SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 0R 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission file number: 33-23693
Entropin, Inc.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Colorado 84-1090424
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
45926 Oasis Street, Indio, California 92201
-----------------------------------------------------
(Address of principal executive offices and Zip Code)
(760) 775-8333
-------------------------------
(Registrant's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 August 15, 1998, 6,000,051 shares of the issuer's Common Stock, $.001 par
value per share were outstanding.
Transitional Small Business Disclosure Format Yes No X
---- ----
<PAGE>
ENTROPIN, INC.
INDEX
-----
Page No.
--------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial statements:
Balance Sheet - December 31, 1997 and June 30, 1998
(Unaudited) 2
Statement of Operations - For the Three Months
Ended June 30, 1997 and 1998 (unaudited) 4
Statement of Operations - For the Six Months Ended
June 30, 1997 and 1998 and Cumulative Amounts from
Inception (August 27, 1984) Through June 30, 1998
(unaudited) 5
Statement of Stockholders' Equity - For the Six
Months Ended June 30, 1998 (unaudited) 6
Statement of Cash Flows - For the Six Months Ended
June 30, 1997 and 1998 and Cumulative Amounts from
Inception (August 27, 1984) Through June 30, 1998
(unaudited) 7
Notes to Unaudited Financial Statements 8
Item 2. Management's Discussion and Analysis or
Plan of Operation 16
PART II. OTHER INFORMATION 18
- -------- -----------------
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1997 and June 30, 1998
(Unaudited)
ASSETS
------
1997 1998
---- ----
Current assets:
Cash $ 291 $138,715
Accounts receivable - stockholder 5,000 -
-------- --------
Total current assets 5,291 138,715
Office equipment, less accumulated depreciation of $282 - 3,945
Other assets:
Deferred stock offering costs (Note 5) 10,746 -
Deposits - 12,260
Patent costs, less accumulated amortization of
$40,300 (1997) and $49,535 (1998) 266,456 274,131
-------- --------
Total other assets 277,202 286,391
-------- --------
$282,493 $429,051
======== ========
See accompanying notes.
2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1997 and June 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
1997 1998
---- ----
Current liabilities:
Accounts payable $ 329,813 $ 104,593
Advances - stockholders (Note 2) 98,873 -
---------- ----------
Total current liabilities 428,686 104,593
Long-term debt:
Stockholders (Note 4) 1,710,487 -
Deferred royalty agreement (Note 7) 155,495 162,639
Compensation agreement (Note 4) 1,500,000 -
----------- ----------
Total long-term debt 3,365,982 162,639
Commitments (Notes 2 and7)
Series A redeemable preferred stock, $.001 par
value, 3,210,487 shares authorized, 3,210,487
shares issued and outstanding (1998) (Note 4) - 3,210,487
Series B redeemable convertible preferred stock,
$.001 par value, 400,000 shares authorized, no
shares issued or outstanding (Note 4) - -
Stockholders' equity (deficit) (Note 5):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A and B reported above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 5,220,000 (1997) and 6,000,051 (1998)
shares issued and outstanding 5,220 6,000
Additional paid-in capital 1,296,780 5,914,210
Deficit accumulated during the development stage (4,814,175) (5,515,015)
Unearned stock compensation (Notes 5 and 7) - (3,453,863)
---------- ----------
Total stockholders' equity (deficit) (3,512,175) (3,048,668)
---------- ----------
$ 282,493 $ 429,051
========== ==========
See accompanying notes.
3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 1997 and 1998
(Unaudited)
1997 1998
---- ----
Costs and expenses:
Research and development $ 31,111 $ 250,456
General and administrative 7,506 344,387
Rent - related party (Note 2) - 3,120
Depreciation and amortization 3,525 5,017
-------- ---------
Operating loss (42,142) (602,980)
-------- ---------
Other income (expense):
Interest income - 4,292
Interest expense (36,612) (458)
-------- ---------
Total other income (expense) (36,612) 3,834
--------- ---------
Net Loss $ (78,754) $(599,146)
========= =========
Basic loss per common share $ (.02) $ (.10)
========= =========
Weighted average common shares
outstanding (Note 6) 5,220,000 6,000,000
========= =========
See accompanying notes.
4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997 and 1998
and for the Period from August 27, 1984 (inception) to June 30, 1998
(Unaudited)
Cumulative
amounts from
1997 1998 inception
---- ---- ---------
Costs and expenses:
Research and development $ 68,956 $ 254,228 $ 4,201,082
General and administrative 14,104 439,759 1,010,014
Rent - related party (Note 2) - 5,200 5,200
Depreciation and amortization 7,387 9,517 66,885
--------- --------- -----------
Operating loss (90,447) (708,704) (5,283,181)
--------- --------- -----------
Other income (expense):
Interest income - 8,801 8,801
Interest expense (73,191) (937) (240,635)
--------- --------- -----------
Total other income (expense) (73,191) 7,864 (231,834)
--------- --------- -----------
Net Loss $(163,638) $(700,840) $(5,515,015)
========= ========= ===========
Basic loss per common share $ (.03) $ (.12) $ (1.03)
========= ========= ===========
Weighted average common shares
outstanding (Note 6) 5,220,000 5,935,000 5,330,000
========= ========= =========
See accompanying notes.
5
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended June 30, 1998
(Unaudited)
Deficit
accumulated
Common stock Additional during the Unearned
------------------- paid-in development stock
Shares Amount capital stage compensation
------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997, as originally reported 5,220,000 $5,220 $1,043,780 $(4,561,175) $ -
Restatement (Note 8) - - 253,000 (253,000) -
--------- ------ ---------- ----------- -----------
Balance, December 31, 1997, as restated 5,220,000 5,220 1,296,780 (4,814,175) -
Sale of common stock for cash ($2.75 per share)
(Note 5) 300,000 300 797,810 - -
Issuance of common stock pursuant to recapitalization
(Note 5) 480,051 480 219,620 - -
Unearned stock compensation pursuant to issuance
of common stock options (Note 5) - - 3,600,000 - (3,600,000)
Amortization of unearned stock compensation (Note 5) - - - - 146,137
Net loss for the six months ended June 30, 1998 - - - (700,840) -
--------- ------ ---------- ----------- -----------
Balance, June 30, 1998 6,000,051 $6,000 $5,914,210 $(5,515,015) $(3,453,863)
========= ====== ========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1998
and for the Period from August 27, 1984 (inception) to June 30, 1998
(Unaudited)
Cumulative
amounts
from
1997 1998 inception
---- ---- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(163,638) $(700,840) $(5,515,015)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 7,387 9,517 66,885
IBC partner royalty agreement 9,526 7,144 162,639
Services contributed in exchange
for stock or stock options - 146,137 1,093,137
Services contributed in exchange for
compensation agreements 46,666 - 2,231,678
Decrease in accounts receivable -
shareholder - 5,000 -
Increase (decease) in accounts payable 4,683 (225,220) 104,593
Increase in accrued interest 64,376 - 169,139
Other - - 131
--------- --------- -----------
Total adjustments 132,638 (57,422) 3,828,202
--------- --------- -----------
Net cash used in operations (31,000) (758,262) (1,686,813)
Cash flows from investing activities:
Purchase of equipment - (4,227) (21,434)
Patent costs - (16,910) (323,666)
Increase in deposits - (12,260) (12,260)
--------- --------- -----------
Net cash used in investing activities - (33,397) (357,360)
Cash flows from financing activities:
Proceeds from recapitalization - 220,100 220,100
Deferred stock offering costs - 10,746 -
Proceeds from sale of common stock - 798,110 1,153,110
Proceeds from stockholder loans - - 809,678
Proceeds from (payments on) stockholder
advances 34,000 (98,873) -
--------- --------- -----------
Net cash provided by financing
activities 34,000 930,083 2,182,888
Net increase in cash 3,000 138,424 138,715
Cash at beginning of period 1,677 291 -
--------- --------- -----------
Cash at end of period $ 4,677 $ 138,715 $ 138,715
========= ========= ===========
</TABLE>
See accompanying notes.
7
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
The accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Certain notes and other
information have been condensed or omitted from the interim financial statements
presented in this report. 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, the financial
statements reflect all adjustments considered necessary for a fair presentation.
The results of operations for the three months and six months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year. For further information, refer to the financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 as filed with the Securities and Exchange Commission.
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Organization:
Entropin, Inc. a Colorado corporation, was organized in August 1984, as a
pharmaceutical research company developing Esterom(R), a topically applied
compound for the treatment of impaired range of motion associated with acute
lower back sprain and acute painful shoulder. The Company is considered to be
a development stage enterprise as more fully defined in Statement No. 7 of
the Financial Accounting Standards Board. Activities from inception include
research and development activities, seeking the U.S. Food and Drug
Administration (FDA) approval for Esterom(R), as well as fund raising.
On January 15, 1998, the Company consummated an agreement and plan of
merger with Vanden Capital group, Inc. (Vanden), in which Vanden acquired all
of the issued and outstanding common shares of the Company (see Note 5). The
Company was merged into Vanden, and Vanden changed its name to Entropin, Inc.
For accounting purposes the acquisition has been treated as a
recapitalization of the Company, based upon historical cost, a reverse
acquisition with the Company as the acquirer.
Basis of presentation and management's plans:
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and development
activities. This has resulted in significant losses and an accumulated
deficit at June 30, 1998 of $5,515,015. The Company's continued existence is
dependent on its ability to obtain the additional funding necessary to
complete the FDA approval process for Esterom(R) and market the product.
8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
As described in Note 5, the Company has successfully completed a private
placement and a recapitalization of the Company which will provide additional
liquidity for the Company for current operations. The Company is also
currently conducting a private offering of a maximum of 400,000 shares of
Series B convertible preferred stock for gross proceeds of $2,000,000 (see
Note 4). However, the Company estimates it will require additional funding of
up to $6,000,000 over the next three years to successfully complete the FDA
approval process. The financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or the amount and classification of liabilities or other adjustments that
might be necessary should the Company be unable to continue as a going
concern in its present form.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Office equipment:
Office equipment is recorded at cost. Depreciation commences as items are
placed in service and is computed on a straight-line method over their
estimated useful lives of five years.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31,
1997, in connection with the private placement of common stock, more fully
discussed in Note 5. Costs incurred as of December 31, 1997 and additional
costs incurred subsequent to that date, were charged against the proceeds of
that offering.
Patents:
Patents are stated at cost less accumulated amortization which is calculated
on a straight-line basis over the useful lives of the assets, estimated by
management to average 17 years. Research and development costs and any costs
associated with internally developed patents (with the exception of legal
costs) are expensed in the year incurred.
9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
1. Organization and summary of significant accounting policies (continued)
----------------------------------------------------------------------
Impairment of long-lived assets:
The Company evaluates the potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of. The Company annually reviews the amount of recorded
long-lived assets for impairment. If the sum of the expected cash flows from
these assets is less than the carrying-amount, the Company will recognize an
impairment loss in such period.
Cash equivalents:
For the purpose of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash. The Company places its cash with
high quality financial institutions. At times, the balance at any one
financial institution may exceed FDIC limits.
Income taxes:
The Company provides for income taxes utilizing the liability approach under
which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which the taxes become payable.
Reclassifications:
Certain reclassifications have been made to the 1997 financial statements to
conform to the 1998 financial statement presentation.
2. Related party transactions
--------------------------
Lease agreement:
In February 1998, the Company entered into an office lease arrangement with a
shareholder. The lease has a two-year term expiring on February 1, 2000 and a
monthly rent of $1,040.
10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
2. Related party transactions (continued)
--------------------------------------
Advances - stockholders:
At December 31, 1997, an aggregate of $98,873 had been advanced to the
Company by two shareholders. The advances were repaid in January 1998 from
proceeds associated with the recapitalization of the Company (see Note 5).
3. Income taxes
------------
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998 (see Note 5), resulted in a change in the
Company's tax status from an S corporation to a taxable corporation. The
effect of the change is to provide for income tax based upon reported results
of operations, and to provide deferred tax assets and liabilities on
temporary differences between reported earnings and taxable income. Since the
Company has had losses since inception, no change in the results of
operations would have occurred, assuming the change in status occurred at the
beginning of the periods presented.
At June 30, 1998, the Company has a net operating loss carryforward of
approximately $745,000 and future tax deductions of $1,980,000 which may be
used to offset future taxable income. The future tax deductions result from
utilizing the cash basis for income tax reporting purposes and unearned stock
compensation. The difference between the tax loss carryforwards and future
tax deductions and the cumulative losses from inception result from the
losses previously incurred by the S corporation. The net operating loss
expires in 2018. At June 30, 1998, total deferred tax assets and valuation
allowance are as follows:
Deferred tax assets resulting from:
Net operating loss carryforwards $ 225,000
Accrual to cash adjustments 690,000
Unearned stock compensation 50,000
-----------
Total 1,020,000
Less valuation allowance (1,020,000)
-----------
$ -
===========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonably assured.
4. Redeemable preferred stock
--------------------------
On January 15, 1998, the Company issued 3,210,487 shares of its Series A
redeemable non-voting, non-cumulative 8% preferred stock in exchange for an
aggregate $1,710,487 of notes payable to shareholders and accrued interest,
and a $1,500,000 compensation agreement. The annual 8% dividend is based upon
a $1.00 per share value, and is only payable out of earnings.
11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
4. Redeemable preferred stock (continued)
--------------------------------------
In June 1998, the Company commenced a private placement of 400,000 shares of
Series B preferred stock at $5.00 per share The Company anticipates incurring
$140,000 of expenses associated with the private placement resulting in net
proceeds of $1,860,000. The Series B preferred stock is designated as
redeemable 10% cumulative non-voting convertible preferred stock with $.001
par value. Dividends will accrue at the rate of $.50 per share per annum and
will be paid annually in arrears commencing July 15, 1998. At the Company's
election, annual dividends may be paid in cash and/or in shares of the
Company's common stock valued at $5.00 per share.
5. Stockholders' equity
--------------------
Recapitalization:
On December 9, 1997, the Company entered into an agreement and plan of merger
with Vanden to exchange all of the issued and outstanding common shares of
the Company, in exchange for 5,220,000 shares of Vanden's $.001 par value
common stock, a reverse acquisition.
Pursuant to the agreement, Vanden agreed to have cash of $220,000 and no
unpaid liabilities at the effective date of the transaction. The exchange was
consummated on January 15, 1998. In connection with the recapitalization, the
Company issued 180,001 shares of its $.001 par value common stock for cash of
$100 and options to purchase an additional 180,001 shares of common stock for
$2.80 per share, as required by a management advisory services contract as
compensation for arranging a merger or acquisition acceptable to the Company.
The difference between the fair value of the stock, estimated by the Company
to be $2.75 per share, and the purchase price for the initial 180,001 shares
was treated as additional cost of the merger and changed to capital,
consistent with accounting for the reverse acquisition as a recapitalization.
The net effect of this transaction was to record an increase and related
decrease to additional paid-in capital of $495,000. The remaining options to
acquire 180,001 shares are exercisable for a five-year period.
Following the exchange, the Company's shareholders own approximately 95% of
the outstanding common stock of Vanden. The reverse acquisition has been
accounted for as a recapitalization of the Company based upon historical
cost. Accordingly, the number of authorized and issued common shares, par
value of common stock and additional paid-in capital have been restated on
the balance sheet and the statement of stockholders' equity to give
retroactive effect to the recapitalization.
Private placement:
On January 15, 1998, the Company completed a private placement of 300,000
shares of its $.001 par value common stock for gross proceeds of $825,000,
$2.75 per share.
12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
5. Stockholders' equity (continued)
--------------------------------
Stock options:
On June 9, 1998, the board of directors approved a resolution whereby the
Company granted to each director options to purchase up to 60,000 shares of
the Company's common stock (300,000 shares in the aggregate), exercisable at
$3.00 per share. The options vest at the rate of 20,000 shares per year
commencing February 1999 through February 2001. Should any of the directors
cease to serve on the Board of Directors, all non-vested options shall be
forfeited.
Unearned stock compensation:
At June 30, 1998, the Company had granted an aggregate of 850,000 options at
purchase prices lower than fair value of the stock at date of grant,
including the director stock options disclosed above (see Note 7). The excess
of the market value over the exercise price has been recorded as additional
paid-in capital and unearned stock compensation. Unearned compensation is
being amortized to expense over the term of the related agreements.
6. Loss per common share
---------------------
Basic net loss per common share is based on the weighted average number of
shares outstanding during the periods. Shares issued for nominal
consideration are considered outstanding since inception. Diluted loss per
share has not been presented as exercise of the outstanding stock options
would have an anti-dilutive effect.
7. Commitments
-----------
Compensation agreements:
In 1993, the Company entered into a 30 year compensation agreement with
I.B.C. limited partners owning 64.28% of the limited partnership. The I.B.C.
Limited Partnership participated in the early development of Esterom(R) (the
medicine) and owned the patent rights to three patents and all intellectual
property rights. Under the terms of the Agreement, the Company acquired all
of the patent and intellectual property rights in exchange for certain
compensation to the limited partners, which is dependent upon the Company's
receipt of a marketing partners technological access fee and royalty
payments. The partnership was subsequently dissolved. Compensation under the
agreement includes a bonus payment of $96,420 to be paid at the time the
Company is reimbursed by a drug company for past expenses paid for
development of the medicine, as well as 64.28% of a decreasing payment rate
(3% to 1%) on cumulative annual royalties received by the Company. As of June
30, 1998 , no liabilities have been accrued with respect to this agreement.
13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
7. Commitments (continued)
-----------------------
In a separate agreement with a former I.B.C. limited partner, the Company has
agreed to pay the partner 35.72% of a decreasing earned payment (3% to 1% on
cumulative annual sales of products by the Company) until October 10, 2004.
From October 10, 2004 until October 10, 2014, the Company will pay the
partner 17.86% of the earned payment. In accordance with the agreement, the
Company has agreed to pay the former limited partner the amount of $40,000
and a minimum earned payment of $3,572 per calendar quarter beginning on
December 1, 1989. Such minimum earned payment is to be evidenced by a
promissory note issued each quarter and payable when the Company is either
reimbursed for expenses paid for the development of the medicine or from the
first income received from the Company from net sales of the medicine. The
quarterly payments are to be applied against the earned payment to be
received by the limited partner. As of December 31, 1997, and June 30, 1998,
the total liability accrued with respect to this agreement totaled $155,495
and $162,639, respectively. The Company will receive a credit against the
earned payments for 50% of monies which are expended in connection with
preparing, filing, obtaining, and maintaining patents involved with the sold
rights.
Development and Supply Agreements:
On January 1, 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. to develop all of the chemistry,
manufacturing and controls to comply with the drug master file of the Food
and Drug Administration as well as supply the bulk active product for
marketing. In exchange for these services, Mallinckrodt will receive
exclusive rights as a supplier of the bulk active product to the Company in
North America. For the first year ended December 31, 1997, the contract price
of the ingredient was fixed based on the number of liters ordered by the
Company. Subsequent to December 31, 1997, the cost per liter will be adjusted
based on changes in the price of the components in the bulk active product.
In addition, pursuant to the agreement, the Company has granted Mallinckrodt
a right of first refusal to supply the Company's requirements of the bulk
active product in all other parts of the world outside of North America.
License Agreement:
In January 1998, the Company entered into an agreement with a director of the
Company, whereby the Company granted the director a non-exclusive right to
make, import and use the Company's product, Esterom(R), under the Company's
licensed patents and to use the Company's confidential information to develop
new products that contain the same active ingredients as Esterom(R), but are
formulated differently. All rights to the improved products will remain the
exclusive property of the Company and the director will receive a two percent
royalty on the net sales of all improved products, and a negotiated royalty
on new products. The expiration date of this agreement is January 1, 2003.
14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1998
7. Commitments (continued)
-----------------------
Management agreement:
During April 1998, the Company entered into an agreement with the Western
Center for Clinical Studies, Inc. (WCCS), a company experienced in managing
pharmaceutical development, including providing assistance in taking
pharmaceutical products to the FDA and through the clinical trials and New
Drug Application stages of development. The Company is required to pay
management fees of $880,400 over the 33 month term of the agreement, and
has granted stock options to WCCS to purchase 450,000 shares of Entropin
common stock. The options have a term of five years from the grant date and
an exercise price of $1.50. The options are exercisable in varying amounts
on dates ranging from August 1998 to December 2000.
The difference between the fair value of the options at date of grant and
the exercise price, totaling approximately $1,950,000 using the
Black-Scholes option - pricing model, has been recorded as additional
paid-in capital and unearned stock compensation. The unearned stock
compensation is being amortized to expense on a straight-line basis over
the 33 month term of the agreement.
Amendment to management advisory agreement:
On May 5, 1998, the Company amended an existing management advisory
services agreement with an organization to extend the agreement through
October 28, 2000 and to provide a monthly fee of $5,000 to the organization
through April 1, 1999. As additional compensation, the organization was
granted an option to purchase up to 100,000 shares of the Company's $.001
par value common stock at a purchase price of $4.00 per share. The rights
granted under the stock option are exercisable if written notice of a right
to exercise the option is given by the Company to the organization on or
before 180 days from May 5, 1998.
8. Restatement of financial statements
-----------------------------------
The Company determined that the fair value of the common shares contributed
in December 1997 by certain shareholders of the Company for services should
be approximately $2.75 per share. The services were originally recorded at
$2.00 per share. The accompanying financial statements have been restated
to reflect the revaluation. The effect of the change for the year ended
December 31, 1997 is to increase net loss by $253,000, increase net loss
per share by $.05 and increase additional paid-in capital by $253,000, as
follows:
Year ended December 31, 1997
-------------------------------------
As previously reported As restated
---------------------- -----------
Net loss $(1,098,448) $(1,351,448)
Net loss per share $(.21) $(.26)
Additional paid-in capital $ 1,043,780 $ 1,296,780
From Inception Through December 31, 1997
----------------------------------------
As previously reported As restated
---------------------- -----------
Net loss $(4,561,175) $(4,814,175)
Net loss per share $(.87) $(.92)
The change has no effect on the net loss or net loss per share for the
three months or six months ended June 30, 1998 or 1997.
15
<PAGE>
Item 2. Management's discussion and analysis or plan of operation
---------------------------------------------------------
Plan of Operation:
Entropin, Inc. is a development stage pharmaceutical company and has not
generated any revenues from operations for the period from August 27, 1984
(inception) through June 30, 1998. Entropin has devoted substantially all
it's resources to acquisition of patents, research and development of the
medicine, and expenses related to the startup of its business.
Entropin has been unprofitable since inception and expects to incur
substantial additional operating losses for the next twelve months, as
well as for the next few years, as it increases expenditures on research
and development and begins to allocate significant and increasing
resources to clinical testing, marketing and other activities. As
described below, in January 1998, the Company successfully completed a
private placement and a reverse acquisition accounted for as a
recapitalization of the Company. These events have provided additional
liquidity for the Company for current operations. The Company is currently
conducting an additional private placement of up to $2,000,000 in
convertible Series B preferred stock which funds will be used to fund
operations during the next twelve months. The Company anticipates
requiring additional funding of up to $6,000,000 over the next three years
to successfully complete the FDA approval process.
The Company recently entered into an agreement with the Western Center for
Clinical Studies, Inc. (WCCS), a California corporation experienced in
managing pharmaceutical development. During the 33 month term of the
agreement, WCCS will assist the Company in obtaining FDA approval for its
product Esterom(R), implementing a business plan and providing experienced
personnel to bring Esterom(R) to commercialization. The Company is
required to pay management fees of approximately $880,400 over the term of
the agreement, and has provided stock options to purchase 450,000 shares
of Entropin common stock over the 33 month period at an exercise price of
$1.50 per share.
Results of Operations:
During the three months ended June 30, 1998, Entropin incurred a net loss
of $599,146 as compared to $78,754 for the three months ended June 30,
1997. The increase resulted primarily from an increase of $336,881 in
general and administrative expenses and an increase of $219,345 in
research and development expenses. Both increases related primarily to
negotiating and initiating the agreement with WCCS, as well as other
start-up organizational expenses.
During the six months ended June 30, 1998, Entropin incurred a loss of
$700,840, as compared to a loss of $163,638 for the six months ended June
30, 1997. The increase resulted primarily from an increase of $425,655 in
general and administrative expenses, relating to recapitalization of
Entropin and negotiation of an agreement with The Western Center for
Clinical Studies, Inc. (WCCS). Interest expense decreased in 1998 by
$72,254 as a result of conversion of notes payable to redeemable preferred
stock on January 15, 1998. Research and development costs also increased
by $185,272 as a result of commencement of the agreement with WCCS.
16
<PAGE>
Entropin's activities to date are not as broad in depth or scope as the
activities it must undertake in the future, and Entropin's historical
operations and financial information are not indicative of Entropin's
future operating results or financial condition or its ability to operate
profitably as a commercial enterprise when and if it succeeds in bringing
any product to market.
Capital Resources and Liquidity:
In the years since inception, Entropin has financed its operations
primarily through the sale of shares of Entropin common stock, and loans
and advances from shareholders. On January 15, 1998, the Company completed
a private placement of 30 units (10,000 shares of its $.001 par value
common stock per unit) at $27,500 unit, or $2.75 per share, which resulted
in gross proceeds of $825,000. Concurrent with the private placement, the
Company completed an agreement and plan of merger with Vanden Capital
Group, Inc. to exchange all of the issued and outstanding common shares of
the Company for 5,220,000 shares of Vanden's $.001 par value common stock.
The Company was merged into Vanden, and Vanden changed its name to
Entropin, Inc. For accounting purposes, the acquisition has been treated
as a recapitalization of the Company based upon historical cost (a reverse
acquisition), with the Company as the acquirer. Pursuant to the agreement,
Vanden provided cash of $220,000.
On January 15, 1998, the Company issued 3,210,487 shares of Series A
redeemable non-voting, noncumulative 8% preferred stock in exchange for an
aggregate $3,210,487 of notes payable to shareholders and accrued interest
and various other liabilities of the Company.
In January 1997, the Company entered into Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") for ten (10) year
terms to develop all of the chemistry, manufacturing and controls
necessary to comply with the drug master file of the FDA, as well as to
supply the bulk active product. In exchange for these services,
Mallinckrodt will receive exclusive rights as a supplier of the bulk
active product to the Company in North America. For the year ended
December 31, 1997, the contract price of the ingredient was fixed based on
the number of liters ordered by the Company. In subsequent years, the cost
per liter will be adjusted based on changes in the price of the components
in the bulk active product.
In June 1998, the Company commenced a private placement of 400,000 shares
of Series B preferred stock at $5.00 per share. The Company anticipates
incurring $140,000 of expenses associated with the private placement
resulting in net proceeds of $1,860,000. The Series B preferred stock is
designated as redeemable 10% cumulative non-voting convertible preferred
stock with $.001 par value. Dividends will accrue at the rate of $.50 per
share per annum and will be paid annually in arrears commencing July 15,
1998. At the Company's election, annual dividends may be paid in cash
and/or in shares of the Company's common stock valued at $5.00 per share.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known to be
contemplated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
-------------------
(1) Form 8-K, dated April 23, 1998, as amended, reporting
developments in the Company's business under Item 5
thereof, filed with the Securities and Exchange
Commission on April 23, 1998.
(2) Form 8-K, dated June 9, 1998, reporting developments
in the Company's business under Item 5 thereof, filed
with the Securities and Exchange Commission on June
10, 1998.
(3) Form 8-K, dated January 15, 1998, as amended,
reporting the change of control of Entropin, Inc. to
Item 1 thereof, filed with the Securities and
Exchange Commission on June 30, 1998.
18
<PAGE>
SIGNATURES
In accordance with the requirement of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENTROPIN, INC.
Date: August 7, 1998 By: /s/ Higgins D. Bailey
---------------------------------------
Higgins D. Bailey
Chairman of the Board of Directors
Date: August 7, 1998 By: /s/ Wellington A. Ewen
---------------------------------------
Wellington A. Ewen
Chief Financial Officer
-19-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FORM 10-Q.
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 138,715
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