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 MARCH 31, 2001
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ________
Commission file number 33-23693
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ENTROPIN, INC
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(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
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(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
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As of May 11, 2001, 9,706,777 shares of the issuer's Common Stock, $.001
par value per share were outstanding.
Transitional Small Business Disclosure Format Yes No X
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INDEX
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PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Balance Sheets - December 31, 2000 and March 31, 2001
(unaudited) 2
Statements of Operations - For the Three Months Ended
March 31, 2000 and 2001 and for the Period from
August 27, 1984 (Inception) through March 31, 2001
(unaudited) 3
Statements of Changes in Stockholders' Equity - For
the Three Months Ended March 31, 2001 (unaudited) 4
Statements of Cash Flows - For the Three Months Ended
March 31, 2000 and 2001 and for the Period from
August 27, 1984 (Inception) through March 31, 2001
(unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 11
PART I. ITEM 1.
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 2000 AND MARCH 31, 2001
(UNAUDITED)
December 31, March 31,
ASSETS 2000 2001
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 6,018,187 $ 6,759,076
Short-term investments 5,821,069 4,499,516
Accrued interest receivable 231,639 179,879
Prepaid insurance - 78,316
------------ ------------
Total current assets 12,070,895 11,516,787
Patent costs, less accumulated amortization of
$106,671 (2000) and $113,095 (2001) 324,495 323,762
Property and equipment, net 7,601 6,691
Other 3,000 3,000
------------ ------------
$ 12,405,991 $ 11,850,240
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 271,035 $ 111,690
Series A redeemable preferred stock, $.001 par value;
3,210,487 shares authorized, issued and outstanding,
$1.00 per share redemption value 3,210,487 3,210,487
Series B redeemable convertible preferred stock, $.001 par
value; 400,000 shares authorized, 190,500 (2000) and
185,500 (2001) shares issued and outstanding, $5.00
per share redemption value 919,618 895,905
Stockholders' equity:
Common stock, $.001 par value; 50,000,000 shares
authorized, 9,688,424 (2000) and 9,706,777 (2001)
shares issued and outstanding 9,688 9,706
Additional paid-in capital 28,241,664 28,465,477
Unearned stock compensation (87,436) (164,148)
Deficit accumulated during the development stage (20,159,065) (20,678,877)
------------ ------------
Total stockholders' equity 8,004,851 7,632,158
------------ ------------
$ 12,405,991 $ 11,850,240
============ ============
See accompanying notes to financial statements.
2
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
AND FOR THE PERIOD FROM AUGUST 27, 1984 (INCEPTION)
THROUGH MARCH 31, 2001
(UNAUDITED)
Inception through
2000 2001 March 31, 2001
---- ---- --------------
Costs and expenses:
Research and development $ 394,033 $ 309,025 $ 9,639,464
General and administrative 933,063 390,854 10,905,984
------------ ------------ ------------
Operating loss (1,327,096) (699,879) (20,545,448)
------------ ------------ ------------
Other income (expense):
Interest income 44,411 180,067 958,631
Interest expense - - (242,811)
------------ ------------ ------------
Total other income (expense) 44,411 180,067 715,820
------------ ------------ ------------
Net loss (1,282,685) (519,812) (19,829,628)
Dividends applicable to
preferred stockholders (28,813) (23,188) (917,123)
------------ ------------ ------------
Net loss applicable to common
stockholders $ (1,311,498) $ (543,000) $(20,746,751)
============ ============ ============
Basic and diluted net loss per
common share $ (.17) $ (.06) $ (3.67)
============ ============ ============
Weighted average common shares
outstanding 7,646,000 9,711,000 5,660,000
============ ============ ============
See accompanying notes to financial statements.
3
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 2001 THROUGH MARCH 31, 2001
(UNAUDITED)
Deficit
accumulated
Additional Unearned during the Total
Common stock paid-in stock development stockholders'
Shares Amount capital compensation stage equity
--------- ------ ------- ------------ ------ ------
Balance, January 1, 2001 9,688,424 $ 9,688 $28,241,664 $ (87,436) $(20,159,065) $ 8,004,851
Unearned stock compensation pursuant to
issuance of common stock options - - 168,576 (168,576) - -
Amortization and valuation adjustment of
unearned stock compensation - - - 91,864 - 91,864
Shares issued from exercise of options 195 - 292 - - 292
Shares issued for services 13,158 13 31,237 - - 31,250
Conversion of Series B preferred stock
to common stock 5,000 5 23,708 - - 23,713
Net loss for the period - - - - (519,812) (519,812)
--------- ------- ----------- ----------- ------------ -----------
Balance, March 31, 2001 9,706,777 $ 9,706 $28,465,477 $ (164,148) $(20,678,877) $ 7,632,158
========= ======= =========== =========== ============ ===========
See accompanying notes to financial statements.
4
ENTROPIN, INC.
(A DEVELOPMENT STATE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 2001
AND FOR THE PERIOD FROM AUGUST 27, 1984 (INCEPTION)
THROUGH MARCH 31, 2001
(UNAUDITED)
Inception through
2000 2001 March 31, 2001
---- ---- --------------
Cash flows from operating activities:
Net loss $ (1,282,685) $ (519,812) $(19,829,628)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 15,170 7,334 134,383
Provision under deferred royalty
agreement 3,572 - -
Services received in exchange for
stock, stock options and warrants 660,407 123,101 8,939,338
Services received in exchange for
compensation agreements - - 2,231,678
(Increase) decrease in accrued
interest receivable (32,536) 51,760 (10,740)
Increase (decrease) in accounts
payable 95,667 (159,345) 111,690
Other (105,764) (78,316) (90,029)
------------ ------------ ------------
Net cash used in operating
activities (646,169) (575,278) (8,513,308)
------------ ------------ ------------
Cash flows from investing activities:
(Purchase) maturities of short-term
investments, net (6,503,000) 1,321,553 (4,499,516)
Patent costs (6,706) (5,691) (436,857)
Purchase of property and equipment (3,168) - (112,670)
------------ ------------ ------------
Net cash (used in) provided by
investing activities (6,512,874) 1,315,862 (5,049,043)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from shares issued pursuant
to recapitalization - - 220,100
Net proceeds from issuance of common
stock and warrants 12,658,263 305 18,278,899
Proceeds from issuance of preferred
stock - - 1,142,750
Proceeds from stockholder loans - - 809,678
Proceeds from stockholder advances - - 98,873
Repayments of stockholder advances - - (98,873)
Payment for cancellation of common
stock warrants (330,000) - (330,000)
Proceeds from convertible notes payable - - 200,000
------------ ------------ ------------
Net cash provided by financing
activities 12,328,263 305 20,321,427
------------ ------------ ------------
Net increase in cash and cash equivalents 5,169,220 740,889 6,759,076
Cash and cash equivalents at beginning
of period 2,260,526 6,018,187 -
------------ ------------ ------------
Cash and cash equivalents at end
of period $ 7,429,746 $ 6,759,076 $ 6,759,076
============ ============ ============
See accompanying notes to financial statements.
5
ENTROPIN, INC.
(A DEVELOPMENT STATE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying financial statements of Entropin, Inc. (the "Company")
have been prepared in accordance with accounting principles generally
accepted in the United States of America 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 accounting principles
generally accepted in the United States of America 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, 2000 and 2001 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, 2000 as filed with the Securities and Exchange
Commission.
1. Organization and selected accounting policies
---------------------------------------------
Organization:
The Company, a Colorado corporation, was organized as a California
corporation in August 1984, to be 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, seeking the U.S. Food and
Drug Administration (FDA) approval for Esterom(R), as well as fund
raising.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that effect 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.
Cash equivalents and short-term investments:
The Company considers cash equivalents to include only highly liquid
securities with an original maturity of three months or less.
Investments with an original maturity of more than three months are
considered short-term investments and have been classified by
management as held-to-maturity. At March 31, 2001, the Company's
portfolio consisted of certificates of deposit that are carried at
amortized cost with an average remaining maturity period of 236 days.
6
Loss per share:
Net loss per common share is computed using the weighted average
number of common shares outstanding. Basic and diluted net loss per
common share amounts are equivalent for the periods presented as the
inclusion of common stock equivalents in the number of shares used for
the diluted computation would be anti-dilutive. Dividends on preferred
stock, consisting of 10% cumulative dividends and deemed dividends
related to the beneficial conversion feature and mandatory redemption
accretion of Series B preferred stock are added to net loss for the
purpose of determining net loss and net loss per share amounts
applicable to common stockholders.
Reclassifications:
Certain prior period amounts have been reclassified to conform with
the current period presentation.
7
PART 1. ITEM 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We were incorporated in California in 1984 as Entropin, Inc. (old
Entropin), and in 1998, completed an agreement and plan of merger with
Vanden Capital Group, Inc. to exchange all of the issued and outstanding
common shares of old Entropin for 5,220,000 shares of Vanden's common
stock. We were merged into Vanden, and Vanden changed its name to Entropin,
Inc. For accounting purposes, the acquisition was treated as a
recapitalization of old Entropin based upon historical cost, with old
Entropin as the acquirer. In conjunction with the merger, Entropin, Inc.
became a Colorado corporation.
From our inception in August 1984, we have devoted our resources
primarily to funding our research and development efforts. We have been
unprofitable since inception and have had no revenue from the sale of
products or other resources, and do not expect revenue for the next two
years, or until Esterom(R) 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 March 31, 2001, our accumulated deficit was approximately $20.7 million.
PLAN OF OPERATION
We raised approximately $13.7 million through a secondary offering and
the sale of the underwriter's over-allotment during the first half of 2000.
We intend to use these funds to complete the clinical trial program
associated with the FDA approval process for the treatment of acute painful
shoulder, as well as ancillary studies and the New Drug Application ("NDA")
process. In the future, we plan to seek FDA approval to market Esterom(R)
for the treatment of impaired range of motion associated with lower back
pain, and identify and develop other medical applications for Esterom(R)
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
Our research and development expense for the three months ended March
31, 2001, was $309,025, as compared to $394,033 for the three months ended
March 31, 2000. Our general and administrative expense for the three
months ended March 31, 2001 was $390,854, as compared to $933,063
for the three months ended March 31, 2000. These expenses include non-
cash compensation expense associated with stock options and warrants
granted in exchange for services as shown in the following table.
Three months ended March 31,
2000 2001
---- ----
Research and development $ 394,033 $ 309,025
Less non-cash compensation 73,316 7,089
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$ 320,717 $ 301,936
============ ============
General and administrative $ 933,063 $ 390,854
Less non-cash compensation 587,091 84,775
------------ ------------
$ 345,972 $ 306,079
============ ============
8
Research and development expense, excluding non-cash compensation
charges, during the three months ended March 31, 2001 was $301,936, as
compared to $320,717 for the same period in 2000. General and
administrative expense, excluding non-cash compensation charges, during the
three months ended March 31, 2001 was $306,079 as compared to $345,972 for
the same period in 2000. After excluding non-cash compensation charges,
research and development and general and administrative expenses were
comparable for the three month periods ended March 31, 2001 and 2000,
respectively.
Non-cash compensation charged to research and development during the
three months ended March 31, 2001 was $7,089, as compared to $73,316 for
the same period in 2000. Non-cash compensation charged to general and
administrative expense was $84,775 during the three months ended March 31,
2001, as compared to $587,091 for the same period in 2000. The decrease in
non-cash compensation charges reflects the declining value of stock options
granted in exchange for services as the underlying stock price declined and
the options vested and were fully expensed.
Our interest income was $180,067 for the three months ended March
31, 2001, as compared to $44,411 for the same period in 2000. This
increase resulted from larger cash, cash equivalent and short-term
investment balances during 2001 reflecting the investment of proceeds from
our secondary public offering completed in May 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations since inception primarily through the
net proceeds generated from the sale of our common and preferred stock, and
through loans and advances from stockholders that were subsequently
converted into equity securities. From inception through March 31, 2001, we
have received net cash proceeds from financing activities aggregating
approximately $20.5 million from these transactions. As of March 31, 2001,
our working capital was approximately $11.4 million.
Our liquidity and capital needs relate primarily to working capital,
research and development of Esterom(R), and other general corporate
requirements. We have not received any cash from operations since
inception. Based on our current plans, we believe the proceeds from our
secondary offering will provide sufficient capital resources to fund our
operations through the NDA approval process. Expectations about our
long-term liquidity may prove inaccurate if approval for Esterom(R) is
delayed or not obtained. We will not generate revenue from sales of
Esterom(R) unless it is approved by the FDA for marketing.
Net cash used in operating activities was approximately $575,000
during the three months ended March 31, 2001, compared with $646,000 for
the same period in 2000. The cash used in operations was primarily related
to general operating expenses and expansion of research and development
activities.
As of March 31, 2001, our principal source of liquidity was
approximately $11.4 million in cash, cash equivalents and short-term
investments.
Our operating expenses can be expected to increase as we proceed with
the required clinical trials, the New Drug Application and other related
stages of the FDA approval process. In the event our capital requirements
are greater than estimated, we may need to raise additional capital to fund
our research and development activities. Our future liquidity and capital
funding requirements will depend on numerous factors, including the timing
of regulatory actions for Esterom(R), the cost and timing of sales,
marketing and manufacturing activities, the extent to which Esterom(R)
gains market acceptance, and the impact of competitors' products. There
can be no assurance that such additional capital will be available on terms
acceptable to us, if at all. If adequate funds are not available, we may
be forced to significantly curtail our operations or to obtain funds
through entering into collaborative agreements or other arrangements that
may be on unfavorable terms. Our failure to raise capital on favorable
terms could have a material adverse effect on our business, financial
condition or results of operations.
9
PART II.
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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 by any governmental authority.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
RECENT SALES OF UNREGISTERED SECURITIES
During the reporting period, the Company has issued the following
unregistered securities:
In March, 2001, Pam Kapustay, an employee of a consultant to the
Company exercised options for an aggregate of 195 shares of the Company's
common stock at $1.50 per share. The Company claims the exemption from
registration provided by Section 4(2) of the 1933 Act.
In February, 2001, the holders of 5,000 shares of the Company's
Series B preferred stock converted their shares into 5,000 shares of the
Company's common stock. The issuance of the shares of common stock upon
the conversion is exempt from registration in that there was no sale of the
shares by the Company. Each holder of the Company's Series B preferred
stock represented that they received the shares for investment and not with
a view to distribution. All certificates were endorsed with a legend
restricting the sale or transfer of the securities except in accordance
with federal securities laws. Stop transfer instructions have been placed
against the transfer of these certificates by the Company's transfer agent.
For securities issued prior to this reporting period, such information
about the sales of unregistered securities is incorporated by reference to
Item 5 of the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2000 filed on May 15, 2001.
USE OF PROCEEDS
Pursuant to a Registration Statement, Registration No. 333-11308, which
became effective on March 14, 2000, the Company 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, the Company obtained
net proceeds of approximately $12.5 million. On May 1, 2000, the Managing
Underwriter exercised its overallotment 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
overallotment expenses of approximately $135,000, the Company obtained net
proceeds of approximately $1.2 million.
Since the Secondary Offering the net proceeds have been used as follows:
$1,210,348 for General and Administrative and Working Capital; $3,179,397
for Phase III clinical trials and the research and development required
thereby; $774,107 is currently maintained in a money market account for
additional working capital and Phase III clinical trials; and $10,484,485
is currently held in temporary investments
10
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 Company's directors have been compensated
directly in an aggregate amount of $105,556; the Company's officers have
directly received $209,116; and Thomas Anderson, who owns more than 10% of
the Company's securities, indirectly received $9,600 in the form of rent
for the Company's office 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no matters submitted to a vote of security holders during
the period of January 1, 2001 to March 31, 2001 through the solicitation of
proxies or otherwise.
ITEM 5. OTHER INFORMATION.
On May 4, 2001 the Company received the resignation of Dr. James Wynn from
his position as a director of the Company. The Company accepted his
resignation on May 11, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
None
(b) Reports on Form 8-K
-------------------
Prior to the filing of this Report, the Company filed the following
Current Reports on Form 8-K:
(a) Current Report on Form 8-K filed on February 5, 2001 regarding
the appointment of Randall L. Carpenter, M.D. to the Company's
Board of Directors;
(b) Current Report on Form 8-K filed on May 3, 2001 regarding an
update of clinical progress and the December 31, 2000 Financial
Results; and
(c) Current Report on Form 8-K filed on May 3, 2001 regarding a
notification received from Nasdaq and the temporary modification
of the Company's trading symbols.
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ENTROPIN, INC.
Date: May 11, 2001 By: /s/ HIGGINS D. BAILEY
----------------------------
Higgins D. Bailey
Chairman of the Board
Date: May 11, 2001 By: /s/ PATRICIA G. KRISS
----------------------------
Patricia G. Kriss
Chief Financial Officer
11