<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 March 31, 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 May 9, 2000 there were outstanding 11,312,435 shares of Common
Stock, par value $.001 per share, of the Registrant.
<PAGE> 2
ZONAGEN, INC.
(A development stage company)
For the Quarter Ended March 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FACTORS AFFECTING FORWARD-LOOKING STATEMENTS 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 4
Consolidated Balance Sheets: March 31, 2000 (Unaudited)
and December 31, 1999 5
Consolidated Statements of Operations: For the three months ended
March 31, 2000 and 1999 and from Inception (August 20, 1987)
through March 31, 2000 (Unaudited) 6
Consolidated Statements of Cash Flows: For the three months ended
March 31, 2000 and 1999 and from Inception (August 20, 1987)
through March 31, 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 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</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 three-month
period ended March 31, 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>
MARCH 31, DECEMBER 31,
2000 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 3,030 $ 4,106
Marketable securities - short term 32,321 31,146
Product inventory 4,525 4,003
Prepaid expenses and other current assets 736 800
----------- -----------
Total current assets 40,612 40,055
LAB EQUIPMENT, FURNITURE AND LEASEHOLD IMPROVEMENTS, NET 739 852
MARKETABLE SECURITIES - LONG TERM 2,693 3,884
OTHER ASSETS, NET 1,536 1,496
----------- -----------
Total assets $ 45,580 $ 46,287
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 3,548 $ 3,561
Accrued expenses 1,784 976
----------- -----------
Total current liabilities 5,332 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, 11,698,524 and 11,681,324 shares issued,
respectively; 11,283,224 and 11,266,024 shares
outstanding, respectively 12 12
Additional paid-in capital 113,712 113,564
Deferred compensation (481) (490)
Cost of treasury stock, 415,300 shares (7,484) (7,484)
Deficit accumulated during the development stage (65,511) (63,852)
----------- -----------
Total stockholders' equity 40,248 41,750
----------- -----------
Total liabilities and stockholders' equity $ 45,580 $ 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 MARCH 31, THROUGH
------------------------------ MARCH 31,
2000 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES
Licensing fees $ - $ - $ 20,250
Product royalties 20 - 425
Interest income 558 629 8,786
------------ ------------ ------------
Total revenues 578 629 29,461
EXPENSES
Research and development 1,397 4,353 77,082
General and administrative 840 933 16,613
Interest expense and amortization
of intangibles - 8 388
------------ ------------ ------------
Total expenses 2,237 5,294 94,083
------------ ------------ ------------
Loss from continuing operations (1,659) (4,665) (64,622)
Income (loss) from discontinued operations - 59 (1,828)
Gain on disposal - 1,014 939
------------ ------------ ------------
NET LOSS $ (1,659) $ (3,592) $ (65,511)
============ ============ ============
Income (loss) per share - basic and diluted:
Loss from continuing operations $ (0.15) $ (0.42)
Income from discontinued operations - 0.01
Gain on disposal - 0.09
------------ ------------
NET LOSS $ (0.15) $ (0.32)
============ ============
Shares used in income (loss) per share calculation:
Basic 11,270 11,215
Diluted 11,270 11,215
</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
(AUGUST 20, 1987)
THREE MONTHS ENDED MARCH 31, THROUGH
---------------------------- MARCH 31,
2000 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,659) $ (3,592) $ (65,511)
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 157 146 2,520
Noncash expenses related to stock-based
transactions 59 87 1,856
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 (523) 184 (4,556)
(Increase) decrease in prepaid expenses and other
current assets 64 34 (621)
(Decrease) increase in accounts payable and
accrued expenses 795 (1,217) 5,209
----------- ----------- -----------
Net cash used in operating activities (1,107) (5,457) (61,707)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities 17 - (35,013)
Capital expenditures (16) (179) (2,177)
Purchase of technology rights and other assets (69) (150) (1,669)
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 (68) 1,921 (36,681)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock 99 47 84,107
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 99 46 101,418
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,076) (3,490) 3,030
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,106 51,640 -
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,030 $ 48,150 $ 3,030
=========== =========== ===========
</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
MARCH 31, 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 March 31, 2000, the
Company has been primarily engaged in research and development and clinical
development and is still in a development stage.
On March 11, 1999, the Company sold substantially all of the assets
related to its wholly owned subsidiary, FTI. These assets included the company
name, accounts receivable, inventory, property and equipment, and certain
Zonagen assets relating to the operation of FTI, for $2.25 million cash and the
assumption of certain specified liabilities. During the quarter ended March 31,
1999, the Company recorded a gain on the sale of FTI of $1.0 million. The
results of FTI have been reported separately as discontinued operations in the
accompanying consolidated financial statements.
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. 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 appropriate, if the U.S. Food and Drug Administration
("FDA") or 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 2001. See Form 10-K dated December 31, 1999 "Item
1. Description of Business -- Business Risks."
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 $32.3 million and marketable
securities-long term were $2.7 million as of March 31, 2000, totaling $35.0
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 money market funds, corporate bonds and
notes, Euro-dollar bonds and taxable auction securities. The Company's policy
is to
8
<PAGE> 9
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
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.
Marketable securities -short term and long term are classified as
follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 2000
---------------------------
SHORT TERM LONG TERM
----------- -----------
<S> <C> <C>
Corporate bonds $ 12,849 $ 700
Corporate notes 6,098 --
Euro-dollars 11,374 1,993
Taxable auction securities 2,000 --
----------- -----------
Total $ 32,321 $ 2,693
=========== ===========
</TABLE>
NOTE 3 -- PRODUCT INVENTORY
The Company maintains an inventory of bulk phentolamine which is the
active ingredient in VASOMAX(R), the Company's oral treatment for male erectile
dysfunction ("MED"). As of March 31, 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 from the contract manufacturer for a
period of five years. Due to the contract manufacturer producing phentolamine
in excess of the Company's actual committed orders, the Company agreed, on
January 27, 2000, to an early purchase of the excess phentolamine 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
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 March 31, 2000 related
to the
9
<PAGE> 10
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
amortization of deferred compensation recorded in connection with options
granted under the 1996 Non-Employee Director Stock Option Plan (the "Director
Plan"). Amortization of deferred compensation recorded in connection with other
option grants totaled approximately $6,500 during the same period ended March
31, 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 March 31, 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, the Company also received nominal royalty payments
from the sale of VASOMAX(R) in Mexico and Brazil during the quarter ended March
31, 2000. 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. A decision by Schering-Plough to terminate the Agreements would have a
material adverse effect on the Company.
During March 2000, reports on 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.
10
<PAGE> 11
ZONAGEN, INC. AND SUBSIDIARY
(A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(Unaudited)
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). There can be no
assurances that the FDA will lift the current clinical hold on the Company's
phentolamine-based products or that the products will ultimately be approved
for marketing. See Form 10-K dated December 31, 1999 "Part 1. Item 1.
Description of Business - Business Risks - Uncertainties Related to Clinical
Trial Results and FDA Approval."
NOTE 6 -- SUBSEQUENT EVENT
On April 18, 2000, the Company announced that it had submitted the
final results of the two-year rat study that the Food and Drug Administration
required to consider lifting the clinical hold on VASOMAX(R) and Vasofem(TM),
the Company's phentolamine mesylate-based products. 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.
In August 1999, the Company announced preliminary findings from the
two-year rat study showing the appearance of brown fat proliferations. These
findings prompted the FDA to place the Company's phentolamine-based programs on
clinical hold in the United States. However, the FDA did allow the completion
of an ongoing Phase III human safety and efficacy study.
Brown fat proliferations are rare occurrences in both man and rats. In
the cases of brown fat proliferations reported to date, the appearances in man
and animals typically have been associated with a benign, non-cancerous
condition. The rarity of this event, however, prompted the FDA to require the
submission of the final study report from the two-year rat study before any
further clinical testing or evaluation would be considered. In addition to the
final study report, as requested, Zonagen has also provided 10% of the tissue
sample slides generated in the two-year rat study for review by a FDA
pathologist.
There can be no assurances that the FDA will drop the current clinical
hold on the Company's phentolamine-based products or that the products will
ultimately be approved for marketing. See Form 10-K dated December 31, 1999
"Part 1. Item 1. Description of Business - Business Risks - Uncertainties
Related to Clinical Trial Results and FDA Approval."
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 may vary significantly from year to
year and quarter to quarter, and depend, among other factors, on the regulatory
approval process in the United States and other foreign jurisdictions, 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.
As of March 31, 2000, the Company had an accumulated deficit of $65.5
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 Company's 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 Company's and its partners' 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 the Company will be able to achieve profitability or
that profitability, if achieved, can be sustained. See Form 10-K dated December
31, 1999 "Item 1. Description of Business -- Business Risks -- Uncertainties
Related to Early Stage of Development," " -- Business Risks -- History of
Operating Losses; Accumulated Deficit" and
12
<PAGE> 13
"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 May 8, 2000. The Company continues
follow-up activities to insure that no material issues will occur.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
Revenues. Total revenues decreased 8.1% to $578,000 for the quarter
ended March 31, 2000 as compared with $629,000 for the same period in the prior
year. Product royalties from sales of VASOMAX(R) in Mexico and Brazil were
approximately $20,000 for the quarter ended March 31, 2000 as compared to zero
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
the clinical hold on VASOMAX(R) is lifted in the United States, the Company
expects royalty payments from foreign sales to be nominal.
Interest income decreased 11% to $558,000 for the first quarter ended
March 31, 2000 as compared with $629,000 for the same period in the prior year.
The decrease was due to decreased cash balances as a result of supporting the
Company's continuing operations that included expenses associated with the
clinical development of the Company's phentolamine-based products, its vaccine
adjuvants and its other products.
Research and Development Expenses. Research and development ("R&D")
expenses include contracted research, regulatory affairs activities and general
research and development expenses. R&D expenses decreased 68% to $1.4 million
for the first quarter ended March 31, 2000 as compared to $4.4 million for the
same period in the prior year. The decrease was due primarily to expenses
associated with the development of VASOMAX(R) and other phentolamine-based
products. These contracted research expenses decreased 82% to approximately
$584,000 for the first quarter ended March 31, 2000 as compared with $3.2
million for the same period in the prior year. The decrease was due primarily
to a reduction in contracted costs associated with the development of
VASOMAX(R) subsequent to the completion of Phase III and open label clinical
trials that were used in the July 1998 NDA submission to the FDA. The Company
will continue to incur costs in connection with the ongoing regulatory review
of VASOMAX(R) until the regulatory process is complete, although at a
substantially reduced level. Further, the FDA placed a clinical hold on the
Company's phentolamine-based products in August 1999. This clinical hold
prevented the Company from continuing further clinical development in the
United States for all indications utilizing the active drug ingredient
phentolamine. General research and development expenses decreased to $813,000
for the quarter ended March 31, 2000 from $1.1 million for the same period in
the prior year. This decrease is primarily due to the reductions made in the
Company's toxicology and analytical labs in September 1999 due to the delay in
the approval
13
<PAGE> 14
process of VASOMAX(R). The Company expects its R&D expenses to increase in the
future, specifically in the area of clinical development, once the Company's
phentolamine-based products are taken off clinical hold by the FDA. There can
be no assurance that the FDA will remove the clinical hold on the Company's
phentolamine-based products. See Form 10-K dated December 31, 1999 "Part 1.
Item 1. Description of Business - Business Risks - Uncertainties Related to
Clinical Trial Results and FDA Approval."
General and Administrative Expenses. General and administrative
expenses decreased by 10% to $840,000 for the quarter ended March 31, 2000 as
compared to $933,000 for the same period in the prior year. Zonagen did not
incur expenses in the first quarter of 2000 relating to hiring and relocating
additional management personnel as it did during the same period in the prior
year. The Company does not anticipate a major increase in general and
administrative expenses until VASOMAX(R) is approved in a major market.
In September 1999, the Company announced that it had decreased its
cash expenditures by reducing staff by fifteen people 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 has sufficient funds to finance these
programs. The staff reductions affected all areas of the Company.
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 March 31, 2000. Since inception of the Schering Plough
agreements through March 31, 2000, the Company 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 $1.1 million was used in operating
activities during the first quarter ended March 31, 2000 as compared to $5.5
million for the same period in the prior year. The Company had cash, cash
equivalents and marketable securities of approximately $38.0 million at March
31, 2000 as compared to approximately $39.1 at December 31, 1999, and as
compared to $48.2 million in cash and cash equivalents on March 31, 1999. The
decreased use of cash for the quarter ended March 31, 2000 was primarily due to
a reduction in contracted costs associated with the development of VASOMAX(R)
upon the completion of the open label safety trials that were 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. The Company
spent approximately $584,000 in connection with its clinical development
programs during the quarter ended March 31, 2000 as compared to $3.2 million
for the same period in the prior year.
14
<PAGE> 15
The Company believes that its existing capital resources will be
sufficient to fund its operations through at least the end of 2001. 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.
The Company's ability to raise additional funds in the public or private
markets will be adversely affected if VASOMAX(R) is not successfully
commercialized and if the results of 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. See Form 10-K dated December 31, 1999 "Item 1.
Description of Business -- Business Risks."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Identification of Exhibit
----------- -------------------------
10.1+ Amendment to the Supply Agreement dated June
12, 1997, between the Company and Plasto S.A.
(Synkem Division) (incorporated by reference to
Exhibit 10.23 to the annual report on Form 10-K
for the fiscal year ended December 31, 1999).
11.1 Statement Regarding Computation of Net Loss Per
Share
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
+ Portions of this exhibit have been omitted based on a request for
confidential treatment pursuant to Rule 24b-2 of the Exchange Act. Such
omitted portions have been filed separately with the Commission.
16
<PAGE> 17
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 10, 2000
By: /s/ Joseph S. Podolski
------------------------------------
Joseph S. Podolski
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2000
By: /s/ F. Scott Reding
------------------------------------
F. Scott Reding
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Identification of Exhibit
- ----------- -------------------------
<S> <C>
10.1+ Amendment to the Supply Agreement dated June 12, 1997, between
the Company and Plasto S.A. (Synkem Division) (incorporated by
reference to Exhibit 10.23 to the annual report on Form 10-K
for the fiscal year ended December 31, 1999).
11.1 Statement Regarding Computation of Net Loss Per Share
27.1 Financial Data Schedule
+ Portions of this exhibit have been omitted based on a request for confidential
treatment pursuant to Rule 24b-2 of the Exchange Act. Such omitted portions
have been filed separately with the Commission.
</TABLE>
<PAGE> 1
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
Net Loss Weighted Average Shares Outstanding Loss per Share
-------- ----------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Basic $1,659,000 / 11,270,000 = $0.15
Diluted $1,659,000 / 11,270,000 = $0.15
</TABLE>
<TABLE> <S> <C>
<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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,030
<SECURITIES> 32,321
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 4,525
<CURRENT-ASSETS> 40,612
<PP&E> 2,109
<DEPRECIATION> 1,370
<TOTAL-ASSETS> 45,580
<CURRENT-LIABILITIES> 5,332
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 40,236
<TOTAL-LIABILITY-AND-EQUITY> 45,580
<SALES> 0
<TOTAL-REVENUES> 578
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,659)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,659)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,659)
<EPS-BASIC> (.15)
<EPS-DILUTED> (.15)
</TABLE>
