UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2000 .
-----------------------------
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 33-23693 .
-----------------------------
ENTROPIN. INC
-------------
(Exact name of small business issuer as specified in its charter)
COLORADO . 84-1090424 .
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer Identification No.)
incorporation or organization)
45926 Oasis Street. Indio. CA 92201
-----------------------------------
(Address of principal executive offices)
(760) 775-8333
--------------
(Issuer's telephone number)
N/A
---
(Former name, former address and former fiscal year, if changed since
last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
--- ---
As of August 7, 2000, 9,598,326 shares of the issuer's Common Stock, $.001
par value per share were outstanding.
Transitional Small Business Disclosure Format Yes No x
--- ---
ENTROPIN, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial statements:
Balance Sheet - December 31, 1999 and June 30, 2000 (unaudited) 2
Statement of Operations - For the Three Months Ended June 30, 1999
and 2000 (unaudited) 4
Statement of Operations - For the Six Months Ended June 30, 1999
and 2000 and Cumulative Amounts from Inception (August 27, 1984)
Through June 30, 2000 (unaudited) 5
Statement of Stockholders' Equity (Deficit) - for the Six Months
Ended June 30, 2000 (unaudited) 6
Statement of Cash Flows - For the Six Months Ended June 30, 1999
and 2000 and Cumulative Amounts from Inception (August 27, 1984)
Through June 30, 2000 (unaudited) 7
Notes to Unaudited Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
PART II. OTHER INFORMATION
Item 1 Legal proceedings 18
Item 2 Changes in securities and use of proceeds 18
Item 4 Submission of matters to a vote of security holders 19
Item 6 Exhibits and reports on Form 8-K 20
Signatures 20
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and June 30, 2000
(Unaudited)
ASSETS
1999 2000
---- ----
Current assets:
Cash and cash equivalents $2,260,526 $ 5,510,460
Certificates of deposit - 8,542,570
Accounts receivable - related party - 256
Accrued interest receivable - 143,266
Prepaid expenses - 19,343
---------- -----------
2,260,526 14,215,895
Property and equipment, at cost:
Leasehold improvements 61,437 61,437
Office furniture and equipment 23,855 33,740
---------- -----------
85,292 95,177
Less accumulated depreciation (23,429) (38,941)
---------- -----------
Net property and equipment 61,863 56,236
Other assets:
Deposits 12,261 13,313
Deferred stock offering costs (Note 4) 169,425 -
Patent costs, less accumulated amortization of
$82,019 (1999) and $94,074 (2000) 321,150 315,800
---------- -----------
Total other assets 502,836 329,113
---------- -----------
$2,825,225 $14,601,244
========== ===========
See accompanying notes.
2
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
December 31, 1999 and June 30, 2000
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 2000
---- ----
Current liabilities:
Accounts payable $ 199,042 $ 367,937
Accounts payable - related parties 123,763 28,750
---------- -----------
Total current liabilities 322,805 396,687
Deferred royalty agreement (Note 6) 184,071 191,215
Commitments and contingencies (Note 6)
Series A redeemable preferred stock, $.001 par
value; 3,210,487 shares authorized, issued and
outstanding, $1 per share redemption value 3,210,487 3,210,487
Series B redeemable convertible preferred stock,
$.001 par value; 400,000 shares authorized, 230,500
share (1999)and 225,500 (2000) issued and outstanding,
$5.00 per share redemption value (Note 3) 1,093,175 1,069,462
Stockholders' equity (deficit)(Note 4):
Preferred stock, $.001 par value; 10,000,000 shares
authorized, Series A and B reported above - -
Common stock, $.001 par value; 50,000,000 shares
authorized, 7,382,280 (1999) and 9,568,180 (2000)
shares issued and outstanding 7,382 9,568
Additional paid-in capital 13,866,412 27,352,513
Deficit accumulated during the development stage (12,640,814) (15,617,235)
Unearned stock compensation (3,218,293) (2,011,453)
----------- -----------
Total stockholders' equity (deficit) (1,985,313) 9,733,393
----------- -----------
$ 2,825,225 $14,601,244
=========== ===========
See accompanying notes.
3
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Three Months Ended June 30, 1999 and 2000
(Unaudited)
1999 2000
---- ----
Costs and expenses:
Research and development (Note 4) $ 376,219 $ 992,252
General and administrative (Note 4) 955,536 915,873
Rent-related party 1,200 2,400
Depreciation and amortization 10,090 12,397
----------- -----------
Operating loss (1,343,045) (1,922,922)
Other income (expense):
Interest income 10,526 224,699
Interest expense (1,662) -
----------- -----------
Total other income (expense) 8,864 224,699
----------- -----------
Net loss (Note 2) (1,334,181) (1,698,223)
Accrued dividends applicable to Series B
preferred stock (Note 3) (30,688) (27,562)
----------- -----------
Net loss applicable to common shareholders (1,364,869) $(1,725,785)
=========== ===========
Basic net loss per common share (Note 5) $ (.20) $ (.18)
=========== ===========
Weighted average common shares
outstanding (Note 5) 6,713,000 9,566,000
=========== ===========
See accompanying notes.
4
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999 and 2000
and for the Period from August 27, 1984 (inception) through June 30, 2000
(Unaudited)
Cumulative
amounts from
1999 2000 inception
---- ---- ------------
Costs and expenses:
Research and development (Note 4) $ 694,331 $ 1,490,275 $ 8,087,685
General and administrative (Note 4) 1,713,651 1,722,889 7,349,528
Rent-related party 1,200 4,800 23,114
Depreciation and amortization 19,793 27,567 150,083
----------- ----------- -----------
Operating loss (2,428,975) (3,245,531) (15,610,410)
Other income (expense):
Interest income 13,331 269,110 358,736
Interest expense (1,662) - (242,811)
----------- ----------- -----------
Total other income (expense) 11,669 269,110 115,925
----------- ----------- -----------
Net loss (Note 2) (2,417,306) (2,976,421) (15,494,485)
Accrued dividends applicable to Series
B preferred stock (Note 3) (61,376) (56,375) (231,935)
----------- ----------- -----------
Net loss applicable to common
shareholder $(2,478,682) $(3,032,796) $(15,726,420)
=========== =========== ============
Basic net loss per common share
(Note 5) $ (.39) $ (.35) $ (2.88)
=========== =========== ============
Weighted average common shares
outstanding (Note 5) 6,359,000 8,595,000 5,470,000
=========== =========== ============
See accompanying notes.
5
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
For the Period from January 1, 2000 through June 30, 2000
(Unaudited)
Deficit
accumulated
Additional Unearned during the
Common stock paid-in stock development
Shares Amount capital compensation stage
--------- ------ ----------- ------------ -------------
Balance, December 31, 1999 7,382,280 $7,382 $13,866,412 $(3,218,293) $(12,640,814)
Amortization of unearned stock
compensation (Note 4) - - - 1,326,840 -
Repurchase of 101,681 stock warrants
for cash (Note 4) - - (330,000) - -
Issuance of common stock pursuant to
public offering (Note 4) 2,000,000 2,000 12,484,138 - -
Shares of stock issued for services 900 1 3,599 - -
Overallotment of common stock pursuant
to public offering (Note 4) 180,000 180 1,184,656 - -
Common stock issued in conversion
of Preferred B shares 5,000 5 23,708 - -
Issuance of stock options to directors - - 120,000 (120,000) -
Net loss for the six months ended
June 30, 2000 - - - - (2,976,421)
--------- ------ ----------- ----------- ------------
Balance, June 30, 2000 9,568,180 $9,568 $27,352,513 $(2,011,453) $(15,617,235)
========= ====== =========== =========== ============
See accompanying notes.
6
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 2000
and for the Period from August 27, 1984 (inception) through June 30, 2000
(Unaudited)
Cumulative
amounts
from
1999 2000 inception
---- ---- ---------
Cash flows from operating activities:
Net loss $(2,417,306) $(2,976,421) $(15,494,485)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 19,793 27,567 150,083
IBC partner royalty agreement 7,144 7,144 191,215
Services contributed in exchange for
stock and stock options 1,571,627 1,330,440 6,791,414
Services contributed in exchange for
compensation agreements - - 2,231,678
Increase (decrease) in accounts
payable - related party (71,106) (95,013) 28,750
Advances to related party - (256) (256)
Increase (decrease) in accounts
payable 402,129 168,895 367,937
Increase in accrued interest - (143,266) 25,873
Other 1,662 (19,343) (17,550)
---------- ----------- -----------
Total adjustments 1,931,249 1,276,168 9,769,144
---------- ----------- -----------
Net cash used in operations (486,057) (1,700,253) (5,725,341)
Cash flows from investing activities:
Purchase of property and equipment (net) (5,632) (9,885) (112,384)
Patent costs (25,117) (6,705) (409,874)
Deposits - (1,052) (13,313)
Certificates of deposit - (8,542,570) (8,542,570)
---------- ----------- -----------
Net cash used in investing activities (30,749) (8,560,212) (9,078,141)
Cash flows from financing activities:
Proceeds from recapitalization - - 220,100
Deferred stock offering costs (30,436) - -
Proceeds from sale of common stock (net) 1,997,817 13,840,399 18,271,414
Proceeds from exercise of stock options 32,000 - -
Proceeds from sale of preferred stock
(net) - - 1,142,750
Repurchase of warrants - (330,000) (330,000)
Proceeds from stockholder loans - - 809,678
Proceeds from stockholder advances - - 98,873
Repayments of stockholder advances - - (98,873)
Proceeds from convertible notes payable 200,000 - 200,000
---------- ----------- -----------
Net cash provided by financing
activities 2,199,381 13,510,399 20,313,942
---------- ----------- -----------
Net increase in cash 1,682,575 3,249,934 5,510,460
Cash and cash equivalents at beginning
of period 445,333 2,260,526 -
---------- ----------- -----------
Cash and cash equivalents at end of
period $2,127,908 $ 5,510,460 $ 5,510,460
========== =========== ===========
(Continued on following page)
See accompanying notes.
7
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 2000
and for the Period from August 27, 1984 (inception) to June 30, 2000
(Unaudited)
(Continued from preceding page)
Supplemental disclosure of non-cash investing and financing activities:
During the six months ended June 30, 2000, the Company issued 900 shares of
common stock for services totaling $3,600.
During the six months ended June 30, 2000, the Company also issued 5,000
shares of common stock in a conversion from preferred B shares totaling
$23,713.
See accompanying notes.
8
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
The accompanying financial statements of the Company have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB. Certain notes and other
information have been condensed or omitted from the interim financial statements
presented in this report. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the financial
statements reflect all adjustments considered necessary for a fair presentation.
The results of operations for the six months ended June 30, 1999 and 2000 are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 1999 as filed with the Securities and Exchange Commission.
1. Organization and selected accounting policies
Organization:
Entropin, Inc., a Colorado corporation, was organized as a California
corporation in August 1984, to be a pharmaceutical research company
developing Esterom(R) solution, a topically applied compound for the
treatment of impaired range of motion associated with acute lower back sprain
and acute painful shoulder. The Company is considered to be a development
stage enterprise as more fully defined in Statement No. 7 of the Financial
Accounting Standards Board. Activities from inception include research and
development, seeking the U.S. Food and Drug Administration (FDA) approval for
Esterom(R) solution, as well as fund raising.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of cash, cash equivalents and certificates
of deposit. The Company places its cash with high quality financial
institutions. At times during the periods, the balances at financial
institutions may exceed FDIC limits.
Stock-based compensation:
The Company has adopted Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation. Compensation costs for stock
options is measured as the excess, if any, of the fair value of the options
at date of grant over the exercise price.
9
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
2. Income taxes
At June 30, 2000, the Company has net operating loss carryforwards of
approximately $4,716,000 and future tax deductions of $8,273,000 which may be
used to offset future taxable income. The future tax deductions result from
utilizing the cash basis for income tax reporting purposes and unearned stock
compensation. The difference between the tax loss carryforwards and future
tax deductions and the cumulative losses from inception result from the
losses previously incurred by the Company as an S corporation. The net
operating loss carryforwards expire in 2018, 2019 and 2020. Approximately
$250,000 of the net operating loss carryforward is limited as to the amount
which may be used in any one year. At December 31, 1999 and June 30, 2000,
total deferred tax assets and valuation allowance are as follows:
1999 2000
---- ----
Net operating loss carryforwards $ 596,000 $ 1,820,107
Accrual to cash adjustments 874,000 875,000
Unearned stock compensation 787,000 2,020,566
---------- -----------
Total 2,257,000 4,715,673
(2,257,000) (4,715,673)
----------- -----------
$ - $ -
=========== ===========
A 100% valuation allowance has been established against the deferred tax
assets, as utilization of the loss carryforwards and realization of other
deferred tax assets cannot be reasonably assured.
3. Redeemable preferred stock
At the Company's election, the annual dividends on the Series B preferred
stock were paid in shares of the Company's common stock valued at $5.00 per
share at July 15, 1999. Dividends are added to net loss in determining net
loss per common share.
10
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
4. Stockholders' equity
Completion of public offering:
On March 20, 2000, the Company completed a secondary public offering. The
Company received net proceeds of approximately $12,500,000 (net of offering
expenses of approximately $2,000,000) from the sale of 2,000,000 shares of
common stock and 2,000,000 redeemable common stock purchase warrants. The
warrants are exercisable at $10.50 per share at any time until March 14,
2005. After March 14, 2001, under certain conditions, the warrants are
redeemable at $.25 per warrant (see Note 7). The Company also issued to the
underwriter warrants to purchase up to 200,000 shares at an exercise price of
$8.75 per share and to purchase up to 200,000 warrants to purchase 200,000
shares at $.30 per warrant. On May 1, 2000, the Company received net proceeds
of $1,184,836 from the overallotment sale of 180,000 shares of common stock
and 300,000 warrants. The warrants carry the same terms as those sold in the
public offering.
Other common stock transactions:
On March 9, 2000, the Company entered into an agreement with an organization
to cancel a 101,681 share stock warrant agreement issued in September 1999 in
connection with private placements of common stock. The Company paid $330,000
cash as consideration for cancellation of the warrant agreement.
Stock options and warrants:
The following is a summary of stock option activity:
Options exercisable
Option Wtd.avg. Wtd. avg.
price per exercise Number exercise Number of
share price of shares price shares
Balance December 31,
1999 $1.50 to $5.00 $3.42 2,616,001 $3.44 1,739,337
Granted $6.00 $6.00 40,000 $6.00 10,000
Exercised $0.00 $0.00 - - -
----- ----- --------- ----- ---------
Balance June 30,
2000 $1.50 to $5.00 $3.46 2,656,001 $3.46 1,749,337
========= =========
11
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
4. Stockholders' equity (continued)
The following is additional information with respect to those options
outstanding at June 30, 2000:
Wtd.avg.remaining Number Options
Option price per share contractural life in years of shares exercisable
---------------------- -------------------------- --------- -----------
$1.50 2.85 450,000 75,000
$2.80 2.55 180,001 180,001
$3.00 5.75 625,000 550,003
$4.00 3.75 901,000 901,000
$5.00 4.35 460,000 33,333
$6.00 4.75 40,000 10,000
---------- ---------
2,656,001 1,749,337
========= =========
The following is a summary of stock warrant activity:
Warrant price Number
per share of shares
------------- ---------
Balance December 31, 1999 $3.00 to $5.00 1,005,181
Granted $8.75 to $10.50 2,500,000
Repurchased $4.00 (101,681)
Exercised $0.00 -
----- ---------
Balance June 30, 2000 $3.00 to $10.50 3,403,500
=========
Unearned stock compensation:
At June 30, 2000, the Company had outstanding an aggregate of 6,059,501
options and warrants of which 1,070,000 were at purchase prices lower than
fair value of the stock at date of grant, including the 450,000 stock options
granted to Western Center for Clinical Studies, Inc. (see Note 6). The excess
of the fair value of the options and warrants, using the Black-Scholes option
pricing model, over the exercise price has been recorded as additional
paid-in capital and unearned stock compensation. Unearned compensation is
being amortized to research and development and general and administrative
expense over the term of the related agreements, as follows:
Six Months Ended Cumulative
June 30, amounts from
1999 2000 inception
Research and development $ 353,193 $ 354,612 $1,565,836
General and administrative 1,204,391 972,228 4,207,211
---------- ---------- ----------
$1,557,584 $1,326,840 $5,773,047
========== ========== ==========
12
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
5. Basic and diluted net loss per share
Basic net loss per share is based on the weighted average number of shares
outstanding during the periods. Shares issued for nominal consideration are
considered outstanding since inception. Diluted loss per share excludes
dilution from common stock equivalents, as exercise of the outstanding stock
options and warrants would have an anti-dilutive effect. The 10% cumulative
dividends on Series B preferred stock have been accrued and added to net loss
for the purpose of determining net loss and net loss per share applicable to
common shareholders.
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 I.B.C. Limited Partnership.
Compensation under the agreement includes a bonus payment of $96,420 to be
paid at the time the Company is reimbursed by a drug company for expenses
incurred for development of the medicine, as well as 64.28% of a decreasing
payment rate (3% to 1% of the Company's annual sales) on cumulative annual
royalties received by the Company. As of June 30, 2000, no liabilities have
been accrued with respect to this agreement.
In a separate agreement with certain former I.B.C. limited partners, the
Company has agreed to pay the partners 35.72% of a decreasing earned payment
(3% to 1% of the Company's annual sales) until October 10, 2004. From October
10, 2004 until October 10, 2014, the Company has agreed to pay the partners
17.86% of the earned payment. In accordance with the agreement, the Company
has agreed to pay these former limited partners a one-time payment of $40,000
and a minimum earned payment of $3,572 per calendar quarter beginning on
December 1, 1989. These amounts become payable when the Company is reimbursed
for expenses incurred for the development of the medicine, or from the first
income received by the Company from net sales of the medicine. The quarterly
payments are to be applied against the earned payment to be received by the
limited partners. As of June 30, 2000, the total liability accrued with
respect to this agreement was $191,215. The Company will receive a credit
against the earned payments of 50% of monies which are expended in connection
with preparing, filing, obtaining, and maintaining patents involved with the
sold rights.
Management agreements:
During April 1998, the Company entered into an agreement with Western Center
for Clinical Studies, Inc. (WCCS), to provide assistance in taking Esterom(R)
solution through the clinical trials and New Drug Application(NDA) approval
process. The agreement was subsequently amended on July 21, 1999. The Company
is required to pay management fees of $880,400 through January 5, 2001 and
$76,400 per quarter commencing January 2001 and continuing until NDA
submission. The Company also has granted stock options to WCCS to purchase
450,000 shares of Entropin common stock at $1.50 per share. WCCS subsequently
assigned options to purchase 16,667 shares of common stock to its employees
and consultants. The options will expire five years from the date they become
exercisable. The shares underlying the options are also provided with certain
registration rights.
13
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
June 30, 2000
6. Commitments and contingencies
In August 1999, the Company entered into an agreement with Therapeutic
Management, Inc. to provide clinical trial management services and monitor
all aspects of Esterom(R)'s Phase III clinical studies. In November 1999, the
Company entered into an agreement with WCCS to assume the Company's
obligations under the Therapeutic Management agreement. The Company will pay
WCCS approximately $350,000 based upon completion of certain project goals.
7. Subsequent events
On July 14, 2000, the Company elected to pay annual dividends of $112,750 on
the Series B preferred stock by issuing 22,500 shares of its $.001 par value
common stock, valued at $5.00 per share.
In July 2000, upon completion of enrollment in the Phase IIIA clinical trial,
the Company terminated its agreements with WCCS. The terms of this
termination agreement include a final payment of $71,600 and the issuance of
an option to purchase 75,000 shares of Entropin, Inc. common stock at $1.50
per share and an option to purchase 90,000 shares of Entropin common stock at
$2.50 per share. A previously issued option to purchase 433,333 shares of
Entropin common stock at $1.50 per share was cancelled as part of this
termination agreement. The Company has also agreed to leave WCCS leasehold
improvements, office furniture and equipment and a deposit with a net book
value of $59,614 at June 30, 2000.
In July 2000, the Company executed a letter of intent with Glenmere Clinical
Research (GCR) to provide the continuing depth of assistance and expertise
required to manage the remaining clinical and regulatory processes of
preparing, submitting, filing and finalizing approval of a New Drug
Application for Esterom(R). GCR will replace WCCS during our Phase III
clinical trials.
14
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We were incorporated in California in 1984 as Entropin, Inc. ("old
Entropin"), and in 1998, completed an agreement and plan of merger with
Vanden Capital Group, Inc. to exchange all of the issued and outstanding
common shares of old Entropin for 5,220,000 shares of Vanden's common
stock. We were merged into Vanden, and Vanden changed its name to
Entropin, Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost, with old
Entropin as the acquirer. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
From our inception in August 1984, we have devoted resources primarily to
funding our research and development efforts. We have been unprofitable
since inception and have had no revenue from the sale of products or
other resources, and do not expect revenue for the next two years, or
until Esterom(R) solution has received FDA approval. We expect to
continue to incur losses for the foreseeable future through the
completion of our Phase III clinical trials and the New Drug Application
process. As of June 30, 2000, our accumulated deficit was approximately
$15.6 million.
PLAN OF OPERATION
In March 2000, we raised $12.5 million through a successful secondary
offering. In May 2000, we raised an additional $1.2 million through the
sale of the underwriter's over-allotment. We intend to use a substantial
portion of these funds to finance part two of our Phase III clinical
trials, our New Drug Application process related to the treatment of
acute painful shoulder, and to provide funds for research and development
and working capital. In the future, we plan to seek FDA approval to
market Esterom(R) solution for the treatment of impaired range of motion
associated with lower back pain and identify and develop other medical
applications for Esterom(R) solution, such as applications for arthritis
and other joint disorders. We intend to minimize our fixed costs by
outsourcing clinical studies, regulatory activities, manufacturing and
sales and marketing.
RESULTS OF OPERATIONS
During the six months ended June 30, 2000, Entropin incurred a net loss
of $2,976,421 compared to $2,417,306 for the six months ended June 30,
1999. Research and development ("R&D") expenses were $1,490,275 for the
six months ended June 30, 2000, compared to $694, 331 for the six months
ended June 30, 1999. The $795,944 increase in research and development
expenses resulted primarily from expenditures associated with our Phase
IIIA clinical trial. This expense was partially offset by an increase in
interest income from $13,331 for the six months ended June 30,1999 to
$269,110 for the six months ended June 30, 2000. The increase in
interest income resulted from larger cash and cash equivalent balances
during 2000 reflecting the proceeds from our successful secondary
offering in late March. R&D and G&A for the six months ended June 30,
2000, included expenses of $354,612 and $972,228, respectively, related
to the amortization of non-cash compensation associated with stock
options issued for services rendered.
15
During the three months ended June 30, 2000, Entropin incurred a net loss
of $1,698,223 compared to $1,334,181 for the three months ended June 30,
1999. The increase resulted primarily from an increase of $616,033 in
research and development expenses related to the funding of our Phase
IIIA clinical trial. This expense was partially offset by a $214,173
increase in interest income.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the net
proceeds generated from the sale of our common and preferred stock, and
through loans and advances from stockholders that were subsequently
converted into equity securities. From inception through June 30, 2000,
we have received net cash proceeds from these financing activities
aggregating approximately $ 20.3 million. As of June 30, 2000, our
working capital was $13,819,208. On March 20, 2000, we completed a
secondary public offering generating net proceeds of approximately $12.5
million from the sale of 2,000,000 shares of common stock and warrants.
On May 1, 2000, we received approximately $1.2 million from the
overallotment sale of 180,000 shares of common stock and 300,000 warrants.
Our liquidity and capital needs relate primarily to working capital,
research and development of Esterom(R) solution, and other general
corporate requirements. We have not received any cash from operations
since inception. Based on our current plans, we believe the proceeds from
our secondary offering and overallotment will provide sufficient capital
resources to fund our operations through the NDA approval process.
Expectations about our long-term liquidity may prove inaccurate if
approval for Esterom(R) solution is delayed or not obtained. We will not
generate revenue from sales of Esterom solution unless Esterom solution
is approved by the FDA for marketing.
Net cash used in operating activities was $1,700,253 during the first six
months of 2000 compared with $486,057 during the first six months of
1999. The cash used in operations was primarily related to funding our
Phase IIIA clinical trial, expansion of research and development
activities, and establishing an administrative infrastructure.
As of June 30, 2000, our principal source of liquidity was approximately
$14.1 million in cash, cash equivalents and certificates of deposits.
In May 2000, we entered into an agreement with Quintiles, Inc., a
Contract Research Organization (CRO) to conduct statistical analysis of
the data collected during the course of our Phase IIIA clinical trial and
to prepare a written report summarizing the results of the trial. The
cost to perform this statistical analysis and medical writing will
approximate $215,000.
In July 2000, upon completion of enrollment in our Phase IIIA clinical
trial, Entropin terminated its agreements with Western Center for
Clinical Studies (WCCS). The termination agreement included a final
payment of $71,600 and the issuance of an option to purchase 75,000
shares of Entropin, Inc. common stock at $1.50 per share and an option to
purchase 90,000 shares of Entropin common stock at $2.50 per share. A
previously issued option to purchase 433,333 shares of Entropin common
stock at $1.50 per share was cancelled as part of the termination
agreement. The Company has also agreed to leave WCCS with assets which
had a net book value of $59,614 at June 30, 2000. These assets comprise
leasehold improvements, office furniture and equipment, and a security deposit.
16
In July 2000, we executed a letter of intent with a CRO, Glenmere
Clinical Research, who will provide the depth of knowledge and expertise
required to manage the remaining clinical and regulatory processes of
preparing, submitting, filing and finalizing approval of a New Drug
Application for Esterom(R).
On July 15, 2000, Entropin issued 22,550 shares of common stock as
payment of the annual dividends accrued on our Series B preferred stock
in accordance with the terms of our July 1998 private placement of
245,500 shares of Series B preferred stock at $5.00 per share. The
Series B preferred stock is designated as redeemable 10% cumulative
non-voting convertible preferred stock with $.001 par value. Dividends
accrue at the rate of $.50 per share per annum and are to be paid
annually in arrears commencing July 15, 1998. At Entropin's election,
annual dividends may be paid in cash and/or in shares of Entropin's
common stock valued at $5.00 per share.
Our operating expenses will increase as we proceed with part two of our
Phase III clinical trials through the New Drug Application and the
related FDA approval process. The estimated period for which we expect
available sources of cash to be sufficient to meet our funding needs is a
forward-looking statement that involves risks and uncertainties. In the
event that our capital requirements are greater than estimated, we may
need to raise additional capital to fund our research and development
activities. Our future liquidity and capital funding requirements will
depend on numerous factors, including the timing of regulatory actions
for Esterom(R) solution, the cost and timing of sales, marketing and
manufacturing activities, the extent to which Esterom(R) solution gains
market acceptance, and the impact of competitors' products. There can be
no assurance that such additional capital will be available on terms
acceptable to us, if at all. If adequate funds are not available, we may
be forced to significantly curtail operations or to obtain funds through
entering into collaborative agreements or other arrangements that may be
on unfavorable terms. Our failure to raise capital on favorable terms
could have a material adverse effect on business, financial condition or
results of operations.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings which management
believes to be material, and there are no such proceedings which are
known to be contemplated.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
During the reporting period, the Registrant did not issue any
securities that were not registered under the 1933 Act. For securities
issued prior this reporting period, such information about the sales of
unregistered securities is incorporated by reference to Item 26 of the
Registrant's Post-Effective Amendment No.1 to Form SB-2 Registration
Statement filed on March 22, 2000 under registration No. 333-11308.
USE OF PROCEEDS
Pursuant to a Registration Statement, Registration No. 333-11308,
which became effective on March 14, 2000, the Registrant sold for an
aggregate market price of $14,500,000 on March 20, 2000, 2,000,000
shares of common stock at $7.00 per share, and 2,000,000 warrants to
purchase 2,000,000 shares of common stock at $0.25 per warrant. All
offering expenses, including underwriting discounts and commissions,
finders' fees, and other underwriting expenses, are estimated to be
$2,000,000 which was paid to the underwriters. After deduction of
offering expenses, Registrant obtained net proceeds of approximately
$12.5 million. On May 1, 2000, the Managing Underwriter exercised its
over-allotment option, for an aggregate price of $1,335,000, to purchase
an additional 180,000 shares of common stock at $7.00 per share, and an
additional 300,000 warrants to purchase 300,000 shares of common stock at
$0.25 per warrant. After deduction of over-allotment expenses of
approximately $135,000, the Registrant obtained net proceeds of
approximately $1.2 million.
Since the Secondary Ofering the net proceeds have been used as
follows: $405,334 for General and Administrative and Working Capital,
$919,425 for Phase III clinical trials and the research and development
required thereby, $2,318,641 is currently maintained in a money market
account for additional working capital and Phase III clinical trials, and
$10,027,575 is currently held in temporary investments pursuant to
Prospectus dated March 14, 2000. None of the proceeds have been applied
to the New Drug Application and are not scheduled for such use until
completion of the Phase III clinical trials. As part of the General and
Administrative Expenses, the Registrant's directors have been compensated
directly in an aggregate amount of $15,000; the Registrant's officers
have directly received $57,712; and Thomas Anderson, who owns more than
10% of the Registrant's securities, indirectly received $2,400 in the
form of rent for the Registrant's office
18
space which was paid to the Law Offices of Thomas Anderson. All other
payments made to other persons or entities were direct payments.
ITEM 4. RESULTS OF SHAREHOLDERS VOTE.
An Annual Meeting of the shareholders of Entropin, Inc. was held in
Denver, Colorado on June 14, 2000. The shareholders approved each of the
following actions presented below together with the results of voting;
The shareholders approved an amendment to Registrant's Articles of
Incorporation to provide for three classes of directors, each class
consisting as nearly as possible of one-third of the Board. One of the
three classes is to be elected in each year as follows: two "Class I
Directors" will be elected for a term expiring at the 2001 Annual
Meeting; three "Class II Directors" will be elected for a term expiring
at the 2002 Annual Meeting; and two "Class III Directors" will be elected
for a term expiring at the 2003 Annual Meeting. Initially, members of all
three classes were elected at the June 14, 2000 Annual Meeting. At
each annual meeting thereafter only directors of the class whose term is
expiring would be voted upon, and upon election each such director would
serve a three-year term. 5,689,162 shareholders voted for the proposal,
66,789 voted against, and 10,603 abstained.
Seven directors were elected at the June 14, 2000 Annual Meeting and
the Board of Directors were divided into three classes with staggered
terms of office. The initial classification of the Board is as follows:
the Class I directors, Daniel L. Azarnoff, M.D. and Donald Hunter, will
serve until date of the 2001 Annual Meeting of Shareholders; the Class II
directors, Wilson Benjamin, Joseph Ianelli and James E. Wynn, Ph.D., will
serve until the date of the 2002 Annual Meeting of Shareholders; and the
Class III directors, Higgins D. Bailey, Ed.D. and Thomas G. Tachovsky,
Ph.D., will serve until the date of the 2003 Annual Meeting of
Shareholders. 8,055,244 shareholders voted for the proposal, 31,684
against, and 13,080 abstained.
Under the third proposal, both the Compensatory Stock Plan and the
amendment to increase the number of shares available under that plan to
500,000 shares of Common Stock were ratified by Shareholders.
Shareholder ratification of the Plan was required to allow options
granted under the Plan to be "Qualified Options." 7,119,240
shareholders voted for the proposal, 958,013 against, and 22,755
abstained.
Finally, the shareholders ratified the selection of Causey, Demgen &
Moore, Inc. as the independent auditors of the Registrant for the year
ending December 31, 2000. 8,067,737 shareholders voted for the proposal,
17,100 against, and 15,171 abstained.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
Exhibit 10.12 Termination Agreement dated as of July 10,
2000 by and between Entropin, Inc. and
Western Center for Clinical Studies, Inc.,
terminating that certain Agreement dated
April 6, 1998 by and between Entropin,
Inc.and the Western Center for Clinical
Studies, Inc. filed under like numbered
exhibit with Entropin, Inc.'s Current
Report on Form 8-K, dated April 23, 1998.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
During the last quarter covered by this Report, the Registrant
filed a Current Report on Form 8-K dated July 25, 2000 regarding the
resignation of Daniel Azarnoff as a member of the Board of Directors and
the appointment of Paul Maier to fill his position. Also, a Current
Report on Form 8-K dated July 26, 2000 was filed regarding the
termination of the Agreement with Western Center for Clinical Studies,
Inc. and the letter of intent to engage Glenmere Clinical Research, Inc.
to provide assistance and expertise for the remaining clinical and
regulatory processes of preparing, submitting, filing and finalizing
approval of a New Drug Application for Esterom (R).
SIGNATURES
In accordance with the requirements of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENTROPIN, INC.
Date: August 14, 2000 By:/s/ HIGGINS D. BAILEY
----------------------------
Higgins D. Bailey
Chairman of the Board
Date: August 14, 2000 By:/s/ PARTICIA G. KRISS
----------------------------
Patricia G. Kriss
Chief Financial Officer
20