UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 November 12, 1999, 7,372,547 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:
Balance Sheet - December 31, 1998 and September 30, 1999
(unaudited) 2
Statement of Operations - For the Three Months Ended
September 30, 1998 and 1999 (unaudited) 4
Statement of Operations - For the Nine Months Ended
September 30, 1998 and 1999 and Cumulative Amounts from
Inception (August 27, 1984) Through September 30, 1999
(unaudited) 5
Statement of Stockholders' Equity - For the Nine Months Ended
September 30, 1999 (unaudited) 6
Statement of Cash Flows - For the Nine Months Ended
September 30, 1998 and 1999 and Cumulative Amounts from
Inception (August 27, 1984) Through September 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 30
Signatures 30
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and September 30, 1999
(Unaudited)
ASSETS
1998 1999
---- ----
Current assets:
Cash and cash equivalents $445,333 $2,938,057
Advances - related party - 22,613
-------- ----------
Total current assets 445,333 2,960,670
Property and equipment, at cost:
Leasehold improvements 72,187 72,187
Office furniture and equipment 15,518 23,855
--------- ---------
87,705 96,042
Less accumulated depreciation (5,006) (21,441)
-------- ---------
Net property and equipment 82,699 74,601
Other assets:
Deposits 12,261 12,261
Deferred stock offering costs (Note 4) - 42,175
Patent costs, less accumulated amortization of
$59,600 (1998) and $76,180 (1999) 295,316 315,171
-------- ---------
Total other assets 307,577 369,607
-------- ---------
$835,609 $3,404,878
======== ==========
See accompanying notes.
2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and September 30, 1999
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1999
---- ----
Current liabilities:
Accounts payable $ 59,141 $ 222,228
Advances - related party 11,314 43,784
--------- ----------
Total current liabilities 70,455 266,012
Deferred royalty agreement (Note 6) 169,783 180,499
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 (1998)
and 230,500 (1999) shares issued and outstanding
(Note 3) 1,142,750 1,083,250
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 7,372,547 (1999)
shares issued and outstanding 6,000 7,373
Additional paid-in capital 7,474,210 12,340,522
Deficit accumulated during the development stage (7,578,802) (11,269,851)
Unearned stock compensation (Note 6) (3,659,274) (2,413,414)
---------- -----------
Total stockholders' equity (deficit) (3,757,866) (1,335,370)
---------- ----------
$ 835,609 $ 3,404,878
========== ===========
See accompanying notes.
3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1998 and 1999
(Unaudited)
1998 1999
---- ----
Costs and expenses:
Research and development (Note 4) $ 393,645 $ 392,464
General and administrative (Note 4) 392,804 765,774
Rent - related party 3,120 2,400
Depreciation and amortization 5,187 13,223
--------- -----------
Operating loss (794,756) (1,173,861)
--------- -----------
Other income (expense):
Interest income 8,962 22,868
Interest expense (514) -
--------- -----------
Total other income (expense) 8,448 22,868
--------- -----------
Net loss (Note 2) (786,308) (1,150,993)
Accrued dividends applicable to Series
B preferred stock (Note 3) (25,573) (28,813)
--------- -----------
Net loss applicable to common
shareholders $(811,881) $(1,179,806)
========= ===========
Basic and diluted net loss per common share $ (.14) $ (.17)
========= ===========
Weighted average common shares
outstanding, basic and diluted (Note 5) 6,000,000 7,126,000
========= ===========
See accompanying notes.
4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 and 1999
and for the Period from August 27, 1984 (inception) to September 30, 1999
(Unaudited)
Cumulative
amounts from
1998 1999 inception
---- ---- ------------
Costs and expenses:
Research and development (Note 4) $ 647,873 $1,086,795 $ 5,940,368
General and administrative (Note 4) 832,563 2,479,425 4,894,255
Rent - related party 8,320 3,600 15,914
Depreciation and amortization 14,704 33,016 114,690
---------- ---------- -----------
Operating loss (1,503,460) (3,602,836) (10,965,227)
---------- ---------- ------------
Other income (expense):
Interest income 17,763 36,199 60,937
Interest expense (1,451) (1,662) (242,811)
---------- ---------- ------------
Total other income (expense) 16,312 34,537 (181,874)
---------- ---------- ------------
Net loss (Note 2) (1,487,148) (3,568,299) (11,147,101)
Accrued dividends applicable to Series
B preferred stock (Note 3) (25,573) (90,189) (146,449)
----------- ---------- ------------
Net loss applicable to common
shareholders $(1,512,721) $(3,658,488) $(11,293,550)
=========== =========== ============
Basic and diluted net loss per common
share $ (.25) $ (.55) $ (2.12)
=========== =========== ============
Weighted average common shares
outstanding, basic and diluted
(Note 5 5,957,000 6,617,000 5,338,000
=========== =========== ============
See accompanying notes.
5
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 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> <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) - - 1,218,000 - (1,218,000)
Amortization of unearned stock compensation (Note 4) - - (196,500) - 2,463,860
Issuance of common stock pursuant to private
placements (Note 4) 1,208,700 1,209 3,366,121 - -
Conversion of promissory notes to common stock
(Note 4) 100,831 101 201,561 - -
Shares issued from exercise of options (Note 4) 20,000 20 79,980 - -
Shares issued for services (Note 4) 3,415 3 14,940 - -
Conversion of Series B preferred stock to common
stock (Note 3) 15,000 15 74,985 - -
Shares issued for Series B preferred stock dividend
(Note 3 24,550 25 122,725 (122,750) -
Accretion to mandatory redemption amount for Series
B preferred stock (Note 3) - - (15,500) - -
Net loss for the nine months ended September 30, 1999 - - - (3,568,299) -
--------- ------ ----------- ------------ -----------
Balance, September 30, 1999 7,372,547 $7,373 $12,340,522 $(11,269,851) $(2,413,414)
========= ====== =========== ============ ===========
</TABLE>
See accompanying notes.
6
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1999
and for the Period from August 27, 1984 (inception) to September 30, 1999
(Unaudited)
Cumulative
amounts from
1998 1999 inception
---- ---- ------------
Cash flows from operating activities:
Net loss $(1,487,148 $(3,568,299) $(11,147,101)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 14,704 33,016 114,690
IBC partner royalty agreement 10,715 10,716 180,499
Services contributed in exchange
for stock or stock options 429,546 2,282,303 4,730,029
Services contributed in exchange for
compensation agreements - - 2,231,678
Increase (decrease) in advances -
related party 5,000 9,857 21,171
Increase (decrease) in accounts
payable (291,258) 163,087 222,228
Increase in accrued interest - - 169,139
Other - 1,661 1,792
----------- --------- ------------
Total adjustments 168,707 2,500,640 7,671,226
----------- ---------- ------------
Net cash used in operations (1,318,441) (1,067,659) (3,475,875)
Cash flows from investing activities:
Purchase of property and equipment (4,227) (8,337) (113,249)
Patent costs (30,449) (36,435) (391,351)
Deposits (12,260) - (12,261)
----------- ---------- ------------
Net cash used in investing
activities (46,936) (44,772) (516,861)
Cash flows from financing activities:
Proceeds from recapitalization 220,100 - 220,100
Deferred stock offering costs 10,746 (42,175) (42,175)
Proceeds from sale of common stock, net 798,110 3,367,330 4,520,440
Proceeds from exercise of stock options - 80,000 80,000
Proceeds from sale of preferred stock 1,142,750 - 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 2,072,833 3,605,155 6,930,793
----------- ---------- ------------
Net increase in cash 707,456 2,492,724 2,938,057
Cash and cash equivalents at beginning of
period 291 445,333 -
----------- ---------- ------------
Cash and cash equivalents at end of
period $ 707,747 $2,938,057 $ 2,938,057
=========== ========== ============
(Continued on following page)
See accompanying notes.
7
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1999
and for the Period from August 27, 1984 (inception) to September 30, 1999
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
During the nine months ended September 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 nine months ended September 30, 1999, the Company issued 3,415
shares of common stock for services totaling $14,943.
In July 1999, the Company issued 24,550 shares of common stock valued at
$5.00 per share as payment of accrued dividends on Series B preferred stock.
See accompanying notes.
8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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 nine months ended September
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., was organized as a California corporation in August 1984, to
be a pharmaceutical research company developing Esterom(R) solution, 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) solution, as
well as fund raising.
On January 15, 1998, the Company consummated an agreement and plan of merger
with Vanden Capital Group, Inc. a Colorado corporation, (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, and
a reverse acquisition with the Company as the acquirer.
Basis of presentation and management's plans:
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and development
activities. This has resulted in significant losses and an accumulated
deficit at September 30, 1999 of $11,269,851. 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) solution and
market the product.
9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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 1,208,700 shares of common stock for gross proceeds of
$3,839,800 (Note 4), which offerings provide liquidity to the Company for
current operations. However, the Company estimates it will require additional
funding of up to $9,000,000 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 three 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
September 30, 1999
1. Organization and summary of significant accounting policies (continued)
Esterom(R) solution 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 September 30, 1999,
in connection with the proposed offering of common stock (see Note 4). In the
event that such offering is successful, costs incurred as of September 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
September 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 September 30, 1999, the Company has net operating loss carryforwards of
approximately $2,869,000 and future tax deductions of $6,268,000 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, 2019 and 2020. Approximately $250,000 of the
net operating loss carryforward is limited as to the amount which may be used
in any one year. At September 30, 1999, total deferred tax assets and
valuation allowance are as follows:
Deferred tax assets resulting from:
Net operating loss carryforwards $ 1,004,000
Accrual to cash adjustments 875,000
Unearned stock compensation 1,319,000
-----------
Total 3,198,000
Less valuation allowance (3,198,000)
-----------
$ -
===========
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
September 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 were paid in shares of the Company's common stock valued at $5.00
per share at July 15, 1999. Dividends are added to net loss in determining
net loss per common share. 15,000 Series B preferred shares have been
converted as of September 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, in a reverse acquisition.
13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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 April 1999, the Company completed a private placement of 497,500 shares of
its $.001 par value common stock at $2.00 per share for gross proceeds of
$995,000.
In June 1999, the Company sold 304,750 shares of common stock at $4.00 for
gross proceeds of $1,219,000 in a private placement.
In September 1999, the Company sold 406,450 shares of common stock at $4.00
for gross proceeds of $1,625,800 in a private placement.
Proposed public offering:
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.
14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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.
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
September 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 and August 1999, the organization exercised options for a
total of 20,000 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 also to be paid a retainer
of $7,000 per month. The organization was engaged to raise capital
aggregating $8 million and provide financial advisory services. 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
September 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, and the remaining
200,000 shares vest in May and August subject to certain funding
requirements. The 200,000 shares 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 September 30, 1999,
the Company has not received any funding attributable to the organization and
warrants to purchase 200,000 shares have been canceled. The remaining
warrants to purchase 100,000 shares are in dispute.
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 ratably 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 and July 1999, the Company provided 120,000 share stock option
agreements to an organization providing financial consulting services. The
options are exercisable at $3.00 to $4.00 per share and vest 25,400 shares as
of June 30, 1999, 20,000 shares at August 5, 1999, with the remaining shares
vesting ratably through February 1, 2001.
In August and September 1999, the Company provided its management team stock
options to purchase an aggregate of 355,000 shares of common stock. The
options are exercisable at $4.00 per share, and vest 240,000 at date of issue
and the remaining 115,000 shares over a 12-month period.
17
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1999
4. Stockholders' equity (continued)
In September 1999, the Company provided a 101,680 share stock warrant
agreement to an organization providing assistance in the June and September
1999 private placements of common stock. The options are exercisable at $4.00
per share for five years and are fully vested.
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 $3.42 2,331,180
Cancelations $3.00 $3.00 (535,000)
Exercised $4.00 $4.00 (20,000)
-------------- ----- ---------
Balance September 30, 1999 $1.50 to $5.00 $3.15 3,136,181
=========
The following is additional information with respect to those options and
warrants outstanding at September 30, 1999:
Weighted
average
remaining
contractual Number
Option/warrant price per share life in years of shares
------------------------------ ------------- ---------
$1.50 5.9 450,000
$2.80 3.3 180,001
$3.00 5.4 1,425,000
$4.00 4.4 971,180
$5.00 4.7 110,000
---------
3,136,181
=========
18
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 1999
4. Stockholders' equity (continued)
Unearned stock compensation:
At September 30, 1999, the Company had outstanding an aggregate of 3,136,181
options and warrants of which 1,070,000 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 Nine months ended
September 30, September 30,
1998 1999 1998 1999
---- ---- ---- ----
Research and development $ 177,273 $ 178,725 $ 265,910 $ 531,918
General and administrative 106,136 531,051 163,636 1,735,442
--------- --------- --------- ---------
$ 283,409 $ 709,776 $ 429,546 $ 2,267,360
========= ========= ========= ===========
5. Basic and diluted net 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 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
September 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 I.B.C. Limited Partnership. The
participated in the early development of Estrom(R)solution (the medicine)
and owned the patent rights to three patents and all intellectual property
rights. Under the terms of the Agreement, the Company acquired all of the
patent and intellectual property rights in exchange for certain compensation
to the limited partners, which is dependent upon the Company's receipt of
a marketing partner's technological access fee and royalty payments. The
limited partnership was subsequently dissolved. Compensation under the
agreement includes a bonus payment of $96,420 to be paid at the time the
Company is reimbursed by a drug company for past expenses paid for
development of the medicine, as well as 64.28% of a decreasing payment
rate (3% to 1%) on cumulative annual royalties received by the Company. As
of September 30, 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 September 30, 1999, the
total liability accrued with respect to this agreement totaled $180,499. 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. Subsequent to December 31, 1997, the price of the ingredient is
based on the price of the components in the bulk active product.
20
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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) solution, 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) solution, 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 agreements:
During April 1998, the Company entered into an agreement with the Western
Center for Clinical Studies, Inc. (WCCS), to provide assistance in taking
Esterom(R) solution 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 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 at $1.50 per share. The options will
expire five years from the date they become exercisable. The shares
underlying the options are also provided with certain registration rights.
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.
In August 1999, the Company entered into an agreement with Therapeutic
Management, Inc. to provide clinical trial management services and monitor
all aspects of Estrom's Phase III clinical studies. The Company will pay
Therapeutic Management in periodic installments over a twelve-month period,
estimated costs aggregating $219,000 plus expenses based upon completion of
certain project goals.
21
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 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.
22
<PAGE>
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company was incorporated in California in 1984 as Entropin, Inc. ("old
Entropin"), and in 1998, completed an agreement and plan of merger with
Vanden Capital Group, Inc. to exchange all of the issued and outstanding
common shares of old Entropin for 5,220,000 shares of Vanden's common stock.
Old Entropin merged into Vanden, and Vanden changed its name to Entropin,
Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost with old Entropin
as the acquirer.
From inception in August 1984, the Company has devoted resources primarily to
fund research and development efforts. The Company has been unprofitable
since inception and has had no revenue from the sale of products or other
resources, and does not expect revenue for the next two years, or until
Esterom(R) solution has received FDA approval. The Company expects to
continue to incur losses for the foreseeable future through the completion of
Phase III clinical trials and the new drug application process. As of
September 30, 1999, the accumulated deficit was approximately $11 million.
Plan of Operation
The Company is currently pursuing additional funding of up to $9,000,000 to
fund its Phase III clinical trials through the new drug application process
and to provide working capital. In the future, the Company plans to seek FDA
approval to market Esterom(R) solution for the treatment of impaired range of
motion associated with lower back pain, and identify and develop other
medical applications for Esterom(R) solution such as applications for
arthritis and other joint disorders. The Company intends to minimize fixed
costs by outsourcing clinical studies, regulatory activities, manufacturing
and sales and marketing, and has engaged the services of a full-time
chief executive officer and president to begin November 29, 1999 which will
increase general and administrative expenses.
Results of Operations
Nine months ended September 30, 1999 compared to nine months ended September
30, 1998. The Company's administrative expenses were $2,479,425 during the
nine months ended September 30, 1999, compared to $832,563 during the nine
months ended September 30, 1998. The Company's research and development
expenses were $1,086,795 during the nine months ended September 30, 1999,
compared to $647,873 during the nine months ended September 30, 1998. The
increases from 1998 to 1999 in each category were due primarily to the
amortization of unearned stock compensation expense recorded in conjunction
with the issuance of stock options pursuant to various consulting and
management agreements.
Three months ended September 30, 1999 compared to three months ended
September 30, 1998. The Company's general and administrative expenses were
$765,774 during the three months ended September 30, 1999, compared to
$392,804 during the three months ended September 30, 1998. The increase from
1998 to 1999 was due primarily to the amortization of unearned stock
compensation expense associated with the issuance of stock options and
warrants. Research and development expenses were comparable for the two
three-month periods.
23
<PAGE>
Liquidity and Capital Resources
The Company has financed operations since inception primarily through the net
proceeds generated from the sale of common and preferred stock, and through
loans and advances from stockholders that were subsequently converted into
equity securities. From inception through September 30, 1999, the Company
received net cash proceeds from financing activities aggregating
approximately $6.6 million from these transactions. As of September 30, 1999,
working capital was $2,694,658.
The Company's liquidity and capital needs relate primarily to working
capital, research and development of Esterom(R) solution, and other general
corporate requirements. The Company has not received any cash from operations
since inception. Based on current plans, the Company believes the proceeds
from the proposed public stock offering will provide sufficient capital
resources to fund operations for the next 20 months. Expectations about
long-term liquidity may prove inaccurate if approval for Esterom(R) solution
is delayed or not obtained. The Company will not generate revenue from sales
of Esterom(R) solution unless Esterom(R) solution is approved by the FDA for
marketing.
The cash used in operations was primarily related to funding expansion of
research and development activities as well as establishing an administrative
infrastructure. The net cash used in operating activities was approximately
$1,068,000 for the nine months ended September 30, 1999 compared to
approximately $1,318,000 in the same period for 1998.
As of September 30, 1999, the Company's principal source of liquidity was
approximately $2.9 million in cash and cash equivalents.
In April 1998, the Company entered into an agreement with Western to assist
in obtaining FDA approval for Esterom(R) solution. The Company 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 a new drug
application is filed with the FDA. The Company also issued to Western stock
options to purchase 450,000 shares of common stock at $1.50 per share.
In August 1999, the Company entered into an agreement with Therapeutic
Management, Inc. to provide clinical trial management services and monitor
all aspects of Esterom's Phase III clinical studies. The Company will pay
Therapeutic Management in periodic installments over a twelve-month period,
estimated costs aggregating $219,000 plus expenses based on completion of
certain project goals.
24
<PAGE>
Operating expenses will increase as the Company proceeds with the Phase III
clinical trials through the new drug application and other related FDA
approval processes. The Company also expects that general and administrative
expenses will increase significantly with the addition of a full-time chief
executive officer and president. The estimate of the period for which the
Company expects available sources of cash to be sufficient to meet funding
needs is a forward looking statement that involves risks and uncertainties.
There can be no assurance that the Company will be able to meet capital
requirements for this period. In the event the Company's capital requirements
are greater than estimated, additional capital will need to be raised to fund
research and development activities. Future liquidity and capital funding
requirements will depend on numerous factors, including the timing of
regulatory actions for Esterom(R) solution, the cost and timing of sales,
marketing and manufacturing activities, the extent to which Esterom(R)
solution gains market acceptance, and the impact of competitors' products.
There can be no assurance that such additional capital will be available on
terms acceptable, if at all. If adequate funds are not available, the Company
may be forced to significantly curtail operations or to obtain funds through
entering into collaborative agreements or other arrangements that may be on
unfavorable terms. Failure to raise capital on favorable terms could have
a material adverse effect on business, financial condition or results of
operations.
Year 2000 Issue
The Company uses a number of computer software programs and operating systems
in internal operations, including applications used in financial business
systems and various administrative functions. To the extent that these
software applications, and the software applications of the Company's
vendors, suppliers, financial institutions and service providers contain
source code that is unable to appropriately interpret the upcoming calendar
year 2000, some level of modification or even possibly replacement of such
source code or applications will be necessary.
To date the Company has not incurred any material expenditures in connection
with evaluating Year 2000 issues. All expenses have related to the
opportunity cost of time spent by several employees identifying and
evaluating the Year 2000 compliance matters. The agreements with Western and
Therapeutic Management represent that their software systems are Year 2000
compliant. The Company has contacted all other major vendors, suppliers,
financial institutions and service providers to ensure they are Year 2000
compliant. Key third party vendors have provided a statement in writing that
their software or systems are Year 2000 compliant. In the event satisfactory
commitments from suppliers are not received, plans with alternate sources
will be made, if available.
The Company believes the worst case scenario relating to Year 2000 risks
includes a power interruption. The Company intends to actively work with
suppliers to minimize the risks of business disruptions resulting from Year
2000 issues.
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 September 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
- ---- ------------- -------------
Metz Family Trust $ 4,000 1,000
John R. Metz and Theresa G. Metz, TTEE
Sunbelt Holdings, Inc. 60,000 15,000
Dennis D. French
MRI, Inc. 20,000 5,000
Profit Sharing Plan
Dennis D. French
Barry Seidman 100,000 25,000
James G. Stevens 20,000 5,000
Jana C. Stevens
Edward Jones Custodian FBO 2,000 500
Sharon Whitaker Roth IRA
Edward Jones, Custodian FBO 10,200 2,550
Ernest Handelin Roth IRA
Edward Jones, Custodian FBO 6,000 1,500
Carl Handelin Roth IRA
Edward Jones, Custodian FBO 5,800 1,450
Kathleen Rounds Roth IRA
26
<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
Edward Jones, Custodian FBO $5,800 1,450
Gary Handelin Roth IRA
Edward Jones, Custodian FBO 9,800 2,450
Alan E. Handelin Roth IRA
Leslie Rounds and Kathleen Rounds 4,000 1,000
Husband and Wife JT
Ralph L. Fuentes and Diana C. Fuentes 3,000 750
Husband and Wife, Community Property
Alan E. Handelin 4,000 1,000
Ernest E. Handelin 73,000 18,250
Joseph P. Sperty 8,000 2,000
Karen H. Sperty
David M. Chapman 20,000 5,000
Danny Yu Defined Benefit Pension Plan 50,000 12,500
Russell L. Davis, Trustee of the 20,000 5,000
Davis Family Trust
Russell L. Davis, Trustee FBO 20,000 5,000
Russell L. Davis Attorney at Law
Profit Sharing Plan
Sylvia E. Davis, Trustee 20,000 5,000
Of the Sylvia E. Davis Trust
Danny Yu and Nancy Yu, Trustees 20,000 5,000
Yu Family Living Trust
Audrey Spangenberg 20,000 5,000
William H. Golod 8,000 2,000
Marsha B. Golod
Samuel F. Trussell 20,000 5,000
John and Donna Bruce 1996 Living Trust 5,000 1,250
Anders Johnsson 2,000 500
Mikael E. Ibssen 8,000 2,000
Mohamed Ali Khawas 30,000 7,500
Torben Maersk 10,000 2,500
27
<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
ATO Ram 2 Ltd. $100,000 25,000
ATO Ram 2 Ltd. 150,000 37,500
Staffan Lindskog 1,000 250
Tawfiq S. Mohammed 20,000 5,000
Wilheim Giersten 60,000 15,000
Dany Novjeim 2,000 500
Goram Gustafsson 10,000 2,500
Edouard Rabbat 2,000 500
Salah Abdullah Dashti 50,000 12,500
Michael C. Saunders 6,000 1,500
Jean Paul Desbrueres 20,000 5,000
Mohammed Al-Nussif 1,200 300
Mahmoud Mohammed Abileh 200,000 50,000
Amir Salim Huneidi 100,000 25,000
Henrik Boyander 4,000 1,000
Raghib Zuberi 5,000 1,250
Steen Thomsen 4,000 1,000
Carlos Conclaves 50,000 12,500
Robert M. Penner and Joanne M. Penner, 20,000 5,000
Trustee of the Penner Family Trust dated 10/17/91
Anders Jonsson 2,000 500
Thomas M. Lyvers, Sr. 10,000 2,500
Brenda R. Lyvers
Charles F. Kirby 50,000 12,500
Heather M. Evans 10,000 2,500
David S. Haydan 20,000 5,000
Direct Diamonds and Gold Exchange, Inc. 20,000 5,000
(M. Grover, President)
Len Rothstein 20,000 5,000
28
<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
Richard D. Reinisch and Grace A. Reinish $40,000 10,000
David A. Zallar 20,000 5,000
Christopher A. Marlett Living Trust 20,000 5,000
David A. Zallar (2nd subscription agreement) 20,000 5,000
TOTAL $1,625,800 406,450
========== =======
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.
In July 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 $4.00 per share for five
years and vest as follows: 20,000 shares at August 5, 1999, and the
remaining 40,000 shares ratably over a four month period through December
5, 1999. 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 granted performance bonus options to
purchase 120,000 shares of the Registrant's common stock to each
of the following executive officers of the Registrant: Higgins D. Bailey
and Donald Hunter. The options are fully vested upon grant and
exercisable at $4.00 per share for five years. 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 certificates were 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 and September 1999, the Registrant approved the grant
to Higgins D. Bailey and Donald Hunter of executive management
options to purchase 15,000 shares each of the Registrant's common stock
each month, beginning July 1999, in exchange for their services as
members of the Registrant's Executive Management Team. During the three
months ended
29
<PAGE>
September 30, 1999, Messrs Bailey and Hunter were thereby granted
executive management options to purchase a total of 90,000 shares of
common stock. The options are fully vested upon grant and exercisable at
$4.00 per share for five years. 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 certificates will be 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.
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 August 20, 1999, reporting developments in
the Company's business under Item 5 thereof and submitted
an agreement with Therapeutic Management dated August 16,
1999 under Item 7 thereof, filed with the Securities and
Exchange Commission on May 7, 1999.
(2) Form 8-K, dated September 23, reporting developments in
the Company's business under Item 5 thereof, filed with
the Securities and Exchange Commission on September 23, 1999.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENTROPIN, INC.
Date: November 12, 1999 By: /s/ Higgins D. Bailey
--------------------------------
Higgins D. Bailey
Chairman of the Board
Date: November 12, 1999 By: /s/ Donald Hunter
--------------------------------
Donald Hunter
Chief Executive Officer, Treasurer
Principal Financial Officer
30
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S FORM 10-QSB FOR THE QUARTER ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FORM
10-QSB.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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<RECEIVABLES> 22,613
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<PP&E> 96,042
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4,293,737
0
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<INCOME-CONTINUING> (3,568,299)
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<NET-INCOME> (3,568,299)
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