U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from to
Commission file number 000-29807
ENTROPIN, INC.
(Exact name of small business issuer as specified in its charter)
| DELAWARE | 68-0150827 | |
| (State or other jurisdiction of incorporation or organization) | (IRS employer Identification No.) |
45926 Oasis Street, Indio, CA 92201
(Address of principal executive offices)
(760) 775-8333
(Issuer’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
As of May 12, 2004, 30,795,341 shares of the issuer’s Common Stock, $.0001 par value per share, were outstanding.
Transitional Small Business Disclosure Format Yes¨ Nox
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
December 31, 2003 and March 31, 2004
| December 31, 2003 | March 31, 2004 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,032,343 | $ | 736,481 | ||||
Short-term investments | — | 2,653,000 | ||||||
Total current assets | 1,032,343 | 3,389,481 | ||||||
Patent costs, less accumulated amortization of $200,944 (2003) and $212,475 (2004) | 493,995 | 571,646 | ||||||
Property and equipment, net | 6,226 | 5,521 | ||||||
Deferred offering costs | 63,697 | — | ||||||
Total assets | $ | 1,596,261 | $ | 3,966,648 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 208,456 | $ | 141,037 | ||||
Contingencies (Note 2) | ||||||||
Stockholders’ equity: | ||||||||
Series A’ redeemable preferred stock, $.0001 par value; 3,210,487 shares authorized, issued and outstanding; liquidation preference of $3,210,487 | 3,210,487 | 3,210,487 | ||||||
Common stock, $.0001 par value; 50,000,000 shares authorized, 11,545,341 (2003) and 30,795,341 (2004) shares issued and outstanding | 1,154 | 3,080 | ||||||
Additional paid-in capital | 30,871,699 | 34,448,307 | ||||||
Deficit accumulated during the development stage | (32,695,535 | ) | (33,836,263 | ) | ||||
Total stockholders’ equity | 1,387,805 | 3,825,611 | ||||||
Total liabilities and stockholders’ equity | $ | 1,596,261 | $ | 3,966,648 | ||||
See accompanying notes to financial statements.
2
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
For the Three Months Ended March 31, 2003 and 2004
and for the Period from August 27, 1984 (Inception) Through March 31, 2004
(Unaudited)
| 2003 | 2004 | Inception through March 31, 2004 | ||||||||||
Costs and expenses: | ||||||||||||
Research and development | $ | 412,063 | $ | 309,578 | $ | 15,726,374 | ||||||
General and administrative | 595,182 | 833,112 | 18,143,764 | |||||||||
Operating loss | (1,007,245 | ) | (1,142,690 | ) | (33,870,138 | ) | ||||||
Other income (expense): | ||||||||||||
Interest income | 10,049 | 1,962 | 1,490,996 | |||||||||
Interest expense | — | — | (242,811 | ) | ||||||||
Series B preferred stock redemption conversion incentive | — | — | (126,310 | ) | ||||||||
Total other income, net | 10,049 | 1,962 | 1,121,875 | |||||||||
Net loss | (997,196 | ) | (1,140,728 | ) | (32,748,263 | ) | ||||||
Dividends applicable to Series B preferred stockholders | (16,688 | ) | — | (1,103,184 | ) | |||||||
Net loss applicable to common stockholders | $ | (1,013,884 | ) | $ | (1,140,728 | ) | $ | (33,851,447 | ) | |||
Basic and diluted net loss per common share | $ | (.10 | ) | $ | (.06 | ) | $ | (5.25 | ) | |||
Weighted average common shares outstanding | 10,008,000 | 18,315,000 | 6,449,000 | |||||||||
See accompanying notes to financial statements.
3
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY
For the Three Months Ended March 31, 2004
(Unaudited)
Series A’ redeemable preferred stock | Common stock | Additional paid-in capital | Deficit accumulated during the development stage | Total stockholders’ equity | |||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance, January 1, 2004 | 3,210,487 | $ | 3,210,487 | 11,545,341 | $ | 1,154 | $ | 30,871,699 | $ | (32,695,535 | ) | $ | 1,387,805 | ||||||||
Shares and warrants issued pursuant to secondary stock offering, net of offering costs | — | — | 19,250,000 | 1,926 | 3,424,046 | — | 3,425,972 | ||||||||||||||
Stock compensation pursuant to the issuance of warrants | — | — | — | — | 152,562 | — | 152,562 | ||||||||||||||
Net loss for the period | — | — | — | — | — | (1,140,728 | ) | (1,140,728 | ) | ||||||||||||
Balance, March 31, 2004 | 3,210,487 | $ | 3,210,487 | 30,795,341 | $ | 3,080 | $ | 34,448,307 | $ | (33,836,263 | ) | $ | 3,825,611 | ||||||||
See accompanying notes to financial statements.
4
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
For the Three Months Ended March 31, 2003 and 2004
and for the Period from August 27, 1984 (Inception) Through March 31, 2004
(Unaudited)
| 2003 | 2004 | Inception through March 31, 2004 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (997,196 | ) | $ | (1,140,728 | ) | $ | (32,748,263 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization | 10,697 | 12,235 | 278,676 | |||||||||
Series B preferred stock redemption conversion incentive | — | — | 126,310 | |||||||||
Loss on disposal of assets | — | — | 1,837 | |||||||||
Services received in exchange for stock, stock options and warrants | 124,979 | 152,562 | 10,236,969 | |||||||||
Services received in exchange for compensation agreements | — | — | 2,231,678 | |||||||||
Decrease in accrued interest receivable | 5,954 | — | — | |||||||||
Increase (decrease) in accounts payable | 126,588 | (67,419 | ) | 348,734 | ||||||||
Other | (100,000 | ) | — | 58,610 | ||||||||
Net cash used in operating activities | (828,978 | ) | (1,043,350 | ) | (19,465,449 | ) | ||||||
Cash flows from investing activities: | ||||||||||||
Maturities (purchase) of short-term investments, net | 990,000 | (2,653,000 | ) | (2,653,000 | ) | |||||||
Patent costs | (6,073 | ) | (89,181 | ) | (784,120 | ) | ||||||
Purchase of property and equipment | — | — | (130,516 | ) | ||||||||
Net cash provided by (used in) investing activities | 983,927 | (2,742,181 | ) | (3,567,636 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from shares issued pursuant to recapitalization | — | — | 220,100 | |||||||||
Proceeds from issuance of common stock and warrants | — | 3,489,669 | 21,727,038 | |||||||||
Proceeds from issuance of preferred stock | — | — | 1,142,750 | |||||||||
Proceeds from stockholder loans | — | — | 809,678 | |||||||||
Proceeds from stockholder advances | — | — | 98,873 | |||||||||
Repayments of stockholder advances | — | — | (98,873 | ) | ||||||||
Payment for cancellation of common stock warrant | — | — | (330,000 | ) | ||||||||
Proceeds from convertible notes payable | — | — | 200,000 | |||||||||
Net cash provided by financing activities | — | 3,489,669 | 23,769,566 | |||||||||
Net increase (decrease) in cash and cash equivalents | 154,949 | (295,862 | ) | 736,481 | ||||||||
Cash and cash equivalents at beginning of period | 2,906,853 | 1,032,343 | — | |||||||||
Cash and cash equivalents at end of period | $ | 3,061,802 | $ | 736,481 | $ | 736,481 | ||||||
(Continued on following page)
See accompanying notes to financial statements.
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ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2003 and 2004
and for the Period from August 27, 1984 (Inception) Through March 31, 2004
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Three Months Ended March 31, | Inception through March 31, 2004 | ||||||||
| 2003 | 2004 | ||||||||
Cash paid for interest during the period | $ | — | $ | — | $ | 242,811 | |||
Supplemental disclosure of non-cash investing and financing activities:
During the period from August 27, 1984 (inception) through March 31, 2004, the Company issued 3,210,487 shares of Series A preferred stock in exchange for an aggregate $1,710,487 of notes payable to stockholders plus accrued interest and a $1,500,000 compensation agreement.
During the period from August 27, 1984 (inception) through March 31, 2004, the Company converted promissory notes payable with outstanding principal and interest balances totaling $201,662 into 100,831 shares of common stock.
During the period from August 27, 1984 (inception) through March 31, 2004, the Company issued 94,850 shares of common stock at $5.00 per share as payment of accrued dividends on Series B preferred stock.
During the three months ended March 31, 2003 and 2004, and the period from August 27, 1984 (inception) through March 31, 2004, the Company issued 10,000, none and 1,337,333 shares of common stock totaling $49,655, $0 and $1,336,610, respectively, for conversion of shares of Series B preferred stock.
See accompanying notes to financial statements.
6
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
(Unaudited)
The accompanying financial statements of Entropin, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under such rules and regulations. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the financial statements reflect all adjustments considered necessary for a fair presentation. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and notes thereto included in our annual report on Form 10-KSB for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on March 30, 2004.
| 1. | Organization and summary of significant accounting policies |
Organization and basis of presentation:
Entropin, Inc. (the “Company”), a Delaware corporation, was organized as a California corporation in August 1984. The Company is a pharmaceutical research and development company focused on the development of its proprietary compound, ENT-103, as a pain therapy. Activities from inception include research and development, seeking the U.S. Food and Drug Administration, or FDA, approval for its proprietary compounds, including its current drug candidate, ENT-103, as well as fund raising.
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 operating losses and an accumulated deficit at March 31, 2004 of $33,836,263. Management anticipates additional operating losses for the foreseeable future. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments related to the recoverability of recorded asset amounts that may be necessary should the Company be unable to continue as a going concern. The Company will need to raise significant additional funds to continue its planned development activities. In the absence of positive cash flows from operations which the Company expects will not be possible for several years, if at all, the Company is and will remain highly dependent on its ability to secure additional funding through the issuance of debt or equity instruments or corporate partnering arrangements. If adequate funds are not available, the Company may be forced to significantly curtail or terminate its operations or to obtain funds through entering into collaborative agreements or other arrangements that may be on unfavorable terms. The Company’s failure to raise sufficient additional funds on favorable terms, or at all, would have a material adverse effect on its business, results of operations and financial position. The Company’s continued existence is currently dependent on its ability to successfully raise additional capital and complete development of, obtain approval for, and successfully market its proprietary compound ENT-103.
7
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
During 1998, the Company consummated an agreement and plan of merger with Vanden Capital Group, Inc. (“Vanden”), a Colorado corporation, under which Vanden acquired all of the issued and outstanding common shares of the Company. 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.
During 1998, the Company also completed private offerings of 245,500 shares of Series B convertible preferred stock for gross proceeds of $1,227,500, $200,000 of convertible notes payable, and 1,508,700 shares of common stock for gross proceeds of $4,664,800. During the first half of 2000, the Company raised approximately $13,700,000 through a secondary offering.
On October 31, 2003, the Company filed a registration statement with the Securities and Exchange Commission (the “SEC”) on Form SB-2 registering 20 million shares of common stock for sale in an offering. On January 20, 2004, the Company received approval from the SEC to begin its best efforts offering to raise a minimum of $750,000 and a maximum of $3.5 million, plus a 10% over-allotment through the sale of shares of the Company’s common stock at $0.20 per share. During the first quarter of 2004, the Company completed the offering, raising net proceeds of approximately $3.4 million, net of offering costs of approximately $444,000 (including non-cash costs of approximately $19,000 related to a warrant issuance). The Company believes that the net proceeds of this offering, along with its other available cash balances, will be sufficient to permit it to operate into early 2005, and to complete its preclinical studies, file an IND and complete its Phase I human trials for ENT-103. Although these estimates reflect the Company’s current expectations, it is possible that the Company’s actual expenditures could exceed these estimates, which would shorten the time during which it could fund its operations.
Because the Company has not yet completed product development, obtained regulatory approval, or verified the market acceptance and demand for any products it may develop, its activities have been accounted for as those of a “development stage enterprise” as set forth in Statement of Financial Accounting Standards No. 7, “Accounting and Reporting by Development Stage Enterprises”.
Use of estimates:
The preparation of financial statements in conformity with GAAP 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 asset and liability approach under which deferred income taxes are recognized based upon currently enacted tax laws and rates
8
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
applicable to the periods in which the taxes are expected to become payable. A valuation allowance is established for deferred income tax assets when their realization is not reasonably assured.
Property and equipment:
Office furniture and equipment is recorded at cost. Depreciation commences as items are placed in service and is computed using the straight-line method over their estimated useful lives of three years.
Leasehold improvements are recorded at cost and amortized using the straight-line method over the shorter of their estimated useful life or the related lease term.
Research and development costs:
Research and development costs are expensed as incurred.
Patents:
The Company believes that patents and other proprietary rights are important to its business. It is the Company’s policy to file patent applications to protect its technology, inventions and improvements to inventions that are considered important to the development of its business. Patent costs are capitalized and amortized on a straight-line basis over an estimated useful life of 16 years.
Amortization expense related to amortizable patents was approximately $8,795 and $11,531 for the three months ended March 31, 2003 and 2004, respectively, and $212,475 from inception through March 31, 2004.
Impairment of long-lived assets:
The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
Cash equivalents and short-term investments:
The Company considers cash equivalents to include only highly liquid securities with an
9
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
original maturity of three months or less. Investments with an original maturity of more than three months are considered short-term investments and have been classified by management as held-to-maturity. At December 31, 2003, the Company did not hold any funds in short-term investments. At March 31, 2004, the Company’s short-term investments consist entirely of certificates of deposit carried at amortized cost with an average remaining maturity period of 247 days.
Concentrations of credit risk:
The Company invests its excess cash principally in certificates of deposit. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any losses on its cash equivalents or short-term investments.
Stock-based compensation:
The Company follows the fair value method of accounting for employee stock-based compensation provided for in Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. Compensation cost for stock option grants is measured as the fair value of the options using the Black-Scholes option pricing model. Amounts recorded for options granted to non-employees are determined in accordance with Statement of Financial Accounting Standards No. 123 and EITF 96-18 based on the fair value of the consideration or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges related to options granted to non-employees are periodically remeasured as the underlying options vest and are included as unearned stock compensation in the stockholders’ equity section of the balance sheet.
In January 2004, the Company issued a warrant to acquire 1,000,000 shares of the Company’s common stock to Navidec, Inc., a consulting organization retained to provide business and financial advisory services to the Company. The warrant became exercisable with respect to 500,000 of the underlying shares on January 31, 2004 and became exercisable with respect to the remaining 500,000 shares on March 31, 2004. The warrant is exercisable at a price of $0.25 per share until its expiration on January 28, 2009. The fair value of warrant was estimated at $152,500 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, 72% volatility rate, risk free interest rate of 2.99% and an expected life of five years. The fair value of the warrant was charged to general and administrative expense.
In January 2004, in connection with its secondary offering, the Company issued a warrant to acquire 119,000 shares of the Company’s common stock to InvestLinc Securities, Inc., pursuant to the Amended and Restated Investment Banking Agreement, dated December 11, 2003 between the parties. The warrant is exercisable at a price of $0.20 per share until its
10
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
expiration on January 28, 2009. The fair value of warrant was estimated at $19,500 on the date of grant using the Black-Scholes option-pricing model with the following assumptions: no dividend yield, 72% volatility rate, risk free interest rate of 2.99% and an expected life of five years. The fair value of the warrant was included in offering costs.
Fair value of financial instruments:
The carrying amounts of cash, cash equivalents, short-term investments, receivables and accounts payable are considered to be representative of their respective fair values because of their short-term nature.
Loss per share:
Net loss per common share is computed using the weighted average number of common shares outstanding. Basic and diluted net loss per common share amounts are equivalent for the periods presented as the inclusion of common stock equivalents in the number of shares used for the diluted computation would be anti-dilutive. Dividends on preferred stock, consisting of 10% cumulative dividends and deemed dividends related to the beneficial conversion feature and mandatory redemption accretion of Series B preferred stock, are added to net loss for the purpose of determining net loss and net loss per share amounts applicable to common stockholders.
Segment reporting:
The Company currently operates in a single segment. In addition, financial results are prepared and reviewed by management as a single operating segment. The Company continually evaluates its operating activities and the method utilized by management to evaluate such activities and will report on a segment basis when appropriate to do so.
| 2. | Litigation |
On January 28, 2003, a complaint was filed in the superior court of the state of California against the Company and two of its directors, Messrs. Higgins Bailey and Thomas Tachovsky, seeking unspecified damages. The lawsuit alleges that the defendants violated Sections 25400/25403/25500 of the California General Corporation Law, as well as Section 11 of the Securities Act of 1933 by making false and misleading statements in publicly disseminated press releases, registration statements and other filings with the Securities and Exchange Commission. The original complaint alleged that one of the Company’s directors, Mr. Bailey, sold stock for personal gain in violation of federal and state securities laws. The suit alleges that defendants failed to disclose negative clinical trial data and failed to perform certain studies prior to the Company’s March 2000 public offering of common stock and warrants. The plaintiffs have proposed to amend their complaint in order to drop their claims under California Corporations Code Section 25400. In addition, the proposed amended
11
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
complaint would narrow the class of purchasers to be bound by the action. Discovery related to the merits of the case has begun, but is not complete. There are currently pending motions to certify the class (which the Company has opposed), a motion for summary judgment based on the statute of limitations (which plaintiffs have opposed), and a motion to amend the complaint. Although the Company believes the claims are without substance, there can be no assurance that it will succeed in defending or settling this action. Additionally, it is possible that this lawsuit will harm the Company’s business and/or financial position. As of the date of this report, the Company is not a party to any other material legal proceedings.
12
| Item 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited financial statements and notes thereto included in Part I – Item 1 of this report, and the audited financial statements and notes thereto contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Form 10-QSB contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the Safe Harbor provisions created by that statute. 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 these terms or other comparable terminology. Our business and results of operations are subject to various risks and uncertainties as disclosed under the caption “Factors That May Affect Our Future Results and the Trading Price of Our Common Stock” in this Form 10-QSB. These risks and uncertainties include our need and ability to raise significant additional capital; our history of significant operating losses; the ability to successfully complete formulation, development and preclinical studies for our sole drug candidate, ENT-103; the time, cost and uncertainty of obtaining regulatory approvals; and the ability to successfully commercialize products. The actual results that we achieve may differ materially from any forward-looking statements due to these risks and uncertainties and we undertake no obligation to update any such forward-looking statements.
We were incorporated in California in 1984 as Entropin, Inc., or old Entropin, and in 1998 completed a merger with and into Vanden Capital Group, Inc. pursuant to which all of the issued and outstanding common shares of old Entropin were converted into a majority of Vanden’s common stock. Vanden subsequently 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. In June 2002, we changed our state of incorporation from Colorado to Delaware.
From our inception in August 1984, we have devoted our resources primarily to funding our research and development efforts and conducting clinical trials on our products. We have been unprofitable since inception and have had no revenue from the sale of products, and do not expect revenue for the foreseeable future until we have received FDA approval for one of the proprietary compounds we are attempting to develop. We expect to continue to incur losses for the foreseeable future through the completion of our preclinical and clinical trials and the FDA approval process. As of March 31, 2004, our accumulated deficit was approximately $33.8 million.
Research and Development
Prior to our current focus on ENT-103, we completed four preclinical animal studies, Phase I, Phase II and Phase II/III human clinical trials for our first product, known as Esterom solution. In January 2002, we reported that our researchers at Harvard Medical School had identified the active ingredient in Esterom solution, which we named ENT-102. Results of our initial preclinical studies revealed that ENT-102 effectively blocks nerve impulse conduction and when injected into animals may have long-lasting properties to reduce and manage pain.
13
Based on these findings and the results of our Phase II/III clinical study with Esterom solution, we decided to forego further development of Esterom solution and pursue development of ENT-102. In January 2003, we announced the discovery of a new chemical entity, ENT-103, a simplified derivative of ENT-102. ENT-103 is a single chemical compound that exists as a single molecular species. In contrast, ENT-102 is a single chemical compound comprised of a mixture of four chemical species. Due to the demonstrated pain reduction equivalency of ENT-103 and ENT-102 in preclinical studies, and the advantages of pursuing regulatory approval with a single molecule versus a mixture of four molecules, we decided to focus on the development of ENT-103 as a therapy for treatment of acute pain.
Assuming that our clinical trials are successful, we estimate that it will take between four and five years to complete the clinical development of ENT-103 so that it can be commercialized. Any significant delays in our clinical trials or commercialization will affect our ability to generate revenue and may harm our ability to continue to raise capital needed to complete the commercialization of ENT-103. The earliest time at which we expect to generate revenue from ENT-103 under a licensing or similar arrangement is following announcement of Phase I clinical trial results, which may be in early 2005, assuming the clinical trial results are positive and that we are able to find a licensing partner at that time.
We estimate that an additional $45 million will be required to complete development and FDA approval of ENT-103. These expenditures primarily represent research, clinical trials and general and administrative costs. To date, we have spent approximately $33.8 million to develop ENT-103 and its predecessor compounds.
Recent Developments
During the first quarter of 2004, we completed a secondary offering of our common stock in which we raised net proceeds of approximately $3.4 million. We believe that the net proceeds of this offering will be sufficient to permit us to operate until early 2005, and to complete our preclinical studies, file an IND and complete our Phase I human trials for ENT-103. Although these estimates reflect our current expectations, it is possible that our actual expenditures could exceed these estimates, which would shorten the time during which we could fund our operations.
Plan of Operation
We will need to raise significant additional funds to continue the development of ENT-103 (topical and injectable formulations) and complete the FDA approval process, which we expect will cost approximately $45 million beyond our total expenditures to date and will take at least an additional four to five years.
We intend to seek additional funding to support our future operations through public or private sales of our equity or debt securities. We also intend to seek additional funding through potential corporate partnerships, licensing arrangements and/or merger/acquisition transactions. We cannot guarantee that we will be able to secure additional funds on reasonable terms, or at all.
14
Results of Operations
Three months ended March 31, 2004, compared to three months ended March 31, 2003.
The net loss for the first quarter of 2004 was approximately $1.1 million, or $0.06 per share on approximately 18.3 million weighted average shares outstanding. In comparison, the net loss for the first quarter of 2003 was approximately $1.0 million, or $0.10 per share on approximately 10.0 million weighted average shares outstanding.
Total research and development expenses were approximately $310,000 during the first quarter of 2004, as compared to approximately $412,000 for the first quarter of 2003. The slight decrease in research and development expenses during the first quarter of 2004 compared with the same period during 2003 reflects differing costs for various preclinical studies performed during the individual periods.
Total general and administrative expenses were approximately $833,000 for the first quarter of 2004, as compared to approximately $595,000 for the first quarter of 2003. Approximately $153,000 of the general and administrative expense incurred during the first quarter of 2004 reflects a charge to non-cash compensation for the fair value of a warrant issued for business and advisory services. Excluding this non-cash charge, the increase in general and administrative expenses during the first quarter of 2004 is primarily attributable to legal fees and higher directors and officers liability insurance premiums attributable to the class action suit filed against the Company in February of 2003.
Interest income during the first quarter of 2004 was approximately $2,000 as compared to approximately $10,000 during the first quarter of 2003. This decrease in interest income reflects lower balances and declining interest rates for cash, cash equivalents and short-term investments during the first quarter of 2004.
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 March 31, 2004, we have received net cash proceeds from financing activities aggregating approximately $23.8 million. As of March 31, 2004, our working capital was approximately $3.2 million.
Our liquidity and capital needs relate primarily to working capital, research and development of ENT-103, and other general corporate requirements. We have not received any cash from operations since inception.
During the first quarter of 2004, we completed a secondary stock offering from which we raised net proceeds of approximately $3.4 million. We estimate that the net proceeds from this offering, along with our other available cash balances, will be sufficient to permit us to operate until early 2005, complete our preclinical studies, file an IND and complete our Phase I human trials for ENT-103. Although these estimates reflect our current expectations, it is possible that our actual expenditures could exceed these estimates, which would shorten the time during which we could fund our operations. We will not generate revenue from sales of any products in the foreseeable future.
Net cash used in operating activities was approximately $1.0 million during the first quarter of 2004, compared with approximately $829,000 during the first quarter of 2003. The cash used in operations was primarily related to funding clinical trials, conducting mechanism of action studies,
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expanding research and development activities and maintaining our administrative infrastructure. As of March 31, 2004, our principal source of liquidity was approximately $3.4 million in cash, cash equivalents and short-term investments.
The estimated period for which we expect available sources of cash to be sufficient to meet our funding needs is a forward-looking statement that involves risks and uncertainties. We will need to raise additional capital to fund future clinical trials and continue other research and development activities. Our future liquidity and capital funding requirements will depend on numerous factors, including the success or failure of our preclinical research and studies on ENT-103, the timing of future clinical trials and other activities related to the FDA approval process, the cost and timing of sales, marketing and manufacturing activities, the extent to which our products, if any, gain 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 sufficient additional funds on favorable terms, or at all, would harm our business, results of operations and financial position.
As of June 26, 2003, our common stock and warrants were delisted from the Nasdaq SmallCap Market for failure to comply with the $1.00 minimum bid price requirement. Our common stock and warrants now trade on the OTC Bulletin Board under the symbols “ETOP” and “ETOPW,” respectively.
To meet future capital needs, we may pursue one or more of the following financing options:
| • | stock offerings, similar to our recent offering, |
| • | licensing agreements with established pharmaceutical companies, and |
| • | investment from, and partnership(s) with, established pharmaceutical companies. |
We are currently open to licensing discussions with established pharmaceutical companies that have drugs or research and development efforts in areas complementary to those in which we have a focus. We believe that ENT-103 can be a complementary co-therapeutic agent for drugs targeting the pain market. Our management is also pursuing direct investments by strategic partners. The desired strategic partner would be expected to participate in the development process from a scientific advisory board standpoint and in any other manner that is deemed mutually beneficial. To date, we have not entered into any such arrangements and none are currently pending. Additionally, there can be no assurance that we will be able to successfully negotiate and complete any of these arrangements or that we will be able to do so on terms we deem acceptable.
Critical Accounting Policies
We routinely grant stock options to compensate officers, directors and employees for their services. This practice allows us to conserve our cash resources for our drug development program. We have adopted the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. Under these provisions, stock based compensation is measured based on the fair value of the options granted using the Black-Scholes option-pricing model. Amounts recorded for options granted to non-employees are determined in accordance with Statement of Financial Accounting Standards No. 123 and EITF 96-18 based on the fair value of the consideration or the fair value of the equity instruments issued, whichever is more reliably measured. Deferred charges related to options granted to non-employees are periodically remeasured as the underlying options vest and are included as unearned stock compensation in the stockholders’ equity section of the balance sheet.
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Factors That May Affect Our Future Results and the Trading Price of Our Common Stock
An investment in shares of our common stock involves a high degree of risk. You should consider carefully the following information about these risks, together with other information contained in this report and our other filings with the Securities and Exchange Commission before you decide to buy our stock. If any of the following risks actually occur, our business, financial condition and prospects would likely suffer. Additional risk and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.
We need to raise additional funds to support our operations. If we are unable to raise these funds, we will be unable to complete our product development and will need to reduce or cease our operations.
Our independent auditors’ opinion on our 2002 and 2003 financial statements includes an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern.
During the first quarter of 2004, we completed a secondary offering of our common stock in which we raised net proceeds of approximately $3.4 million. We believe that the net proceeds of this offering will be sufficient to permit us to operate until early 2005, and to complete our preclinical studies, file an Investigational New Drug application (“IND”) and complete our Phase I human trials for ENT-103. Although these estimates reflect our current expectations, it is possible that our actual expenditures could exceed these estimates, which would shorten the time during which we could fund our operations. In addition, any delay in the completion of our preclinical studies, IND filing or Phase I human trials, could significantly harm our prospects given our limited remaining funds.
We will need to raise significant additional funds to continue the development of ENT-103 (topical and injectable formulations) and complete the FDA approval process, which we expect will cost approximately $45 million beyond our total expenditures to date and will take at least an additional four to five years. Our future funding requirements will depend on many factors, including:
| • | progress with preclinical and toxicology studies of ENT-103; |
| • | the costs of clinical tests and obtaining regulatory approval for ENT-103; |
| • | the costs and expenses associated with defending against the securities lawsuit recently filed against us and certain of our executive officers; |
| • | the magnitude of our research and development programs; |
| • | the costs involved in obtaining and maintaining patent and other intellectual property rights; and |
| • | the cost of commercial manufacturing. |
We intend to seek additional funding to support our future operations through public or private sales of our equity or debt securities. Any negative results or delay in our clinical and preclinical studies will adversely affect our ability to raise additional funds through the issuance of securities or consummation of corporate partnering relationships. Any additional equity or debt financings that we may complete will be dilutive to our existing stockholders. We also intend to seek additional funding through potential corporate partnerships, licensing arrangements and/or merger/acquisition transactions. Any such collaborative arrangements, if necessary to raise additional funds, may require us to relinquish rights to some of our technologies or products, and may be dilutive to our existing stockholders. We cannot guarantee that we will be able to secure additional funds on reasonable terms, or at all. If we are unable to obtain the significant additional funds to support our
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operations, we will be unable to complete our product development, we will need to reduce or cease our operations, and you may lose your entire investment in our company.
We have a history of losses and we may never achieve or maintain profitability.
To date we have experienced significant operating losses in funding the research, development and testing of our previous drug candidate, Esterom solution, and our subsequent and current drug candidates, ENT-102 and ENT-103. We expect to continue to incur substantial operating losses during our research, development and preclinical testing of ENT-103 and during the regulatory approval process for ENT-103, including filing a New Drug Application (“NDA”) and conducting clinical trials. From our inception through March 31, 2004, we have incurred cumulative net operating losses of $33.8 million. We will not be able to pursue generating revenues from sales of ENT-103 unless it is approved by the FDA for marketing. FDA approval will take several years, if ENT-103 is approved at all, and we may never achieve profitable operations.
If we fail to obtain regulatory approval to commercialize ENT-103, or if approval is delayed, it will increase the cost of development, and will likely prevent or delay our ability to sell ENT-103 and generate revenue.
Our sole current drug candidate, ENT-103, has undergone only limited preclinical development and we do not anticipate beginning human clinical trials with ENT-103 until early 2005, although we can give no assurances as to the results of or the time to complete the preclinical studies. We have not yet filed an application to commence human clinical trials, known as an Investigational New Drug, or IND, application, nor have we requested or received regulatory approval from the FDA for marketing products containing ENT-103. Neither ENT-103 nor any other products that may result from our research and development programs are expected to be commercially available for several years, if at all. Any delay in the timing of the preclinical studies will adversely affect our ability to complete the necessary clinical trials, which could significantly harm our prospects given our limited remaining funds.
The development of new pharmaceutical products is highly uncertain and subject to a number of risks. The FDA approval process generally takes years and consumes substantial capital resources with no assurance of ultimate success. We cannot apply for FDA approval to market ENT-103 until the product successfully completes all of the required clinical trials. Several factors may prevent our successful completion of the clinical trials, including negative or inconclusive preclinical results, failure or delays in the FDA approval process, insufficient capital resources, inability to properly design and complete clinical trials, or insufficient proof that ENT-103 is safe and effective. In addition, interim results do not necessarily predict final results, as was the case with our Esterom clinical trials. Negative or inconclusive results generated during preclinical or toxicology studies, or any future clinical studies, will have an immediate negative impact on our operations and future prospects.
There can be no assurance that development of ENT-103 will be completed successfully, that we will not encounter problems in preclinical studies or clinical trials that will cause the delay or suspension of such trials, that current or future testing will show ENT-103 to be effective or that ENT-103 will receive regulatory approval. Moreover, even if ENT-103 does receive regulatory approval, there can be no assurance that ENT-103 will be commercially successful, or that we will be able to secure all of the patent and other regulatory protections necessary to prevent competitors from producing similar products. The failure of ENT-103 to receive timely regulatory approval and achieve commercial success will negatively impact our business and results of operations.
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In addition, as a controlled substance, ENT-103 will be subject to expensive and burdensome administrative requirements that will increase our costs.
We rely on third parties to test, research, develop and manufacture ENT-103 and those third parties may not perform successfully, which could harm our business, financial condition and results of operations.
We depend on contractual arrangements with third parties for the provision of services and expertise in selected areas. Under these contractual arrangements, third parties are responsible for:
| • | conducting preclinical research and toxicology studies; |
| • | conducting clinical trials and obtaining regulatory approvals; |
| • | process and analytical methods development; |
| • | clinical supply and commercial manufacturing; |
| • | product packaging; |
| • | research; and |
| • | enhanced drug formulation(s). |
Our existing contractual relationships place substantial responsibility on these third parties, which could result in delays or termination if they fail to perform as predicted. Although we believe that we could replace these contractual relationships if necessary, we may not be able to do so in a timely manner or on favorable terms, if at all. If these third parties fail to perform their contractual obligations, it could have a negative impact on our business and results of operations.
We are dependent on contract manufacturers for the production of ENT-103 and our failure to obtain or retain these contract manufacturers would negatively impact our business and results of operations.
We have utilized, and intend to continue utilizing, third party manufacturers to produce the supplies of ENT-103 needed for our preclinical studies. We have no experience in manufacturing and do not have any manufacturing facilities. Consequently, we are solely dependent on Macfarlan Smith, our contract manufacturer, for all production of ENT-103 for development and commercialization purposes. Although there are several other contract manufacturers with whom we could contract for the supply of ENT-103, any disruption of our supply through Macfarlan Smith could result in delays and additional costs that could harm our operations.
We depend on key personnel who would be difficult to replace and our business will likely be harmed if we lose their services.
We have only two full-time executive employees, Thomas Tachovsky and Patricia Kriss, our Chief Executive Officer and Chief Financial Officer, respectively. Although we have an employment agreement with Mr. Tachovsky, his employment relationship is at-will, which means that either party can terminate the employment relationship at any time and for any reason. We do not have an employment contract with Ms. Kriss and her employment relationship is also at-will. Although we maintain key person life insurance for both of our executive employees, the loss of either person would materially harm our operations. In addition, we rely on the members of the Scientific Committee of the Board of Directors, our Scientific and Medical Advisory Board and a number of other specialty consultants to assist in formulating our research and development strategy. The loss of either of our key executives or primary consultants could impede the achievement of our objectives and our business would likely be harmed.
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We are a defendant in a lawsuit, which if determined adversely, could harm our business, results of operations and financial condition.
On January 28, 2003, a complaint was filed in the superior court of the state of California against the Company and two of its directors, Messrs. Higgins Bailey and Thomas Tachovsky, seeking unspecified damages. The lawsuit alleges that the defendants violated Sections 25400/25403/25500 of the California General Corporation Law, as well as Section 11 of the Securities Act of 1933 by making false and misleading statements in publicly disseminated press releases, registration statements and other filings with the Securities and Exchange Commission. The original complaint alleged that one of the Company’s directors, Mr. Bailey, sold stock for personal gain in violation of federal and state securities laws. The suit alleges that defendants failed to disclose negative clinical trial data and failed to perform certain studies prior our March 2000 public offering of common stock and warrants. The plaintiffs have proposed to amend their complaint in order to drop their claims under California Corporations Code Section 25400. In addition, the proposed amended complaint would narrow the class of purchasers to be bound by the action. Discovery related to the merits of the case has begun, but is not complete. There are currently pending motions to certify the class (which the Company has opposed), a motion for summary judgment based on the statute of limitations (which plaintiffs have opposed), and a motion to amend the complaint. Although the Company believes the claims are without substance, there can be no assurance that it will succeed in defending or settling this action. Additionally, it is possible that this lawsuit will harm the Company’s business and/or financial position.
The scope and validity of patents and proprietary rights is particularly important in our industry and the loss of any such rights could harm our business and prospects.
Patents, trademarks and other intellectual property rights are important in our industry and important to our success. Others may challenge, seek to invalidate, infringe or circumvent any patents we own, and the rights we have under those patents may not provide competitive advantages to us. If we are unable to successfully prosecute our patent applications, defend our existing patents or if others develop similar products beyond the protection of our existing patents, our business could be impaired.
In addition, the manufacture, use or sale of our products may infringe on the patent rights of others. Competitors and other third parties may initiate patent litigation against us in the United States or in foreign countries based on existing patents or patents that may be granted in the future. Many of our competitors have obtained patents covering competing products and processes and they may assert these patents against us. Patent litigation can be extremely expensive and time consuming.
We may also need to initiate litigation, which could be time-consuming and expensive, to enforce our proprietary rights or to determine the scope and validity of others’ rights. Any such litigation could result in substantial costs and diversion of resources, regardless of the outcome. In addition, a court may find our patents invalid or may find that we have infringed on a competitor’s rights. If any claims or actions are asserted against us, we may be required to participate in expensive interference proceedings to determine who has the right to a patent for the technology.
Pharmaceutical companies may be exposed to significant product liability claims that can be very costly. Given our limited financial resources, any such claims could harm our business.
The clinical testing of products containing ENT-103 entails risk of product liability claims. Medical testing has historically been litigious and we face financial exposure to product liability claims in the
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event that use of our products results in personal injury. We also face the possibility that defects in the manufacture of ENT-103 based products 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 currently have no product liability insurance and very limited financial resources that could be used to satisfy any such claims, although we anticipate purchasing product liability insurance in reasonable and customary amounts prior to our sale of ENT-103 based products. Such insurance can be expensive, difficult to obtain and may not be available in the future at reasonable cost or in sufficient amounts to protect us against losses. An inability to maintain insurance or to otherwise protect against potential product liability could prevent or inhibit the commercialization of ENT-103 products. Moreover, a product liability claim in excess of our insurance coverage limits or product recall could significantly diminish our limited financial resources and harm our business and results of operations.
The pharmaceutical industry is highly competitive and most of our competitors are larger and have more experience, as well as greater technical and financial resources. As a result, we face significant competitive hurdles.
The pharmaceutical industry is characterized by intense competition and is subject to rapid and significant technological change. There are currently many successful products marketed for the treatment of pain and our competitors have new products and product candidates in all stages of development that will complete with ENT-103 if it is commercialized. Our competitors include major pharmaceutical companies, biotechnology firms, universities and other research institutions, both in the United States and abroad. 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 approval of products. Accordingly, our competitors may obtain regulatory approval for their products more rapidly than we are able to. If we commence commercial sales of our products, we will also be competing with respect to manufacturing efficiencies and marketing capabilities, areas in which we have no prior experience.
Rapid technological change could make our products obsolete.
Pharmaceutical technologies have undergone rapid and significant change. We expect that pharmaceutical technologies will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Even if ENT-103 is approved for marketing, rapid technological development in our industry may render it obsolete before we can recoup all or any portion of our development expenses. If this were to happen, we may be forced to write off development costs, abandon ENT-103 or other drug candidates and seek new drug candidates for regulatory approval and commercialization, all of which could materially adversely affect our business, financial condition and results of operations.
The existing trading market for our securities is limited, which affects the price and liquidity of our securities.
Our common stock was recently delisted from the Nasdaq SmallCap Market and now trades on the OTC Bulletin Board. Securities trading on the OTC Bulletin Board typically suffer from lower liquidity, which may lead to depressed trading prices, greater price volatility and difficultly in buying or selling shares, particularly in large quantities. Currently, there is a limited trading market for our common stock and we cannot predict when, if ever, a fully developed public market for the common stock will occur. If a developed public trading market for the common stock does develop at a future time, there are no assurances that it will be sustained for any period of time. Any sales of shares by
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stockholders in substantial amounts in the public market could adversely affect the prevailing market price and could impair our future ability to raise capital through the sale of equity securities.
In addition, the SEC has adopted regulations which generally define “penny stock” to be any listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect the ability of purchasers in this offering to sell our securities in the secondary market.
We may sell additional shares of capital stock in the future, which could dilute your investment.
Our Certificate of Incorporation authorizes the issuance of up to 50,000,000 shares of common stock and up to 20,000,000 shares of preferred stock. In our secondary offering completed during the first quarter of 2004, we issued a total of 19,250,000 shares of common stock. As of March 31, 2004, there were 30,795,341 shares of common stock issued and outstanding and 3,210,487 shares of Series A’ preferred stock. In the future, we intend to raise additional capital to meet our financial needs through the sale of equity or other securities. Our Board of Directors has the power to issue substantial additional shares of common stock and preferred stock without stockholder approval. Potential investors should be aware that any such stock issuance may result in reduction of the book value or market price, if any, of the outstanding shares of common stock. If we issue any additional shares of common stock or preferred stock, such issuance will reduce the proportionate ownership and voting power of each other stockholder. Further, any new issuance of shares may result in a change in control of our company.
The price of common stock has fluctuated greatly over the past several years and we expect this volatility to continue.
The market prices and trading volumes for the securities of development stage companies in general, and for our securities in particular, have historically been highly volatile and have experienced significant price and volume fluctuations. These fluctuations may or may not be related to our operating performance, and the announcement of developments regarding our products, regulatory approval status, competition, government regulation or other matters that are material to our business or prospects may cause significant swings in our stock prices.
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CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of our disclosure controls and procedures as of the end of the period covered by this report conducted by our management, our Chief Executive and Chief Financial Officers believe that these controls and procedures are effective to ensure that we are able to collect, process and disclose the information we are required to disclose in the reports we file with the SEC within the required time periods.
Internal Control over Financial Reporting
During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II.
OTHER INFORMATION
| Item 1. | Legal Proceedings |
On January 28, 2003, a complaint was filed in the superior court of the state of California against the Company and two of its directors, Messrs. Higgins Bailey and Thomas Tachovsky, seeking unspecified damages. The lawsuit alleges that the defendants violated Sections 25400/25403/25500 of the California General Corporation Law, as well as Section 11 of the Securities Act of 1933 by making false and misleading statements in publicly disseminated press releases, registration statements and other filings with the Securities and Exchange Commission. The original complaint alleged that one of the Company’s directors, Mr. Bailey, sold stock for personal gain in violation of federal and state securities laws. The suit alleges that defendants failed to disclose negative clinical trial data and failed to perform certain studies prior our March 2000 public offering of common stock and warrants. The plaintiffs have proposed to amend their complaint in order to drop their claims under California Corporations Code Section 25400. In addition, the proposed amended complaint would narrow the class of purchasers to be bound by the action. Discovery related to the merits of the case has begun, but is not complete. There are currently pending motions to certify the class (which the Company has opposed), a motion for summary judgment based on the statute of limitations (which plaintiffs have opposed), and a motion to amend the complaint. Although the Company believes the claims are without substance, there can be no assurance that it will succeed in defending or settling this action. Additionally, it is possible that this lawsuit will harm the Company’s business and/or financial position. As of the date of this report, the Company is not a party to any other material legal proceedings.
| Item 2. | Changes in Securities |
Recent Issuances of Unregistered Securities
During the quarterly period ended March 31, 2004, we issued a warrant to acquire 1,000,000 shares of our common stock to Navidec Financial Services, Inc., a consulting organization retained to provide business and financial advisory services. The warrant is exercisable at a price of $0.25 per share until its expiration on January 28, 2009. The warrant contains a cashless exercise provision and provides certain registration rights to the holder. The issuance of the warrant was made in reliance upon 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.
During the quarterly period ended March 31, 2004, we issued a warrant to acquire 119,000 shares of our common stock to InvestLinc Securities, Inc., pursuant to the Amended and Restated Investment Banking Agreement, dated December 11, 2003 between the parties. The warrant is exercisable at a price of $0.20 per share until its expiration on January 28, 2009. The warrant contains a cashless exercise provision and provides certain registration rights to the holder. The issuance of the warrant was made in reliance upon 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.
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| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
There have been no matters submitted to a vote of security holders during the quarterly period ended March 31, 2004 through the solicitation of proxies or otherwise.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits and Reports on Form 8-K |
| (a) | Exhibits |
Exhibit Number | Description | |
| 2.1 | Agreement of Plan of Merger, dated May 2, 2002, by and between Entropin, Inc., a Delaware Corporation and Entropin, Inc., a Colorado corporation (1) | |
| 3.1 | Certificate of Incorporation of Entropin, Inc., a Delaware corporation (2) | |
| 3.2 | Bylaws of Entropin, Inc., a Delaware corporation (2) | |
| 3.3 | Certificate of Designations of Series A’ Preferred Stock of Entropin, Inc. (3) | |
| 4.1 | Form of Common Stock Purchase Warrant (4) | |
| 4.2 | Warrant for Common Stock issued to Navidec Financial Services, Inc. (5) | |
| 4.3 | Warrant for Common Stock issued to InvestLinc Securities, Inc. (5) | |
| 10.1 | Agreement and Plan of Merger, dated December 9, 1997 between Vanden Capital Group, Inc. and Entropin, Inc. (6) | |
| 31.1 | Certification of President and Chief Executive Officer | |
| 31.2 | Certification of Chief Financing Officer | |
| 32.1 | Certification of President and Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. | |
| (1) | Incorporated by reference to the like numbered exhibit filed with the Registrant’s quarterly report on Form 10-QSB on August 14, 2002. |
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| (2) | Incorporated by reference from the like numbered exhibits as filed with the Registrant’s Current Report on Form 8-K on June 26, 2002. |
| (3) | Incorporated by reference from the like numbered exhibit as filed with the Registrant’s annual report on Form 10-KSB/A on April 30, 2003. |
| (4) | Incorporated by reference to the exhibit filed with the Registrant’s Registration Statement on Form SB-2/A, No. 333-11308, on March 15, 2000. |
| (5) | Incorporated by reference to the exhibits filed with the Registrant’s annual report on Form 10-KSB on March 30, 2004. |
| (6) | Incorporated by reference from the exhibit filed with the Registrant’s Current Report on Form 8-K, as amended, on January 15, 1998. |
| (b) | Reports on Form 8-K |
During the current quarter we filed the following Current Reports on Form 8-K:
On March 26, 2004, we filed a Form 8-K attaching a press release in which we announced our financial results for the year ended December 31, 2003.
In accordance with the requirements of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENTROPIN, INC., a Delaware corporation | ||||||||
Date: May 12, 2004 | By: | /s/ Thomas G. Tachovsky, Ph.D. | ||||||
Thomas G. Tachovsky, Ph.D. President and Chief Executive Officer | ||||||||
Date: May 12, 2004 | By: | /s/ Patricia G. Kriss | ||||||
Patricia G. Kriss Chief Financial Officer | ||||||||
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