SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A-1
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15 (d) of the Securities Exchange Act of 1934
during the preceding 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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
The number of shares outstanding of the issuer's common stock, as of May 14,
1998 is 6,000,051 shares $.001 par value.
<PAGE>
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial statements:
Balance Sheet - December 31, 1997 and March 31, 1998 (unaudited 2
Statement of Operations - For the Three Months Ended March 31,
1997 and 1998 and Cumulative Amounts from Inception (August 27,
1984) Through March 31, 1998 (unaudited) 3
Statement of Stockholders' Equity - For the Three Months Ended
March 31, 1998 (unaudited) 4
Statement of Cash Flows - For the Three Months Ended March 31,
1997 and 1998 and Cumulative Amounts from Inception (August 27,
1984) Through March 31, 1998 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis or Results of Operations 12
PART II. OTHER INFORMATION 13
- -------- ----------------- --
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
March 31, 1998
ASSETS
------
1997 1998
---- ----
<S> <C> <C>
Current assets:
Cash $ 291 $ 538,506
Accounts receivable - stockholder 5,000 5,000
---------- ----------
Total current assets 5,291 543,506
Deferred stock offering costs (Note 5) 10,746 -
Patent costs, less accumulated amortization of
$40,300 (1997) and $44,800 (1998) 266,456 261,956
---------- ----------
$ 282,493 $ 805,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 329,813 $ 31,567
Advances - stockholders (Note 2) 98,873 -
---------- ----------
Total current liabilities 428,686 31,567
Long-term debt:
Stockholders (Note 4) 1,710,487 -
Deferred royalty agreement (Note 7) 155,495 159,067
Compensation agreement (Note 4) 1,500,000 -
---------- ----------
Total long-term debt 3,365,982 159,067
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
Stockholders' equity (deficit) (Note 5):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A 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 1,043,780 2,061,210
Deficit accumulated during the development stage (4,561,175) (4,662,869)
---------- ----------
Total stockholders' equity (deficit) (3,512,175) (2,595,659)
---------- ----------
$ 282,493 $ 805,462
========== ==========
</TABLE>
See accompanying notes.
-2-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997 and 1998
and for the Period from August 27, 1984 (inception) to March 31, 1998
(Unaudited)
Cumulative
amounts from
1997 1998 inception
---- ---- ------------
Costs and expenses:
Research and development $ 37,843 $ 3,772 $ 3,756,626
General and administrative 6,598 95,372 606,627
Rent - related party (Note 2) - 2,080 2,080
Depreciation and amortization 3,862 4,500 61,868
--------- --------- -----------
Operating loss (48,305) (105,724) (4,427,201)
Other income (expense):
Interest income - 4,509 4,509
Interest expense (36,579) (479) (240,177)
--------- --------- -----------
Total other income (expense) (36,579) 4,030 (235,668)
--------- --------- -----------
Net loss $ (84,884) $(101,694) $(4,662,869)
========= ========= ===========
Basic loss per common share $ (.02) $ (.02) $ (.89)
========= ========= ===========
Weighted average common shares
outstanding (Note 6) 5,220,000 5,870,000 5,232,000
========= ========= ===========
See accompanying notes.
-3-
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months Ended March 31, 1998 March 31, 1998
Deficit
accumulated
Common Stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
------ ------ ---------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997 5,220,000 $5,220 $1,043,780 $(4,561,175)
Sale of common stock for cash ($2.75 per share) 300,000 300 797,810 -
(Note 5)
Issuance of common stock pursuant to recapitalization
(Note 5) 480,051 480 219,620 -
Net loss for the three months ended March 31, 1998 - - - (101,694)
--------- ------ ---------- -----------
Balance, March 31, 1998 6,000,051 $6,000 $2,061,210 $(4,662,869)
========= ====== ========== ===========
</TABLE>
See accompanying notes.
-4-
<PAGE>
<TABLE>
<CAPTION>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1998 and for the
Period from August 27, 1984 (inception) to March 31, 1998
(Unaudited)
Cumulative
amounts
from
1997 1998 inception
---- ---- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(84,884) $(101,694) $(4,662,869)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,862 4,500 61,868
IBC partner royalty agreement 4,763 3,572 159,067
Services contributed in exchange
for stock - - 694,000
Services contributed in exchange for
compensation agreements 23,333 - 2,231,678
Increase in accounts receivable -
shareholder - - (5,000)
Increase (decease) in accounts payable 3,761 (298,246) 31,567
Increase in accrued interest 32,188 - 169,139
Other - - 131
-------- --------- -----------
Total adjustments 67,907 (290,174) 3,342,450
-------- --------- -----------
Net cash used in operations (16,977) (391,868) (1,320,419)
Cash flows from investing activities:
Purchase of equipment - - (17,207)
Patent costs - - (306,756)
-------- --------- -----------
Net cash used in investing activities - - (323,963)
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
Outstanding checks in excess of
bank balance 3,300 - -
Proceeds from stockholder loans - - 809,678
Proceeds from (payments on) stockholder
advances 12,000 (98,873) -
-------- --------- -----------
Net cash provided by financing
activities 15,300 930,083 2,182,888
-------- --------- -----------
Net increase (decrease) in cash (1,677) 538,215 538,506
Cash at beginning of period 1,677 291 -
-------- --------- -----------
Cash at end of period $ - $ 538,506 $ 538,506
======== ========= ===========
</TABLE>
See accompanying notes.
-5-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 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 ended March 31, 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 a
stockholders' deficit at March 31, 1998 of $4,662,869. 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.
-6-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 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. However, the
Company estimates it will require additional funding of up to $8,000,000
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.
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 the 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.
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.
-7-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
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.
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.
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.
-8-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
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 the $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.
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 $2.00 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 $360,000. 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 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.
-9-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
6. Loss per share
--------------
Basic net loss per 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
Estrom(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 March 31, 1998 , no liabilities have been
accrued with respect to this agreement.
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 March 31, 1998, the total liability accrued with respect to this
agreement totaled $155,495 and $159,067, respectively.
-10-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
7. Commitments (continued)
-----------------------
Development and Supply Agreement:
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 will be 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.
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, as
well as grant stock options to WCCS within thirty days after execution of
the agreement to purchase 450,000 shares of Entropin common stock. The
options will have a term of five years from the grant date and an exercise
price of $1.50. The options will be exercisable in varying amounts on dates
ranging from August 1998 to December 2000.
-11-
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
7. Commitments (continued)
-----------------------
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, will be recorded as additional
paid-in capital and unearned stock compensation. The unearned stock
compensation will be amortized to expense on a straight-line basis over the
33 month term of the agreement.
8. Subsequent event
----------------
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.
-12-
<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 for the period from August 27, 1984 (inception)
through March 31, 1998. Entropin has devoted substantially all its
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 12 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 has successfully completed a private placement
and a reverse acquisition accounted for as a recapitalization of the
Company that will provide additional liquidity for the Company for current
operations. The Company estimates, however, that an additional private
placement of $2,000,000 in equity or debt securities may be required during
1998, as well as 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 will be
required to pay management fees of approximately $880,400 over the term of
the agreement, as well as provide 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 March 31, 1998, Entropin incurred a loss of
$101,694, as compared to a loss of $84,884 for the three months ended March
31, 1997. The increase resulted primarily from an increase of $90,854 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
$36,100 as a result of conversion of notes payable to redeemable preferred
stock on January 15, 1998. Research and development costs also decreased by
$34,073 due to the Company concentrating it's efforts on negotiations with
WCCS and the recapitalization during the first quarter of 1998.
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.
-13-
<PAGE>
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, non-cumulative 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.
-14-
<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.
(a) On January 15, 1998, the security holders of the Company voted on
and approved an amendment to the Company's Articles of Incorporation to effect a
1-for-300 reverse stock split whereby each 300 currently authorized and
outstanding shares of the Company's $.0001 par value Common Stock (the "Old
Common Stock") was exchanged and converted into one share of $.001 par value
Common Stock (the "New Common Stock"). The amendments to the Company's Articles
of Incorporation were approved by a majority of the outstanding shares of Common
Stock at a meeting of all of the Company's shareholders held on January 15,
1998, pursuant to applicable provisions of the Colorado Business Corporation
Act.
(c) During the past three years, the Registrant or Old Entropin issued
its securities to the following persons for the cash or other consideration
indicated in transactions that were not registered under the 1933 Act.
I.
January 1998 Private Placement (Old Entropin)
---------------------------------------------
No. of Shares of
Name Common Stock Consideration Received
- ---- ---------------- ---------------------
Suzanne Oliphant 10,000 $27,500
Albert W. White 10,000 $27,500
Stephen H. West 20,000 $55,000
C. Richard Harrison 10,000 $27,500
Jeanette Y. Mihaly 20,000 $55,000
Joy Ann Svenson 10,000 $27,500
Richard L. Monfort 180,000 $495,000
David T. Treadwell 10,000 $27,500
-15-
<PAGE>
No. of Shares of
Name Common Stock Consideration Received
- ---- ---------------- ----------------------
David Bressler 5,000 $13,750
Gerald Olesh 10,000 $27,500
Arthur Kassoff 10,000 $27,500
Armond A. Azharian 5,000 $13,750
------- --------
Total 300,000 $825,000
======= ========
The offers and sales set forth in I above 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. All of the purchasers are known by
Old Entropin's (now the Registrant's) president, Higgins D. Bailey, or were
referred to him by other purchasers in this offering. Based upon the written
representations made by the purchasers and other information known to the
Registrant, the Registrant believes all of the purchasers were accredited
investors as that term is defined in Rule 501 of Regulation D. No broker/dealers
were involved in the sale and no commissions were paid. 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.
II.
In November 1997, Old Entropin issued an 8% note in the principal
amount of $1,500,000 maturing December 31, 2000 payable to James E. Wynn as
compensation for research and development services provided since the inception
of the Company. In January 1998, Old Entropin converted this obligation to
1,500,000 shares of its redeemable 8% non-voting, non-cumulative Series A
preferred stock, at $1.00 per share. The issuance of the promissory note and the
subsequent conversion into shares of Series A preferred stock were made in
reliance upon the exemption from registration provided by Section 4(2) of the
Act. The purchaser represented that he acquired the securities for investment,
and all certificates issued to the purchaser 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.
-16-
<PAGE>
III.
Debt/Equity Exchange (Old Entropin)
-----------------------------------
No. of Shares of Series
Name A Preferred Stock Consideration Received
---- ----------------------- ----------------------
Higgins D. Bailey 178,000 $ 178,000
Lowell M. Somers 822,446 $ 822,446
Thomas T. Anderson Trust 710,041 $ 710,041
--------- ----------
Total 1,710,487 $1,710,487
========= ==========
Old Entropin had accrued $1,710,487, including interest, in long-term
debt owed to the abovementioned stockholders at December 31, 1996 and 1997. On
January 15, 1998, Old Entropin converted all of such long-term debt plus accrued
interest to 1,710,487 shares of Old Entropin's redeemable 8% non-voting,
non-cumulative Series A Preferred Stock at $1 per share, for a total of
$1,710,487. The issuance of the shares of Series A preferred stock was made in
reliance upon the exemption from registration provided by Section 4(2) of the
Act. The purchasers represented that they acquired 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.
IV.
In December, 1997, Old Entropin entered into an agreement with LMU &
Company ("LMU"). As partial consideration for LMU's services under the
agreement, Old Entropin issued an option to purchase 180,001 shares of Old
Entropin's common stock, exercisable for cash of $100. The issuance of the
option to LMU was made in reliance upon the exemption from registration provided
by Section 4(2) of the Act. No broker/dealers were involved in the sale and no
commissions were paid. LMU represented that LMU acquired the option for
investment and not with a view to distribution. LMU exercised its option in
January 1998. Stop transfer instructions have been placed against the transfer
of these certificates by the Registrant's transfer agent.
V.
January 1998 Vanden-Old Entropin Merger
---------------------------------------
On January 15, 1998, in order to consummate the Agreement and Plan of
Merger with Entropin, Inc., a California corporation ("Old Entropin"), the
Registrant issued 5,700,001 shares of its Common Stock, $.001 par value per
-17-
<PAGE>
share, and 3,210,487 shares of the Company's redeemable 8% non-voting,
non-cumulative Preferred Stock, $.001 par value per share, in exchange for all
of the issued and outstanding shares of Common Stock and Preferred Stock of Old
Entropin on a one-for-one basis, as follows:
<TABLE>
<CAPTION>
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Caroline T. Somers 1,145,793 1,145,793
Higgins D. & Shirley A. Bailey 1,404,093 1,404,093
Higgins D. Bailey, Pledge 1,404,093 1,404,093
Higgins D. Bailey 178,000 178,000
Chandler G. Brown 257,085 257,085
CapMac Eighty-Two LP 73,130 73,130
Milton D. McKenzie, Trustee for
The Milton D. McKenzie
Revocable Trust 102,834 102,834
Milton D. McKenzie 52,632 52,632
James E. Wynn 518,085 1,500,000 518,085 1,500,000
CKC Partners 78,300 78,300
Danny and Nancy Yu 10,000 10,000
Brent and Marlene Jackson 50,000 50,000
William J. Currin 10,000 10,000
Jacquelyn D. Anderson Baker 5,455 5,455
Interstate Johnson Lane Corp. 10,000 10,000
Dennis K. Metzler 5,000 5,000
Jerry L. And Nancy Sands 1,000 1,000
The Macy Family Trust 10,000 10,000
Dewey H. And Virginia Crim 20,000 20,000
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
James W. Toot 7,500 7,500
Robert L. Simpson 5,000 5,000
Gladys F. Decker & Deloras D.
Hunter, Trustees for Gladys F.
Decker Trust No. 1 20,000 20,000
Donald Hunter, Trustee of the
Donald Hunter Residuary Marital
Trust 80,000 80,000
Deloras Decker Hunter, Trustee
of the Deloras Decker Hunter
Generation Skipping Trust 10,000 10,000
Lowell M. Somers 822,446 822,446
Thomas T. Anderson Trust 710,041 710,041
The Underwood Family Partners 60,001 60,001
Steven C. & Lynn T. Quoy 60,000 60,000
Suzanne Oliphant 10,000 10,000
Albert W. White 10,000 10,000
Stephen H. West 20,000 20,000
C. Richard Harrison 10,000 10,000
Jeanette Y. Mihaly 20,000 20,000
Joy Ann Svenson 10,000 10,000
Richard L. Monfort 180,000 180,000
David T. Treadwell 10,000 10,000
David Bressler 5,000 5,000
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Series A Series A
Name Common Preferred Common Preferred
- ---- ------ --------- ------ ---------
<S> <C> <C> <C> <C>
Gerald Olesh 10,000 10,000
Arthur Kassoff 10,000 10,000
Armond A. Azharian 5,000 5,000
--------- --------- --------- ---------
TOTAL 5,700,001 3,210,487 5,700,001 3,210,487
========= ========= ========= =========
</TABLE>
The exchange of Old Entropin shares for shares of the Registrant was
effected under the exemption from registration provided under Section 4(2) of
the Act and Rule 506 of Regulation D promulgated thereunder, for transactions
not involving a public offering. Based upon the written representations made by
the investors and other information known to the Registrant, the Registrant
believes all of the investors were accredited investors as that term is defined
in Rule 501 of Regulation D. All investors represented that they purchased the
securities for investment, and all certificates issued to the investors 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. No broker/dealers were involved with the exchange, and
no commissions were paid. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's transfer agent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of the Company's shareholders was held on January 15,
1998. The following matters were submitted to and approved by the Company's
shareholders:
1. A proposal to approve the acquisition (the "Entropin Acquisition")
by the Company of all of the outstanding shares of Entropin, Inc., a California
corporation ("Entropin"), for shares of the Company's New Common Stock, and
shares of the Company's Preferred Stock, $.001 par value per share, pursuant to
which: (1) the shareholders of Entropin acquired control of the Company (by
ownership of approximately 95% of the outstanding voting shares of the Company
following completion of the Entropin Acquisition); and (2) the Company become
engaged in the pharmaceutical research business and commercially developing a
patented medicinal preparation known as Esterom(R), which was the current
business of Entropin.
-20-
<PAGE>
<TABLE>
<CAPTION>
% of % of % of
shares shares shares
For outstanding Against outstanding Abstain outstanding
--- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
57,068,400 63.4% 167,000 Less than 1% 45,000 Less than 1%
</TABLE>
2. A proposal to approve an amendment to Article III of the Company's
Articles of Incorporation to effect a 1-for-300 reverse stock split whereby each
300 currently authorized and outstanding shares of the Company's $.0001 par
value Common Stock were exchanged and converted into one share of $.001 par
value Common Stock.
<TABLE>
<CAPTION>
% of % of % of
shares shares shares
For outstanding Against outstanding Abstain outstanding
--- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
56,277,700 62.5% 757,000 Less than 1% 245,700 Less than 1%
</TABLE>
3. A proposal to approve an amendment to Article III of the Company's
Articles of Incorporation to fix the number of authorized shares of capital
stock of the Company at a total of 60,000,000 shares, 50,000,000 of which shall
be designated as Common Stock and 10,000,000 of which shall be designated as
Preferred Stock.
<TABLE>
<CAPTION>
% of % of % of
shares shares shares
For outstanding Against outstanding Abstain outstanding
--- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
56,192,700 62.4% 267,000 Less than 1% 820,700 Less than 1%
</TABLE>
4. A proposal to approve an Amendment to Article I of the Company's
Articles of Incorporation to change the Company's name to Entropin, Inc.
<TABLE>
<CAPTION>
% of % of % of
shares shares shares
For outstanding Against outstanding Abstain outstanding
--- ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
56,968,400 63.3% 167,000 Less than 1% 145,000 Less than 1%
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
-21-
<PAGE>
(b) Reports on Form 8-K
(1) Form 8-K, dated January 15, 1998, as amended,
reporting the change of control pursuant to Item 1,
and consummation of the acquisition of all of the
issued and outstanding shares of Entropin, Inc. by
the Company pursuant to 2 thereof.
(2) Form 8-K, dated January 22, 1998, reporting
developments in the Company's business under Item 5
thereof.
(3) Form 8-K, dated February 25, 1998, reporting
developments in the Company's business under Item 5
thereof.
(4) Form 8-K, dated March 25, 1998, reporting Changes in
Registrant's Certifying Accountants under Item 4, and
reporting change of the Company' fiscal year under
Item 8.
-22-
<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: June 30, 1998 By: /s/ Higgins D. Bailey
---------------------------------------
Higgins D. Bailey
Chairman of the Board of Directors
Date: June 30, !998 By: /s/ Wellington A. Ewen
---------------------------------------
Wellington A. Ewen
Chief Financial Officer
-21-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 538,506
<SECURITIES> 0
<RECEIVABLES> 5,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 543,506
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 805,462
<CURRENT-LIABILITIES> 31,567
<BONDS> 0
3,210,487
0
<COMMON> 6,000
<OTHER-SE> (2,601,659)
<TOTAL-LIABILITY-AND-EQUITY> 805,462
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 105,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 479
<INCOME-PRETAX> (101,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (101,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (101,694)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
