UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
---------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 33-23693
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ENTROPIN, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1090424
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
45926 Oasis Street, Indio, California 92201
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(Address of principal executive offices)
(760) 755-8333
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(Issuer's telephone number)
N/A
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(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
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As of November 6, 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
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<PAGE>
ENTROPIN, INC.
INDEX
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PART 1. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Financial Statements:
Balance Sheet - December 31, 1997 and September 30, 1998 (unaudited) 2
Statement of Operations - For the Three Months Ended September 30,
1997 and 1998 (unaudited) 4
Statement of Operations - For the Nine Months Ended September 30,
1997 and 1998 and Cumulative Amounts from Inception (August 27,
1984) Through September 30, 1998 (unaudited) 5
Statement of Stockholders' Equity - For the Nine Months
Ended September 30, 1998 (unaudited) 6
Statement of Cash Flows - For the Nine Months Ended September 30,
1997 and 1998 and Cumulative Amounts from Inception (August 27,
1984) Through September 30, 1998 (unaudited) 7
Notes to Unaudited Financial Statements 8
Item 2. Management's Discussion and Analysis or Plan of Operations 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
-1-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1997 and September 30, 1998
(Unaudited)
ASSETS
1997 1998
------- --------
Current assets:
Cash and cash equivalents $ 291 $ 707,747
Accounts receivable - stockholder 5,000 -
------- ----------
Total current assets 5,291 707,747
Office equipment, less accumulated depreciation
of $564 (1998) - 3,663
Other assets:
Deferred stock offering costs (Note 5) 10,746 -
Deposits - 12,260
Patent costs, less accumulated amortization of
$40,300 (1997) and $54,440 (1998) 266,456 282,765
-------- ----------
Total other assets 277,202 295,025
-------- ----------
$282,493 $1,006,435
======== ==========
See accompanying notes.
-2-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1997 and September 30, 1998
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1997 1998
---------- ----------
Current liabilities:
Accounts payable $ 329,813 $ 38,555
Advances - stockholders (Note 2) 98,873 -
----------- ----------
Total current liabilities 428,686 38,555
Long-term debt:
Stockholders (Note 4) 1,710,487 -
Deferred royalty agreement (Note 7) 155,495 166,210
Compensation agreement (Note 4) 1,500,000 -
----------- ----------
Total long-term debt 3,365,982 166,210
Commitments (Notes 2 and 7)
Series A redeemable preferred stock,
$.001 par value, 3,210,487 shares
authorized, issued and outstanding (1998)
(Note 4) - 3,210,487
Series B redeemable convertible preferred
stock, $.001 par value, 400,000 shares
authorized, 245,500 shares issued and
outstanding (Note 4) - 1,142,750
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 5,614,210
Deficit accumulated during the development stage (4,814,175) (6,301,323)
Unearned stock compensation (Notes 5 and 7) - (2,870,454)
---------- -----------
Total stockholders' equity (deficit) (3,512,175) (3,551,567)
----------- -----------
$ 282,493 $1,006,435
========== ==========
See accompanying notes.
-3-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1997 and 1998
(Unaudited)
1997 1998
--------- --------
Costs and expenses:
Research and development $ 44,591 $ 393,645
General and administrative 17,901 392,804
Rent - related party (Note 2) - 3,120
Depreciation and amortization 7,613 5,187
--------- ---------
Operating loss (70,105) (794,756)
--------- ---------
Other income (expense):
Interest income - 8,962
Interest expense (23,374) (514)
--------- ---------
Total other income (expense) (23,374) 8,448
--------- ---------
Net Loss (93,479) (786,308)
Accrued dividends applicable to Series B
preferred stock (Note 4) - (25,573)
--------- ---------
Net loss applicable to common shareholders $(93,479) $(811,881)
========= =========
Basic loss per common share $ (.02) $ (.14)
========= =========
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 Nine Months Ended September 30, 1997 and 1998 and for the Period from
August 27, 1984 (inception) to September 30, 1998 (Unaudited)
Cumulative
amounts from
1997 1998 inception
--------- --------- -----------
Costs and expenses:
Research and development $ 113,547 $ 647,873 $ 4,594,727
General and administrative 32,005 832,563 1,402,818
Rent - related party (Note 2) - 8,320 8,320
Depreciation and amortization 15,000 14,704 72,072
---------- ----------- -----------
Operating loss (160,552) (1,503,460) (6,077,937)
---------- ----------- -----------
Other income (expense):
Interest income - 17,763 17,763
Interest expense (96,565) (1,451) (241,149)
---------- ----------- -----------
Total other income (expense) (96,565) 16,312 (223,386)
---------- ----------- -----------
Net Loss (257,117) (1,487,148) (6,301,323)
Accrued dividends applicable to Series
B preferred stock (Note 4) - (25,573) (25,573)
--------- ----------- -----------
Net loss applicable to common
shareholders $(257,117) $(1,512,721) $(6,326,896)
========= =========== ===========
Basic loss per common share $ (.05) $ (.25) $ (1.17)
========= =========== ===========
Weighted average common shares
outstanding (Note 6) 5,220,000 5,957,000 5,425,000
========== ========== ==========
See accompanying notes.
-5-
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT
For the Nine Months Ended September 30, 1998
(Unaudited)
<CAPTION>
Deficit
accumulated
Additional during the Unearned
Common stock paid-in development stock
Shares Amount capital stage compensation
------------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997 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) - - 3,300,000 - (3,300,000)
Amortization of unearned stock compensation (Note 5) - - - - 429,546
Net loss for the nine months ended September 30, 1998 - - - (1,487,148) -
--------- ------- ---------- ----------- -----------
Balance, September 30, 1998 6,000,051 $ 6,000 $5,614,210 $(6,301,323)$(2,870,454)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
-6-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1998
and for the Period from August 27, 1984 (inception) to September 30, 1998
(Unaudited)
Cumulative
amounts
from
1997 1998 inception
---------- ---------- ------------
Cash flows from operating activities:
Net loss $ (257,117)$ (1,487,148)$ (6,301,323)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 15,000 14,704 72,072
IBC partner royalty agreement - 10,715 166,210
Services contributed in exchange
for stock or stock options - 429,546 1,376,546
Services contributed in exchange for
compensation agreements 70,000 - 2,231,678
Decrease in accounts receivable -
shareholder - 5,000 -
Increase (decease) in accounts payable 68,912 (291,258) 38,555
Increase in accrued interest 85,090 - 169,139
Other - - 131
---------- ------------ ------------
Total adjustments 239,002 168,707 4,054,331
---------- ------------ ------------
Net cash used in operations (18,115) (1,318,441) (2,246,992)
Cash flows from investing activities:
Purchase of equipment - (4,227) (21,434)
Patent costs (32,993) (30,449) (337,205)
Increase in deposits - (12,260) (12,260)
---------- ------------ ------------
Net cash used in investing activities (32,993) (46,936) (370,899)
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 sale of preferred stock - 1,142,750 1,142,750
Proceeds from stockholder loans - - 809,678
Proceeds from (payments on) stockholder
advances 53,037 (98,873) -
---------- ------------ ------------
Net cash provided by financing
activities 53,037 2,072,833 3,325,638
----------- ----------- ------------
Net increase in cash 1,929 707,456 707,747
Cash at beginning of period 1,677 291 -
----------- ----------- ------------
Cash at end of period $ 3,606 $ 707,747 $ 707,747
========== ============ ============
See accompanying notes.
-7-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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 nine months ended September
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 September 30, 1998 of $6,301,323. 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
September 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 provided additional
liquidity for the Company for current operations. The Company also sold in
a private offering 245,500 shares of Series B convertible preferred stock
for gross proceeds of $1,227,500 (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 in connection with
the private placements of common and preferred stock, more fully discussed
in Notes 4 and 5. Costs deferred were charged against the proceeds of those
offerings.
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
September 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 purposes 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
September 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 September 30, 1998, the Company has a net operating loss carryforward of
approximately $1,050,000 and future tax deductions of $2,920,000 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 September 30, 1998, total
deferred tax assets and valuation allowance are as follows:
Deferred tax assets resulting from:
Net operating loss carryforwards $ 394,000
Accrual to cash adjustments 933,000
Unearned stock compensation 162,000
-----------
Total 1,489,000
Less valuation allowance (1,489,000)
-----------
$ -
===========
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
September 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. As of September 30, 1998,
the Company sold 245,500 shares for total net proceeds of approximately
$1,143,000. The Series B preferred stock is designated as redeemable 10%
cumulative non-voting convertible preferred stock with $.001 par value. The
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. Dividends are added to
net loss in determining net loss per common 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 charged 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
September 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 September 30, 1998, the Company had granted an aggregate of 750,000
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. The 10% cumulative dividends on Series
B preferred stock have been accrued and added to net loss for the purpose
of determining net loss and net loss per share applicable to common
shareholders.
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 partner's 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 September 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
September 30, 1998
7. Commitments (continued)
In a separate agreement with certain former I.B.C. limited partners, the
Company has agreed to pay the partners 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 partners 17.86% of the earned payment. In accordance
with the agreement, the Company has agreed to pay these former limited
partners the amount of $40,000 and a minimum earned payment of $3,572 per
calendar quarter beginning on December 1, 1989. Such minimum earned
payments are to be evidenced by promissory notes 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 partners.
As of December 31, 1997, and September 30, 1998, the total liability
accrued with respect to this agreement totaled $155,495 and $166,210,
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
September 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.
Executive compensation plan:
On September 11, 1998, the board of directors approved a compensation plan
for three officers and directors which included stock options aggregating
600,000 shares based upon certain performance criterial, at an exercise
price of $4.00 per share. Other terms and conditions of the options are the
same as the director options described in Note 5.
8. Subsequent event
In October 1998, a 100,000 share stock option agreement previously provided
in conjunction with a management advisory services agreement was assigned
to another organization, with whom the Company entered into a new one year
consulting agreement. The consultant will provide investor relations and
development services. The options are exercisable at $4.00 per share and
vest 50,000 shares as of the date of the agreement, 25,000 shares on March
31, 1999 and 25,000 shares on June 30, 1999.
-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 September 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 conducted an additional private placement of $1,227,000 in
convertible Series B preferred stock which funds will be used to fund
operations through February 1999. The Company is currently pursuing
additional interim funding and/or a strategic partner to provide total
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 September 30, 1998, Entropin incurred a
net loss of $786,308 as compared to $93,479 for the three months ended
September 30, 1997. The increase resulted primarily from an increase
of $374,903 in general and administrative expenses and an increase of
$349,054 in research and development expenses. Both increases related
primarily to initiating the agreement with WCCS, as well as other
start-up organizational expenses.
During the nine months ended September 30, 1998, Entropin incurred a
loss of $1,487,148, as compared to a loss of $257,117 for the nine
months ended September 30, 1997. The increase resulted primarily from
an increase of $800,558 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 $95,114 as a result of
conversion of notes payable to redeemable preferred stock on January
15, 1998. Research and development costs also increased by $534,326 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 and preferred
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
sold a total of 245,500 shares for net proceeds of $1,143,000. 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 2. CHANGES IN SECURITIES.
(c) During the period covered by this report, the Registrant issued its
stock to the persons set forth below for the cash consideration indicated in
transactions that were not registered under the 1933 Act.
The offer and sale of the Series B Preferred Stock set forth below were
made in reliance upon the exemption from registration provided by Section 4(2)
of the 1933 Act and/or Regulation D and Rule 506 adopted thereunder. Based
upon written representations made by each of the purchasers, the Registrant
believes that all were Accredited Investors as that term is defined in Rule
501 of Regulation D. Broker/dealers were involved in the sale of $847,500 of
the Series B Preferred Stock and approximately $84,750 were paid in commissions.
All purchasers represented that they purchased the securities for investment,
and all certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by certificates may not be sold,
transferred, pledged or hypothecated without having first been registered or
the availability of an exemption from registration established. Stop transfer
instructions have been placed against the transfer of these certificates by the
Registrant's Transfer Agent.
Series B Preferred Stock is designated as redeemable ten (10%) percent
cumulative non-voting preferred stock with $.001 par value and convertible on a
1 for 1 basis into Common Stock. At the Company's election, annual dividends
may be paid in cash and/or in Shares of the Company's Common Stock, at the rate
of one share of Common Stock for each $5.00 in accrued dividends. All issued
and outstanding Preferred Stock shall be redeemed in full on or before July 15,
2003 ("Expiration Date"). The Company reserves the right to redeem, in whole or
in part based on a pro rata basis with other holders of the Preferred Stock, the
outstanding Preferred Stock upon 30 days' notice at $5.00 per share plus
accrued and unpaid dividends to the redemption date from the date of issuance
up to the Expiration Date. Notwithstanding the foregoing, in the event that
the Company redeems the Preferred Stock within one year from date of issuance,
the redemption price shall be $6.00 per share plus accrued and unpaid dividends
to the redemption date; provided, however, if the Company redeems such Preferred
Stock within six months from date of issuance, the Preferred Shareholder shall
receive a dividend equivalent to one-half of the annual accrued dividend amount.
-18-
<PAGE>
July 1998 Private Placement of Series B Preferred Stock
-------------------------------------------------------
Name No. of Shares of Consideration
- ---- ---------------- -------------
Series B Preferred Stock Received
------------------------ --------
Brian P. Bertelsen 5,000 $ 25,000
Cardiovascular Associates P.C.
Profit Sharing Plan FBO Lester
Lockspeiser M. D. 5,000 25,000
CKC Partners 5,000 25,000
Brett Conrad 5,000 25,000
Russell L. Davis 10,000 50,000
Gladys F. Decker Trust No. 1 5,000 25,000
Paul Ernst 15,000 75,000
Heather M. Evans 2,000 10,000
Thomas A. Forti 5,000 25,000
David L. Gertz 5,000 25,000
Abdallah E. Ghusn 5,000 25,000
Growth Ventures, Inc. Pension
Plan & Trust 10,000 50,000
George Guerrieri 5,000 25,000
Deloras Decker Hunter
Generation Skipping Trust 5,000 25,000
Interstate/Lane Johnson
F/B/O Kenton R. Holden 5,000 25,000
Inverness Investments Profit
Sharing Plan 5,000 25,000
J. Paul Consulting Corp. 10,000 50,000
Joseph E. Kovarik 5,000 25,000
Samantha Landy 4,000 20,000
Arthur M. Lavenue 5,000 25,000
Myron A. Leon 2,500 12,500
-19-
<PAGE>
Name No. of Shares of Consideration
- ---- ---------------- -------------
Series B Preferred Stock Received
------------------------ --------
Macy Family Trust 20,000 100,000
Jeffrey S. Maen and
Leonard L. Maen 2,500 12,500
B. Edwin Massey 2,500 12,500
Sharon M. McDonald 15,000 75,000
David N. and Arianne B. Nemelka 5,000 25,000
Pete Perlman 2,000 10,000
Douglas L. Ray 5,000 25,000
Dan Rudden 5,000 25,000
Donald H. Schroeder 5,000 25,000
Ralph Tash Trust DTD 5/28/71 20,000 100,000
James W. Toot 25,000 125,000
Richard F. And Barbara A. Van
Dresser, TTEES of the Living
Trust DTD 5-5-92 5,000 25,000
Stephen H. West 5,000 25,000
Danny Yu Defined Benefit
Pension Plan 5,000 25,000
------- ----------
TOTAL 245,500 $1,227,500
======= ==========
In September 1998, the Company granted to each director options to purchase
up to 60,000 shares of the Company's Common Stock (an aggregate of 300,000
shares), exercisable at $3.00 per share, which 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. The issuance of the option to each
director was made in reliance upon the exemption from registration provided
by Section 4(2) of the 1933 Act. No broker/dealers were involved in the sale
and no commissions were paid. Each director represented that he acquired the
option for investment and not with a view to distribution.
ITEM 5. OTHER INFORMATION.
Dewey H. Crim, a Director of the Company, replaced Higgins D. Bailey as
Chief Executive Officer effective September 11, 1998. Mr. Bailey remains as the
Company's Chairman of the Board of Directors.
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 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 August 28, 1998.
-21-
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENTROPIN, INC.
Date: November 6, 1998 By: \s\ Higgins D. Bailey
--------------------------------
Higgins D. Bailey
Chairman of the Board of Directors
Date: November 6, 1998 By: \s\ Wellington A. Ewen
--------------------------------
Wellington A. Ewen
Chief Financial Officer
-22-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FORM 10-Q.
</LEGEND>
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<PERIOD-START> JAN-01-1998
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