U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
December 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required] for the transition period
from ___________ to __________
COMMISSION FILE NUMBER: 33-23693
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ENTROPIN, INC.
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(Name of small business issuer in its charter)
COLORADO 84-1090424
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
45926 OASIS STREET
INDIO, CALIFORNIA 92201
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (760) 775-8333
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Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Stock NASDAQ SmallCap Market
Warrants to Purchase Common Stock NASDAQ SmallCap Market
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements
for at least the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. [ X ]
Issuer's revenues for its most recent fiscal year: $-0-
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Aggregate market value of voting stock held by non-affiliates as of March 24,
2000: $43,229,640
Shares of Common Stock, $.001 par value, outstanding as of March 24, 2000:
9,382,280
DOCUMENTS INCORPORATED BY REFERENCE: SEE PART III, ITEM 13-"EXHIBITS,
FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K" FOR A LISTING OF DOCUMENTS
INCORPORATED BY REFERENCE INTO THIS ANNUAL REPORT ON FORM 10-KSB.
Transitional Small Business Disclosure Format (Check one): Yes ; No X ;
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TABLE OF CONTENTS
PART I
Item 1. Description of Business. . . . . . . . . . . . . . . . . . . .1
Item 2. Description of Property. . . . . . . . . . . . . . . . . . . .8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . .8
Item 4. Submission of Matters to a Vote of Security Holders. . . . . .8
PART II
Item 5. Market Price of the Registrant's Common Stock and Related
Security Holder Matters. . . . . . . . . . . . . . . . . . . .9
Item 6. Management's Discussion and Analysis of Financial Condition
and Plan of Operations . . . . . . . . . . . . . . . . . . . 26
Item 7. Financial Statements.. . . . . . . . . . . . . . . . . . . . 28
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . . 29
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act.. 29
Item 10. Executive Compensation . . . . . . . . . . . . . . . . . . . 29
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Item 11. Security Ownership of Certain Beneficial Owners and
Management.. . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Certain Relationships and Related Transactions.. . . . . . . 29
Item 13. Exhibits, Financial Statements and Reports on Form 8-K.. . . 29
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ENTROPIN, INC.
FORM 10-KSB
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Summary," "Management's Discussion and
Analysis of Financial Condition and Plan of Operations," "Business" and
elsewhere in this Form 10-KSB and in the Company's periodic filings with
the SEC constitute forward-looking statements. These statements involve
known and unknown risks, significant uncertainties and other factors which
may cause actual results, levels of activity, performance or achievements
to be materially different from any future results, levels of activity,
performance or achievements expressed or implied by such forward-looking
statements.
In some cases, you can identify the forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of such terms or other comparable terminology.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance or achievements. Moreover,
the Company assumes no responsibility for the accuracy and completeness of
such statements.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
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. We were merged into Vanden, and Vanden changed
its name to Entropin, Inc. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
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
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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 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 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
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later in the year 2000. 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.
to supply and manufacture Esterom(R) solution. Mallinckrodt, Inc., is the
only company authorized by the Drug Enforcement Agency (DEA) to provide
cocaine for medical and research purposes. 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 Center for
Clinical Studies (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.
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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
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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.
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, the NDA
is generally submitted. The FDA may request additional information before
accepting the 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
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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 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
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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.
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 has been 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.
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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 Wellington Ewen, Chief Financial Officer. We are actively
seeking a qualified individual to serve as a full-time Chief Financial Officer.
ITEM 2. DESCRIPTION OF PROPERTY.
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. In the future, we may lease
separate office space for our corporate headquarters in Indio, California
and terminate our current lease.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are known
to be contemplated for which the Company anticipates a material risk of loss.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET PRICE OF THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
PRICE RANGE OF OUR COMMON STOCK
From February 25, 1998 until March 13, 2000, our common stock traded
on the NASD OTC Bulletin Board under the trading symbol "ETOP". Since
March 14, 2000 our common stock has been traded on the NASDAQ SmallCap
Market 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
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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
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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
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First Quarter
(through March 24, 2000) $11.00 $6.75
On March 24, 2000, the closing bid price of the common stock on the
NASDAQ SmallCap Market was $7.25 per share.
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PRICE RANGE OF OUR WARRANTS
Since March 14, 2000, our warrants have been traded on the NASDAQ
SmallCap Market under the trading symbol "ETOPW". The following table sets
forth the high and low bid prices for the common stock for the quarter
indicated. Prices reflect bids posted by market makers and may not
necessarily reflect actual transactions.
Year ended December 31, 2000 High Bid Low Bid
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First Quarter
(through March 24, 2000) $3.1875 $2.3125
On March 24, 2000, the closing bid price of the warrants on the NASD
SmallCap Market was $2.375 per warrant.
HOLDERS
As of March 24, 2000 there were approximately 412 holders of record of
our common stock.
DIVIDENDS
The payment of dividends by the Company is within the discretion of
its Board of Directors and depends in part upon the Company's earnings,
capital requirements, debt covenants and financial condition. 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 B preferred stock, although we may elect to pay the dividends on the
Series B preferred stock in shares of our common stock. As of December 31,
1999, we have issued 24,550 shares of common stock as dividends on our
Series B preferred stock. Our Series A preferred stock is redeemable, 8%
non-cumulative non-voting preferred stock which is only redeemable 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.
RECENT SALES OF UNREGISTERED SECURITIES
During the reporting period, the Registrant issued securities to the
following persons for the cash or other consideration indicated in
transactions that were not registered under the 1933 Act.
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I.
In September 1998, the Registrant granted options to purchase an
aggregate of 295,000 shares of the Registrant's common stock at an exercise
price of $4.00 per share for five years to its Executive Management as
follows: Donald Hunter 120,000 shares; Higgins D. Bailey 55,000 shares, and
Dewey H. Crim 120,000 shares. The shares are fully vested as to Messrs.
Hunter and Bailey. Mr. Crim resigned from Executive Management and 100,000
of his shares are vested. The Registrant subsequently granted additional
options on the same terms to Messrs. Hunter and Bailey, its Executive
Management, as follows: 2,500 shares each in February 1999; 5,000 shares
per month each for the period March through June 1999; and 15,000 shares
per month each for the period July through November 1999. The Registrant
claims the exemption from registration provided by Section 4(2) of the 1933
Act for this transaction. No broker/dealers were involved in the sale and
no commissions were paid. The option certificates were impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
II.
In March 1999, the Registrant entered into an agreement with J. Paul
Consulting Corporation (JPC). As partial consideration for JPC's services
under the agreement, the Registrant issued JPC an option to purchase
175,000 shares of the Registrant's common stock, exercisable at $3.00 per
share. The option would become 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 tradeable. The issuance of the
option to JPC was made in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved
in the sale and no commissions were paid. JPC represented that they
acquired the option for investment and not with a view to distribution.
III.
In March 1999, the Registrant entered into an agreement with GJM
Trading Partners, Ltd.(GJM). As partial consideration for GJM's services
under the agreement, the Registrant issued GJM an option to purchase
125,000 shares of the Registrant's common stock, exercisable at $3.00 per
share. The option would become 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 tradeable. The issuance of the
option to GJM was made in reliance upon the exemption from registration
provided by Section 4(2) of the 1933 Act. No broker/dealers were involved
in the sale and no commissions were paid. GJM represented that they
acquired the option for investment and not with a view to distribution.
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IV.
In March 1999, the Registrant entered into an agreement with
Transition Partners, Limited (TPL). The agreement terminated in July 1999.
As part of the termination, TPL surrendered for cancellation a previously
issued warrant to acquire 300,000 shares of the Registrant's common stock
at $4.50 per share for five years, in exchange for a warrant to purchase
50,000 shares of the Registrant's common stock at $4.00 per share. The
issuance of the warrant to TPL was made in reliance upon the exemption from
registration provided by Section 4(2) of the 1933 Act. No broker/dealers
were involved in the sale and no commissions were paid. TPL represented
that they acquired the option for investment and not with a view to
distribution.
V.
In March 1999, the Registrant entered into an agreement with Grayson
& Associates, Inc. (G&A). As partial consideration for G&A's services
under the agreement, the Registrant issued G&A a warrant to purchase up to
300,000 shares of the Registrant's common stock at $3.00 per share,
provided however, if the average of the closing bid/ask price for the
Registrant's common stock for the 20 consecutive trading days prior to
March 30, 2000 is less than $3.00 per share, the exercise price for the
first 100,000 shares represented by the warrant will be adjusted down to
reflect a 25% discount from the average of the closing bid/ask price for
such period, exercisable as follows: 100,000 shares exercisable
immediately; an additional 100,000 shares shall become exercisable provided
that the Registrant has received $2 million in funding on or before May 15,
1999; and, the remaining 100,000 shares shall become exercisable provided
that the Registrant has received an additional $4 million in funding on or
before August 31, 1999, subject to ratable reductions to the extent that
any of the funding is not attributable to G&A. The warrant expires March
22, 2004. The issuance of the warrant to G&A was made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act. No
broker/dealers were involved in the sale and no commissions were paid. G&A
represented that they acquired the option for investment and not with a
view to distribution. As of August 31, 1999, G&A has performed no services
on behalf of the Registrant and the Registrant disputes any obligation
under the warrant agreement.
VI.
In March 1999, the Registrant conducted a private offering of its 10%
90-Day Promissory Notes, as amended (Note), convertible at the election of
the note holders into shares of the Registrant's common stock, at $2.00 per
share, to the following:
Name Consideration No. of Warrants*
---- ------------- ---------------
J. Paul Consulting Corporation $60,000 210,000
James Toot $30,000 105,000
Claudia McAdam $15,000 52,500
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GJM Trading Partners, Ltd. $15,000 52,500
Great Expectations Family L.P. $30,000 105,000
Bateman Dynasty $30,000 105,000
Cambridge Holdings, Ltd. $15,000 52,500
Underwood Family Partners $5,000 17,500
------ ------
Total $200,000 700,000
======== =======
* Three and one-half warrants for each $1 of Promissory Notes
purchased, exercisable over a five year period from the date the shares
become freely tradeable at $3.00 per share.
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
Notes and warrants issued to the purchasers were impressed with a
restrictive legend advising that the Notes and warrants may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
VII.
In April 1999, the Registrant issued the following shares of Registrant's
common stock at $2.00 per share, in exchange for the surrender of its 10%
90-Day Convertible Promissory Notes, as amended (Notes), and the unpaid
accrued interest on such Notes:
Principal Amount of Note
------------------------
Name plus Interest No. of Shares
- ---- -------------- -------------
J. Paul Consulting Corporation $60,500 30,250
James Toot $30,250 15,125
Claudia McAdam $15,124 7,562
GJM Trading Partners, Ltd. $15,124 7,562
Great Expectations Family L.P. $30,250 15,125
Bateman Dynasty $30,250 15,125
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Principal Amount of Note
------------------------
Name plus Interest No. of Shares
- ---- -------------- -------------
Cambridge Holdings, Ltd. $15,124 7,562
Underwood Family Partners $5,040 2,520
------ -----
Total $201,662 100,831
======= =======
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent.
VIII.
April 1999 Private Placement
----------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Deloras Decker Hunter, Trustee $50,000 25,000
W. Douglas Moreland $40,000 20,000
L. Michael Underwood $15,000 7,500
Gladys F. Decker, Trustee $23,000 11,500
Paul C. and Carol A. Rivello $14,000 7,000
Max Gould $15,000 7,500
John J. Turk, Jr. $10,000 5,000
Myron A. Leon $20,000 10,000
Michael J. Kirby $10,000 5,000
Kenton Roy Holden IRA $10,000 5,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Inverness Investment Profit Sharing Plan $15,000 7,500
Bleu Ridge Consultants Profit $10,000 5,000
Danny Yu Defined Benefit Pension Plan $18,000 9,000
Gulfstream Financial Partners, LLC $15,000 7,500
Frank J. Kostro $15,000 7,500
Samuel F. Trussell $20,000 10,000
David M. Chapman $20,000 10,000
Richard F. and Barbara A. Vandresser $10,000 5,000
Charles C. Bruner $6,500 3,250
Anthony B. Petrelli $6,500 3,250
Eugene L. Neidiger $7,000 3,500
Heather Evans $2,000 1,000
Steve Schulz Defined Benefit Trust $25,000 12,500
Nancy Nita Macy, Trustee $40,000 20,000
William E. Ambrose $10,000 5,000
C. Richard and Johanna W. Harrison $10,000 5,000
Business Development Corporation $10,000 5,000
Nanna B. Schov Custodian for
Davie Mork and Andreas B. Mork $8,000 4,000
Barry A. Bates $15,000 7,500
Thomas A. Forti, DDS $25,000 12,500
Brad Rhodes $10,000 5,000
Ronald Glosser $20,000 10,000
Brian P. and Cheri Bertelsen $10,000 5,000
Jeanette Y. Mihaly $10,000 5,000
Benedetto Casale $20,000 10,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Colin David Rickson $10,000 5,000
Arthur Kassoff $16,000 8,000
Michael O'Hare $10,000 5,000
Arianne Nemelka $30,000 15,000
Boulder Family Partnership, Ltd. $50,000 25,000
Carla Johnson $10,000 5,000
Patrick N. Kephart $5,000 2,500
Dale Duncan $15,000 7,500
Len Rothstein $15,000 7,500
Abdallah E. Ghusn $12,000 6,000
Leona Connelly $10,000 5,000
Albert W. White $10,000 5,000
David L. Gertz $10,000 5,000
Gregory Pusey $10,000 5,000
Jill Pusey, Custodian for
Jacqueline Pusey $5,000 2,500
Jill Pusey, Custodian for
Christopher Pusey $5,000 2,500
Cambridge Holdings, Ltd. $50,000 25,000
Arthur Marsh Lavenue 10,000 5,000
Paul Ernst 30,000 15,000
Sharon M. McDonald 30,000 15,000
Douglas L. Ray 8,000 4,000
Scott Deitler 10,000 5,000
Michael P. Noonan 15,000 7,500
Russell L. Davis Profit Sharing Plan 20,000 10,000
Cardiovascular Associates, PC
FBO L. Lockspeiser, M.D. 10,000 5,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Charles Kirby 24,000 12,000
------ ------
TOTAL $995,000 497,500
======= =======
The offers and sales set forth above were made in reliance upon the
exemption from registration provided by Section 4(2) of the 1933 Act and/or
Regulation D and Rule 506 adopted thereunder. Based upon information known
to the Registrant, and representations made by each of the purchasers, the
Registrant believes that all of the purchasers were Accredited Investors as
that term is defined in Rule 501 of Regulation D. No broker/dealers were
involved in the sale and no commissions were paid. All of such purchasers
represented that they purchased the securities for investment, and all
certificates issued to the purchasers were impressed with a restrictive
legend advising that the shares represented by the certificates may not be
sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent.
IX.
In May 1999, a consultant to the Registrant exercised options for an
aggregate of 8,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
X.
June 1999 Private Placement
---------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Torben Maersk $ 10,000 2,500
James M. Love 50,000 12,500
Al-Houda Hotels & Tourism 150,000 37,500
Concorde Bank Limited 50,000 12,500
Bobzin Dieter 40,000 10,000
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Name Consideration No. of Shares
- ---- ------------- -------------
Carlos Goncalves 50,000 12,500
Tectron-Industria de Productos 100,000 25,000
Electronicos, LDA
Jean Paul Desbrueres 30,000 7,500
Wilhelm Giersten 20,000 5,000
Dany Noujeim 2,000 500
Goran Gustafson 10,000 2,500
Lars Kellman 10,000 2,500
Gert Kristensson 20,000 5,000
Sune Persson 20,000 5,000
Johanna Brassert 25,000 6,250
Asuno, Inc. 300,000 75,000
Henri Jacob 26,000 6,500
Sylvie Lapidouse 40,000 10,000
Ernst Schneider 50,000 12,500
Kurt Marty 25,000 6,250
Helaba Schweiz 45,000 11,250
Jean-Pierre Delaloye 24,000 6,000
Coutts Bank LTD 24,000 6,000
Etoile Limited 24,000 6,000
Fondation Brigar 24,000 6,000
Galba Anstalt 50,000 12,500
------ ------
TOTAL $1,219,000 304,750
========== =======
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of
Regulation D adopted thereunder for the transactions described above. All
of the purchasers were either known to the Registrant, or were referred to
the Registrant by a consultant to the Company. Based upon the written
representations
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<PAGE>
made by the purchasers and other information known to the Registrant, the
Registrant believes all of the purchasers were Accredited Investors as that
term is defined in Rule 501 of Regulation D. All purchasers represented
that they purchased the securities for investment, and all certificates
issued to the purchasers were impressed with a restrictive legend advising
that the shares represented by certificates may not be sold, transferred,
pledged or hypothecated without having first been registered or the
availability of an exemption from registration established. Stop transfer
instructions have been placed against the transfer of these certificates by
the Registrant's Transfer Agent. No brokers or dealers received
compensation in connection with the sale of these shares.
XI.
In June 1999, the Registrant granted options to acquire 20,000 shares
of the Registrant's common stock to Wellington Ewen, the Registrant's Chief
Financial Officer, at an exercise price of $4.00 per share for five years
from the dates the options become exercisable. The shares shall vest
ratably over a 12 month period from date of grant. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XII.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to Wendy Rieder, a consultant of the
Registrant, at an exercise price of $5.00 per share for five years from the
date the options become exercisable. The shares vest as follows: 20,000
shares as of May 1, 2000, with the remaining shares vesting on a pro rata
basis monthly through May 1, 2002. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XIII.
In June 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to LMU & Company, a consultant of the
Registrant. The options are exercisable at $3.00 per share for nine years
and vest as to 20,000 shares covered hereby on February 1, 1999.
Thereafter, this Option shall vest as to the remaining 40,000 shares
covered hereby on a pro rata basis monthly commencing March 1, 1999, and
ending February 1, 2001. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The option certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not
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<PAGE>
be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration established.
XIV.
In July 1999, the Registrant issued an aggregate of 24,550 shares of
its common stock to the holders of the Registrant's Series B Preferred
Stock as a dividend, valued at $5.00 per share. The issuance of the
dividend shares was exempt from registration in that there was no sale of
the shares by the Registrant. Each holder of the Registrant's Series B
Preferred Stock represented that he received the shares for investment and
not with a view to distribution. All certificates were endorsed with a
legend restricting the sale or transfer of the securities except in
accordance with federal securities laws. Stop transfer instructions have
been placed against the transfer of these certificates by the Registrant's
Transfer Agent.
XV.
In July 1999, a consultant to the Registrant exercised options for an
aggregate of 12,000 shares of the Registrant's common stock at $4.00 per
share. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act. The certificate issued to the consultant was
impressed with a restrictive legend advising that the shares represented by
certificate may not be sold, transferred, pledged or hypothecated without
having first been registered or the availability of an exemption from
registration established. No brokers or dealers received compensation in
connection with the sale of these shares.
XVI.
In July 1999, the Registrant granted options to acquire 60,000 shares
of the Registrant's common stock to LMU & Company, a consultant of the
Registrant. The options are exercisable at $4.00 per share for five years
from the dates they become exercisable and vest as follows: 20,000 shares
at August 5, 1999, and the remaining 40,000 shares ratably over a four
month period through December 5, 1999. The Registrant claims the exemption
from registration provided by Section 4(2) of the 1933 Act for this
transaction. No broker/dealers were involved in the sale and no commissions
were paid. The option certificate was impressed with a restrictive legend
advising that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XVII.
In July 1999, the Registrant granted performance bonus options to
purchase 120,000 shares of the Registrant's common stock to each of the
following executive officers of the Registrants: Higgins D. Bailey and
Donald Hunter. The options are fully vested upon grant and exercisable at
$4.00 per share for five years. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no
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<PAGE>
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XVIII.
In September 1999, the Registrant granted an option to purchase
23,500 shares of the Registrant's common stock to CCRI, a consultant of the
Registrant at an exercise price of $4.00 per share. The options are
exercisable at any time within five years of the grant date and are fully
vested. The Registrant claims the exemption from registration provided by
Section 4(2) of the 1933 Act for this transaction. No broker/dealers were
involved in the sale and no commissions were paid. The option certificate
was impressed with a restrictive legend advising that the shares
represented by the certificate may not be sold, transferred, pledged or
hypothecated without having first been registered or the availability of an
exemption from registration established.
XIX.
September 1999 Private Placement
--------------------------------
Name Consideration No. of Shares
- ---- ------------- -------------
Metz Family Trust $4,000 1,000
John R. Metz and Theresa G. Metz, TTEE
Sunbelt Holdings, Inc. 60,000 15,000
Dennis D. French
MRI, Inc. 20,000 5,000
Profit Sharing Plan
Dennis D. French
Barry Seidman 100,000 25,000
James G. Stevens 20,000 5,000
Jana C. Stevens
Edward Jones Custodian FBO 2,000 500
Sharon Witaker Roth IRA
Edward Jones, Custodian FBO 10,200 2,550
Ernest Handelin Roth IRA
Edward Jones, Custodian FBO 6,000 1,500
Carl Hendelin Roth IRA
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<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
Edward Jones, Custodian FBO 5,800 1,450
Kathleen Rounds Roth IRA
Edward Jones,Custodian FBO 5,800 1,450
Gary Handelin Roth IRA
Edward Jones, Custodian FBO 9,800 2,450
Alan E. Handelin Roth IRA
Leslie Rounds and Kathleen Rounds 4,000 1,000
Husband and Wife, JT
Ralph L. Fuentes and Diana C. Fuentes 3,000 750
Husband and Wife, Community Property
Alan E. Handelin 4,000 1,000
Ernest E. Handelin 73,000 18,250
Joseph P. Sperty 8,000 2,000
Karen H. Sperty
David M. Chapman 20,000 5,000
Danny Yu Defined Benefit Pension Plan 50,000 12,500
Russell L. Davis, Trustee of the 20,000 5,000
Davis Family Trust
Russell L. Davis, Trustee FBO 20,000 5,000
Russell L. Davis Attorney at Law
Profit Sharing Plan
Sylvia E. Davis, Trustee 20,000 5,000
Of the Sylvia E. Davis Trust
Danny Yu and Nancy Yu, Trustees 20,000 5,000
Yu Family Living Trust
Audrey Spangenberg 20,000 5,000
William H. Golod 8,000 2,000
Marsha B. Golod
Samuel F. Trussell 20,000 5,000
-22-
<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
John and Donna Bruce 1996 Living Trust 5,000 1,250
Anders Johnson 2,000 500
Mikael E. Ibsen 8,000 2,000
Mohamed Ali Khawas 30,000 7,500
Malisco Switch Great Ind.
Torben Maersk 10,000 2,500
ATO Ram 2 Ltd. 100,000 25,000
ATO Ram 2 Ltd. 150,000 37,500
Staffan Lindskog 1,000 250
Tawfig S. Mohammed 20,000 5,000
Wilheim Giersten 60,000 15,000
Dany Novjeim 2,000 500
Goram Gustafsson 10,000 2,500
Edouard Rabbat 2,000 500
Riyadh Exhibitions Co. Ltd.
Salah Abdullah Dashti 50,000 12,500
Michael C. Saunders 6,000 1,500
Jean Paul Desbrueres 20,000 5,000
Mohammed Al-Nussif 1,200 300
Mahmound Mohammed Abileh 200,000 50,000
Amir Salim Huneidi 100,000 25,000
Henrik Boyander 4,000 1,000
Raghib Zuberi 5,000 1,250
Yamama-Al-Kuwait
Steen Thomsen 4,000 1,000
Carlos Goncalves 50,000 12,500
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<PAGE>
Name Consideration No. of Shares
- ---- ------------- -------------
Robert and Joanne Penner, Trustees 20,000 5,000
of the Penner Family Trust
Anders Jonson 2,000 500
Thomas M. Lyvers, Sr. 10,000 2,500
Brenda R. Lyvers
Charles Kirby 50,000 12,500
Heather M. Evans 10,000 2,500
David S. Haydan 20,000 5,000
Shirley C. Haydan
Direct Diamonds and
Gold Exchange, Inc. 20,000 5,000
Len Rothstein 20,000 5,000
Richard D. Reinisch and 40,000 10,000
Grace A. Reinish
David A. Zallar 20,000 5,000
Christopher A. Marlett Living Trust 20,000 5,000
David A. Zallar 20,000 5,000
------ -----
Total $1,625,800 406,450
========== =======
The Company claims the exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and/or Rule 506 of
Regulation D adopted thereunder for the transactions described above. All
of the purchasers were either known to the Registrant, or were referred to
the Registrant by a consultant to the Company. Based upon the written
representations made by the purchasers and other information known to the
Registrant, the Registrant believes all of the purchasers were Accredited
Investors as that term is defined in Rule 501 of Regulation D. All
purchasers represented that they purchased the securities for investment,
and all certificates issued to the purchasers were impressed with a
restrictive legend advising that the shares represented by certificates may
not be sold, transferred, pledged or hypothecated without having first been
registered or the availability of an exemption from registration
established. Stop transfer instructions have been placed against the
transfer of these certificates by the Registrant's Transfer Agent. No
brokers or dealers received compensation in connection with the sale of
these shares.
-24-
<PAGE>
XX.
In September 1999, as partial consideration for consulting services
the Registrant issued Neidiger, Tucker, Bruner, Inc. a warrant to purchase
up to 101,681 shares of the Registrant's common stock, exercisable at $4.00
per share for five years. The Registrant claims the exemption from
registration provided by Section 4(2) of the 1933 Act for this transaction.
No broker/dealers were involved in the sale and no commissions were paid.
The warrant certificate was impressed with a restrictive legend advising
that the shares represented by the certificate may not be sold,
transferred, pledged or hypothecated without having first been registered
or the availability of an exemption from registration established.
XXI.
In November 1999, as partial consideration for consulting services,
the Registrant issued ATO Ram 2, Ltd. a warrant to purchase up to 30,000
shares of the Registrant's common stock, exercisable at $4.00 per share for
five years. The Registrant claims the exemption from registration provided
by Section 4(2) of the 1933 Act for this transaction. No broker/dealers
were involved in the sale and no commissions were paid. The warrant
certificate was impressed with a restrictive legend advising that the
shares represented by the certificate may not be sold, transferred, pledged
or hypothecated without having first been registered or the availability of
an exemption from registration established.
XXII.
In November 1999, the Registrant granted an option to purchase 400,000
shares of the Registrant's common stock to Thomas G. Tachovsky, a Director,
President and Chief Executive Officer of the Registrant, at an exercise
price of $5.00 per share. The shares vest as follows: 100,000 shares 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 dates they become exercisable. The Registrant claims
the exemption from registration provided by Section 4(2) of the 1933 Act
for this transaction. No broker/dealers were involved in the sale and no
commissions were paid. The option certificate was impressed with a
restrictive legend advising that the shares represented by the certificate
may not be sold, transferred, pledged or hypothecated without having first
been registered or the availability of an exemption from registration
established.
XXIII.
As of September 1999, the holders of 15,000 shares of the Registrant's
Series B Preferred Stock converted their shares into 15,000 shares of the
Registrant's common stock. The issuance of the shares of common stock upon
the conversion is exempt from registration in that there was no sale of the
shares by the Registrant. Each holder of the Registrant's Series B
Preferred Stock represented that he received the shares for investment and
not with a view to distribution. All certificates were endorsed with a
legend restricting the sale or transfer of the securities except in
accordance with
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<PAGE>
federal securities laws. Stop transfer instructions have been placed
against the transfer of these certificates by the Registrant's Transfer Agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
PLAN 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 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.
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<PAGE>
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. 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
administrative 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. 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. On March 20, 2000, we completed
a secondary public offering from which the net proceeds were approximately
$12,600,000 from the sale of 2,000,000 shares of common stock and warrants.
Our liquidity and capital needs relate primarily to working
capital, research and development of Esterom(R) solution, and other general
corporate requirements. We have not received any cash from operations
since inception. Based on our current plans, we believe the proceeds from
our secondary offering 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 $2,300,000 in cash and cash equivalents, excluding the
proceeds of our secondary public offering.
-27-
<PAGE>
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 first part of the Phase III clinical
studies. 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 an additional $350,000 based on completion of certain project goals.
In March 2000, we entered into an agreement with Neidiger, Tucker,
Bruner, Inc. to cancel a 101,681 share stock warrant agreement, for which
we agreed to pay $330,000 cash as consideration.
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. 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.
ITEM 7. FINANCIAL STATEMENTS.
The Financial Statements set forth on pages F-1 to F-24 of this Report
are incorporated herein by reference.
-28-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There are no changes in, or disagreements with, the accountants on
accounting and financial disclosure.
PART III
Items 9 through 12 will be contained in the definitive proxy statement
which shall be filed within 120 days of the date hereof and are
incorporated herein by reference.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-KSB:
Financial Statements of Entropin, Inc.
Report of Independent Certified Public Accountants
Balance Sheets - December 31, 1998 and 1999
Statements of Operations - Years ended December 31, 1998 and
1999, and for the Period from August 27, 1984 (Inception) Through
December 31, 1999
Statements of Changes in Stockholders' Equity (Deficit) - For
the Period from August 27, 1984 (Inception) Through December 31, 1999
Statements of Cash Flows - Years ended December 31, 1998 and
1999, and for the Period from August 27, 1984 (Inception) Through
December 31, 1999
Notes to Financial Statements - December 31, 1998 and 1999
-29-
<PAGE>
Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.
Exhibit
Number Description
- ------- -----------
3.1 Articles of Incorporation(1)
3.2 Bylaws(1)
3.3 Articles of Merger, as filed with the Colorado Secretary of
State on January 15, 1998(2)
3.4 Amended and Restated Articles of Incorporation, as filed with
the Colorado Secretary of State on January 15, 1998, as
corrected(2)
3.5 Amended Articles of Incorporation, as filed with the Colorado
Secretary of State on July 20, 1998(6)
3.6 Amended and Restated Bylaws, dated March 20, 1999(9)
4.1 Specimen copy of stock certificate for Common Stock, $.001 par
value(2)
4.2 Specimen copy of stock certificate for Series A Preferred
Stock, $.001 par value (2)
4.3 Form of Common Stock Purchase Warrant Certificate(9)
10.1 Stock Option Plan(1)
10.2 Stock Bonus Plan(1)
10.3 Agreement and Plan of Merger, dated December 9, 1997 between
Vanden Capital Group, Inc. and Entropin, Inc.(2)
10.4 Agreement dated January 1, 1997, between the Registrant and
Mallinckrodt, Inc. (Development and Supply Agreement)(4)
10.5 Lease Agreement, dated February 1, 1998, between the
Registrant and Thomas T. Anderson(4)
10.6 License Agreement dated January 1, 1998, between the
Registrant and Dr. James E. Wynn(4)
-30-
<PAGE>
10.7 Assignment of Patent #4,556,663 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc(4)
10.8 Assignment of Patent #4,512,996 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc (4)
10.9 Assignment of Patent #4,469,700 dated September 24, 1992, by
Lowell M. Somers, M.D. to Entropin, Inc.(4)
10.10 Assignment of rights in the application for Letters Patent
under Serial Number 07/999,307 by Lowell M. Somers and James
E. Wynn to Entropin, Inc., dated February 16, 1993(4)
10.11 Assignment of rights in the application for Letters Patent
under Serial Number 08/260,054 by Lowell M. Somers and James
E. Wynn to Entropin, Inc., dated July 29, 1994(4)
10.12 Agreement dated April 18, 1998 by and between the Registrant
and the Western Center for Clinical Studies, Inc.(5)
10.13 Agreement Among Shareholders, dated June 29, 1998(6)
10.14 1998 Compensatory Stock Plan (7)
10.15 Agreement dated August 16, 1999, by and between the Registrant
and Therapeutic Management, Inc. [Confidential treatment has
been granted](8)
10.16 Agreement Among Shareholders, dated March 3, 1999(9)
10.17 Amendment, dated August 3, 1998, by and between the Registrant
and Western Center for Clinical Studies, Inc.(9)
10.18 Second Amendment, dated July 21, 1999, between the Registrant
and the Western Center for Clinical Studies, Inc.(9)
10.19 Amendment to License Agreement, dated June 5, 1999, between
the Registrant and Dr. James E. Wynn(9)
10.20 Wrap Around Agreement dated November 10, 1999, by and between
the Registrant and Therapeutic Management, Inc. [Confidential
treatment has been granted.](9)
10.21 Underwriting Agreement between the Registrant and Neidiger,
Tucker, Bruner, Inc.(3)
-31-
<PAGE>
24.2 Consent of Causey Demgen & Moore Inc.(9)
27 Financial Data Schedule (3)
___________
(1) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Registration Statement on Form S-1, No. 33-23693
effective October 21, 1989.
(2) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, as amended, dated January 15,
1998.
(3) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Post-Effective Amendment No. 1 to Form SB-2, Reg.
No. 333-11308, dated March 22, 2000.
(4) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Annual Report on Form 10-KSB, dated April 15, 1998,
as amended.
(5) Incorporated by reference from the like numbered exhibit filed with
the Registrant's Current Report on Form 8-K, dated April 23, 1998.
(6) Incorporated by reference from the like numbered exhibits filed with
the Registrant's Registration Statement on Form S-1, No. 333-51737
effective August 21, 1998.
(7) Incorporated by reference from the like numbered exhibit as filed with
the Registrant's Registration Statement on Form S-8 as filed on
December 30, 1998.
(8) Incorporated by reference from the like numbered exhibit as filed with
the Registrant's Current Report on Form 8-K, as amended, dated August 20,
1999.
(9) Incorporated by reference from the like numbered exhibits as filed
with the Registrant's Pre-Effective Amendment No. 1 to Form SB-2
Registration Statement, Reg. No. 333-11308, dated March 9, 2000.
(b) Reports on Form 8-K.
During the last quarter covered by this report, the Company
filed no Current Reports on Form 8-K.
-32-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
Date: March 30, 2000 ENTROPIN, INC.
By \s\ Higgins D. Bailey
--------------------------------
Higgins D. Bailey,
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
\s\ Higgins D. Bailey Chairman of the Board March 30, 2000
- -------------------------- and Secretary
Higgins D. Bailey
\s\ Thomas G. Tachovsky President, Director and March 30, 2000
- -------------------------- Chief Executive Officer
Thomas G. Tachovsky
\s\ Daniel L. Azarnoff Director March 30, 2000
- --------------------------
Daniel L. Azarnoff
\s\ Wellington A. Ewen Chief Financial Officer and March 30, 2000
- -------------------------- Principal Financial Officer
Wellington A. Ewen
\s\ Donald Hunter Director March 30, 2000
- --------------------------
Donald Hunter
\s\ James E. Wynn Director March 30, 2000
- --------------------------
James E. Wynn
\s\ Wilson Benjamin Director March 30, 2000
- --------------------------
Wilson Benjamin
\s\ Joseph R. Ianelli Director March 30, 2000
- --------------------------
Joseph R. Ianelli
-34-
<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.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
February 4, 2000, except for
Note 9, as to which the date is
March 9, 2000, and Note 10, as
to which the date is March 20, 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 IBC limited partners, the Company has accrued
a liability totaling $184,071 at December 31, 1999 for advance royalties due
to the individuals (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 FDA approval 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 completed the secondary offering on March 20, 2000
(see Note 10).
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. The
Company completed the public offering on March 20, 2000 (see Note 10).
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 (see Note 9).
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:
Options/warrants
Option/ 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 Options/
contractual Number warrants
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.
9. Subsequent event
On March 9, 2000, the Company entered into an agreement with an organization
to cancel a 101,681 share stock warrant agreement issued in September 1999 in
connection with private placements of common stock (see Note 5). The Company
has agreed to pay $330,000 cash as consideration for cancellation of the
warrant agreement.
10.Completion of public offering
On March 20, 2000, the Company completed a secondary public offering. The
Company received net proceeds of approximately $12,600,000 from the sale of
2,000,000 shares of common stock and 2,000,000 redeemable common stock
purchase warrants.
F-24
