SUBJECT TO COMPLETION. DATED MARCH 2, 2000
PROSPECTUS
ENTROPIN, INC. [Logo]
2,000,000 Shares of Common Stock
and
2,000,000 Redeemable Common Stock Purchase Warrants
We are offering shares of common stock and warrants to purchase shares
of common stock in units consisting of one share and one warrant. The
common stock and warrants will trade as separate securities immediately
after this offering. For a description of the terms of the warrants, see
"Prospectus Summary - The Offering - Warrants" on page 3.
Our common stock is traded on the NASD OTC Bulletin Board under the
symbol "ETOP". On February 28, 2000, the closing bid price of the common
stock was $7.625 per share. We have applied to list our common stock and
warrants under the symbols "ETOP" and "ETOPW" on the Nasdaq SmallCap Market
after this offering.
THESE ARE SPECULATIVE SECURITIES. INVESTING IN THE SHARES AND
WARRANTS INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PER PER
SHARE WARRANT TOTAL
- ----------------------------------------------------------------------------
Public offering price: . . . . . . . . . . . . . $ $ $
- ----------------------------------------------------------------------------
Underwriting discounts and commissions:. . . . . $ $ $
- ----------------------------------------------------------------------------
Proceeds to Entropin, Inc. . . . . . . . . . . . $ $ $
- ----------------------------------------------------------------------------
We have granted a 45-day option to the underwriter to purchase up to
300,000 additional shares and 300,000 additional warrants to cover over-
allotments.
NEIDIGER, TUCKER, BRUNER, INC.
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
, 2000
<PAGE>
The following language appears in red on the left side of the cover page.
A registration statement relating to these securities has been filed with
the Securities and Exchange Commission but has not yet become effective.
These securities may not be sold nor may offers to buy be accepted prior to
the time the registration statement becomes effective. This prospectus
shall not constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such State.
<PAGE>
3 PHOTOS INSIDE FRONT COVER:
[PHOTO 1]
Vial containing Esterom(R) solution
[PHOTO 2]
Esterom(R) solution being applied to patient's shoulder
[PHOTO 3]
Mobility measurement of patient's shoulder
<PAGE>
Please read this prospectus carefully. It describes our business, our
product and our finances. We have prepared this prospectus so that you
will have the information necessary to make an investment decision.
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different
from that contained in this prospectus. We are offering to sell, and
seeking offers to buy shares and warrants only in jurisdictions where
offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of our securities.
STATE NOTICES
ARIZONA RESIDENTS: The securities offered pursuant to this prospectus may
only be purchased by Arizona residents who satisfy us that they meet the
following financial suitability requirements: The Arizona resident
purchaser must have either (a) annual gross income of at least $100,000, or
$150,000 combined with spouse, during the year prior to this offering and
a reasonable expectation of such income in the current year, or, (b) a
minimum net worth of $250,000, or $300,000 when combined with spouse,
(exclusive of home, home furnishings and automobiles) and the investment in
the securities does not exceed 10% of the net worth of the investor,
together with spouse if applicable.
CALIFORNIA RESIDENTS: The securities offered pursuant to this prospectus
may only be purchased by California residents who satisfy us that they meet
the following financial suitability requirements: The California resident
purchaser must have either (a) annual gross income of at least $65,000 and
a minimum net worth (exclusive of home, home furnishings and automobiles)
of $250,000; or, (b) a minimum net worth (exclusive of home, home
furnishings and automobiles) of $500,000.
NORTH DAKOTA RESIDENTS: The securities offered pursuant to this prospectus
may only be purchased by North Dakota residents who satisfy us that they
meet the following financial suitability requirements: The North Dakota
resident purchaser must have either (a) annual gross income of at least
$45,000 and a minimum net worth (exclusive of home, home furnishings and
automobiles) of $45,000; or, (b) a minimum net worth (exclusive of home,
home furnishings and automobiles) of $100,000
<PAGE>
TABLE OF CONTENTS
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Price Range of our Common Stock. . . . . . . . . . . . . . . . . . . . 11
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . 14
Our Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Summary Compensation Table . . . . . . . . . . . . . . . . . . . . . . 27
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . 29
Related Party and Other Material Transactions. . . . . . . . . . . . . 30
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . 31
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . 34
Underwriting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . 38
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . .F-1
We are a reporting company under the Securities Exchange Act of 1934.
We have filed periodic reports, including Annual Reports containing
financial statements of the Company audited by independent public
accountants, and quarterly reports, which contain unaudited financial
statements, with the Securities and Exchange Commission. Copies of such
reports can be obtained at prescribed rates by written request addressed to
the Commission, Public Reference Section, 450 Fifth Street, NW, Washington,
D. C. 20549. In addition, we have filed with the Securities and Exchange
Commission, a registration statement on Form SB-2 under the Securities Act
with respect to the shares and warrants offered.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information that we present more
fully in other sections of this prospectus. To understand this offering,
you should read the entire prospectus carefully, including the risk factors
and financial statements.
ENTROPIN
Entropin, is a development stage pharmaceutical company that has
developed Esterom(R) solution, a topical formulation for the treatment of
conditions involving impaired range of motion. Impaired range of motion
often accompanies injuries and disorders of the shoulder and lower back, as
well as other conditions of the joints. Esterom(R) solution is derived
from a process involving the chemical breakdown of cocaine into new and
different molecules, three of which have been patented by us. We have
completed four preclinical animal studies and Phase I and Phase II human
clinical trials for Esterom(R) solution. These trials indicated that
Esterom(R) solution was well tolerated at the dose used. Moreover, the
range of motion with patients suffering from shoulder and back conditions
was improved significantly when compared with patients receiving a placebo.
The trials also indicated that Esterom(R) solution did not appear to have
any potential for addiction or abuse. We began Phase III trials for
treatment of impaired range of motion due to shoulder injuries and
functionality in November 1999. We expect to complete our Phase III trials
and submit a new drug application to the FDA in early 2001.
OUR MARKET OPPORTUNITY
If we obtain FDA approval, we believe that there will be a substantial
market for Esterom(R) solution based on the following:
* 40 million Americans suffer from lower back conditions, according to
a 1999 report by the American Academy of Orthopedic Surgeons.
* Over 7 million Americans suffer from shoulder injuries or disorders,
according to a 1996 report by the Center for Disease Control, National
Center for Health Statistics.
* Nearly 17.5 million Americans seek prescriptive drug therapy annually
for the treatment of painful shoulder, acute back strain or related
conditions, according to the National Ambulatory Medical Care Survey
1998 report by the National Center for Health Statistics.
* In its most recent report on lower back pain issued in 1994, the U.S.
Agency for Health Care Policy and Research indicated that back pain
was the second most common reason, after the common cold, for seeing
a doctor and costs associated with back pain, including lost
productivity, exceeded $50 billion a year.
* Treatments for impaired range of motion for lower back and shoulder
conditions include steroidal drugs, non-steroidal anti-inflammatory
drugs such as ibuprofen and muscle relaxants, all of which reduce pain
but do not necessarily improve impaired range of motion.
1
<PAGE>
OUR STRATEGY
Our initial goal is to complete the commercialization of Esterom(R)
solution. If we succeed, we will seek to develop products for related
muscle and joint disorders. In order to achieve our goals, we plan to:
* Seek FDA approval to market Esterom(R) solution for the treatment of
impaired range of motion associated with shoulder function;
* Seek FDA approval to market Esterom(R) solution for the treatment of
impaired range of motion associated with lower back sprain;
* Identify and develop other related medical applications for Esterom(R)
solution, such as the treatment of arthritis and other joint disorders;
* Identify and develop international markets; and
* Minimize our fixed costs by outsourcing clinical studies, regulatory
activities, manufacturing and sales and marketing.
Entropin is a Colorado corporation. Our corporate offices are located
at 45926 Oasis Street, Indio, California 92201, telephone number (760)
775-8333. Esterom(R) solution is a trademark registered with the United
States Patent and Trademark Office. Our Web site is located at
www.entropin.com. Information contained in our Web site should not be
considered a part of this prospectus.
2
<PAGE>
THE OFFERING
Unless otherwise indicated, all information in this prospectus assumes
no exercise of the over-allotment option granted to the underwriters to
purchase additional shares and warrants.
Securities offered. . . . . 2,000,000 shares of common stock and
2,000,000 warrants to purchase 2,000,000
shares of common stock. The securities are
offered in units consisting of one share and
one warrant. The common stock and warrants
will trade separately immediately after the
offering.
Warrants. . . . . . . . . . The warrants will be exercisable at $_____
per share at any time until five years from
the date of this prospectus. We may not
redeem the warrants for at least one year
after the date of this prospectus. After
that date, if the closing bid price of our
common stock on each of the 10 consecutive
trading days preceding our notice of
redemption is greater than or equal to
$_____ (200% of the closing bid price of our
common stock on the effective date of the
offering), we may redeem some or all of the
outstanding warrants upon 30 days' prior
written notice to the holders. The
redemption price will be $0.25 per warrant.
If we give notice of redemption, holders of
the warrants will have 30 days during which
they may elect to exercise the warrants,
sell the warrants or allow the warrants to
be redeemed for the redemption price.
Common stock outstanding. . 7,382,280 shares of common stock were
outstanding on February 28, 2000. After the
offering, there will be 9,382,280 shares
outstanding. Shares outstanding exclude up
to 3,851,682 shares of common stock issuable
on exercise of outstanding options, warrants
and convertible securities.
Risk Factors. . . . . . . . An investment in the shares and warrants
involves a high degree of risk. You should
not consider purchase of the shares and
warrants unless you can afford to lose your
entire investment.
Use of proceeds . . . . . . To fund costs associated with Phase III
clinical trials; the FDA approval process
for Esterom(R) solution; research and
development of additional applications of
Esterom(R) solution; general and
administrative expenses; and working capital.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto. The
selected financial data as of December 31, 1998 and 1999, and for the years
then ended are derived from audited financial statements included in this
prospectus.
<TABLE>
<CAPTION>
Cumulative
amounts from
inception
through
STATEMENT OF OPERATIONS Years ended December 31, December 31,
DATA: ------------------------ ------------
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue $ -0- $ -0- $ -0-
Research and development 1,743,837 906,719 6,597,410
Other costs and expenses 3,195,425 1,857,908 5,920,654
------------ ------------ ------------
Net loss (4,939,262) (2,764,627) (12,518,064)
Accrued dividends applicable
to Series B preferred stock (119,300) (56,260) (175,560)
------------ ------------ ------------
Net loss applicable to
common shareholders $ (5,058,562) $ (2,820,887) $(12,693,624)
============ ============ ============
Basic and diluted net loss per
common share $ (.75) $ (.47) $ (2.36)
============ ============ ============
Weighted average number of
shares outstanding 6,749,000 5,968,000 5,374,000
============ ============ ============
</TABLE>
BALANCE SHEET DATA:
The unaudited proforma balance sheet data reflects the issuance of
securities in this offering.
Unaudited Pro
forma
December 31, December 31,
1999 1999
------------ ------------
Cash and cash equivalents $2,260,526 $
Working capital 1,937,721
Total assets 2,825,225
Total liabilities 506,876
Redeemable preferred stock 4,303,662
Stockholders' equity (deficit) (1,985,313)
4
<PAGE>
RISK FACTORS
The offering involves a high degree of risk. You should carefully
consider the risks and uncertainties of this offering described below and
other information in this prospectus before investing in our common stock.
If any of these risks occur, our business, results of operation and
financial condition could be adversely affected. This could cause the
trading price of our common stock to decline, and you might lose part or
all of your investment.
Many of the statements in this prospectus constitute forward-looking
statements. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our results, levels of
activity, performance or achievements to be materially different from those
implied by these forward-looking statements. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology.
Although we believe that the expectations reflected in the forward-
looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor
any other person assumes responsibility for the accuracy and completeness
of these statements. We are under no duty to update any of the forward-
looking statements after the date of this prospectus.
WE HAVE A LIMITED OPERATING HISTORY, A HISTORY OF LOSSES AND EXPECT FUTURE
LOSSES.
We have no operating history upon which an investor can base an
evaluation of our company and our prospects. Our auditor's report for year
end December 31, 1999 expressed doubt about our ability to continue as a
going concern. We have had losses from operations since our inception in
1984 to December 31, 1999, totaling $12,518,064, and we expect to incur
future losses from operations. At December 31, 1999 we had a total
stockholders deficit of $1,985,313. We expect our operating expenses to
significantly increase over the next several years due to clinical testing
and other expenses related to seeking FDA approval. Our ability to achieve
profitable operations is dependent on obtaining regulatory approval for
Esterom(R) solution, entering into agreements for product development and
commercialization, and expanding from development into successful
marketing, all of which require significant amounts of capital. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 14 and "Use of Proceeds" on page 10.
WE ARE DEPENDENT ON THE PROCEEDS OF THIS OFFERING AND MAY REQUIRE
ADDITIONAL CAPITAL.
We have financed our business through the sale of securities and
advances from stockholders and have had no revenue from operations. We are
dependent upon the proceeds of this offering to fund continuing operations
and management has broad discretion as to the application of the proceeds.
We may require additional capital to fund our operations.
5
<PAGE>
WE WILL NOT BE ABLE TO MARKET ESTEROM(R) SOLUTION UNLESS WE OBTAIN REQUIRED
REGULATORY APPROVAL.
The FDA approval process generally takes years and consumes
substantial capital resources with no assurance of ultimate success. We
cannot apply for FDA approval to market Esterom(R) solution until the
product successfully completes the required Phase III clinical trials.
Several factors may prevent our successful completion of the Phase III
clinical trials including:
* insufficient capital resources;
* inability to obtain the required number of patients to complete
the trials; and,
* insufficient proof that Esterom(R) solution is safe and
effective.
The regulatory approval processes differ among foreign jurisdictions
and approval in one jurisdiction does not ensure other approvals. As a
result, we may be required to undertake additional trials and incur
additional expense in order to obtain foreign approvals. Even if we
complete the trials, we may be unable to obtain FDA approval of Esterom(R)
solution. Failure to obtain FDA or foreign jurisdictional approval would
negatively impact our business. See "Our Business - Government Regulation"
beginning on page 19.
IF WE LOSE OUR ESTEROM(R) SOLUTION MANUFACTURER, WE WILL BE UNABLE TO BRING
ESTEROM(R) SOLUTION TO MARKET.
We are dependent upon Mallinckrodt, Inc., our sole supplier, to
provide us with cocaine as a raw material from which the active ingredients
in Esterom(R) solution are derived. If Mallinckrodt is unable or unwilling
to supply us, we may be unable to bring Esterom(R) solution to market. See
"Our Business - Outsourcing" on page 18.
OUR SUCCESS DEPENDS UPON ESTEROM(R) SOLUTION'S ACCEPTANCE BY PHYSICIANS,
INSURANCE COMPANIES AND THE PUBLIC.
Sales of Esterom(R)'s solution depend on acceptance of the product by
physicians, insurance companies who provide pharmaceutical coverage and the
public as an alternative to, or in combination with, other therapies for
the treatment of impaired range of motion associated with painful shoulder
and other conditions.
ESTEROM(R) SOLUTION'S CLASSIFICATION AS A CONTROLLED SUBSTANCE MAY LIMIT
SALES AND INCREASE COSTS.
As a controlled substance, Esterom(R) solution will be subject to
expensive and burdensome administrative requirements which will increase
our costs. Moreover, these administrative requirements may discourage
Esterom(R) solution's use and acceptance by the medical community. See
"Our Business - DEA Status" on page 21.
WE WILL BE DEPENDENT UPON THIRD PARTIES TO MARKET ESTEROM(R) SOLUTION.
We have no experience in the sale or marketing of pharmaceutical
products and will be dependent upon third parties to sell and market
Esterom(R) solution. If we are unable to enter into satisfactory marketing
arrangements, our sales will be adversely affected. See "Our Business -
Outsourcing" on page 18.
6
<PAGE>
IF WE ARE UNABLE TO DEFEND OUR ESTEROM(R) SOLUTION PATENTS OR IF OTHERS
DEVELOP SUBSTANTIALLY EQUIVALENT PRODUCTS, OUR BUSINESS COULD BE IMPACTED.
Our patents, trademarks and other intellectual property rights are
important to our success. Patent litigation can be extremely expensive and
time consuming. If we are unable to defend our existing patents or if
others develop similar products beyond the protection of our existing
patents, our business could be impaired. See "Our Business - Patents" on
page 19.
WE WILL BE EXPOSED TO PRODUCT LIABILITY CLAIMS.
We will be exposed to potential product liability claims which are
inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products, and product liability claims may be asserted
against us. Product liability insurance for the pharmaceutical industry is
expensive. There can be no assurance that adequate insurance coverage will
be available to us at acceptable costs, or that a product liability claim
would not adversely affect our business or financial condition. See "Our
Business - Product Liability Insurance" on page 21.
A LARGE NUMBER OF OUR SHARES OF COMMON STOCK ARE ELIGIBLE FOR FUTURE SALE
WHICH COULD LOWER OUR MARKET PRICE.
Sales of common stock after the offering, or even the potential for
those sales, are likely to lower the market price of our common stock. In
addition, these sales may negatively affect our ability to raise needed
capital through the sale of our common stock. The table below indicates
the number of shares outstanding, the number of shares issuable upon
exercise of options, warrants and convertible securities and which of such
shares are free trading and restricted.
NUMBER OF
SHARES DESCRIPTION
7,382,280 Common stock currently outstanding
6,028,082 Free trading common stock outstanding
3,621,182 Common Stock issuable upon exercise of currently
outstanding options and warrants
2,000,000 Common stock issuable upon exercise of warrants
outstanding upon completion of offering
230,500 Common stock issuable upon conversion of Series B
convertible preferred stock
1,354,198 Common stock available for sale under Rule 144 of the
Securities Act
Other than 65,000 shares, all remaining 4,179,564 shares owned by our
directors, officers, and 5% or greater stockholders, and substantially all
of the shares underlying the outstanding options and warrants are subject
to lock-up agreements which expire one year after the date of this
prospectus unless released sooner upon the written consent of the
representatives. When the lock-up period expires, the 4,179,564 shares
subject to lock-up and the shares issuable upon exercise of options and
7
<PAGE>
warrants, and conversion of preferred stock will be eligible for sale which
will have a depressive effect on the market price of our common stock. See
"Shares Eligible for Future Sale" on page 34 and "Description of Securities
- - Other Options, Warrants and Convertible Securities" on page 33.
INVESTORS WILL EXPERIENCE DILUTION OF BOOK VALUE OF SHARES PURCHASED IN THE
OFFERING.
Net tangible book value per share at December 31, 1999 and prior to
the offering is $(.31) per share. Upon the sale of 2,000,000 shares of
common stock at $_____ per share, net tangible book value per share after
the offering will be $_____ per share, resulting in dilution of $_____ or
____% to investors in the offering. Current shareholders purchased their
shares at a price below the price of the shares being offered.
OUR CONTROL WILL NOT CHANGE AFTER THE OFFERING.
After the completion of this offering, the officers, directors and
other principal shareholders will continue to own a majority of our common
stock, and have voting control over us.
OUR STOCK HAS BEEN THINLY TRADED AND IS SUBJECT TO PRICE VOLATILITY.
Before this offering, our stock traded on the NASD OTC Bulletin Board.
Historically:
* our Company has not been covered by regular reports from
financial analysts of established standing;
* the limited amount and distribution of our stock has exacerbated
the effect of relatively small imbalances in supply and demand;
and
* the number of stock brokerage firms trading our common stock has
been limited.
Due to these factors, the trading price of our common stock could be
subject to wide fluctuations in response to quarterly variations in
operating results, changes in financial estimates by securities analysts,
announcements of technological innovations or new products by us or our
competitors or other factors. In addition, the stock market has
experienced extreme price and volume fluctuations that have particularly
affected the market prices for many biotechnology and small capitalization
companies.
OUR STOCK AND WARRANTS MAY BECOME SUBJECT TO "PENNY STOCK" RULES.
If our common stock were to trade for less than $5.00 per share, then
our common stock and warrants would each be considered a "penny stock"
under federal securities law. Additional regulatory requirements apply to
trading of penny stocks by broker-dealers. This could adversely effect the
trading market for our common stock and warrants.
8
<PAGE>
OUR WARRANTS CAN BE REDEEMED ON SHORT NOTICE.
At any time after one year following the date of this prospectus, we
can redeem the warrants for $0.25 per warrant on 30 days' written notice,
provided that the closing price of our common stock has been at least $___
for the ten consecutive trading days immediately preceding the notice of
redemption. If we give notice of redemption, a holder would be forced to
sell or exercise the warrants or accept the redemption price. See
"Description of Securities - Warrants" on page 31.
WE CAN ISSUE PREFERRED STOCK WITHOUT THE CONSENT OF OUR SHAREHOLDERS.
Our Board of Directors may issue shares of preferred stock without
stockholder approval on such terms as the Board may determine. The rights
of the holders of common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may
issue in the future. See "Description of Securities - Preferred Stock" on
page 33.
A CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IS REQUIRED BEFORE
PURCHASERS MAY EXERCISE THE WARRANTS.
Purchasers of our warrants will be able to exercise the warrants only
if a current prospectus relating to the common stock underlying the
warrants is then in effect, and only if our common stock is qualified for
sale or exempt from qualification under applicable state securities laws of
the states in which the holders of the warrants reside. Although we have
undertaken to maintain the effectiveness of a current prospectus covering
the common stock underlying the warrants, there can be no assurance that we
will be able to do so. The value of the warrants may be impaired if a
current prospectus covering the common stock issuable upon exercise of the
warrants is not kept effective, or if the common stock is not qualified or
exempt from qualification in the states in which the holders of warrants
reside. See "Description of Securities - Warrants" on page 31.
WE HAVE NO AGREEMENTS WITH OUR MANAGEMENT WHICH SECURE THEIR CONTINUING
SERVICE.
Our management members are employed at will. Therefore, a management
member may terminate employment at any time. See "Management" beginning on
page 23.
WE ENTERED TRANSACTIONS WITH RELATED PARTIES WHICH WERE NOT SUBJECT TO
INDEPENDENT DIRECTOR APPROVAL.
Past transactions with related parties were ratified by disinterested
directors and believed to be on terms at least as favorable as obtainable
from third parties. However, until recently, we did not have independent
directors. Future related party transactions will be subject to independent
director ratification. See "Related Party and Other Material Transactions"
beginning on page 30.
9
<PAGE>
USE OF PROCEEDS
After payment of underwriting commissions and other expenses of the
offering, the net proceeds of the offering are estimated to be $________
million, or $______ million if the over allotment option is exercised. We
expect to use the net proceeds approximately as follows:
* Phase III clinical trials $ 55%
* New Drug Application for Esterom(R) $ 20%
solution
* Research and development of additional
applications of Esterom(R) solution $ 10%
* General office and administrative expenses
and working capital (includes salaries,
rent, travel, professional fees) $ 15%
There may be changes in our proposed use of proceeds due to changes in
our business. Proceeds not immediately needed will be invested in treasury
bills, insured bank deposits or similar investments. No proceeds will be
used to redeem preferred stock.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock and do
not intend to pay dividends on our common stock in the foreseeable future.
Instead, we will retain any earnings to finance the expansion of our
business and for general corporate purposes. We are obligated to pay
dividends on our Series A and Series B preferred stock, although we may
elect to pay the dividends on the Series B preferred stock in shares of our
common stock. We have paid no dividends on our Series A preferred stock.
As of December 31, 1999 we have issued 24,550 shares of common stock as
dividends on our Series B preferred stock.
10
<PAGE>
PRICE RANGE OF OUR COMMON STOCK
Since February 25, 1998, our common stock has been traded on the NASD
OTC Bulletin Board under the trading symbol "ETOP". The following table
sets forth the high and low bid prices for the common stock for the
quarters indicated. Prices reflect bids posted by market makers and may
not necessarily reflect actual transactions.
Year ended December 31, 1998 High Bid Low Bid
- ---------------------------- -------- -------
First Quarter $3.375 $3.00
Second Quarter $7.875 $3.25
Third Quarter $7.50 $3.50
Fourth Quarter $4.75 $3.375
Year ended December 31, 1999
- ----------------------------
First Quarter $6.125 $3.00
Second Quarter $7.6875 $5.875
Third Quarter $6.3125 $5.1875
Fourth Quarter $6.875 $4.00
Year ended December 31, 2000
- ----------------------------
First Quarter (through February 28, 2000) $9.25 $6.75
On February 28, 2000, the closing bid price of the common stock on the
NASD OTC Bulletin Board was $7.625 per share. As of February 28, 2000,
there were 406 holders of record of our common stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1999:
* our actual capitalization; and
* our proforma capitalization reflecting the sale of 2,000,000
shares and 2,000,000 warrants in the offering at the public
offering price of $______ per share and $______ per warrant, and
the use of the net proceeds of the offering.
<TABLE>
<CAPTION>
December 31, 1999
-----------------
Actual Pro forma
------ ---------
<S> <C> <C>
Redeemable preferred stock:
Series A: 3,210,487 shares issued and outstanding $ 3,210,487 $
Series B: 230,500 shares issued and outstanding 1,093,175
Stockholders' equity
Preferred stock, $.001 par value-- 10,000,000 shares
authorized, Series A and Series B outstanding ---
(reported above)
Common stock, $.001 par value-- 50,000,000 shares
authorized: 7,382,280 shares issued and outstanding
(actual), and 9,382,280 shares issued and outstanding 7,382
(proforma)
Additional paid-in capital 13,866,412
Deficit accumulated during the development stage (12,640,814)
Unearned stock compensation (3,218,293)
-----------
Total stockholders' equity (deficit) (1,985,313)
-----------
Total capitalization $ 2,318,349
===========
</TABLE>
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and notes thereto. The
selected financial data as of December 31, 1998 and 1999, and for the years
then ended are derived from audited financial statements included in this
prospectus.
<TABLE>
<CAPTION>
Cumulative
amounts from
inception
through
STATEMENT OF OPERATIONS Years ended December 31, December 31,
DATA: ------------------------ ------------
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenue $ -0- $ -0- $ -0-
Research and development 1,743,837 906,719 6,597,410
Other costs and expenses 3,195,425 1,857,908 5,920,654
------------ ------------ ------------
Net loss (4,939,262) (2,764,627) (12,518,064)
Accrued dividends applicable
to Series B preferred stock (119,300) (56,260) (175,560)
------------ ------------ ------------
Net loss applicable to
common shareholders $ (5,058,562) $ (2,820,887) $(12,693,624)
============ ============ ============
Basic and diluted net loss per
common share $ (.75) $ (.47) $ (2.36)
============ ============ ============
Weighted average number of
shares outstanding 6,749,000 5,968,000 5,374,000
============ ============ ============
</TABLE>
BALANCE SHEET DATA:
The unaudited proforma balance sheet data reflects the issuance of
securities in this offering.
Unaudited Pro
forma
December 31, December 31,
1999 1999
------------ ------------
Cash and cash equivalents $2,260,526 $
Working capital 1,937,721
Total assets 2,825,225
Total liabilities 506,876
Redeemable preferred stock 4,303,662
Stockholders' equity (deficit) (1,985,313)
13
<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 our 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 December 31, 1999, our accumulated deficit was
approximately $12.6 million.
PLAN OF OPERATION
We have raised sufficient funds in 1999 to complete the first part of
a two part Phase III clinical trial program associated with the FDA
approval process for the treatment of acute painful shoulder. The trials
began in November 1999 and the first part is scheduled for completion in
mid-2000. We intend to use a substantial portion of the net proceeds of
our secondary offering to fund our Phase III clinical trials through 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. We
have engaged the services of a full-time chief executive officer and
president beginning November 29, 1999 which will increase our general and
administrative expenses.
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to year ended December 31, 1998.
Our research and development expenses were $1,743,837 for 1999, as compared
to $906,719 in 1998. The increase in research and development resulted
primarily from initiation of Phase III clinical trials, and approximately
$200,000 from non-cash compensation expenses associated with stock options
granted to Western Center for Clinical Studies (Western). Our general and
administrative expenses were $3,211,809 in 1999, as compared to $1,844,575
in 1998. The increase in general and administrative expenses relates
primarily to our preparation costs for the start of Phase III clinical
trials and fund raising activities. Moreover, the 1999 increase resulted
from an increase of approximately $1,200,000 in non-cash compensation
expense associated with stock options.
14
<PAGE>
Our interest income was $64,888 in 1999, as compared to $24,738 in
1998. The increase was primarily a result of larger temporary cash
investment balances in 1999 from proceeds of private placements.
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 December 31, 1999,
we have received net cash proceeds from financing activities aggregating
approximately $6.8 million from these transactions. As of December 31,
1999, our working capital was $1,937,721.
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 will provide sufficient capital resources to fund
our operations for at least the next 20 months. 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 approximately $1,480,000 in
1998 and $1,617,000 in 1999. The cash used in operations was primarily
related to funding expansion of research and development activities as well
as establishing an administrative infrastructure. For the year ended
December 31, 1999, cash used in operating activities principally represents
the net loss for the period of $4,939,262 adjusted for non-cash stock
option compensation and an increase in accounts payable.
As of December 31, 1999, our principal source of liquidity was
approximately $2.3 million in cash and cash equivalents.
In April 1998, we entered into an agreement with Western to assist us
in obtaining FDA approval for Esterom(R) solution. We are 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. We also issued to Western stock options
to purchase 450,000 shares of our common stock at $1.50 per share.
In August 1999, we entered into an agreement with Therapeutic
Management, Inc. to provide us clinical trial management services and
monitor all aspects of Esterom's Phase III A and B clinical studies. In
November 1999, we entered into an agreement with Western to assume our
obligations under the Therapeutic Management Agreement. We will pay
Western approximately $350,000 based upon completion of certain project
goals.
In November 1999, we entered into an agreement with Western to assume
our obligations under our agreement with Therapeutic Management, Inc. to
perform tasks required to comply with FDA regulations applicable to the
conduct, coordination and management of the first Phase III trial. Among
other things, WCCS is to select investigators, train clinical site
personnel, maintain the master file of
15
<PAGE>
all pre-study and study documents, and prepare the Study Report to be
submitted to the FDA. We will pay Western approximately $350,000 based on
completion of certain project goals.
Our operating expenses will increase as we proceed with the two part
Phase III clinical trials through the new drug application and other
related FDA approval process. We also expect that our general and
administrative expenses will increase significantly with the addition of
our full time chief executive officer and president. The 20 month period
estimate 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 as set forth under "Risk Factors" and elsewhere in this
prospectus. In the event 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 our 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 our business, financial
condition or results of operations.
YEAR 2000 ISSUE
To date we have not experienced any material difficulties or incurred
significant expenditures in connection with Year 2000 issues. All of our
expenses have related to the opportunity cost of time spent by several of
our 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. We contacted all other major
vendors, suppliers, financial institutions and service providers to ensure
they are Year 2000 compliant. Key third party vendors provided a statement
in writing that their software or systems are Year 2000 compliant.
16
<PAGE>
OUR BUSINESS
Entropin is a development stage pharmaceutical company that has
developed Esterom(R) solution, a topical formulation for the treatment of
conditions involving impaired range of motion. Impaired range of motion
often accompanies injuries and disorders of the shoulder and lower back, as
well as other conditions affecting body joints. Esterom(R) solution is
derived from a process involving the chemical breakdown of cocaine into new
and different molecules, three of which have been patented by us. We have
completed four preclinical animal studies and Phase I and Phase II human
clinical trials for Esterom(R) solution. These trials indicated that
Esterom(R) solution was well tolerated and did not appear to have any
potential for addiction or abuse. Moreover, the range of motion with
patients in the Phase II trial suffering from shoulder and lower back
conditions was improved significantly when compared with patients receiving
a placebo. We began Phase III trials for treatment of impaired range of
motion due to shoulder injuries and functionality in November 1999. We
expect to complete our Phase III trials and submit a new drug application
to the FDA in early 2001.
Esterom(R) solution is derived through a manufacturing process
involving hydrolysis and solvolysis of cocaine in a propylene glycol and
water solution. Hydrolysis and solvolysis are chemical processes in which
a substance reacting with a solvent such as propylene glycol and water
solution, is changed into one or more other substances. Through this
process, we have identified three new molecules, derivatives of
benzoylecgonine, ecgonine and ecgonidine, which form the basis of our
formulation of Esterom(R) solution and are claimed under two of our eight
United States patents. A third United States patent claims a method for
preparing Esterom(R) solution.
REGULATORY HISTORY
In March 1987, we filed an investigative new drug application with the
FDA which incorporated the results of our four pre-clinical animal safety
studies in which no significant toxicity was noted. Our subsequent human
Phase I clinical safety trial for Esterom(R) solution was completed in
1991, and involved 24 healthy male subjects. The results of this trial
indicated that Esterom(R) solution was well tolerated and showed no
significant toxicity. Based on these results, the FDA allowed us to
initiate Phase II clinical efficacy and safety trials in 1992.
Our Phase II clinical trial, completed in 1994, was designed to
determine the safety and efficacy of Esterom(R) solution in patients who
had impaired range of motion due to acute lower back strain, acute painful
shoulder or the removal of a cast. The Phase II clinical trial involved 97
patients, each of whom received two topical applications of Esterom(R)
solution or placebo, with the second treatment applied 24 hours after the
first. The results of the trial showed that Esterom(R) solution provided
statistically significant improved range of motion in both back and
shoulder conditions which was sustained for at least seven days. There was
no clinically observed local anesthetic or analgesic effect. The range of
motion for each condition was measured by the number of degrees to which
the subject could move the affected part in one direction or another. The
results for patients who had impaired range of motion resulting from cast
removal were inconclusive and we did not pursue this indication further.
In 1996, we submitted our Phase III Protocol to the FDA, and a revised
Phase III Protocol in 1999. Our Phase III studies will include two trials
in multiple clinical study centers in differing
17
<PAGE>
geographic areas of the U.S. The trials will be double-blind and placebo-
controlled in which neither patient nor doctor will know whether the
patient receives Esterom(R) solution or placebo.
We began the first Phase III trial in November 1999 and we expect to
begin the second trial in several months. In each of the two studies 300
patients will be enrolled for a total of 600 patients. Of the 300 patients
in each study, 100 will receive single strength Esterom(R) solution, 100
double strength, and 100 placebo. The second trial has a longer patient
follow-up period than the first trial.
Our Phase III trials will test Esterom(R) solution for improved range
of motion and functionality associated solely with shoulder injuries.
Functionality involves a patient's ability to perform everyday functions,
such as hair combing or removing a pullover sweater. Subsequently, we
intend to seek FDA approval for treatment by Esterom(R) solution of lower
back sprain.
OUTSOURCING
In January 1997, we entered into an agreement with Mallinckrodt, Inc.,
the only company authorized by the Drug Enforcement Agency (DEA) to provide
cocaine for medical and research purposes, and to supply and manufacture
Esterom(R) solution. Due to federal restrictions, Esterom(R) solution
cannot be manufactured outside of the United States for sale in the United
States. Due to DEA licensing requirements, Mallinckrodt is our sole source
for cocaine and for producing Esterom(R) solution. In addition, our
agreement with Mallinckrodt provides that it will comply with the Good
Manufacturing Practices imposed by the FDA through its facilities
inspection program. In exchange for the services, Mallinckrodt was granted
the right to be our exclusive supplier in North America and a right of
first refusal to be our exclusive world-wide supplier.
In April 1998, we entered into an agreement with Western, to assist us
in administering the clinical trials necessary for obtaining FDA approval
of Esterom(R) solution. Daniel L. Azarnoff, M.D., a director of Entropin,
is a director of Western.
In August 1999, we entered into an agreement with Therapeutic
Management, Inc., a clinical research organization, to provide
comprehensive clinical trial management and monitor our first of two Phase
III clinical trials for Esterom(R) solution.
In November 1999, we entered into an agreement with Western to perform
and assume our obligations under our agreement with Therapeutic Management
for compliance with FDA regulations.
We do not intend to establish our own direct sales force to market
Esterom(R) solution. Instead, we are actively pursuing strategic
relationships with pharmaceutical companies to whom we can outsource the
marketing of Esterom(R) solution.
18
<PAGE>
PATENTS
We hold eight U. S. patents issued between 1984 and 1998 with
expiration dates ranging from September 2001 to June 2014. These patents
include two material composition patents covering the molecules contained
in Esterom(R) solution that expire in 2012 and 2013. Our three initial
patents were based on methods of treatment of rheumatoid arthritis using
benzoylecgonine and related compounds. Our five subsequent patents include
compound, composition and method claims involving derivatives of the
compounds represented in the earlier patents. Since the formula for
Esterom(R) solution contains the derivatives protected by certain of the
subsequent patents, the expiration of the earlier patents in 2001 and 2002
will not permit a replication of Esterom(R) solution by a competitor. We
believe that some of the patents to which we have rights may be eligible
for extensions of up to five years.
In December 1993 we filed an International Patent Application under
the Patent Cooperation Treaty claiming compounds present in the Esterom(R)
formulation from which eight separate patent applications were derived --
Australia, Canada, Europe, Hungary, Japan, New Zealand, Norway and Poland.
In addition, we have filed patent applications in China, Israel, Mexico,
South Africa and Taiwan. From these foreign applications, nine patents
have been issued to date.
GOVERNMENT REGULATION
The research, development, testing, manufacturing, promotion,
marketing and distribution of drug products are extensively regulated by
government authorities in the United States and other countries. Drugs are
subject to rigorous regulation by the FDA in the United States and similar
regulatory bodies in other countries. The steps ordinarily required before
a new drug may be marketed in the United States, which are similar to steps
required in most other countries, include:
* Preclinical safety studies in animals and formulation studies and
the submission to the FDA of an Investigational New Drug (IND)
application for a new drug;
* Adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug for each medical indication;
* The submission of a New Drug Application (NDA) to the FDA; and,
* FDA review and approval of the NDA.
Preclinical animal tests include laboratory evaluation of product
chemistry, stability, pharmaceutical properties and formulation, as well as
studies to prove the product is safe in animals. The results of
preclinical testing are submitted to the FDA as part of an NDA. The FDA
may halt proposed or ongoing clinical trials until it allows the trials to
continue under specified terms.
Clinical trials to support new drug applications are typically
conducted in three sequential phases. During Phase I safety studies, the
initial introduction of the drug on healthy human subjects, the drug is
tested to assess how the drug is handled in the body and the level of drugs
in the body over time, as well as side effects associated with increasing
doses.
19
<PAGE>
Phase II usually involves studies in a limited patient population to:
- assess the efficacy of the drug in specific, targeted indications;
- assess dosage tolerance and optimal dosage; and/or
- identify possible adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials (also
called pivotal studies, major studies or advanced clinical trials) are
undertaken to further demonstrate clinical efficacy and to further test for
safety of the product within an expanded patient population at
geographically dispersed clinical study sites.
After successful completion of the required clinical testing, a NDA is
generally submitted. The FDA may request additional information before
accepting a NDA for filing, in which case the application must be
resubmitted with the additional information. Once the submission has been
accepted for filing, the FDA has 180 days to review the application and
respond to the applicant. The review process is often significantly
extended by FDA requests for additional information or clarification. The
FDA may refer the new drug application to an appropriate advisory committee
for review, evaluation and recommendation as to whether the application
should be approved, but the FDA is not bound by the recommendation of an
advisory committee.
If FDA evaluations of the new drug application and the manufacturing
facilities are favorable, the FDA may issue either an approval letter or an
approvable letter. An approvable letter will usually contain a number of
conditions that must be met in order to secure final approval of the new
drug application and authorization of commercial marketing of the drug for
certain indications. The FDA may refuse to approve the new drug
application or issue a not approvable letter, outlining the deficiencies in
the submission and often requiring additional testing or information.
The manufacturers of approved products and their manufacturing
facilities are subject to continual review and periodic inspections.
Because we intend to contract with third parties for manufacturing our
product, our control of compliance with FDA requirements will be more
complicated. In addition, identification of certain side effects or the
occurrence of manufacturing problems after any of our drugs are on the
market could cause subsequent withdrawal of approval, reformulation of the
drug, additional clinical trials, and changes in labeling of the product.
Outside the United States, our ability to market our products will
also be contingent upon receiving marketing authorizations from the
appropriate regulatory authorities. The foreign regulatory approval
process includes all of the risks associated with the FDA approval set
forth above. The requirements governing the conduct of clinical trials and
marketing authorization vary widely from country to country. At present,
foreign marketing authorizations are applied at a national level, although
within Europe procedures are available to companies wishing to market a
product in more than one European Union, or EU, member state.
Under a new regulatory system in the EU, marketing authorizations may
be submitted at either a centralized, a decentralized or a national level.
The centralized procedure is mandatory for the
20
<PAGE>
approval of biotechnology products and high technology products and
available at the applicant's option for other products. The centralized
procedure provides for the grant of a single marketing authorization that
is valid in all EU member states. The decentralized procedure is available
for all medicinal products that are not subject to the centralized
procedure. The decentralized procedure provides for mutual recognition of
national approval decisions, changes existing procedures for national
approval decisions and establishes procedures for coordinated EU actions on
products, suspensions and withdrawals. Under this procedure, the holder of
a national marketing authorization for which mutual recognition is sought
may submit an application to one or more EU member states, certify that the
dossier is identical to that on which the first approval was based or
explain any differences and certify that identical dossiers are being
submitted to all member states for which recognition is sought. Within 90
days of receiving the application and assessment report, each EU member
state must decide whether to recognize approval. The procedure encourages
member states to work with applicants and other regulatory authorities to
resolve disputes concerning mutual recognition. Lack of objection of a
given country within 90 days automatically results in approval of the EU
country.
We will choose the appropriate route of European regulatory filing to
accomplish the most rapid regulatory approvals. However, the regulatory
strategy may not secure regulatory approvals or approvals of the chosen
product indications. We intend to contract with an experienced third party
to assist with our European clinical development and regulatory approvals.
DEA STATUS
The DEA has designated Esterom(R) solution as a Schedule II controlled
substance. The manufacture, storage, shipment and use of a Schedule II
controlled substance is subject to costly and burdensome regulations. We
have submitted a petition to the DEA to delist Esterom(R) solution as a
Schedule II substance based on the data obtained in Phase I and II clinical
studies in human beings which indicated that Esterom(R) solution showed no
effects on the cardiovascular system and did not appear to cross the blood-
brain barrier. The petition is currently under review by the U.S. Attorney
General's office and the FDA. We do not expect a decision unless and until
Esterom(R) solution is approved for marketing by the FDA.
PRODUCT LIABILITY INSURANCE
Sales of Esterom(R) solution entails risk of product liability claims.
Medical testing has historically been litigious, and we face financial
exposure to product liability claims in the event that use of Esterom(R)
solution results in personal injury. We also face the possibility that
defects in the manufacture of Esterom(R) solution might necessitate a
product recall. There can be no assurance that we will not experience
losses due to product liability claims or recalls in the future. We
anticipate purchasing product liability insurance in reasonable and
customary amounts when we begin to sell Esterom(R) solution. Such
insurance can be expensive, difficult to obtain and may not be available in
the future at a reasonable cost or in sufficient amounts to protect us
against losses due to liability. An inability to maintain insurance at an
acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit our commercialization of Esterom(R) solution.
Moreover, a product liability claim in excess of relevant insurance
coverage or product recall could have a material adverse effect on our
business, financial condition and results of operations.
21
<PAGE>
ROYALTY COMMITMENTS
In connection with our acquisition of the rights to the three original
patents for Esterom(R) solution from non-affiliated parties, we agreed to
pay a royalty of approximately 1% of amounts paid to us from the sale of
Esterom(R) solution. We have agreed to pay a minimum royalty from actual
sales consisting of a front end payment of $40,000 and quarterly payments
of $3,572 which is accruing from December 1, 1989, less a credit to us for
50% of patent expenses we incur.
COMPETITION
To our knowledge, there are no products on the market which treat
impaired range of motion associated with injuries and disorders of the
shoulder and lower back. For these conditions, physicians often prescribe
steroidal drugs, non-steroidal anti-inflammatory drugs, pain relievers, and
muscle relaxants. While these products reduce discomfort, they generally
do not address impaired range of motion.
The pharmaceutical industry is characterized by intense competition
and is subject to rapid and significant technological change. Rapid
technological development may cause Esterom(R) solution and any other
products we develop to become obsolete before we can recoup all or any
portion of our development expenses. Our competitors include major
pharmaceutical companies, biotechnology firms, universities and other
research institutions, both in the United States and abroad, which are
actively engaged in research and development of products in the therapeutic
areas being pursued by us. Most of our competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than us. In addition, many of our competitors have
significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, our
competitors may succeed in obtaining regulatory approval for their products
more rapidly than we are able to obtain approval for Esterom(R) solution.
If we commence significant commercial sales of our products, we will also
be competing with respect to manufacturing efficiencies and marketing
capabilities, areas in which we have no experience.
EMPLOYEES
We have one full time executive officer, Thomas G. Tachovsky, our
President and Chief Executive Officer and one full time administrative
employee. We have three part-time executive officers, Higgins D. Bailey,
Chairman of the Board and Secretary, Donald Hunter, Vice Chairman of the
Board and Treasurer and Wellington Ewen, Chief Financial Officer. We are
actively seeking a qualified individual to serve as a full-time Chief
Financial Officer.
PROPERTIES
We sublease 800 square feet of office space in Indio, California from
one of our principal stockholders, Thomas T. Anderson, for a monthly rent
of $800 on a month to month basis. We believe the lease is at or below
market price for comparable office space. Following this offering, we
intend to lease separate office space for our corporate headquarters in
Indio, California and terminate our current lease.
22
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the names, ages and positions of our
executive officers and directors:
Name Age Position
---- --- --------
Thomas G. Tachovsky 52 President, Chief Executive Officer
and Director
Higgins D. Bailey 69 Chairman of the Board and Secretary
Donald Hunter 65 Vice Chairman of the Board and
Treasurer
Daniel L. Azarnoff 73 Director
James E. Wynn 57 Director
Wilson Benjamin 56 Director
Joseph R. Ianelli 61 Directr
Wellington A. Ewen 59 Chief Financial Officer
All members of the board of directors hold office until the next
annual meeting of shareholders and the election and qualification of their
successors, or until death, resignation or removal. Messrs. Benjamin and
Ianelli are independent directors. Officers serve at the discretion of the
Board of Directors. We are actively seeking an individual qualified to
serve as a full time Chief Financial Officer.
THOMAS G. TACHOVSKY, Ph.D. joined us as a director, President and
Chief Executive Officer in November 1999. Since June 1997 he has held a
series of interim senior management positions in development stage bio-
pharmaceutical companies including Redox Pharmaceuticals Corporation;
Novavax, Inc. and Paracelsian, Inc. From June 1995 to November 1997, he
was a director and executive vice-president of Protyde Pharmaceuticals,
Inc. From June 1991 to February 1998, he was general partner of MATCO &
Associates, a bio-pharmaceutical industry consulting firm for corporate
partnering, technology assessment and market valuation. He has held
business development positions with Cytogen Corporation and Creative
Biomolecules and was a research and development manager with Johnson &
Johnson. Dr. Tachovsky received a B.S. degree in biology from Gonzaga
University; a M.S. degree in management from Lesley College; and a Ph.D
degree in microbiology from the University of Rochester School of Medicine.
HIGGINS D. BAILEY, Ed.D. joined us as an officer and director in July
1992 and is currently our Chairman of the Board and Secretary. From July
1995 to December 1996, Dr. Bailey was President and Chief Executive Officer
for the Pharmaceutical Educational and Development Foundation at the
Medical University of South Carolina, Charleston, South Carolina, which
formulates and manufactures pharmaceutical products. Since 1991, he has
served as the business manager for Thomas T. Anderson Law Firm, Indio,
California. Thomas T. Anderson is one of our principal stockholders. Dr.
Bailey
23
<PAGE>
received a B.A. degree in biology from Eastern Washington University, a
M.S. degree in program planning and personnel and a Ed.D. degree in
administration and management from the University of California, Berkeley,
California.
DONALD HUNTER joined us as a director and Secretary in February 1998.
In May 1999, he resigned as Secretary and was appointed as our Chief
Executive Officer and Treasurer. He served as Chief Executive Officer
until November 1999. Since 1994, Mr. Hunter has served as a consultant to
Entergy Corporation as well as other concerns dealing with mergers and
acquisitions and other business matters. From 1991 to 1994, he was senior
vice president of Entergy Corporation. Mr. Hunter received a B.S. degree
in chemical engineering from Purdue University and a M.S. degree in nuclear
engineering from Iowa State University.
DANIEL L. AZARNOFF, M.D. joined us as a director in February 1998 and
acted as our President on a part-time basis until April 1998. Since 1988,
Dr. Azarnoff has been President of D. L. Azarnoff Associates, a company
engaged in consulting for various pharmaceutical and biotechnology
companies including Sandoz, Orion Pharma, DeNovo, Inc., Cibus
Pharmaceutical and Cellegy Pharmaceuticals, Inc. Since August 1998, Dr.
Azarnoff has held a clinical faculty position at Stanford University
Medical School. Prior to the time, he held faculty positions at the
University of Kansas Medical School, Northwestern University Medical
School, the University of Chicago Medical School and St. Louis University
School of Medicine. Dr. Azarnoff is a director of Amerimmune, Inc., a
publicly held pharmaceutical drug and development company. Since June
1999, he has served as Senior Vice President, Medical/Regulatory Affairs
for Cellegy Pharmaceutical, Inc. Dr. Azarnoff received a B.S. degree in
biology and a M.S. degree in zoology from Rutgers University and a M.D.
degree from the University of Kansas Medical School.
JAMES E. WYNN, Ph.D. joined us as a director in February 1998. Since
1977, Dr. Wynn has been a Professor and since September 1995, Assistant
Dean for Research at the Medical University of South Carolina. Prior to
that time, he held various other positions at the University, including
Chairman of the Department of Pharmaceutical Sciences, College of Pharmacy
and principal investigator for the Drug Bioequivalence Evaluation Program.
Dr. Wynn received a B.S. degree in pharmacy and a Ph.D. degree in medicinal
chemistry from the Medical College of Virginia, Virginia Commonwealth
University, Richmond, Virginia.
WILSON BENJAMIN joined us as a director in February 2000. Since 1992
he has been the President and Chief Executive Officer of Al Fawaris Co.
where he is responsible for Al Fawaris' investments and participation in
the management of certain of its portfolio companies. Since 1992 he has
also served as the Chairman of the Board of Directors and Chief Executive
Officer of ATO Ram 2 Ltd. where he is responsible for managing ATO's
operations and its investments in public and private companies in the
United States, Europe and the Persian Gulf States. Since 1999, he has been
the Chairman of the Board of Directors of Arab Commercial TV Co., a cable
television broadcasting company. Mr. Benjamin received a B.A. in business
administration from Al Hikma University in Baghdad, Iraq.
24
<PAGE>
JOSEPH R. IANELLI joined us as a director in February 2000. Since
January 1999 he has been the President and Chief Executive Officer of
PharmaConnect, Inc. responsible for design and development of an internet
website for physicians. Since January 1999 he has also been the President
and Chief Executive Officer of Renaissance Pharmaceuticals, Inc. a
development stage company involved in drug delivery technologies. From
1983 to January 1999 he served as the Senior Vice President of Business
Development for Astra U.S.A., Inc. where he was responsible for
acquisitions and licensing. At Astra, he served on the Executive Committee
and was a member of the Management Advisory Board. Mr. Ianelli received a
B.A. in Biology from Marist College, a M.A. in Biology from the State
University of New York and an M.B.A. from Iona College.
WELLINGTON A. EWEN, C.P.A., M.B.A has been the Company's Chief
Financial Officer since April 1998. From 1988 to the present, Mr. Ewen has
been the owner and manager of Wellington A. Ewen & Associates, a business
consulting firm in Malibu, California. He has acted as a financial and
accounting officer for various businesses during that time. Prior to
that, Mr. Ewen served as senior manager at the public accounting firms of
Coopers & Lybrand, Los Angeles, California and Arthur Andersen & Co., New
York, New York. Mr. Ewen is a C.P.A. in the states of New York and
California and has earned M.B.A. and B.S. degrees from Cornell University.
SCIENTIFIC AND MEDICAL ADVISORY BOARD
Our Board of Directors has established a Scientific and Medical
Advisory Board to advise and consult with us as may be requested by the
Board from time-to-time. We pay the members of our Scientific and Medical
Advisory Board $1,500 per meeting, as well as reimbursement for any
expenditures incurred on our behalf. In connection with their appointment
to the Scientific and Medical Advisory Board, in June 1998, each member was
also granted options to purchase 3,000 shares of our common stock,
exercisable at $1.50 per share, vesting at the rate of 1,000 shares per
year over a three year period. Currently, the Scientific and Medical
Advisory Board consists of the following:
ARTHUR HULL HAYES, JR., M.D., since 1991, has been Vice Chairman and
Medical Director, Nelson Communications, Inc. and the President of
MediScience Associates, Inc., the regulatory/medical consulting division of
Nelson Communications. From 1981 to 1983, Dr. Hayes was appointed the
Commissioner of the FDA during which time he was also Assistant Surgeon
General. He was named Provost and Dean at the New York Medical College
from 1983 to 1986, where he also served as Professor of Medicine and
Pharmacology from 1983 to 1999. From 1986 to 1991, Dr Hayes was the
president and chief executive officer and member of the board of directors
of EM Pharmaceuticals, Inc., a North American subsidiary of E. Merck,
Darmstadt, Germany. He is a Diplomate of the American Colleges of
Physicians, Cardiology, and Chest Physicians, the American Academy of
Pharmaceutical Physicians, the New York Academy of Medicine and the Royal
College of Medicine. He has published numerous scientific and public
policy articles.
GERHARD LEVY, Pharm.D., is University Distinguished Professor of
Pharmaceutics Emeritus (active) at the State University of New York at
Buffalo School of Pharmacy, where he has served since 1998. From 1958 to
date, Dr. Levy has authored over 550 publications. He has consulted for
the United States Food and Drug Administration and has consulted for the
World Health Organization.
25
<PAGE>
He has received awards for scientific achievement and excellence, including
the first Lifetime Achievement in the Pharmaceutical Science Award of the
International Pharmaceutical Federation.
WILLIAM CHARLES MCMASTER, M.D., has been Clinical Professor in the
Department of Orthopeadic Surgery at the University of California, Irvine
since 1984. He also has a private practice in Orange, California. He is
a member of the American Orthopeadic Association and the American
Orthopedic Society for Sports Medicine. He has held numerous elected
offices in the California Orthopedic Association, the American Academy of
Orthopedic Surgery and the Western Orthopaedic Association. He is a fellow
of the American College of Surgeons and a founding member of the Society
for Biomaterials and Association for Arthritic Hip and Knee Surgery. Dr.
McMaster has published numerous publications and presentations in sports
medicine and orthopedic surgery.
LESTER A. MITSCHER, Ph.D. has been University Distinguished Professor,
Department of Medicinal Chemistry at the University of Kansas since 1975.
Dr. Mitscher has consulted with numerous pharmaceutical companies,
including Proctor and Gamble, Panax Laboratories, Abbott Laboratories, G.D.
Searle, Sandoz Laboratories, and DuPont Merck Labs over the last 31 years.
He served (1981 - 1984) as chairman of the Biological and Natural Products
Section of the National Institute of Health, chairman of the Hematology and
Chemotherapy Study Section of the American Cancer Society (1989 - 1994) and
chairman of the Cooperative Drug Screening Program of the International
Organization for Chemistry in Development, World Health Organization. Dr.
Mitscher has authored several books and over 235 original papers and book
chapters.
KENNETH LLOYD MELMON, M.D., has been Professor of Medicine and
Pharmacology since 1978 and is an Associate Dean for Postgraduate Medical
Education at the Stamford University School of Medicine. Dr. Melmon has
authored numerous original papers and book chapters. He has been a member
of the National Research Council of the Institute of Medicine (1990) the
Committee on Technological Innovation in Medicine of the National Academy
of Science (1990 - 1993) and the National Board of Medical Examiners.
(1989-1996).
26
<PAGE>
SUMMARY COMPENSATION TABLE
The following table provides certain summary information concerning
compensation paid to our Chief Executive Officers for the calendar years
1998 and 1999. No officer was paid compensation for services in excess of
$100,000 per year for either year.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
Restricted
Annual Compensation Stock Options & Other
Name and Position Year Salary($) Bonus($) Awards SARs Compensation
- ----------------- ---- --------- -------- ------ ---- ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas G. Tachovsky, 1999 22,051 -0- -0- 400,000 -0-
President and CEO
since 11/99(1)
Donald Hunter, 1999 -0- -0- -0- 277,500 -0-
CEO from 5/99 to 11/99(2)
Higgins D. Bailey, 1998 95,833 -0- -0- -0- -0-
Chairman and CEO from
1/98 until 9/98(3)
A. Thomas Tenenbaum, 1998 -0- -0- -0- -0- -0-
CEO until 1/15/1998
</TABLE>
__________________________________
(1) Dr. Tachovsky received options to purchase 400,000 shares of our common
stock at $5.00 per share of which 100,000 shares are exercisable upon
completion of the first Phase III trial; 150,000 shares upon submission of
the NDA and 150,000 shares upon approval of the NDA. The options expire
five years from the date they become exercisable.
(2) Mr. Hunter received options to purchase 217,500 shares of our common
stock at $4.00 per share, exercisable for five years from date of grant, as
compensation for services performed for us during the period of July 1,
1998 through November 30, 1999. In August 1999, we also granted Mr. Hunter
options to purchase 120,000 shares of our common stock, exercisable at
$4.00 per share for a period of five years, as a bonus for services rendered.
(3) Dr. Bailey's employment agreement terminated January 15, 1999. During
1999, Dr. Bailey received options to purchase 107,500 shares of our common
stock at $4.00 per share, exercisable for five years from date of grant, as
compensation for services performed for us during the period from January
15, 1999 through September 1, 1999. In August 1999, we also granted Dr.
Bailey options to purchase 120,000 shares of our common stock, exercisable
at $4.00 per share for a period of five years, as a bonus for services rendered.
OPTIONS GRANTED TO DIRECTORS AND EXECUTIVE MANAGEMENT
In 1998 our directors were granted a total of 240,000 options to
purchase common stock at $3.00 per share for a period of ten years. In 1998
and 1999 our executive management was granted a total of 610,000 options to
purchase common stock at $4.00 per share for a period of five years. In
1999 our Chief Executive Officer and President was granted 400,000 options
to purchase common stock at $5.00 per share. The options are subject to
vesting on performance standards being met and are exercisable for a period
of five years.
27
<PAGE>
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for services as
directors, although they are reimbursed for out-of-pocket expenses in
attending board of directors' meetings. Each non-salaried director
receives options to purchase 20,000 shares of our common stock for each
year of service as a director.
STOCK COMPENSATORY PLAN
In September 1998 our board of directors authorized an employee
stock-based compensation plan, the 1998 Stock Compensatory Plan, which
provides for the grant of options intended to qualify as "incentive stock
options" or "nonqualified stock options" within the meaning of Section 422
of the United States Internal Revenue Code of 1986 (the "Code"), as well as
stock bonus shares. Incentive stock options are issuable only to
employees. The purposes of the plan are to attract and retain the best
available personnel, to provide additional incentives to our employees, and
to promote the success of our business.
We have reserved 300,000 shares of common stock for issuance under the
plan, which is administered by the entire board of directors. Under the
plan, the board of directors determines which individuals will receive
options or bonus shares, the time period during which options may be
partially or fully exercised, the number of shares of common stock that may
be purchased under each option and the option price. Options granted under
the plan are generally exercisable for a period of ten years from the date
of grant at an exercise price not less than the fair market value of the
shares at the date of grant. Options granted under the plan generally vest
over a one to three year period from the date of the grant. To date, we
have issued 8,031 bonus shares for services and granted no options under
the plan.
NON-QUALIFIED STOCK OPTIONS GRANTED TO EXECUTIVE OFFICERS DURING 1999
The following table sets forth certain information regarding grants of
stock options to our Executive Officers who received stock options during
1999. The fair value of the option grant was estimated on the date of the
grant utilizing the Black-Scholes option pricing model with the following
assumptions: 51% to 100% volatility, five year life, risk free rate of
return of 5.5% to 6.2% and a 0% dividend yield. None of the following
options have been exercised.
<TABLE>
<CAPTION>
Number of % of Total
Securities Options Grant Date
Underlying Granted to Exercise Grant Present
Name Options Employees Price($) Date Value
---- ------- --------- -------- ---- -----
Granted
-------
<S> <C> <C> <C> <C> <C>
Higgins D. Bailey 217,500 25% $4.00 2/99 - $ 680,000
11/99
Donald Hunter 217,500 25% $4.00 2/99 - $ 680,000
11/99
Thomas G. Tachovsky 400,000 47% $5.00 11/99 $1,260,000
Wellington Ewen 20,000 2% $4.00 6/99 $ 60,000
</TABLE>
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
holdings of common stock (1) by each person who, as of February 28, 2000
holds of record or is known by us to hold beneficially or of record, more
than 5% of our common stock, (2) by each executive officer and director,
and (3) by all officers and directors as a group. The address of each
person is our address at 45926 Oasis Street, Indio, California 92201. The
beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock
issuable on exercise of currently exercisable or convertible securities or
securities exercisable or convertible within 60 days after the date of this
prospectus are deemed beneficially owned and outstanding for computing the
percentage owned by the person holding such securities, but are not
considered outstanding for computing the percentage of any other person.
Percentage of Shares
Number of Beneficially Owned
Shares -------------------
Beneficially Before After
Name of Beneficial Owners Owned Offering Offering
- ------------------------- ----- -------- --------
Thomas G. Tachovsky -0-(1) 0.0 0.0
Higgins D. Bailey 1,711,593(2) 22.3 21.7
Thomas T. Anderson 1,404,093(3) 19.0 18.5
Caroline T. Somers 862,793 11.7 11.4
James E. Wynn 493,085(4) 6.7 6.5
Daniel L. Azarnoff 79,444(5) 1.1 1.0
Donald Hunter 548,000(6) 7.0 6.8
All directors and
executive officers as
a group (5 persons) 2,832,122 34.4 33.6
___________________
(1) Does not include up to 400,000 shares issuable upon exercise of stock
options, none of which are vested.
(2) Includes 1,404,093 shares owned in joint tenancy with Shirley A.
Bailey, the spouse of Dr. Bailey, and 307,500 shares that are issuable
upon exercise of stock options.
(3) Held of record by Dr. Bailey as security for a loan made by Mr. Bailey
to Mr. Anderson.
(4) Represents 433,085 shares which are owned in joint tenancy with Joyce
Wynn, the spouse of Dr. Wynn, 25,000 shares held solely by Joyce Wynn,
and 35,000 shares that are issuable upon exercise of stock options.
(5) Represents the following shares issuable upon exercise of stock
options: options to purchase 35,000 shares granted to Dr. Azarnoff;
and, options to purchase an aggregate of 133,332 shares granted to
Western Center for Clinical Studies, which are fully vested, of which
44,444 shares are attributable to Dr. Azarnoff who owns 1/3 of the
voting shares.
(6) Of these shares, 35,500 shares are held in the name of Deloras Decker
Hunter, Trustee of the Deloras Decker Hunter Generation Skipping
Trust. Deloras Decker Hunter is the spouse of Mr. Hunter and Mr.
Hunter is deemed to have voting control over these 35,500 shares. In
addition, includes 432,500 shares that are issuable upon exercise of
stock options.
29
<PAGE>
RELATED PARTY AND OTHER MATERIAL TRANSACTIONS
During 1996 and 1997, we were advanced an aggregate of $83,873 by
Higgins D. Bailey, our former President, current Chairman and a principal
stockholder. These advances were paid in full January 1998.
We sublease approximately 800 square feet of office space from Thomas
T. Anderson, one of our principal stockholders. The rent on the sublease
is $800 per month. We believe this is a competitive lease rate for similar
real estate in the area where the office is located.
On January 15, 1998, we converted $1,710,487 of long-term debt and
accrued interest incurred for cash advances and past services associated
with research and development into 1,710,487 shares of our redeemable 8%
non-voting, non-cumulative Series A Preferred Stock at $1.00 per share.
The debt was owed to Higgins D. Bailey, Thomas T. Anderson and Lowell Somers.
We owed Dr. James E. Wynn $1,500,000 for research and development
services provided from 1984 through 1997 as evidenced by an 8% Note due
December 31, 2000. In January 1998 we converted this obligation to
1,500,000 shares of our non-voting, non-cumulative redeemable 8% Series A
preferred stock, valued at $1.00 per share. In addition, in December 1997,
certain of our stockholders contributed shares of our common stock to Dr.
Wynn for research and development services (259,042 shares valued at
$712,000, or $2.75 per share). The expense and related capital
contributions were reflected at December 31, 1997. Dr. Wynn was
subsequently appointed one of our directors in February 1998.
In January 1998, we granted Dr. Wynn a non-exclusive right for three
years to develop both improved products and new products from our
proprietary and confidential information. Improved products are those that
contain the same active ingredients as Esterom(R) solution, but that are
formulated differently. New products are those which are developed from
cocaine or a derivative and are separately patentable. We will have all
rights to the improved and new products. Dr. Wynn will receive a two
percent royalty on the net commercial sales of any improved products he
develops. The royalty percentage on any new products he develops is to be
determined through negotiation. If agreement is not reached, the royalty
is to be determined by an arbitrator with pharmaceutical industry experience.
In April 1998 we entered into an agreement, as amended July 21, 1999,
with Western to assist us in completing the Phase III study and new drug
application phase for FDA approval of Esterom(R) solution for limited range
of motion associated with shoulder injuries and disorders. We are paying
$880,400 over the period from April 1998 through January 5, 2001, and
$76,400 per quarter commencing January 2001 and continuing until NDA
submission. We also granted Western options to purchase an aggregate of
450,000 shares of our common stock at $1.50 per share for a term of five
years. The options vest at various times based upon performance. Daniel
L. Azarnoff, M.D., a director of Entropin is also a director of Western.
30
<PAGE>
In November 1999, we entered into an agreement with Western to assume
our obligations under our agreement with Therapeutic Management, Inc. to
perform tasks required to comply with FDA regulations applicable to the
conduct, coordination and management of the first Phase III trial. Among
other things, WCCS is to select investigators, train clinical site
personnel, maintain the master file of all pre-study and study documents,
and prepare the Study Report to be submitted to the FDA. We will pay
Western approximately $350,000 based on completion of certain project goals.
These transactions are believed to be as favorable as obtainable from
third parties and were approved by directors who did not have an interest
in the transactions. However, at the time of the transactions we did not
have any independent disinterested directors to ratify the transactions.
All future material related party transactions and loans will be made or
entered into on terms that are no less favorable than those that can be
obtained from non-related third parties. In addition, all future material
related party transactions and loans, and any forgiveness of loans, must be
approved by a majority of our independent directors who do not have an
interest in the transactions and who have access, at our expense, to our
legal counsel or to independent legal counsel.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 50,000,000 shares of common
stock, $.001 par value per share, and 10,000,000 shares of preferred stock,
$.001 par value per share.
COMMON STOCK
At February 28, 2000 there were 7,382,280 shares of common stock
outstanding held of record by 406 stockholders. Each share of common stock
is entitled to one vote on all matters submitted to a vote of the
stockholders, and cumulative voting is not permitted. Upon issuance,
shares of common stock are not subject to further assessment or call.
Subject to the prior rights of any series of preferred stock that may be
issued by us, holders of common stock are entitled to receive ratably such
dividends that may be declared by the board of directors out of funds
legally available therefor and are entitled to share ratably in all assets
remaining after payment of liabilities in the event of our liquidation,
dissolution or winding up. Holders of common stock have no preemptive
rights or rights to convert their common stock into any other securities.
All outstanding shares of common stock are, and all shares of common stock
to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
WARRANTS
Each warrant will entitle the holder to purchase one share of common
stock at an exercise price of $______ per share (150% of the initial public
offering price of the shares). The warrants will generally be exercisable
at any time for five years after the date of this prospectus, unless
earlier redeemed. The warrants are redeemable by us, at a price of $0.25
per warrant:
* upon 30 days' prior written notice;
31
<PAGE>
* no earlier than one year from the date of this prospectus; and then
* only if the closing bid price of the common stock equals or
exceeds $______ (200% of the initial public offering price of the
shares), per share for the 10 consecutive trading days
immediately preceding the date of notice of redemption.
If we give notice of our intention to redeem, a holder must either:
* sell or exercise the warrants before the date specified in the
redemption notice; or
* accept the redemption price.
The warrants will be issued in registered form under a warrant
agreement between us and Corporate Stock Transfer, Inc., as warrant agent.
The shares of common stock underlying the warrants, when issued upon
exercise of a warrant, will be fully paid and nonassessable. We will pay
any transfer tax incurred as a result of the issuance of common stock to
the holder upon its exercise.
The warrants contain provisions that protect the holders against
dilution by adjustment of the exercise price. These adjustments will occur
if there is a merger, stock split or reverse stock split, stock dividend or
recapitalization and they could occur in other situations. We are not
required to issue fractional shares upon the exercise of a warrant. The
holder of a warrant will not possess any rights as our shareholder until he
or she exercises the warrant.
A warrant may be exercised by surrendering the warrant certificate
* on or before the expiration or redemption date of the warrant at
the offices of the warrant agent; with
* the form of "Election to Purchase" on the reverse side of the
warrant certificate completed and executed as indicated; and
* payment of the exercise price by certified or bank check payable
to the order of Entropin, Inc. for the number of shares for to
which the warrant is being exercised.
In order for a holder to exercise the warrants, there must be
* a current registration statement in effect with the Securities
and Exchange Commission; and,
* qualification in effect under applicable state securities laws or
applicable exemptions from state qualification requirements, with
respect to the issuance of common stock or other securities
underlying the warrants.
32
<PAGE>
We have agreed to use all commercially reasonable efforts to cause a
registration statement with respect to such securities under the Securities
Act to be filed and to become and remain effective in anticipation of and
before the exercise of the warrants and to take such other actions under
the laws of various states as may be required to cause the sale of common
stock or other securities upon exercise of warrants to be lawful. We will
not be required to honor the exercise of warrants if, in the opinion of our
board of directors with the advice of counsel, the sale of securities upon
exercise would be unlawful.
For the life of the warrants, the holders have the opportunity to
profit from a rise in the market price of the common stock without assuming
the risk of ownership of the shares of common stock underlying the
warrants. The warrant holders may be expected to exercise their warrants
at a time when we would, in all likelihood, be able to obtain any needed
capital by an offering of common stock on terms more favorable than those
provided for by the warrants. Furthermore, the terms on which we could
obtain additional capital during the life of the warrants may be adversely
affected.
OTHER OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES
We have outstanding options and warrants to purchase an aggregate of
3,621,182 shares of our common stock, at exercise prices ranging from $1.50
to $5.00 per share and expiration dates ranging from July 2004 to February
2008. Additionally, there are 230,500 shares issuable upon conversion of
the Series B preferred stock.
PREFERRED STOCK
Our Board of Directors has the authority, without further action by
the stockholders, to issue up to 10,000,000 shares of preferred stock in
one or more series and to fix the powers, designations, preferences and
relative, participation, option or other rights thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences, sinking fund terms and the number of shares constituting any
series. The issuance of preferred stock in certain circumstances may have
the effect of delaying, deferring or preventing a change in control of our
company, may discourage bids for our common stock at a premium over the
market price of the common stock, and may adversely affect the market price
of, and the voting and other rights of the holders of the common stock.
Our Board of Directors has designated 3,210,487 shares of preferred
stock as Series A redeemable non-voting preferred stock, of which all were
issued to four holders of record in exchange for our promissory notes and
deferred compensation. Series A preferred stock is designated as
redeemable eight (8%) percent non-cumulative non-voting preferred stock and
redeemable only from 20% of annual "Earnings", but not to exceed "Net Cash
Flow from Operating Activities" as those terms are defined under GAAP. The
Series A preferred stock will be automatically canceled on January 16,
2005, if not fully redeemed within that time period.
Our Board of Directors has designated 400,000 shares of preferred
stock as convertible Series B redeemable non-voting preferred stock, of
which 245,500 shares were issued and 230,500 shares remain outstanding held
by 33 holders of record. Series B preferred stock is designated as redeemable
33
<PAGE>
ten (10%) percent cumulative non-voting preferred stock with $.001 par
value and convertible on a one for one basis into common stock. At our
election, annual dividends may be paid in cash and/or in shares of our
common stock, at the rate of one share of common stock for each $5.00 in
accrued dividends. We may redeem at any time, in whole or in part based
on a pro rata basis with other holders of the Series B preferred stock, the
outstanding Series B preferred stock upon 30 days' notice at $5.00 per
share plus accrued and unpaid dividends from the date of issuance up to the
expiration date. All issued and outstanding Series B preferred stock must
be redeemed in full on or before July 15, 2003.
We will not offer preferred stock to officers, directors or holders of
5% or more of our securities except on the same terms as offered to all
other existing shareholders or new shareholders, or unless the issuance of
preferred stock is approved by a majority of our independent directors who
do not have an interest in the transaction and who have access, at our
expense, to our legal counsel or to independent legal counsel.
STOCK TRANSFER AGENT
Corporate Stock Transfer, Inc., Denver, Colorado is our transfer
agent. The transfer agent's address is 3200 Cherry Creek Drive South,
Suite 430, Denver, Colorado 8020, and its telephone number is (303) 282-4800.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
Our Amended Articles of Incorporation limit the liability of directors
to stockholders for monetary damages for breach of a fiduciary duty except
in the case of liability: (i) for any breach of their duty of loyalty to us
or our stockholders; (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for
unlawful distributions as provided in Section 7-108-403 of the Colorado
Business Corporation Act; or (iv) for any transaction from which the
director derived an improper personal benefit.
Our Articles of Incorporation and Bylaws provide for the
indemnification of our directors and officers to the maximum extent
permitted by law, including Section 7-109-102 of the Colorado Business
Corporation Act, against all liability and expense (including attorneys'
fees) incurred by reason of the fact that the officer or director served in
such capacity, or in a certain capacity for another entity at our request.
Section 7-109-102 of the Colorado Business Corporation Act provides
generally for indemnification of directors against liability incurred as a
result of actions, suits or proceedings if they acted in good faith and in
a manner they reasonably believed to be in or not opposed to our best interests.
SHARES ELIGIBLE FOR FUTURE SALE
We presently have outstanding 7,382,280 shares of common stock of
which 6,028,082 shares are free trading. However, we entered into lock-up
agreements with our officers and directors and 5% stockholders which,
except for 65,000 shares, requires that all remaining 4,184,621 shares of
common stock owned by such persons may not be sold for a period of one year
following the date of this prospectus without the prior written consent of
the representatives.
34
<PAGE>
We have agreed to register 711,200 shares of common stock under the
Securities Act of 1933, on behalf of certain stockholders. We may be
required to file a registration statement as soon as practicable from the
date of the closing of this offering, at our expense, under the Securities
Act, with respect to these shares of common stock, and to use our best
efforts to effect the registration, subject to some conditions and
limitations. At such time as these shares may be registered, they will be
free trading. If we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other
security holders, the holders of registration rights will be entitled to
notice of the registration and will be entitled to include, at our expense,
their shares in the registration
We have issued 1,354,198 shares of common stock which are "restricted"
shares subject to restrictions upon resale under Rule 144 under the
Securities Act. In general, under Rule 144, as currently in effect, any
person (or persons whose shares are aggregated), including persons deemed
to be affiliates, whose restricted securities have been fully paid for and
held for at least one year from the later of the date of payment therefor
to us or acquisition thereof from an affiliate, may sell such securities in
brokers' transactions or directly to market makers, provided that the
number of shares sold in any three month period may not exceed the greater
of 1% of the then outstanding common stock or the average weekly trading
volume of the common stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain notice requirements
and the availability of current public information about us. After two
years have elapsed from the later of the issuance of restricted securities
by us or their acquisition from an affiliate, such securities may be sold
without limitation by persons who are not affiliates under Rule 144. The
1,354,198 shares of restricted stock become eligible for sale at various
times during the period April through September 2000, with 35,500 shares
subject to the lock-up agreement described above.
Sales of substantial amounts of common stock by our stockholders under
Rule 144 or otherwise, or even the potential for such sales, are likely to
have a depressive effect on the market price of the shares of common stock
and warrants and could impair our ability to raise capital through the sale
of our equity securities.
UNDERWRITING
The underwriters named below for whom Neidiger, Tucker, Bruner, Inc.
and Westport Resources Investment Services, Inc. are acting as
representatives, have severally agreed, under the terms and conditions of
an underwriting agreement with us and the underwriters, to purchase from
us, and we have agreed to sell to them, the number of shares and warrants
set forth in the table below at the prices set forth on the cover page of
this prospectus.
Underwriters Number of Shares Number of Warrants
------------ ---------------- ------------------
Neidiger, Tucker, Bruner, Inc.
Westport Resources Investment
Services, Inc.
TOTAL
35
<PAGE>
If any shares and warrants are purchased, the underwriters are
committed to purchase all of the 2,000,000 shares and warrants offered by
this prospectus, but not the 300,000 shares and the 300,000 warrants
subject to the over-allotment option. The underwriting agreement also
provides that if an underwriter defaults, the purchase commitments of the
non-defaulting underwriters may be increased or this offering may be
terminated.
Once the underwriters have purchased the shares and warrants at the
public offering prices of $______ per share and $______ per warrant less
the 8% underwriting discount, they will offer the shares and warrants in
units consisting of one share and one warrant to the public at the public
offering prices and to other broker-dealers who are members of the selling
group at that price minus a concession of $______ per share and $______ per
warrant. The underwriters and selling group members may allow a discount
of $______ per share and $______ per warrant on sales to other broker-
dealers, including the underwriters. After the public offering of the
shares and warrants, the public offering price, the concessions to selling
group members and the discount to other broker-dealers may be changed by
the representatives.
We have granted the underwriters an option, expiring at the close of
business 45 days after the date of this prospectus, to purchase up to
300,000 additional shares and 300,000 additional warrants from us on the
same terms as apply to the sale of the shares and warrants set forth above.
The underwriters may exercise the option only to cover over-allotments
incurred in the sale of the shares and warrants.
The representatives have informed us that they do not expect the
underwriters to confirm sales of shares and warrants on a discretionary basis.
The following table summarizes the discounts and estimated expenses
that we will pay to the underwriters:
<TABLE>
<CAPTION>
TOTAL
--------------------
PER PER WITHOUT
--- --- WITH OVER- OVER-
SHARE WARRANT ALLOTMENT ALLOTMENT
----- ------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
(8% of the offering price). . . . . . . . . .
Nonaccountable expense allowance
payable by us (3% of the offering price). . .
</TABLE>
We have also agreed to issue to the representatives warrants that
entitle the holder to purchase up to 200,000 shares at an exercise price of
$______ per share and to purchase up to 200,000 warrants to purchase
200,000 shares at $______ per share. The representatives' warrants may not
be exercised for at least one year and will be restricted from sale,
transfer, assignment, or hypothecation for a period of five years from the
effective date of the offering, except to officers or partners (not
directors) of the representatives and members of the selling group and/or
their officers or partners. The representatives' warrants are not
redeemable by us. We have agreed to maintain an effective registration
statement
36
<PAGE>
with respect to the issuance of the securities underlying the
representatives' warrants, if necessary, to allow their public resale
without restriction, at all times during the period in which the
representatives' warrants are exercisable, beginning one year after the
date of this prospectus. Such securities are being registered on the
registration statement of which this prospectus is a part.
The underwriting agreement provides for indemnification between us and
the underwriters against some liabilities, including liabilities under the
Securities Act of 1933 and for contribution by us and the underwriters to
payments that may be required to be made in respect of those liabilities.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to our directors, officers and controlling persons under the
agreement between us and the underwriters, or otherwise, we have been
advised that in the opinion of the SEC this indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
We have agreed that, for a period of one year following the completion
of this offering, we generally will not offer, sell, contract to sell,
grant any option for the sale or otherwise dispose of any of our common
stock without the consent of the representatives. Our officers, directors
and the holders of 5% or more of our outstanding common stock (aggregating
4,184,621 shares) have agreed that for a period of one year following the
date of this prospectus, they will not offer, sell, contract to sell, grant
any option for the sale or otherwise dispose of any of our common stock,
other than intra-family transfers or transfers to trusts for estate
planning purposes, without the consent of the representatives, which will
not be unreasonably withheld.
We have applied for listing of our common stock and warrants on the
Nasdaq SmallCap Market. If listing is approved, our common stock will
trade under the symbol "ETOP" and our warrants will trade under the symbol
"ETOPW".
Prior to this offering, our common stock has traded on the NASD OTC
Bulletin Board and there has been no public market for our warrants. Stock
that trades on the OTC Bulletin Board can experience a relatively inactive
trading market, or low trading volume, high volatility and/or trading
prices that may not bear any reasonable relationship to the financial
condition or book value of the company.
We can offer no assurances that the public offering price will
correspond to the price at which the common stock and warrants will trade
in the public market subsequent to the offering or that an active trading
market for the common stock and warrants will develop and continue after
the offering.
The representatives on behalf of the underwriters may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange
Act of 1934.
* Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position.
* Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
37
<PAGE>
* Syndicate covering transactions involve purchases of the common
stock and warrants in the open market after the distribution has
been completed in order to cover syndicate short positions.
* Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the shares and warrants
originally sold by the syndicate member are purchased in a
syndicate covering transaction to cover syndicate short
positions.
These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock and warrants to be
higher than it would otherwise be in the absence of such transactions.
These transactions may be effected on the Nasdaq SmallCap Market or
otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
and the warrants to purchase common stock offered hereby will be passed
upon for us by Brenman Bromberg & Tenenbaum, P.C., Denver, Colorado.
Members of the firm of Brenman Bromberg & Tenenbaum, P.C. own 59,855 shares
of our common stock. A. Thomas Tenenbaum, a director of Brenman Bromberg
& Tenenbaum, P.C., was our CEO prior to our merger with old Entropin. The
Law Office of Gary A. Agron, Englewood, Colorado has acted as counsel to
the representatives in connection with this offering.
EXPERTS
The financial statements for the years ended December 31, 1999 and
1998, and for the period from August 27, 1984 (inception) to December 31,
1999, included in this prospectus and Registration Statement have been
audited by Causey Demgen & Moore Inc., independent auditors, as set forth
in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form SB-2 under
the Securities Act with respect to the shares and warrants offered. This
prospectus omits some information contained in the registration statement
and the exhibits, as permitted by the rules and regulations of the SEC. For
further information with respect to us and our securities, you should
review the registration statement and its exhibits, which may be inspected,
without charge, at the Public Reference Section of the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional office of the SEC located at 7 World Trade Center, Suite 1300, New
York, NY 10048. Copies of all or any portion of the Registration
Statement may be obtained from the Public Reference Section of the SEC,
upon payment of prescribed fees. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other
information about registrants that file electronically with the SEC,
including the registration statement. The address of the SEC's World Wide
Web site is http://www.sec.gov.
38
<PAGE>
ENTROPIN, INC.
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999:
Report of Independent Certified Public Accountants F-2
Balance Sheets as of December 31, 1998 and 1999 F-3
Statements of Operations for Years Ended December 31, 1998
and 1999, and for the Period from August 27, 1984 (Inception)
Through December 31, 1999 F-5
Statements of Changes in Stockholders' Equity (Deficit)
For the Period from August 27, 1984 (Inception) Through
December 31, 1999 F-6
Statements of Cash Flows For Years Ended December 31, 1998
and 1999, and for the Period from August 27, 1984 (Inception)
Through December 31, 1999 F-9
Notes to Financial Statements December 31, 1998 and 1999 F-11
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Entropin, Inc.
We have audited the accompanying balance sheet of Entropin, Inc. (a
development stage company) as of December 31, 1998 and 1999, and the related
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years then ended and for the period from August 27, 1984
(inception) through December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entropin, Inc. as of
December 31, 1998 and 1999 and the results of its operations and its cash
flows for the years then ended and for the period from August 27, 1984
(inception) through December 31, 1999, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has been
primarily involved in research and development activities, resulting in
significant losses and an accumulated deficit at December 31, 1999 of
$12,640,814 These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
February 4, 2000
F-2
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
ASSETS
1998 1999
---- ----
Current assets:
Cash and cash equivalents $ 445,333 $2,260,526
Property and equipment, at cost:
Leasehold improvements 72,187 61,437
Office furniture and equipment 15,518 23,855
---------- ----------
87,705 85,292
Less accumulated depreciation (5,006) (23,429)
----------- -----------
Net property and equipment 82,699 61,863
Other assets:
Deposits 12,261 12,261
Deferred stock offering costs (Note 5) - 169,425
Patent costs, less accumulated amortization of
$59,600 (1998) and $82,019 (1999) 295,316 321,150
---------- ----------
Total other assets 307,577 502,836
---------- ----------
$ 835,609 $ 2,825,225
========== ===========
See accompanying notes.
F-3
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1998 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1999
---- ----
Current liabilities:
Accounts payable $ 59,141 $ 199,042
Accounts payable - related parties 11,314 123,763
---------- ----------
Total current liabilities 70,455 322,805
Deferred royalty agreement (Note 7) 169,783 184,071
Commitments and contingencies (Notes 1 and 7)
Series A redeemable preferred stock,
$.001 par value; 3,210,487 shares
authorized, issued and outstanding,
$1 per share redemption value (Note 4) 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, $5.00 per share
redemption value (Note 4) 1,142,750 1,093,175
Stockholders' equity (deficit) (Note 5):
Preferred stock, $.001 par value; 10,000,000
shares authorized, Series A and B reported
above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 6,000,051 (1998) and 7,382,280
(1999) shares issued and outstanding 6,000 7,382
Additional paid-in capital 7,474,210 13,866,412
Deficit accumulated during the development stage (7,578,802) (12,640,814)
Unearned stock compensation (3,659,274) (3,218,293)
---------- ----------
Total stockholders' equity (deficit) (3,757,866) (1,985,313)
---------- ----------
$ 835,609 $2,825,225
========== ==========
See accompanying notes.
F-4
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (Inception) through December 31, 1999
Cumulative
amounts from
1998 1999 inception
---- ---- ------------
Costs and expenses:
Research and development (Note 5) $ 906,719 $ 1,743,837 $ 6,597,410
General and administrative (Note 5) 1,844,575 3,211,809 5,626,639
Rent-related party (Note 2) 12,314 6,000 18,314
Depreciation and amortization 24,306 40,842 122,516
----------- ----------- ------------
Operating loss (2,787,914) (5,002,488) (12,364,879)
Other income (expense):
Interest income 24,738 64,888 89,626
Interest expense (1,451) (1,662) (242,811)
----------- ----------- ------------
Total other income (expense) 23,287 63,226 (153,185)
----------- ----------- ------------
Net loss (Note 3) (2,764,627) (4,939,262) (12,518,064)
Accrued dividends applicable to Series
B preferred stock (Note 4) (56,260) (119,300) (175,560)
----------- ----------- ------------
Net loss applicable to common share-
holders $(2,820,887) $(5,058,562) $(12,693,624)
Basic net loss per common share
(Note 6) $ (.47) $ (.75) $ (2.36)
=========== ========== ============
Weighted average common shares
outstanding (Note 6) 5,968,000 6,749,000 5,374,000
=========== ========= ============
See accompanying notes.
F-5
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at August 27, 1984 (inception) - $ - $ - $ - $ - $ -
Sale of common stock for cash
in 1984 ($.005 per share) 991,800 992 4,008 - - -
Issuance of common stock in exchange
for services in 1991 ($.005 per
share) 3,967,198 3,967 16,033 - - -
Cash contribution from shareholder in
1991 - - 50,000 - - -
Net loss for the period from inception
through December 31, 1994 - - - - - (2,824,221)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1994 4,958,998 4,959 70,041 - - (2,824,221)
Cash received for common stock
subscription - - - 150,000 - -
Net loss for the year - - - - - (263,368)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1995 4,958,998 4,959 70,041 150,000 - (3,087,589)
Sale of common stock for cash ($1.15
per share) 261,002 261 299,739 (150,000) - -
Net loss for the year - - - - - (375,138)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1996 5,220,000 5,220 369,780 - - (3,462,727)
</TABLE>
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Capital contributions - - 927,000 - - -
Net loss for the year - - - - - (1,351,448)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1997 5,220,000 5,220 1,296,780 - - (4,814,175)
Sale of common stock for cash, $2.75
per share (Note 5) 300,000 300 797,810 - - -
Issuance of common stock pursuant to
recapitalization (Note 5) 480,051 480 219,620 - - -
Unearned stock compensation pursuant
to issuance of common stock options
(Notes 5 and 7) - - 5,160,000 - (5,160,000) -
Amortization of unearned stock
compensation (Note 5) - - - - 1,500,726 -
Net loss for the year - - - - - (2,764,627)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1998 6,000,051 6,000 7,474,210 - (3,659,274) (7,578,802)
</TABLE>
(Continued on following page)
See accompanying notes.
F-7
<PAGE>
<TABLE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (Inception) through December 31, 1999
(Continued from preceding page)
<CAPTION>
Deficit
accumulated
Additional Unearned during the
Common stock paid-in Stock stock development
Shares Amount capital subscriptions compensation stage
------ ------ ---------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Unearned stock compensation pursuant
to issuance of common stock options
(Note 5) - - 2,504,500 - (2,504,500) -
Amortization of unearned stock
compensation (Note 5) - - - - 2,945,481 -
Issuance of common stock pursuant to
private placements (Note 5) 1,208,700 1,209 3,366,121 - - -
Conversion of promissory notes to
common stock (Note 5) 100,831 101 201,561 - - -
Shares issued from exercise of
options (Note 5) 20,000 20 79,980 - - -
Shares issued for services 13,148 12 67,755 - - -
Conversion of Series B preferred
stock to common stock (Note 4) 15,000 15 74,985 - - -
Shares issued for Series B preferred
stock dividend (Note 4) 24,550 25 122,725 - - (122,750)
Accretion to mandatory redemption
amount for Series B preferred stock - - (25,425) - - -
Net loss for the year - - - - - (4,939,262)
--------- ------ ---------- ---------- ------------ ------------
Balance, December 31, 1999 7,382,280 $7,382 $13,866,412 $ - $(3,218,293)($12,640,814)
========= ====== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (Inception) through December 31, 1999
Cumulative
amounts
from
1998 1999 inception
---- ---- ---------
Cash flows from operating activities:
Net loss $(2,764,627) $(4,939,262) $(12,518,064)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 24,306 40,842 122,516
IBC partner royalty agreement 14,288 14,288 184,071
Services contributed in exchange
for stock and stock options 1,500,726 3,013,248 5,460,974
Services contributed in exchange
for compensation agreements - - 2,231,678
Increase in accounts payable -
related party 11,314 112,449 123,763
Decrease in accounts receivable -
shareholder 5,000 - -
Increase (decrease) in accounts
payable (270,672) 139,901 199,042
Increase in accrued interest - - 169,139
Other - 1,662 1,793
----------- ----------- ------------
Total adjustments 1,284,962 3,322,390 8,492,976
----------- ----------- ------------
Net cash used in operations (1,479,665) (1,616,872) (4,025,088)
Cash flows from investing activities:
Purchase of property and equipment
(net) (87,705) 2,413 (102,499)
Patent costs (48,160) (48,253) (403,169)
Deposits (12,261) - (12,261)
----------- ----------- ------------
Net cash used in investing activities (148,126) (45,840) (517,929)
Cash flows from financing activities:
Proceeds from recapitalization 220,100 - 220,100
Deferred stock offering costs 10,746 (169,425) (169,425)
Proceeds from sale of common stock 798,110 3,447,330 4,600,440
Proceeds from sale of preferred stock 1,142,750 - 1,142,750
Proceeds from stockholder loans - - 809,678
Proceeds from stockholder advances - - 98,873
Repayments of stockholder advances (98,873) - (98,873)
Proceeds from convertible notes payable - 200,000 200,000
----------- ----------- ------------
Net cash provided by financing
activities 2,072,833 3,477,905 6,803,543
----------- ----------- ------------
Net increase in cash 445,042 1,815,193 2,260,526
Cash and cash equivalents at beginning
of period 291 445,333 -
----------- ----------- ------------
Cash and cash equivalents at end of
period $ 445,333 $ 2,260,526 $ 2,260,526
=========== =========== ============
(Continued on following page)
See accompanying notes.
F-9
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1998 and 1999
and for the Period from August 27, 1984 (inception) through December 31, 1999
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1998 1999 inception
---- ---- -----------
Cash paid during period for interest $1,451 $ - $61,306
Supplemental disclosure of non-cash financing activities:
Pursuant to an agreement with an IBC limited partner, the Company has accrued
a liability totaling $184,071 at December 31, 1999 for advance royalties due
to the individual (see Note 7).
On January 15, 1998, the Company issued 3,210,487 shares of Series A
preferred stock in exchange for an aggregate $1,710,487 of notes payable to
shareholders plus accrued interest and a $1,500,000 compensation agreement.
During 1998 and 1999, the Company entered into several stock option
agreements with persons and entities that have contributed services to the
Company. In accordance with Statement of Financial Accounting Standards 123,
the Company has recorded deferred compensation related to these agreements
totaling $5,160,000 and $2,504,500 and has amortized compensation expense
totaling $1,500,726 and $2,945,481, during 1998 and 1999, respectively. These
stock option agreements are described more fully in Note 5.
During 1999, the Company converted note payable agreements with outstanding
principal and interest balances totaling $201,662 into 100,831 shares of
common stock.
During 1999, the Company issued 13,148 shares of common stock for services
totaling $67,767.
In 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.
F-10
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies
Organization:
Entropin, Inc., a Colorado corporation, was organized 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 5). The Company was merged into Vanden, and Vanden changed
its name to Entropin, Inc. For accounting purposes, the acquisition has been
treated as a recapitalization of the Company, based upon historical cost, 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 December 31, 1999 of $12,640,814. 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.
As described in Note 5, the Company successfully completed recapitalization
of the Company in January 1998. The Company also sold private offerings of
245,500 shares of Series B convertible preferred stock for gross proceeds of
$1,227,500 (Note 4), $200,000 of convertible notes payable, and 1,508,700
shares of common stock for gross proceeds of $4,664,800 (Note 5), which
offerings provide liquidity to the Company for current operations. The
Company raised sufficient funds in 1999 to complete the first part of a two
part Phase III clinical trial program associated with the FDA approval
process for the treatment of acute painful shoulder. The trials began in
November 1999 and the first part is scheduled for completion in mid 2000.
Management is confident that it will raise the added funds necessary to
complete the second part of the Phase III trials, ancillary studies and the
New Drug Application (NDA) process, as well as additional funds for research
and development and working capital via a secondary securities offering in
early 2000. The Company estimates it will require additional funding of up to
$10 million 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.
F-11
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies (continued)
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.
The Company holds eight U.S. patents issued between 1984 and 1998 with
expiration dates ranging from September 2001 to June 2014. These patents
include two material composition patents covering the molecules contained in
Esterom(R) solution that expire in 2012 and 2013. The Company's three initial
patents were based on methods of treatment of rheumatoid arthritis using
benzoylecgonine and related compounds, and the five subsequent patents
include compound, composition and method claims involving derivative of the
compounds represented in the earlier patents. The Company believes that some
of the patents may be eligible for extensions of up to five years.
In December 1993, the Company filed an International Patent Application under
the Patent Cooperation Treaty claiming compounds present in the Esterom(R)
solution formulation from which eight separate patent applications were
derived - Australia, Canada, Europe, Hungary, Japan, New Zealand, Norway and
Poland. In addition, the Company filed patent applications in China, Israel,
Mexico, South Africa and Taiwan. From these foreign applications, nine
patents have been issued to date.
F-12
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. Organization and summary of significant accounting policies (continued)
Impairment of long-lived assets:
The Company evaluates the potential impairment of long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". The Company annually reviews the amount of recorded
long-lived assets for impairment. If the sum of the expected cash flows from
these assets is less than the carrying amount, the Company will recognize an
impairment loss in such period.
Cash equivalents:
For the purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31, 1999,
in connection with the proposed offering of common stock (see Note 5). In the
event that such offering is successful, costs incurred as of December 31,
1999, and additional costs incurred subsequent to that 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 exceeded 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.
2. Related party transactions
Lease agreement:
The Company subleases approximately 800 square feet of office space from a
principal stockholder, at $800 per month.
F-13
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
2. Related party transactions (continued)
Conversion of long-term debt - stockholders:
On January 15, 1998, the Company converted $1,710,487 of long-term debt and
accrued interest, incurred for cash advances and past services associated
with research and development, into 1,710,487 shares of 8% non-voting,
non-cumulative Series A preferred stock at $1.00 per share (see Note 4). The
debt was owed to significant stockholders.
3. Income taxes
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998 (see Note 5), resulted in a change in the
Company's tax status from an S corporation to a taxable corporation. The
effect of the change is to provide for income tax based upon reported results
of operations, and to provide deferred tax assets and liabilities on
temporary differences between reported earnings and taxable income.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $3,558,000 and future tax deductions of $6,946,000 which may be
used to offset future taxable income. The future tax deductions result
primarily from utilizing the cash basis for income tax reporting purposes and
unearned stock compensation. The difference between the tax loss
carryforwards and future tax deductions and the cumulative losses from
inception result from the losses previously incurred by the S corporation.
The net operating loss carryforwards expire in 2018 and 2019. Approximately
$250,000 of the net operating loss carryforward is limited as to the amount
which may be used in any one year. At December 31, 1998 and 1999, total
deferred tax assets and the valuation allowance are as follows:
1998 1999
---- ----
Deferred tax assets resulting from:
Net operating loss carryforwards $ 480,000 $1,245,000
Accrual to cash adjustments 872,000 875,000
Unearned stock compensation 525,000 1,556,000
---------- ----------
Total 1,877,000 3,676,000
(1,877,000) (3,676,000)
---------- ----------
$ - $ -
========== ==========
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.
F-14
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
4. 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,
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 shares
are redeemable only from 20% of annual earnings, but not exceeding net cash
flow from, operating activities, 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 accrue at the rate of $.50 per share per annum and are 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 December 31, 1999. All unconverted shares will be redeemed at
$5.00 per share on or before July 15, 2003.
5. Stockholders' equity
Recapitalization:
On December 9, 1997, the Company entered into an agreement and plan of merger
with Vanden to exchange all of the issued and outstanding common shares of
the Company, in exchange for 5,220,000 shares of Vanden's $.001 par value
common stock, in a reverse acquisition.
F-15
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. 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 and is presented on the statement of changes
in stockholders' equity as an issuance of 480,051 shares of common stock for
cash proceeds of $220,100 pursuant to recapitalization. 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 the
merger. The difference between the fair value of the stock, estimated by the
Company to be $2.75 per share, and the purchase price for the initial 180,001
shares was treated as additional cost of the merger and charged to capital,
consistent with accounting for the reverse acquisition as a recapitalization.
The net effect of this transaction was to record an increase and related
decrease to additional paid-in capital of $495,000. The remaining options to
acquire 180,001 shares are exercisable for a five-year period.
Following the exchange, the Company's shareholders owned approximately 95% of
the outstanding common stock of Vanden. The reverse acquisition has been
accounted for as a recapitalization of the Company based upon historical
cost. Accordingly, the number of authorized and issued common shares, par
value of common stock and additional paid-in capital have been restated on
the balance sheet and the statement of stockholders' equity to give
retroactive effect to the recapitalization.
Private placements:
In January 1998, the Company completed a private placement of 300,000 shares
of its $.001 par value common stock for gross proceeds of $825,000, $2.75 per
share.
In April 1999, the Company completed a private placement of 497,500 shares of
its $.001 par value common stock 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 per
share 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
per share 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 2,000,000 units (consisting of one share of
common stock and one warrant to purchase one share of common stock) with
gross proceeds of approximately $12 to $14 million. The per share price will
be determined by mutual agreement between the Company and underwriter.
F-16
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
Other issuances of common stock:
In March 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. In
April 1999, the Company amended the 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 notes,
including accrued interest, to common stock resulting in new issuances of
common stock totaling 100,831 shares. Due to the immediate conversion of the
notes to common stock, 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:
In April 1998, the Company granted stock options to Western Center for
Clinical Studies, Inc. to purchase 450,000 shares of the Company's common
stock at $1.50 per share (see Note 7).
In August 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 1999, a director resigned and options to purchase
35,000 shares were canceled.
In September 1998, the board of directors approved a compensation plan for
three officers and directors, to serve on a management team, which included
stock options in lieu of salary 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. During 1999, a director
resigned and options to purchase 20,000 shares were canceled. During the
period July through October 1999, the Company provided its management team
additional stock options in lieu of salary to purchase an aggregate of
430,000 shares of common stock. The options are exercisable at $4.00 per
share, and were fully vested at December 31, 1999.
F-17
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. 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 provided investor relations and development
services, and received 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. In July 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.
In December 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 provides investment community relations services,
and receives 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. In July 1999, the Company terminated the
consulting agreement. As final settlement, the organization received $69,084
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.
F-18
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. 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 provides 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, with the remaining
200,000 shares to vest in May and August 1999, 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 warrants will be through March 22, 2004. The Company had not
received any funding during 1999 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 stock option agreements
aggregating 120,000 shares 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 through February 1, 2001.
In September 1999, the Company provided a 101,681 share stock warrant
agreement to an organization providing assistance in the June and September
1999 private placements of common stock. The warrants are exercisable at
$4.00 per share for five years and are fully vested.
In November 1999, as partial consideration for consulting services, the
Company issued to a consultant a warrant to purchase 30,000 shares of common
stock, exercisable at $4.00 per share for five years.
F-19
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
Also in November 1999, the Company granted an option to purchase 400,000
shares of common stock to its president at an exercise price of $5.00 per
share. The shares vest as follows: 100,000 shares upon completion of the
first part of the Phase III trials; 150,000 shares upon submission of the New
Drug Application (NDA); and, 150,000 shares upon approval of the NDA. The
options expire five years from the dates they become exercisable.
The following is a summary of stock option and warrant activity:
Option/ Options exercisable
warrant Wtd. avg. Wtd. avg.
price per exercise Number exercise Number of
share price of shares price shares
----- ----- --------- ----- ------
Balance December 31, 1997 $ - $ - - $ - -
Granted $.001 to $4.00 $2.47 1,540,002 - -
Exercised $0.001 $0.001 (180,001) - -
------ ------ ---------
Balance December 31, 1998 $1.50 to $4.00 $2.79 1,360,001 $3.36 635,001
Granted $3.00 to $5.00 $3.71 2,836,181 - -
Canceled $3.00 to $4.00 $3.04 (555,000) - -
Exercised $4.00 $4.00 (20,000) - -
----- ----- ---------- ----- ---------
Balance December 31, 1999 $1.50 to $5.00 $3.37 3,621,182 $ 3.59 1,667,848
========= =========
The following is additional information with respect to those options and
warrants outstanding at December 31, 1999:
Wtd.avg.
remaining
contractual Number Options
Option/warrant price per share life in years of shares exercisable
------------------------------ ------------- --------- -----------
$1.50 3.4 450,000 75,000
$2.80 3.0 180,001 180,001
$3.00 6.5 1,425,000 314,999
$4.00 4.4 1,076,181 1,067,848
$5.00 4.8 490,000 30,000
--------- ---------
3,621,182 1,667,848
========= =========
F-20
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. Stockholders' equity (continued)
At December 31, 1999, outstanding options and warrants aggregating 1,565,182
shares have certain registration rights and options and warrants aggregating
2,295,181 shares contain certain cashless exercise provisions.
4,114,564 shares of the 4,179,564 shares owned by the Company's directors,
officers, and 5% or greater stockholders, and substantially all of the shares
underlying the outstanding options and warrants are subject to lock-up
agreements which expire one year after the effective date of the proposed
public offering unless released sooner upon written consent.
Unearned stock compensation:
At December 31, 1999, the Company had outstanding an aggregate of 3,621,182
options and warrants of which 2,436,000 were granted 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 7). The excess of the fair value at the
grant date of the options and warrants, 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:
Year ended Cumulative
December 31, amounts from
1998 1999 inception
---- ---- ------------
Research and development $ 502,000 $ 709,224 $1,211,224
General and administrative 998,726 2,236,257 3,234,983
---------- ---------- ----------
$1,500,726 $2,945,481 $4,446,207
========== ========== ==========
The fair value of each option and warrant grant is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998 and 1999: dividend yield of 0%, expected
volatility of 51% - 100%, risk-free interest rate of 4.63% - 6.22%, and
expected life of five to nine years.
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.
F-21
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
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. The
limited partnership participated in the early development of Esterom(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 December 31, 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 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 December 31, 1999, the
liability accrued with respect to this agreement totaled $184,071. 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 ten 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. The price of the ingredient is based on the price of the components
in the bulk active product.
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.
F-22
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
7. Commitments and contingencies (continued)
The Company is dependent upon Mallinckrodt, Inc. to provide the raw material
from which the active ingredients in Esterom(R) solution are derived.
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 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 in July 1999 and October
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 Esterom(R) solution's Phase III clinical studies. In November
1999, the Company entered into an agreement with WCCS to assume the Company's
obligations under Therapeutic Management Agreement. The Company will pay WCCS
approximately $350,000 based upon completion of certain project goals.
F-23
<PAGE>
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
8. Financial instruments
The carrying values of cash and cash equivalents, accounts payable and
accounts payable - related party approximates 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 4 and 7.
F-24
<PAGE>
ENTROPIN, INC. [Logo]
2,000,000 Shares of Common Stock
and
2,000,000 Redeemable Common Stock Purchase Warrants
-----------
PROSPECTUS
-----------
NEIDIGER, TUCKER, BRUNER, INC.
WESTPORT RESOURCES INVESTMENT SERVICES, INC.
, 2000
