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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2006
 or
 o
    
    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: 001-15281
 ZONAGEN, INC.
  Delaware
(State or other
jurisdiction of
incorporation or
organization)
    
    76-0233274
(IRS Employer
Identification No.)
 
 
 þ o
  o o þ
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ZONAGEN, INC.
     
 PageFACTORS AFFECTING FORWARD-LOOKING STATEMENTS
    
    
    3PART I. FINANCIAL INFORMATION
    
    
    4Item 1. Financial StatementsUnaudited Condensed Consolidated Balance Sheets: March 31, 2006 and December 31, 2005
    
    
    5Unaudited Condensed Consolidated Statements of Operations: For the three months ended March 31, 2006 and 2005 and from Inception (August 20, 1987) through March 31, 2006
    
    
    6Unaudited Condensed Consolidated Statements of Cash Flows: For the three months ended March 31, 2006 and 2005 and from Inception (August 20, 1987) through March 31, 2006
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    21Item 1A.
Risk Factors
    
    
    21Item 5. Other Information
    
    
    21Item 6. Exhibits
    
    
    21SIGNATURES
    
    
    22Amendment to Lease dated March 17, 2006Certification pursuant to Section 302 of CEOCertification pursuant to Section 302 of CFOCertification pursuant to Section 906 of CEOCertification pursuant to Section 906 of CFO
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FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
  3




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  4




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ZONAGEN, INC. AND SUBSIDIARY
  
 CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent AssetsCash and cash equivalents
    
    $
    4,587
    
    
    $
    2,165Marketable securities
    
    
    10,356
    
    
    
    14,667Prepaid expenses and other current assets
    
    
    197
    
    
    
    231Total current assets
    
    
    15,140
    
    
    
    17,063Fixed Assets,net
    
    
    64
    
    
    
    19Other assets
    
    
    638
    
    
    
    600Total assets
    
    $
    15,842
    
    
    $
    17,682LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    468
    
    
    $
    338Accrued expenses
    
    
    304
    
    
    
    389Total current liabilities
    
    
    772
    
    
    
    727Commitments & ContingenciesStockholders EquityUndesignated Preferred Stock, $.001 par value, 5,000,000
shares authorized, none issued and outstanding
    
    
    
    
    
    
    Common Stock, $.001 par value, 20,000,000 shares
authorized, 12,082,997 and 12,016,636 shares issued,
respectively, 10,145,962 and 10,079,601 shares
outstanding, respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    117,395
    
    
    
    117,166Deferred compensation
    
    
    
    
    
    
    (130
    )Cost of treasury stock, 1,937,035 and 1,937,035 shares, respectively
    
    
    (5,948
    )
    
    
    (5,948
    )Deficit accumulated during the development stage
    
    
    (96,389
    )
    
    
    (94,145
    )Total stockholders equity
    
    
    15,070
    
    
    
    16,955Total liabilities and stockholders equity
    
    $
    15,842
    
    
    $
    17,682
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ZONAGEN, INC. AND SUBSIDIARY
  
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  From Inception(August 20, 1987)throughThree Months Ended March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006Revenues and other incomeLicensing fees
    
    $
    
    
    
    $
    
    
    
    $
    28,755Product royalties
    
    
    
    
    
    
    
    
    
    
    627Research and development grants
    
    
    
    
    
    
    4
    
    
    
    1,219Interest income
    
    
    174
    
    
    
    108
    
    
    
    13,930Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    102Other Income
    
    
    
    
    
    
    
    
    
    
    35Total revenues and other income
    
    
    174
    
    
    
    112
    
    
    
    44,668ExpensesResearch and development
    
    
    1,808
    
    
    
    1,236
    
    
    
    102,169General and administrative
    
    
    610
    
    
    
    431
    
    
    
    29,157Interest expense and amortization
of intangibles
    
    
    
    
    
    
    
    
    
    
    388Total expenses
    
    
    2,418
    
    
    
    1,667
    
    
    
    131,714Loss from continuing operations
    
    
    (2,244
    )
    
    
    (1,555
    )
    
    
    (87,046
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Gain on disposal
    
    
    
    
    
    
    
    
    
    
    939Net loss before cumulative effect of
change in accounting principle
    
    
    (2,244
    )
    
    
    (1,555
    )
    
    
    (87,935
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    (8,454
    )Net loss
    
    $
    (2,244
    )
    
    $
    (1,555
    )
    
    $
    (96,389
    )Loss per share  basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.19
    )Shares used in loss per share calculation:Basic
    
    
    10,140
    
    
    
    8,326Diluted
    
    
    10,140
    
    
    
    8,326
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ZONAGEN, INC. AND SUBSIDIARY
  
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  From Inception(August 20, 1987)throughThree Months Ended March 31,
    
    
    March 31,2006
    
    
    2005
    
    
    2006Cash Flows from Operating ActivitiesNet loss
    
    $
    (2,244
    )
    
    $
    (1,555
    )
    
    $
    (96,389
    )Gain on disposal of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (939
    )Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    (102
    )Adjustments to reconcile net loss to net cash
used in operating activities:Noncash financing costs
    
    
    
    
    
    
    
    
    
    
    316Noncash inventory impairment
    
    
    
    
    
    
    
    
    
    
    4,417Noncash patent impairment
    
    
    
    
    
    
    
    
    
    
    1,339Noncash decrease in accounts payable
    
    
    
    
    
    
    
    
    
    
    (1,308
    )Depreciation and amortization
    
    
    
    
    
    
    1
    
    
    
    3,780Noncash expenses related to stock-based
transactions
    
    
    156
    
    
    
    4
    
    
    
    2,973Common stock issued for agreement not to
compete
    
    
    
    
    
    
    
    
    
    
    200Series B Preferred Stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    18Maturities of marketable securities
    
    
    14,112
    
    
    
    3,400
    
    
    
    38,937Purchases of marketable securities
    
    
    (9,801
    )
    
    
    (20,140
    )
    
    
    (20,758
    )Changes in operating assets and liabilities
(net effects of purchase of businesses in 1988 and 1994):Decrease (increase) in receivables
    
    
    
    
    
    
    
    
    
    
    (199
    )Decrease (increase) in inventory
    
    
    
    
    
    
    
    
    
    
    (4,447
    )Decrease (increase) in prepaid expenses and other
current assets
    
    
    34
    
    
    
    (205
    )
    
    
    102(Decrease) increase in accounts payable and
accrued expenses
    
    
    45
    
    
    
    538
    
    
    
    1,968Net cash provided by (used in) operating activities
    
    
    2,302
    
    
    
    (17,957
    )
    
    
    (70,092
    )Cash Flows from Investing ActivitiesMaturities (purchases) of marketable securities
    
    
    
    
    
    
    
    
    
    
    (28,723
    )Capital expenditures
    
    
    (45
    )
    
    
    (3
    )
    
    
    (2,342
    )Purchase of technology rights and other assets
    
    
    (38
    )
    
    
    (21
    )
    
    
    (2,659
    )Proceeds from sale of PP&E
    
    
    
    
    
    
    
    
    
    
    225Cash acquired in purchase of FTI
    
    
    
    
    
    
    
    
    
    
    3Proceeds from sale of subsidiary, less
$12,345 for operating losses during
1990 phase-out period
    
    
    
    
    
    
    
    
    
    
    138Proceeds from sale of the assets of FTI
    
    
    
    
    
    
    
    
    
    
    2,250Increase in net assets held for disposal
    
    
    
    
    
    
    
    
    
    
    (213
    )Net cash used in investing activities
    
    
    (83
    )
    
    
    (24
    )
    
    
    (31,321
    )Cash Flows from Financing ActivitiesProceeds from issuance of common stock, net of
offering costs
    
    
    
    
    
    
    18,180
    
    
    
    102,404(Increase) decrease in prepaid offering costs
    
    
    
    
    
    
    600
    
    
    
    Exercise of stock options
    
    
    203
    
    
    
    85
    
    
    
    288Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    23,688Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (21,487
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    
    
    
    
    2,839Principal payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (1,732
    )Net cash provided by (used in) financing activities
    
    
    203
    
    
    
    18,865
    
    
    
    106,000Net increase (decrease) in cash and cash equivalents
    
    
    2,422
    
    
    
    884
    
    
    
    4,587Cash and cash equivalents at beginning of period
    
    
    2,165
    
    
    
    736
    
    
    
    Cash and cash equivalents at end of period
    
    $
    4,587
    
    
    $
    1,620
    
    
    $
    4,587
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ZONAGEN, INC. AND SUBSIDIARY
  
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2006
 NOTE 1  Organization and Operations
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NOTE 2  Stock-based Compensation
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Three Months EndedMarch 31, 2005Net loss, as reported
    
    $
    (1,555
    )Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    4Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (275
    )Pro forma net loss
    
    $
    (1,826
    )Loss per share -Basic  as reported
    
    $
    (0.19
    )Basic  pro forma
    
    
    (0.22
    )Diluted  as reported
    
    
    (0.19
    )Diluted  pro forma
    
    
    (0.22
    )
  AggregateWeighted Average
    
    
    Intrinsic ValueStock Options
    
    
    Exercise Price
    
    
    (in thousands)Outstanding at December 31, 2005
    
    
    1,715,363Granted
    
    
    Exercised
    
    
    (66,361
    )
    
    
    
    
    
    $
    421Forfeited
    
    
    (176,854
    )Outstanding at March 31, 2006
    
    
    1,472,148
    
    
    $
    4.39
    
    
    $
    7,386Exercisable at March 31, 2006
    
    
    926,246
    
    
    $
    4.85
    
    
    $
    4,221
  NOTE 3  Marketable Securities
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NOTE 4  Patents
  NOTE 5  Loss Per Share
   Three Months Ended March 31,2006
    
    
    2005Net loss
    
    $
    (2,244
    )
    
    $
    (1,555
    )Weighted average common shares
outstanding
    
    
    10,140
    
    
    
    8,326Basic loss per share
    
    $
    (0.22
    )
    
    $
    (0.19
    )Weighted average common and
dilutive potential common shares
outstanding:Weighted average common shares
outstanding
    
    
    10,140
    
    
    
    8,326Diluted loss per share
    
    $
    (0.22
    )
    
    $
    (0.19
    )
  NOTE 6  Stockholders Equity
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NOTE 7  Commitments and Contingencies
  th
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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 . The following discussion of financial condition should be read in
conjunction with the accompanying consolidated financial statements and related notes.
 Overview
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®
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Results of Operations
 Three Month Periods Ended March 31, 2006 and 2005
  17




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Revenues and other income
   Research and Development Expenses
 General and Administrative Expenses
 Liquidity and Capital Resources
   18




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures
   20




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  
 Item 5. Other Information
 
 
 Item 6. Exhibits
 10.1
    
    Amendment to Lease, dated March 17, 200631.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).31.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).32.1
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).32.2
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
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SIGNATURES
  ZONAGEN, INC.  By:
    /s/ Joseph S. PodolskiJoseph S. PodolskiPresident, Chief Executive Officer  and Director
(Principal Executive Officer)  By:
    /s/ Louis Ploth, Jr.Louis Ploth, Jr.Vice President Business Development, Chief Financial Officer, Director and Secretary
(Principal Financial and Accounting Officer) 22




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Index to Exhibits
 10.1
    
    Amendment to Lease, dated March 17, 200631.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).31.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).32.1
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).32.2
    
    Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
 23