<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 September 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)
<TABLE>
<S> <C>
Delaware 76-0233274
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
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 November 10, 2000 there were outstanding 11,316,632 shares of
Common Stock, par value $.001 per share, of the Registrant.
<PAGE> 2
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended September 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: September 30, 2000 (Unaudited)
and December 31, 1999 5
Consolidated Statements of Operations: For the three months ended
September 30, 2000 and 1999, nine months ended September 30, 2000 and 1999
and from Inception (August 20, 1987) through September 30, 2000 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
September 30, 2000 and 1999, nine months ended September 30, 2000 and 1999
and from Inception (August 20, 1987) through September 30, 2000 (Unaudited) 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</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 nine-month
period ended September 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>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,397 $ 4,106
Marketable securities - short term 16,971 31,146
Product inventory 4,525 4,003
Prepaid expenses and other current assets 1,023 800
------------- -------------
Total current assets 32,916 40,055
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, net 614 852
MARKETABLE SECURITIES - LONG TERM 6,022 3,884
OTHER ASSETS, net 1,633 1,496
------------- -------------
Total assets $ 41,185 $ 46,287
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,438 $ 3,561
Accrued expenses 873 976
------------- -------------
Total current liabilities 3,311 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, 11,731,932 and 11,681,324 shares issued,
respectively; 11,316,632 and 11,266,024 shares
outstanding, respectively 12 12
Additional paid-in capital 113,754 113,564
Deferred compensation (322) (490)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (68,086) (63,852)
------------- -------------
Total stockholders' equity 37,874 41,750
------------- -------------
Total liabilities and stockholders' equity $ 41,185 $ 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
(AUGUST 20,
1987)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, THROUGH
-------------------------------- ------------------------------- SEPTEMBER 30,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
REVENUES
Licensing fees $ -- $ -- $ -- $ -- $ 20,250
Product royalties 35 182 65 204 470
Interest income 582 425 1,702 1,607 9,930
------------- ------------- ------------- ------------- -------------
Total revenues 617 607 1,767 1,811 30,650
EXPENSES
Research and development 1,179 2,094 3,698 10,007 79,383
General and administrative 732 692 2,303 2,565 18,076
Interest expense and amortization
of intangibles -- -- -- 8 388
------------- ------------- ------------- ------------- -------------
Total expenses 1,911 2,786 6,001 12,580 97,847
------------- ------------- ------------- ------------- -------------
Loss from continuing operations (1,294) (2,179) (4,234) (10,769) (67,197)
Income (loss) from discontinued operations -- -- -- 59 (1,828)
Gain on disposal -- -- -- 1,014 939
------------- ------------- ------------- ------------- -------------
NET LOSS $ (1,294) $ (2,179) $ (4,234) $ (9,696) $ (68,086)
============= ============= ============= ============= =============
Income (loss) per share - basic and diluted:
Loss from continuing operations $ (0.11) $ (0.19) $ (0.37) $ (0.96)
Income from discontinued operations -- -- -- 0.01
Gain on disposal -- -- -- 0.09
------------- ------------- ------------- -------------
NET LOSS $ (0.11) $ (0.19) $ (0.37) $ (0.86)
============= ============= ============= =============
Shares used in income (loss) per share
calculation:
Basic 11,316 11,264 11,298 11,236
Diluted 11,316 11,264 11,298 11,236
</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 NINE MONTHS (AUGUST 20,
ENDED ENDED 1987)
SEPTEMBER 30, SEPTEMBER 30, THROUGH
---------------------------- ---------------------------- SEPTEMBER 30,
2000 1999 2000 1999 2000
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,294) $ (2,179) $ (4,234) $ (9,696) $ (68,086)
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 79 85 352 337 2,715
Noncash expenses related to stock-based
transactions 100 60 242 181 2,039
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 -- 1 (523) 325 (4,556)
(Increase) decrease in prepaid expenses and other
current assets 14 65 (223) (42) (908)
(Decrease) increase in accounts payable and
accrued expenses (207) (69) (1,225) (2,230) 3,189
------------- ------------- ------------- ------------- -------------
Net cash used in operating activities (1,308) (2,037) (5,611) (12,224) (66,211)
CASH FLOWS FROM INVESTING ACTIVITIES
(Purchases) maturities of marketable securities 7,198 (38,009) 12,038 (38,009) (22,992)
Capital expenditures (14) (71) (57) (328) (2,218)
Purchase of technology rights and other assets (48) (42) (195) (455) (1,795)
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 7,136 (38,122) 11,786 (36,542) (24,827)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 4 3 116 76 84,124
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 4 3 116 75 101,435
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,832 (40,156) 6,291 (48,691) 10,397
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,565 43,105 4,106 51,640 --
------------- ------------- ------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,397 $ 2,949 $ 10,397 $ 2,949 $ 10,397
============= ============= ============= ============= =============
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
SEPTEMBER 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 September 30, 2000, the
Company has been primarily engaged in research and development and clinical
development and is still in a development stage.
In July 2000, the Company implemented a cost reduction program
involving a significant headcount reduction and other major cost cutting
measures. The Company released eighteen full-time employees, including some
members of upper management, which resulted in additional expenses of
approximately $500,000 in the third quarter ended September 30, 2000. These
expenses include an early pay-out from a stay bonus program that was implemented
after the reduction in staff that occurred in September 1999, severance packages
and other related expenses. Also in July 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. This review is still
in process.
Based on the decision to engage Deutsche Banc Alex. Brown to review
strategic alternatives for the redeployment of the Company's assets, the Company
anticipates a future lay-off and will incur costs relating to severance packages
and other related expenses. The lay-off will include a pay-out from a stay bonus
program that was implemented after the reduction in staff that occurred in
September 1999.
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 reduction in force and
other major cost cutting measures effected in July 2000, 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 -- NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
(SAB 101) which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 is effective the
fourth fiscal quarter of the fiscal years beginning after December 15, 1999 and
requires companies to report any changes in revenue recognition as a cumulative
change in accounting principle at the time of implementation in accordance with
Accounting Principles Board Opinion No. 20, "Accounting Changes." We are
currently in the process of evaluating what impact SAB 101 will have on our
financial position or our results of operations.
8
<PAGE> 9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
NOTE 3 -- 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 approximately $17.0 million and marketable
securities-long term were approximately $6.0 million as of September 30, 2000,
totaling $23.0 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, Euro-dollar bonds and asset-backed securities. The Company's policy
is to hold investments to maturity, 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 4 -- 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 September 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. The Company believes that its
phentolamine mesylate inventory shelf life will be sufficient until the product
launch date.
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 5 -- 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.
9
<PAGE> 10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
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. As a result of 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 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. The
initial offering period began July 1, 2000.
On September 29, 2000, the Company granted certain of its remaining
employees, 87,000 options to purchase common stock at an exercise price of
$3.469 which was the closing price on the day of grant. These options vest upon
the earlier of the completion of a strategic alternative transaction or one year
from the date of grant. In addition, the Company also provided one director with
an option to purchase 577 shares of common stock at an exercise price of $3.469,
which was the closing price on the day of grant. These options were granted to
the director as compensation for Board of Directors' services provided to the
Company.
NOTE 6 -- 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 September 30, 2000. The Company could receive
10
<PAGE> 11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
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, 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.
Until VASOMAX(R) is approved for commercial sale in the United States or other
major territories, the Company expects royalty payments to be nominal. 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 met this business criterion in Mexico but has not met
it in Brazil, the two jurisdictions where the product is currently being sold.
In addition, until this business criterion is met, royalties may be
substantially reduced, 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 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.
11
<PAGE> 12
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 expenses. 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.
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), in July 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 Company implemented other major cost cutting measures,
resulting in eighteen full-time employees of the Company being laid-off during
the third quarter ended September 30, 2000. The Company recognized an
incremental expense of approximately $500,000 relating to that reduction in
staff. 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. If the Company completes a
strategic alternative transaction, the Company anticipates that additional
expenses will be incurred relating to an additional reduction in staff.
12
<PAGE> 13
In August 1999, the Company announced the preliminary finding of brown
fat proliferations in a small percentage of rats, in a two-year
phentolamine-mesylate carcinogenicity study. Consequently, the FDA placed both
VASOMAX(R) and Vasofem(TM), which both contain phentolamine-mesylate as its
active ingredient, on clinical hold in the U.S. until the final report on the
data from the two-year study could be 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). On April 18,
2000, the Company announced that it had submitted the final results of the
two-year rat study. On May 16, 2000, the Company announced that it had been
notified by the FDA that an additional two year animal study would be required
before the FDA would consider VASOMAX(R) for approval, but 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. On August 14, 2000 the Company announced
that the Medicines Control Agency in the United Kingdom, which had previously
placed VASOMAX(R) on clinical hold, had completely lifted its clinical hold on
VASOMAX(R), because it felt that the drug did not represent a significant
carcinogenic risk to man. On September 7, 2000 the Company announced that it had
been notified by the FDA that a shorter mechanistic study of brown fat
proliferation may be submitted in lieu of an additional two year rodent study.
On October 2, 2000 the Company announced that it had elected to conduct such a
mechanistic 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 and the ultimate outcome of the study.
There can be no assurances that the FDA will accept the data generated
from an alternative mechanistic study as adequate to lift the partial clinical
hold on the Company's phentolamine-mesylate based products or that the products
will ultimately be approved for marketing. Additionally, there can be no
assurance that the FDA or other similar regulatory authorities 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 6 of Notes to Consolidated Financial Statements (Unaudited)"
included elsewhere in this quarterly report on Form 10-Q.
As of September 30, 2000, the Company had an accumulated deficit of
$68.1 million. Losses have resulted principally from costs incurred conducting
clinical trials for VASOMAX(R) and Vasofem(TM), in 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
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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.
RESULTS OF OPERATIONS
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
Revenues. Total revenues remained relatively constant at $617,000 for
the three month period ended September 30, 2000 as compared with $607,000 for
the same period in the prior year and were approximately $1.8 million for both
the nine month period ended September 30, 2000 and for the same period in the
prior year.
Product royalties from sales of VASOMAX(R) in Mexico and Brazil were
approximately $35,000 for the three month period ended September 30, 2000 as
compared to $182,000 for the same period in the prior year and approximately
$65,000 for the nine month period ended September 30, 2000 as compared to
$204,000 for the same period in the prior year. Product royalties for the three
and nine month periods ended September 30, 2000 included initial pipeline
filling of VASOMAX(R) in Brazil. 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 or other major territories,
the Company expects royalty payments to be nominal.
Interest income increased 37% to $582,000 for the three month period
ended September 30, 2000 as compared with $425,000 for the same period in the
prior year. Interest income increased 6% to $1.7 million for the nine month
period ended September 30, 2000 as compared with $1.6 million for the same
period in the prior year. The increase is attributable to rising interest rates
and the implementation of a new investment strategy offset by lower cash
balances.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted clinical development ("Contract R&D") and internal
clinical development and general internal research and development expenses
("Internal R&D"). R&D expenses decreased 44% to $1.2 million for the three month
period ended September 30, 2000 as compared to $2.1 million for the same period
in the prior year. R&D expenses decreased 63% to $3.7 million for the nine month
period ended September 30, 2000 as compared to $10.0 million for the same period
in the prior year. During the quarter ended September 30, 2000, the Company
incurred a $270,000 charge relating to the employee staff reduction.
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Contract R&D expenses decreased 62% to approximately $381,000 for the
three month period ended September 30, 2000 as compared with $1.0 million for
the same period in the prior year and decreased 81% to approximately $1.3
million for the nine month period ended September 30, 2000 as compared with $6.7
million for the same period in the prior year. These decreases were due
primarily to a decline in expenses associated with the contracted 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.
The Company will continue to incur costs, although at a substantially reduced
level, in connection with the ongoing regulatory review of VASOMAX(R).
Internal R&D expenses decreased 27% to $799,000 for the three month
period ended September 30, 2000 from $1.1 million for the same period in the
prior year and decreased 27% to $2.4 million for the nine month period ended
September 30, 2000 from $3.3 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 increased by 6% to $732,000 for the three month period ended September
30, 2000 as compared to $692,000 for the same period in the prior year and
decreased by 10% to $2.3 million for the nine month period ended September 30,
2000 as compared to $2.6 million for the same period in the prior year. Both the
three and nine month periods ended September 30, 2000 include a charge of
$230,000 for the reduction in employees during the third quarter ended September
30, 2000. Net expenses decreased in both the three and nine month periods ended
September 30, 2000. 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 during the nine month period ended September 30,
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 September 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 $1.3
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million was used in operating activities during the three month period ended
September 30, 2000 as compared to $2.0 million for the same period in the prior
year. Of the $1.3 million used in the third quarter, approximately $670,000 was
used to pay for severance packages, early payment of employee stay bonuses that
would be due in January 2001 and other expenses associated with the Company's
reduction of 18 full-time employees during the third quarter ended September 30,
2000. The Company had cash, cash equivalents and marketable securities of
approximately $33.4 million at September 30, 2000 as compared to approximately
$39.1 million at December 31, 1999, and as compared to $41.0 million in cash and
cash equivalents on September 30, 1999. The decreased use of cash for the
quarter ended September 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 in the three and nine month periods ended September 30,
2000. The Company spent approximately $381,000 in connection with its clinical
development programs during the quarter ended September 30, 2000 as compared to
$1.0 million for the same period in the prior year. The Company is obligated to
pay approximately $270,000 in stay bonuses in January 2001 to employees that
were granted stay bonuses in October 1999 after the September 1999 employee
staff reduction.
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
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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.
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PART II - OTHER INFORMATION
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
(1) Current Report on Form 8-K dated August 8, 2000
reporting under Item 5.
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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: November 14, 2000
By: /s/ Joseph S. Podolski
---------------------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2000
By: /s/ Louis Ploth, Jr.
---------------------------------------------
Louis Ploth, Jr.
Vice President Finance
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
----------- -------------------------
<S> <C>
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
</TABLE>
