##### 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 September 30, 2005
 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 þ
 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: September 30, 2005 and December 31, 2004
    
    
    5Unaudited Condensed Consolidated Statements of Operations: For the three months ended September 30, 2005 and 2004, nine months ended September 30, 2005 and 2004 and from Inception (August 20, 1987) through September 30, 2005
    
    
    6Unaudited Condensed Consolidated Statements of Cash Flows: For the three months ended September 30, 2005 and 2004, nine months ended September 30, 2005 and 2004 and from Inception (August 20, 1987) through September 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
    
    
    21Item 4. Controls and Procedures
    
    
    21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 5. Other Information
    
    
    22Item 6. Exhibits
    
    
    22SIGNATURES
    
    
    23Certification 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
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCurrent AssetsCash and cash equivalents
    
    $
    3,000
    
    
    $
    736Marketable securities
    
    
    16,053
    
    
    
    4,800Prepaid expenses and other current assets
    
    
    203
    
    
    
    34Total current assets
    
    
    19,256
    
    
    
    5,570Fixed Assets,net
    
    
    21
    
    
    
    18Other assets
    
    
    564
    
    
    
    1,018Total assets
    
    $
    19,841
    
    
    $
    6,606LIABILITIES AND STOCKHOLDERS EQUITYCurrent LiabilitiesAccounts payable
    
    $
    440
    
    
    $
    144Accrued expenses
    
    
    181
    
    
    
    470Total current liabilities
    
    
    621
    
    
    
    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
    
    
    (156
    )
    
    
    (234
    )Cost of treasury stock, 1,937,035 and 6,997,035 shares, respectively
    
    
    (5,948
    )
    
    
    (21,487
    )Deficit accumulated during the development stage
    
    
    (91,882
    )
    
    
    (86,754
    )Total stockholders equity
    
    
    19,220
    
    
    
    5,992Total liabilities and stockholders equity
    
    $
    19,841
    
    
    $
    6,606
  5




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ZONAGEN, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 From Inception(August 20, 1987)throughThree Months Ended September 30,
    
    
    Nine Months Ended September 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues and other incomeLicensing fees
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,755Product royalties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    627Research and development grants
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    118
    
    
    
    1,219Interest income
    
    
    175
    
    
    
    27
    
    
    
    456
    
    
    
    75
    
    
    
    13,582Gain on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Other Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    35Total revenues and
other income
    
    
    175
    
    
    
    29
    
    
    
    460
    
    
    
    228
    
    
    
    44,320ExpensesResearch and development
    
    
    1,641
    
    
    
    929
    
    
    
    4,231
    
    
    
    1,914
    
    
    
    98,491General and administrative
    
    
    461
    
    
    
    540
    
    
    
    1,357
    
    
    
    1,268
    
    
    
    27,980Interest expense and amortization
of intangibles
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388Total expenses
    
    
    2,102
    
    
    
    1,469
    
    
    
    5,588
    
    
    
    3,182
    
    
    
    126,859Loss from continuing operations
    
    
    (1,927
    )
    
    
    (1,440
    )
    
    
    (5,128
    )
    
    
    (2,954
    )
    
    
    (82,539
    )Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,828
    )Gain on disposal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939Net loss before cumulative effect of
change in accounting principle
    
    
    (1,927
    )
    
    
    (1,440
    )
    
    
    (5,128
    )
    
    
    (2,954
    )
    
    
    (83,428
    )Cumulative effect of change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,454
    )Net loss
    
    $
    (1,927
    )
    
    $
    (1,440
    )
    
    $
    (5,128
    )
    
    $
    (2,954
    )
    
    $
    (91,882
    )Loss per share  basic and diluted:
    
    $
    (0.19
    )
    
    $
    (0.29
    )
    
    $
    (0.54
    )
    
    $
    (0.57
    )Shares used in loss per share calculation:Basic
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,501
    
    
    
    5,159Diluted
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,501
    
    
    
    5,159
  6




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ZONAGEN, INC. AND SUBSIDIARY
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 From Inception(August 20, 1987)throughThree Months Ended September 30,
    
    

Nine Months Ended September 30,
    
    
    September 30,2005
    
    
    
    
    
    

2004
    
    

2005
    
    

2004
    
    

2005Cash Flows from Operating ActivitiesNet loss
    
    $
    (1,927
    )
    
    
    
    
    
    $
    (1,440
    )
    
    $
    (5,128
    )
    
    $
    (2,954
    )
    
    
    (91,882
    )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
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    308
    
    
    
    1,339Noncash decrease in accounts payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,308
    )Depreciation and amortization
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    5
    
    
    
    8
    
    
    
    3,778Noncash expenses related to stock-based
transactions
    
    
    26
    
    
    
    
    
    
    
    52
    
    
    
    64
    
    
    
    52
    
    
    
    2,792Common stock issued for agreement not to
compete
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200Series B Preferred Stock issued for consulting
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Maturities (purchases) of marketable securities
    
    
    2,711
    
    
    
    
    
    
    
    2,350
    
    
    
    (11,253
    )
    
    
    (2,000
    )
    
    
    12,482Changes 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
    
    
    18
    
    
    
    
    
    
    
    137
    
    
    
    (170
    )
    
    
    149
    
    
    
    95(Decrease) increase in accounts payable and
accrued expenses
    
    
    (108
    )
    
    
    
    
    
    
    (3
    )
    
    
    36
    
    
    
    (125
    )
    
    
    1,845Decrease (increase) in other assets
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    600
    
    
    
    274
    
    
    
    Net cash provided by (used in) operating activities
    
    
    722
    
    
    
    
    
    
    
    1,377
    
    
    
    (15,846
    )
    
    
    (4,288
    )
    
    
    (71,595
    )Cash Flows from Investing ActivitiesMaturities (purchases) of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,723
    )Capital expenditures
    
    
    (1
    )
    
    
    
    
    
    
    (6
    )
    
    
    (8
    )
    
    
    (19
    )
    
    
    (2,297
    )Purchase of technology rights and other assets
    
    
    (79
    )
    
    
    
    
    
    
    (30
    )
    
    
    (147
    )
    
    
    (129
    )
    
    
    (2,585
    )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
    
    
    (80
    )
    
    
    
    
    
    
    (36
    )
    
    
    (155
    )
    
    
    (148
    )
    
    
    (31,202
    )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
    
    
    642
    
    
    
    
    
    
    
    1,341
    
    
    
    2,264
    
    
    
    (18,390
    )
    
    
    3,000Cash and cash equivalents at beginning of period
    
    
    2,358
    
    
    
    
    
    
    
    1,215
    
    
    
    736
    
    
    
    20,946
    
    
    
    Cash and cash equivalents at end of period
    
    $
    3,000
    
    
    
    
    
    
    $
    2,556
    
    
    $
    3,000
    
    
    $
    2,556
    
    
    $
    3,000
  7




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ZONAGEN, INC. AND SUBSIDIARY
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 Sept. 30,
    
    
    Nine Months Ended Sept. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net loss, as reported
    
    $
    (1,927
    )
    
    $
    (1,440
    )
    
    $
    (5,128
    )
    
    $
    (2,954
    )Add: Stock-based employee
compensation expense
included in reported net
income, net of related tax
effects
    
    
    26
    
    
    
    52
    
    
    
    64
    
    
    
    52Deduct: Total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of related
tax effects
    
    
    (181
    )
    
    
    (191
    )
    
    
    (591
    )
    
    
    (310
    )Pro forma net loss
    
    $
    (2,082
    )
    
    $
    (1,579
    )
    
    $
    (5,655
    )
    
    $
    (3,212
    )Loss per share -Basic  as reported
    
    $
    (0.19
    )
    
    $
    (0.29
    )
    
    $
    (0.54
    )
    
    $
    (0.57
    )Basic  pro forma
    
    
    (0.21
    )
    
    
    (0.32
    )
    
    
    (0.60
    )
    
    
    (0.62
    )Diluted
 as reported
    
    
    (0.19
    )
    
    
    (0.29
    )
    
    
    (0.54
    )
    
    
    (0.57
    )Diluted  pro forma
    
    
    (0.21
    )
    
    
    (0.32
    )
    
    
    (0.60
    )
    
    
    (0.62
    )
   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 Sept. 30,
    
    
    Nine Months Ended Sept. 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Loss
    
    $
    (1,927
    )
    
    $
    (1,440
    )
    
    $
    (5,128
    )
    
    $
    (2,954
    )Weighted average
common shares
outstanding
    
    
    10,080
    
    
    
    4,993
    
    
    
    9,501
    
    
    
    5,159Basic loss per share
    
    $
    (0.19
    )
    
    $
    (0.29
    )
    
    $
    (0.54
    )
    
    $
    (0.57
    )Diluted loss per share
    
    $
    (0.19
    )
    
    $
    (0.29
    )
    
    $
    (0.54
    )
    
    $
    (0.57
    )
  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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16




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17




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Results of Operations
 Three Month and Nine Month Periods Ended September 30, 2005 and 2004
  Revenues and other income
  18




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Research and Development Expenses
 General and Administrative Expenses
 19




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Liquidity and Capital Resources
    20




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Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Recent Accounting Pronouncements
  
 Item 4. Controls and Procedures
   21




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 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).
 22




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SIGNATURES
  ZONAGEN, INC.Date: November 11, 2005By:
    
    /s/ Joseph S. PodolskiJoseph S. PodolskiPresident, Chief Executive Officer
and Director(Principal Executive Officer)Date: November 11, 2005By:
    
    /s/ Louis Ploth, Jr.Louis Ploth, Jr.Vice President Business Development, ChiefFinancial Officer, Director and Secretary(Principal Financial and Accounting Officer)
 23




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##### Table of Contents



INDEX
TO EXHIBITS
 Exhibits
    
    Description31.1
    
    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).