##### Table of Contents



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 June 30, 2005
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
  ZONAGEN, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    76-0233274
(IRS Employer
Identification No.)
 
 
 þ 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:  June 30, 2005 and December 31, 2004
    
    
    5Unaudited Condensed Consolidated Statements of Operations:  For the three-months ended June 30, 2005 and 2004, six-months ended June 30, 2005 and 2004 and from Inception (August 20, 1987) through June 30, 2005
    
    
    6Unaudited Condensed Consolidated Statements of Cash Flows: For the three-months ended June 30, 2005 and 2004, six-months ended June 30, 2005 and 2004 and from Inception (August 20, 1987) through June 30, 2005
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits
    
    
    21SIGNATURES
    
    
    22Certification of CEO pursuant to Section 302Certification of CFO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906
  2




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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
 June 30,
    
    December 31,2005
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    2,358
    
    
    $
    736Marketable securities
    
    
    18,764
    
    
    
    4,800Prepaid expenses and other current assets
    
    
    222
    
    
    
    34Total current assets
    
    
    21,344
    
    
    
    5,570Fixed Assets,net
    
    
    22
    
    
    
    18Other assets
    
    
    485
    
    
    
    1,018Total assets
    
    $
    21,851
    
    
    $
    6,606LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    530
    
    
    $
    144Accrued expenses
    
    
    200
    
    
    
    470Total current liabilities
    
    
    730
    
    
    
    614Commitments and 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, 12,016,636 and 11,989,936 shares issued,
respectively; 10,079,601 and 4,992,901 shares
outstanding, respectively
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    117,194
    
    
    
    114,455Deferred compensation
    
    
    (182
    )
    
    
    (234
    )Cost of treasury stock, 1,937,035 and 6,997,035 shares, respectively
    
    
    (5,948
    )
    
    
    (21,487
    )Deficit accumulated during the development stage
    
    
    (89,955
    )
    
    
    (86,754
    )Total stockholders equity
    
    
    21,121
    
    
    
    5,992Total liabilities and stockholders equity
    
    $
    21,851
    
    
    $
    6,606
  5




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ZONAGEN, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 From Inception(August 20, 1987)throughThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004
    
    2005Revenues and other incomeLicensing fees
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,755Product royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Research and development grants
    
    
    
    
    
    
    53
    
    
    
    4
    
    
    
    117
    
    
    
    1,219Interest income
    
    
    173
    
    
    
    22
    
    
    
    281
    
    
    
    48
    
    
    
    13,407Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Other Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    35Total revenues and other income
    
    
    173
    
    
    
    75
    
    
    
    285
    
    
    
    200
    
    
    
    44,145ExpensesResearch and development
    
    
    1,355
    
    
    
    508
    
    
    
    2,590
    
    
    
    985
    
    
    
    96,850General and administrative
    
    
    465
    
    
    
    294
    
    
    
    896
    
    
    
    728
    
    
    
    27,519Interest expense and amortization
of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Total expenses
    
    
    1,820
    
    
    
    802
    
    
    
    3,486
    
    
    
    1,713
    
    
    
    124,757Loss from continuing operations
    
    
    (1,647
    )
    
    
    (727
    )
    
    
    (3,201
    )
    
    
    (1,513
    )
    
    
    (80,612
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Gain on disposal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939Net loss before cumulative effect of
change in accounting principle
    
    
    (1,647
    )
    
    
    (727
    )
    
    
    (3,201
    )
    
    
    (1,513
    )
    
    
    (81,501
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,454
    )Net loss
    
    $
    (1,647
    )
    
    $
    (727
    )
    
    $
    (3,201
    )
    
    $
    (1,513
    )
    
    $
    (89,955
    )Loss per share  basic and diluted:
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.29
    )Shares used in loss per share calculation:Basic
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,208
    
    
    
    5,242Diluted
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,208
    
    
    
    5,242
  6




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ZONAGEN, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 From Inception(August 20, 1987)throughThree Months Ended June 30,
    
    Six Months Ended June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004
    
    2005Cash Flows from Operating ActivitiesNet loss
    
    $
    (1,647
    )
    
    $
    (727
    )
    
    $
    (3,201
    )
    
    $
    (1,513
    )
    
    
    (89,955
    )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
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20
    
    
    
    1,339Noncash decrease in accounts payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,308
    )Depreciation and amortization
    
    
    2
    
    
    
    3
    
    
    
    3
    
    
    
    5
    
    
    
    3,776Noncash expenses related to stock-based
transactions
    
    
    34
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    2,766Common stock issued for agreement not to
compete
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Series B Preferred Stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Maturities (purchases) of marketable securities
    
    
    2,777
    
    
    
    (250
    )
    
    
    (13,964
    )
    
    
    (4,350
    )
    
    
    9,771Changes 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
    
    
    16
    
    
    
    55
    
    
    
    (188
    )
    
    
    11
    
    
    
    77(Decrease) increase in accounts payable and
accrued expenses
    
    
    (394
    )
    
    
    22
    
    
    
    143
    
    
    
    (123
    )
    
    
    1,952Decrease (increase) in other assets
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    284
    
    
    
    Net cash used in operating activities
    
    
    788
    
    
    
    (877
    )
    
    
    (16,569
    )
    
    
    (5,666
    )
    
    
    (72,318
    )Cash Flows from Investing ActivitiesMaturities (purchases) of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,723
    )Capital expenditures
    
    
    (3
    )
    
    
    (9
    )
    
    
    (6
    )
    
    
    (12
    )
    
    
    (2,295
    )Purchase of technology rights and other assets
    
    
    (47
    )
    
    
    (46
    )
    
    
    (68
    )
    
    
    (99
    )
    
    
    (2,506
    )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
    
    
    (50
    )
    
    
    (55
    )
    
    
    (74
    )
    
    
    (111
    )
    
    
    (31,121
    )Cash Flows from Financing ActivitiesProceeds from issuance of common stock, net
of offering costs
    
    
    
    
    
    
    
    
    
    
    18,180
    
    
    
    
    
    
    
    102,404Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    85
    
    
    
    
    
    
    
    85Proceeds from issuance of preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,688Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,954
    )
    
    
    (21,487
    )Proceeds from issuance of notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,839Principal payments on notes payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,732
    )Net cash provided by (used by) financing activities
    
    
    
    
    
    
    
    
    
    
    18,265
    
    
    
    (13,954
    )
    
    
    105,797Net increase (decrease) in cash and cash equivalents
    
    
    738
    
    
    
    (932
    )
    
    
    1,622
    
    
    
    (19,731
    )
    
    
    2,358Cash and cash equivalents at beginning of period
    
    
    1,620
    
    
    
    2,147
    
    
    
    736
    
    
    
    20,946
    
    
    
    Cash and cash equivalents at end of period
    
    $
    2,358
    
    
    $
    1,215
    
    
    $
    2,358
    
    
    $
    1,215
    
    
    $
    2,358
  7




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ZONAGEN, INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
 NOTE 1  Organization and Operations
      8




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Recent Accounting Pronouncements
   NOTE 2  Stock-based Compensation
  9




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Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net loss, as reported
    
    $
    (1,647
    )
    
    $
    (727
    )
    
    $
    (3,201
    )
    
    $
    (1,513
    )Add: Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    34
    
    
    
    
    
    
    
    38
    
    
    
    Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (135
    )
    
    
    (98
    )
    
    
    (410
    )
    
    
    (118
    )Pro forma net loss
    
    $
    (1,748
    )
    
    $
    (825
    )
    
    $
    (3,573
    )
    
    $
    (1,631
    )Loss per share -Basic  as reported
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.29
    )Basic  pro forma
    
    
    (0.17
    )
    
    
    (0.17
    )
    
    
    (0.39
    )
    
    
    (0.31
    )Diluted as reported
    
    
    (0.16
    )
    
    
    (0.15
    )
    
    
    (0.35
    )
    
    
    (0.29
    )Diluted  pro forma
    
    
    (0.17
    )
    
    
    (0.17
    )
    
    
    (0.39
    )
    
    
    (0.31
    )
   10




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NOTE 3  Marketable Securities
   NOTE 4  Patents
  NOTE 5  Loss Per Share
   11




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Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net Loss
    
    $
    (1,647
    )
    
    $
    (727
    )
    
    $
    (3,201
    )
    
    $
    (1,513
    )Average common shares
outstanding
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,208
    
    
    
    5,242Basic loss per share
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.29
    )Diluted loss per share
    
    $
    (0.16
    )
    
    $
    (0.15
    )
    
    $
    (0.35
    )
    
    $
    (0.29
    )
  NOTE 6  Stockholders Equity
      12




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NOTE 7  Commitments and Contingencies
  13




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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
conjuction with the accompanying consolidated financial statements and related notes.
 Overview
    14




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15




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16




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Results of Operations
 Three Month and Six Month Periods Ended June 30, 2005 and 2004
  Revenues and other income
    17




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Research and Development Expenses
 General and Administrative Expenses
 Liquidity and Capital Resources
   18




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19




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




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
   For
    
    WithheldJoseph S. Podolski
    
    
    9,380,062
    
    
    
    33,000Louis Ploth, Jr.
    
    
    9,374,511
    
    
    
    38,551Daniel F. Cain
    
    
    9,376,112
    
    
    
    36,950Jean Fourcroy, M.D., Ph.D., M.P.H.
    
    
    9,375,561
    
    
    
    37,501Jeffrey R. Harder, J.D.
    
    
    9,374,312
    
    
    
    38,750Nola Masterson.
    
    
    9,354,361
    
    
    
    58,701David Poorvin, Ph.D.
    
    
    9,354,161
    
    
    
    58,901
  For 9,387,161
    
    Against 19,801
    
    Abstain 6,100
 
 Item 5. Other Information
  
 Item 6. Exhibits
 31.1
    
    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).
 21




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SIGNATURES
  ZONAGEN, INC.Date: July 29, 2005By:
    
    /s/ Joseph S. PodolskiJoseph S. Podolski
    President, Chief Executive Officer and Director
    (Principal Executive Officer)Date: July 29, 2005By:
    
    /s/ Louis Ploth, Jr.Louis Ploth, Jr.
    Vice President Business Development, ChiefFinancial Officer, Director and Secretary
    (Principal Financial and Accounting Officer)
 22




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##### Table of Contents



INDEX TO EXHIBITS
 31.1
    
    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).