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 June 30, 1999
--------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 33-23693
----------------------------
ENTROPIN, INC.
- -------------------------------------------------------------------------
(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, CA 92201
- -------------------------------------------------------------------------
(Address of principal executive offices)
(760) 775-8333
- -------------------------------------------------------------------------
(Issuer'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 9, 1999, 6,950,872 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
-----
PART 1. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Item 1. Financial Statements: 2
Balance Sheet - December 31, 1998 and June 30, 1999 (unaudited) 2
Statement of Operations - For the Three Months Ended June 30,
1998 and 1999 (unaudited) 4
Statement of Operations - For the Six Months Ended June 30, 1998
and 1999 and Cumulative Amounts from Inception (August 27, 1984)
Through June 30, 1999 (unaudited) 5
Statement of Stockholders' Equity - For the Six Months Ended June
30, 1999 (unaudited) 6
Statement of Cash Flows - For the Six Months Ended June 30, 1998
and 1999 and Cumulative Amounts from Inception (August 27, 1984)
Through June 30, 1999 (unaudited) 7
Notes to Unaudited Financial Statements 9
Item 2. Management's Discussion and Analysis or Plan of Operations 23
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and June 30, 1999
(Unaudited)
ASSETS
1998 1999
---- ----
Current assets:
Cash and cash equivalents $445,333 $2,127,908
Advances - related party - 59,792
-------- ----------
Total current assets 445,333 2,187,700
Property and equipment, at cost:
Leasehold improvements 72,187 72,187
Office furniture and equipment 15,518 21,150
-------- ----------
87,705 93,337
Less accumulated depreciation (5,006) (13,894)
-------- ----------
Net property and equipment 82,699 79,443
Other assets:
Deposits 12,261 12,261
Deferred stock offering costs (Notes 4 and 8) - 30,436
Patent costs, less accumulated amortization of
$59,600 (1998) and $70,505 (1999) 295,316 309,528
-------- ----------
Total other assets 307,577 352,225
-------- ----------
$835,609 $2,619,368
======== ==========
See accompanying notes.
2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and June 30, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1999
---- ----
Current liabilities:
Accounts payable $ 59,141 $ 461,270
Advances - related party 11,314 -
-------- ---------
Total current liabilities 70,455 461,270
Deferred royalty agreement (Note 6) 169,783 176,927
Commitments and contingencies (Note 6)
Series A redeemable preferred stock, $.001 par
value, 3,210,487 shares authorized, issued and
outstanding (Note 3) 3,210,487 3,210,487
Series B redeemable convertible preferred stock,
$.001 par value, 400,000 shares authorized,
245,500 shares issued and outstanding (Note 3) 1,142,750 1,142,750
Stockholders' equity (deficit) (Note 4):
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, 6,000,051 (1998) and 6,914,322 (1999)
shares issued and outstanding 6,000 6,915
Additional paid-in capital 7,474,210 10,190,317
Deficit accumulated during the development stage (7,578,802) (9,996,108)
Unearned stock compensation (Note 6) (3,659,274) (2,573,190)
----------- -----------
Total stockholders' equity (deficit) (3,757,866) (2,372,066)
----------- -----------
$ 835,609 $2,619,368
========== ==========
See accompanying notes.
3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 1998 and 1999
(Unaudited)
1998 1999
---- ----
Costs and expenses:
Research and development (Note 4) $ 250,456 $ 376,219
General and administrative (Note 4) 344,387 955,536
Rent - related party 3,120 1,200
Depreciation and amortization 5,017 10,090
--------- ---------
Operating loss (602,980) (1,343,045)
--------- ----------
Other income (expense):
Interest income 4,292 10,526
Interest expense (458) (1,662)
--------- ----------
Total other income (expense) 3,834 8,864
--------- ----------
Net loss (Note 2) (599,146) (1,334,181)
Accrued dividends applicable to Series
B preferred stock (Note 3) - (30,688)
--------- ----------
Net loss applicable to common
shareholders $(599,146) $(1,364,869)
========= ===========
Basic and diluted net loss per common share $ (.10) $ (.20)
========= ===========
Weighted average common shares
outstanding, basic and diluted (Note 5) 6,000,000 6,713,000
========= =========
See accompanying notes.
4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998 and 1999 and for the
Period from August 27, 1984 (inception) to June 30, 1999
(Unaudited)
Cumulative
amounts from
1998 1999 inception
---- ---- ---------
Costs and expenses:
Research and development (Note 4) $ 254,228 $ 694,331 $ 5,547,904
General and administrative (Note 4) 439,759 1,713,651 4,128,481
Rent - related party 5,200 1,200 13,514
Depreciation and amortization 9,517 19,793 101,467
--------- ---------- -----------
Operating loss (708,704) (2,428,975) (9,791,366)
--------- ---------- -----------
Other income (expense):
Interest income 8,801 13,331 38,069
Interest expense (937) (1,662) (242,811)
--------- ---------- -----------
Total other income (expense) 7,864 11,669 (204,742)
--------- ---------- -----------
Net loss (Note 2) (700,840) (2,417,306) (9,996,108)
Accrued dividends applicable to Series
B preferred stock (Note 3) - (61,376) (117,636)
--------- ------------ ---------
Net loss applicable to common
shareholders $(700,840) $(2,478,682) $(10,113,744)
========= =========== ============
Basic and diluted net loss per common
share $ (.12) $ (.39) $ (1.91)
========= =========== ============
Weighted average common shares
outstanding, basic and diluted
(Note 5) 5,935,000 6,359,000 5,308,000
========= =========== ============
See accompanying notes.
5
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Six Months Ended June 30, 1999
(Unaudited)
<CAPTION>
Deficit
accumulated
Additional during the Unearned
Common stock paid-in development stock
Shares Amount capital stage compensation
------ ------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 6,000,051 $ 6,000 $ 7,474,210 $ (7,578,802)$ (3,659,274)
Unearned stock compensation pursuant to issuance
of common stock options (Note 4) - - 668,000 - (668,000)
Amortization of unearned stock compensation (Note 4) - - (196,500) - 1,754,084
Issuance of common stock pursuant to private
placements (Note 4) 802,250 803 1,997,014 - -
Conversion of promissory notes to common stock
(Note 4) 100,831 101 201,561 - -
Shares issued from exercise of options (Note 4) 8,000 8 31,992 - -
Shares issued for services (Note 4) 3,190 3 14,040 - -
Net loss for the six months ended June 30, 1999 - - - (2,417,306) -
--------- ------- ----------- ----------- -----------
Balance, June 30, 1999 6,914,322 $ 6,915 $10,190,317 $(9,996,108) $(2,573,190)
========== ======= =========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1999 and for the
Period from August 27, 1984 (inception) to June 30, 1999
(Unaudited)
Cumulative
amounts from
1998 1999 inception
---- ---- ----------
Cash flows from operating activities:
Net loss $ (700,840)$(2,417,306)$ (9,996,108)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 9,517 19,793 101,467
IBC partner royalty agreement 7,144 7,144 176,927
Services contributed in exchange
for stock or stock options 146,137 1,571,627 4,019,353
Services contributed in exchange for
compensation agreements - - 2,231,678
Increase (decrease) in advances -
related party 5,000 (71,106) (59,792)
Increase (decrease) in accounts payable (225,220) 402,129 461,270
Increase in accrued interest - - 169,139
Other - 1,662 1,793
-------- --------- ---------
Total adjustments (57,422) 1,931,249 7,101,835
-------- --------- ---------
Net cash used in operations (758,262) (486,057) (2,894,273)
Cash flows from investing activities:
Purchase of property and equipment (4,227) (5,632) (110,544)
Patent costs (16,910) (25,117) (380,033)
Deposits (12,260) - (12,261)
--------- --------- ---------
Net cash used in investing activities (33,397) (30,749) (502,838)
Cash flows from financing activities:
Proceeds from recapitalization 220,100 - 220,100
Deferred stock offering costs 10,746 (30,436) (30,436)
Proceeds from sale of common stock, net 798,110 1,997,817 3,150,927
Proceeds from exercise of stock options - 32,000 32,000
Proceeds from sale of preferred stock - - 1,142,750
Proceeds from stockholder loans - - 809,678
Repayments of stockholder advances (98,873) - -
Proceeds from convertible notes payable - 200,000 200,000
--------- --------- ---------
Net cash provided by financing
activities 930,083 2,199,381 5,525,019
--------- --------- ---------
Net increase in cash 138,424 1,682,575 2,127,908
Cash and cash equivalents at beginning of
period 291 445,333 -
--------- --------- ---------
Cash and cash equivalents at end of period $ 138,715 $2,127,908 $2,127,908
========= ========== ==========
(Continued on following page)
See accompanying notes.
7
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1999 and for the
Period from August 27, 1984 (inception) to June 30, 1999
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended June 30, 1999, the Company converted notes
payable agreements with outstanding principal and interest balances
totaling $201,662 into 100,831 shares of common stock.
During the six months ended June 30, 1999, the Company issued 3,190 shares of
common stock for services totaling $14,043.
See accompanying notes.
8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
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,
1999 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, 1998 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, 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 4). 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, 1999 of $9,996,108. 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.
9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
1. Organization and summary of significant accounting policies(continued)
As described in Note 4, the Company has successfully completed a private
placement and a recapitalization of the Company. The Company also sold
private offerings of 245,500 shares of Series B convertible preferred stock
for gross proceeds of $1,227,500 (Note 3), $200,000 of convertible notes
payable, and 802,250 shares of common stock for gross proceeds of $2,214,000
(Note 4), which offerings provide liquidity to the Company for current
operations. However, the Company estimates it will require additional funding
of up to $11,000,000 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.
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.
Property and equipment:
Office furniture and 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.
Leasehold improvements are recorded at cost and amortized over the five-year
term of the lease.
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 16 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.
10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
1. Organization and summary of significant accounting policies (continued)
Esterom(R) is protected by a U.S. Composition Patent granted December 27,
1994 which includes safeguarding the discovery of three new molecules. The
Company's patents include the following: Patent #5,763,456 granted June 9,
1998 with the Company as Assignee; Patent #5,663,345 granted September 2,
1997 with the Company as Assignee; Patent #5,559,123 granted September 24,
1996 with the Company as Assignee; Patent #5,525,613 granted June 11, 1996
with the Company as Assignee; and Patent #5,376,667 granted December 27, 1994
with the Company as Assignee. In addition, Dr. Lowell M. Somers obtained the
following initial patents which he subsequently assigned to the Company in
September 1992; #4,512,996 granted April 1985; patent #4,469,700 granted
September 1984; and Patent #4,556,663 granted December 1985. Although the
Company has obtained approval of Patent Application #5,556,663, the Patent
has not yet been issued.
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.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to June 30, 1999, in
connection with the proposed offering of common stock (see Notes 4 and 8). In
the event that such offering is successful, costs incurred as of June 30,
1999, and additional costs incurred subsequent to the date will be charged
against the proceeds of the offering; if the offering is not successful, the
costs will be charged to operations.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash and cash equivalents. The Company
places its cash with high quality financial institutions. At times during the
periods, the balances at financial institutions may exceed FDIC limits.
11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
1. Organization and summary of significant accounting policies (continued)
Stock-based compensation:
The Company has adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
Compensation costs for stock options is measured as the excess, if
any, of the fair value of the options at date of grant over the
exercise price.
2. Income taxes
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998 (see Note 4), 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.
At June 30, 1999, the Company has net operating loss carryforwards of
approximately $2,230,000 and future tax deductions of $5,560,000 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
carryforwards expire in 2018 and 2019. Approximately $250,000 of the net
operating loss carryforward is limited as to the amount which may be used in
any one year. At June 30, 1999, total deferred tax assets and valuation
allowance are as follows:
Deferred tax assets resulting from:
Net operating loss carryforwards $ 780,000
Accrual to cash adjustments 875,000
Unearned stock compensation 1,070,000
---------
Total 2,725,000
Less valuation allowance (2,725,000)
----------
$ -
==========
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.
12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
3. Redeemable preferred stock
In December 1997, the Board of Directors approved an amendment to the
Articles of Incorporation to authorize 10,000,000 shares of $.001 par value
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.
The Series A preferred stock is subject to mandatory redemption. The funds
available for redemption will be equal to more than 20% but less than 50% of
annual earnings, as determined annually by the Board of Directors, but not
exceeding cash flow from operations and will automatically cancel on January
16, 2005, if not fully redeemed. The Company may voluntarily redeem
outstanding shares of preferred stock at $1 per share.
In July 1998, the Company completed a private placement of 245,500 shares of
Series B preferred stock at $5.00 per share, for total net proceeds of
$1,142,750. The Series B preferred stock is designated as redeemable 10%
cumulative non-voting convertible preferred stock with $.001 par value. The
shares are convertible on a one for one basis into common stock. The
dividends will accrue at the rate of $.50 per share per annum and will be
paid annually commencing July 15, 1999. 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. None of the Series B preferred shares have been
converted as of June 30, 1999. All unconverted shares will be redeemed on or
before July 15, 2003.
4. 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.
13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
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 options to purchase 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.
Private placements:
In January 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.
In April 1999, the Company completed a private placement of 497,500 shares of
its $.001 par value common stock for gross proceeds of $995,000, $2.00 per
share.
In June 1999, the Company sold 304,750 shares of common stock for gross
proceeds of $1,219,000 ($4.00 per share) in a private placement.
Proposed public offering and private placement:
In June 1999, the Company entered into a letter of intent with an underwriter
to conduct a public offering of shares of common stock with gross proceeds of
approximately $7,500,000 to $9,000,000. The per share price will be
determined by mutual agreement between the Company and underwriter. On July
1, 1999, the underwriter commenced a private placement of 500,000 shares (at
$4.00 per share) of the Company's $.001 par value common stock in order to
raise additional capital of up to $2,000,000.
14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
Other issuances of common stock:
On March 24, 1999, the Company received cash proceeds aggregating $200,000
pursuant to eight 10% convertible note payable agreements with various
unrelated individuals and entities. Each note was unsecured, and due the
earlier of 90 days from the date of issue or upon the receipt by the Company
of certain proceeds from a private offering of its securities. Each note
agreement also provided a warrant granting the holder the right to purchase
three and one half restricted shares of the Company's common stock for each
dollar of principal received by the Company, for an aggregate of 700,000
shares. The warrants have certain registration rights, an exercise price of
$3.00 per share and are exercisable for five years from the date the shares
become freely tradable. To the extent that the shares underlying the warrants
are not registered within two years of grant date, the holders have the right
to exercise the warrants on a cashless basis for a period of five years. On
April 20, 1999, The Company amended its 10% convertible promissory note
agreements to allow the note holders to convert their promissory notes to
shares of common stock at $2.00 per share. Upon issuing the amendment, all
note holders converted their promissory notes, including accrued interest, to
common stock resulting in new issuances of common stock totaling 100,831
shares. None of the proceeds received upon issuance of the notes payable were
allocated to the warrants. The net effect of allocating proceeds to the
warrants would be an increase and corresponding equal decrease in additional
paid-in capital.
On June 30, 1999, the Company issued 3,190 shares of common stock to a
professional corporation for services totaling $14,043 ($4.40 per share).
Stock options and warrants:
On August 4, 1998, 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 for ten years at $3.00 per share. Options to purchase
20,000 shares each were fully vested February 1999, and the remaining 40,000
vest on a pro rata basis monthly through February 2001. Should any of the
directors cease to serve on the board of directors, all non-vested options
shall be forfeited. During June 1999, options to purchase 35,000 shares were
canceled.
On September 11, 1998, the board of directors approved a compensation plan
for three officers and directors, to serve on a management team, which
included stock options aggregating 295,000 shares, exercisable for five years
at $4.00 per share. Options to purchase 125,000 shares were fully vested
in December 1998 and January 1999, and the remaining 170,000 vested on a
pro rata basis monthly through June 30, 1999.
15
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
In October 1998, the Company provided a 100,000 share stock option agreement
to an organization, with whom the Company entered into a one year consulting
agreement. The consultant provides investor relations and development
services, and receives compensation of $5,000 per month. 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. During May 1999, the organization exercised options for 8,000 shares of
common stock. On July 17, 1999, the Company also agreed to provide the
organization with an additional cash payment of $10,000, a warrant to
purchase up to an additional 23,500 shares of the Company's common stock, as
well as a finder's fee for all funds received by the Company related to fund
raising activities attributable to the organization. The warrant is
exercisable for five years at $4.00 per share.
On December 15, 1998, the board of directors approved a resolution whereby
the Company granted to a company and an individual two stock options to
purchase up to 17,500 shares of the Company's common stock (35,000 shares in
the aggregate) in exchange for services the Company received during 1998. The
options are exercisable at $4.00 per share for a period of five years and are
fully vested as of the date of the resolution.
On March 11, 1999, the Company provided a 175,000 share stock option
agreement to an organization with whom the Company entered a one year
consulting agreement. The Company may terminate the agreement after six
months. The organization will provide investment community relations
services, and will receive compensation of $3,000 per month. The option is
exercisable at $3.00 per share. The option provides certain registration
rights to the holder, and is exercisable the earlier of January 1, 2000 or
when the shares become registered. The exercise period is five years from the
date the shares become freely tradable. To the extent that the shares
underlying the options are not registered within two years of grant date, the
holders have the right to exercise the options on a cashless basis for a
period of five years.
On March 15, 1999, the Company provided a 300,000 share stock warrant
agreement to an organization, with whom the Company entered into an eight
month consulting agreement. The organization was engaged to raise capital
aggregating $8 million and provide financial advisory services, and will
receive a retainer of $7,000 per month. The warrants were exercisable at
$4.50 per share. On July 26, 1999, the Company terminated this consulting
agreement. As final settlement of this agreement, the organization will
receive $64,084 for fees and expenses earned in conjunction with fund raising
and a warrant to purchase 50,000 shares of the Company's common stock,
exercisable for five years at $4.00 per share. The previous warrants to
purchase 300,000 shares of the Company's common stock were canceled.
16
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
On March 22, 1999, the Company provided a 125,000 share stock option
agreement to a partnership, with whom the Company entered into a six month
consulting agreement. The partnership will provide financial community
relations and debt funding services. The options are exercisable at $3.00 per
share. The options provide certain registration rights to the holder, and are
exercisable the earlier of January 1, 2000 or when the shares become
registered. The exercise period is five years from the date the shares become
freely tradable. To the extent that the shares underlying the options are not
registered within two years of grant date, the holders have the right to
exercise the options on a cashless basis for a period of five years.
On March 31, 1999, the Company provided a 300,000 share stock warrant
agreement to an organization, with whom the Company entered into an eight
month consulting agreement. The organization was engaged to raise capital
aggregating $8 million and provide financial advisory services. The warrants
are exercisable at $3.00 per share, provide certain registration rights, and
vest 100,000 shares as of the date of the agreement, 100,000 shares when the
Company has received $2 million in funding on or about May 15, 1999 and
100,000 shares when the Company has received $4 million in funding on or
about August 31, 1999. The 200,000 shares vesting in May and August are
subject to ratable reductions to the extent that any of the funding is not
attributable to the organization. The term of the warrant will be through
March 22, 2004. As of June 30, 1999, the Company has not received any funding
attributable to the organization and disputes any obligation under the stock
warrant agreement.
In June 1999, the Company provided a 60,000 share stock option agreement to
an individual providing intellectual property assistance and advice related
to the Company's technology and products. The options are exercisable at
$5.00 per share for five years. Options to purchase 20,000 shares vest on
May 1, 2000, with the remaining shares vesting monthly through May 1, 2002.
In June 1999, the Company provided a 20,000 share stock option agreement to
an officer in exchange for services rendered to the Company. The options are
exercisable at $4.00 per share for five years. The options vest ratably over
a 12 month period from date of grant.
In June 1999, the Company provided a 60,000 share stock option agreement to
an organization providing financial consulting services. The options are
exercisable at $3.00 per share and vest 25,400 shares as of June 30, 1999,
with the remaining shares vesting on a pro rata basis monthly through
February 1, 2001. The term of the option is through February 1, 2008.
17
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
The following is a summary of stock option and warrant activity:
Option/ Weighted
warrant average
price per exercised Number
share price of shares
Balance December 31, 1998 $1.50 to $4.00 $2.79 1,360,001
Granted $3.00 to $5.00 $3.34 1,741,000
Cancelations $3.00 $3.00 (35,000)
Exercised $4.00 $4.00 (8,000)
-------------- ----- ---------
Balance June 30, 1999 $1.50 to $5.00 $3.10 3,058,001
=========
The following is additional information with respect to those options and
warrants outstanding at June 30, 1999 (including options to purchase 300,000
shares of common stock at $4.50 per share which were canceled subsequent to
June 30, 1999 and options to purchase 300,000 shares at $3.00 per share which
are disputed by the Company):
Weighted
average
remaining
contractual Number
Option/warrant price per share life in years of shares
------------------------------ ------------- ---------
$1.50 5.9 450,000
$2.80 3.5 180,001
$3.00 5.5 1,625,000
$4.00 4.4 443,000
$4.50 4.8 300,000
$5.00 4.8 60,000
----------
3,058,001
==========
18
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
4. Stockholders' equity (continued)
Unearned stock compensation:
At June 30, 1999, the Company had outstanding an aggregate of 3,058,001
options and warrants of which 2,178,000 were at purchase prices lower than
fair value of the stock at date of grant, including the stock options and
warrants disclosed above and the 450,000 granted to the Western Center for
Clinical Studies, Inc. (see Note 6). The excess of the fair value of the
options and warrants, using the Black-Scholes option pricing model, over the
exercise price has been recorded as additional paid-in capital and unearned
stock compensation. Unearned compensation is being amortized to research and
development and general and administrative expense over the term of the
related agreements, as follows:
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
---- ---- ---- ----
Research and development $ 88,637 $ 177,306 $ 88,637 $ 353,193
General and administrative 57,500 632,513 57,500 1,204,391
-------- --------- -------- ---------
$146,137 $ 809,819 $146,137 $1,557,584
======== ========= ======== ==========
5. Basic and diluted net loss per share
Basic net loss per share is based on the weighted average number o shares
outstanding during the periods. Shares issued for nominal consideration are
considered outstanding since inception. Diluted loss per share excludes
dilution from common stock equivalents, as exercise of the outstanding stock
options and warrants 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.
19
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
6. Commitments and contingencies
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 June
30, 1999, no liabilities have been accrued with respect to this agreement.
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 payment is 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 June 30, 1999, the
total liability accrued with respect to this agreement totaled $176,927. The
Company will receive a credit against the earned payments of 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 received 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 has been
adjusted based on changes in the price of the components in the bulk active
product.
20
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
6. Commitments and contingencies (continued)
In addition, pursuant to the agreements, 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(NDA) approval. The agreement was subsequently amended on
July 21, 1999. The Company is required to pay management fees of $880,400
over the period from April 26, 1998 through January 5, 2001 and $76,400 per
quarter commencing January 2001 and continuing until NDA submission. The
Company also has granted stock options to WCCS to purchase 450,000 shares of
Entropin common stock. The options have a term of seven years from the grant
date and an exercise price of $1.50. The shares underlying the options are
also provided with certain registration rights. The options are exercisable
in varying amounts on dates ranging from August 1998 to the earlier of NDA
approval or contract termination.
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 initial 33 month term
of the agreement.
21
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 1999
7. Financial instruments
The carrying values of cash and cash equivalents, advances-related party and
accounts payable approximated fair value due to the short-term maturities of
these instruments.
The Company believes that it is not practical to estimate a fair market value
different from the carrying value of long-term debt. Long-term debt,
excluding the deferred royalty agreement, was converted into redeemable
preferred stock on January 15, 1998. Both the redeemable preferred stock and
the deferred royalty agreement have numerous features unique to these
securities and agreements as described in Notes 3 and 6.
8. Subsequent events
On July 21, 1999, the Company entered into an agreement with an organization
which provides new business development and licensing assistance by
identifying and contacting prospective pharmaceutical partners. The term of
the agreement is six months with an option to renew for an additional six
months. The agreement provides for fees aggregating approximately $40,000 for
the initial six month term, as well as a success fee for each agreement
consummated as a result of the project.
On July 26, 1999, the Company authorized the issuance of 24,550 shares of
$.001 par value common stock as payment of accrued dividends on the Series B
Preferred stock.
22
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
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, 1999. 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 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 of
both common and Series A preferred stock and a reverse acquisition
accounted for as a recapitalization of the Company. In July 1998, the
Company conducted an additional private placement of $1,227,500 in
convertible Series B preferred stock. In March 1999, the Company received
cash proceeds aggregating $200,000 pursuant to notes payable, which were
subsequently converted to common stock at $2.00 per share. During the three
months ended June 30, 1999, the Company received gross cash proceeds
aggregating $2,214,000 related to two private placements. These events have
provided liquidity for the Company for current operations. The Company is
currently pursuing additional interim funding and/or a strategic partner to
provide total additional funding of up to $11,000,000 to successfully
complete the FDA approval process.
During 1998, Entropin entered into an agreement with the Western Center for
Clinical Studies, Inc. (WCCS), a California corporation experienced in
managing pharmaceutical development. WCCS will assist Entropin in obtaining
FDA approval for its product Esterom(R), implementing a business plan and
providing experienced personnel to bring Esterom(R) to commercialization.
Entropin is required to pay management fees of approximately $880,400
through January 5, 2001 and $76,400 per quarter beginning January 2001 and
continuing until NDA submission. Entropin also provided stock options to
purchase 450,000 shares of Entropin common stock over the period of the
agreement at an exercise price of $1.50 per share.
Results of Operations:
During the six months ended June 30, 1999, Entropin incurred a net loss of
$2,417,306 (including significant non-cash research and development and
general and administrative expenses of $1,571,627 relating to issuance of
securities for services) as compared to $700,840 for the six months ended
June 30, 1998. The increase resulted primarily from an increase of
$1,273,892 in general and administrative expenses and an increase of
$440,103 in research and development expenses. Both increases resulted
primarily from the amortization of unearned stock compensation expense
recorded in conjunction with the issuance of stock options pursuant to
various consulting and management agreements.
23
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
During the three months ended June 30, 1999, Entropin incurred a net loss
of $1,334,181 as compared to $599,146 for the three months ended June 30,
1998. The increase resulted primarily from an increase of $611,149 in
general and administrative expenses and an increase of $125,763 in
research and development expenses. Both increases resulted from non-cash
compensation expense of $809,819 recorded in conjunction with stock
options.
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,
Entropin completed a private placement of 30 units (10,000 shares of its
$.001 par value common stock per unit) at $27,500 per unit, or $2.75 per
share, which resulted in gross proceeds of $825,000. Concurrent with the
private placement, Entropin completed an agreement and plan of merger with
Vanden Capital Group, Inc. to exchange all of the issued and outstanding
common shares of Entropin for 5,220,000 shares of Vanden's $.001 par value
common stock. Entropin was merged into Vanden, and Vanden changed its name
to Entropin, Inc. For accounting purposes, the acquisition has been
treated as a recapitalization of Entropin based upon historical cost (a
reverse acquisition), with Entropin as the acquirer. Pursuant to the
agreement, Vanden provided cash of $220,000.
On January 15, 1998, Entropin 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 July 1998, Entropin completed a private placement of 245,500 shares of
Series B preferred stock at $5.00 per share, for gross proceeds of
$1,227,500. 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 Entropin's election,
annual dividends may be paid in cash and/or in shares of Entropin's common
stock valued at $5.00 per share. On July 26, 1999, Entropin issued 24,550
shares of common stock as payment of the accrued dividends on the Series B
preferred stock.
During the period from March 1999 through June 1999, Entropin entered into
four consulting agreements with organizations engaged to raise capital and
provide financial advisory services. The terms of the agreements range
from six months to one year and provide for retainers aggregating $10,000
per month. Entropin provided common stock option and warrant agreements
aggregating 960,000 shares exercisable at $3.00 to $4.50 per share.
24
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
On March 24, 1999, Entropin received cash proceeds aggregating $200,000
pursuant to eight convertible note payable agreements with various
unrelated individuals and entities. Each note provided a warrant granting
the holder the right to purchase three and one half restricted shares of
Entropin's common stock for each dollar of principal received by Entropin,
for an aggregate of 700,000 shares. On April 20, 1999, Entropin amended
the promissory note agreements to allow the note holders to convert their
promissory notes to shares of common stock. Upon issuing the amendment,
all note holders converted their promissory notes including accrued
interest to common stock resulting in new issuances of common stock
totaling 100,831 shares.
On April 20, 1999, Entropin completed a private placement of 497,500
shares of its $.001 par value common stock for gross proceeds of $995,000,
$2.00 per share.
As of June 30, 1999, Entropin sold 304,750 shares of stock in a private
placement for gross proceeds of $1,219,000, $4.00 per share.
In June 1999, Entropin entered into a letter of intent with an underwriter
to conduct a public offering of shares of common stock with gross proceeds
of approximately $7,500,000 to $9,000,000. The per share price will be
determined by mutual agreement between the Company and underwriter. On
July 1, 1999, the underwriter commenced a private placement of 500,000
shares (at $4.00 per share) of Entropin's $.001 par value common stock in
order to raise additional capital of up to $2,000,000.
On July 21, 1999, the Company entered into an agreement with an
organization which provides new business development and licensing
assistance by identifying and contacting prospective pharmaceutical
partners. The term of the agreement is six months with an option to renew
for an additional six months. The agreement provides for fees aggregating
approximately $40,000 for the initial six month term, as well as a success
fee for each agreement consummated as a result of the project.
25
<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 common stock, $.001 par value per share ("Common Stock") to the persons
set forth below for the cash consideration indicated in transactions that
were not registered under the 1933 Act.
In May 1999, a consultant to the Registrant exercised options for an
aggregate of 8,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
In June 1999, the Registrant completed a private placement of Common
Stock at a price of $4.00 per share as follows:
Name Consideration No. of Shares
- ---- ------------- -------------
Torben Maersk $10,000 2,500
James M. Love 50,000 12,500
Al-Houda Hotels & Tourism 150,000 37,500
Concorde Bank Limited 50,000 12,500
Bobzin Dieter 40,000 10,000
Carlos Goncalves 50,000 12,500
Tectron-Industria de Productos Electronicos, LDA 100,000 25,000
Jean Paul Desbrueres 30,000 7,500
Wilhelm Giersten 20,000 5,000
26
<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
Dany Noujeim $2,000 500
Goran Gustafson 10,000 2,500
Lars Kellman 10,000 2,500
Gert Kristensson 20,000 5,000
Sune Persson 20,000 5,000
Johanna Brassert 25,000 6,250
Asuno, Inc. 300,000 75,000
Henri Jacob 26,000 6,500
Sylvie Lapidouse 40,000 10,000
Ernst Schneider 50,000 12,500
Kurt Marty 25,000 6,250
Helaba Schweiz 45,000 11,250
Jean-Pierre Delaloye 24,000 6,000
Coutts Bank LTD 24,000 6,000
Etoile Limited 24,000 6,000
Fondation Brigar 24,000 6,000
Galba Anstalt 50,000 12,500
------ ------
TOTAL $1,219,000 304,750
========== =======
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of
Regulation D adopted thereunder for the transactions described above. All
of the purchasers were either known to the Registrant, or were referred to
the Registrant by a consultant to the Company. 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. 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. No
brokers or dealers received compensation in connection with the sale of
these shares.
27
<PAGE>
In June 1999, the Registrant granted options to acquire 20,000 shares
of the Registrant's common stock to Wellington Ewen, the Registrant's Chief
Financial Officer, at an exercise price of $4.00 per share for five years.
The options shall vest ratably over a 12 month period from date of grant.
The Registrant claims the exemption from registration provided by Section
4(2) of the 1933 Act for this transaction. No broker/dealers were involved
in the sale and no commissions were paid. The option certificate was
impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated
without having first been registered or the availability of an exemption
from registration established.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to Wendy Rieder, a consultant of the
Registrant, at an exercise price of $5.00 per share for five years and vest
20,000 shares as of May 1, 2000, with the remaining shares vesting on a pro
rata basis monthly through May 1, 2002. The Registrant claims the exemption
from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions
were paid. The option certificate was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to LMU & Company, a consultant of the
Registrant. The options are exercisable at $3.00 per share for nine years
and vest 25,400 shares as of June 30, 1999, with the remaining shares
vesting on a pro rata basis monthly through February 1, 2002. The
Registrant claims the exemption from registration provided by Section 4(2)
of the 1933 Act for this transaction. No broker/dealers were involved in
the sale and no commissions were paid. The option certificate was
impressed with a restrictive legend advising that the shares represented by
the certificate may not be sold, transferred, pledged or hypothecated
without having first been registered or the availability of an exemption
from registration established.
In July 1999, the Registrant issued an aggregate of 24,550 shares of
its common stock to the holders of the Registrant's Series B Preferred
Stock as a dividend, valued at $5.00 per share. The issuance of the
dividend shares was made in reliance upon the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended. No
brokers or dealers received compensation in connection with the sale of
these shares. Each holder of the Registrant's Series B Preferred Stock
represented that he received the shares for investment and not with a view
to distribution. All certificates were endorsed with a legend restricting
the sale or transfer of the securities except in accordance with federal
securities laws. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent.
In July 1999, the Registrant granted Transition Partners, Limited
("TPL"),a warrant to acquire 50,000 shares of the Registrant's common stock
at $4.00 per share for five years, in exchange for the return to the
Registrant of warrants to purchase up to 300,000 shares of the Registrant's
common stock previously granted by the Registrant in March, 1999. The
issuance of the warrant to TPL was made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act.
28
<PAGE>
No broker/dealers were involved in the sale and no commissions were paid.
TPL represented that TPL acquired the option for investment and not with a
view to distribution.
In July 1999, a consultant to the Registrant exercised options for an
aggregate of 12,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
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 May 7, 1999, reporting developments in the
Company's business under Item 5 thereof, filed with the
Securities and Exchange Commission on May 7, 1999.
(2) Form 8-K, dated June 21, 1999, reporting developments in the
Company's business under Item 5 thereof, filed with the
Securities and Exchange Commission on June 21, 1999.
29
<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: August 11, 1999 By: /s/ Higgins D. Bailey
-------------------------------
Higgins D. Bailey
Chairman of the Board
Date: August 11, 1999 By: /s/ Donald Hunter
-------------------------------
Donald Hunter
Chief Executive Officer & Treasurer
Date: August 11, 1999 By: /s/ Wellington A. Ewen
-------------------------------
Wellington A. Ewen
Chief Financial Officer
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FORM
10-QSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,127,908
<SECURITIES> 0
<RECEIVABLES> 59,792
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,187,700
<PP&E> 93,337
<DEPRECIATION> (13,894)
<TOTAL-ASSETS> 2,619,368
<CURRENT-LIABILITIES> 461,270
<BONDS> 0
4,353,237
0
<COMMON> 6,915
<OTHER-SE> (2,378,981)
<TOTAL-LIABILITY-AND-EQUITY> 2,619,368
<SALES> 0
<TOTAL-REVENUES> 13,331
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,430,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,417,306)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,417,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,417,306)
<EPS-BASIC> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
