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, 2000 .
---------------------------------
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 6, 2000, 9,696,424 shares of the issuer's Common Stock,
$.001 par value per share were outstanding.
Transitional Small Business Disclosure Format Yes No x
--- ---
<PAGE>
ENTROPIN, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Balance Sheet - December 31, 1999 and September 30, 2000
(unaudited) 2
Statement of Operations - For the Three Months Ended September
30, 1999 and 2000 (unaudited) 4
Statement of Operations - For the Nine Months Ended September
30, 1999 and 2000 and Cumulative Amounts from Inception (August
27, 1984) Through September 30, 2000 (unaudited) 5
Statement of Stockholders' Equity (Deficit) - for the Nine
Months Ended September 30, 2000 (unaudited) 6
Statement of Cash Flows - For the Nine Months Ended September
30, 1999 and 2000 and Cumulative Amounts from Inception (August
27, 1984) Through September 30, 2000 (unaudited) 7
Notes to Unaudited Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 6 Exhibits and Reports on Form 8-K 19
Signatures 19
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and September 30, 2000
(Unaudited)
ASSETS
1999 2000
---- ----
Current assets:
Cash and cash equivalents $2,260,526 $ 4,748,714
Certificates of deposit - 7,980,569
Accrued interest receivable - 193,768
Prepaid expenses - 9,671
---------- -----------
Total current assets 2,260,526 12,932,722
Property and equipment, at cost:
Leasehold improvements 61,437 -
Office furniture and equipment 23,855 10,911
---------- -----------
85,292 10,911
Less accumulated depreciation (23,429) (2,403)
---------- -----------
Net property and equipment 61,863 8,508
Other assets:
Deposits 12,261 3,000
Deferred stock offering costs (Note 4) 169,425 -
Patent costs, less accumulated amortization of
$82,019 (1999) and $100,330 (2000) 321,150 325,086
----------- -----------
Total other assets 502,836 328,086
----------- -----------
$2,825,225 $13,269,316
========== ===========
See accompanying notes.
2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and September 30, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 2000
---- ----
Current liabilities:
Accounts payable $ 199,042 $ 143,564
Accounts payable - related parties 123,763 -
---------- ----------
Total current liabilities 322,805 143,564
Deferred royalty agreement (Note 7) 184,071 194,787
Commitments and contingencies (Note 7)
Series A redeemable preferred stock,
$.001 par value; 3,210,487 shares
authorized, issued and outstanding,
$1 per share redemption value 3,210,487 3,210,487
Series B redeemable convertible preferred stock,
$.001 par value; 400,000 shares
authorized, 230,500 shares (1999) and 195,500
shares (2000) issued and outstanding, $5.00
per share redemption value (Note 3) 1,093,175 927,184
Stockholders' equity (deficit) (Notes 4 and 5):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A and B reported above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 7,382,280 (1999) and 9,691,424 (2000)
shares issued and outstanding 7,382 9,692
Additional paid-in capital 13,866,412 27,365,423
Deficit accumulated during the development stage (12,640,814) (17,401,043)
Unearned stock compensation (3,218,293) (1,180,778)
----------- -----------
Total stockholders' equity (deficit) (1,985,313) 8,793,294
----------- -----------
$ 2,825,225 $13,269,316
=========== ===========
See accompanying notes.
3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended September 30, 1999 and 2000
(Unaudited)
1999 2000
---- ----
Costs and expenses:
Research and development (Note 5) $ 392,464 $1,025,382
General and administrative (Note 5) 765,774 854,360
Rent-related party 2,400 2,400
Depreciation and amortization 13,223 7,173
---------- ----------
Operating loss (1,173,861) (1,889,315)
Other income (expense):
Interest income 22,868 218,258
Interest expense - -
--------- ----------
Total other income (expense) 22,868 218,258
--------- ----------
Net loss (Note 2) (1,150,993) (1,671,057)
Accrued dividends applicable to Series B
preferred stock (Note 3) (28,813) (24,437)
---------- ----------
Net loss applicable to common shareholders $(1,179,806)$(1,695,494)
=========== ===========
Basic net loss per common share (Note 6) $ (.17) $ (.18)
=========== ===========
Weighted average common shares
outstanding (Note 6) 7,126,000 9,625,000
=========== ===========
See accompanying notes.
4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999 and 2000
and for the Period from August 27, 1984 (inception)through September 30, 2000
(Unaudited)
Cumulative
amounts from
1999 2000 inception
---- ---- ------------
Costs and expenses:
Research and development (Note 5) $1,086,795 $2,515,657 $ 9,113,067
General and administrative (Note 5) 2,479,425 2,577,249 8,203,888
Rent-related party 3,600 7,200 25,514
Depreciation and amortization 33,016 34,740 157,256
---------- --------- -----------
Operating loss (3,602,836) (5,134,846) (17,499,725)
Other income (expense):
Interest income 36,199 487,368 576,994
Interest expense (1,662) - (242,811)
---------- ---------- -----------
Total other income (expense) 34,537 487,368 334,183
---------- ---------- -----------
Net loss (Note 2) (3,568,299) (4,647,478) (17,165,542)
Accrued dividends applicable to Series B
preferred stock (Note 3) (90,189) (80,812) (256,372)
-------- -------- ---------
Net loss applicable to common
shareholders $(3,658,488) $(4,728,290) $(17,421,914)
=========== =========== ============
Basic net loss per common share (Note 6) $ (.55) $ (.53) $ (3.15)
=========== =========== ============
Weighted average common shares
outstanding (Note 6) 6,617,000 8,941,000 5,535,000
=========== =========== ============
See accompanying notes.
5
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from January 1, 2000 through September 30, 2000
(Unaudited)
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in stock development
Shares Amount capital compensation stage
------ ------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999 7,382,280 $7,382 $13,866,412 $(3,218,293) $(12,640,814)
Amortization of unearned stock
compensation (Note 5) - - - 1,803,925 -
Repurchase of 101,681 stock warrants
for cash (Note 4) - - (330,000) - -
Issuance of common stock pursuant
to public offering (Note 4) 2,000,000 2,000 12,492,888 - -
Shares of stock issued for services 18,608 19 106,427 - -
Overallotment of common stock pur-
suant to public offering (Note 4) 180,000 180 1,184,656 - -
Common stock issued in conversion
of Preferred B shares 35,000 35 165,956 - -
Issuance of stock options to directors - - 120,000 (120,000) -
Shares issued for Series B preferred
stock dividend (Note 3) 22,550 23 112,727 - (112,750)
Cashless exercise of 105,000 options
and warrants 52,986 53 (53) - -
Cancellation of 433,333 options to WCCS - - (353,590) 353,590 -
Net loss for the nine months ended
September 30, 2000 - - - - (4,647,478)
--------- ------ ----------- ---------- ------------
Balance, September 30, 2000 9,691,424 $9,692 $27,365,423 $(1,180,778) $(17,401,042)
========= ====== =========== =========== ============
</TABLE>
See accompanying notes.
6
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 2000
and for the Period from August 27, 1984 (inception) through September 30, 2000
(Unaudited)
Cumulative
amounts
from
1999 2000 inception
---- ---- ----------
Cash flows from operating activities:
Net loss $(3,568,299) $(4,647,478) $(17,165,542)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 33,016 34,740 157,256
Write-off of assets in connection
with contract termination - 59,614 59,614
IBC partner royalty agreement 10,716 10,716 194,787
Services contributed in exchange for
stock and stock options 2,282,303 1,910,371 7,371,345
Services contributed in exchange for
compensation agreements - - 2,231,678
Increase (decrease) in accounts
payable - related party - (123,763) -
Advances to related party 9,857 - -
Increase (decrease) in accounts
payable 163,087 (55,478) 143,564
Increase in accrued interest - (193,768) (24,629)
Other 1,661 (9,671) (7,878)
--------- ---------- -----------
Total adjustments 2,500,640 1,632,761 10,125,737
---------- ---------- -----------
Net cash used in operations (1,067,659) (3,014,717) (7,039,805)
Cash flows from investing activities:
Purchase of property and equipment
(net) (8,337) (10,171) (112,670)
Patent costs (36,435) (22,248) (425,417)
Deposits - (3,256) (15,517)
Certificates of deposit - (7,980,569) (7,980,569)
--------- ---------- -----------
Net cash used in investing activities (44,772) (8,016,244) (8,534,173)
Cash flows from financing activities:
Proceeds from recapitalization - - 220,100
Deferred stock offering costs (42,175) 169,425 169,425
Proceeds from sale of common stock
(net) 3,367,330 13,679,724 18,110,739
Proceeds from exercise of stock options 80,000 - -
Proceeds from sale of preferred stock
(net) - - 1,142,750
Repurchase of warrants - (330,000) (330,000)
Proceeds from stockholder loans - - 809,678
Proceeds from stockholder advances - - 98,873
Repayments of stockholder advances - - (98,873)
Proceeds from convertible notes payable 200,000 - 200,000
--------- ---------- -----------
Net cash provided by financing
activities 3,605,155 13,519,149 20,322,692
---------- ---------- -----------
Net increase in cash 2,492,724 2,488,188 4,748,714
Cash and cash equivalents at beginning
of period 445,333 2,260,526 -
--------- ----------- ----------
Cash and cash equivalents at end
of period $2,938,057 $4,748,714 $4,748,714
========== ========== ==========
(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, 1999 and 2000 and for the
Period from August 27, 1984 (inception) to September 30, 2000
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
During the nine months ended September 30, 2000, the Company issued 18,608
shares of common stock for services totaling $106,446.
During the nine months ended September 30, 2000, the Company also issued
35,000 shares of common stock in a conversion from preferred B shares
totaling $165,991.
In July 2000, the Company issued 22,550 shares of common stock valued at
$5.00 per share as payment of accrued dividends on Series B preferred stock.
8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
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 nine months ended September 30, 1999 and 2000
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, 1999 as filed with the Securities and Exchange Commission.
1. Organization and selected accounting policies
Organization:
Entropin, Inc., a Colorado corporation, 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.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents and certificates
of deposit. The Company places its cash with high quality financial
institutions. At times during the periods, the balances at financial
institutions may exceed FDIC limits.
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.
9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
2. Income taxes
At September 30, 2000, the Company has net operating loss carryforwards of
approximately $5,238,000 and future tax deductions of $8,650,000 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 Company as an 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 December 31, 1999 and September 30,
2000, total deferred tax assets and valuation allowance are as follows:
1999 2000
---- ----
Deferred tax assets resulting from:
Net operating loss carryforwards $ 596,000 $2,151,000
Accrual to cash adjustments 874,000 876,000
Unearned stock compensation 787,000 2,211,000
--------- ---------
Total 2,257,000 5,238,000
Less valuation allowance (2,257,000) (5,238,000)
---------- -----------
$ - $ -
========== ===========
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.
3. Redeemable preferred stock
At the Company's election, the annual dividends on the Series B preferred
stock were paid in shares of the Company's common stock valued at $5.00 per
share at July 15, 2000. Dividends are added to net loss in determining net
loss per common share.
10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
4. Stockholders' equity
Completion of public offering:
On March 20, 2000, the Company completed a secondary public offering. The
Company received net proceeds of approximately $12,500,000 (net of offering
expenses of approximately $2,000,000) from the sale of 2,000,000 shares of
common stock and 2,000,000 redeemable common stock purchase warrants. The
warrants are exercisable at $10.50 per share at any time until March 14,
2005. After March 14, 2001, under certain conditions, the warrants are
redeemable at $.25 per warrant. The Company also issued to the underwriter
warrants to purchase up to 200,000 shares at an exercise price of $8.75 per
share and to purchase up to 200,000 warrants to purchase 200,000 shares at
$.30 per warrant. On May 1, 2000, the Company received net proceeds of
$1,184,836 from the overallotment sale of 180,000 shares of common stock and
300,000 warrants. The warrants carry the same terms as those sold in the
public offering.
Other common stock transactions:
On March 9, 2000, the Company entered into an agreement with an organization
to cancel a 101,681 share stock warrant agreement issued in September 1999 in
connection with private placements of common stock. The Company paid $330,000
cash as consideration for cancellation of the warrant agreement.
Stock options and warrants:
The following is a summary of stock option activity:
Options exercisable
-------------------
Option Wtd.avg. Wtd.avg.
price per exercise Number exercise Number of
share price of shares price shares
--------- -------- --------- -------- ---------
Balance December 31,
1999 $1.50 to $5.00 $3.42 2,616,001 $3.45 1,772,673
Granted $1.50 to $6.00 $2.82 205,000 $2.48 185,004
Exercised $4.00 $4.00 (95,000) $4.00 (95,000)
Cancelled $1.50 $1.50 (433,333) $1.50 (75,000)
----- ----- --------- ----- ---------
Balance September 30,
2000 $1.50 to $5.00 $3.71 2,292,668 $3.41 1,787,677
========= =========
11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
4. Stockholders' equity (continued)
The following is additional information with respect to those options
outstanding at September 30, 2000:
Wtd.avg.remaining Number Options
Option price per share contractual life in years of shares exercisable
---------------------- -------------------------- --------- -----------
$1.50 2.63 91,667 75,000
$2.50 4.75 90,000 90,000
$2.80 2.29 180,001 180,001
$3.00 5.53 625,000 590,005
$4.00 3.74 806,000 806,000
$5.00 3.58 460,000 26,667
$6.00 4.50 40,000 20,004
--------- ---------
2,292,668 1,787,677
========= =========
The following is a summary of stock warrant activity:
Warrant price Number
per share of shares
------------- ---------
Balance December 31, 1999 $3.00 to $5.00 1,005,181
Granted $8.75 to $10.50 2,500,000
Repurchased $4.00 (101,681)
Exercised $4.00 (10,000)
----- ---------
Balance September 30, 2000 $3.00 to $10.50 3,393,500
=========
5. Unearned stock compensation
At September 30, 2000, the Company had outstanding an aggregate of 5,686,168
options and warrants of which 801,667 were at purchase prices lower than fair
value of the stock at date of grant, including the 181,667 stock options
granted to Western Center for Clinical Studies, Inc. (see Note 7). 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:
12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
5. Unearned stock compensation (continued)
Three Months Ended Nine Months Ended Cumulative
September 30, September 30, amounts from
1999 2000 1999 2000 inception
---- ---- ---- ---- ---------
Research and
development $178,725 $ 5,142 $ 531,918 $ 359,754 $1,570,978
General and
administrative 531,051 537,743 1,735,442 1,509,971 4,744,954
-------- -------- ---------- ---------- ----------
$709,776 $542,885 $2,267,360 $1,869,725 $6,315,932
======== ======== ========== ========== ==========
6. 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.
7. 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.
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 expenses
incurred for development of the medicine, as well as 64.28% of a decreasing
payment rate (3% to 1% of the Company's annual sales) on cumulative annual
royalties received by the Company. As of June 30, 2000, 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% of the Company's annual sales) until October 10, 2004. From October
10, 2004 until October 10, 2014, the Company has agreed to pay the partners
17.86% of the earned payment. In accordance with the agreement, the Company
has agreed to pay these former limited partners a one-time payment of $40,000
and a minimum earned payment of $3,572 per calendar quarter beginning on
December 1, 1989. These amounts become payable when the Company is reimbursed
for expenses incurred for the development of the medicine, or from the first
income received by 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, 2000, the total liability accrued with
respect to this agreement was $194,787. 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.
13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2000
7. Commitments and contingencies (continued)
Management agreements:
During April 1998, the Company entered into an agreement with 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
process. 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. WCCS subsequently
assigned options to purchase 16,667 shares of common stock to its employees
and consultants.
In July 2000, upon completion of enrollment in the Phase IIIA clinical trial,
the Company terminated its agreements with WCCS. The terms of the termination
agreement include a final payment of $71,600 and the issuance of an option to
purchase 75,000 shares of Entropin, Inc. common stock at $1.50 per share and
an option to purchase 90,000 shares of Entropin, Inc. common stock at $2.50
per share. A previously issued option to purchase 433,333 shares of Entropin
common stock at $1.50 per share was cancelled as part of this termination
agreement. The Company has also agreed to leave WCCS leasehold improvements,
office furniture and equipment and a deposit with a net book value of $59,614
at June 30, 2000.
In May 2000, the Company entered into an agreement with a contract research
organization to conduct statistical analysis of the data collected during the
course of the Phase IIIA clinical trial and to prepare a written report
summarizing the results of the trial. The cost to perform this statistical
analysis and medical writing will approximate $269,000.
In July 2000, the Company executed a letter of intent with a contract
research organization to manage the remaining clinical and regulatory
processes of preparing, submitting, filing and finalizing approval of a New
Drug Application for Esterom(R). this organization will replace WCCS during
our Phase III clinical trials.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were 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. We were 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. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
From our inception in August 1984, we have devoted resources primarily to
funding our research and development efforts. We have been unprofitable
since inception and have had no revenue from the sale of products or
other resources, and do not expect revenue for the next two years, or
until Esterom(R) solution has received FDA approval. We expect to
continue to incur losses for the foreseeable future through the
completion of our Phase III clinical trials and the New Drug Application
process. As of September 30, 2000, our accumulated deficit was
approximately $17.4 million.
PLAN OF OPERATION
In March 2000, we raised $12.5 million through a successful secondary
offering. In May 2000, we raised an additional $1.2 million through the
sale of the underwriter's overallotment. We intend to use a substantial
portion of these funds to finance part two of our Phase III clinical
trials, our New Drug Application process related to the treatment of
acute painful shoulder, and to provide funds for research and development
and working capital. In the future, we plan 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. We intend to minimize our fixed costs by
outsourcing clinical studies, regulatory activities, manufacturing and
sales and marketing.
RESULTS OF OPERATIONS
During the nine months ended September 30, 2000, Entropin incurred a net
loss of $4,647,478 compared to $3,568,299 for the nine months ended
September 30, 1999. Research and development ("R&D") expenses were
$2,515,657 for the nine months ended September 30, 2000, compared to
$1,086,795 for the nine months ended September 30, 1999. The $1,428,862
increase in research and development expenses resulted primarily from
expenditures associated with our Phase IIIA clinical trial. This expense
was partially offset by an increase in interest income from $36,199 for
the nine months ended September 30,1999 to $487,368 for the nine months
ended September 30, 2000. The increase in interest income resulted from
larger cash and cash equivalent balances during 2000 reflecting the proceeds
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from our successful secondary offering in late March. R&D and G&A for
the nine months ended September 30, 2000, included expenses of $359,754
and $1,509,971, respectively, related to the amortization of non-cash
compensation associated with stock options issued for services rendered.
During the three months ended September 30, 2000, Entropin incurred a net
loss of $1,691,057 compared to $1,150,993 for the three months ended
September 30, 1999. The increase resulted primarily from an increase of
$632,918 in research and development expenses related to the funding of
our Phase IIIA clinical trial. This expense was partially offset by a
$195,390 increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the net
proceeds generated from the sale of our common and preferred stock, and
through loans and advances from stockholders that were subsequently converted
into equity securities. From inception through September 30, 2000, we have
received net cash proceeds from these financing activities aggregating
approximately $20.3 million. As of September 30, 2000, our working capital
was $12,789,158. On March 20, 2000, we completed a secondary public offering
generating net proceeds of approximately $12.5 million from the sale of
2,000,000 shares of common stock and warrants. On May 1, 2000, we received
approximately $1.2 million from the overallotment sale of 180,000 shares of
common stock and 300,000 warrants.
Our liquidity and capital needs relate primarily to working capital,
research and development of Esterom(R) solution, and other general
corporate requirements. We have not received any cash from operations
since inception. Based on our current plans, we believe the proceeds from
our secondary offering and overallotment will provide sufficient capital
resources to fund our operations through the NDA approval process.
Expectations about our long-term liquidity may prove inaccurate if
approval for Esterom(R) solution is delayed or not obtained. We will not
generate revenue from sales of Esterom(R) solution unless Esterom(R)
solution is approved by the FDA for marketing.
Net cash used in operating activities was $3,014,717 during the first
nine months of 2000 compared with $1,067,659 during the first nine months
of 1999. The cash used in operations was primarily related to funding our
Phase IIIA clinical trial, expansion of research and development
activities, and establishing an administrative infrastructure.
As of September 30, 2000, our principal source of liquidity was approximately
$12.7 million in cash, cash equivalents and certificates of deposits.
In May 2000, we entered into an agreement with a contract research
organization to conduct statistical analysis of the data collected during
the course of our Phase IIIA clinical trial and to prepare a written
report summarizing the results of the trial. The cost to perform this
statistical analysis and medical writing will approximate $269,000,
including a change order issued in October 2000, covering additional
analysis not specified in the original contract.
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In July 2000, upon completion of enrollment in our Phase IIIA clinical
trial, Entropin terminated its agreements with Western Center for
Clinical Studies (WCCS). The termination agreement included a final
payment of $71,600 and the issuance of an option to purchase 75,000
shares of Entropin, Inc. common stock at $1.50 per share and an option to
purchase 90,000 shares of Entropin common stock at $2.50 per share. A
previously issued option to purchase 433,333 shares of Entropin common
stock at $1.50 per share was cancelled as part of the termination
agreement. The Company has also agreed to leave WCCS with assets, which
had a net book value of $59,614 at June 30, 2000. These assets comprise
leasehold improvements, office furniture and equipment, and a security deposit.
In July 2000, we executed a letter of intent with a contract research
organization to manage the remaining clinical and regulatory processes of
preparing, submitting, filing and finalizing approval of a New Drug
Application for Esterom(R).
On July 15, 2000, Entropin issued 22,550 shares of common stock as
payment of the annual dividends accrued on our Series B preferred stock
in accordance with the terms of our July 1998 private placement of
245,500 shares of Series B preferred stock at $5.00 per share. The
Series B preferred stock is designated as redeemable 10% cumulative non-
voting convertible preferred stock with $.001 par value. Dividends
accrue at the rate of $.50 per share per annum and are to 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.
Our operating expenses will increase as we proceed with part two of our
Phase III clinical trials through the New Drug Application and the
related FDA approval process. The estimated period for which we expect
available sources of cash to be sufficient to meet our funding needs is a
forward-looking statement that involves risks and uncertainties. In the
event that our capital requirements are greater than estimated, we may
need to raise additional capital to fund our research and development
activities. Our 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 to us, if at all. If adequate funds are not available, we 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. Our failure to raise capital on favorable terms
could have a material adverse effect on business, financial condition or
results of operations.
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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 AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
In July 2000, the Registrant issued an aggregate of 22,550 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 exempt from registration in that there was no sale of the
shares by the Registrant. 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.
For securities issued prior to this reporting period, such information
about the sales of unregistered securities is incorporated by reference
to Item 26 of the Registrant's Post-Effective Amendment No.1 to Form SB-2
Registration Statement filed on March 22, 2000 under registration No. 333-11308.
USE OF PROCEEDS
Pursuant to a Registration Statement, Registration No. 333-11308, which
became effective on March 14, 2000, the Registrant sold for an aggregate
market price of $14,500,000 on March 20, 2000, 2,000,000 shares of common
stock at $7.00 per share, and 2,000,000 warrants to purchase 2,000,000
shares of common stock at $0.25 per warrant. All offering expenses,
including underwriting discounts and commissions, finders' fees, and
other underwriting expenses, are estimated to be $2,000,000 which was
paid to the underwriters. After deduction of offering expenses,
Registrant obtained net proceeds of approximately $12.5 million. On May 1,
2000, the Managing Underwriter exercised its overallotment option, for
an aggregate price of $1,335,000, to purchase an additional 180,000
shares of common stock at $7.00 per share, and an additional 300,000
warrants to purchase 300,000 shares of common stock at $0.25 per warrant.
After deduction of overallotment expenses of approximately $135,000, the
Registrant obtained net proceeds of approximately $1.2 million.
Since the Secondary Offering the net proceeds have been used as follows:
$672,764 for General and Administrative and Working Capital; $1,968,415
for Phase III clinical trials and the research and development required
thereby; $2,588,672 is currently maintained in a money market account for
additional working capital and Phase III clinical trials; and $10,140,611
is currently held in temporary investments pursuant to Prospectus dated
March 14, 2000. None of the proceeds have been applied to the New Drug
Application and are not scheduled for such use until completion of the
Phase III clinical trials. As part of the General and Administrative
Expenses, the Registrant's directors have been compensated directly in an
aggregate amount of $25,000; the Registrant's officers have directly
received $107,180; and Thomas Anderson, who owns more than 10% of the
Registrant's securities, indirectly received $4,800 in the form of
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rent for the Registrant's office space which was paid to the Law Offices
of Thomas Anderson. All other payments made to other persons or entities
were direct payments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no matters submitted to a vote of security holders during
the period of July 1, 2000 to September 30, 2000 through the solicitation
of proxies or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)Exhibits
--------
EXHIBIT 27 FINANCIAL DATA SCHEDULE
(b) Reports on Form 8-K
-------------------
During the last quarter covered by this Report, the Registrant filed a
Current Report on Form 8-K dated October 9, 2000 regarding the results of
the Phase IIIA clinical trials required by the U.S. Food and Drug
Administration as reported in that certain press release dated October 2, 2000.
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 14, 2000 By: /s/ HIGGINS D. BAILEY
--------------------------------
Higgins D. Bailey
Chairman of the Board
Date: November 14, 2000 By: /s/ PATRICIA G. KRISS
--------------------------------
Patricia G. Kriss
Chief Financial Officer
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