 --
------- -------- ------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,565 $ 43,105 $ 4,565 $ 43,105 $ 4,565
======= ======== ======= ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
Reduction of debt due to final payment, in stock,
of FTI Acquisition $ -- $ -- $ -- $ -- $ 94
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
7
<PAGE> 8
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 1 -- ORGANIZATION AND OPERATIONS
Zonagen, Inc., a Delaware corporation, (together with its wholly owned
subsidiary, Fertility Technologies, Inc. ("FTI"), the "Company" or "Zonagen"),
was organized on August 20, 1987 ("Inception"), and is a biopharmaceutical
company engaged in the development of pharmaceutical products for the
reproductive system, including sexual dysfunction, vaccine adjuvants, fertility
and female health as well as urological applications, specifically prostate
cancer. Until the sale of substantially all the assets of FTI in March 1999,
Zonagen also sold devices, instruments and supplies to fertility specialists,
obstetricians and gynecologists. From Inception through June 30, 2000, the
Company has been primarily engaged in research and development and clinical
development and is still in a development stage.
On July 27, 2000, the Company announced that its Board of Directors had
made the decision to review strategic alternatives as a result of the previously
announced delays associated with the Company's lead product VASOMAX(R). The
Company has engaged Deutsche Banc Alex. Brown to review strategic alternatives
for the redeployment of its assets. At the same time, the Board elected to
reduce cash expenditures and conserve resources as part of the redeployment
strategy. Accordingly, management was instructed to immediately reduce headcount
to the minimum required to maintain existing technologies and commitments during
this transitional period and to implement other major cost cutting measures. As
a result of this decision, sixteen full-time employees of the Company were
laid-off effective July 27, 2000, leaving approximately thirteen full-time
employees.
The Company has experienced negative cash flows from operations since
its Inception and has funded its activities to date primarily from equity
financings and corporate collaborations. Substantial funds will be required to
continue the Company's research and development programs, including preclinical
studies and clinical trials of its products, and to commence sales and marketing
efforts if appropriate, if the U.S. Food and Drug Administration ("FDA") or
other regulatory approvals are obtained. Based on the decision to engage
Deutsche Banc Alex. Brown to review strategic alternatives for the redeployment
of the Company's assets and its reduction in force on July 27, 2000 and decision
to implement other major cost cutting measures, the Company believes that its
existing capital resources will be sufficient to fund its operations for at
least the next several years. See "Item 1. Description of Business -- Business
Risks" in the Company's annual report on Form 10-K for the fiscal year ended
December 31, 1999.
NOTE 2 -- MARKETABLE SECURITIES-SHORT AND LONG TERM
Short term marketable securities have a remaining maturity of less than
twelve months and long term marketable securities have a remaining maturity of
greater than twelve months. All investments are stated at amortized cost.
Marketable securities-short term were $24.2 million and marketable
securities-long term were $6.0 million as of June 30, 2000, totaling $30.2
million as compared to marketable securities-short term of $31.1 million and
marketable securities-long term of $3.9 million at December 31, 1999, totaling
$35.0 million. In prior years, the Company invested only in 30-day commercial
paper. The Company now invests excess funds in longer maturities to secure a
higher yield. These investments include corporate bonds and notes and
Euro-dollar bonds. The Company's policy is to hold investments to maturity,
8
<PAGE> 9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
to require minimum credit ratings of A1/P1 and A2/A and to make no investments
with maturities more than three years. The average life of the investment
portfolio may not exceed 24 months.
NOTE 3 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine mesylate which
is the active ingredient in VASOMAX(R), the Company's oral treatment for male
erectile dysfunction ("MED"). As of June 30, 2000, the cost of this bulk raw
material inventory on hand was approximately $4.5 million as compared to
approximately $4.0 million at December 31, 1999.
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 mesylate from the contract manufacturer
for a period of five years. Due to the contract manufacturer producing
phentolamine mesylate in excess of the Company's actual committed orders, the
Company agreed, on January 27, 2000, to an early purchase of the excess
phentolamine mesylate production at a substantially discounted price. This
purchase satisfied the years 2000 and 2001 contractual minimum purchase
obligations, leaving the Company with no future contractual purchase
obligations. If VASOMAX(R) is approved by the FDA and the Company purchases
additional phentolamine from the contract manufacturer, then the Company will be
required, by the contract manufacturer, to pay a premium equal to the amount
previously discounted.
NOTE 4 -- STOCK OPTIONS AND EMPLOYEE STOCK PURCHASE PLAN
Over the related vesting periods, the Company records and amortizes
deferred non-cash 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. During the period ended March 31, 2000, the Company recorded
deferred compensation of approximately $50,000 in connection with options
granted to a consultant. The Company recorded compensation expense of
approximately $52,000 for the three month period ended June 30, 2000 related to
the amortization of deferred compensation recorded in connection with options
granted under the 1996 Non-Employee Director Stock Option Plan (the "1996
Director Plan"). Amortization of deferred compensation recorded in connection
with other option grants totaled approximately $31,400 during the quarter ended
June 30, 2000.
On May 23, 2000, the shareholders approved the Company's 2000
Non-Employee Directors' Stock Option Plan (the "2000 Director Plan") to provide
for the automatic grant of options to purchase shares of Common Stock to the
Company's non-employee directors. With the adoption of the 2000 Director Plan,
the Board terminated the 1996 Director Plan; however, any previously granted
options under the terminated 1996 Director Plan shall continue in force
unaffected by such action. In connection with the approval of the 2000 Director
Plan, on May 23, 2000 the Company granted an initial grant of options to
directors, totaling 170,000 shares of Common Stock at an exercise price of $3.25
which was the closing price on the date of grant. Also, during the month of June
2000, under the Company's 2000 Director Plan, the Company
9
<PAGE> 10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
provided an initial stock option grant for 40,000 shares of Common Stock, to a
newly elected Director, at an exercise price of $3.375 which was the closing
price on the date of grant.
On May 23, 2000, the shareholders also approved the Company's 2000
Employee Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan provides
the Company's employees with an opportunity to purchase Common Stock through
accumulated payroll deductions. A total of 150,000 shares of Common Stock has
been reserved for issuance under the Purchase Plan through December 2000. In
addition, the Purchase Plan provides for annual increases in the number of
shares available for issuance under the Purchase Plan on the first day of each
year, beginning January 1, 2001, in an amount equal to 50,000 shares. As of June
30, 2000 there were no accrued contributions being held by the Company as the
initial Offering Period did not begin until July 1, 2000.
NOTE 5 -- LICENSE, RESEARCH AND DEVELOPMENT AGREEMENT
Schering-Plough Corporation
In November 1997, the Company entered into exclusive license agreements
with affiliates of Schering-Plough Corporation, a U.S.-based pharmaceutical
company (including such affiliates, "Schering-Plough"), with respect to the
Company's VASOMAX(R) product for the treatment of MED. Zonagen has received a
total of $20.0 million from Schering-Plough from inception of the collaboration
through June 30, 2000. The Company could receive up to an additional $37.5
million in milestone payments, which are tied to the receipt of regulatory
approvals for VASOMAX(R) in major developed country jurisdictions. In addition,
during the quarter ended June 30, 2000 the Company also received $11,000 in
royalty payments from the sale of VASOMAX(R) in Mexico and Brazil. Under the
terms of the agreements, the Company receives quarterly royalty payments based
on net product sales by Schering-Plough. These quarterly payments are expected
to lag current quarter sales by up to sixty days. The Schering-Plough agreements
provide for Zonagen to receive escalating royalty payments based on increasing
product sales levels. There can be no assurance that VASOMAX(R) will be approved
in the U.S. or any other jurisdiction or that Schering-Plough will achieve sales
levels that result in escalating royalty payments.
As provided for in the Schering-Plough agreements, royalty rates
payable are substantially reduced on VASOMAX(R) sales in a territory where the
Company has not met a certain business criterion called for in the agreements.
Currently, the Company has not met that business criterion in Mexico and Brazil,
the two jurisdictions where the product is currently being sold. Until this
business criterion is met in these countries, the Company will continue to
receive royalties at the reduced rate. In addition, until this business
criterion is met, royalties may be reduced substantially further, if during any
calendar quarter, unit sales of orally administered phentolamine-based products
for MED by competitors in this territory exceed certain specified market shares.
Under the terms of the Schering-Plough agreements, Schering-Plough has
broad discretion as to whether or not to continue the collaboration with
Zonagen. As discussed earlier, Zonagen is currently
10
<PAGE> 11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
seeking strategic alternatives that could materially alter the current
management or ownership structure of Zonagen. There can be no assurance that
Schering-Plough will accept any such potential structure. If Schering-Plough is
not satisfied with such structure, they may decide at that time to terminate
their agreements with the Company. Such decision, or any decision by
Schering-Plough to terminate such agreements, could materially and adversely
affect Zonagen.
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of rats in the two-year rat study.
Consequently, the FDA placed both VASOMAX(R) and Vasofem(TM) on clinical hold in
the U.S. until the final report on the data from the two-year study is
submitted, reviewed and assessed by the FDA. At the time the clinical holds were
imposed, the FDA did allow Schering-Plough to complete the ongoing human study
of VASOMAX(R).
During March 2000, the Company reported the results of 27 additional
preclinical and clinical studies relating to the VASOMAX(R) Investigational New
Drug ("IND") were submitted to the FDA. These studies include a variety of drug
interaction and metabolism studies, as well as the two long-term open label
clinical safety studies.
On April 18, 2000, the Company announced that it had submitted the
final results of the two-year rat study that the FDA required to consider
lifting the clinical hold on VASOMAX(R) and Vasofem(TM). A New Drug Application
is on file with the FDA seeking approval of VASOMAX(R) for the treatment of male
erectile dysfunction. Vasofem(TM) is being developed as a therapy for female
sexual arousal disorder.
On May 16, 2000, the Company announced that it had been notified by the
FDA that an additional animal study would be required before the FDA would
consider VASOMAX(R) for approval. The FDA recommended that the Company conduct
another two year rodent study due to concerns about the previously reported
brown fat proliferations observed in the course of the earlier two year rat
study in which phentolamine mesylate, the active ingredient in VASOMAX(R), was
administered on a daily basis. The FDA also informed the Company that the status
of the VASOMAX(R) IND had been upgraded from a complete to a partial clinical
hold. Additional human studies of VASOMAX(R) for the treatment of male erectile
dysfunction may be conducted in the U.S., but must be limited to a duration of
no more than three months and the total number of doses may not exceed three per
week. The Company continues to have ongoing dialogue with the FDA on how to
address the preclinical safety concern. The FDA has provided the Company an
opportunity to submit a proposal for a mechanistic study that could potentially
be considered as an alternative to another two-year rodent study. Whether such a
mechanistic study will be successful in alleviating the FDA's safety concerns
regarding the occurrence of brown fat proliferations, will depend on the
relevance to humans of the hypotheses being tested in this study and the
ultimate outcome. There can be no assurances that the FDA will accept an
alternative mechanistic study that would cause the FDA to lift the partial
clinical hold on the Company's phentolamine-based products or that the products
will ultimately be approved for marketing. See "Part 1. Item 1. Description of
Business - Business Risks - Uncertainties Related to Clinical Trial Results and
FDA Approval" in the Company's annual report on Form 10-K for the fiscal year
ended December 31, 1999.
11
<PAGE> 12
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTE 6 -- SUBSEQUENT EVENT
On July 27, 2000, the Company announced that its Board of Directors had
made the decision to review strategic alternatives as a result of the previously
announced delays associated with the Company's lead product VASOMAX(R). The
Company has engaged Deutsche Banc Alex. Brown to review strategic alternatives
for the redeployment of its assets. At the same time, the Board elected to
reduce cash expenditures and conserve resources as part of the redeployment
strategy. Accordingly, management was instructed to immediately reduce headcount
to the minimum required to maintain existing technologies and commitments during
this transitional period and to implement other major cost cutting measures. As
a result of this decision, sixteen full-time employees of the Company were
laid-off effective July 27, 2000, leaving approximately thirteen full-time
employees.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements reflect
the Company's current views with respect to future events and financial
performance and are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated in such forward-looking statements. See "Factors Affecting
Forward-Looking Statements" included elsewhere in this quarterly report on Form
10-Q.
OVERVIEW
Zonagen, Inc. ("Zonagen" or the "Company"), a Delaware Corporation was
organized on August 20, 1987 ("Inception") and is a development stage company.
Zonagen is a biopharmaceutical company engaged in the development of products
for the reproductive system, including sexual dysfunction, vaccine adjuvants,
products for fertility and female health as well as urological applications,
specifically prostate cancer.
Zonagen's results of operations have varied significantly from year to
year and quarter to quarter, primarily due to the regulatory approval process in
the United States and other foreign jurisdictions of the Company's potential
products, the signing of new licenses and product development agreements, the
timing of revenues recognized pursuant to license agreements, the achievement of
milestones by licensees or the Company, the progress of clinical trials
conducted by the licensees and the Company and the levels of research, marketing
and administrative expense. The timing of the Company's revenues may not match
the timing of the Company's associated product development expenses. To date,
research and development expenses have generally exceeded revenue in any
particular period and/or fiscal year.
In September 1999, the Company announced that it had decreased its
cash expenditures by reducing staff by fifteen full-time employees and by
slowing down spending on certain of its research programs. By concentrating
primarily on its lead product candidates (VASOMAX(R), Vasofem(TM) and vaccine
adjuvants), the Company sought to insure that it had sufficient funds to finance
these programs. Due to the continued delays in the approval of VASOMAX(R), on
July 27, 2000, the Company's Board of Directors announced their decision to
engage Deutsche Banc Alex. Brown to review strategic alternatives for the
redeployment of its assets. At the same time, the Board elected to reduce cash
expenditures and conserve resources as part of the redeployment strategy.
Accordingly, management was instructed to immediately reduce headcount to the
minimum required to maintain existing technologies and commitments during this
transitional period and to implement other major cost cutting measures. As a
result of this decision, sixteen full-time employees of the Company were
laid-off, leaving thirteen full-time employees. The Company expects that as a
result of these two reductions in force and the other major cost cutting
measures implemented, internal spending in all areas will continue to decrease,
prospectively. There can be no assurance that the FDA or other similar
regulatory jurisdictions will approve VASOMAX(R) for commercial sale. See "Part
1. Item 1. Description of Business - Business Risks - Uncertainties Related to
Clinical Trial Results and FDA Approval" in the Company's annual report on Form
10-K for the fiscal year ended December 31, 1999 and "Part I. Financial
Information -- Item 1. Financial Statements -- Note 5 of Notes of Consolidated
Financial Statements (Unaudited)" included elsewhere in this quarterly report on
Form 10-Q.
As of June 30, 2000, the Company had an accumulated deficit of $66.8
million. Losses have resulted principally from costs incurred conducting
clinical trials for VASOMAX(R) and Vasofem(TM), in
13
<PAGE> 14
research and development activities related to efforts to develop the Company's
products and from the associated administrative costs required to support those
efforts. There can be no assurance that the Company will be able to successfully
complete the transition from a development stage company to the successful
introduction of commercially viable products. The ability to achieve
profitability will depend, among other things, on successfully completing the
development of its products in a reasonable time frame and at a reasonable cost,
obtaining regulatory approvals, establishing marketing, sales and manufacturing
capabilities or collaborative arrangements with others that possess such
capabilities, the ability to realize value from the Company's research and
development programs through the commercialization of those products and raising
sufficient funds to finance its activities. There can be no assurance that
profitability can be achieved or if achieved, can be sustained. See "Item 1.
Description of Business -- Business Risks -- Uncertainties Related to Early
Stage of Development," " -- Business Risks -- History of Operating Losses;
Accumulated Deficit" in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1999 and "Part I. Financial Information - Item 1.
Financial Statements - Note 1 of Notes to Consolidated Financial Statements
(Unaudited)" included elsewhere in this quarterly report on Form 10-Q.
IMPACT OF YEAR 2000
The Company experienced no significant problems regarding the turn of
the millennium ("Year 2000") through August 9, 2000. The Company continues
follow-up activities to insure that no material issues will occur.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2000 AND 1999
Revenues. Total revenues remained relatively constant at $571,000 for
the three month period ended June 30, 2000 as compared with $576,000 for the
same period in the prior year, but decreased 8% to $1.1 million for the six
month period ended June 30, 2000 as compared with $1.2 million for the same
period in the prior year.
Product royalties from sales of VASOMAX(R) in Mexico and Brazil were
approximately $11,000 for the three month period ended June 30, 2000 as compared
to $22,000 for the same period in the prior year and approximately $30,000 for
the six month period ended June 30, 2000 as compared to $22,000 for the same
period in the prior year. Schering-Plough commenced sales of VASOMAX(R) in
Mexico, under the brand name Z-MAX(R), in May 1998 and in Brazil in May 1999.
Under the terms of the agreements, the Company receives quarterly royalty
payments based on net product sales by Schering-Plough. These quarterly payments
are expected to lag current quarter sales by up to sixty days. Until VASOMAX(R)
is approved for commercial sale in the United States, the Company expects
royalty payments from foreign sales to be nominal.
Interest income increased 1% to $560,000 for the three month period
ended June 30, 2000 as compared with $554,000 for the same period in the prior
year. The increase in the current year is attributable to rising interest rates
and the prior implementation of a new investment strategy. Interest income
decreased 8% to $1.1 million for the six month period ended June 30, 2000 as
compared with $1.2 million for the same period in the prior year. The decrease
is attributable to lower cash balances offset by rising interest rates and the
implementation of a new investment strategy.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D
14
<PAGE> 15
expenses decreased 69% to $1.1 million for the three month period ended June 30,
2000 as compared to $3.6 million for the same period in the prior year. R&D
expenses decreased 68% to $2.5 million for the six month period ended June 30,
2000 as compared to $7.9 million for the same period in the prior year.
Contracted research expenses decreased 88% to approximately $306,000
for the three month period ended June 30, 2000 as compared with $2.5 million for
the same period in the prior year and decreased 84% to approximately $890,000
for the six month period ended June 30, 2000 as compared with $5.7 million for
the same period in the prior year. These decreases were due primarily to a
decline in expenses associated with the clinical development of VASOMAX(R) and
other phentolamine-based products. The costs associated with the development of
VASOMAX(R) declined substantially subsequent to the submission of the New Drug
Application ("NDA") to the Food and Drug Administration ("FDA") and the
completion of a variety of drug interaction and metabolism studies, including
two long-term open label clinical safety studies. During May 2000, the FDA
upgraded the previously imposed clinical hold on VASOMAX(R) and Vasofem(TM) to a
partial clinical hold. The Company will continue to incur costs, although at a
substantially reduced level, in connection with the ongoing regulatory review of
VASOMAX(R).
General research and development expenses decreased 18% to $816,000 for
the three month period ended June 30, 2000 from $1.0 million for the same period
in the prior year and decreased 27% to $1.6 million for the six month period
ended June 30, 2000 from $2.2 million for the same period in the prior year.
These decreases are primarily due to the reductions made in personnel in the
Company's toxicology and analytical labs in September 1999 due to the delay in
the approval process of VASOMAX(R). This decrease was partially offset by a stay
bonus program implemented in October 1999, for the remaining employees.
General and Administrative Expenses. General and administrative
expenses decreased by 22% to $731,000 for the three month period ended June 30,
2000 as compared to $940,000 for the same period in the prior year and decreased
by 16% to $1.6 million for the six month period ended June 30, 2000 as compared
to $1.9 million for the same period in the prior year. During September 1999,
the Company implemented a cost reduction program, including a reduction in force
that lowered personnel and related expense. A portion of the decrease was offset
by a stay bonus program implemented in October 1999, for the remaining
employees. In addition, the Company did not incur expenses in the first half of
2000 relating to hiring and relocating additional management personnel as it did
during the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Since Inception, the Company has financed its operations primarily with
proceeds from the private placements and public offerings of equity securities
and with funds received under collaborative agreements. Zonagen has received a
total of $20.0 million from Schering-Plough from inception of its collaboration
through June 30, 2000 and has received only nominal royalty payments from the
sale of VASOMAX(R) in Mexico and Brazil.
The Company's primary use of cash to date has been in operating
activities to fund research and development, including preclinical studies and
clinical trials, and general and administrative expenses required to support
those activities. Net cash of approximately $3.2 million was used in operating
activities during the second quarter ended June 30, 2000 as compared to $4.7
million for the same period in the prior year. Of the $3.2 million used in the
second quarter, approximately $1.6 million was used to pay
15
<PAGE> 16
outstanding accounts payable balances from 1999 and for a payment to the
contract manufacturer for the final purchase of phentolamine which was agreed to
by the Company on January 27, 2000. The Company had cash, cash equivalents and
marketable securities of approximately $34.8 million at June 30, 2000 as
compared to approximately $39.1 at December 31, 1999, and as compared to $43.1
million in cash and cash equivalents on June 30, 1999. The decreased use of cash
for the quarter ended June 30, 2000 was primarily due to a reduction in
contracted costs associated with the development of VASOMAX(R) upon the
completion of certain clinical trials conducted in support of the VASOMAX(R) NDA
submission. In addition, in August 1999, the FDA placed the Company's
phentolamine-based clinical development programs on hold in the U.S. which
further reduced clinical development expenses. During May 2000, the FDA upgraded
the clinical status of VASOMAX(R) to a partial clinical hold. The Company spent
approximately $306,000 in connection with its clinical development programs
during the quarter ended June 30, 2000 as compared to $2.5 million for the same
period in the prior year.
Based on the decision to engage Deutsche Banc Alex. Brown to review
strategic alternatives for the redeployment of the Company's assets and to
reduce cash expenditures and conserve resources as part of the redeployment
strategy, the Company believes that its existing capital resources will be
sufficient to fund its operations through at least the next several years. 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 affiliates of Schering-Plough or any future collaborators and costs
associated with any of those collaborative research, manufacturing, marketing or
other funding arrangements; the costs and timing of seeking regulatory approvals
of VASOMAX(R) and the Company's other 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. 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. See "Item 1. Description of Business
-- Business Risks" in the Company's annual report on Form 10-K for the fiscal
year ended December 31, 1999.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
16
<PAGE> 17
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Stockholders was held on May 23,
2000 to consider and vote upon the following proposals:
(i) Election of Directors. The following individuals were
nominated and elected as directors, with the
following number of shares voted for and withheld
with respect to each director.
For Withheld
--------- ---------
Martin P. Sutter 8,504,371 1,323,333
Joseph S. Podolski 9,696,338 131,366
Steven Blasnik 8,508,151 1,319,553
Jeffrey M. Jonas, M.D. 8,520,245 1,307,459
Timothy McInerney 8,817,127 1,010,577
(ii) Approval of the Company's 2000 Employee Stock Purchase Plan
For 5,072,243 Against 259,597 Abstain 92,861
(iii) Approval of the Company's 2000 Non-Employee Directors'
Stock Option Plan
For 3,744,689 Against 1,611,675 Abstain 68,337
(iv) Approval of the appointment of Arthur Andersen LLP as the
Company's independent public accountants for 2000
For 9,713,055 Against 74,523 Abstain 40,126
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
---------- -------------------------
10.1 2000 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Appendix A to the
Company's Proxy Statement filed on April 26, 2000)
11.1 Statement Regarding Computation of Net Loss Per
Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
17
<PAGE> 18
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 11, 2000
By: /s/ Joseph S. Podolski
-----------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000
By: /s/ Louis Ploth, Jr.
-----------------------------------
Louis Ploth, Jr.
Vice President Finance
(Principal Financial and
Accounting Officer)
<PAGE> 19
EXHIBIT INDEX
Exhibit No. Identification of Exhibit
---------- -------------------------
10.1 2000 Non-Employee Directors' Stock Option Plan
(incorporated by reference to Appendix A to the
Company's Proxy Statement filed on April 26, 2000)
11.1 Statement Regarding Computation of Net Loss Per
Share
27.1 Financial Data Schedule
