As filed with the Securities and Exchange Commission on July 22, 1998
Registration No. 333-51737
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
under the
SECURITIES ACT OF 1933
ENTROPIN, INC.
(Name of small business issuer in its charter)
Colorado 283 84-1090424
- ---------------------- ---------------------------- ----------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
Entropin, Inc.
45926 Oasis Street
Indio, California 92201
(760) 775-8333
(Address and telephone number of principal
executive offices and principal place of business)
----------------
Higgins D. Bailey
Chairman of the Board
Entropin, Inc.
45926 Oasis Street
Indio, California 92201
(760) 775-8333
(Name, address and telephone number of agent
for service)
Copies of all communications to:
A. Thomas Tenenbaum, Esq.
Judy A. Gooch, Esq.
Brenman Bromberg & Tenenbaum, P.C.
Mellon Financial Center
1775 Sherman Street, Suite 1001
Denver, Colorado 80203
(303) 894-0234
(303) 839-1633 FAX
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: AS SOON AS PRACTICABLE AFTER THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
CALCULATION OF REGISTRATION FEE
============================================================================================================================
Proposed
Amount Proposed maximum Amount of
Title of each class of to be maximum aggregate registration
securities to be registered registered offering price(1) offering price(1) fee
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Common Stock ($.001 Par Value) 5,754,546 $ 7.50 $43,159,095 $ 12,731.93
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock Underlying Options 296,668 7.50 2,225,010 656.38
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TOTAL 6,051,214 $ 7.50 $45,384,105 $13,388.31
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(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rules 457(a) and (g).
CROSS REFERENCE SHEET
Form SB-2
Item No. Sections in Prospectus
- --------- ----------------------
1 Front of Registration Statement and Outside Front
Cover of Prospectus................................................. Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus.......................................................... Inside Front Cover Pages (I)(ii);
Table of Contents
3 Summary Information and Risk Factors................................ Prospectus Summary; Risk Factors
4 Use of Proceeds..................................................... Prospectus Summary; Use of Proceeds
5 Determination of Offering Price..................................... Cover Page; Plan of Distribution
6 Selling Security Holders............................................ Selling Security Holders
7 Plan of Distribution................................................ Prospectus Summary; Plan of Distribution
8 Legal Proceedings................................................... Legal Proceedings
9 Directors, Executive Officers, Promoters and
Control Persons..................................................... Management - Directors and Executive Officers
10 Security Ownership of Certain Beneficial Owners
and Management...................................................... Security Ownership of Certain Beneficial Owners
and Management
11 Description of Securities........................................... Description of Securities
12 Interest of Named Experts and Counsel............................... Experts
13 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities...................... Statement as to Indemnification
14 Organization within Last Five Years................................. The Company; Interests of Management and
Others in Certain Transactions
15 Description of Business............................................. Prospectus Summary; Risk Factors; The Company
16 Management's Discussion and Analysis or Plan of
Operation........................................................... Management's Discussion and Analysis or Plan of
Operation
17 Description of Property............................................. The Company
18 Certain Relationships and Related Transactions...................... Interests of Management and Others in Certain
Transactions
19 Market for Common Equity and Related
Stockholder Matters................................................. Risk Factors; Market for Common Equity,
Dividend Policy and Related Shareholder Matters
20 Executive Compensation.............................................. Management - Executive Compensation
21 Financial Statements................................................ Index to Financial Statements
22 Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.............................. Experts
23 Indemnification of Directors and Officers........................... Indemnification of Directors and Officers
24 Other Expenses of Issuance and Distribution......................... Other Expenses of Issuance and Distribution
25 Recent Sales of Unregistered Securities............................. Recent Sales of Unregistered Securities
26 Exhibits............................................................ Exhibits
27 Undertakings........................................................ Undertakings
PROSPECTUS
ENTROPIN, INC.
6,051,214 Shares
This Prospectus relates to the resale by the holders (the "Selling
Security Holders") named herein, for their own accounts, of up to 6,051,214
shares of Common Stock, $.001 par value (hereinafter sometimes referred to as
the "Shares") of Entropin, Inc., a Colorado corporation (the "Company"). The
Company is obligated to register: (a) 5,400,001 Shares and 180,001 Shares
underlying options pursuant to the terms of an Agreement and Plan of Merger (the
"Merger Agreement"); (b) 300,000 Shares in accordance with certain registration
rights granted to purchasers in a private placement offering of securities; and,
(c) 54,545 Shares and an additional 116,667 Shares underlying options pursuant
to contract agreements to register such shares . See Description of Securities -
Options for the terms of the options.
Pursuant to an agreement among certain Selling Security Holders (the
"Shareholders Agreement") who are Company officers, directors and major
shareholders, an aggregate of 4,748,388 Shares which they own may be sold or
otherwise disposed of for a period of one year from the date of this Prospectus
only as the Company may permit. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders. The Shares subject to the Shareholders Agreement may be
offered or sold under this Prospectus during the term of the Shareholders
Agreement upon the Company's consent and after expiration of the Shareholders
Agreement without such consent. See The Company and Selling Security Holders.
The Company was formerly known as Vanden Capital Group, Inc.
("Vanden"). In January 1998, the Company and Entropin, Inc., a California
corporation, ("Old Entropin") consummated the Merger Agreement pursuant to which
the Company acquired all of the issued and outstanding shares of stock of Old
Entropin. In connection with the Merger Agreement, the Company changed its name
to Entropin, Inc. and succeeded to the business activity of Old Entropin, which
ceased to exist.
The Company's Common Stock is traded on the Electronic Bulletin Board
under the trading symbol "ETOP". See Market for Common Equity, Dividend Policy,
The Company and Description of Securities.
The shares of Common Stock being offered hereby are not being
underwritten in this offering, and the Company will not receive any proceeds
from their sale. The Company will receive cash proceeds from the exercise, if
any, of outstanding options. See Selling Security Holders.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK TO INVESTORS.
PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE DISCUSSION UNDER RISK
FACTORS COMMENCING ON PAGE 4 OF THIS PROSPECTUS.
Brokers and dealers who propose to effect transactions in the Shares
should assure themselves of the existence of appropriate exemptions from the
securities registration requirements of the securities laws of the applicable
jurisdictions or effectuate such registrations in connection with any offers or
sales of the Shares.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
-------------------
The date of this Prospectus is , 1998
---------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF
AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
TABLE OF CONTENTS
Summary........................................ 1 Security Ownership of Certain
Risk Factors................................... 4 Beneficial Owners and Management.................. 40
Use of Proceeds................................ 14 Interests of Management and Others in Certain
Capitalization................................. 14 Transactions........................................ 42
Market For Common Equity, Description of Securities........................... 44
Dividend Policy and Selling Security Holders............................ 46
Related Shareholder Matters................... 15 Plan of Distribution................................ 50
Management's Discussion and Legal Matters....................................... 51
Analysis or Plan of Operations................ 15 Experts............................................. 51
The Company.................................... 18 Shares Eligible for Future Sale..................... 52
Legal Proceedings.............................. 28 Additional Information.............................. 52
Management..................................... 28 Glossary............................................ 53
Executive Compensation......................... 34 Financial Statements............................... F-1
ii
SUMMARY
The following summary is qualified in its entirety by the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Technical terms used herein are defined in the Glossary. See
Glossary.
THE COMPANY
Entropin, Inc. (the "Company") is a developing stage company engaged
in the pharmaceutical research business. The Company is currently developing a
patented medicinal preparation known as Esterom(R), formulated for the treatment
of impaired range of motion associated with acute lower back sprain and acute
painful shoulder.
The Company's scientific advisor, Dr. James E. Wynn and the inventor
of Esterom(R), Dr. Lowell M. Somers, have identified three new molecules which
serve as the basis for seven U.S. patents owned by the Company. The Company
estimates that an average of 17 years of patent protection remain. Patent
applications have been filed in 29 foreign countries which the Company believes
will provide protection for a significant market worldwide. Future plans include
the research and development of additional drugs related to Esterom(R)'s
technology.
The Company has a current and open Investigational New Drug ("IND")
file with the U.S. Food and Drug Administration ("FDA") and is in Phase II of
the approval process. Four preclinical animal studies and FDA Phase I Clinical
Studies on Esterom(R) have been successfully completed. The results of the Phase
II study indicate that the drug is safe and effective. The Company has designed
the Phase III Protocol and must complete the Phase III Study prior to completion
of the New Drug Application ("NDA") required by the FDA for final approval of a
new prescription drug.
The two indications tested with the topical application of Esterom(R)
were acute lower back sprain and acute painful shoulder. The range of motion of
each condition was improved significantly when compared with patients receiving
a placebo. The Company believes that these two conditions affect about sixty
million Americans each year and represent a substantial domestic market. There
is no estimate available for the size of the international market, which also
appears to have potential. Additional markets under consideration are the
domestic and international veterinary markets.
The Company was incorporated in the State of Colorado in 1987 as Vanden
Capital Group, Inc. for the primary purpose of providing business and management
advisory services. The Company also had been considering business acquisitions.
On January 15, 1998, the Company and Entropin, Inc., a California corporation,
("Old Entropin") consummated an Agreement and Plan of Merger ( the "Merger
Agreement"), whereby the Company acquired all of the issued and outstanding
shares of Old Entropin stock in exchange for: (i) the issuance of 5,700,001
shares of the Company's Common Stock (which amount includes 300,000 shares
issued pursuant to a private placement conducted by Old Entropin); (ii) issuance
under an option 180,001 shares of the Company's Common Stock; and, (iii) the
issuance of 3,210,487 shares of the Company's Series A redeemable non-voting
preferred stock. In connection with the Merger, the Company changed its name to
Entropin, Inc., and succeeded to the business activity of Old Entropin. For the
period from inception through March 31, 1998, the Company had an accumulated
deficit of $4,662,869.
-1-
The Company is obligated to register: (a) 5,400,001 Shares and 180,001
Shares underlying options pursuant to the terms of an Agreement and Plan of
Merger (the "Merger Agreement"); (b) 300,000 Shares in accordance with certain
registration rights granted to purchasers in a private placement offering of
securities; and, (c) 54,545 Shares and an additional 116,667 Shares underlying
options pursuant to contractual agreements to register such shares. See
Description of Securities - Options for the terms of the options.
The Company has entered an agreement with its officers and directors
and major shareholders pursuant to which 4,748,388 Shares owned by such persons
may be sold only as the Company may permit for a period of one year from the
date of this Prospectus. The Shareholders Agreement was entered in anticipation
that potential funding sources at times may require or request a restriction on
disposition of securities owned by a company's management and major
shareholders. See The Company.
The Company's executive offices are located at 45926 Oasis Street,
Indio, California 92201 and its telephone number is (760) 775-8333.
THE OFFERING
Common Stock Offered for
Selling Security Holders.................... 6,051,214 shares of Common Stock $0.001 par value.
(includes 296,668 shares underlying options held by
certain Selling Security Holders). See Security Holders.
Use of Proceeds............................. The Company will not receive any proceeds from the sale
of the Shares. The Company will receive cash proceeds
from the exercise, if any, of outstanding options. See Use
of Proceeds and The Company.
Risk Factors................................ An investment in the securities offered by this Prospectus
involves a high degree of risk and should be considered
only by persons who can afford the loss of their entire
investment. Prospective purchasers should review
carefully the entire Prospectus and should consider,
among other things the matters set forth under Risk
Factors.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction
with Management's Discussion and Analysis or Plan of Operations, and the
financial statements and notes thereto included elsewhere in this Prospectus.
The statements of operations data for the years ended December 31, 1997 and
-2-
1996, and the balance sheet data at December 31, 1997 and 1996 are derived from
and should be read in conjunction with the financial statements of the Company
and notes thereto audited by Causey Demgen & Moore Inc., independent auditors.
The selected financial data as of and for the three month period ending
March 31, 1998 and 1997, and for the period from August 27, 1984 (inception) to
March 31, 1998 are derived from the unaudited financial statements of the
Company, which, in the opinion of the Company reflected all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of the results for the three months ended March 31, 1998 and 1997, which are not
necessarily indicative of the results for a full year.
Unaudited
Cumulative
Amounts from
Unaudited Inception
STATEMENTS OF OPERATIONS Three Months ended through
DATA: Years Ended December 31, March 31 March 31
------------------------ ------------------ ------------
1996 1997 1997 1998 1998
---- ---- ---- ---- ----
Revenues $ - $ - $ - $ - $ -
Research and development 167,818 683,209 37,845 3,772 3,756,626
Other costs and expenses (net) 207,320 415,239 47,039 97,922 906,243
--------- ----------- --------- ---------- -----------
Net loss $(375,138) $(1,098,448) $( 84,884) $( 101,694) $(4,662,869)
========= =========== ========= ========== ===========
Basic net loss per common
share(1) $ (.07) $ (.21) $ (.02) $ (.02) $ (.89)
========= =========== ========= ========== ===========
Common shares used in
computing basic net loss per
common share(1) 5,220,000 5,220,000 5,220,000 5,870,000 5,232,000
========= ========= ========= ========= =========
BALANCE SHEET DATA: Unaudited Pro
December 31, December 31, Unaudited forma(2)
1996 1997 March 31, 1998 March 31, 1998
------------ ------------ -------------- --------------
Cash and cash equivalents $ 1,677 $ 291 $ 538,506 $ 2,398,506
Working capital (deficit) $ (162,916) $ (423,395) $ 511,939 $ 2,371,939
Total assets $ 225,003 $ 282,493 $ 805,462 $ 2,665,462
Long-term liabilities $ 3,143,137 $ 3,365,982 $ 159,067 $ 159,067
Series A Redeemable preferred
stock - - 3,210,487 3,210,487
Series B Convertible preferred
stock - - - 1,860,000
Stockholders' equity (deficit) $(3,087,727) $(3,512,175) $(2,595,659) $(2,595,659)
(1) See Note 5 to the Financial Statements for a description of the computation
of net income (loss) from continuing operations per common share.
(2) Adjusted to give effect to net proceeds from sale of 400,000 shares of
Series B convertible redeemable preferred stock at $5.00 per share.
-3-
RISKS FACTORS
The Shares offered hereby are speculative in nature and involve a high
degree of risk. The Shares should be purchased only by persons who can afford to
lose their entire investment. Therefore, prior to making any purchase, each
prospective investor should consider very carefully the following risk factors,
as well as all of the other information set forth elsewhere in this Prospectus,
including the information contained in the financial statements.
SUBSTANTIAL CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's operations to date have consumed substantial capital
without generating any revenues, and the Company will continue to require
substantial and increasing amounts of funds to conduct necessary research and
development, preclinical and clinical testing of its products, and to market any
products which may receive regulatory approval. In January 1998 in connection
with the merger, the Company obtained: (i) $220,000 from Vanden; (ii) proceeds
of $825,000 from a private placement of securities; and, (iii) additional
liquidity for the Company's current operations by the conversion of $3,210,487
in debt to Series A redeemable nonvoting Preferred Stock. The Company is
currently conducting a private offering of a maximum of 400,000 shares of
convertible preferred stock for 2 million dollars which will be completed by
July 31, 1998. (See Management's Discussion and Analysis or Plan of Operations,
and Description of Securities.) The Company may seek additional funds within the
next 10 to 12 months to fund continuing research and development costs. If the
Company should require additional funding within the next 10 to 12 months, the
Company believes that it will be able to obtain such financing. The Company
anticipates that additional funding of up to $6,000,000 will be required over
the following three years to successfully complete the FDA approval process. The
Company's ability to meet its cash obligations as they become due and payable in
the subsequent fiscal year is expected to depend for at least the next several
years on its ability to obtain equity and/or debt capital.
The Company is contractually obligated to pay a royalty in the
aggregate of approximately one to three percent (1% to 3%) of gross revenue to
certain persons pursuant to separate agreements of dissolution among the
partners of a partnership. . Under a separate agreement entered into with six
limited partners and heirs of limited partners who own in the aggregate 64.28%
of the limited partnership, the Company is obligated to pay a bonus payment in
the aggregate of $96,420 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. No liability has been accrued with respect to this agreement.
In a separate agreement, the Company has agreed to pay two limited
partners owning the remaining 35.72% interest in the limited partnership, 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. The
Company also agreed to pay the former limited partners an aggregate of $40,000
-4-
and a combined minimum earned payment of $3,572 per calendar quarter beginning
December 1, 1989. The 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
Company has accrued the liability regarding the minimum earned payment. The
Company will receive a credit against the earned payments for 50% of monies
which are expended in connection with preparing, filing, obtaining, and
maintaining patents involved with the sold rights.
In addition, the Company has entered into an agreement with Western
Center for Clinical Studies, Inc. ("WCCS"), whereby WCCS will assist the Company
in obtaining FDA approval for its product, Esterom(R), implementing a business
plan and providing experienced personnel to bring Esterom(R) to
commercialization, in exchange for a management fee of $880,400 to be paid over
the 33 month term of the agreement, as well as provide stock options to purchase
450,000 shares of the Company's Common Stock over the 33 month period at an
exercise price of $1.50 per share. The Company intends to use the proceeds from
the private placement of its Series B convertible preferred stock to meet its
monthly payment obligation to WCCS. The payment obligation commenced in April,
1998.
There can be no assurance that the Company will be successful in
raising funds necessary to bring Esterom(R) to market. Additional funds will be
sought, most likely through sale of equity or debt securities, which can be
expected to result in substantial dilution to existing shareholders, including
purchasers of the Shares. The Company may also seek funds through collaborative
arrangements with strategic partners or others. Such arrangements could require
relinquishment of rights to certain technologies, products or markets which it
would not otherwise relinquish. If adequate funds are not available, the Company
will delay and may be unable to complete Phase III testing. See Risk Factors -
"Substantial Capital Needs, Management's Discussion and Analysis or Plan of
Operations, and The Company.
EARLY STAGE OF PRODUCT DEVELOPMENT; SUBSTANTIAL OPERATING LOSSES
The Company has not yet generated any operating revenues. The Company
cannot predict when marketing approval for Esterom(R) will be obtained, if ever.
Even if such approval is obtained, there can be no assurance that Esterom(R)
will be successfully marketed. The Company has experienced significant operating
losses due to substantial expenses incurred to acquire and fund development of
the product and, as of March 31, 1998, had an accumulated deficit of $4,662,869.
The Company expects its operating expenses to increase over the next several
years as it funds development, clinical testing and other expenses of seeking
FDA approval. The Company's ability to achieve a profitable level of operation
is dependent in large part on obtaining regulatory approvals for Esterom(R) and
any subsequent products, entering into agreements for product development and
commercialization, and expanding from development into successful marketing, all
of which will require significant amounts of capital. There can be no assurance
-5-
that the Company will ever achieve a profitable level of operations. See
Management's Discussion and Analysis or Plan of Operations.
POSSIBLE INABILITY TO MEET CASH OBLIGATIONS
The Company may experience cash flow difficulties from time to time due
to its substantial capital needs. For the foreseeable future, the Company's
ability to meet its obligations as they become due and payable will depend on
its ability to obtain debt and/or equity funding. In the event that the Company
cannot raise sufficient capital when needed to sustain or expand its operations,
the Company would likely suspend research and development activities. See Risk
Factors - "Substantial Capital Needs , Management's Discussion and Analysis or
Plan of Operations, and The Company.
DEPENDENCE ON ONE PRODUCT AND FDA APPROVAL
The Company's principal development efforts are centered on the
development of a new drug, Esterom(R), which management believes shows promise
for the treatment of impaired range of motion associated with acute lower back
sprain and acute painful shoulder. While limited clinical trials of Esterom(R)
have to date produced favorable results, significant additional trials are
required, and no assurance can be given that the drug will ultimately be
approved by the FDA. The Company intends to develop additional products;
however, the Company has not identified any other potential products at this
time and there can be no assurance that any additional drugs will be developed
or approved for marketing by the FDA. The Company has never introduced a product
for sale to the public, and no assurance can be given that marketing of the
Company's product in any country in which it may be approved will be financially
successful, which could materially adversely effect the Company. See The
Company.
TECHNOLOGICAL CHANGE AND COMPETITION
The pharmaceutical industry is characterized by intense competition and
is subject to rapid and significant technological change. Rapid technological
development may cause the products to become obsolete before the Company recoups
all or any portion of the related expenses. The Company's competitors include
major pharmaceutical companies, biotechnology firms and 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 the Company. Most of the Company's competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiencies and marketing capabilities, areas in which it has little
experience. See The Company - Competition.
-6-
GOVERNMENT REGULATION AND PRODUCT APPROVALS
The research, preclinical development, clinical trial, manufacturing,
marketing and sale of pharmaceuticals are subject to extensive regulation by
governmental authorities. Products which may be developed by the Company cannot
be marketed commercially in any jurisdiction in which they have not been
approved. In the United States, pharmaceuticals are subject to rigorous
regulation by the U.S. Food and Drug Administration ("FDA") via the
Investigational New Drug Application ("IND") and New Drug Application ("NDA")
approval process for bringing new drug products to the market. In addition,
certain pharmaceuticals are subject to review by the Drug Enforcement Agency
(DEA) to determine the status as a controlled substance. The Federal Food, Drug
and Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion of the
Company's potential products.
The process of obtaining regulatory approvals is lengthy and extremely
expensive. Approval by U.S. authorities does not guarantee, nor necessarily
facilitate or expedite, approval in other countries. Further, government
regulations are subject to change and it is possible that additional criteria
may be established or imposed which could prevent or delay regulatory approval
of Esterom(R) or any subsequent products of the Company. See The Company -
Governmental Regulations.
The Company's product, Esterom, contains chemicals derived from a
substance that is considered to have abuse potential and therefore, is currently
classified as a controlled substance by the DEA. However, no evidence of central
nervous or cardiovascular systems stimulation were noted in Phase I or II
trials. The Company has submitted a petition to the DEA to delist or reclassify
Esterom from its current Schedule II status, based on the data obtained in Phase
I and II clinical studies in human beings which provides evidence that the
product does not have abuse potential and therefore, does not warrant scheduling
as a controlled substance. The petition is currently under review by the U.S.
Attorney General to determine if it is possible to approve the petition without
violating U.S. laws or U.S. international treaty obligations. A change in
controlled substance schedule would require FDA concurrence which is unlikely to
be given before the product is approved for marketing. In the event that the
Company's product is not reclassified, the extra requirements of prescribing a
drug product in this category may decrease its sales and profitability to some
extent. However, the Company believes that the restrictions on the number of
doses and refills placed on Schedule II status drugs will not present a material
risk for the Company because Esterom(R) has been demonstrated in a double-blind,
placebo controlled Phase II study of back sprains and strains and certain
shoulder injuries to be effective after only two doses. It may also be possible
for orthopedic surgeons and sports medicine physicians to apply Esterom(R) in
their office, bypassing the need of the patient to take a prescription to a
pharmacy for filling. See The Company- Governmental Regulations, DEA Status.
-7-
DEPENDENCE ON AGREEMENT WITH WESTERN CENTER FOR CLINICAL STUDIES, INC.
The Company has entered into an agreement with the Western Center for
Clinical Studies, Inc. ("WCCS"), a California corporation experienced in
providing assistance to companies in the process of taking pharmaceutical
products through the FDA approval process (the "Agreement"). The Company will
rely on WCCS for its expertise in assisting the Company to obtain FDA approval
for its product, Esterom(R), in exchange for a management fee of $880,400 to be
paid over the 33 month term of the Agreement, as well as grant stock options to
WCCS within thirty days after execution of the Agreement to purchase an
aggregate of 450,000 shares of Entropin common stock, exercisable for a period
of five years from date of vesting at an exercise price of $1.50 per share. In
the event that the Company can not pay the financial obligations required by the
Agreement, the Company would be forced to terminate the Agreement by giving 60
days' notice, and make a cash payment to WCCS in the amount of three (3) months'
management fees, or $76,400. The loss of the services provided by WCCS would
adversely affect the Company's ability to obtain timely FDA approval on its
product, Esterom, and the Company would likely suspend further research and
development activities. See Risk Factors - "Substantial Capital Needs ,
Management's Discussion and Analysis or Plan of Operations, and The Company.
DEPENDENCE ON MANUFACTURER AGREEMENT
In January 1997, the Company entered into Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") for ten (10) year terms to
develop all of the chemistry, manufacturing and controls necessary to comply
with the bulk drug master file requirements of the FDA. If the Company must seek
an alternative manufacturer of its product and is unable to obtain or retain
third party manufacturing on commercially acceptable terms, it may not be able
to commercialize pharmaceutical products as planned. Moreover, contract
manufacturers that the Company may use must adhere to current Good Manufacturing
Practices ("GMP") which are regulations enforced by the FDA through its
facilities inspection program. These facilities must pass a pre-approval plant
inspection before the FDA will issue an approval to market the product. The
Company's dependence upon third parties for the manufacture of pharmaceutical
products may adversely affect the Company's profit margins and its ability to
develop and deliver pharmaceutical products on a timely and competitive basis.
See Management's Discussion and Analysis or Plan of Operations, and The Company
- - Proposed Manufacturing Plans.
DEPENDENCE ON SOLE-SOURCE SUPPLIER
In January 1997, the Company entered into a Supply Agreement with
Mallinckrodt, Inc. ("Mallinckrodt") for a ten (10) year term to supply the
cocaine essential to its product. The Company will rely exclusively on
Mallinckrodt as the sole supplier of the bulk active product in North America.
Therefore, Mallinckrodt is currently the sole source for cocaine and for
manufacturing the Company's product, Esterom(R). For the year ended December 31,
1997, the contract price of the ingredient was fixed based on the number of
liters ordered by the Company. In subsequent years, the cost per liter will be
adjusted based on changes in the price of the components in the bulk active
product.
-8-
If the Company is unable to obtain a sufficient supply of the product
from Mallinckrodt or such supplies are delayed, the Company could experience
significant delays in bringing the product to market as well as delays in human
clinical testing schedules and delays in submissions of the product for
regulatory approval and initiation of further development progress, any of which
could have a material adverse effect on the Company's business and results of
operations. In addition, if the Company must seek an alternative supplier and is
unable to obtain or retain third party manufacturing on commercially acceptable
terms, it may not be able to commercialize pharmaceutical products as planned.
See Management's Discussion and Analysis or Plan of Operations, and The Company
- - Proposed Manufacturing Plans.
DEPENDENCE ON THIRD PARTIES TO MARKET THE COMPANY'S PRODUCT
The Company does not intend to manufacture any pharmaceutical products.
The Company believes that its strategy for outsourcing manufacturing is cost
effective since it avoids the high fixed costs of plant, equipment and large
manufacturing staff, and thereby enables the Company to conserve its resources.
However, there can be no assurance that the Company would be able to outsource
manufacture any of such products successfully and in a cost-effective manner.
The Company will seek to identify and propose strategic partners and/or
distributors for the Company's product. If the Company should encounter delays
or difficulties in establishing relationships with drug manufacturers to
produce, package and distribute its finished pharmaceutical products, market
introduction and subsequent sales of such products would be adversely affected.
See The Company.
DEPENDENCE ON OFFICERS AND FUTURE EMPLOYEES
The Company is dependent on its officers and directors. The following
officers of the Company are also officers of WCCS, a subcontractor employed to
assist the Company in obtaining FDA approval for its product, and will serve
only during the term of the WCCS contract (33 months): President, Daniel L.
Azarnoff, M.D.; Vice President of Science/Regulatory Affairs, Lois Rezler,
Ph.D.; and, Chief Operating Officer, Roy S. Azarnoff, Ph.D. If the WCCS
agreement is terminated for any reason prior to the Company's obtaining FDA
approval of its product, the loss of services by any of the above officers would
adversely affect the management of the Company. In addition, if the Company
fails to retain the services of its Chief Executive Officer or Chief Financial
Officer, the Company's operations would be adversely affected. The Company does
not have key man insurance on any of its officers or directors. See Management.
MANAGEMENT OF GROWTH
The Company's ability to manage its growth, if any, will require it to
continue to improve and expand its management, operational and financial systems
and controls. If the Company's management is unable to manage growth
effectively, the Company's business and results of operations will be adversely
affected. See The Company and Management.
-9-
TECHNOLOGICAL UNCERTAINTIES
All of the Company's product development efforts are based upon
technologies and therapeutic approaches that have not been widely tested or
used. There is, therefore, a significant risk that these approaches will not
prove to be successful. While the Company believes that the results obtained to
date in preclinical and limited clinical studies support further research and
development, those results are not necessarily indicative of results that will
be obtained in further human clinical testing. See The Company.
PHARMACEUTICAL PRICING; PENDING HEALTH CARE REFORMS
Government health administration authorities, together with private
health insurers, increasingly are attempting to contain health care costs by
limiting the price or reimbursement levels for medical products and services. In
certain foreign markets, pricing or profitability of prescriptive
pharmaceuticals is subject to government control. In the United States, there
have been a number of federal and state proposals to implement similar
government controls or otherwise significantly reform the existing health care
system. Due to uncertainties as to the ultimate features of this or any other
reform initiatives that may be enacted, the Company cannot predict which, if
any, of such reform proposals will be adopted, when they may be adopted, or what
impact they may have on the Company. It is possible that any legislation which
is enacted will include provisions resulting in price limits, utilization
controls or other consequences that may adversely affect the Company. See The
Company - Governmental Regulations.
PATENTS AND PROPRIETARY RIGHTS
Although the Company has been issued certain patents, patents are not a
guarantee of protection from competitors, especially in an area characterized by
rapid advances. Enforcement of patents and proprietary rights in many countries
can be expected to be problematic or unpredictable. There can be no assurance
that any patents issued or licensed to the Company will not be challenged,
invalidated, infringed upon, or designed around by others or that the claims
contained in such patents will not infringe the patent claims of others.
Furthermore, there can be no assurance that others will not independently
develop similar products. Although management believes that patents provide
significant protection for the Company's product, the Company's business may be
adversely affected by competitors who develop a substantially equivalent
product. Patent litigation can be extremely expensive, and the Company may find
that it is unable to fund litigation necessary to defend its rights. See The
Company - Patent.
PRODUCT LIABILITY; LACK OF INSURANCE
The Company's business will expose it to potential product liability
risks which are inherent in the testing, manufacturing, marketing and sale of
pharmaceutical products, and product liability claims may be asserted against
the Company. Product liability insurance for the pharmaceutical industry
generally is expensive. The Company intends to obtain product liability
insurance prior to the commencement of Phase III clinical studies. There can be
-10-
no assurance that adequate insurance coverage will be available at acceptable
costs, or that a product liability claim would not adversely affect the business
or financial condition of the Company.
AUTHORIZED STOCK AVAILABLE FOR ISSUANCE BY THE COMPANY
There are presently outstanding 6,000,051 shares out of a total of
50,000,000 shares of Common Stock, $.001 par value, and 3,210,487 shares of
Series A redeemable nonvoting Preferred Stock, $.001 par value, out of
10,000,000 shares of Preferred Stock authorized for issuance under the Company's
Articles of Incorporation. The Company has designated 400,000 shares of its
Preferred Stock as Series B convertible Preferred stock, which are being sold in
a private offering at $5.00 per share and are convertible on a 1 for 1 basis
into Common Stock. The remaining shares of Common Stock and/or Preferred Stock
not issued or reserved for specific purposes may be issued without any action or
approval of the Company's shareholders. To the extent persons holding the
Company's options exercise their options and receive shares of Common Stock, the
number of shares of Common Stock outstanding will increase; however, there can
be no assurance that any of the option holders will exercise their options.
Other than the option exercise, management has no present plans, agreements or
undertakings involving the issuance of such shares except as disclosed in this
Prospectus. Any such issuances could be used as a method of discouraging,
delaying or preventing a change in control of the Company or could dilute the
shareholders' ownership of the Company. There can be no assurance that
management will not undertake to issue such shares if it deems it appropriate to
do so. See Description of Securities.
ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors can, without obtaining shareholder
approval, issue shares of Preferred Stock having rights that could adversely
affect the voting power of the Common Stock. The possible issuance of shares of
Preferred Stock can be used to oppose hostile takeover attempts.
See Description of Securities.
POSSIBLE VOLATILITY OF PRICE OF SHARES OF COMMON STOCK
The prices of securities of publicly traded corporations tend to
fluctuate widely. It can be expected, therefore, that there may be wide
fluctuations in the price of the Company's Common Stock. A public market for the
Common Stock has developed only recently and there is no assurance that the
market in the Common Stock will be sustained. The Company's Common Stock is
traded on the Electronic Bulletin Board under the trading symbol "ETOP".
Fluctuations in trading interest and changes in the Company's operating results,
financial condition and prospects could have a significant impact on the market
prices for the Common Stock. See Market for Common Equity, Dividend Policy and
Related Shareholder Matters.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not anticipate paying dividends in the foreseeable future. No person
seeking dividend income from an investment should purchase Shares offered
-11-
hereby. The Company is obligated to pay dividends on its Series A redeemable
nonvoting Preferred Stock; however, the obligation is non-cumulative. In
addition, the Company is obligated to pay an annual dividend equivalent to $.50
per share for each outstanding share of its convertible Series B Preferred
Stock; the obligation is cumulative and, at the Company's discretion, may be
paid in cash or Common Stock. See Description of Securities.
INDEMNIFICATION AND LIMITED MONETARY DAMAGES
The Company's Amended Articles of Incorporation limit the liability of
the directors to shareholders for monetary damages for breach of a fiduciary
duty except in cases of liability for: (i) any breach of their duty of loyalty
to the Company or its shareholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
certain unlawful distributions; or, (iv) transaction from which the director
derived an improper personal benefit. Shareholders cannot recover in full for
improper acts of the Board and its members.
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON PRICE OF COMMON
STOCK
Future sales of Common Stock by current shareholders and option holders
could adversely affect the market price of the Company's Common Stock. All of
the Shares registered hereunder can be resold pursuant to this Prospectus.
However, the Company has entered into an agreement with its officers and
directors and major shareholders pursuant to which 4,748,388 Shares owned by
such persons may be sold only as the Company may permit for a period of one year
from the date of this Prospectus. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders. (See The Company, Selling Security Holders and Shares
Eligible for Future Sale.) In the event the Shares are not sold under this
Prospectus, the Shares remain "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act. In general, under Rule 144, as
currently in effect, any person (or persons whose shares are aggregated),
including persons deemed to be affiliates, whose restricted securities have been
fully paid for and held for at least one year from the later of the date of
payment therefor to the Company or acquisition thereof from an affiliate, may
sell such securities in brokers' transactions or directly to market makers,
provided that the number of shares sold in any three month period may not exceed
the greater of 1% of the then outstanding Common Stock or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain notice requirements and
the availability of current public information about the Company. After two
years have elapsed from the later of the issuance of restricted securities by
the Company or their acquisition from an affiliate, such securities may be sold
without limitation by persons who are not affiliates under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the
Company under Rule 144 or otherwise, or even the potential for such sales, are
likely to have a depressive effect on the market price of the Common Stock and
could impair the Company's ability to raise capital through the sale of its
equity securities.
-12-
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and the Company intends that
such forward-looking statements be subject to the safe harbors for such
statements under such sections. The Company's forward-looking statements include
the plans and objectives of management for future operations, including plans
and objectives relating to the Company's planned marketing efforts and future
economic performance of the Company. The forward-looking statements and
associated risks set forth in the Prospectus include or relate to the ability of
the Company to: (i) obtain regulatory approval for its product, including, but
not limited to, the FDA; (ii) obtain meaningful consumer acceptance and a
successful market for the product on a national and international basis at
competitive prices; (iii) develop and maintain an effective national and
international sales network; (iv) forecast demand for its product; (v) maintain
pricing and thereby maintain adequate profit margins; and, (vi) achieve adequate
intellectual property protection.
The forward-looking statements herein are based on current expectations
that involve a number of risks and uncertainties. Such forward-looking
statements are based on assumptions that: (i) the Company will obtain the
necessary governmental and regulatory approval for its product and subsequently,
market and provide the product on a timely basis; (ii) the Company will obtain
equity and/or debt capital; (iii) there will be no material adverse competitive
or technological change in condition of the Company's business; (iv) there will
be a demand for the Company's product; (v) the Company's forecasts accurately
anticipate market demand; and, (vi) there will be no material adverse change in
the Company's operations, business or governmental regulation affecting the
Company or its suppliers. The foregoing assumptions are based on judgments with
respect to, among other things, future economic, competitive and market
conditions, and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the Company's
control. Accordingly, although the Company believes that the assumptions
underlying the forward-looking statements are reasonable, any such assumption
could prove to be inaccurate and therefore there can be no assurance that the
results contemplated in forward-looking statements will be realized. In
addition, as disclosed elsewhere in "Risk Factors", there are a number of other
risks inherent in the Company's business and operations which could cause the
Company's operating results to vary markedly and adversely from prior results,
or the results contemplated by the forward-looking statements. Management
decisions, including budgeting, are subjective in many respects and periodic
revisions must be made to reflect actual conditions and business developments,
the impact of which may cause the Company to alter its marketing, capital
investment and other expenditures, which may also materially adversely affect
the Company's results of operations. In light of significant uncertainties
inherent in forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the Company's objectives or plans will be achieved. See
Management's Discussion and Analysis or Plan of Operations and The Company.
-13-
USE OF PROCEEDS
None of the proceeds from the sale of the shares of Common Stock by the
Selling Security Holders will be received by the Company. The Company will
receive cash proceeds from the exercise, if any, of outstanding options. See
Selling Security Holders and Plan of Distribution.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998, and as adjusted to give effect to the private offering of
400,000 Shares of Series B convertible Preferred Stock.
March 31, 1998
--------------
Pro Forma
Actual as adjusted(1)
----------- --------------
Long-term debt $ 159,067 $ 159,067
Series A redeemable nonvoting preferred stock, $.001 3,210,487 3,210,487
par value; 3,210,487 shares, issued and outstanding
Series B convertible redeemable nonvoting preferred
stock, $.001 par value; 400,000 shares, issued and
outstanding, as adjusted
-0- 1,860,000
Stockholders' equity (deficit):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A and Series B outstanding
(reported above)
Common stock, $.001 par value; 50,000,000 shares 6,000 6,000
authorized, 6,000,051 shares issued and
outstanding
Additional paid-in capital 2,061,021 2,061,210
Deficit accumulated during the development stage (4,662,869) (4,662,869)
----------- -----------
Total stockholders' equity (deficit) (2,595,659) (2,595,659)
----------- -----------
Total capitalization $ 773,895 $ 2,633,895
=========== ===========
- -------------------
(1) Adjusted to give effect to the private offering of 400,000 shares of
convertible, non-voting Series B Preferred Stock at $5.00 per share.
-14-
MARKET FOR COMMON EQUITY, DIVIDEND POLICY AND
RELATED SHAREHOLDER MATTERS
MARKET INFORMATION. The Company's securities are not eligible for
listing on the NASDAQ system; however, the Company's stock commenced trading on
the Electronic Bulletin Board under the trading symbol "ETOP" on February 25,
1998. The following table sets forth the high and low bid prices for the
Company's Common Stock since the Common Stock commenced trading on February 25,
1998. The quotations reflect inter-dealer prices, with retail mark-up, mark-down
or commissions, and may not represent actual transactions. The information
presented has been derived from National Quotation Bureau, Inc.
1998 Fiscal Year High Bid Low Bid
---------------- -------- -------
First Quarter $3.375 $3.00
Second Quarter $7.875 $3.25
Third Quarter (through July 20, 1998) $7.50 $7.50
On July 20, 1998, the last reported bid and asked prices for the Common
Stock were $7.50 and $8.25, respectively.
DIVIDEND POLICY. 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 and financial condition. Since its inception, the
Company has not paid any dividends on its Common Stock and does not anticipate
paying such dividends in the foreseeable future. The Company intends to retain
earnings, if any, to finance its operations.
SHAREHOLDER INFORMATION. As of July 20, 1998, the Company had
approximately 217 holders of record of the Company's Common Stock and four (4)
holders of record of the Company's Series A Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
PLAN OF OPERATIONS
The Company is a development stage pharmaceutical company and has not
generated any revenues for the period from August 27, 1984 (inception) to date.
The Company has devoted substantially all its resources to acquisition of
patents, research and development of the medicine, and expenses related to the
startup of its business.
The Company has been unprofitable since inception and expects to incur
substantial additional operating losses for at least the next 12 months, as well
as for the next few years, as it increases expenditures on research and
development and begins to allocate significant and increasing resources to
clinical testing, marketing and other activities. As described below, in 1998
the Company completed a private placement, exchanged preferred stock for debt
-15-
and completed a reverse acquisition accounted for as a recapitalization of the
Company. These events will provide additional liquidity for the Company for
current operations. The Company is currently conducting an additional private
placement of up to $2,000,000 in convertible Series B preferred stock which
funds will be used to fund operations during the next 12 months. The Company
anticipates requiring additional funding of up to $6,000,000 over the following
three years to successfully complete the FDA approval process.
The Company recently entered into an agreement with the Western Center
for Clinical Studies, Inc. (WCCS), a California corporation experienced in
managing pharmaceutical development. During the 33 month term of the agreement,
WCCS will assist the Company in obtaining FDA approval for its product
Esterom(R), implementing a business plan and providing experienced personnel to
bring Esterom(R) to commercialization. The Company will be required to pay a
management fee of approximately $880,400 over the term of the agreement, as well
as provide stock options to purchase 450,000 shares of the Company's Common
Stock over the 33 month period at an exercise price of $1.50 per share.
RESULTS OF OPERATIONS
From inception until March 31, 1998, the Company has incurred expenses
of $3,756,626 in research and development costs, $606,627 in general and
administrative expenses, $240,177 interest expenses, and other net expenses of
$59,439 resulting in a loss of $4,662,869 for the period from inception (August
27, 1984) to March 31, 1998.
During the three months ended March 31, 1998, the Company incurred a
loss of $101,694, as compared to a loss of $84,884 for the three months ended
March 31, 1997. The increase resulted primarily from an increase of $90,854 in
general and administrative expenses, relating to recapitalization of the Company
and negotiation of an agreement with WCCS. Interest expense decreased in 1998 by
$36,100 as a result of conversion of notes payable to redeemable preferred stock
on January 15, 1998. Research and development costs also decreased by $34,073
due to the Company concentrating its efforts on negotiations with WCCS and the
recapitalization during the first quarter of 1998.
For the year ended December 31, 1997, the Company incurred $683,209 in
research and development fees, $269,853 in general and administrative expenses
and $127,386 in interest expense, resulting in a loss of $1,098,448. Research
and development fees incurred during 1997 were approximately $515,000 higher
than in 1996. The increase related primarily to recording research and
development expense and contributed capital for the estimated fair value of
common stock ($518,000) contributed by certain shareholders to an individual in
exchange for research and development services provided since inception of the
Company. General and administrative expenses incurred during 1997 were
approximately $168,000 higher than in 1996. The increase related primarily to
recording legal expense and contributed capital for the estimated fair value of
common stock ($156,000) contributed by certain shareholders to an individual for
business advisory and legal services.
-16-
The Company's activities to date are not as broad in depth or scope as
the activities it must undertake in the future, and the Company's historical
operations and financial information are not indicative of the Company's future
operating results or financial condition or its ability to operate profitably as
a commercial enterprise when and if it succeeds in bringing any product to
market.
CAPITAL RESOURCES AND LIQUIDITY
In the years since inception, the Company has financed its operations
primarily through the sale of shares of Entropin common stock, loans and
advances from shareholders. At December 31, 1997, outstanding liabilities to
shareholders aggregated $1,809,360, including 8% notes payable to shareholders
in an aggregate amount of $1,710,487, including accrued interest of $169,131,
which notes were due on December 31, 2000. These notes were subsequently
converted as noted below into Series A redeemable nonvoting, noncumulative
Preferred Stock.
On January 15, 1998, the Company issued 3,210,487 shares of Series A
redeemable non-voting, noncumulative 8% preferred stock in exchange for an
aggregate of $3,210,487 of notes payable to shareholders and accrued interest
and for various other liabilities of the Company.
On January 15, 1998, the Company completed a private placement of 30
units (each unit consisting of 10,000 shares of its $.001 par value common stock
per unit) at $27,500 per unit, or $2.75 per share, which resulted in gross
proceeds of $825,000. Concurrent with the private placement, the Company
completed an agreement and plan of merger with Vanden Capital Group, Inc. to
exchange all of the issued and outstanding common shares of the Company for
5,220,000 shares of Vanden's $.001 par value common stock. Pursuant to the
agreement, Vanden provided cash of $220,000. 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 (a reverse acquisition), with the Company as the acquiror.
In January 1997, the Company entered into Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") for ten (10) year terms to
develop all of the chemistry, manufacturing and controls necessary to comply
with the drug master file of the FDA, as well as to supply the bulk active
product. In exchange for these services, Mallinckrodt will receive exclusive
rights as a supplier of the bulk active product to the Company in North America.
For the year ended December 31, 1997, the contract price of the ingredient was
fixed based on the number of liters ordered by the Company. In subsequent years,
the cost per liter will be adjusted based on changes in the price of the
components in the bulk active product.
In June 1998, the Company commenced a private placement of 400,000
shares of convertible Series B preferred stock (See Description of Securities -
Preferred Stock) at $5.00 per share for a maximum offering of $2,000,000.
Dividends on the preferred stock will accrue at the rate of $.50 per share per
annum, will be cumulative and will be paid annually in arrears commencing July
15, 1998. At the Company's election, annual dividends may be paid in cash and/or
in shares of the Company's common stock valued at $5.00 per share.
-17-
EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE
The Company has not experienced material unfavorable effects on its
results of operations due to currency exchange fluctuations with any foreign
suppliers or material unfavorable effects upon its results of operations as a
result of domestic inflation.
YEAR 2000 ISSUE
The Company's management does not believe that the Company will be
materially adversely affected by the computer software Year 2000 issue. The
Company does not have significant exposure to the Year 2000 issue. The Company's
vendors and suppliers may have some exposure to the issue but at this time,
management does not anticipate a material adverse impact on the Company's
operations.
FORWARD LOOKING INFORMATION
Statements of the Company's or management's intentions, beliefs,
anticipations, expectations and similar expressions concerning future events
contained in this document constitute "forward looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. As with any future event,
there can be no assurance that the events described in forward looking
statements made in this report will occur or that the results of future events
will not vary materially from those described in the forward looking statements
made in this document. Important factors that could cause the Company's actual
performance and operating results to differ materially from the forward looking
statements include, but are not limited to, (i) the ability of the Company to
obtain regulatory approval for its product including but not limited to the FDA,
(ii) the ability of the Company to obtain meaningful consumer acceptance and a
successful market for the product on a national and international basis at
competitive prices, (iii) the ability of the Company to develop and maintain an
effective national and international distribution plan, (iv) success of the
Company in forecasting demand for its product, (v) the ability of the Company to
maintain pricing and thereby maintain adequate profit margins, (vi) the ability
of the Company to achieve adequate intellectual property protection.
THE COMPANY
BACKGROUND
Entropin, Inc. (the "Company") was incorporated in the State of
Colorado in 1987 as Vanden Capital Group, Inc., for the primary purpose of
providing business and management advisory services. The Company also had been
considering business acquisitions. On January 15, 1998, the Company and
Entropin, Inc., a California corporation, ("Old Entropin") consummated an
Agreement and Plan of Merger ( the "Merger Agreement"), whereby the Company
acquired all of the issued and outstanding shares of Old Entropin common stock
which consisted of 5,700,001 shares of common stock and 3,210,487 shares of
Series A redeemable non-voting preferred stock in exchange for the issuance of
-18-
5,700,001 shares of the Company's Common Stock and 3,210,487 shares of Series A
redeemable non-voting preferred stock. In connection with the Merger, the
Company changed its name to Entropin, Inc. and succeeded to the business
activity of Old Entropin. The terms and conditions of the Merger Agreement
obligate the Company to register all of the Shares of the Company's Common Stock
issued to shareholders of Old Entropin following the consummation of the Merger
Agreement.
The Company has entered into an agreement with its officers and
directors and major shareholders pursuant to which 4,748,388 Shares owned by
such persons may be sold only as the Company may permit for a period of one year
from the date of this Prospectus. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders. See Selling Security Holders and Shares Eligible for Future
Sale.
The Company is currently engaged in pharmaceutical research and will be
developing a patented medicinal preparation known as Esterom(R) for potential
sale to the public. The Company is the beneficiary of more than 19 years of
extensive research and development with respect to the product, Esterom(R),
undertaken by Lowell M. Somers, MD, the inventor of the product, and James E.
Wynn, Ph.D., the Company's scientific advisor. The present formulation of
Esterom(R) is based on early chemical and clinical studies performed by Drs.
Somers and Wynn, in conjunction with other doctors.
The Company is currently pursuing approval of the product with the U.S.
Food and Drug Administration ("FDA"). Esterom(R) is a medicinal preparation
formulated for the treatment of impaired range of motion associated with acute
lower back sprain and acute painful shoulder. The Company has been assigned
seven patents issued by the U.S. Patent Office. The Company has a current and
open Investigational New Drug ("IND") file with the FDA and is in Phase II of
the approval process.
The two indications tested with the topical application of Esterom(R)
were acute lower back sprain and acute painful shoulder. The range of motion of
each condition was improved significantly when compared with patients receiving
a placebo. The Company believes that these two conditions affect about sixty
million Americans each year and represent a substantial domestic market. There
is no estimate available for the size of the international market, which also
appears to have potential. Additional markets being considered are the domestic
and international veterinary market.
THE PRODUCT - ESTEROM(R)
Dr. Somers originally discovered Esterom(R), a medicinal preparation, in
1979. The product name is derived from its chemical identity and medical purpose
since it is an ester that improves the range of motion (ROM) of patients
suffering from a painful shoulder or back sprain/strain.
In 1979, Drs. Somers and Wynn initiated a collaborative effort to study
the chemical composition of Esterom(R) and its clinical effects which effort
continues today under the Company's aegis. As Chairman of the Department of
Pharmaceutical Sciences, College of Pharmacy, Medical University of South
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Carolina, Dr. Wynn developed a manufacturing method that produced a product
which could satisfy FDA requirements for testing purposes. The reproducible
hydrolytic process that Dr. Wynn developed led to the discovery of three new
molecules in 1993. The three newly discovered molecules are a novel class of
benzoylecgonine ("BE"), ecgonine ("EC") and ecgonidine derivatives.
GOVERNMENTAL REGULATIONS
GENERAL. The manufacturing and marketing of the Company's proposed
products and its research and development activities are and will continue to be
subject to regulation by federal, state and local governmental authorities in
the United States and other countries. In the United States, pharmaceuticals are
subject to rigorous regulation by the FDA's Center for Drug Evaluation and
Research, which reviews and approves marketing of drugs. The Federal Food, Drug
and Cosmetic Act, the regulations promulgated thereunder, and other federal and
state statutes and regulations govern, among other things, the testing,
manufacture, labeling, storage, record keeping, advertising and promotion of the
Company's potential products. Since the Company's product, Esterom(R), contains
chemicals that are derived from a substance that has abuse potential, the Drug
Enforcement Agency (DEA) in conjunction with the FDA will determine Esterom(R)'s
level of scheduling as a controlled substance.
APPROVAL PROCESS. The process of obtaining FDA approval for a new drug
takes several years and generally involves the expenditure of substantial
resources. The steps required before a new drug can be produced and marketed for
human use include clinical trials and the approval of the New Drug Application
("NDA").
PRE-CLINICAL TESTING. The compound is subjected to extensive laboratory
and animal testing to determine if the compound is biologically safe and has the
functionality for which its therapeutic use is intended. All animal safety
studies must be performed under current good laboratory practices ("GLP").
INVESTIGATIONAL NEW DRUG (IND). Before human tests can begin, the drug
sponsor must file an IND application with the FDA, showing how the drug is made
and the results of animal testing. If the FDA does not reject the application
within 30 days, IND status permits the sponsor to undertake initial studies in
human volunteer subjects.
HUMAN TESTING (CLINICAL). Under an IND, the human clinical testing
program involves three phases. Clinical trials are conducted in accordance with
protocols that detail the objectives of the study, the parameters to be used to
monitor safety and the efficacy criteria to be evaluated, including the type of
statistical analysis that will be done. Each protocol is submitted to the FDA as
part of the IND filing. At the present time, two well-controlled clinical trials
are required to establish efficacy. Each clinical study is conducted under the
auspices of an independent Institutional Review Board ("IRB") for each
institution at which the study will be conducted. The IRB will consider, among
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other things, information on the product, ethical factors, the risk to human
subjects, and the potential benefits of therapy relative to risk.
In Phase I clinical trials, studies usually are conducted on healthy
volunteers to determine the maximum tolerated dose, adverse events and
pharmacokinetics of a product. Efficacy endpoints, even if surrogate measures,
are also obtained if possible. Phase II studies are conducted on a statistically
relevant number of patients having a specific disease to determine initial
efficacy in humans for a specific disease, and possible adverse effects and
safety risks. Phase III normally involves the pivotal trials of a drug,
consisting of wide-scale studies on patients with the disease for which the drug
is intended, in order to evaluate the overall benefits and risks of the drug for
the treated disease. In addition to a placebo, these studies may compare the
Company's drug product with other available products. Phase I, II and III
studies are planned to demonstrate safety and efficacy as required for FDA
approval. The FDA continually reviews the clinical trial plans and results and
may suggest design changes or may discontinue the trials at any time if
significant safety or other issues arise.
NEW DRUG APPLICATION (NDA). Upon completion of Phase III, the drug
sponsor may file an NDA containing all pre-clinical, pharmacology and toxicology
information, and clinical and chemical, manufacturing and control ("CMC")
information that has been gathered, as well as all other information that is
known from any other sources. The information must include essentially all the
data collected during the IND phase (e.g. chemical structure and
characterization of the drug, formula and manufacturing process, stability in
the proposed packaging, animal and laboratory studies, results of all human
tests, etc.) and proposed labeling. Once submitted, the FDA has 90 days to
accept the application. If the application is accepted, the Company must pay the
FDA approximately $200,000 as a user fee in order to continue with the review
process.
APPROVAL. Once a NDA is approved, the manufacturer is required to keep
the FDA informed at all times regarding any adverse reactions. Moreover,
contract manufacturers that the Company may use must adhere at all times to
current Good Manufacturing Practices ("GMP") regulations enforced by the FDA
through its facilities inspection program. These facilities must pass a pre-
approval plant inspection before the FDA will issue a pre-market approval of the
product. The FDA may also require post-marketing testing (Phase IV) to support
the conclusion of efficacy and safety of the product, which can involve
significant expense. After FDA approval is obtained for initial indications,
further clinical trials are necessary to gain approval for the use of the
product for additional indications.
The testing and approval process is likely to require substantial time
and effort, and there can be no assurance that any FDA approval will be granted
on a timely basis, if at all. The approval process is affected by a number of
factors, primarily the adverse effects of the drug (safety) and its therapeutic
benefits (efficacy). Additional preclinical or clinical trials may be required
during the FDA review period and may delay marketing approval. A task force
established by the FDA has recently proposed significant changes in the design,
analysis and reporting of clinical studies conducted under INDs, in response to
the results of a Phase III trial of a drug by another company in which severe
complications and death occurred. The task force recommended increased
requirements for reporting adverse effects and new, more stringent rules that
would require clinical trial investigators to assume that toxicities reported by
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patients are drug-related. If these recommendations are implemented, the length
of time and costs associated with obtaining market approval by the FDA are
likely to be significantly increased.
Outside the United States, the Company will be subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for its products. The requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursements vary widely from country to
country.
FDA STATUS/CONTINUING RESEARCH AND DEVELOPMENT
IND Application. Drs. Somers and Wynn filed the IND application on March
9, 1987. The results of four pre-clinical animal studies with no toxicity noted,
were incorporated within the IND Application for FDA approval.
HUMAN TESTING. The Phase I Clinical Study involving 24 healthy male
subjects, was concluded with little or no toxicity observed.
Since Esterom(R) maintained a clear toxicity profile and was shown to be
safe in both animals and in healthy male volunteers when applied topically, the
FDA approved a protocol for a Phase II Clinical Study. The Phase II clinical
study involved a double-blind, randomized, placebo-controlled investigation
designed to continue to look for adverse effects and to determine the efficacy
of Esterom(R) as compared to a placebo in patients who have an impaired range of
motion resulting from acute lower back sprain and acute painful shoulder. The
Phase II Clinical Study involved 97 patients, each of whom received two
applications of Esterom(R) or placebo, with the second application being
performed 24 hours after the first. Overall, Esterom(R) provided relief in both
the back and shoulders 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 improved significantly when compared with patients
receiving a placebo. Range of motion for the shoulder may be defined as the
number of degrees to which the patient may move the arm away from the side in a
forward, backward or upward direction.
The Company has designed the Phase III Protocol and must complete the
Phase III studies prior to completion of the New Drug Application required by
the FDA for final approval of a new prescription drug. As currently planned, the
Phase III studies will include multiple trials in a number of clinical site
study centers in differing geographic areas of the U.S., with approximately 300
patients involved in the study. . The final study design may change according to
possible new FDA requirements. The studies will be double-blind and
placebo-controlled.
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The Company recently entered into an agreement with the Western Center
for Clinical Studies ("WCCS"), a California corporation experienced in managing
pharmaceuticals which are at an early stage of development and providing
assistance to companies in the process of taking pharmaceutical products to the
FDA and through the IND and NDA stages of development in a timely and cost-
efficient manner. WCCS has developed a business plan to accomplish the scope of
its work and will assist the Company in implementing its overall business plan.
In addition, WCCS will provide additional experienced management with the intent
of assisting the Company in developing its product, Esterom(R), to be able to be
used commercially. WCCS will arrange for and oversee necessary studies and
clinical trials of Esterom(R), appoint and utilize the services of a Scientific
and Medical Advisory Board for the Company, assist in developing a distribution
plan, and identify and propose strategic partners and/or distributors for the
Company's product. All work performed by WCCS will be provided by employees and
consultants of WCCS, as the Company's subcontractor. It is estimated that WCCS
will complete the scope of its project within 33 months, commencing April 18,
1998.
Through Phase II, all CMC work was performed at the Medical University
of South Carolina's Pharmaceutical Development Center, College of Pharmacy.
Mallinckrodt, Inc. ("Mallinckrodt"), a leading manufacturer of chemicals and
drugs has agreed to continue to develop Esterom(R) to meet all FDA and GMP
requirements, develop a Drug Master File, file all appropriate CMC documentation
with the FDA, supply Phase III clinical study material, and manufacture the
product to be used commercially. WCCS will advise the Company concerning
appropriate monitoring procedures to manage the Company's manufacturing contract
with Mallinckrodt and seek alternative companies which have the capability of
manufacturing the Company's product, in an effort to minimize any potential
delays or setbacks. See The Company - Proposed Manufacturing Plans.
Esterom(R) is presently a Schedule II controlled substance. However, the
results of Phase I and Phase II Clinical Trials showed no central nervous system
activity, elevated blood pressure, increase in heart rate or euphoria. The
Company believes that the components of the medicine do not cross the blood
brain barrier, and consequently, it is expected that there is no propensity for
abuse. Therefore, an application has been made to the Drug Enforcement
Administration ("DEA") to reclassify Esterom(R) and delist it as a controlled
substance.
SUMMARY OF PHASE I/II FINDINGS
Based on its clinical studies, the Company believes that Esterom(R) may
involve a new and unique mechanism of action. The Phase I Study demonstrated
that the product does not cause detectable systemic effects including no effect
on the cardiovascular system. During the Study, Esterom(R) caused no significant
adverse events and was observed to be safe. The Company confirmed that in Phase
I and Phase II trials, no anesthetic activity or vasoconstrictive activity was
observed.
Although the precise function of Esterom(R) is not known, the medicinal
preparation is neither a local anesthetic nor analgesic. An anesthetic relieves
pain at rest and pain with movement. An analgesic relieves major pain at rest
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and provides minor pain relief with movement. In comparison and according to
patient evaluations, Esterom(R) provides minor relief of pain at rest and major
relief of pain during movement.
DEA STATUS
Esterom(R) is presently a Schedule II controlled substance. A Schedule
II controlled substance is required to be stored and shipped under secured
conditions. A log must be kept to account for all of the manufactured product,
with an entry made each time the drug changes hands listing how much is
distributed to whom and how much is prescribed for each patient. The prescribing
health care provider must have a DEA controlled substance license, and depending
upon the State, may be required to use special prescription pads. The number of
doses and refills is also controlled, depending upon the product's controlled
substance schedule.
Entropin has submitted a petition to the DEA to delist or reclassify
Esterom(R) from its current schedule II status, based on the data obtained in
Phase I and II clinical studies in human beings. The data provides evidence that
Esterom(R) by the route of administration and dose proposed for marketing has no
cardiovascular or central nervous system effects. The Company believes
Esterom(R) does not have the abuse potential of its precursor, cocaine, and does
not warrant scheduling as a controlled substance. The petition is under review
by the U.S. Attorney General to determine if it is possible to approve the
petition without violating United States laws or United States international
treaty obligations. A change in controlled substance schedule would require FDA
concurrence which is unlikely to be given before the product is approved for
marketing.
PROPOSED MANUFACTURING PLANS
Esterom(R) is made by the solvolysis of cocaine base in propylene gylcol
and water. The Company believes that the components of the medicine do not cross
the blood brain barrier, and consequently, it is expected that there is no
propensity for abuse. Cocaine is controlled by the DEA under strict importation
regulations specified in law. To the Company's knowledge, Stepan Company
("Stepan") is the only company that can import coca leaves and process them for
the extraction of cocaine bases. This base is shipped to Mallinckrodt for
purification and sale on the medical and scientific market. Stepan and
Mallinckrodt work with the DEA to set annual quotas for importing the coca
leaves related to projected use and sale of the processed cocaine. Because of
federal restrictions, Esterom(R) can not be manufactured outside of the United
States for sale in the United States. As a result, Mallinckrodt is currently the
sole source for cocaine and for producing Esterom(R).
Mallinckrodt has supplied all of the Company's cocaine for the
laboratory manufacturing of the product for use in research and clinical trials,
and has been aware of the development of the drug since the IND application was
filed. In January 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. ("Mallinckrodt") to develop all of the
chemistry, manufacturing and controls necessary to comply with the drug master
file of the FDA, as well as supply the bulk active product for marketing. In
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exchange for these services, Mallinckrodt will receive exclusive rights as a
supplier of the bulk active product to the Company in North America. For the
year ended December 31, 1997, the contract price of the ingredient was fixed
based on the number of liters ordered by the Company. In subsequent years, the
cost per liter will be adjusted based on changes in the price of the components
in the bulk active product. Although Mallinckrodt believes it can increase the
coca leaf importation quotas to supply the bulk active material as required,
there is no assurance that sufficient importation quotes can be maintained, or
that additional governmental regulations are not imposed on the Company or its
suppliers, which may affect the Company's ability to market the product.
PROPOSED MARKETING PLANS
The Company plans to market its products through strategic partners
and/or distributors. WCCS has developed a business plan to accomplish the scope
of its work and will assist the Company in implementing its overall business
plan. In addition, WCCS will provide additional experienced management with the
intent of assisting the Company in developing its product, Esterom(R), to be
able to be used commercially. With the assistance of WCCS, the Company will
develop a distribution plan and identify and propose strategic partners and/or
distributors for the Company's product.
ROYALTY COMMITMENTS
The I.B.C. Limited Partnership, a California limited partnership,
participated in the early development of Esterom(R) and owned the patent rights
to three patents and all intellectual property rights. In 1993, the Company
entered into a 30 year compensation agreement with six of the limited partners
and heirs of limited partners of I.B.C. who owned in the aggregate 64.28% of the
limited partnership in exchange for their respective rights to the patents and
intellectual property rights owned by the I.B.C. Limited Partnership. The
Company entered into a separate agreement with the remaining two I.B.C. limited
partners whose interests totaled 35.72% in exchange for their remaining
interest. The partnership was subsequently dissolved.
Under a separate agreement entered into with the limited partners and
heirs of limited partners comprising 64.28% of the limited partnership, the
Company is obligated to pay a bonus payment in the aggregate of $96,420 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. No liability has
been accrued with respect to this agreement.
In a separate agreement, the Company has agreed to pay the two limited
partners owning the remaining 35.72% interest in the limited partnership, 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 partner 17.86% of the earned payment. The Company
also agreed to pay the former limited partner an aggregate of $40,000 and a
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combined minimum earned payment of $3,572 per calendar quarter beginning
December 1, 1989. The minimum earned payment is evidenced by a promissory note
issued each quarter and 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 former
limited partner. The Company has accrued liability regarding the minimum earned
payment. The Company will receive a credit against the earned payments for 50%
of monies which are expended in connection with preparing, filing, obtaining,
and maintaining patents involved with the sold rights. See Financial Statements
- - Note 6.
PATENTS
Esterom(R) is protected by a U.S. Composition Patent granted December
27, 1994 which includes safeguarding the discovery of three new molecules. The
Company's patents are as follows: Patent #5,763,456 granted June 9, 1998 with
the Company as Assignee, expiring June 31, 2015; Patent #5,663,345 granted
September 2, 1997 with the Company as Assignee, expiring September 2, 2014;
Patent #5,559,123 granted September 24, 1996 with the Company as Assignee,
expiring September 24, 2013; Patent #5,525,613 granted June 11, 1996 with the
Company as Assignee, expiring June 16, 2014; and, Patent #5,376,667 granted
December 27, 1994 with the Company as Assignee, expiring December 31, 2012. In
addition, Dr. Lowell M. Somers obtained the following initial patents which he
subsequently assigned to the Company in September, 1992: #4,512,996 granted
April 1985, expiring April 23, 2002; Patent #4,469,700 granted September 1984,
expiring September 4, 2001; and, Patent #4,556,663 granted December, 1985,
expiring December 3, 2001.
The three initial patents were drawn to methods of treatment of
rheutomoid arthritis based on compounds which were known to the scientific
community. The five subsequent patents were drawn on different compound claims
which were derivatives of the known compound claims represented in the earlier
patents. Since the formula for the Company's product, Esterom(R), contains the
derivatives protected by the subsequent patents, the expiration of the earlier
patents in 2001 and 2002 will not permit a replication of Esterom(R) by a
competitor.
Drs. Wynn and Somers have assigned to the Company their respective
rights to the U. S. Patents and for foreign countries. In December, 1993, an
International Patent Application was filed under the Patent Cooperation Treaty
in the U.S. Receiving Officer, whereby the Company's technology will be
protected for a significant market worldwide.
EMPLOYEES
As of December 31, 1997, the Company had no full time employees. As of
the date hereof, the Company has two full time employees at its corporate
headquarters in Indio, California. The Company has subcontracted with an
individual for corporate financial services. In addition, the Company has
subcontracted with WCCS for purposes of completing the testing requirements
necessary for FDA approval for the Company's product, Esterom(R) for a term of
33 months. Officers of WCCS presently serve in the following positions in the
Company: Daniel L. Azarnoff, M.D., President; Lois Rezler, Ph.D., Vice President
of Science and Regulatory Affairs; and, Roy S. Azarnoff, Ph.D., Chief Operating
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Officer. Drs. Azarnoff, Rezler and Azarnoff will not receive compensation in
addition to the management fees paid to WCCS by the Company, for their services
rendered to the Company as its officers. Dr. Daniel Azarnoff will serve as the
Company's president until such time as the Company hires an experienced
individual to serve as its President. Drs. Rezler and Roy Azarnoff shall serve
in their respective capacities until the termination of the WCCS contract.
The scientific, medical and chemical development of Esterom(R) to date
has been done under contract with the Medical University of South Carolina,
College of Medicine and the College of Pharmacy, Charleston, South Carolina. See
Management.
PROPERTIES
The Company leases 800 square feet of office space as its corporate
headquarters in Indio, California from one of its principal stockholders, Thomas
T. Anderson, for a monthly rent of $1,040, for a two year term which expires
February 1, 2000, which the Company believes is market or below market rate for
comparable office space.
WCCS leased 2,700 square feet of office space in Woodland Hills,
California from a non-affiliated entity for a five year (5) year term for a
monthly rent of $4,086.90 for months 1 through 30, and $4,517.10 for months 31
through 60, commencing July 1, 1998 and expiring July, 2003. WCCS will provide
approximately one-half of the office for the use of Entropin office staff for
which the Company will reimurse WCCS on a pro rata square foot basis.
COMPETITION
The pharmaceutical industry is characterized by intense competition and
is subject to rapid and significant technological change. Rapid technological
development may cause the products to become obsolete before the Company recoups
all or any portion of the related expenses. The Company's competitors include
major pharmaceutical companies, biotechnology firms and 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 the Company. Most of the Company's competitors have substantially
greater financial, technical, manufacturing, marketing and human resource
capabilities than the Company. In addition, many of the Company's competitors
have significantly greater experience in testing new or improved therapeutic
products and obtaining regulatory approvals of products. Accordingly, the
Company's competitors may succeed in obtaining regulatory approval for products
more rapidly than the Company. If the Company commences significant commercial
sales of its products, it will also be competing with respect to manufacturing
efficiencies and marketing capabilities, areas in which it has little
experience.
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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.
MANAGEMENT
The following table sets forth the names and positions of the directors,
executive officers and key employees of the Company:
Name Age Officer or Position Director Since
---- --- ------------------- --------------
Higgins D. Bailey 68 Chairman of the Board July, 1992
Daniel L. Azarnoff 71 President and Director February, 1998
Donald Hunter 64 Secretary and Director February, 1998
Dewey H. Crim 61 Principal Accounting February, 1998
Officer, Treasurer and
Director
Lois Rezler 46 Vice President-Science
and Regulatory Affairs
Roy S. Azarnoff 67 Chief Operating Officer
Wellington A. Ewen 58 Chief Financial Officer
James E. Wynn 56 Director February, 1998
The directors of the Company are elected to hold office until the next
annual meeting of shareholders and until their respective successors have been
elected and qualified. Officers of the Company are elected annually by the Board
of Directors and hold office until their successors are elected and qualified.
The following sets forth biographical information concerning the
Company's directors and executive officers for at least the past five years.
HIGGINS D. BAILEY, Ed.D. has been an officer and director of the
Company since July 1992 serving as its President and Chief Executive Officer and
is currently the Chairman of the Board of the Company. From 1995 to 1996, Mr.
Bailey was Interim President and Chief Executive Officer for the Pharmaceutical
Educational and Development Foundation at the Medical University of South
Carolina, Charleston, South Carolina, which formulates and manufactures
pharmaceutical products. From 1991 to present, he was also business manager for
Thomas T. Anderson Law Firm, Indio, California. Prior to 1991, Mr. Bailey owned
and operated various travel and tour related companies which subsequently merged
into larger organizations. In addition, Mr. Bailey was an educator for over 25
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years. Mr. Bailey received a B.A. degree in biology from Eastern Washington
University, a M.S. degree in program planning and personnel and Ed.D. in
administration and management from the University of California, Berkeley,
California.
DANIEL L. AZARNOFF, M.D., has been a director of the Company since
February 1998 and was appointed President of the Company in April 1998. From
1988 to present, Dr. Azarnoff has served as President of D. L. Azarnoff
Associates, a company engaged in consulting for various pharmaceutical and
biotechnology companies including Sandoz, Orion Pharma, DeNovo, Inc., Cibus
Pharmaceutical and Cellegy Pharmaceuticals, Inc. From 1978 to 1985, Dr. Azarnoff
was Corporate Senior Vice President of G.D. Searle & Co., an international
pharmaceutical company, and from 1978 through 1985 served as President of Searle
Research and Development, a division of G. D. Searle & Co. Dr. Azarnoff was on
the faculty of the University of Kansas Medical School ("KUMC") from 1962
through 1978 rising to the rank of KUMC Distinguished Professor of Medicine and
Pharmacology. Dr. Azarnoff has also held faculty positions at Northwestern
University Medical School, the University of Chicago Medical School, St. Louis
University School of Medicine and was a Fulbright Scholar at the Karolinska
Institute in Stockholm, Sweden. Dr. Azarnoff is a member of various medical and
honorary societies including the Institute of Medicine of the National Academy
of Sciences. He has lectured extensively within and outside the United States,
and published numerous scientific articles and books on various aspects of
clinical pharmacology. Dr. Azarnoff has served on various advisory committees,
including the Endocrine and Metabolism and other Ad Hoc advisory committees of
the Food and Drug Administration, World Heath Organization, American Medical
Association, National Institutes of Health and National Research Council of the
National Academy of Sciences. Dr. Azarnoff has served on the Science Advisory
Board of various corporations which include Neurobiological Technology, Inc.,
Gilead Science, Inc., Oread, Inc., Cibus Pharmaceutical and Sandoz Research
Institute. Dr. Azarnoff has served or is serving as a director on the following
privately held pharmaceutical drug and development companies: Oread, Inc., Cibus
Pharmaceutical and DeNovo, Inc. Dr. Azarnoff serves as Vice President,
Medical/Regulatory Affairs for Cellegy Pharmaceutical, Inc. None of the above
corporations are developing drugs similar to the Company's products. Dr.
Azarnoff received a B.S. degree in biology and a M.S. degree in zoology from
Rutgers University. Dr. Azarnoff received an M.D. degree from the University of
Kansas Medical School.
DONALD HUNTER has been a director and the Secretary of the Company
since January 1998. Since 1994, Mr. Hunter has served as a consultant to Entergy
Corporation as well as other industrial concerns dealing with
mergers/acquisitions and other business matters. From 1991 to 1994, he was
senior vice president of Entergy Corporation and was responsible for the merger
activities with Gulf States Utilities. Prior to 1991, Mr. Hunter was president
and chief operating officer of Louisiana Power & Light Company and executive
vice president and chief operating officer of New Orleans Public Service, Inc.
In addition, he has served on the board of directors of a number of companies
and service companies. His prior business affiliations include positions as vice
president for Yankee Atomic Electric, president and majority owner of Pioneer
Steel Company, and various executive positions with Helix Technology
Corporation. Mr. Hunter received a B.S. degree in chemical engineering from
Purdue University and a M.S. in nuclear engineering from Iowa State University.
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DEWEY H. CRIM has been a director and the Treasurer of the Company
since January 1998. Mr. Crim currently serves as President and Chief Executive
Officer of the Links Foundation, Inc. From 1995 to 1997, he served as Executive
Vice President of the Inspirational Network, a national cable television
company. From 1980 to 1995, Mr. Crim was employed with BellSouth Corporation, a
national telecommunications company, where he served as President of two
subsidiaries: TechSouth, Inc., and BellSouth Media Technology, Inc. Mr. Crim
later served as a senior business development strategist on the BellSouth
Corporate staff. In addition, his responsibilities included negotiating an
alliance between Walt Disney Company and three regional telephone companies
which subsequently became Americast Corporation. Mr. Crim was also founder and
President of Central Computer Services, Inc., a computer service company which
provided support services to more than 50 banks. Mr. Crim began his career at
Electronic Data Systems Corp. in Dallas, Texas. Mr. Crim serves as a director on
the following privately held companies: Telecom Wireless Solutions, Inc., a
wireless telecommunications company, and Eastside Bank, a federal savings bank.
Mr. Crim received a B.S. degree in business and accounting from the University
of Alabama.
LOIS REZLER, Ph.D. became Vice President of Science and Regulatory
Affairs of the Company in April, 1998. For more than ten years, Dr. Rezler has
been engaged in consulting for various pharmaceutical and biotechnology
corporations including Smith Kline, Smith & Nephew, Cheesborough Ponds, CIBA,
Merck Sharpe Dome, Baxter Travenol and others. Since January 1996, Dr. Rezler
has acted as a regulatory consultant for Western Center for Clinical Studies. On
behalf of her various clients, Dr. Rezler's duties and responsibilities have
included working at bench level to assist in drug design and development,
preparing and submitting grant applications to various government agencies,
consulting in all aspects of preparing IND and NDA submissions to the FDA,
including biologics devices, new drugs, priority drugs and orphan drugs. Dr.
Rezler's duties also include responsibility for developing time lines and
budgets for the project. Dr. Rezler received her Ph.D. in Public Health from
Edinburgh University.
ROY S. AZARNOFF, Ph.D. became Chief Operating Officer of the Company in
April, 1998. Dr. Azarnoff currently serves as the chief operating officer for
Western Center for Clinical Studies (since 1995), a consulting firm that
provides research support assistance to community hospitals and medical groups
for clinical trials with pharmaceutical, biotechnology, diagnostic and medical
device companies, and as Chief Executive Officer of Medical Research Consultant
Associates Inc. (since 1989), a consulting firm that provides research support
assistance to community hospitals, research institutes and drug and medical
device companies. From 1986 to 1989, Dr. Azarnoff served as director of the
Office of Research and Sponsored Projects at California State University, and
from 1977-79 and 1981-83, served as administrator for Technical Assistance
Projects at California State University Foundation. Dr. Azarnoff was chief
executive officer for Eldercare Management Group from 1984 to 1986. Dr. Azarnoff
developed and then directed the fourth largest area agency on aging in the
United States as the director for the Office for the Aging for the City of Los
Angeles from 1972 to 1977. In addition, Dr. Azarnoff has authored numerous
articles and served as assistant professor at Boston University from 1957 to
1966. Dr. Azarnoff received his B.A. from New York University, M.A. from State
University of Iowa and his Ph.D. in Public Health from University of Missouri.
-30-
WELLINGTON A. EWEN, C.P.A., MBA has been the Company's Chief Financial
Officer since April, 1998 and has served as a consultant to the Company since
March, 1998. From 1988 to the present, Mr. Ewen is the owner and manager of
Wellington A. Ewen & Associates, a business consulting firm in Malibu,
California. He has acted as a financial and accounting officer for various
businesses during that time. Prior to that, Mr. Ewen served as senior manager at
the public accounting firms of Coopers & Lybrand, Los Angeles, California and
Arthur Andersen & Co., New York, New York. Mr. Ewen is a C.P.A. in the States of
New York and California and has MBA and BS degrees from Cornell University.
JAMES E. WYNN, Ph.D. has been a director of the Company since February
1998. Dr. Wynn has served as Professor and Assistant Dean for Research at the
Medical University of South Carolina. His responsibilities include faculty
development and research funding plans for the college which are currently being
implemented. From 1969 to 1982 Dr. Wynn was a faculty member at the University
of South Carolina College where he rose to the rank of Professor of Medicinal
Chemistry. In 1982 he assumed the position of Professor and Chairman of the
Department of Pharmaceutical Sciences, College of Pharmacy, Medical University
of South Carolina. In this position Dr. Wynn implemented a new Ph.D. program and
developed a viable research program in pharmaceutical sciences. He established
and operated South Carolina's only Drug Bioequivalence Evaluation Program,
serving as the principal investigator on 25 drug bioavailability/clinical
evaluation trials. Dr. Wynn led the development of the Pharmaceutical
Development Center (PDC), a contract GMP facility for the formulation and
manufacture of clinical supplies for the pharmaceutical industry. Dr. Wynn, as
the Company's scientific advisor, co-authored the patents, supervised the final
process for laboratory manufacturing of Esterom(R), and the analytical work to
identify three newly discovered molecules. Since 1984, Dr. Wynn has served as
co-principal investigator for Entropin's Phase I and Phase II clinical studies.
Dr. Wynn has authored numerous articles which have appeared in scholarly and
professional publications. Recognized as an outstanding educator in pharmacy,
Dr. Wynn received 45 teaching awards over the past 20 years, including
recognition as the 1995 South Carolina "Governor's Professor of the Year". Dr.
Wynn received his B.S. degree in pharmacy and his Ph.D. in medicinal chemistry
with a minor in analytical chemistry from the Medical College of Virginia,
Virginia Commonwealth University, Richmond, Virginia.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors receive
reimbursement of reasonable expenses incurred in attending meetings. In June
1998, the Board of Directors adopted a resolution whereby the Company granted to
each director options to purchase up to 60,000 shares of the Company's Common
Stock, exercisable at $3.00 per share, which options vest at the rate of 20,000
shares per year commencing February, 1999 through February, 2001. Should any of
the directors cease to serve on the Board of Directors, all non-vested options
shall be forfeited. Officers are elected annually by the Board of Directors and
serve at the discretion of the Board. The Company has not entered into any
employment agreements or any other understandings with its directors or
executive officers concerning compensation.
-31-
Daniel L. Azarnoff, M.D., the Company's President and Director, and Roy
S. Azarnoff, Ph.D., the Company's Chief Operating Officer, are brothers.
Currently, the Company does not have an Audit Committee.
SCIENTIFIC AND MEDICAL ADVISORY BOARD
The Board of Directors has established a Scientific and Medical
Advisory Board to advise and consult with the Board of Directors as may be
requested by the Board from time-to-time. Currently, the Scientific and Medical
Advisory Board consists of: Arthur H. Hayes, Jr., M.D.; Gerhard Levy, Pharm.D.;
William Charles McMaster, M.D.; Kenneth L. Melmon, M.D.; and, Lester Mitscher,
Ph.D. The members of the Scientific and Medical Advisory Board will receive
$1,500 per meeting as compensation from the Company for serving in that
capacity, as well as reimbursement for any expenditures incurred on behalf of
the Company. In connection with their appointment to the Scientific and Medical
Advisory Board, in June, 1998, each member was granted options to purchase 3,000
shares of the Company's Common Stock, exercisable at $1.50 per share, which
options vest at the rate of 1,000 shares per year over a three (3) year period
until July, 2001.
ARTHUR HULL HAYES, JR., M.D., currently Vice Chairman and Medical
Director, Nelson Communications, Inc. and the President of MediScience
Associates, Inc. the regulatory/medical consulting division of Nelson
Communications. Dr. Hayes was awarded an NIH fellowship in neuropharmacology
research at Cornell University Medical College in 1960. He joined Cornell's
faculty serving as Associate Professor of Medicine and Pharmacology, Associate
Dean for Academic Affairs, and Attending Physician, The New York Hospital. He
established and directed the hospital's first cardiac pacemaker clinic. In 1972,
Dr. Hayes became Professor of Medicine and Pharmacology, founding Director of
the Division of Clinical Pharmacology, and Attending Physician at the
Pennsylvania State University College of Medicine, Hershey Medical Center where
he also served as chairman of the admissions committee and established a
referral-research hypertension clinic. He also chaired the hospital Pharmacy and
Therapeutics Committee and served on the institutional review board. In April,
1981 Dr. Hayes was appointed Commissioner of Food and Drugs (FDA) and an
Assistant Surgeon General, positions he held until September, 1983 when he was
named Provost and Dean, Professor of Medicine, Pharmacology and Family &
Community Medicine (Public Health), and Director of the Institute of Human
Values in Medical Ethics at the New York Medical College. Dr Hayes is the past
president and chief executive officer and member of the board of directors of EM
Pharmaceuticals, Inc., a North American subsidiary of E. Merck, Darmstadt,
Germany. He has received numerous scientific and public service awards and
honors, is a Charter Diplomate of the American Colleges of Physicians,
Cardiology, and Chest Physicians, the American Academy of Pharmaceutical
Physicians, the New York Academy of Medicine and the Royal College of Medicine.
He serves on a number of academic, commercial and foundation boards of
directors, advisory committees and editorial boards, and is the chairman of the
Council on Family Health. He has published over 100 scientific and public policy
articles and book chapters, delivered more than 2500 professional lectures and
testified at 24 Congressional Hearings.
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GERHARD LEVY, Pharm.D., is University Distinguished Professor of
Pharmaceutics Emeritus (active) at the State University of New York at Buffalo
School of Pharmacy, where he has served since 1958. Dr. Levy's research
interests are in the areas of pharmacokinetics, kinetics of drug action and
biopharmaceutics. He has been a member of the editorial board or editorial
advisory board of 15 journals, including International Journal of Clinical
Pharmacology, Clinical Pharmacology and Therapeutics, Pharmacy Today,
Perspectives in Biochemical Pharmacology and Clinical Pharmacokinetics. He has
authored over 550 publications and is included in the list of Most Cited
Scientists in the November 1990 issue of the Scientist. He has served on a
number of committees of the Food and Drug Administration and was a principal
consultant to Bureau of Drugs Advisory Panel System. He has consulted for the
World Health Organization and was appointed to a distinguished visiting
professor position at several universities, including Hebrew University in
Israel, University of Iowa, University of Leiden in the Netherlands and the
University of Manchester in Great Britain. Among many elected memberships and
numerous awards for achievement and excellence, Dr. Levy is the recipient of the
first Lifetime Achievement in the Pharmaceutical Sciences Award of the
International Pharmaceutical Federation.
KENNETH LLOYD MELMON, M.D., is currently Professor of Medicine and
Pharmacology and Associate Dean for Postgraduate Medical Education at the
Stanford University School of Medicine. He is past president of the American
Federation of Clinical Research, the Western Society of Clinical Investigation,
the American Society of Clinical Investigation and the Western Association of
Advancement of Science and the Council of the International Society of
Immunopharmacology. He was a recipient of a Burroughs Wellcome Clinical
Pharmacology Scholar award, a National Institutes of Health Special Fellowship
award and a John Simon Guggenheim Memorial Foundation Fellowship for
Experimental Studies in Clinical Biochemistry and Immunopharmacology. Dr. Melmon
has authored over 300 original papers and book chapters, has served on the
editorial board of a dozen scientific journals, including New England Journal of
Medicine, American Journal of Physiology, Journal of Clinical Investigation and
the Annals of Internal Medicine, and has provided editorial consultation for
numerous others. In recent years, he has been a member of the National Research
Council of the Institute of Medicine, the Committee on Technological Innovation
in Medicine of the National Academy of Sciences and the National Board of
Medical Examiners. He served as the chairperson of the Commission of
Prescription Drug Use from 1976 to 1980. In 1978, he joined the Stanford
University School of Medicine as Chairman of the Department of Medicine where he
initiated programs of academic-industry interface that have made possible
numerous technology transfers between basic and clinical science. In 1994 he was
honored with the Oscar B. Hunter Award of the American Society of Clinical
Pharmacology and Therapeutics.
LESTER A. MITSCHER, Ph.D. is currently University Distinguished
Professor, Department of Medicinal Chemistry at the University of Kansas. He is
past chairman of the Medicinal Chemistry Division of the American Chemical
Society and chairman of the American Society for Pharmacognosy. He is a fellow
of the American Association for Advancement of Science and is the recipient of
the Research Achievement Award in Natural Products Chemistry of the American
Pharmaceutical Association Academy of Pharmaceutical Sciences, the Volweiler
Award for Research Achievement of the American Association of Colleges of
Pharmacy, the Smissman Award in Medicinal Chemistry of the American Chemical
Society and the Higuchi-Simons Award in the Biomedical Sciences. Dr. Mitscher
has consulted with numerous pharmaceutical companies, including Proctor and
-33-
Gamble, Panax Laboratories, Abbott Laboratories, G.D. Searle, Sandoz
Laboratories, and DuPont Merck Labs. He has served as chairman of the Biological
and Natural Products Section of the National Institutes of Health, chairman of
the Hematology and Chemotherapy Study Section of the American Cancer Society and
chairman of the Cooperative Drug Screening Program of the International
Organization for Chemistry in Development, World Health Organization. Dr.
Mitscher has authored several books, over 200 original papers and book chapters,
and served as an editor of nearly a dozen professional journals, including The
Journal of Antibiotics, Allergy and Infectious Diseases, Medicinal Research
Reviews (editor-in-chief) and the Journal of Medicinal Chemistry.
William Charles McMaster, M.D. is currently Professor and Chief
Department of Orthopaedic Surgery at the University of California, Irvine. He
also has a private practice in Orange County, California. He is a member of the
American Orthopaedic Society for Sports Medicine, has held numerous elected
offices in the California Orthopaedic Association, the American Academy of
Orthopaedic Surgery and the Western Orthopaedic Association, is a fellow of the
American College of Surgeons and a founding member of the Society for
Biomaterials and Association for Arthritic Hip and Knee Surgery. He served as
team physician for the 1980 United States Olympic and national swimming team at
the Hawaii International Invitational, 1981 USA/USSR swimming competition in
Kiev, the 1984 United States Olympic swimming team, Fifth World Swimming
Championships in Madrid, Spain and Sixth World Swimming Championships in Perth,
Australia. In 1988, he served as Physician Specialist for the XXIII Olympiad in
Los Angeles, California. Dr. McMaster has authored over 100 publications and
presentations, in his area of research specialty, sports medicine and
orthopaedic surgery.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information regarding compensation paid
to the Company's CEO. During the year ended December 31, 1997, no executive of
the Company received in excess of $100,000 in salary and/or bonuses. Drs.
Azarnoff, Rezler and Azarnoff will not receive compensation in addition to the
management fees paid to WCCS by the Company, for their services rendered to the
Company as its officers.
Long Term
Compensation Awards
-----------------------
Annual Compensation ($$) Restricted
------------------------ Stock Options & Other
Name and Position Year Salary Bonus Awards(4) SARs(4) Compensation
- ----------------- ---- ------ ----- -------- --------- ------------
Higgins D. Bailey 1997 $-0- $-0- -0- -0- $-0-
President and Chief
Executive Officer
1996 $-0- $-0- -0- -0- $-0-
1995 $-0- $-0- -0- -0- $-0-
A. Thomas Tenenbaum, 1997 $-0- $-0- -0- -0- $-0-
Former President and
Chief Executive Officer 1996 $-0- $-0- -0- -0- $-0-
of Vanden
1995 $-0- $-0- -0- -0- $-0-
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STOCK OPTION PLAN
In July 1988, the Company adopted a Stock Option Plan (the "Option
Plan") which provides for the issuance of stock bonuses or stock options to
purchase up to 16,666 shares of Common Stock, adjusted to reflect the subsequent
recapitalization of the Company, to employees, officers, directors and
consultants of the Company. The Option Plan expired July 2, 1998.
OPTION GRANTS
Prior to the expiration of the Company's Stock Option Plan on July 2,
1998, the Company issued options to purchase all 16,667 shares of the Company's
Common Stock reserved under the Option Plan to WCCS, exercisable at $1.50 per
Share. WCCS will allocate options to purchase; (i) 15,000 shares of the
Company's Common Stock to members of the Scientific and Medical Advisory Board
which options will vest pro rata annually over a three (3) year period until
July, 2001; and, (ii) the remaining 1,667 options to various administrative
personnel employed by WCCS, which options will vest pro rata monthly over a
three (3) year period until July, 2001.
STOCK COMPENSATION PLAN
In July 1988, the Company adopted a Stock Bonus Plan ("Stock Bonus
Plan"), to support and increase the Company's ability to attract, retain and
compensate persons of experience and ability and whose services are considered
valuable. The Stock Bonus Plan expired on July 2, 1998. No shares were issued
pursuant to the Stock Bonus Plan.
LIMITATIONS ON DIRECTORS' AND OFFICERS' LIABILITY
The Company's Amended Articles of Incorporation limit the liability of
directors to shareholders for monetary damages for breach of a fiduciary duty
except in the case of liability: (i) for any breach of their duty of loyalty to
the Company or its shareholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) for
unlawful distributions as provided in Section 7-108-403 of the Colorado Business
Corporation Act; or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's Articles of Incorporation and Bylaws provide for the
indemnification of directors and officers of the Company to the maximum extent
permitted by law, including Section 7-109-102 of the Colorado Business
Corporation Act, against all liability and expense (including attorneys' fees)
incurred by reason of the fact that the officer or director served in such
capacity for the Company, or in a certain capacity for another entity at the
request of the Company. Section 7- 109-102 of the Colorado Business Corporation
Act provides generally for indemnification of directors against liability
incurred as a result of actions, suits or proceedings if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company.
-35-
On January 29, 1998, the Company obtained Directors and Officers
indemnity liability insurance coverage, including securities coverages, in the
amount of $3,000,000 which indemnifies the Company against claims, as well as
provides coverage against any claims against the officers and directors of the
Company which (i) the Company is not legally permitted or required to pay or
(ii) when the Company is legally required or permitted to pay such loss as
indemnity to the Directors and Officers but cannot in fact pay such loss due
solely to the financial insolvency of the Company.
There is no pending litigation or proceeding involving a director,
officer, employee or other agent of the Company as to which indemnification is
being or may be sought, and the Company is not aware of any other pending or
threatened litigation that may result in claims for indemnification by any
director, officer, employee or other agent.
-36-
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
On January 15, 1998, the Company effected a reverse stock split of 1
share for each 300 shares of its Common Stock issued and outstanding. Pursuant
to the terms of the Merger Agreement, the Company issued shares of its Common
Stock and Series A redeemable non-voting Preferred Stock to the shareholders of
Old Entropin as of January 15, 1998 on the basis of one share of the Company's
Common Stock and Series A redeemable non-voting Preferred Stock for each one
share of Old Entropin common stock and Series A redeemable non-voting preferred
stock issued and outstanding which resulted in a change in control of the
beneficial ownership of the Company.
The Company has entered into an agreement with its officers and
directors and major shareholders pursuant to which 4,748,388 Shares owned by
such persons may be sold only as the Company may permit for a period of one year
from the date of this Prospectus. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders.
The following table sets forth, as of the date hereof, the ownership of
the Company's Common Stock and Series A redeemable non-voting Preferred Stock by
(i) each director and executive officer of the Company, (ii) all executive
officers and directors of the Company as a group, and (iii) all persons known by
the Company to beneficially own more than 5% of the Company's Common Stock
and/or Series A redeemable non-voting Preferred Stock. Not included are up to
433,333 options to be issued to WCCS, certain officers of which also serve as
officers of the Company. See Interests of Management and Others in Certain
Transactions.
Common Stock Series A Preferred Stock
------------ ------------------------
Amount and Amount and
Nature of Nature of
Name and Address Beneficial Percent Beneficial Percent
of Shareholder Ownership(1) of Class Ownership(1) of Class
- ---------------- --------- -------- --------- --------
Higgins D. Bailey 1,404,093(2) 23.4% 178,000 5.6%
45926 Oasis Street
Indio, CA 92201
Thomas T. Anderson 1,404,093(3) 23.4% 710,041(4) 22.1%
45926 Oasis Street
Indio, CA 92201
Milton D. McKenzie 1,750,417(5) 29.2% -0- -0-
45926 Oasis Street
Indio, CA 92201
Caroline T. Somers 905,793 15.1% 822,446(6) 25.6%
233 Paulin, No. 8512
Calexco, CA 92231
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Common Stock Series A Preferred Stock
------------ ------------------------
Amount and Amount and
Nature of Nature of
Name and Address Beneficial Percent Beneficial Percent
of Shareholder Ownership(1) of Class Ownership(1) of Class
- ---------------- ---------- -------- --------- --------
Lowell M. Somers 905,793(7) 15.1% 822,446 25.6%
233 Paulin, No. 8512
Calexco, CA 92231
James E. Wynn 518,085 8.6% 1,500,000 46.7%
306 Ayers Circle
Summerville, SC 29485
Donald Hunter 150,000(8) 2.5% -0- -0-
598 Kinzie Island Court
Sanibel, FL 33957
Dewey H. Crim 20,000(9) 0.3% -0- -0-
242 Southern Hills Drive
Duluth, GA 30039
Daniel L. Azarnoff -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
Wellington A. Ewen -0- -0- -0- -0-
45926 Oasis Street
Indio, CA 92201
Lois Rezler -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
Roy Azarnoff -0- -0- -0- -0-
433 Airport Blvd., Suite 419
Burlingame, CA 94010-2014
All Directors and Executive 2,092,178 34.5% 1,678,000 52.3%
Officers as a group (8 persons)
- -----------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed.
(2) Owned in joint tenancy with Shirley A. Bailey, the spouse of Higgins D.
Bailey. (3) Held of record by Higgins D. Bailey as security for a loan made
by Mr. Bailey to Mr. Anderson. Milton D. McKenzie has sole voting power
with respect to these shares.
(4) Held of record by David M. Chapman and Samuel F. Trussell as security for
deferred compensation owed to Messrs. Chapman and Trussell by Mr. Anderson.
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(5) Including 1,404,093 shares held in the name of Higgins D. Bailey, as
pledgee in connection with a loan made by Higgins D. Bailey to Thomas T.
Anderson which is collateralized by the shares, and over which Mr. McKenzie
has sole voting power as a result of an irrevocable proxy granted to Mr.
McKenzie by Mr. Anderson in connection with a loan made by Mr. McKenzie to
Mr. Anderson which is collateralized by the same shares. In addition,
includes 243,490 Shares held of record by CapMac Eighty-two, a limited
partnership of which Mr. McKenzie is a general partner.
(6) Includes 822,446 shares of Series A redeemable non-voting Preferred Stock
owned by Lowell M. Somers, the spouse of Caroline T. Somers.
(7) Includes 905,793 shares of Common Stock owned by Caroline T. Somers, the
spouse of Lowell M. Somers.
(8) Of these shares, 10,000 shares are held in the name of Deloras Decker
Hunter, Trustee of the Deloras Decker Hunter Generation Skipping Trust.
Deloras Decker Hunter is the spouse of Mr. Hunter and Mr. Hunter is deemed
to have voting control over these 10,000 shares. In addition, these shares
include 60,000 shares underlying an option assigned to Mr. Hunter in
January, 1998.
(9) These shares are owned in joint tenancy with Virginia Crim, the spouse of
Dewey H. Crim.
INTERESTS OF MANAGEMENT AND OTHERS IN CERTAIN TRANSACTIONS
During 1997, the Company received advances totaling $15,000 from Milton
D. McKenzie, a stockholder in the Company. The advances did not bear interest
and were payable upon demand. In addition, during 1996 and 1997, the Company was
advanced an aggregate of $73,873 by Higgins D. Bailey, the Company's former
President, current Chairman and stockholder. In January 1998, the above
referenced debts were paid in full.
The Company had accrued the following long-term debt owed to
stockholders at December 31, 1996 and 1997:
1996 1997
---- ----
8% Note payable - Thomas T. Anderson, a stockholder,
issued for cash advances, principal plus accrued interest
due December 31, 2000, unsecured $ 631,678 $ 631,678
8% Note payable - Higgins D. Bailey, the Company's
former President, current Chairman and a stockholder,
issued for cash advances, principal plus accrued interest
due December 31, 2000, unsecured 178,000 178,000
8% Note payable - Lowell M. Somers, a stockholder,
issued for past services, principal plus accrued interest
due December 31, 2000, unsecured 731,678 731,678
Accrued interest payable to Thomas T. Anderson and
Lowell M. Somers, stockholders of the Company 60,341 169,131
---------- ----------
$1,601,697 $1,710,487
========== ==========
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On January 15, 1998, the Company converted all above noted long-term
debt plus accrued interest to 1,710,487 shares of the Company's redeemable 8%
non-voting, non-cumulative Series A Preferred Stock at $1 per share, for a total
of $1,710,487.
During November 1997, the Company began negotiating with James E. Wynn
regarding compensation for research and development services provided since the
inception of the Company. In exchange for these past services, the Company
agreed to issue an 8% note payable to the individual in the principal amount of
$1,500,000 maturing December 31, 2000. Subsequent to year end, the Company
converted this obligation to 1,500,000 shares of its non-voting, non-cumulative
redeemable Series A preferred stock, at $1.00 per share. In December, 1997,
certain shareholders of the Company contributed a portion of their common stock
to James E. Wynn as partial settlement for research and development services
(259,042 shares valued at $518,000, approximately $2.00 per share). The expense
and related capital contributions were reflected at December 31, 1997. James E.
Wynn was subsequently appointed a Director to the Company's Board in February,
1998.
In January 1998, the Company entered into an agreement with James E.
Wynn, a director of the Company, whereby the Company granted James E. Wynn a
non-exclusive right to develop new products that contain the same active
ingredients as Esterom(R), but are formulated differently. All rights to the
improved products will remain the exclusive property of the Company and James E.
Wynn will receive two (2%) percent royalties on the net sales of all new
improved products. The expiration date of this agreement is January 1, 2003.
In February 1998, the Company entered into a lease arrangement with one
of its principal shareholders, Thomas T. Anderson. The lease encompasses 800
square feet of office space at a monthly rate of $1,040.
On February 16, 1998, the Company's Board of Directors approved a
contract between the Company and James E. Wynn, whereby James E. Wynn will
manufacture a duplicate sample of the Phase II clinical material necessary for
quality control of the clinical supply manufactured in the Mallinckrodt
laboratories.
On April 18, 1998, the Company entered into an agreement with Western
Center for Clinical Studies ("WCCS") whereby WCCS agreed to assist the Company
in completing the Phase III study and NDA Phase for FDA approval of the
Company's product, Esterom(R), in exchange for $880,400 and options to purchase
an aggregate of 450,000 shares of the Company's common stock at $1.50 per share
over a five (5) year period. Officers of WCCS presently serve in the following
positions in the Company: Daniel L. Azarnoff, President; Lois Rezler, Vice
President of Science and Regulatory Affairs; and, Roy S. Azarnoff, Chief
Operating Officer. Daniel L. Azarnoff has served as a director on the Company's
Board of Directors since February, 1998.
-40-
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue up to 50,000,000 shares of Common
Stock, $.001 par value. There are 6,000,051 shares presently outstanding. All
shares of Common Stock have equal voting rights and, when validly issued and
outstanding, have one vote per share in all matters to be voted upon by
shareholders. The shares of Common Stock have no preemptive, subscription,
conversion or redemption rights and may be issued only as fully paid and
non-assessable shares. Cumulative voting in the election of directors is not
allowed, which means that the holders of a majority of the outstanding shares
represented at any meeting at which a quorum is present will be able to elect
all of the directors if they choose to do so and, in such event, the holders of
the remaining shares will not be able to elect any directors. On liquidation of
the Company, each common shareholder is entitled to receive a pro rata share of
the Company's assets available for distribution to common shareholders.
PREFERRED STOCK
The Company is authorized to issue up to a total of 10,000,000 shares
of preferred stock, $.001 par value, with the shares to be issued in series by
the Board of Directors. The Company's Board of Directors has designated
3,210,487 shares of preferred stock as Series A redeemable non-voting Preferred
Stock, of which all were issued. There are four (4) holders of record of the
Company's Series A redeemable non-voting Preferred Stock. In addition, the
Company's Board of Directors has designated 400,000 shares of preferred stock as
convertible Series B Preferred Stock, which none have been currently issued.
Such shares are currently being sold in a private offering at $5.00 per Share
and are convertible on a 1 for 1 basis into Common Stock. The remaining shares
of preferred stock may be issued in one or more series from time to time with
such designations, rights, preferences and limitations as the Company's board of
directors may determine without approval of its shareholders.
Series A Preferred Stock is designated as redeemable eight (8%) percent
non-cumulative non-voting preferred stock with $.001 par value. The Series A
Preferred Stock is redeemable only from 20% to 50% 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 automatically expire on January
16, 2005 if not fully redeemed within that time period.
Series B Preferred Stock is designated as redeemable ten (10%) percent
cumulative non-voting preferred stock with $.001 par value and convertible on a
1 for 1 basis into Common Stock. At the Company's election, annual dividends may
be paid in cash and/or in Shares of the Company's Common Stock, at the rate of
one share of Common Stock for each $5.00 in accrued dividends. All issued and
outstanding Preferred Stock shall be redeemed in full on or before July 15, 2003
("Expiration Date"). The Company reserves the right to redeem, in whole or in
part based on a pro rata basis with other holders of the Preferred Stock, the
outstanding Preferred Stock upon 30 days' notice at $5.00 per share plus accrued
-41-
and unpaid dividends to the redemption date from the date of issuance up to the
Expiration Date. Notwithstanding the foregoing, in the event that the Company
redeems the Preferred Stock within one year from date of issuance, the
redemption price shall be $6.00 per share plus accrued and unpaid dividends to
the redemption date; provided, however, if the Company redeems such Preferred
Stock within six months from date of issuance, the Preferred Shareholder shall
receive a dividend equivalent to one-half of the annual accrued dividend amount.
The rights, preferences and limitations of separate series of serial
preferred stock may differ with respect to such matters as may be determined by
the Company's Board of Directors, including without limitation, the rate of
dividends, method or nature or prepayment of dividends, terms of redemption,
amounts payable on liquidation, sinking fund provisions, conversion rights and
voting rights. The ability of the Board to issue preferred stock could also be
used by it as a means for resisting a change of control of the Company and can
therefore be considered an "anti-takeover" device.
OPTION/WARRANTS
The Company issued options to purchase 180,001 shares of the Company's
Common Stock to a non-affiliate for business advisory services at an exercise
price of $2.80 per share for a period of five (5) years ending October 28, 2003.
In April, 1998, the Company granted options to purchase 100,000 Shares of the
Company's Common Stock at a price of $4.00 per share to this party for
additional advisory services, exercisable at such time as the services have been
completed. In June, 1998, the Company issued options to purchase 16,667 shares
of the Company's Common Stock to Western Center for Clinical Studies ("WCCS") ,
pursuant to an agreement between the Company and WCCS of which: (i) options to
purchase 15,000 shares of the Company's Common Stock will be allocated to
members of the Scientific and Medical Advisory Board, exercisable at $1.50 per
Share, which options will vest pro rata annually over a three (3) year period
until July, 2001; and, (ii) options to purchase 1,667 shares of the Company's
Common Stock will be allocated to administrative staff of WCCS, exercisable at
$1.50 per Share, which options will vest pro rata monthly over a three (3) year
period until July, 2001. The above-mentioned options are being registered in
this Prospectus pursuant to registration rights granted in the respective
contractual agreements.
In June 1998, the Board of Directors adopted a resolution whereby the
Company granted to each director options to purchase up to 60,000 shares of the
Company's Common Stock, exercisable at $3.00 per share, which options vest at
the rate of 20,000 shares per year commencing February, 1999 through February,
2001. Should any of the directors cease to serve on the Board of Directors, all
non-vested options shall be forfeited.
DIVIDEND POLICY
Dividends are payable on Common Stock when, as, and if declared by the
Board of Directors out of funds legally available to pay dividends, subject to
any preferences which may be given to holders of preferred stock. The Company
-42-
has paid no cash dividends to date and it does not anticipate payment of cash
dividends in the foreseeable future.
STOCK TRANSFER AGENT
The Company has designated Corporate Securities Transfer, Inc., Denver,
Colorado as its transfer agent for the Common Stock.
SELLING SECURITY HOLDERS
This Prospectus covers the proposed sale of (a) 5,400,001 Shares and
180,001 Shares underlying options pursuant to the terms of an Agreement and Plan
of Merger (the "Merger Agreement"); (b) 300,000 Shares in accordance with
certain registration rights granted to purchasers in a private placement
offering of securities conducted by Old Entropin in December 1997; and, (c)
54,545 Shares and an additional 116,667 Shares underlying options pursuant to
contractual agreements to register such shares with certain of the Selling
Shareholders.
Pursuant to an agreement among certain Selling Security Holders (the
"Shareholders Agreement") who are Company officers, directors and major
shareholders, an aggregate of 4,748,388 Shares which they own may be sold or
otherwise disposed of for a period of one year from the date of this Prospectus
only as the Company may permit. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders. The Shares subject to the Shareholders Agreement may be
offered or sold under this Prospectus during the term of the Shareholders
Agreement upon the Company's consent and after expiration of the Shareholders
Agreement without such consent. See The Company and Selling Security Holders.
The Company will not receive any of the proceeds from the sale of the
Shares by the Selling Security Holders. The Company will receive cash proceeds
from the exercise, if any, of outstanding options of up to $929,000 in cash.
The following table sets forth certain information concerning the
beneficial ownership of Common Stock and Preferred Stock by each Selling
Security Holder as of July 20, 1998. No shares of Series A Preferred Stock are
being registered hereby.
Shares Shares of Shares of Common Stock Shares of
of Common Common Owned After Offering Shares of Series A
Stock Owned Stock ------------------------ Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ---------- -------- ------ ---------- ---------- ------------
Caroline T Somers 905,793 905,793 -0- -0- 822,446(3) 822,446(3)
Higgins D. Bailey *&
Shirley A. Bailey 1,404,093 1,404,093 -0- -0- 178,000(4) 178,000(4)
Chandler G. Brown 257,085 257,085 -0- -0- -0- -0-
-43-
Shares Shares of Shares of Common Stock Shares of
of Common Common Owned After Offering Shares of Series A
Stock Owned Stock ------------------------ Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ---------- -------- ------ ---------- ---------- -----------
CapMac Eighty-Two
Limited Partnership 243,490 243,490 -0- -0- -0- -0-
Milton D. McKenzie,
Trustee of the Milton
D. McKenzie
Revocable Trust 1,750,417(5) 1,750,417(5) -0- -0- -0- -0-
James E. Wynn* 518,085 518,085 -0- -0- 1,500,000 1,500,000
CKC Partners 78,300 78,300 -0- -0- -0- -0-
Danny & Nancy Yu 10,000 10,000 -0- -0- -0- -0-
Brent & Marlene
Jackson 50,000 50,000 -0- -0- -0- -0-
William L. Currin 10,000 10,000 -0- -0- -0- -0-
Jacquelyn D.
Anderson Baker 5,454 5,454 -0- -0- -0- -0-
Interstate Johnson
Lane Corporation 10,000 10,000 -0- -0- -0- -0-
Dennis K. Metzler 5,000 5,000 -0- -0- -0- -0-
Jerry L. and Nancy
Sands 1,000 1,000 -0- -0- -0- -0-
The Macy Family
Trust 10,000 10,000 -0- -0- -0- -0-
Dewey H.* &
Virginia Crim 20,000 20,000 -0- -0- -0- -0-
James W. Toot 7,500 7,500 -0- -0- -0- -0-
Gladys F. Decker &
Deloras D. Hunter,
Trustees of the Gladys
F. Decker Trust No. 1 20,000 20,000 -0- -0- -0- -0-
Donald Hunter* 140,000(6) 140,000(6) -0- -0- -0- -0-
Deloras Decker
Hunter, Trustee of the
Deloras Decker
Hunter Generation
Skipping Trust 10,000 10,000 -0- -0- -0- -0-
-44-
Shares Shares of Shares of Common Stock Shares of
of Common Common Owned After Offering Shares of Series A
Stock Owned Stock ------------------------ Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ---------- -------- ------ ---------- ---------- -----------
Suzanne Oliphant 10,000 10,000 -0- -0- -0- -0-
Albert W. White 10,000 10,000 -0- -0- -0- -0-
Stephen H. West 20,000 20,000 -0- -0- -0- -0-
C. Richard Harrison 10,000 10,000 -0- -0- -0- -0-
Jeanette Y. Mihaly 20,000 20,000 -0- -0- -0- -0-
Joy Ann Svenson 10,000 10,000 -0- -0- -0- -0-
Richard L. Monfort 180,000 180,000 -0- -0- -0- -0-
David T. Treadwell 10,000 10,000 -0- -0- -0- -0-
David Bressler 5,000 5,000 -0- -0- -0- -0-
Gerald Olesh 10,000 10,000 -0- -0- -0- -0-
Arthur Kassoff 10,000 10,000 -0- -0- -0- -0-
Armond A. Azharian 5,000 5,000 -0- -0- -0- -0-
The Underwood
Family Partners 120,002(7) 120,002(7) -0- -0- -0- -0-
Steven C. & Lynn T.
Quoy 120,000(8) 120,000(8) -0- -0- -0- -0-
Thomas T. Anderson
Trust 1,404,093(9) 1,404,093(9) -0- -0- 710,041(10) 710,041(10)
Gross Ventures, Inc.
Profit Sharing Trust 20,000 20,000 -0- -0- -0- -0-
B. A. Bates 20,000 20,000 -0- -0- -0- -0-
David M. Chapman 10,000 10,000 -0- -0- -0- -0-
Samuel Trussell 10,000 10,000 -0- -0- -0- -0-
Xavier Equihua 1,000 1,000 -0- -0- -0- -0-
Samantha Landy IRA 7,272 7,272 -0- -0- -0- -0-
Karen Campbell,
Custodian for Lauren
and Abigail Campbell 2,000 2,000 -0- -0- -0- -0-
Watson Corporation 4,000 4,000 -0- -0- -0- -0-
-45-
Shares Shares of Shares of Common Stock Shares of
of Common Common Owned After Offering Shares of Series A
Stock Owned Stock ------------------------ Series A Preferred
Prior to Offered Preferred Stock After
Name Offering (1) Hereby (2) Number Percentage Stock Offering
---- ---------- -------- ------ ---------- ---------- -----------
Watson Development
Corporation 1,000 1,000 -0- -0- -0- -0-
Kenneth P. Carter,
Custodian for Taylor
and Sydney Carter 2,000 2,000 -0- -0- -0- -0-
Douglas F. and Dena
K. Carter 12,000(11) 12,000(11) -0- -0- -0- -0-
Michael A. Oliver 3,000 3,000 -0- -0- -0- -0-
A. Thomas
Tenenbaum** 39,500 20,000 19,500 -0- -0- -0-
David Callaham 10,000 10,000 -0- -0- -0- -0-
Max Gould 44,545 44,545 -0- -0- -0- -0-
John R. Bridges, Jr. 10,000 10,000 -0- -0- -0- -0-
WCCS 16,667(12) 16,667 -0- -0- -0- -0-
LMU & Co. 100,000(13) 100,000 -0- -0- -0- -0-
o Denotes a director and/or officer-employee of the Company
** Denotes a person previously employed by, or a director of, the Company
during the past three years.
(1) Beneficial ownership is calculated in accordance with Rule 13d-3(d) of the
Securities Exchange Act of 1934, as amended. Under Rule 13d-3(d), shares
not outstanding that are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person of
the class, but not deemed outstanding for the purposes of calculating the
percentage owned of the class by any other person.
(2) The number of Shares offered hereby consists of outstanding Shares held and
offered for the account of the Selling Shareholders.
(3) The Preferred Shares are held of record by Lowell M. Somers, spouse of
Caroline D. Somers.
(4) The Preferred Shares are held of record by Higgins D. Bailey.
(5) Including 1,404,093 shares held in the name of Higgins D. Bailey, as
pledgee in connection with a loan made by Higgins D. Bailey to Thomas T.
Anderson which is collateralized by the shares, and over which Mr. McKenzie
has sole voting power as a result of an irrevocable proxy granted to Mr.
KcKenzie by Mr. Anderson in connection with a loan made by Mr. McKenzie to
Mr. Anderson which is collateralized by the same shares. In addition,
includes 143,490 Shares held of record by CapMac Eighty-two, a limited
partnership of which Mr. McKenzie is a general partner.
(6) Includes 20,000 Shares held of record by the Donald Hunter Residuary
Marital Trust as to which Mr. Hunter has beneficial ownership as trustee.
In addition, the Shares include options to purchase 60,000 Shares Does not
include Shares held by record by spouse.
(7) Includes 60,001 Shares underlying options
(8) Includes 60,000 Shares underlying options
-46-
(9) Held of record by Higgins D. Bailey as security for a loan made by Mr.
Bailey to Mr. Anderson. Milton D. McKenzie has sole voting power with
respect to these shares.
(10) Held of record by David M. Chapman and Samuel F. Trussell as security for
deferred compensation owed to Messrs. Chapman and Trussell by Mr. Anderson.
(11) Includes 4,000 Shares held of record by Douglas F. Carter, Custodian for
McKenzie L. Carter as to which Mr. Carter has beneficial ownership as
custodian.
(12) The Shares constitute options to purchase 16,667 Shares of the Company's
Common Stock which were granted to WCCS pursuant to a contractual agreement
for assignment as follows: options to purchase 15,000 Shares will be
assigned to members of the Company's Scientific and Medical Advisory Board;
and, options to purchase 1,667 Shares will be assigned to WCCS
administrative personnel.
(13) The Shares constitute options to purchase 100,000 Shares of the Company's
Common Stock.
PLAN OF DISTRIBUTION
The Selling Shareholders have advised the Company that prior to the
date of this Prospectus they have not made any agreements or arrangements with
any underwriters, brokers or dealers regarding the resale of the Shares. The
Company has been advised by the Selling Shareholders that the Shares may at any
time or from time to time be offered for sale either directly by the Selling
Shareholders or by their transferees or other successors in interest. Such sales
may be made in the over-the-counter market or in privately negotiated
transactions.
The Selling Shareholders have exercised their right to require the
Company to register the Shares which the Selling Shareholders acquired from the
Company in connection with a merger by the Company and Entropin, Inc, a
California corporation effective January 15, 1998 ("the Merger Agreement"). In
connection with the Merger Agreement, the Selling Shareholders were granted
certain registration rights pursuant to which the Company has agreed to maintain
a current registration statement to permit public sales of the Shares for a
period of at least nine months from the date of this Prospectus or until the
Shares have been sold, whichever first occurs. The Company will pay all of the
expenses incident to the offering and sale of the Shares to the public by the
Selling Shareholders other than commissions and discounts of underwriters,
dealers or agents, if any. Expenses to be paid by the Company include legal and
accounting fees in connection with the preparation of the Registration Statement
of which this Prospectus is a part, legal fees in connection with the
qualification of the sale of the Shares under the laws of certain states,
registration and filing fees, printing expenses, and other expenses. The Company
will not receive any proceeds from the sale of the Shares by the Selling
Shareholders.
The Company anticipates that the Selling Shareholders from time to time
will offer the Shares through: (i) dealers or agents or in ordinary brokerage
transactions; (ii) direct sales to purchasers or sales effected through an
agent; (iii) privately negotiated transactions; or, (iv) combinations of any
such methods. The Shares would be sold at market prices prevailing at the time
of sale or at negotiated prices. Dealers and brokers involved in the offer and
sale of the Shares may receive compensation in the form of discounts and
commissions. Such compensation, which may be in excess of ordinary brokerage
commissions, may be paid by the Selling Shareholders and/or the purchasers of
Shares for whom such underwriters, dealers or agents may act. The Selling
Shareholders and any dealers or agents which participate in the distribution of
the Shares may be deemed to be "underwriters" as defined in the Securities Act
-47-
of 1933, as amended (the "1933 Act") and any profit on the sale of the Shares
and any discounts, commissions or concessions received by any dealers or agents
might be deemed by the NASD to constitute underwriting compensation.
If the Company is notified by the Selling Shareholders that any
material arrangement has been entered into with an underwriter for the sale of
Shares, a supplemental prospectus will be filed to disclose such of the
following information as the Company believes appropriate: (i) the name of the
participating underwriter; (ii) the number of Shares involved; (iii) the price
at which such Shares are sold; (iv) the commissions paid or discounts or
concessions allowed to such underwriter; and, (v) other facts material to the
transaction.
Sales of Shares in the over-the-counter market may be by means of one
or more of the following: (i) a block trade in which a broker or dealer will
attempt to sell the Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (ii) purchases by a dealer as
principal and resale by such dealer for its account pursuant to this Prospectus;
and, (iii) ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by the
Selling Shareholders may arrange for other brokers or dealers to participate.
The Company is unable to predict the effect which sales of the Shares
by the Selling Shareholders might have upon the market price of the Company's
Common Stock or the Company's ability to raise further capital.
LEGAL MATTERS
Legal matters in connection with the Shares being offered hereby have
been passed on for the Company by the law firm of Brenman Bromberg & Tenenbaum,
P.C., Denver, Colorado. Members of the firm of Brenman Bromberg & Tenenbaum,
P.C. own 52,274 Shares of the Company's Common Stock.
EXPERTS
The statements of operations data for the years ended December 31,
1997 and 1996, and for the period from August 27, 1984 (inception) to December
31, 1997, included in this Prospectus and Registration Statement have been
audited by Causey Demgen & Moore Inc., independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has outstanding 6,000,051 shares of Common Stock.
All of the Shares registered hereunder can be resold pursuant to this
Prospectus. However, the Company has entered into an agreement with its officers
and directors and major shareholders pursuant to which 4,748,388 Shares owned by
-48-
such persons may be sold only as the Company may permit for a period of one year
from the date of this Prospectus. The Shareholders Agreement was entered in
anticipation that potential funding sources at times may require or request a
restriction on disposition of securities owned by a company's management and
major shareholders. (See The Company and Selling Security Holders.) In the event
the Shares are not sold under this Prospectus, the Shares remain "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least one year
from the later of the date of payment therefor to the Company or acquisition
thereof from an affiliate, may sell such securities in brokers' transactions or
directly to market makers, provided that the number of shares sold in any three
month period may not exceed the greater of 1% of the then outstanding Common
Stock or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain notice requirements and the availability of current public information
about the Company. After two years have elapsed from the later of the issuance
of restricted securities by the Company or their acquisition from an affiliate,
such securities may be sold without limitation by persons who are not affiliates
under Rule 144.
Sales of substantial amounts of Common Stock by shareholders of the
Company under Rule 144 or otherwise, or even the potential for such sales, are
likely to have a depressive effect on the market price of the shares of Common
Stock and Warrants and could impair the Company's ability to raise capital
through the sale of its equity securities. See Risk Factors.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement under the Securities Act
of 1933, as amended with respect to the securities offered hereby with the
United States Securities and Exchange Commission ("SEC"), 450 Fifth Street,
N.W., Washington, D.C. 20549. This Prospectus, which is a part of the
Registration Statement, does not contain all of the information contained in the
Registration Statement and the exhibits and schedules thereto, certain items of
which are omitted in accordance with the rules and regulations of the SEC. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement, including all exhibits
and schedules therein, which may be examined at the SEC's Washington, D.C.
office, 450 Fifth Street, N.W., Washington, D.C. 20549 without charge, or copies
of which may be obtained from the SEC upon request and payment of the prescribed
fee. Statements made in this Prospectus as to the contents of any contract,
agreement or document are not necessarily complete, and in each instance
reference is made to the copy of such contract, agreement or other document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in its entirety by such reference. The Company is a reporting company
under the Securities Exchange Act of 1934, as amended, and in accordance
therewith in the future will file reports and other information with the SEC.
All of such reports and other information may be inspected and copied at the
public reference facilities maintained by the SEC at the address set forth above
in Washington, D.C. and at regional offices of the SEC located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
-49-
Suite 1300, New York, New York 10048. In addition, the Company intends to
provide its shareholders with annual reports, including audited financial
statements, unaudited interim reports and such other reports as the Company may
determine necessary. The SEC maintains a Web site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the SEC at http://www.secgov.
GLOSSARY
"ESTEROM(R)" means the product employed in Entropin's Phase II studies which
contains benzoylecgonine, ecgonine, ecgonidine and their 2-hydroxypropyl esters.
"ESTEROM RELATED COMPOUNDS" means the compounds of formulas and the
pharmaceutical compositions containing those compounds, or mixtures thereof,
identified and/or claimed under Entropin's Licensed Patents.
"DEA" means the Drug Enforcement Administration.
"FDA" means the United States Food and Drug Administration.
"IND" means an Investigational New Drug application filed with the FDA.
"NDA" means a New Drug Application filed with the FDA.
"RANGE OF MOTION" for a shoulder may be defined as the number of degrees to
which the patient may move the arm from the side in a forward, backward or
upward direction.
"GMP" means Good Manufacturing Practices which are regulations enforced by the
FDA through its facilities inspection program.
-50-
INDEX TO FINANCIAL STATEMENTS
-----------------------------
ENTROPIN, INC.
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997:
- ---------------------------------------------------------------------------
Report of Causey Demgen & Moore Inc. Independent Certified Public Accountants.............................. F-2
Balance Sheets As of December 31, 1996 and 1997............................................................ F-3
Statements of Operations
For Years Ended December 31, 1996 and 1997, and for the Period from August 27, 1984
(Inception) Through December 31, 1997.................................................................. F-4
Statements of Changes in Stockholders' Equity
For the Period from August 27, 1984 (Inception) Through December 31, 1997.............................. F-5
Statements of Cash Flows
For Years Ended December 31, 1996 and 1997, and for the Period from August 27, 1984
(Inception) Through December 31, 1997.................................................................. F-6
Notes to Financial Statements
December 31, 1996 and 1997............................................................................. F-8
UNAUDITED FINANCIAL STATEMENTS FOR QUARTER ENDED MARCH 31, 1998:
- ----------------------------------------------------------------
Balance Sheet - December 31, 1997 and March 31, 1998 (unaudited)........................................... F-18
Statement of Operations for the Three Months ended March 31, 1997 and 1998 and for the Period from
August 27, 1984 (inception) to March 31, 1998......................................................... F-19
Statement of Changes in Stockholders' Equity (Deficit) for the Three Months Ended March 31, 1998........... F-20
Statement of Cash Flows for the Three Months Ended March 31, 1997 and 1998 and for the Period from
August 27, 1984 (inception) to March 31, 1998 (unaudited)............................................. F-21
Notes to Unaudited Financial Statements - March 31, 1998................................................... F-22
F-1
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, 1996 and 1997, 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, 1997. 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, 1996 and 1997 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, 1997, in conformity with generally accepted accounting principles.
Denver, Colorado
February 22, 1998, except
for Note 9, as to which the
date is March 19, 1998 CAUSEY DEMGEN & MOORE INC.
F-2
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1996 and 1997
ASSETS
------
1996 1997
---- ----
Current assets:
Cash $ 1,677 $ 291
Accounts receivable - stockholder (Note 2) 5,000 5,000
---------- ----------
Total current assets 6,677 5,291
Deferred stock offering costs (Notes 4 and 8) - 10,746
Patent costs, less accumulated amortization of
$22,300 (1996) and $40,300 (1997) 218,326 266,456
---------- ----------
$ 225,003 $ 282,493
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 148,557 $ 329,813
Advances - stockholders (Note 2) 21,036 98,873
---------- ----------
Total current liabilities 169,593 428,686
Long-term debt:
Stockholders (Note 2) 1,601,697 1,710,487
Deferred royalty agreement (Note 6) 111,440 155,495
Compensation agreement (Note 6) 1,430,000 1,500,000
---------- ----------
Total long-term debt 3,143,137 3,365,982
Commitments and contingencies (Notes 6 and 8)
Series A redeemable preferred stock, $.001 par value,
3,210,487 shares authorized, no shares issued
and outstanding (Notes 3 and 8) - -
Stockholders' equity (deficit) (Notes 4 and 8):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A reported above (Note 3) - -
Common stock, $.001 par value; 50,000,000
shares authorized, 5,220,000 shares issued
and outstanding 5,220 5,220
Additional paid-in capital 369,780 1,043,780
Deficit accumulated during the development stage (3,462,727) (4,561,175)
---------- ----------
Total stockholders' equity (deficit) (3,087,727) (3,512,175)
---------- ----------
$ 225,003 $ 282,493
========== ==========
See accompanying notes.
F-3
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Years Ended December 31, 1996 and 1997
and for the Period from August 27, 1984 (inception) to December 31, 1997
Cumulative
amounts from
1996 1997 inception
---- ---- ------------
Costs and expenses:
Research and development $ 167,818 $ 683,209 $ 3,752,854
General and administrative 101,894 269,853 511,255
Depreciation and amortization 10,550 18,000 57,368
--------- ----------- -----------
Operating loss (280,262) (971,062) (4,321,477)
Other income (expense):
Interest expense (94,876) (127,386) (239,698)
--------- ----------- -----------
Net loss $(375,138) $(1,098,448) $(4,561,175)
========= =========== ===========
Basic net loss per common share (Note 5) $ (.07) $ (.21) $ (.87)
========= =========== ===========
See accompanying notes.
F-4
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from August 27, 1984 (inception) to December 31, 1997
Deficit
accumulated
Common Stock Additional during the
------------------ paid-in Stock development
Shares Amount capital subscriptions stage
------ ------ ---------- ------------- ------------
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)
Capital contributions (Note 4) - - 674,000 - -
Net loss for the year - - - - (1,098,448)
--------- ------ ---------- -------- -----------
Balance, December 31, 1997 5,220,000 $5,220 $1,043,780 $ - $(4,561,175)
========= ====== ========== ======== ===========
See accompanying notes.
F-5
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Years Ended December 31, 1996 and 1997
and for the Period from August 27, 1984 (inception) to December 31, 1997
Cumulative
amounts
from
1996 1997 inception
---- ---- ---------
Cash flows from operating activities:
Net loss $(375,138) $(1,098,448) $(4,561,175)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization 10,550 18,000 57,368
IBC partner royalty agreement - 44,055 155,495
Services contributed in exchange
for stock - 674,000 694,000
Services contributed in exchange for
compensation agreements 110,000 70,000 2,231,678
Increase in accounts receivable -
shareholder - - (5,000)
Increase in accounts payable 33,418 181,256 329,813
Increase in accrued interest 60,341 108,790 169,139
Other - - 139
--------- ----------- -----------
Total adjustments 214,309 1,096,101 3,632,624
--------- ----------- -----------
Net cash used in operations (160,829) (2,347) (928,551)
Cash flows from investing activities:
Purchase of equipment - - (17,207)
Patent costs (54,564) (66,130) (306,756)
--------- ----------- -----------
Net cash used in investing activities (54,564) (66,130) (323,963)
Cash flows from financing activities:
Deferred stock offering costs - (10,746) (10,746)
Proceeds from sale of common stock 150,000 - 355,000
Proceeds from stockholder loans 19,972 - 809,678
Proceeds from stockholder advances 21,035 77,837 98,873
--------- ----------- -----------
Net cash provided by financing
activities 191,007 67,091 1,252,805
--------- ----------- -----------
Net increase (decrease) in cash (24,386) (1,386) 291
Cash at beginning of period 26,063 1,677 -
--------- ----------- -----------
Cash at end of period $ 1,677 $ 291 $ 291
========= =========== ===========
(Continued on following page)
See accompanying notes.
F-6
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the years ended December 31, 1996 and 1997 and for the
Period from August 27, 1984 (inception) to December 31, 1997
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Cumulative
amounts
from
1996 1997 inception
---- ---- ---------
Cash paid during period
for interest $6,372 $15,598 $59,855
Supplemental disclosure of non-cash financing activities:
During 1996, the Company entered into a compensation agreement with the spouse
of a shareholder for $731,678 in exchange for services performed for the Company
in prior years (see Note 2).
Pursuant to an agreement with an IBC limited partner, the Company has accrued a
liability totaling $155,495 at December 31, 1997 for advance royalties due to
the individual (see Note 6).
In November of 1997, the Company reached an agreement with an individual to
enter into a compensation agreement in exchange for services the individual has
provided the Company since inception (see Note 6). The Company has reflected a
liability of $1,430,000 and $1,500,000 in 1996 and 1997, respectively, related
to this agreement.
See accompanying notes.
F-7
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Organization:
Entropin, Inc., a Colorado corporation, was organized in August 1984, as a
pharmaceutical research company developing Esterom(R), 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 activities, seeking the
U.S. Food and Drug Administration (FDA) approval for Esterom(R), as well as
fund raising.
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 a
stockholders' deficit at December 31, 1997 of $4,561,175. The Company's
continued existence is dependent on its ability to obtain the additional
funding necessary to complete the FDA approval process for Esterom(R) and
market the product.
As described in Note 8, the Company has successfully completed a private
placement and a recapitalization of the Company which will provide
additional liquidity for the Company for current operations. However, the
Company estimates it will require additional funding of up to $8,000,000
over the next three years to successfully complete the FDA approval
process. The financial statements do not include any adjustment relating to
the recoverability and classification of recorded asset amounts or the
amount and classification of liabilities or other adjustments that might be
necessary should the Company be unable to continue as a going concern in
its present form.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Income Taxes:
The Company has elected under the Internal Revenue Code to be an 'S'
corporation. In lieu of corporation income taxes, the shareholders of an
'S' corporation include their respective shares of the Company's net income
or loss in their individual income tax returns.
F-8
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31,
1997, in connection with the private placement of common stock, more fully
discussed in Note 6. Costs incurred as of December 31, 1997 and additional
costs incurred subsequent to that date, were charged against the proceeds
of the offering.
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 17 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.
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.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash. The Company
places its cash with high quality financial institutions. At times during
the years, the balance at any one financial institution may exceed FDIC
limits.
Reclassifications:
Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 financial statement presentation.
F-9
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
2. Related party transactions
--------------------------
Office Space:
The Company presently uses part of an office facility and administrative
services provided by a director and stockholder of the Company at no cost.
Accounts receivable - stockholder:
During 1994, the Company advanced $5,000 to a stockholder. The advance does
not bear interest and is due on demand. The Company expects the advance to
be paid in full.
Advances - stockholders:
During 1996 and 1997, the Company was advanced an aggregate of $83,873 by a
stockholder from the stockholder's personal line of credit. The advances
are non-interest bearing and due on demand.
During 1997, the Company received advances from a stockholder totaling
$15,000. The advances do not bear interest and are payable upon demand. The
stockholders' advances have been repaid from proceeds of the private
placement on January 22, 1998 (see Note 4).
Long-term debt - stockholders:
Long-term debt - stockholders consisted of the following at December 31,
1996 and 1997:
1996 1997
---- ----
8% Note payable - stockholder, issued for cash advances,
principal plus accrued interest due December 31,
2000, unsecured $ 631,678 $ 631,678
8% Note payable - stockholder, issued for cash advances,
principal plus accrued interest due December 31,
2000, unsecured 178,000 178,000
8% Note payable - stockholder, issued for past services,
principal plus accrued interest due December 31,
2000, unsecured 731,678 731,678
Accrued interest payable 60,341 169,131
---------- ----------
$1,601,697 $1,710,487
========== ==========
As described in Note 6, effective January 15, 1998, all above noted
long-term debt plus accrued interest was converted to 1,710,487 shares of the
Company's redeemable 8% non-voting, non-cumulative Series A Preferred Stock
at $1 per share, for a total of $1,720,487 which represents the recorded
amount of the liability at December 31, 1997 and fair value of preferred
stock issued.
F-10
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
3. Redeemable preferred stock
--------------------------
In December 1997, the Board of Directors approved an amendment to the
Articles of Incorporation to authorize 10,000,000 shares of $.001 par value
preferred stock. 3,210,487 shares of the Company's preferred stock were
designated as redeemable, non-voting, non-cumulative 8% Series A Preferred
Stock (see Note 8). 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 will be subject to mandatory redemption. The
funds available for redemption will be equal to more than 20% but less than
50% of annual earnings, as determined annually by the Board of Directors,
but not exceeding cash flow from operations and will automatically cancel
in seven years if not fully redeemed. The Company may voluntarily redeem
outstanding shares of preferred stock at $1 per share.
4. Stockholders' equity
--------------------
Buy-sell agreement:
On August 11, 1993, the Company entered into a buy-sell agreement with the
existing stockholders which, among other provisions, requires stockholders
desiring to sell or transfer shares to a person or entity other than an
immediate family member to first submit a proposal of the sale or transfer
and its terms to the Company. Pursuant to the agreement, the Company is
entitled to a first right option to purchase some or all of the shares on
the terms and price offered to the buyer after which, subject to certain
provisions, all other individual shareholders may then purchase any
remaining shares not purchased by the Company. The buy-sell agreement was
cancelled January 15, 1998.
Authorized capital:
Pursuant to the recapitalization more fully described in Note 8, in
December 1997, the Board of Directors approved an amendment to the Articles
of Incorporation to increase the authorized common stock to 7,000,000
shares and to establish its par value at $.001 per share.
Stock split:
On December 10, 1997, the Board of Directors approved a 198.36-for-one
stock split. Accordingly, all references to common shares including the
number of shares (except shares authorized), stock option data, additional
paid-in capital, and per share information have been retroactively restated
to reflect the stock split, which presentation is consistent with the
recapitalization of the Company (see Note 8).
F-11
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
4. Stockholders' equity (continued)
--------------------------------
Private placement:
As of December 31, 1997, the Company had commenced a private placement of
30 units (10,000 shares of its $.001 par value common stock per unit) at
$27,500 per unit, $2.75 per share, which closed on January 15, 1998 with
gross proceeds of $825,000 (see Note 8).
Capital contributions:
In December 1997, certain shareholders of the Company contributed a portion
of their common stock to an individual providing business advisory and
legal services to the Company (78,300 shares valued at $156,000) and to the
Chairman of the Pharmaceutical Sciences Department of a university as
partial settlement for research and development services (259,042 shares
valued at $518,000). The transactions were accounted for based upon the
fair value of the common shares contributed, approximately $2.00 per share.
The expense and related capital contributions are reflected at December 31,
1997.
5. Basic net loss per share
------------------------
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods, 5,220,000 shares. Shares issued for nominal
consideration are considered outstanding since inception. Diluted loss per
share has not been presented as exercise of the outstanding stock options
would have an anti-dilative effect.
6. Commitments and contingencies
-----------------------------
Compensation agreements:
In 1993, the Company entered into a 30 year compensation agreement with
I.B.C. limited partners owning 64.28% of the limited partnership. The
I.B.C. Limited Partnership participated in the early development of
Estrom(R) (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 partners technological
access fee and royalty payments. The 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, 1996 and 1997, no liabilities
have been accrued with respect to this agreement.
F-12
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
In a separate agreement with a former I.B.C. limited partner, the Company
has agreed to pay the partner 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 partner 17.86% of the earned payment. In accordance with the agreement,
the Company has agreed to pay the former limited partner 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 to be
evidenced by a promissory note issued each quarter and payable when the
Company is either reimbursed for expenses paid for the development of the
medicine or from the first income received from the Company from net sales
of the medicine. The quarterly payments are to be applied against the
earned payment to be received by the limited partner. As of December 31,
1996, and 1997, the total liability accrued with respect to this agreement
totaled $111,440 and $155,495, respectively.
Consulting Agreement:
On March 12, 1996, the Company entered into a Consulting Agreement with a
firm whereby the Company has to pay the firm up to a $50,000 success fee
concurrent with the Company's signing of any agreement establishing a
corporate partnership, product license, or any other agreement relating to
the marketing of the medicine. As of December 31, 1997 50% of this fee had
been earned and $25,000 had been recorded as a liability and expense.
Development of New Products Agreement:
On January 26, 1987, the Company entered into a Development of New Products
Agreement with a university whereby the university provides various
services including research and development, product formulations, and
clinical supply for the Company relating to its development of the medicine
on a project by project basis. Prior to the commencement of each project,
the Company and the university will mutually agree on the nature, type, and
timing of each special project as well as the terms of compensation to the
university. Under the agreement, the university is required to disclose to
the Company all inventions, discoveries, or improvements conceived or made
by the university and has agreed to assign all its interests to the
Company.
F-13
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
6. Commitments and contingencies (continued)
-----------------------------------------
Compensation Agreement:
During November 1997, the Company began negotiating with an individual
regarding compensation for research and development services provided since
the inception of the Company. In exchange for these services, the Company
agreed to issue an 8% note payable to the individual in the principal
amount of $1,500,000 maturing December 31, 2000. The Company has accrued
related costs of $1,430,000 as of December 31, 1996, and accrued additional
liability of $70,000 during the year ended December 31, 1997. Subsequent to
year end, the Company converted this obligation to 1,500,000 shares of its
non-voting, non-cumulative redeemable 8% Series "A" preferred stock, at $1
per share, which was considered to be fair value of the services received
by the Company (see Note 8). In addition, effective December 15, 1997 three
stockholders of the Company agreed to transfer a portion of their common
stock to provide the individual with approximately 5% of the outstanding
common shares (see Note 4).
Development and Supply Agreements:
On January 1, 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. to develop all of the chemistry,
manufacturing and controls to comply with the drug master file of the Food
and Drug Administration as well as supply the bulk active product for
marketing. In exchange for these services, Mallinckrodt will receive
exclusive rights as a supplier of the bulk active product to the Company in
North America. For the first year ended December 31, 1997, the contract
price of the ingredient will be fixed based on the number of liters ordered
by the Company. Subsequent to December 31, 1997, the cost per liter will be
adjusted based on changes in the price of the components in the bulk active
product.
In addition, pursuant to the agreement, 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.
Management advisory services agreement:
On October 28, 1997, the Company entered into a 3-year agreement with an
organization providing management advisory services to the Company. The
organization provides assistance in developing and implementing a strategic
plan of merger or acquisition and for business and financial community
relations. The agreement provides compensation, for arranging a merger or
acquisition acceptable to the Company, through the issuance of two options
to acquire 180,001 shares of the Company's common stock for $100 and
$504,000, respectively, simultaneous with the closing of the merger (see
Note 8). The options are exercisable for a five-year period. In addition,
the organization received registration rights for the shares underlying the
options. The difference between the fair value of the stock and the
exercise price will be treated as additional costs of the merger and
charged to capital.
F-14
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
7. Financial instruments
---------------------
The carrying values of cash, accounts receivable-shareholder, accounts
payable and advances-shareholders approximated fair value due to the
short-term maturities of these instruments.
The Company believes that it is not practical to estimate a fair market
value different from the carrying value of long-term debt. Long-term debt,
excluding the deferred royalty agreement, was converted into redeemable
preferred stock on January 15, 1998. Both the redeemable preferred stock
and the deferred royalty agreement have numerous features unique to these
securities and agreements as described in Notes 3 and 6.
8. Subsequent events
-----------------
Recapitalization:
On December 9, 1997, the Company entered into an agreement and plan of
merger with Vanden Capital Group, Inc. (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.
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. As a condition precedent to the
exchange, the Company successfully raised gross proceeds of $825,000
through a private placement of its common stock (see Note 3).
Following the exchange, the Company's shareholders own approximately 95% of
the outstanding common stock of Vanden. The acquisition has been accounted
for as a recapitalization of the Company based upon historical cost.
Accordingly, the number 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.
Issuance of preferred stock:
On January 15, 1998, the Company issued 3,210,487 shares of its Series A
redeemable non-voting, non-cumulative 8% preferred stock in exchange for an
aggregate $1,710,487 of notes payable to shareholders and accrued interest,
and the $1,500,000 compensation agreement (see Notes 2 and 6).
F-15
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events (continued)
-----------------------------
Issuance of common stock:
In connection with the recapitalization effected on January 15, 1998, the
Company issued 180,001 shares of its $.001 par value common stock to an
unrelated entity for cash of $100 as required by the management advisory
services contract (see Note 6). The difference between the fair value of
the stock, estimated by the Company to be $2.00 per share, and the exercise
price was treated as additional cost of the transaction (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 $360,000.
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), 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), 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.
Change in tax status:
The consummation of the stock exchange with Vanden and the issuance of
preferred stock in January 1998, resulted in a change in the Company's tax
status from an S corporation to a taxable corporation. The effect of the
change would be 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. Since the Company
has had losses since inception, no change in the results of operations
would have occurred, assuming the change in status occurred at the
beginning of the periods presented.
Unaudited pro forma combined balance sheet:
The following table presents the unaudited pro forma combined balance sheet
of the Company and Vanden as though the combination had occurred on
December 31, 1997, giving effect to the recapitalization, the private
placement and the other subsequent events described above.
F-16
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and 1997
8. Subsequent events (continued)
-----------------------------
Assets:
Current assets $1,034,247
Other assets 266,456
----------
$1,300,703
==========
Liabilities and stockholders' equity:
Current liabilities $428,686
Other liabilities 155,495
Redeemable preferred stock 3,210,487
Stockholders' equity (deficit) (2,493,965)
----------
$1,300,703
==========
9. Proposed management agreement
-----------------------------
During March 1998, the Company has been negotiating an agreement with a
company experienced in managing pharmaceutical development , including
providing assistance in taking pharmaceutical products to the FDA and
through the clinical trials and New Drug Application stages of development.
The agreement is proposed to have a 33 month term, at the end of which the
Company's primary product, Esterom(R), may be approved for marketing. The
Company would be required to pay management fees of approximately $900,000
over the term of the agreement, as well as grant stock options to the
company within thirty days after execution of the agreement to purchase
450,000 shares of Entropin common stock. The options will have a term of
five years from the grant date and an exercise price of $1.50. The options
will be exercisable in varying amounts on dates ranging from August 1998 to
December 2000.
The difference between the fair value of the options at date of grant and
the exercise price, estimated to be approximately $1,950,000 using the
Black-Scholes option- pricing model, will be recorded as additional paid-in
capital and unearned stock compensation. The unearned stock compensation
will be amortized to expense on a straight-line basis over the 33 month
term of the agreement.
F-17
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1997 and March 31, 1998
(Unaudited)
ASSETS
------
1997 1998
---- ----
Current assets:
Cash $ 291 $ 538,506
Accounts receivable - stockholder 5,000 5,000
---------- ----------
Total current assets 5,291 543,506
Deferred stock offering costs (Note 5) 10,746 -
Patent costs, less accumulated amortization of
$40,300 (1997) and $44,800 (1998) 266,456 261,956
---------- ----------
$ 282,493 $ 805,462
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Accounts payable $ 329,813 $ 31,567
Advances - stockholders (Note 2) 98,873 -
---------- ----------
Total current liabilities 428,686 31,567
Long-term debt:
Stockholders (Note 4) 1,710,487 -
Deferred royalty agreement (Note 7) 155,495 159,067
Compensation agreement (Note 4) 1,500,000 -
---------- ----------
Total long-term debt 3,365,982 159,067
Commitments (Notes 2 and7)
Series A redeemable preferred stock,
$.001 par value, 3,210,487 shares
authorized, 3,210,487 shares issued
and outstanding (1998)(Note 4) - 3,210,487
Stockholders' equity (deficit) (Note 5):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A reported above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 5,220,000 (1997) and 6,000,051 (1998)
shares issued and outstanding 5,220 6,000
Additional paid-in capital 1,043,780 2,061,210
Deficit accumulated during the development stage (4,561,175) (4,662,869)
---------- ----------
Total stockholders' equity (deficit) (3,512,175) (2,595,659)
---------- ----------
$ 282,493 $ 805,462
========== ==========
See accompanying notes.
F-18
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 1997 and 1998
and for the Period from August 27, 1984 (inception) to March 31, 1998
(Unaudited)
Cumulative
amounts from
1997 1998 inception
---- ---- ------------
Costs and expenses:
Research and development $ 37,843 $ 3,772 $ 3,756,626
General and administrative 6,598 95,372 606,627
Rent - related party (Note 2) - 2,080 2,080
Depreciation and amortization 3,862 4,500 61,868
--------- --------- -----------
Operating loss (48,305) (105,724) (4,427,201)
Other income (expense):
Interest income - 4,509 4,509
Interest expense (36,579) (479) (240,177)
--------- --------- -----------
Total other income (expense) (36,579) 4,030 (235,668)
--------- --------- -----------
Net loss $ (84,884) $(101,694) $(4,662,869)
========= ========= ===========
Basic net loss per common share $ (.02) $ (.02) $ (.89)
========= ========= ===========
Weighted average common shares
outstanding (Note 6) 5,220,000 5,870,000 5,232,000
========= ========= ===========
See accompanying notes.
F-19
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Three Months Ended March 31, 1998 (Unaudited)
Deficit
accumulated
Common Stock Additional during the
-------------------- paid-in development
Shares Amount capital stage
------ ------ ---------- -----------
Balance, December 31, 1997 5,220,000 $5,220 $1,043,780 $(4,561,175)
Sale of common stock for cash ($2.75 per share) 300,000 300 797,810 -
(Note 5)
Issuance of common stock pursuant to recapitalization
(Note 5) 480,051 480 219,620 -
Net loss for the three months ended March 31, 1998 - - - (101,694)
--------- ------ ---------- -----------
Balance, March 31, 1998 6,000,051 $6,000 $2,061,210 $(4,662,869)
========= ====== ========== ===========
See accompanying notes.
F-20
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1998 and for the
Period from August 27, 1984 (inception) to March 31, 1998
(Unaudited)
Cumulative
amounts
from
1997 1998 inception
---- ---- ----------
Cash flows from operating activities:
Net loss $(84,884) $(101,694) $(4,662,869)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 3,862 4,500 61,868
IBC partner royalty agreement 4,763 3,572 159,067
Services contributed in exchange
for stock - - 694,000
Services contributed in exchange for
compensation agreements 23,333 - 2,231,678
Increase in accounts receivable -
shareholder - - (5,000)
Increase (decease) in accounts payable 3,761 (298,246) 31,567
Increase in accrued interest 32,188 - 169,139
Other - - 131
-------- --------- -----------
Total adjustments 67,907 (290,174) 3,342,450
-------- --------- -----------
Net cash used in operations (16,977) (391,868) (1,320,419)
Cash flows from investing activities:
Purchase of equipment - - (17,207)
Patent costs - - (306,756)
-------- --------- -----------
Net cash used in investing activities - - (323,963)
Cash flows from financing activities:
Proceeds from recapitalization - 220,100 220,100
Deferred stock offering costs - 10,746 -
Proceeds from sale of common stock - 798,110 1,153,110
Outstanding checks in excess of
bank balance 3,300 - -
Proceeds from stockholder loans - - 809,678
Proceeds from (payments on) stockholder
advances 12,000 (98,873) -
-------- --------- -----------
Net cash provided by financing
activities 15,300 930,083 2,182,888
-------- --------- -----------
Net increase (decrease) in cash (1,677) 538,215 538,506
Cash at beginning of period 1,677 291 -
-------- --------- -----------
Cash at end of period $ - $ 538,506 $ 538,506
======== ========= ===========
See accompanying notes.
F-21
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
The accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Certain notes and other
information have been condensed or omitted from the interim financial statements
presented in this report. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair presentation.
The results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997 as filed with the Securities and Exchange Commission.
1. Organization and summary of significant accounting policies
-----------------------------------------------------------
Organization:
Entropin, Inc., a Colorado corporation, was organized in August 1984, as a
pharmaceutical research company developing Esterom(R), 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 activities, seeking the
U.S. Food and Drug Administration (FDA) approval for Esterom(R), as well as
fund raising.
On January 15, 1998, the Company consummated an agreement and plan of
merger with Vanden Capital Group, Inc. (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, 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 a
stockholders' deficit at March 31, 1998 of $4,662,869. The Company's
continued existence is dependent on its ability to obtain the additional
funding necessary to complete the FDA approval process for Esterom(R) and
market the product.
F-22
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
As described in Note 5, the Company has successfully completed a private
placement and a recapitalization of the Company which will provide
additional liquidity for the Company for current operations. However, the
Company estimates it will require additional funding of up to $8,000,000
over the next three years to successfully complete the FDA approval
process. The financial statements do not include any adjustment relating to
the recoverability and classification of recorded asset amounts or the
amount and classification of liabilities or other adjustments that might be
necessary should the Company be unable to continue as a going concern in
its present form.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Deferred stock offering costs:
Deferred stock offering costs represent costs incurred to December 31,
1997, in connection with the private placement of common stock, more fully
discussed in Note 5. Costs incurred as of December 31, 1997 and additional
costs incurred subsequent to that date, were charged against the proceeds
of the offering.
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 17 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.
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.
F-23
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
1. Organization and summary of significant accounting policies (continued)
-----------------------------------------------------------------------
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.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash. The Company
places its cash with high quality financial institutions. At times, the
balance at any one financial institution may exceed FDIC limits.
Reclassifications:
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 financial statement presentation.
2. Related party transactions
--------------------------
Lease agreement:
In February 1998, the Company entered into an office lease arrangement with
a shareholder. The lease has a two-year term expiring on February 1, 2000
and a monthly rent of $1,040.
Advances - stockholders:
At December 31, 1997, an aggregate of $98,873 had been advanced to the
Company by two shareholders. The advances were repaid in January 1998 from
proceeds associated with the recapitalization of the Company (see Note 5).
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.
Since the Company has had losses since inception, no change in the results
of operations would have occurred, assuming the change in status occurred
at the beginning of the periods presented.
F-24
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
4. Redeemable preferred stock
--------------------------
On January 15, 1998, the Company issued 3,210,487 shares of its Series A
redeemable non-voting, non-cumulative 8% preferred stock in exchange for an
aggregate $1,710,487 of notes payable to shareholders and accrued interest,
and the $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.
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, a reverse acquisition.
Pursuant to the agreement, Vanden agreed to have cash of $220,000 and no
unpaid liabilities at the effective date of the transaction. The exchange
was consummated on January 15, 1998. In connection with the
recapitalization, the Company issued 180,001 shares of its $.001 par value
common stock for cash of $100 and options to purchase an additional 180,001
shares of common stock for $2.80 per share, as required by a management
advisory services contract as compensation for arranging a merger or
acquisition acceptable to the Company. The difference between the fair
value of the stock, estimated by the Company to be $2.00 per share, and the
purchase price for the initial 180,001 shares was treated as additional
cost of the merger and changed 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 $360,000. The remaining options to acquire 180,001
shares are exercisable for a five-year period.
Following the exchange, the Company's shareholders own 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 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 placement:
On January 15, 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.
F-25
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
6. 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 has not been
presented as exercise of the outstanding stock options would have an
anti-dilutive effect.
7. Commitments
-----------
Compensation agreements:
In 1993, the Company entered into a 30 year compensation agreement with
I.B.C. limited partners owning 64.28% of the limited partnership. The
I.B.C. Limited Partnership participated in the early development of
Estrom(R) (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 partners technological
access fee and royalty payments. The 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 March 31, 1998 , no liabilities have been
accrued with respect to this agreement.
In a separate agreement with a former I.B.C. limited partner, the Company
has agreed to pay the partner 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 partner 17.86% of the earned payment. In accordance with the agreement,
the Company has agreed to pay the former limited partner 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 to be
evidenced by a promissory note issued each quarter and payable when the
Company is either reimbursed for expenses paid for the development of the
medicine or from the first income received from the Company from net sales
of the medicine. The quarterly payments are to be applied against the
earned payment to be received by the limited partner. As of December 31,
1997, and March 31, 1998, the total liability accrued with respect to this
agreement totaled $155,495 and $159,067, respectively.
F-26
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
7. Commitments (continued)
-----------------------
Development and Supply Agreements:
On January 1, 1997, the Company entered into 10 year Development and Supply
Agreements with Mallinckrodt, Inc. to develop all of the chemistry,
manufacturing and controls to comply with the drug master file of the Food
and Drug Administration as well as supply the bulk active product for
marketing. In exchange for these services, Mallinckrodt will receive
exclusive rights as a supplier of the bulk active product to the Company in
North America. For the first year ended December 31, 1997, the contract
price of the ingredient will be fixed based on the number of liters ordered
by the Company. Subsequent to December 31, 1997, the cost per liter will be
adjusted based on changes in the price of the components in the bulk active
product.
In addition, pursuant to the agreement, the Company has granted
Mallinckrodt a right of first refusal to supply the Company's requirements
of the bulk active product in all other parts of the world outside of North
America.
License Agreement:
In January 1998, the Company entered into an agreement with a director of
the Company, whereby the Company granted the director a non-exclusive right
to make, import and use the Company's product, Esterom(R), 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), 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 agreement:
During April 1998, the Company entered into an agreement with the Western
Center for Clinical Studies, Inc. (WCCS), a company experienced in managing
pharmaceutical development, including providing assistance in taking
pharmaceutical products to the FDA and through the clinical trials and New
Drug Application stages of development. The Company is required to pay
management fees of $880,400 over the 33 month term of the agreement, as
well as grant stock options to WCCS within thirty days after execution of
the agreement to purchase 450,000 shares of Entropin common stock. The
options will have a term of five years from the grant date and an exercise
price of $1.50. The options will be exercisable in varying amounts on dates
ranging from August 1998 to December 2000.
F-27
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
March 31, 1998
7. Commitments (continued)
-----------------------
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, will be recorded as additional
paid-in capital and unearned stock compensation. The unearned stock
compensation will be amortized to expense on a straight-line basis over the
33 month term of the agreement.
8. Subsequent events
-----------------
Amendment to management advisory agreement:
On May 5, 1998, the Company amended an existing management advisory
services agreement with an organization to extend the agreement through
October 28, 2000 and to provide a monthly fee of $5,000 to the organization
through April 1, 1999. As additional compensation, the organization was
granted an option to purchase up to 100,000 shares of the Company's $.001
par value common stock at a purchase price of $4.00 per share. The rights
granted under the stock option are exercisable if written notice of a right
to exercise the option is given by the Company to the organization on or
before 180 days from May 5, 1998.
Private placement of preferred stock:
In June 1998, the Company commenced a private placement of 400,000 shares
of Series B preferred stock at $5.00 per share. The Company anticipates
incurring $140,000 of expenses associated with the private placement
resulting in net proceeds of $1,860,000. The Series B preferred stock is
designated as redeemable 10% cumulative non-voting convertible preferred
stock with $.001 par value. Dividends will accrue at the rate of $.50 per
share per annum and will be paid annually in arrears commencing July 15,
1998. At the Company's election, annual dividends may be paid in cash
and/or in shares of the Company's common stock valued at $5.00 per share.
F-28
ENTROPIN, INC.
_________ Shares
PROSPECTUS
__________, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. The Colorado Business Corporation Act (the "Act") allows indemnification of
directors, officers, employees and agents of the Company against liabilities
incurred in any proceeding in which an individual is made a party because he was
a director, officer, employee or agent of the Company if such person conducted
himself in good faith and reasonable believed his actions were in, or not
opposed to, the best interests of the Company, and with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. A person must be found to be entitled to indemnification under this
statutory standard by procedures designed to assure that disinterested members
of the Board of Directors have approved indemnification or that, absent the
ability to obtain sufficient numbers of disinterested directors, independent
counsel or shareholders have approved the indemnification based on a finding
that the person has met the standard. Indemnification is limited to reasonable
expenses. In addition, the Company's By-Laws provide that the Company shall have
the power to indemnify its officers, directors, employees and agents to the
extent permitted by the Act.
Specifically, the Act provides as follows:
"7-109-102. Authority to indemnify directors.
(1) Except as provided in subsection (4) of this section, a
corporation may indemnify a person made a party to a proceeding because the
person is or was a director against liability incurred in the proceeding
if:
(a) The person conducted himself or herself in good faith; and
(b) The person reasonably believed:
(I) In the case of conduct in an official capacity with the
corporation, that his or her conduct was in the corporation's best
interests; and
(II) In all other cases, that his or her conduct was at
least not opposed to the corporation's best interests; and
(c) In the case of any criminal proceeding, the person had no
reasonable cause to believe his or her conduct was unlawful.
(2) A director's conduct with respect to an employee benefit plan for
a purpose the director reasonably believed to be in the interests of the
participants in or beneficiaries of the plan is conduct that satisfies the
II-1
requirement of subparagraph (II) of paragraph (b) of subsection (1) of this
section. A director's conduct with respect to an employee benefit plan for
a purpose that the director did not reasonably believe to be in the
interests of the participants in or beneficiaries of the plan shall be
deemed not to satisfy the requirements of paragraph (a) of subsection (1)
of this section.
(3) The termination of a proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent is not, of
itself, determinative that the director did not meet the standard of
conduct described in this section.
(4) A corporation may not indemnify a director under this section:
(a) In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation; or
(b) In connection with any other proceeding charging that the
director derived an improper personal benefit, whether or not
involving action in an official capacity, in which proceeding the
director was adjudged liable on the basis that he or she derived an
improper personal benefit.
(5) Indemnification permitted under this section in connection with a
proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
7-109-103. MANDATORY INDEMNIFICATION OF DIRECTORS.
Unless limited by its articles of incorporation, a corporation shall
indemnify a person who was wholly successful, on the merits or otherwise,
in the defense of any proceeding to which the person was a party because
the person is or was a director, against reasonable expenses incurred by
him or her in connection with the proceeding.
7-109-105. COURT-ORDERED INDEMNIFICATION OF DIRECTORS.
(1) Unless otherwise provided in the articles of incorporation, a
director who is or was a party to a proceeding may apply for
indemnification to the court conducting the proceeding or to another court
of competent jurisdiction. On receipt of an application, the court, after
giving any notice the court considers necessary, may order indemnification
in the following manner:
(a) If it determines that the director is entitled to mandatory
indemnification under section 7-109-103, the court shall order
indemnification, in which case the court shall also order the
corporation to pay the director's reasonable expenses incurred to
obtain court-ordered indemnification.
II-2
(b) If it determines that the director is fairly and reasonably
entitled to indemnification in view of all the relevant circumstances,
whether or not the director met the standard of conduct set forth in
section 7-109-102(1) or was adjudged liable in the circumstances
described in section 7-109-102(4), the court may order such
indemnification as the court deems proper; except that the
indemnification with respect to any proceeding in which liability
shall have been adjudged in the circumstances described in section
7-109-102(4) is limited to reasonable expenses incurred in connection
with the proceeding and reasonable expenses incurred to obtain
court-ordered indemnification.
7-109-106. DETERMINATION AND AUTHORIZATION OF INDEMNIFICATION OF DIRECTORS.
(1) A corporation may not indemnify a director under section 7-109-102
unless authorized in the specific case after a determination has been made
that indemnification of the director is permissible in the circumstances
because the director has met the standard of conduct set forth in section
7-109-102. A corporation shall not advance expenses to a director under
section 7-109-104 unless authorized in the specific case after the written
affirmation and undertaking required by section 7-109-104(1)(a) and (1)(b)
are received and the determination required by section 7-109-104(1)(c) has
been made.
(2) The determinations required by subsection (1) of this section
shall be made:
(a) By the board of directors by a majority vote of those present
at a meeting at which a quorum is present, and only those directors
not parties to the proceeding shall be counted in satisfying the
quorum; or
(b) If a quorum cannot be obtained, by a majority vote of a
committee of the board of directors designated by the board of
directors, which committee shall consist of two or more directors not
parties to the proceeding; except that directors who are parties to
the proceeding may participate in the designation of directors for the
committee.
(3) If a quorum cannot be obtained as contemplated in paragraph (a) of
subsection (2) of this section, and a committee cannot be established under
paragraph (b) of subsection (2) of this section, or, even if a quorum is
obtained or a committee is designated, if a majority of the directors
constituting such quorum or such committee so directs, the determination
required to be made by subsection (1)of this section shall be made:
(a) By independent legal counsel selected by a vote of the board
of directors or the committee in the manner specified in paragraph (a)
or (b) of subsection (2) of this section or, if a quorum of the full
board cannot be obtained and a committee cannot be established, by
independent legal counsel selected by a majority vote of the full
board of directors; or
(b) By the shareholders.
II-3
(4) Authorization of indemnification and advance of expenses shall be
made in the same manner as the determination that indemnification or
advance of expenses is permissible; except that, if the determination that
indemnification or advance of expenses is permissible is made by
independent legal counsel, authorization of indemnification and advance of
expenses shall be made by the body that selected such counsel.
7-109-107. INDEMNIFICATION OF OFFICERS, EMPLOYEES, FIDUCIARIES, AND AGENTS.
(1) Unless otherwise provided in the articles of incorporation:
(a) An officer is entitled to mandatory indemnification under
section 7-109-103, and is entitled to apply for court-ordered
indemnification under section 7-109-105, in each case to the same
extent as a director;
(b) A corporation may indemnify and advance expenses to an
officer, employee, fiduciary, or agent of the corporation to the same
extent as to a director; and
(c) A corporation may also indemnify and advance expenses to an
officer, employee, fiduciary, or agent who is not a director to a
greater extent, if not inconsistent with public policy, and if
provided for by its bylaws, general or specific action of its board of
directors or shareholders, or contract.
7-109-108. INSURANCE.
A corporation may purchase and maintain insurance on behalf of a
person who is or was a director, officer, employee, fiduciary, or agent of
the corporation, or who, while a director, officer, employee, fiduciary, or
agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, fiduciary,
or agent of another domestic or foreign corporation or other person or of
an employee benefit plan, against liability asserted against or incurred by
the person in that capacity or arising from his or her status as a
director, officer, employee, fiduciary, or agent, whether or not the
corporation would have power to indemnify the person against the same
liability under section 7-109-102, 7-109-103, or 7-109-107. Any such
insurance may be procured from any insurance company designated by the
board of directors, whether such insurance company is formed under the laws
of this state or any other jurisdiction of the United States or elsewhere,
including any insurance company in which the corporation has an equity or
any other interest through stock ownership or otherwise.
7-109-109. LIMITATION OF INDEMNIFICATION OF DIRECTORS.
(1) A provision treating a corporation's indemnification of, or
advance of expenses to, directors that is contained in its articles of
incorporation or bylaws, in a resolution of its shareholders or board of
directors, or in a contract, except an insurance policy, or otherwise, is
II-4
valid only to the extent the provision is not inconsistent with sections
7-109-101 to 7-109-108. If the articles of incorporation limit
indemnification or advance of expenses, indemnification and advance of
expenses are valid only to the extent not inconsistent with the articles of
incorporation.
(2) Sections 7-109-101 to 7-109-108 do not limit a corporation's power
to pay or reimburse expenses incurred by a director in connection with an
appearance as a witness in a proceeding at a time when he or she has not
been made a named defendant or respondent in the proceeding.
7-109-110. NOTICE TO SHAREHOLDERS OF INDEMNIFICATION OF DIRECTOR.
If a corporation indemnifies or advances expenses to a director under
this article in connection with a proceeding by or in the right of the
corporation, the corporation shall give written notice of the
indemnification or advance to the shareholders with or before the notice of
the next shareholders' meeting. If the next shareholder action is taken
without a meeting at the instigation of the board of directors, such notice
shall be given to the shareholders at or before the time the first
shareholder signs a writing consenting to such action."
B. Article VIII of the Registrant's Amended and Restated Articles of
Incorporation provides for the elimination of personal liability for monetary
damages for the breach of fiduciary duty as a director except for liability (i)
resulting from a breach of the director's duty of loyalty to the Registrant or
its shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (iii) for approving
payment of distributions to shareholders to the extent that any such actions are
illegal under the Act; or (iv) for any transaction from which a director derives
an improper personal benefit. This Article further provides that the personal
liability of the Registrant's directors shall be eliminated or limited to the
fullest extent permitted by the Act.
On January 29, 1998, the Company obtained Directors and Officers indemnity
liability insurance coverage, including securities coverages, in the amount of
$3,000,000 which indemnifies the Company against claims, as well as provides
coverage against any claims against the officers and directors of the Company
which (i) the Company is not legally permitted or required to pay or (ii) when
the Company is legally required or permitted to pay such loss as indemnity to
the Directors and Officers but cannot in fact pay such loss due solely to the
financial insolvency of the Company.
There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being or
may be sought, and the Company is not aware of any other pending or threatened
litigation that may result in claims for indemnification by any director,
officer, employee or other agent.
II-5
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or to be incurred by the Registrant in connection with
the issuance and distribution of the securities being offered.
Registration and filing fee ............................ $ 13,388.00
Printing . . . . . . . ................................. 1,000.00
Edgar costs ............................................ 1,000.00
Accounting fees and expenses ........................... 3,000.00
Legal fees and expenses ................................ 25,000.00
Blue Sky fees and filing fees .......................... 7,500.00
Postage and Delivery ................................... 1,500.00
Miscellaneous .......................................... 350.00
------------
Total .................................................. $ 52,738.00
===========
All amounts listed above, except for the registration fees, are estimates.
All expenses itemized above will be paid by the Registrant. Sales agent
discounts and commissions to any brokers or dealers will be borne by the Selling
Shareholders for the Shares offered by the Selling Shareholders.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant and Old Entropin issued
securities to the following persons for the cash or other consideration
indicated in transactions that were not registered under the 1933 Act.
January 1998 Private Placement (Old Entropin)
---------------------------------------------
No. of Shares of
Name Common Stock Consideration Received
- ---- ---------------- ----------------------
Suzanne Oliphant 10,000 $27,500
Albert W. White 10,000 $27,500
Stephen H. West 20,000 $55,000
C. Richard Harrison 10,000 $27,500
Jeanette Y. Mihaly 20,000 $55,000
Joy Ann Svenson 10,000 $27,500
Richard L. Monfort 180,000 $495,000
David T. Treadwell 10,000 $27,500
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David Bressler 5,000 $13,750
Gerald Olesh 10,000 $27,500
Arthur Kassoff 10,000 $27,500
Armond A. Azharian 5,000 $13,750
------- --------
Total 300,000 $825,000
======= ========
The offers and sales set forth in I 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. All of the purchasers are known by
Old Entropin's (now the Registrant's) Chairman, Higgins D. Bailey, or were
referred to him by other purchasers in this offering. 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. No broker/dealers
were involved in the sale and no commissions were paid. 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.
II.
In November 1997, Old Entropin issued an 8% note in the principal amount of
$1,500,000 maturing December 31, 2000 payable to James E. Wynn as compensation
for research and development services provided since the inception of the
Company. In January 1998, Old Entropin converted this obligation to 1,500,000
shares of its redeemable 8% non-voting, non-cumulative Series A preferred stock,
at $1.00 per share. The issuance of the promissory note and the subsequent
conversion into shares of Series A preferred stock were made in reliance upon
the exemption from registration provided by Section 4(2) of the Act. The
purchaser represented that he acquired the securities for investment, and all
certificates issued to the purchaser 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.
II-7
III.
Debt/Equity Exchange (Old Entropin)
-----------------------------------
No. of Shares of Series
Name A Preferred Stock Consideration Received
---- ----------------------- ----------------------
Higgins D. Bailey 178,000 $178,000
Lowell M. Somers 822,446 $822,446
Thomas T. Anderson Trust 710,041 $710,041
--------- ----------
Total 1,710,487 $1,710,487
========= ==========
Old Entropin had accrued $1,710,487, including interest, in long-term debt
owed to the abovementioned stockholders at December 31, 1996 and 1997. On
January 15, 1998, Old Entropin converted all of such long-term debt plus accrued
interest to 1,710,487 shares of Old Entropin's redeemable 8% non-voting,
non-cumulative Series A Preferred Stock at $1 per share, for a total of
$1,710,487. The issuance of the shares of Series A preferred stock was made in
reliance upon the exemption from registration provided by Section 4(2) of the
Act. The purchasers represented that they acquired 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.
IV.
In December, 1997, Old Entropin entered into an agreement with LMU &
Company ("LMU"). As partial consideration for LMU's services under the
agreement, Old Entropin issued an option to purchase 180,001 shares of Old
Entropin's common stock, exercisable for cash of $100. The issuance of the
option to LMU was made in reliance upon the exemption from registration provided
by Section 4(2) of the Act. No broker/dealers were involved in the sale and no
commissions were paid. LMU represented that LMU acquired the option for
investment and not with a view to distribution. LMU exercised its option in
January 1998. Stop transfer instructions have been placed against the transfer
of these certificates by the Registrant's transfer agent.
V.
January 1998 Vanden-Old Entropin Merger
---------------------------------------
On January 15, 1998, in order to consummate the Agreement and Plan of
Merger with Entropin, Inc., a California corporation ("Old Entropin"), the
Registrant issued 5,700,001 shares of its Common Stock, $.001 par value per
share, and 3,210,487 shares of the Company's redeemable 8% non-voting,
II-8
non-cumulative Preferred Stock, $.001 par value per share, in exchange for all
of the issued and outstanding shares of Common Stock and Preferred Stock of Old
Entropin on a one-for-one basis, as follows:
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Name
- ---- Series A Series A
Common Preferred Common Preferred
------ --------- ------ ---------
Caroline T. Somers 1,145,793 1,145,793
Higgins D. & Shirley A. Bailey 1,404,093 1,404,093
Higgins D. Bailey, Pledge 1,404,093 1,404,093
Higgins D. Bailey 178,000 178,000
Chandler G. Brown 257,085 257,085
CapMac Eighty-Two LP 73,130 73,130
Milton D. McKenzie, Trustee for
The Milton D. McKenzie
Revocable Trust 102,834 102,834
Milton D. McKenzie 52,632 52,632
James E. Wynn 518,085 1,500,000 518,085 1,500,000
CKC Partners 78,300 78,300
Danny and Nancy Yu 10,000 10,000
Brent and Marlene Jackson 50,000 50,000
William J. Currin 10,000 10,000
Jacquelyn D. Anderson Baker 5,455 5,455
Interstate Johnson Lane Corp. 10,000 10,000
Dennis K. Metzler 5,000 5,000
Jerry L. And Nancy Sands 1,000 1,000
The Macy Family Trust 10,000 10,000
Dewey H. And Virginia Crim 20,000 20,000
James W. Toot 7,500 7,500
II-9
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Name
- ---- Series A Series A
Common Preferred Common Preferred
------ --------- ------ ---------
Robert L. Simpson 5,000 5,000
Gladys F. Decker & Deloras D.
Hunter, Trustees for Gladys F.
Decker Trust No. 1 20,000 20,000
Donald Hunter, Trustee of the
Donald Hunter Residuary Marital
Trust 80,000 80,000
Deloras Decker Hunter, Trustee
of the Deloras Decker Hunter
Generation Skipping Trust 10,000 10,000
Lowell M. Somers 822,446 822,446
Thomas T. Anderson Trust 710,041 710,041
The Underwood Family Partners 60,001 60,001
Steven C. & Lynn T. Quoy 60,000 60,000
Suzanne Oliphant 10,000 10,000
Albert W. White 10,000 10,000
Stephen H. West 20,000 20,000
C. Richard Harrison 10,000 10,000
Jeanette Y. Mihaly 20,000 20,000
Joy Ann Svenson 10,000 10,000
Richard L. Monfort 180,000 180,000
David T. Treadwell 10,000 10,000
David Bressler 5,000 5,000
Gerald Olesh 10,000 10,000
Arthur Kassoff 10,000 10,000
II-10
Consideration Received
No. of Old
No. of Shares Entropin Shares
---------------------------- -----------------------------
Name
- ---- Series A Series A
Common Preferred Common Preferred
------ --------- ------ ---------
Armond A. Azharian 5,000 5,000
--------- --------- --------- ---------
TOTAL 5,700,001 3,210,487 5,700,001 3,210,487
========= ========= ========= =========
The exchange of Old Entropin shares for shares of the Registrant was
effected under the exemption from registration provided under Section 4(2) of
the Act and Rule 506 of Regulation D promulgated thereunder, for transactions
not involving a public offering. Based upon the written representations made by
the investors and other information known to the Registrant, the Registrant
believes all of the investors were accredited investors as that term is defined
in Rule 501 of Regulation D. All investors represented that they purchased the
securities for investment, and all certificates issued to the investors 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. No broker/dealers were involved with the exchange, and
no commissions were paid. Stop transfer instructions have been placed against
the transfer of these certificates by the Registrant's transfer agent.
ITEM 27. EXHIBITS AND FINANCIAL SCHEDULES
The following is a complete list of exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein.
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 correct.(2)
3.5 Amended Articles of Incorporation, as filed with the Colorado
Secretary of State on July 20, 1998, as correct.(2)
4.3 Specimen copy of stock certificate for Common Stock,$.001par
value; Specimen copy of stock certificate for Series A Preferred
Stock,$.001par value (2)
5.1 Form of Opinion of Brenman Bromberg & Tenenbaum, P.C.
10.1 Stock Option Plan(1)
II-11
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)
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
16.0 Statement from Schumacher & Associates, the prior certifying
accountant in response to the information disclosed in the
Company's Form 8-K dated March 25, 1998, captioned "Changes in
Registrant's Certifying Accountant" (3)
24.1 Consent of Brenman Bromberg & Tenenbaum, P.C. (included in
Exhibit 5)
24.2 Consent of Causey Demgen & Moore Inc.
27 Financial Data Schedule
II-12
- -----------
(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 exhibits filed with the
Registrant's Current Report on Form 8-K, as amended, dated January 15,
1998.
(3) Incorporated by reference from an exhibit numbered 4.0 as filed with the
Registrant's Current Report on Form 8-K, as amended, dated March 25, 1998.
(4) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Annual Report on Form 10K-SB, 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.
ITEM 28. UNDERTAKINGS
The undersigned Registrant will:
(a)(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the registration statement; and (iii)
include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-13
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City and County of Denver, State of Colorado on July 21,
1998.
ENTROPIN, INC.
By: /s/ Higgins D. Bailey
--------------------------------------
Higgins D. Bailey, Chairman
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Higgins D Bailey Chairman of the Board July 21, 1998
- --------------------------- of Directors, CEO, CFO
Higgins D. Bailey and Director
/s/ Daniel L. Azarnoff President and Director July 21, 1998
- ---------------------------
Daniel L. Azarnoff
/s/ Wellington A. Ewen Chief Financial Officer July 21, 1998
- ---------------------------
Wellington A. Ewen
/s/ Donald Hunter Secretary and Director July 21, 1998
- ---------------------------
Donald Hunter
/s/ Dewey H. Crim Treasurer and Director July 21, 1998
- ---------------------------
Dewey H. Crim
/s/ James E. Wynn Director July 21, 1998
- ---------------------------
James E. Wynn
II-14