AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 2003
REGISTRATION NO. 333-110159
================================================================================
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 as Specified in its Charter)
DELAWARE 68-0150827
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
2833
(Primary Standard Industrial
Classification Code Number)
----------------
45926 OASIS STREET
INDIO, CALIFORNIA 92201
(760) 775-8333
(Address and Telephone Number of Principal Executive Offices and
Principal Place of Business)
----------------
THOMAS G. TACHOVSKY, PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ENTROPIN, INC.
45926 OASIS STREET
INDIO, CALIFORNIA 92201
(760) 775-8333
(Name, Address and Telephone Number of Agent for Service)
----------------
COPIES TO:
CRAIG S. ANDREWS, ESQ.
RYAN A. MURR, ESQ.
HELLER EHRMAN WHITE & MCAULIFFE, LLP
4350 LA JOLLA VILLAGE DRIVE, 7TH FLOOR
SAN DIEGO, CA 92122
(858) 450-8400
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
- --------------------------------------------------------------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) 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 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 this Form is a post-effective amendment filed pursuant to Rule 462(d) 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, 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 THAT SPECIFICALLY STATES THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DECEMBER 17, 2003
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THIS OFFERING IS BEING MADE ONLY TO INVESTORS IN COLORADO, ILLINOIS, MARYLAND,
NEW JERSEY, NEW YORK, SOUTH CAROLINA AND TEXAS AND ACCREDITED INVESTORS IN
ARIZONA, CALIFORNIA, INDIANA, IOWA, MICHIGAN, MISSISSIPPI AND OKLAHOMA. SEE
"INVESTOR SUITABILITY REQUIREMENTS" BEGINNING ON PAGE 38.
ENTROPIN, INC.
$3,000,000
COMMON STOCK
This is a "best efforts" offering to raise between $500,000 and $3,000,000
through the sale of up to 20,000,000 shares of Entropin, Inc. common stock. The
offering is expected to continue until February 13, 2004, although the offering
may be extended. Funds will be placed in escrow until the first purchase of at
least $500,000 is completed through this offering. If we do not sell $500,000 in
shares of our common stock by February 13, 2004, we will promptly refund all
proceeds in the escrow account, without interest, unless all prospective
investors agree in writing to waive this financing condition. We will deliver
stock certificates representing shares purchased as soon as practicable, but in
no event later than 30 days after the initial close or any subsequent close of
the offering. The minimum investment will be $1,000. InvestLinc Securities, LLC,
a registered broker-dealer, is serving as our placement agent for this offering.
Broker fees and commissions, in addition to the expenses of this offering, will
be deducted directly from the proceeds of the offering.
PER SHARE TOTAL MINIMUM TOTAL MAXIMUM
--------- ------------- -------------
Offering price................................... $ $ 500,000 $ 3,000,000
Placement agent discounts and commissions........ $ $ 40,000 $ 240,000
Proceeds to us before expenses................... $ $ 460,000 $ 2,760,000
We may also sell up to $300,000 of common stock, or ten percent of the maximum
offering, at the public offering price to cover over-allotments, if any. See
"Plan of Distribution" beginning on page 39. We currently expect the public
offering price of our common stock to be between $0.20 and $0.30 per share. Our
common stock and warrants are traded on the Over-The-Counter Bulletin Board
under the symbols "ETOP" and "ETOPW," respectively.
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS AND IS HIGHLY
SPECULATIVE. YOU SHOULD PURCHASE THESE SECURITIES ONLY IF YOU CAN AFFORD A
COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ
ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING THESE SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
STATE NOTICES
ARIZONA: THESE SECURITIES ARE REGISTERED UNDER THE SECURITIES ACT OF
ARIZONA, BUT THE FACT OF THE REGISTRATION IS NOT TO BE DEEMED
A FINDING BY THE ARIZONA CORPORATION COMMISSION OR THE
DIRECTOR OF THE SECURITIES DIVISION THAT THIS PROSPECTUS IS
TRUE OR ACCURATE, NOR DOES THE REGISTRATION MEAN THAT THE
COMMISSION OR THE DIRECTOR HAS PASSED ON THE MERITS OF OR
OTHERWISE APPROVED THE SECURITIES DESCRIBED IN THIS
PROSPECTUS.
MARYLAND: A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN
FILED WITH THE DIVISION OF SECURITIES OF THE DEPARTMENT OF LAW
OF MARYLAND, BUT HAS NOT YET BECOME EFFECTIVE. INFORMATION
CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE
SECURITIES MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................1
RISK FACTORS...................................................................5
USE OF PROCEEDS...............................................................10
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.......................11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................12
BUSINESS......................................................................16
LEGAL PROCEEDINGS.............................................................27
FACILITIES....................................................................27
EMPLOYEES.....................................................................27
MANAGEMENT....................................................................27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................34
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES................................35
DESCRIPTION OF SECURITIES.....................................................35
INVESTOR SUITABILITY REQUIREMENTS.............................................38
PLAN OF DISTRIBUTION..........................................................39
LEGAL MATTERS.................................................................41
EXPERTS.......................................................................41
WHERE YOU CAN FIND MORE INFORMATION...........................................41
INDEX TO FINANCIAL STATEMENTS................................................F-1
i
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US, THE SALE OF OUR COMMON STOCK IN THIS OFFERING, OUR
FINANCIAL STATEMENTS AND THE NOTES TO THOSE FINANCIAL STATEMENTS THAT APPEAR
ELSEWHERE IN THIS PROSPECTUS.
BUSINESS OVERVIEW
We are a pharmaceutical research and development company focused on the
development of proprietary compounds for pain therapy. Our primary
activities since inception have been research and development, including
preclinical studies, and tests focused on securing U.S. Food and Drug
Administration, or FDA, approval for our proprietary compounds. We have
previously completed preclinical animal studies, Phase I, Phase II and
Phase II/III human clinical trials for our first pain-relief product
candidate, known as Esterom(R) solution. Despite promising preclinical and
early-stage clinical trial results with Esterom solution, our later-state
clinical trials did not fully support our earlier results and we elected to
abandon further commercial development of Esterom solution. However, in
January 2002, one of our researchers at Harvard Medical School identified
the active ingredient in Esterom solution, which we named ENT-102. Results
of initial preclinical studies revealed that ENT-102 may effectively block
nerve impulse conduction and, when injected into animals, may have
long-lasting properties to reduce and manage pain.
Based on these findings we decided to pursue development of ENT-102. In
January 2003, we announced the discovery of a new chemical entity, ENT-103,
a simplified derivative of ENT-102. Due to the perceived demonstrated pain
reduction equivalency of ENT-103 and ENT-102 in preclinical studies, and
the perceived advantages of pursuing regulatory approval with a simpler
molecular structure, we decided to focus on the development of ENT-103 as a
therapy for treatment of acute pain.
We believe that ENT-103 has the potential to effectively treat a number of
medical conditions using various delivery systems. At present, we are
actively pursuing injectable and topical delivery systems for ENT-103. A
third delivery system, inhalation therapy, is also being evaluated.
Although we believe that ENT-103 and related compounds could have a
significant impact on the pain market, the compound may not prove effective
in the necessary clinical trials.
We have not yet sought approval from the FDA to commence human clinical
trials with ENT-103. The total cost of the clinical trials needed for
approval of ENT-103 are expected to cost approximately $10 million and we
anticipate an additional $45 million will be required to complete
development and commercialization of ENT-103. We currently do not have
sufficient funds to initiate or complete these clinical trials. We are
seeking to raise funds in this offering to initiate clinical trials and
start the regulatory approval process. We have never had any revenue and we
will not be able to pursue generating revenues from sales of ENT-103 unless
it is approved by the FDA for marketing. FDA approval will take several
years, if ENT-103 is approved at all, and we may never achieve profitable
operations. If this offering is successful and we commence human clinical
trials for ENT-103, we will need to raise additional money to complete the
clinical trials necessary for commercialization of the compound. We may
seek to raise this additional capital through the sale of additional
securities or, if and when we have positive clinical trial results, through
licensing or partnering arrangements.
The market for prescription pain drugs is quite large, and although it is
well developed with many successful products, there are often significant
side effects associated with their use. We believe that a new product for
the treatment of pain that does not have the associated side effects could
capture a significant segment of this market. Based on preclinical studies,
ENT-103 appears to be highly effective and without many of the side effects
caused by existing pain medications. However, our clinical data are only
preliminary and although ENT-103 appears to be a promising drug candidate,
this market is characterized by intense competition and our competitors are
generally large pharmaceutical companies with significantly greater
resources and experience.
THE COMPANY
We were incorporated in California in 1984 as Entropin, Inc., or old
Entropin, and in 1998, completed a merger with and into Vanden Capital
Group, Inc., after which 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.
1
In conjunction with the merger, Entropin, Inc. became a Colorado
corporation. In June 2002, we changed our state of incorporation from
Colorado to Delaware. Our principal executive offices are located at 45926
Oasis Street, Indio, California 92201. Our telephone number is (760)
775-8333. Our website is located at www.entropin.com. We do not consider
information contained in our website to be part of this prospectus.
Entropin and Esterom are registered trademarks of Entropin, Inc. This
prospectus also refers to trademarks and trade names of other companies and
organizations.
THE OFFERING
With this offering, we are seeking to raise between $500,000 (the "Minimum
Offering") and $3 million (the "Maximum Offering") through the sale and
issuance of up to 20 million shares of common stock to accredited
investors. Investments will be held by an escrow agent until we have at
least $500,000 in total investments in this offering or until February 13,
2004, the offering termination date. If we have not reached the Minimum
Offering by February 13, 2004, the escrow agent will promptly return all
escrowed funds, without interest, and the offering will terminate unless
all prospective investors agree in writing to waive this financing
condition. If we have reached the Minimum Offering by February 13, 2004,
but have not reached the Maximum Offering, we may extend the offering for
up to 60 days. See "Plan of Distribution" on page 39. Set forth below is
certain additional information regarding the terms of this offering.
This information and all other disclosure regarding the offering in this
prospectus assumes that the over-allotment option is not exercised, unless
indicated to the contrary.
Common stock we are offering............................. Up to 20,000,000 shares.
Common stock to be outstanding after this offering....... Up to 31,545,341 shares, depending on offering subscription.(1)
Over-The-Counter Bulletin Board symbol................... ETOP
Use of proceeds.......................................... The net proceeds of this offering will be used to support the
further development of ENT-103 and for other general corporate
purposes, including working capital. See "Use of Proceeds."
_____________
(1) We had 11,545,341 shares of common stock and 3,210,487 shares of Series A'
Preferred Stock outstanding as of September 30, 2003, excluding:
o Options to purchase up to 2,766,619 shares of common stock at a
weighted-average exercise price of $2.44 per share;
o Warrants to purchase up to 3,283,500 shares of common stock at a
weighted-average exercise price of $8.63 per share; and
o Warrants to be issued to the placement agent following completion of
the offering for 7% of the total shares sold in the offering with an
exercise price equal to the price per share in this offering. See
"Plan of Distribution."
CAPITALIZATION
Set forth below is the selected unaudited pro forma capitalization of
Entropin at September 30, 2003, after giving effect to (A) the hypothetical
sale of $500,000 of shares of common stock, which represents the Minimum
Offering, and (B) the hypothetical sale of $3,000,000 of shares of common
stock, which represents the Maximum Offering (excluding the
over-allotment), in each case the hypothetical proceeds shown are net of
Placement Agent's 8% commission. Other expenses of this offering will be
deducted from the proceeds.
2
MINIMUM OFFERING SEPTEMBER 30, 2003
---------------------------------------------
PRO FORMA PRO FORMA,
ACTUAL ADJUSTMENTS AS ADJUSTED
------------- ------------- -------------
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 1,547,051 $ 460,000 $ 2,007,051
Working capital 1,493,220 460,000 1,953,220
Total assets 1,999,341 460,000 2,459,341
Total stockholders' equity 1,945,510 460,000 2,405,510
MAXIMUM OFFERING SEPTEMBER 30, 2003
---------------------------------------------
PRO FORMA PRO FORMA,
ACTUAL ADJUSTMENTS AS ADJUSTED
------------- ------------- -------------
Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 1,547,051 $ 2,760,000 $ 4,307,051
Working capital 1,493,220 2,760,000 4,253,220
Total assets 1,999,341 2,760,000 4,759,341
Total stockholders' equity 1,945,510 2,760,000 4,705,510
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and notes thereto. The selected
financial data as of December 31, 2001 and 2002, and for the years then
ended are derived from audited financial statements included in this
prospectus. The selected balance sheet data as of September 30, 2003, is
derived from unaudited financial statements included in this prospectus.
Cumulative
Years ended Nine months amounts from
Statement of Operations Data: December 31, ended inception through
----------------------------- September 30, September 30,
2001 2002 2003 2003
------------- ------------- ------------- -------------
Revenue $ -- $ -- $ -- $ --
Costs and expenses:
Research and development 2,315,076 3,048,063 548,066 15,241,644
General and administrative 1,973,401 2,403,835 2,033,255 16,925,621
------------- ------------- ------------- -------------
Operating loss (4,288,477) (5,451,898) (2,581,321) (32,167,265)
Other income (expense), net 497,462 190,102 (105,768) 1,117,549
------------- ------------- ------------- -------------
Net loss (3,791,015) (5,261,796) (2,687,089) (31,049,716)
Dividends applicable to Series B
preferred stockholders (96,384) (91,033) (35,039) (1,103,184)
------------- ------------- ------------- -------------
Net loss applicable to common stockholders $ (3,887,399) $ (5,352,829) $ (2,722,128) $(32,152,900)
============= ============= ============= =============
Basic and diluted net loss per common share $ (0.40) $ (0.54) $ (0.26) $ (5.16)
============= ============= ============= =============
Weighted average number of shares outstanding 9,739,000 9,874,000 10,410,000 6,227,000
============= ============= ============= =============
3
BALANCE SHEET DATA: December 31,
-------------------------------------
2001 2002
---- ----
Cash and short-term investments $8,708,254 $3,896,853
Working capital 8,598,595 3,840,357
Total assets 9,122,767 4,328,784
Total liabilities 142,986 62,450
Redeemable preferred stock 4,035,536 3,923,034
Stockholders' equity 4,944,245 343,300
September 30, 2003
-------------------------------------------
Actual Pro forma (1) Pro forma (2)
------ ------------- -------------
Cash and cash equivalents $1,547,051 $2,007,051 $4,307,051
Working capital 1,493,220 1,953,220 4,253,220
Total assets 1,999,341 2,459,341 4,759,341
Total liabilities 53,831 53,831 53,831
Redeemable preferred stock 3,210,487 3,210,487 3,210,487
Stockholders' equity 1,945,510 2,405,510 4,705,510
(1) This pro forma balance sheet data reflects net proceeds of $460,000
from the minimum offering.
(2) This pro forma balance sheet data reflects net proceeds of $2,760,000
from the maximum offering.
4
RISK FACTORS
THE SHARES WE ARE OFFERING ARE HIGHLY SPECULATIVE IN NATURE AND INVOLVE A
HIGH DEGREE OF RISK. THEY SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN
AFFORD TO LOSE THEIR ENTIRE INVESTMENT. THEREFORE, EACH PROSPECTIVE
INVESTOR SHOULD, PRIOR TO PURCHASE, CONSIDER CAREFULLY THE FOLLOWING
INFORMATION ABOUT THESE RISKS, TOGETHER WITH OTHER INFORMATION CONTAINED IN
THIS PROSPECTUS AND OUR FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION AND PROSPECTS WOULD LIKELY SUFFER.
RISKS RELATED TO OUR COMPANY
OUR INDEPENDENT AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT REGARDING OUR
ABILITY TO CONTINUE AS A GOING CONCERN DUE TO OUR LIMITED FINANCIAL
RESOURCES. EVEN IF THIS OFFERING IS SUCCESSFUL, WE WILL NEED TO RAISE
ADDITIONAL FUNDS TO SUPPORT OUR OPERATIONS. IF WE ARE UNABLE TO RAISE THESE
FUNDS, WE WILL BE UNABLE TO COMPLETE OUR PRODUCT DEVELOPMENT AND WILL NEED
TO REDUCE OR CEASE OUR OPERATIONS.
Our independent auditors' opinion on our 2002 financial statements, which
are included in this prospectus, includes an explanatory paragraph
indicating substantial doubt about our ability to continue as a going
concern. We currently are able to pay our debts and meet our obligations as
they become due, and we believe that our existing capital resources will be
sufficient to satisfy our current and projected funding requirements for
the next few months, which should carry us into the first quarter of 2004.
If the Minimum Offering of $500,000 is raised, we estimate that the net
proceeds will be sufficient to permit us to operate into the second quarter
of 2004 while we complete the preclinical toxicology studies for ENT-103.
If the Maximum Offering of $3,000,000 is raised, we estimate that the net
proceeds of this offering will be sufficient to permit us to operate
through year-end 2004 and possibly longer while we complete our preclinical
studies, file an IND and initiate our initial Phase I human trials for
ENT-103. Although these estimates reflect our current expectations, it is
possible that our actual expenditures could exceed these estimates, which
would shorten the time during which we could fund our operations.
Even if this offering is successful, we will need to raise additional funds
to continue the development of ENT-103 and complete the FDA approval
process, which we expect will cost approximately $55 million beyond our
total expenditures to date and will take at least an additional four to
five years. This offering will raise only a portion of the needed $55
million, and our future funding requirements will depend on many factors,
including:
o progress with preclinical and toxicology studies of ENT-103;
o the costs of clinical tests and obtaining regulatory approval for
ENT-103;
o the costs and expenses associated with defending against the
securities lawsuit recently filed against us and certain of our
executive officers;
o the magnitude of our research and development programs;
o the costs involved in obtaining and maintaining patent and other
intellectual property rights; and
o the cost of manufacturing and of commercialization activities and
arrangements.
We intend to seek additional funding to support our future operations
through public or private sales of our equity or debt securities. Any
negative results or delay in our clinical and preclinical studies will
adversely affect our ability to raise additional funds through the issuance
of securities or consummation of corporate partnering relationships. Any
additional equity or debt financings that we may complete will be dilutive
to our stockholders. We also intend to seek additional funding through
potential corporate partnerships, licensing arrangements and/or
merger/acquisition transactions. Any such collaborative arrangements, if
necessary to raise additional funds, may require us to relinquish rights to
some of our technologies or products, and may be dilutive to our
stockholders. We cannot guarantee that we will be able to secure additional
funds on reasonable terms, or at all. If we are unable to obtain additional
funds to support our operations, we will be unable to complete our product
development, we may need to reduce or cease our operations, and you may
lose your entire investment in our company.
5
WE HAVE A HISTORY OF LOSSES AND WE MAY NEVER ACHIEVE OR MAINTAIN
PROFITABILITY.
To date we have experienced significant operating losses in funding the
research, development and testing of our previous drug candidate, Esterom
solution, and our subsequent and current drug candidates, ENT-102 and
ENT-103. We expect to continue to incur substantial operating losses during
our research, development and preclinical testing of ENT-103 and during the
regulatory approval process for ENT-103, including filing a New Drug
Application and conducting clinical trials. From our inception through
September 30, 2003, we have incurred cumulative net operating losses of
$32.1 million. We will not be able to pursue generating revenues from sales
of ENT-103 unless it is approved by the FDA for marketing. FDA approval
will take several years, if ENT-103 is approved at all, and we may never
achieve profitable operations.
IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALIZE ENT-103, OR IF
APPROVAL IS DELAYED, IT WILL INCREASE THE COST OF DEVELOPMENT, AND WILL
LIKELY PREVENT OR DELAY OUR ABILITY TO SELL ENT-103 AND GENERATE REVENUE.
Our sole current drug candidate, ENT-103, has undergone only limited
preclinical development and we do not anticipate beginning human clinical
trials with ENT-103 until the third quarter of 2004, although we can give
no assurances as to the results of or the time to complete these
preclinical studies. We have not yet filed an application to commence human
clinical trials, known as an Investigational New Drug, or IND, application,
nor have we requested or received regulatory approval from the FDA for
marketing products containing ENT-103. Neither ENT-103 nor any other
products that may result from our research and development programs are
expected to be commercially available for several years, if at all. Any
delay in the timing of the preclinical studies will adversely affect our
ability to complete the necessary clinical trials, which could
significantly harm our prospects given our limited remaining funds.
The development of new pharmaceutical products is highly uncertain and
subject to a number of risks. The FDA approval process generally takes
years and consumes substantial capital resources with no assurance of
ultimate success. We cannot apply for FDA approval to market ENT-103 until
the product successfully completes all of the required clinical trials.
Several factors may prevent our successful completion of the clinical
trials, including negative or inconclusive preclinical results, failure or
delays in the FDA approval process, insufficient capital resources,
inability to properly design and complete clinical trials or insufficient
proof that ENT-103 is safe and effective. In addition, interim results do
not necessarily predict final results, as was the case with our Esterom
clinical trials. Negative or inconclusive results generated during
preclinical or toxicology studies, or any future clinical studies, will
have an immediate negative impact on our operations and future prospects.
There can be no assurance that development of ENT-103 will be completed
successfully, that we will not encounter problems in preclinical studies or
clinical trials that will cause the delay or suspension of such trials,
that current or future testing will show ENT-103 to be effective or that
ENT-103 will receive regulatory approval. Moreover, even if ENT-103 does
receive regulatory approval, there can be no assurance that ENT-103 will be
commercially successful, or have all of the patent and other regulatory
protections necessary to prevent competitors from producing similar
products. The failure of ENT-103 to receive timely regulatory approval and
achieve commercial success will negatively impact our business and results
of operations.
In addition, as a controlled substance, ENT-103 will be subject to
expensive and burdensome administrative requirements that will increase our
costs.
WE RELY ON THIRD PARTIES TO TEST, RESEARCH, DEVELOP AND MANUFACTURE ENT-103
AND THOSE THIRD PARTIES MAY NOT PERFORM SUCCESSFULLY, WHICH COULD HARM OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
We depend on contractual arrangements with third parties for the provision
of services and expertise in selected areas. Under these contractual
arrangements, third parties are responsible for:
o conducting preclinical research and toxicology studies;
o conducting clinical trials and obtaining regulatory approvals;
6
o process and analytical methods development;
o clinical supply and commercial manufacturing;
o product packaging;
o research; and
o enhanced drug formulation(s).
Our existing contractual relationships place substantial responsibility on
these third parties, which could result in delays or termination if they
fail to perform as predicted. Although we believe that we could replace
these contractual relationships if necessary, we may not be able to do so
on favorable terms, if at all. If these third parties fail to perform their
contractual obligations, it could have a negative impact on our business
and results of operations.
WE ARE DEPENDENT ON CONTRACT MANUFACTURERS FOR THE PRODUCTION OF ENT-103
AND OUR FAILURE TO OBTAIN OR RETAIN THESE CONTRACT MANUFACTURERS WOULD
NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS.
We have utilized, and intend to continue utilizing, third party
manufacturers to produce the supplies of ENT-103 needed for our preclinical
studies. We have no experience in manufacturing and do not have any
manufacturing facilities. Consequently, we are solely dependent on
Macfarlan Smith, our contract manufacturer, for all production of ENT-103
for development and commercialization purposes. Although there are several
other contract manufacturers with whom we could contract for the supply of
ENT-103, any disruption of our supply through Macfarlan Smith could result
in delays and additional costs that could harm our operations.
WE DEPEND ON KEY PERSONNEL WHO WOULD BE DIFFICULT TO REPLACE AND OUR
BUSINESS WILL LIKELY BE HARMED IF WE LOSE THEIR SERVICES.
We have only two full-time executive employees, Thomas Tachovsky and
Patricia Kriss, our Chief Executive Officer and Chief Financial Officer,
respectively. We do not have an employment contract with Mr. Kriss and,
although we maintain key person life insurance for both of our executive
employees, the loss of either person would materially harm our operations.
In addition, we rely on the members of the Scientific Committee of the
Board of Directors (described below), our Scientific and Medical Advisory
Board and a number of other specialty consultants to assist in formulating
our research and development strategy. The loss of either of our key
executives or primary consultants could impede the achievement of our
objectives and our business would likely be harmed.
WE ARE A DEFENDANT IN A LAWSUIT, WHICH IF DETERMINED ADVERSELY, COULD HARM
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In February 2003, a complaint was filed in the Superior Court of the State
of California against us and certain of our executive officers seeking
unspecified damages and alleging that the defendants violated federal and
state securities laws. Although we believe the claims are without merit and
have filed a motion for summary judgment, we can provide no assurances that
we will succeed in defending or settling this action. In addition, we
expect to incur up to $500,000 in legal and other fees, which represents
the deductible under our insurance policy, to defend against this action.
We have incurred legal fees and expenses in this action of approximately
$385,000 through October 31, 2003. In addition to the costs related to this
lawsuit, defending ourselves in this action may distract our management
team by requiring significant time attending to this matter. As a result,
it is possible that this lawsuit will harm our business or financial
condition.
7
RISKS RELATED TO OUR INDUSTRY
THE SCOPE AND VALIDITY OF PATENTS AND PROPRIETARY RIGHTS IS PARTICULARLY
IMPORTANT IN OUR INDUSTRY AND THE LOSS OF ANY SUCH RIGHTS COULD HARM OUR
BUSINESS AND PROSPECTS.
Patents, trademarks and other intellectual property rights are important in
our industry and important to our success. Others may challenge, seek to
invalidate, infringe or circumvent any patents we own, and the rights we
have under those patents may not provide competitive advantages to us. If
we are unable to successfully prosecute our patent applications, defend our
existing patents or if others develop similar products beyond the
protection of our existing patents, our business could be impaired.
In addition, the manufacture, use or sale of our products may infringe on
the patent rights of others. Competitors and other third parties may
initiate patent litigation against us in the United States or in foreign
countries based on existing patents or patents that may be granted in the
future. Many of our competitors have obtained patents covering competing
products and processes and they may assert these patents against us. Patent
litigation can be extremely expensive and time consuming.
We may also need to initiate litigation, which could be time-consuming and
expensive, to enforce our proprietary rights or to determine the scope and
validity of others' rights. Any such litigation could result in substantial
costs and diversion of resources, regardless of the outcome. In addition, a
court may find our patents invalid or may find that we have infringed on a
competitor's rights. If any claims or actions are asserted against us, we
may be required to participate in expensive interference proceedings to
determine who has the right to a patent for the technology.
PHARMACEUTICAL COMPANIES MAY BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY
CLAIMS THAT CAN BE VERY COSTLY. GIVEN OUR LIMITED FINANCIAL RESOURCES, ANY
SUCH CLAIMS COULD HARM OUR BUSINESS.
The clinical testing of products containing ENT-103 entails risk of product
liability claims. Medical testing has historically been litigious and we
face financial exposure to product liability claims in the event that use
of our products results in personal injury. We also face the possibility
that defects in the manufacture of ENT-103 based products might necessitate
a product recall. There can be no assurance that we will not experience
losses due to product liability claims or recalls in the future. We
currently have no product liability insurance, although we anticipate
purchasing product liability insurance in reasonable and customary amounts
prior to our sale of ENT-103 based products. Such insurance can be
expensive, difficult to obtain and may not be available in the future at
reasonable cost or in sufficient amounts to protect us against losses. An
inability to maintain insurance or to otherwise protect against potential
product liability could prevent or inhibit the commercialization of ENT-103
products. Moreover, a product liability claim in excess of our insurance
coverage limits or product recall could harm our business, financial
condition and results of operations.
THE PHARMACEUTICAL INDUSTRY IS HIGHLY COMPETITIVE AND MOST OF OUR
COMPETITORS ARE LARGER AND HAVE MORE EXPERIENCE, AS WELL AS GREATER
TECHNICAL AND FINANCIAL RESOURCES. AS A RESULT, WE FACE SIGNIFICANT
COMPETITIVE HURDLES.
The pharmaceutical industry is characterized by intense competition and is
subject to rapid and significant technological change. There are currently
many successful products marketed for the treatment of pain and our
competitors have new products and product candidates in all stages of
development that will complete with ENT-103 if it is commercialized. Our
competitors include major pharmaceutical companies, biotechnology firms,
universities and other research institutions, both in the United States and
abroad. Most of our competitors have substantially greater financial,
technical, manufacturing, marketing and human resource capabilities than
us. In addition, many of our competitors have significantly greater
experience in testing new or improved therapeutic products and obtaining
regulatory approval of products. Accordingly, our competitors may obtain
regulatory approval for their products more rapidly than we are able to. If
we commence commercial sales of our products, we will also be competing
with respect to manufacturing efficiencies and marketing capabilities,
areas in which we have no prior experience.
8
RAPID TECHNOLOGICAL CHANGE COULD MAKE OUR PRODUCTS OBSOLETE.
Pharmaceutical technologies have undergone rapid and significant change. We
expect that pharmaceutical technologies will continue to develop rapidly.
Our future will depend in large part on our ability to maintain a
competitive position with respect to these technologies. Even if ENT-103 is
approved for marketing, rapid technological development in our industry may
render it obsolete before we can recoup all or any portion of our
development expenses. If this were to happen, we may be forced to write off
development costs, abandon ENT-103 or other drug candidates and seek new
drug candidates for regulatory approval and commercialization, all of which
could materially adversely affect our business, financial condition and
results of operations.
RISKS RELATED TO THE OFFERING
THE EXISTING TRADING MARKET FOR OUR SECURITIES IS LIMITED, WHICH AFFECTS
THE PRICE AND LIQUIDITY OF OUR SECURITIES.
Our common stock was recently delisted from the Nasdaq SmallCap Market and
now trades on the NASD OTC Bulletin Board. Securities trading on the OTC
Bulletin Board typically suffer from lower liquidity, which may lead to
depressed trading prices, greater price volatility and difficultly in
buying or selling shares, particularly in large quantities. Currently,
there is a limited trading market for our common stock and we cannot
predict when, if ever, a fully developed public market for the common stock
will occur. If a developed public trading market for the common stock does
develop at a future time, there are no assurances that it will be sustained
for any period of time. Any sales of shares by stockholders in substantial
amounts in the public market could adversely affect the prevailing market
price and could impair our future ability to raise capital through the sale
of equity securities.
In addition, the SEC has adopted regulations which generally define "penny
stock" to be any listed, trading equity security that has a market price
less than $5.00 per share or an exercise price of less than $5.00 per
share. These requirements may restrict the ability of broker-dealers to
sell our common stock and may affect the ability of purchasers in this
offering to sell our securities in the secondary market.
WE MAY SELL ADDITIONAL SHARES OF CAPITAL STOCK IN THE FUTURE, WHICH COULD
DILUTE YOUR INVESTMENT.
Our Certificate of Incorporation authorizes the issuance of up to
50,000,000 shares of common stock and up to 20,000,000 shares of preferred
stock. Upon the sale of shares offered pursuant to this prospectus
(assuming the Maximum Offering is completed), there will be 31,545,341
shares of common stock issued and outstanding and 3,210,487 shares of
Series A' Preferred stock. We will seek to raise additional capital to meet
our financial needs through the sale of equity or other securities. Our
Board of Directors has the power to issue substantial additional shares of
common stock and preferred stock without stockholder approval. Potential
investors should be aware that any such stock issuance may result in
reduction of the book value or market price, if any, of the outstanding
shares of common stock. If we issue any additional shares of common stock
or preferred stock, such issuance will reduce the proportionate ownership
and voting power of each other stockholder. Further, any new issuance of
shares may result in a change in control of our company.
THE PRICE OF COMMON STOCK HAS FLUCTUATED GREATLY OVER THE PAST SEVERAL
YEARS AND WE EXPECT THIS VOLATILITY TO CONTINUE.
The market prices and trading volumes for the securities of development
stage companies in general, and for our securities in particular, have
historically been highly volatile and have experienced significant price
and volume fluctuations. These fluctuations may or may not be related to
our operating performance, and the announcement of developments regarding
our products, regulatory approval status, competition, government
regulation or other matters that are material to our business or prospects
may cause significant swings in our stock prices.
From January 1, 2002 through the date of this prospectus, our closing stock
price has reached a high of $3.85 per share and a low of $0.20 per share.
See, "Market for Common Stock and Related Stockholder Matters - Price Range
for Common Stock." Because of this volatility, you may not be able to sell
your shares at or above the offering price and may lose part or all of your
investment.
9
USE OF PROCEEDS
We estimate the proceeds from the sale of the shares we are offering to be
$2,760,000 if the Maximum Offering of $3,000,000 in shares are sold in this
offering, and $460,000 if the Minimum Offering of $500,000 in shares are
sold in this offering, in each case after deducting expenses payable by us
in connection with this offering and assuming that the over-allotment
option is not exercised. These offering expenses include, but are not
limited to, a 8% commission to be paid to our placement agent for all
shares sold in this offering. See "Plan of Distribution."
We believe our current cash and short-term investments will be sufficient
to fund our operations through the first quarter of 2004. If the Minimum
Offering of $500,000 is raised, we estimate that the net proceeds will be
sufficient to permit us to operate through the first quarter of 2004 while
we complete the preclinical toxicology studies for ENT-103. If the Maximum
Offering of $3,000,000 is raised, we estimate that the net proceeds of this
offering will be sufficient to permit us to operate for an additional nine
months (through year-end 2004) and possibly longer while we complete our
preclinical studies, file an IND and initiate our initial Phase I human
trials for ENT-103. We expect to use the net proceeds of this offering as
follows:
AMOUNT OF PROCEEDS
------------------
MINIMUM OFFERING MAXIMUM OFFERING
---------------- ----------------
USE(S) AMOUNT PERCENT** AMOUNT PERCENT**
------ ------------- -------- -------------- ---------
Preclinical development of ENT-103................. $ 300,000 65% $ 1,200,000 43%
Preparation and filing of IND for ENT-103.......... - - 125,000 5%
Phase I Clinical Trial for ENT-103................. - - 250,000 9%
General office and administrative expenses
(includes salaries, insurance, rent, travel and
professional fees)................................. * 160,000 35% $*1,185,000 43%
------------- -------- -------------- ---------
$ 460,000 100% $ 2,760,000 100%
============= ======== ============== =========
_____________
* Additional expenditure after using currently available cash and cash
equivalents.
** Total percent may not equal 100% due to rounding.
Pending utilization of the net proceeds of this offering as set forth
above, we intend to make deposits in interest bearing accounts, purchase
certificates of deposit, United States government obligations or other
short term, investment-grade, interest-bearing investments.
THESE ESTIMATES ARE SUBJECT TO MATERIAL CHANGE IF, IN THE OPINION OF
MANAGEMENT, OUR ACTUAL OPERATIONS JUSTIFY DIFFERENT EXPENDITURES OR A
DIFFERENT ALLOCATION OF PRIORITIES.
10
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
From February 25, 1998 until March 13, 2000, our common stock traded on the
OTC Bulletin Board under the trading symbol "ETOP." From March 14, 2000 to
June 25, 2003, our common stock was traded on the Nasdaq SmallCap Market
under the trading symbol "ETOP." Since June 26, 2003, our common stock has
been traded on the OTC Bulletin Board under the trading symbol "ETOP."
Although quotations for shares of our common stock may be obtained through
the OTC Bulletin Board, because secondary market activity for shares of our
common stock has been limited and sporadic, such quotations may not
accurately reflect the price or prices at which purchasers or sellers would
currently be willing to purchase or sell such shares. The quotations on the
OTC Bulletin Board reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not necessarily represent actual
transactions. The following table sets forth the high and low closing
prices per share for our common stock for the quarters indicated.
Year ended December 31, 2001 High Low
---------------------------- ---- ---
First Quarter.................................... $ 3.59 $ 1.63
Second Quarter................................... $ 2.60 $ 1.56
Third Quarter.................................... $ 2.13 $ 1.63
Fourth Quarter................................... $ 2.30 $ 1.87
Year ended December 31, 2002 High Low
---------------------------- ---- ---
First Quarter.................................... $ 3.80 $ 2.05
Second Quarter................................... $ 3.85 $ 2.36
Third Quarter.................................... $ 3.73 $ 0.38
Fourth Quarter................................... $ 0.44 $ 0.27
Year ending December 31, 2003 High Low
----------------------------- ---- ---
First Quarter.................................... $ 0.92 $ 0.25
Second Quarter................................... $ 1.10 $ 0.33
Third Quarter.................................... $ 0.80 $ 0.45
Fourth Quarter (through December 12, 2003)....... $ 0.45 $ 0.20
On December 12, 2003, the closing price of our common stock on the OTC
Bulletin Board was $0.21 per share.
STOCKHOLDERS
As of October 30, 2003, approximately 360 holders of record owned
approximately 5,270,770 shares of our common stock with the remaining
shares held in street name through registered brokers. As of October 30,
2003, approximately 24 holders of record owned warrants to purchase a total
of 983,500 shares of our common stock, with the remaining warrants held in
street name through registered brokers.
DIVIDENDS
We have never declared or paid dividends on our common stock and do not
intend to pay dividends on our common stock in the foreseeable future.
Instead, we intend to retain any earnings to finance the expansion of our
business and for general corporate purposes. Any payment of dividends on
the common stock is subject to the prior dividend rights of the outstanding
Series A' Preferred stock.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations and other portions of this prospectus contain
forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the Safe
Harbor provisions created by that statute. In some cases, you can identify
the forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of these
terms or other comparable terminology. Our business and results of
operations are subject to various risks and uncertainties as disclosed
under the caption "Risk Factors," starting on Page 4 of this prospectus,
and in the risk factors contained in our periodic reports filed with the
Securities and Exchange Commission. These risks and uncertainties include
our need and ability to raise significant additional capital; our history
of significant operating losses; the ability to successfully complete
formulation, development and preclinical studies for our sole drug
candidate, ENT-103; the time, cost and uncertainty of obtaining regulatory
approvals; and the ability to successfully commercialize products. The
actual results that we achieve may differ materially from any
forward-looking statements due to these risks and uncertainties and we
undertake no obligation to update any such forward-looking statements.
OVERVIEW
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE AUDITED AND UNAUDITED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
IN THIS PROSPECTUS.
We were incorporated in California in 1984 as Entropin, Inc., or old
Entropin, and in 1998 completed a merger with and into Vanden Capital
Group, Inc. pursuant to which all of the issued and outstanding common
shares of old Entropin were converted into a majority of Vanden's common
stock. Vanden subsequently changed its name to Entropin, Inc. For
accounting purposes, the acquisition was treated as a recapitalization of
old Entropin based upon historical cost, with old Entropin as the acquirer.
In conjunction with the merger, Entropin, Inc. became a Colorado
corporation. In June 2002, we changed our state of incorporation from
Colorado to Delaware.
From our inception in August 1984, we have devoted our resources primarily
to funding our research and development efforts and conducting clinical
trials on our products. We have been unprofitable since inception and have
had no revenue from the sale of products, and do not expect revenue for the
foreseeable future until we have received FDA approval for one of the
proprietary compounds we are attempting to develop. We expect to continue
to incur losses for the foreseeable future through the completion of our
preclinical and clinical trials and the FDA approval process. As of
September 30, 2003, our accumulated deficit was approximately $32.1
million.
RESEARCH AND DEVELOPMENT
Prior to our current focus on ENT-103, we completed four preclinical animal
studies, Phase I, Phase II and Phase II/III human clinical trials for our
first product, known as Esterom solution. In January 2002, we reported that
our researchers at Harvard Medical School had identified the active
ingredient in Esterom solution, which we named ENT-102. Results of our
initial preclinical studies revealed that ENT-102 effectively blocks nerve
impulse conduction and when injected into animals may have long-lasting
properties to reduce and manage pain.
Based on these findings and the results of our Phase II/III clinical study
with Esterom solution, we decided to forego further development of Esterom
solution and pursue development of ENT-102. In January 2003, we announced
the discovery of a new chemical entity, ENT-103, a simplified derivative of
ENT-102. ENT-103 is a single chemical compound that exists as a single
molecular species. In contrast, ENT-102 is a single chemical compound
comprised of a mixture of four chemical species. Due to the demonstrated
pain reduction equivalency of ENT-103 and ENT-102 in preclinical studies,
and the advantages of pursuing regulatory approval with a single molecule
versus a mixture of four molecules, we decided to focus on the development
of ENT-103 as a therapy for treatment of acute pain.
12
As of September 30, 2003, we have spent a total of approximately $32.1
million developing ENT-103 and its predecessor products, ENT-102 and
Esterom solution.
The following table provides certain information regarding our research and
development expenditures for ENT-103 and its predecessor compounds (ENT-102
and Esterom solution) during fiscal years 2001 and 2002 and the nine months
ended September 30, 2002 and 2003.
Fiscal years Nine months ended
2001 2002 September 30, 2002 September 30, 2003
---- ---- ------------------ ------------------
Research and Development
Expenditures................... $ 2,315,076 $ 3,048,063 $ 2,650,072 $ 548,066
Assuming that our clinical trials are successful, we estimate that it will
take between four and five years to complete the clinical development of
ENT-103 so that it can be commercialized. Any significant delays in our
clinical trials or commercialization will affect our ability to generate
revenue and may harm our ability to continue to raise capital needed to
complete the commercialization of ENT-103. The earliest time at which we
expect to generate revenue from ENT-103 under a licensing or similar
arrangement is following announcement of Phase I clinical trial results,
which may be in early 2005, assuming the clinical trial results are
positive and that we are able to find a licensing partner at that time.
We estimate that an additional $45 million will be required to complete
development and FDA approval of ENT-103. These expenditures primarily
represent research, clinical trials and general and administrative costs.
To date, we have spent approximately $32.1 million to develop ENT-103 and
its predecessor compounds.
PLAN OF OPERATION
Based on our current operating budget, we believe that our existing capital
resources will be sufficient to satisfy our current and projected funding
requirements for the next few months, which should carry us into the first
quarter of 2004. If the Minimum Offering of $500,000 is raised, we estimate
that the net proceeds will be sufficient to permit us to operate into the
second quarter of 2004 while we complete the preclinical toxicology studies
for ENT-103. If the Maximum Offering of $3,000,000 is raised, we estimate
that the net proceeds of this offering will be sufficient to permit us to
operate through year-end 2004 and possibly longer while we complete our
preclinical studies, file an IND and initiate our initial Phase I human
trials for ENT-103. Although these estimates reflect our current
expectations, it is possible that our actual expenditures could exceed
these estimates, which would shorten the time during which we could fund
our operations.
We recognize our need to obtain additional funds to support our operations.
With this in mind, we have retained the investment banking firm, InvestLinc
Capital Services LLC. We believe that InvestLinc will be able to assist us
in identifying potential strategic relationships and sources of additional
capital to finance our growth and further development of our proprietary
compound, ENT-103. We also believe that InvestLinc will help us identify
potential investors and/or strategic partners, including merger and
acquisition candidates. We cannot guarantee that we will be able to
accomplish our financing goals, establish suitable strategic relationships
or identify suitable merger or acquisition candidates. Moreover, our actual
expenses, obligations and liabilities may exceed those estimated in our
budget, which would significantly shorten the time in which we could
maintain our operations without obtaining additional funds.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001.
The net loss for the year 2002 was approximately $5.4 million, or $0.54 per
basic and diluted share on approximately 9.9 million weighted average
shares outstanding. In comparison, the net loss for the year 2001 was
approximately $3.9 million, or $0.40 per share on approximately 9.7 million
weighted average shares outstanding. The net loss incurred during 2002
exceeds the net loss incurred during 2001, primarily because of the costs
associated with conducting and closing our clinical trial for Esterom(R)
solution during 2002.
Total research and development expenses were approximately $3.0 million for
2002, as compared to approximately $2.3 million for 2001. These expenses
include non-cash compensation expense associated with stock issued and
stock options granted in exchange for services of approximately $3,000 in
2002 and approximately $18,000 in 2001.
13
Total general and administrative expenses were approximately $2.4 million
for 2002, as compared to approximately $2.0 million for 2001. These
expenses include non-cash compensation expense associated with stock issued
and stock options granted in exchange for services of approximately
$545,000 in 2002 and approximately $580,000 in 2001.
The decrease in non-cash compensation from 2001 to 2002 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 approximately $190,000 in 2002, as compared to
approximately $497,000 in 2001. This decrease reflects lower balances and
declining interest rates for cash, cash equivalents and short-term
investments during 2002.
NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002.
The net loss applicable to common stockholders for the first nine months of
2003 was approximately $2,722,000, or $0.26 per basic and diluted share on
approximately 10.4 million weighted average shares outstanding. In
comparison, the net loss applicable to common stockholders for the first
nine months of 2002 was approximately $4,418,000, or $0.45 per basic and
diluted share on approximately 9.9 million weighted average shares
outstanding. The net loss incurred during the first nine months of 2002
exceeded the net loss incurred during the first nine months of 2003,
primarily because of the costs associated with conducting our clinical
trial for Esterom solution during 2002.
Total research and development expenses were approximately $548,000 for the
first nine months of 2003, as compared to approximately $2,650,000 for the
first nine months of 2002. Research and development expenses during the
first nine months of 2002 exceeded expenses during the first nine months of
2003, primarily because of clinical trial expenses incurred during 2002.
Total general and administrative expenses were approximately $2,033,000 for
the first nine months of 2003, as compared to approximately $1,881,000 for
the first nine months of 2002. These expenses include non-cash compensation
expense associated with stock issued and stock options granted in exchange
for services of approximately $240,000 for the first nine months of 2003
and approximately $406,000 for the first nine months of 2002. General and
administrative expenses during the first nine months of 2003 exceeded
expense during the first nine months of 2002, primarily due to increases in
legal expense and directors and officers liability insurance premiums.
Other income and expense includes interest income of approximately $20,500
during the first nine months of 2003, as compared to approximately $175,600
during the first nine months of 2002. This decrease reflects lower balances
and declining interest rates for cash, cash equivalents and short-term
investments during 2003. Other income and expense for the first nine months
of 2003 also includes a non-cash charge of approximately $126,300
reflecting a redemption conversion incentive provided in connection with
the exchange of our Series B preferred stock for common stock.
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 September 30,
2003, we have received net cash proceeds from financing activities
aggregating approximately $20.3 million. As of September 30, 2003, our
working capital was approximately $1.5 million.
Our liquidity and capital needs relate primarily to working capital,
research and development of ENT-103, and other general corporate
requirements. We have not received any cash from operations since
inception. Based on our current plans, we believe that our available
resources will provide sufficient capital resources to fund our operations
through the first quarter of 2004. Expectations about our liquidity may
prove inaccurate if development progress for our proprietary compounds is
delayed, or if our expenses are greater than currently anticipated. We will
not generate revenue from sales of any products in the foreseeable future.
14
On August 11, 2003, the holders of all outstanding shares of Series B
preferred stock exchanged each share of Series B preferred stock for 9.4967
shares of common stock pursuant to a recapitalization agreement with the
Company. As a result, there are no shares of Series B preferred stock
outstanding subsequent to August 11, 2003.
Net cash used in operating activities was approximately $4.7 million and
$2.3 million during fiscal 2002 and the first nine months of 2003,
respectively, compared with approximately $3.1 million and $3.9 million
during fiscal 2001 and the first nine months of 2002, respectively. The
cash used in operations was primarily related to funding clinical trials,
expanding research and development activities and maintaining our
administrative infrastructure. As of September 30, 2003, our principal
source of liquidity was approximately $1.5 million in cash and cash
equivalents.
We believe that our operating expenses will remain relatively low until we
complete our preclinical research and will increase as we proceed with
clinical trials, the new drug application, or NDA, process and other
activities related to the 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. We will need to raise additional capital to fund future
clinical trials and continue other research and development activities. Our
future liquidity and capital funding requirements will depend on numerous
factors, including the success or failure of our preclinical research and
studies on ENT-103, the timing of future clinical trials and other
activities related to the FDA approval process, the cost and timing of
sales, marketing and manufacturing activities, the extent to which our
products, if any, gain market acceptance, and the impact of competitors'
products. There can be no assurance that such additional capital will be
available on terms acceptable to us, if at all. If adequate funds are not
available, we may be forced to significantly curtail our operations or to
obtain funds through entering into collaborative agreements or other
arrangements that may be on unfavorable terms. Our failure to raise
sufficient additional funds on favorable terms, or at all, would harm our
business, results of operations and financial position.
As of June 26, 2003, our common stock and warrants were delisted from the
Nasdaq SmallCap Market for failure to comply with the $1.00 minimum bid
price requirement. Our common stock and warrants now trade on the OTC
Bulletin Board under the symbols "ETOP" and "ETOPW," respectively. Trading
on the OTC Bulletin Board could result in a less liquid market available
for existing and potential investors to trade shares of our common stock
and warrants and could ultimately further depress the trading price of our
common stock and warrants. In addition, we may have more difficulty in
raising necessary additional funds as a result of not trading on the Nasdaq
SmallCap Market.
To meet future capital needs, we may pursue one or more of the following
financing options:
o stock offerings, such as this offering,
o licensing agreements with established pharmaceutical companies,
and
o investment from, and partnership(s) with, established
pharmaceutical companies.
We are currently open to licensing discussions with established
pharmaceutical companies that have drugs or research and development
efforts in areas complementary to those in which we have a focus. We
believe that ENT-103 can be a complementary co-therapeutic agent for drugs
targeting the pain market. Our management is also pursuing direct
investments by strategic partners. The desired strategic partner would be
expected to participate in the development process from a scientific
advisory board standpoint and in any other manner that is deemed mutually
beneficial. To date, we have not entered into any such arrangements and
none are currently pending. Additionally, there can be no assurance that we
will be able to successfully negotiate and complete any of these
arrangements or that we will be able to do so on terms we deem acceptable.
CRITICAL ACCOUNTING POLICIES
We routinely grant stock options to compensate officers, directors and
employees for their services. This practice allows us to conserve our cash
resources for our drug development program. We have adopted the fair value
accounting provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation". Under these provisions,
15
stock based compensation is measured based on the fair value of the options
granted using the Black-Scholes option-pricing model. Amounts recorded for
options granted to non-employees are determined in accordance with
Statement of Financial Accounting Standards No. 123 and EITF 96-18 based on
the fair value of the consideration or the fair value of the equity
instruments issued, whichever is more reliably measured. Deferred charges
related to options granted to non-employees are periodically remeasured as
the underlying options vest and are included as unearned stock compensation
in the stockholders' equity section of the balance sheet.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 requires that a liability be recorded in the
guarantor's balance sheet upon issuance of a guarantee. In addition, FIN 45
requires certain disclosures about each of the entity's guarantees. The
disclosure provisions of FIN 45 are effective for annual and interim
periods that end after December 15, 2002. The recognition provisions of FIN
45 are applicable prospectively to guarantees entered after December 31,
2002. The adoption of FIN 45 effective January 1, 2003 did not have a
material effect on our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for those entities that elect to voluntarily adopt
the fair value accounting provisions of SFAS 123, "Accounting for
Stock-Based Compensation." SFAS No. 148 also requires more prominent
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation as well as pro forma
disclosure of the effect in interim financial statements. The transition
and annual disclosure provisions of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002. The interim disclosure requirements
are effective for the first interim period ending after December 15, 2002.
Entropin has previously adopted the fair value accounting provisions of
SFAS No. 123 and therefore the adoption of SFAS No. 148 did not have a
material effect on the Company's results of operations or financial
position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity" ("SFAS No. 150"). This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the first
interim period beginning after June 15, 2003, with certain exceptions. The
adoption of SFAS No. 150 effective July 1, 2003 did not have a material
effect on our results of operations or financial position.
BUSINESS
BUSINESS OVERVIEW
Entropin is a pharmaceutical research and development company focused on
the development of proprietary compounds for pain therapy. Our primary
activities since inception have been research and development, including
preclinical studies, and tests focused on securing U.S. Food and Drug
Administration (FDA) approval for our proprietary compounds. We believe
that our current compound, ENT-103, has the potential to effectively treat
a number of medical conditions using various delivery systems. At present,
we are actively pursuing two delivery systems, injectable and topical, for
ENT-103. A third delivery system, inhalation therapy, is being evaluated.
The discovery of ENT-103 began in Northern California in August of 1984.
Lowell M. Somers, M.D., a general practitioner, had identical twin brothers
as patients. The genetically identical twins were 35 years old and appeared
to be in good physical health until one developed severe rheumatoid
arthritis. Dr. Somers began to research how one twin could be symptom-free
and the other incapacitated and struggling to survive as a result of the
disease. Dr. Somer's investigation led to the discovery that the
symptom-free twin was addicted to cocaine (chemically known as
benzoylmethylecgonine or BME). Based on this knowledge, Dr. Somers began to
look beyond the abusive characteristics of cocaine to research the drug's
potential medicinal characteristics. He began to explore the potential of
16
BME in his laboratory and developed a rudimentary mixture of a drug later
called Esterom. Dr. Somers administered the mixture to the dying twin over
a two-week period with remarkable results. Signs of active arthritis began
to disappear and the previously bed-ridden twin became more mobile.
Subsequent testing revealed that the previously debilitating rheumatoid
arthritis was in remission. Following this discovery, three more rheumatoid
arthritis patients were treated with the Esterom solution for two weeks
each to validate the initial results. The disease went into remission in
all three patients.
Cocaine (BME) has been used for over a century as a potent pain reliever.
Its use, however, was limited because of the potential for addiction
following repeated use of the drug. Although the Esterom solution is
derived from cocaine, we believe the results of Entropin's clinical studies
indicate that the Esterom solution does not demonstrate any of the adverse
clinical effects of cocaine, such as euphoria, rapid heart beat, or
elevated blood pressure and is non-addictive. We believe that our
proprietary development process allows us to isolate the positive medical
benefits of cocaine and avoid the negative side effects, potentially
representing a major breakthrough in the treatment of pain.
In the late 1980s Entropin filed an Investigational New Drug, or IND,
application with the FDA seeking approval of Esterom solution as a topical
application. Based on our successful completion of four preclinical animal
studies with no material adverse events, the FDA approved the application.
In 1991, Entropin began a Phase I clinical study of Esterom as a topically
applied solution to determine the drug's safety profile. We believe the
results of the study returned the following positive findings:
o No significant changes in diastolic or systolic blood pressure;
o No significant differences in blood pressure between active and
placebo;
o No significant differences in pulse rate between active and
placebo;
o No cardiovascular effects;
o No irritation attributed to Esterom;
o No central nervous system effects (including euphoria); and
o No change in blood chemistry.
A small number of patients reported mild pruritus (itching) and redness
(skin irritation) after the fifth day of application in both the drug and
placebo groups. A post study patch test performed on all subjects revealed
no evidence of allergic sensitization and suggested that this side effect
was likely related to the irritant effect of propylene glycol which was in
both Esterom and the placebo.
Phase I results were submitted to the FDA and Entropin was allowed to
proceed with a Phase II clinical study to continue testing for any toxic
effects and to begin determining the efficacy of Esterom. Improvement in
range of motion was measured in two separate patient groups (acute back
sprain and painful shoulders) to determine the drug's efficacy. Entropin
reported in January 1996 that the Phase II clinical trials showed
statistically significant improvement in range of motion was achieved in
both groups within ten minutes of application which was sustained for the
length of the study (seven days). No significant toxicity was observed.
Following the submission of the Phase II results, the FDA permitted
Entropin to proceed with a Phase III clinical study with primary endpoints
measuring shoulder range of motion and, at the FDA's request, quality of
life improvement, as measured by a subjective questionnaire. The results of
this Phase III study, released in October of 2000, indicated that Esterom
showed some degree of efficacy, although not at the statistically
significant levels required by the FDA, which meant that we would need to
conduct one or more additional clinical studies to be able to obtain the
needed regulatory approval. No significant adverse events (side effects)
were observed.
Based on the positive dose trending and lack of toxicity observed in our
Phase III trials, we designed, and received FDA approval for, a Phase
II/III clinical study using a different subjective questionnaire to measure
quality of life improvement, as required by the FDA. Results of this trial
were released in September of 2002 and were similar to our earlier Phase
III trial; Esterom demonstrated safety and efficacy, but did not achieve
the FDA required levels of statistical significance, thereby requiring
additional clinical trial data if the Company wished to continue the
development of the solution.
17
DISCOVERY OF ENT-102 AND ENT-103
In an effort to understand Esterom's mechanism of action, or MOA, and to
identify and quantify each component of our Esterom solution, Entropin
contracted for the synthesis of each of the chemical entities in the
Esterom solution and began MOA studies with researchers from Brigham &
Women's Hospital at Harvard Medical School and the University of Arizona
Medical Center.
From these studies, we discovered that Esterom works by effectively
blocking nerve impulse conduction, resulting in anesthetic and potentially
long-lasting analgesic properties. Having both anesthetic and analgesic
properties makes Esterom extremely unique. Testing the individual
components that comprise the Esterom solution, we discovered the
hydroxypropyl esters of benzoylecgonine, which we named ENT-102, are very
potent and comprise the active molecules in the mixture. In preclinical
animal models, these molecules were shown to be 30- to 50-times more potent
as analgesics than their non-ester parent compounds, and 5-times more
potent than lidocaine, a commonly used anesthetic for local analgesia (pain
suppression). Subsequently, we discovered a method of synthetically
preparing ENT-102 and have U.S. and foreign patents pending for this
method.
Based on the discovery of ENT-102 and the preclinical research findings at
Harvard and the University of Arizona using ENT-102, coupled with the
results of our Phase II/III clinical study with Esterom solution, we
decided to halt further development of Esterom and pursue development of
ENT-102. In January 2003, these development efforts yielded a new chemical
entity, ENT-103, the simplified next generation of ENT-102.
ENT-103 is a single chemical compound that exists as a single molecular
species. In contrast, ENT-102 is a single chemical compound comprised of a
mixture of four chemical species. Based on the demonstrated pain reduction
equivalency of ENT-103 and ENT-102 in preclinical studies, and the
advantages of pursuing regulatory approval with a single molecule versus a
mixture of four molecules, we elected to focus on the development of
ENT-103 as a therapy for treatment of acute pain. Because ENT-103 is
significantly different on a molecular level from Esterom solution, which
has eighteen molecules compared to ENT-103's single molecule, we cannot use
any of the Esterom clinical trial data for ENT-103.
In February 2003, our executive management team and Board of Directors met
with our key scientific advisors to review the progress of the preclinical
studies. Following that meeting, we assembled a committee of independent
pain experts to critique the work performed by our collaborators. The
committee performed an in-depth review of the research and the preclinical
studies and concluded, among other things, that ENT-103 appeared to
demonstrate performance as an active pain reliever in preclinical models
for post-incisional pain and neuropathic pain. Based on these conclusions,
we were encouraged to continue our preclinical research with ENT-103.
Accordingly, we are now actively investigating two delivery systems,
injectable and topical, for administering ENT-103. A third delivery system,
inhalation therapy, is under consideration. We believe that ENT-103 may be
effective for treating a number of medical conditions using various
delivery systems.
In October 2003 we expanded the preclinical evaluation of ENT-103 by
initiating studies at the University of Miami. These studies were
undertaken as a follow-up to our previous studies performed at Harvard
Medical School and the University of Arizona. The University of Miami
investigators evaluated the effects of ENT-103 in neurogenic inflammatory
pain. These studies showed that ENT-103 exhibited analgesic (pain killing)
activity for both acute pain and chronic pain and that the analgesic
effects were long-lasting. By comparison, lidocaine, a widely used
analgesic, was effective only on acute pain and its analgesic effects did
not last as long as those exhibited by ENT-103.
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RELATED PRODUCTS
Our research has not only led to the discovery of ENT-103, but also to the
discovery of potential new therapeutic compounds using our proprietary
Structural Activity Relationship, or SAR, technology. We believe that this
technology will allow us to develop new pharmaceutical compounds by
treating compounds like building blocks. By combining different compounds
in novel ways, new products can be developed that are safer and more
effective. For example, minor chemical modifications have produced new
non-steroidal anti-inflammatory compounds that have fewer gastrointestinal
side effects than the existing base product currently on the market.
Two of Entropin's issued patents describe the SAR technology that forms the
basis for systematically developing New Chemical Entities, or NCEs, which
may expand our product pipeline. These NCEs have the potential for
different safety and efficacy profiles, as well as the potential for
treating new and different disease indications as compared to ENT-103 and
Esterom solution. The following table identifies the NCEs that combine
benzoylecgonine with eight chemical entities representing drugs currently
on the market. The resulting NCEs appear to combine the pain killing
properties of ENT-103 with each of these well-known anti-inflammatory
compounds, resulting in potentially more potent anti-inflammatory/analgesic
products:
GENERIC NAME TRADE NAME
------------ ----------
Acetylsalicylic acid Aspirin
Ibuprofen Advil
Piroxicam Feldene
Naproxen Naprosyn
Indomethacin Indocin
Fenoprofen Nalfon
Acetaminophen Excedrin
Mefenamic acid Ponstel
Although we have not commenced any preclinical or clinical trials testing
the safety or efficacy of these NCEs, we believe that the clinical
properties of the component parts will not be adversely affected by
combining the generic anti-inflammatory / analgesic product with ENT-103.
SCIENTIFIC OVERVIEW
When BME (cocaine) is mixed with a pharmaceutical solvent called propylene
glycol and heated under defined conditions, the addictive potential of the
BME is essentially eliminated. In our clinical studies using the Esterom
solution prepared in this manner, there was no evidence of any of the
physiological effects associated with the use of BME.
Our preclinical studies have shown that the removal of the chemical
structure called methyl from benzoylMETHYLecgonine and the substitution of
a propylene structure to give HYDROXYPROPYL benzoylecgonine, results in the
generation of a potent anesthetic/analgesic. As noted above, both our
clinical studies with Esterom solution and a study` performed by our
collaborators at Research Triangle Institute indicate that little, if any,
HYDROXYPROPYLbenzoylecgonine is likely to pass into the brain.
19
There are two forms of propylene glycol - 1,2 and 1,3 propylene glycol -
that can be used to prepare HYDROXYPROPYLbenzoylecgonine. We have called
the drug prepared using 1,2 propylene glycol ENT-102; drug prepared with
1,3 propylene glycol is called ENT-103. Both of these chemicals have been
shown to be active in preclinical testing in models for pain and both are
potent anesthetics/analgesics. The difference between the two compounds has
to do with the chemical structures and how they react with benzoylecgonine
to form the HYDROXYPROPYLbenzoylecgonine. Figure 1 below depicts the
structure of ENT-102 and Figure 2 below depicts ENT-103. We believe that
the relative chemical simplicity of ENT-103 will make it easier to obtain
regulatory approval of the compound.
FIGURE 1
ENT-102
[graphics of compounds shown here]
FIGURE 2
ENT-103
[graphics of compounds shown here]
20
In February 2003, we met with our key scientific advisors to review the
progress of the preclinical studies being performed at Harvard Medical
School and the University of Arizona. These preclinical studies indicate
that ENT-103 performs as an active pain reliever in preclinical models for
post-incisional pain and neuropathic pain. Demonstrating preclinical
pharmacology is the essential first step in the development of a drug and
the data reviewed at this recent meeting continues to support the activity
of ENT-103 as a potential new pain therapeutic. The key scientific
observations from our review of these preclinical studies include:
o ENT-103 is effective in acute pain states;
o ENT-103 is effective against the consequences of acute
inflammatory pain;
o ENT-103 is effective against experimental neuropathic pain; and
o ENT-103 suppresses the abnormal pain to tactile stimulation that
occurs after an incision.
Preclinical research conducted at the University of Arizona evaluated the
effects of ENT-103 in three pain models: (1) acute pain representative of
post-operative pain; (2) pain associated with acute and chronic
inflammatory pain; and (3) neuropathic pain. This preclinical research
indicates that ENT-103 is an active compound that is effective in acute
pain states, acute inflammatory pain, and neuropathic pain, but does not
alter chronic inflammatory pain at the dose tested. Assuming the use of a
delivery system that will effectively get the drug to the site of action,
ENT-103 has demonstrated efficacy in the treatment of pain.
Research conducted at Harvard Medical School expanded studies of ENT-103 to
treat the elevated pain, or hyperalgesia, which follows a surgical
incision. These preclinical studies indicated that ENT-103 demonstrates
complete anesthesia of the skin for up to two hours after injection.
Our preclinical studies also revealed that ENT-103 has at least a 3-fold
greater safety profile for cardiotoxic reactions over bupivacaine and that
ENT-103 was approximately 4-fold safer than bupivacaine with regard to
neurotoxicity. Additionally, through IN SILICO (computerized prediction of
chemical activity) modeling, we have concluded that ENT-103 is expected to
have little blood-brain barrier penetration potential, suggesting that
ENT-103 is unlikely to pass from the bloodstream into the brain in any
significant amount.
PRODUCT DEVELOPMENT STATUS
We have yet to commence human clinical studies with ENT-103. We expect to
complete our ENT-103 preclinical research and toxicology studies and begin
human trials in late 2004. In anticipation of the commencement of human
clinical studies, we have conducted and will continue to conduct
preclinical testing as required by the FDA. These studies include
additional assessment of pharmacologic activity, assessment of cardiotoxic
and neurotoxic potential, as well as other potential toxicology studies
required by the FDA, and studies to address the absorption, distribution,
metabolism and elimination of ENT-103 in a variety of formulations.
PRODUCTION PROCESS
The ENT series of compounds are manufactured from a readily available
source, pharmaceutical-grade cocaine. We obtain the starting material from
our manufacturing partner, Macfarlan Smith of Edinburgh, Scotland.
Macfarlan Smith is a 100+ year old company recognized as one of the premier
active pharmaceutical ingredient manufacturers and they are regarded as
particularly expert at the production of narcotic substances. We believe
that we would be able to obtain, on commercially reasonable terms, adequate
supplies of the ENT series compounds from another supplier if there was any
significant disruption of our supply relationship with Macfarlan Smith.
The production process, for which we have filed a manufacturing patent, is
a simple, straightforward three-step process that typically has yields in
excess of 95%. We have also prepared the free-base form and several salts
of ENT-103 that facilitate the development of various potential delivery
forms of ENT-103, such as a topical and/or inhaled form of the drug.
21
MARKET OVERVIEW
Pain is common to nearly all medical conditions. The type and severity of
the pain determines the treatment. For this reason, the pharmaceutical
market for pain is divided into two main categories, acute and chronic
pain, and then further segregated by the underlying disease causing the
pain.
The characteristics of the pain market have been defined by Frontline
Strategic Management in a 2001 study entitled, "Pain Management: A
Strategic Market Analysis." The key market characteristics identified are:
o Total sales worldwide in 2000 for prescription drugs to treat
pain - $21.6 billion;
o U.S. prevalence (total number of patients with the medical
problem) of chronic pain - 85.1 million; and
o U.S. incidence (total number of occurrences of a medical problem)
of acute pain - 192.7 million.
There are two major classes of compounds to treat pain: non-steroidal
anti-inflammatory drugs (NSAIDs) and narcotics. According to Frontline,
these two classes of pain relievers had sales of more than $10 billion in
the U.S. alone in 2000. These drugs, however, often have significant side
effects associated with their use. A new product for the treatment of pain
that does not have the associated side effects could be expected to capture
a significant segment of this very large market.
We retained MEDACorp, a division of the investment bank Leerink Swan, to
identify the segments of the pain market with major unmet needs. MEDACorp's
medical consultants concluded that a product with the characteristics of
ENT-103 has the potential to become a significant new medical product in
the treatment of a variety of significant indications, including the
following:
o Herpes zoster (shingles); o Herpes simplex virus II;
o Post-operative pain; o Minor dermatological procedures;
o Lower-back pain; o Trigeminal neuralgia;
o Fibromyalgia; o Nerve entrapment syndromes;
o Sprains and strains; o Intra-muscular injections;
o Atopic dermatitis; o Oral & esophageal candidiasis; and
o Mucositis; o Phelbotomy and IV placement.
We believe that the market for pharmaceutical products to treat pain has
substantial unmet needs and presents a substantial opportunity for
Entropin. Because ENT-103 can be formulated for topical and injectable
delivery, we believe our compound has the potential to address many unmet
needs in this market, such as an injected product for the treatment of
post-operative pain and a topical product for the treatment of a variety of
localized painful conditions including Herpes zoster (shingles),
dermatologic/cosmetic procedures, and Herpes simplex type II. Additionally,
we have begun investigation into an inhalable formulation of ENT-103 that
may have use for the treatment of chronic pain. Each of these indications
represent large markets in the U.S. and abroad and we believe that ENT-103
and related products discovered through our SAR technology potentially
represent significant advances in the treatment of patients in each market.
COMPETITION
The pharmaceutical industry is characterized by rapidly evolving technology
and intense competition. Many companies of all sizes, including major
pharmaceutical companies and specialized biotechnology companies, may
currently be engaged in activities similar to our activities. Many of our
competitors have substantially greater financial and other resources and
larger research and development and clinical and regulatory affairs staffs.
In addition, colleges, universities, governmental agencies and other public
22
and private research organizations continue to conduct research and are
becoming more active in seeking patent protection and licensing
arrangements to collect royalties for use of technologies that they have
developed, some of which may be in direct competition with our proposed
products. We also must compete with these institutions in recruiting highly
qualified scientific personnel. We do not have the resources to compete
with major pharmaceutical companies on a wide-scale basis in the areas of
preclinical and clinical testing, regulatory approvals, manufacturing and
marketing. In addition, many of our competitors have significantly greater
experience in testing new or improved therapeutic products and obtaining
regulatory approval of products. Accordingly, our competitors may succeed
in obtaining regulatory approval for their products more rapidly than we
are able to obtain approval for ENT-103.
The PhRMA "2003 Survey: Medicines In Development For Older Americans" lists
29 products in various stages of development for the treatment of pain. The
products under development include new chemical entities as well as product
line extensions of existing products. Both large and small biotechnology
and pharmaceutical companies are supporting development of pain products.
To the best of our knowledge, none of these companies are developing
products based upon cocaine. In light of our patent portfolio, the tight
import controls and regulatory restrictions on cocaine and coca leaves
(from which cocaine is derived), and the fact that the active compound in
cocaine cannot be synthesized in the laboratory, we believe that there is a
relatively small risk that another pharmaceutical company will be able to
successfully develop a pain product derived from cocaine, although we do
expect our competitors to continue developing competing products derived
from other sources.
INTELLECTUAL PROPERTY
Our policy is to file patent applications to protect technology, inventions
and improvements to our inventions that are considered important to the
development of our business. In general, our patents relate to novel,
active ingredients that are useful in preventing and treating a number of
important diseases and disorders. These include immunoregulatory disorders,
neuromuscular disorders, joint disorders (including arthritis,
osteoarthritis and related inflammatory disorders), connective tissue
disorders, circulatory disorders and pain indications. We also have issued
patents covering processes for producing these compounds and for methods of
treating or preventing multiple diseases and disorders using these
compounds.
As described in our patent portfolio table set forth below, we currently
hold 63 issued and pending patent applications worldwide, including seven
issued U.S. patents and 44 issued foreign patents; we have four patents
pending in the U.S.
Patents and Patent Applications
United States Foreign
Description Issued Pending Issued Pending
----------- ------ ------- ------ -------
Benzoylecgonine and Benzoylnorecgonine for
Treatment of Rheumatoid Arthritis -- -- 4 --
Novel Benzoylecgonine, Ecgonine and Ecgonidine Derivatives 3 -- 30 --
Covalently Coupled Benzoylecgonine, Ecgonine and Ecgonidine
Derivatives 4 1 10 5
Methods For Producing 1,2-Hydroxyalkyl Tropane Esters
(Esterom) -- 1 -- 1
Methods for Producing Hydroxyalkyl Tropane Esters -- 1 -- 2
Novel 1,3-Propanediol Tropane Esters and Related Compounds -- 1 -- --
TOTALS 7 4 44 8
23
The issued U.S. patents include two composition-of-matter patents covering
the molecules contained in Esterom solution (including ENT-102) that expire
in 2012 and 2013, respectively. We have also filed a patent application
with the United States Patent Office along with international counterparts
that describes a method for the enrichment of the compounds covered in our
composition of matter patents that will extend the protection of ENT-102.
This patent application describes a method for the production of Esterom
solution and its components, including ENT-102.
In August 2002, we filed a patent describing the manufacturing process for
ENT-102. This application describes the preparation of commercial
quantities of ENT-102 and other related compounds (including ENT-103). The
patent application is currently in the process of being filed abroad. In
December 2002, we filed a composition of matter patent application for
ENT-103. We believe that composition-of-matter patents provide the
strongest protection available.
Our new patent application claims composition of matter containing ENT-103
and also provides the potential for the development of a number of
additional new chemical entities. We believe our other patents also provide
the foundational framework for the discovery of additional new chemical
entities using our SAR technology, resulting in new and different products.
We also rely on trade secret protection of our intellectual property. We
regularly enter into confidentiality agreements with third parties,
employees and consultants. We believe that these agreements generally
protect our intellectual property rights by providing assignment of
interests in patents and other intellectual property to Entropin arising
from work done and restricting the disclosure and misuse of confidential
information. However, trade secrets may be lawfully reverse-engineered by
competitors and generally provide less protection than patents.
BUSINESS ORGANIZATION
We maintain a limited management team and support structure comprised of
three full-time employees and have historically contracted with
professional organizations and third parties who have provided services and
expertise in areas such as research and development, preclinical and
toxicology studies, clinical trial organization and management, regulatory
matters, clinical supply and manufacturing of our products, product
packaging, and enhanced drug formulation.
We have employed this virtual outsourcing business model since the late
eighties. This model has effectively kept costs low and allowed us to
maximize our limited resources. Outsourcing allows us to secure the most
qualified individuals and institutions without encumbering us with heavy
fixed costs. By employing this business model, we believe that we can more
effectively control the cost of bringing a drug to market. It is estimated
that major pharmaceutical companies spend more than $800 million dollars to
secure FDA approval and bring a new product to market. We estimate we can
bring ENT-103 to market for less than $100 million, assuming that the
compound proves to be safe and effective in clinical trials.
The primary organizations and third party providers with whom we have
contracted, and intend to contract with in the future, for professional
services are identified below along with the services they have provided.
Although each of these relationships is important to us, we believe that we
would be able to arrange for another party to provide similar services on
substantially the same economic terms if we were to lose any of these
relationships. However, this may delay our operations and cause us to incur
additional costs.
PARTY RELATIONSHIP
Macfarlan Smith Macfarlan Smith, a wholly owned subsidiary of Johnson Matthey plc, manufactures
active pharmaceutical ingredients and initially manufactured the Esterom solution
used in our clinical trials. Subsequently, their scientists have developed a method
for manufacturing scale-up of ENT-103.
RTI International RTI International, a research institute affiliated with Research Triangle Park (a
collaboration among North Carolina State University, Duke University and the
University of North Carolina at Chapel Hill), prepared as analytical reference
standards each of the components in the Esterom solution, providing us with the
tool to determine the active ingredient and proceed with the development of
ENT-103. We expect that we will continue to collaborate with researchers at RTI on
the development of additional compounds using SAR technology.
24
Brigham & Women's In 2001, we entered into a collaboration with Gary Strichartz, Ph.D., Professor of
Hospital, Harvard Anesthesiology and Director of the Pain Research Center to study the effects of
Medical School Esterom Solution and its components in various preclinical pain models. Through
this work we identified ENT-102/103 as the active component. We expect that we will
continue to collaborate with researchers at Harvard Medical School on future development
of ENT-103.
University of To expand and corroborate the work done by Dr. Strichartz, we entered into a
Arizona School of collaboration with Frank Porreca, Ph.D., Professor of Pharmacology, University of
Medicine Arizona School of Medicine to evaluate the effects of Esterom and its various
components in preclinical models of inflammatory and neuropathic pain. We expect
that we will continue to collaborate with researchers at the University of Arizona
School of Medicine on the future development of ENT-103.
The Miami Project to We have commenced additional preclinical pharmacology and the evaluation of new
Cure Paralysis, formulations of ENT-103 in a collaboration with Jacqueline Sagen, Ph.D. Dr. Sagen
University of Miami will be testing ENT-103 in certain models for both acute and chronic pain. We
School of Medicine expect that we will continue to collaborate with researchers at the University of
Miami School of Medicine on the future development of ENT-103.
We have also entered into an agreement with a specialty pharmaceutical company
pursuant to which we will attempt to combine ENT-103 with its proprietary
excipient to create a topical formulation. We expect that any new formulations
will be tested by our paid researches at Harvard Medical School, the University
of Arizona or other academic institutions as deemed appropriate. Research
efforts under this agreement have not yet begun and it is too early to know if
this research will result in an effective topical formulation.
GOVERNMENT REGULATION
We are subject to two principal areas of governmental regulation, as
described below.
U.S. FOOD AND DRUG ADMINISTRATION
The research, development, testing, manufacturing, promotion, marketing and
distribution of drug products are extensively regulated by government
authorities in the United States and other countries. Drugs are subject to
rigorous regulation by the Food and Drug Administration, or FDA, in the
United States and similar regulatory bodies in other countries. The steps
ordinarily required before a new drug may be marketed in the United States,
which are similar to steps required in most other countries, include:
o preclinical safety studies in animals and formulation studies;
o submission to the FDA of an Investigational New Drug, or IND,
application, approval of which must be received prior to
commencing human clinical studies with a new drug;
o adequate and well-controlled clinical trials to establish the
safety and efficacy of the drug for each medical indication;
o submission of a New Drug Application, or NDA, to the FDA; and
o FDA review and approval of the NDA.
Preclinical animal tests include laboratory evaluation of product
chemistry, stability, pharmaceutical properties and formulation, as well as
studies to prove the product is safe in animals. The results of preclinical
testing are submitted to the FDA for review prior to submission of an IND;
the FDA can prevent us from commencing human clinical studies should it
find these studies inadequate. The FDA may halt proposed or ongoing
clinical trials at any time and/or allow the trials to continue under
specified terms.
25
Clinical trials to support new drug applications are typically conducted in
three sequential phases. During Phase I safety studies, the initial
introduction of the drug to healthy human subjects, the drug is tested to
assess how it is handled in the body and to measure the level of the drug
in the body over time, as well as any side effects associated with
increasing doses.
Phase II usually involves studies in a limited patient population to: (1)
assess the efficacy of the drug in specific, targeted indications; (2)
assess dosage tolerance and optimal dosage; and/or (3) identify possible
adverse effects and safety risks.
If a compound is found to be potentially effective and to have an
acceptable safety profile in Phase II evaluations, Phase III trials (also
called pivotal studies, major studies or advanced clinical trials) are
undertaken to further demonstrate clinical efficacy and further test for
safety of the product within an expanded patient population at
geographically dispersed clinical study sites.
After successful completion of the required clinical testing, the NDA is
generally submitted. The FDA may request additional information before
accepting the NDA for filing, in which case the application must be
resubmitted with the additional information. Once the submission has been
accepted for filing, the FDA has 180 days to review the application and
respond to the applicant. The review process is often significantly
extended by FDA requests for additional information or clarification. The
FDA may refer the new drug application to an appropriate advisory committee
for review, evaluation and recommendation as to whether the application
should be approved, but the FDA is not bound by the recommendation of an
advisory committee.
If FDA evaluations of the new drug application, or NDA, and the
manufacturing facilities are favorable, the FDA may issue either an
approval letter or an approvable letter. An approvable letter will usually
contain a number of conditions that must be met in order to secure final
approval of the NDA and authorization of commercial marketing of the drug
for certain indications. The FDA may refuse to approve the NDA or issue a
not approvable letter, outlining the deficiencies in the submission and
often requiring additional testing or information.
The manufacturers of approved products and their manufacturing facilities
are subject to continual review and periodic inspections. Because we intend
to contract with third parties for manufacturing our product, our control
over compliance with FDA requirements will be more complicated. In
addition, identification of certain side effects or the occurrence of
manufacturing problems after any of our drugs are on the market could cause
subsequent withdrawal of approval, reformulation of the drug, additional
clinical trials, and changes in labeling of the product.
Outside the United States, our ability to market our products will also be
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. Although the requirements governing the conduct of
clinical trials and marketing authorization vary widely from country to
country, the foreign regulatory approval process includes all of the risks
associated with the FDA approval set forth above. At present, foreign
marketing authorizations are applied for at a national level, although
within Europe procedures are available to companies wishing to market a
product in more than one European Union member state.
We will choose the appropriate route of European regulatory filing to
accomplish the most rapid regulatory approvals. However, the regulatory
strategy may not secure regulatory approvals or approvals of the chosen
product indications. We intend to contract with an experienced third party
to assist with our European clinical development and regulatory approvals.
U.S. DRUG ENFORCEMENT ADMINISTRATION
The DEA has designated Esterom solution as a Schedule II controlled
substance. Because ENT-103 is a derivative component of Esterom solution,
and also contains benzoylecgonine; this compound is also considered a
Schedule II controlled substance. The manufacture, storage, shipment and
use of a Schedule II controlled substance are subject to stringent
government regulations.
26
LEGAL PROCEEDINGS
On January 28, 2003, a complaint was filed in the superior court of the
state of California against us and certain of our executive officers
seeking unspecified damages. The lawsuit alleges that the defendants
violated Sections 25400/25403/25500 of the California General Corporation
Law, as well as Section 11 of the Securities Act of 1933 by making false
and misleading statements in publicly disseminated press releases,
registration statements and other filings with the Securities and Exchange
Commission. The plaintiffs also allege that one of our directors sold stock
for personal gain in violation of federal and state securities laws. The
suit alleges that defendants failed to disclose negative clinical trial
data and failed to perform certain studies prior our March 2000 public
offering of common stock and warrants. We believe the claims are without
merit and have filed a motion for summary judgment with the court. Although
we believe the claims are without substance, there can be no assurance that
we will succeed in defending or settling this action. Additionally, it is
possible that this lawsuit will harm our business and/or financial
position.
FACILITIES
We sublease 800 square feet of office space in Indio, California from one
of our principal stockholders, Thomas T. Anderson, for a monthly rent of
$800 on a month-to-month basis. We believe this lease is at or below market
prices for comparable office space. We believe that our current space is
adequate for our current and identified future needs.
EMPLOYEES
We have two full-time executive officers, Thomas G. Tachovsky, President
and Chief Executive Officer and Patricia G. Kriss, Chief Financial Officer,
Vice President of Finance and Administration, and Secretary/Treasurer, and
one full-time administrative employee. The core management team is
augmented by Higgins D. Bailey, Chairman of the Board, and Joseph R.
Ianelli, Vice Chairman of the Board. The members of our Board of Directors,
including the Chairman and the Vice Chairman, are compensated with stock
options rather than cash salaries.
MANAGEMENT
The names, ages and current positions of our Directors and Executive
Officers are as follows:
Name Age Position
---- --- --------
Higgins D. Bailey. Ed.D. 73 Chairman of the Board and Director
Joseph R. Ianelli, M.B.A. 64 Vice Chairman of the Board and Director
Thomas G. Tachovsky, Ph.D. 56 President, Chief Executive Officer and Director
Patricia G. Kriss, M.B.A. 53 Chief Financial Officer, Vice President of Finance &
Administration and Secretary/Treasurer
Randall L. Carpenter, M.D. 50 Director
Paul V. Maier, M.B.A. 55 Director
Bruce R. Manning R.Ph. 60 Director
Dennis K. Metzler, J.D. 63 Director
Set forth below is biographical information for each of our Executive
Officers and each member of our Board of Directors.
27
HIGGINS D. BAILEY, ED.D., joined us as an officer and director in July 1992
and is currently our Chairman of the Board. From July 1995 to December
1996, Dr. Bailey was 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. Since 1991, he has served as the
business manager for Thomas T. Anderson Law Firm, Indio, California. Thomas
T. Anderson is one of our principal stockholders. Dr. Bailey currently
serves as Chairman of the Board for Criticare Systems, Inc., a public
company that manufacturers and sells vital signs medical monitoring
equipment. Dr. Bailey received a B.A. degree in biology from Eastern
Washington University, an M.S. degree in program planning and personnel and
an Ed.D. degree in administration and management from the University of
California, Berkeley, California.
JOSEPH R. IANELLI, M.B.A., joined us as a director in February 2000. Since
June 2002 he has been Vice President of Licensing for Paratek
Pharmaceuticals. From August 2000 to June 2002, Mr. Ianelli owned and
operated Ianelli Associates, LLP, a consulting firm focused on serving the
pharmaceutical, biotechnology and medical device industries. From 1999
through 2000 he was the President and Chief Executive Officer of
PharmaConnect, Inc. responsible for design and development of an Internet
website for physicians. From 1999 through 2000 he also served as the
President and Chief Executive Officer of Renaissance Pharmaceuticals, Inc.,
a development stage company involved in drug delivery technologies. From
1983 to January 1999 he served as the Senior Vice President of Business
Development for Astra USA, Inc. where he was responsible for acquisitions
and licensing. At Astra, he served on the Executive Committee and was a
member of the Management Advisory Board. Mr. Ianelli currently serves as a
director of Bioject Medical Technologies, Inc. a leading developer of
needle-free drug delivery systems. Mr. Ianelli received a B.A. degree in
Biology from Marist College, an M.A. degree in Biology from the State
University of New York and an M.B.A. degree from Iona College.
THOMAS G. TACHOVSKY, PH.D., joined us as a director, President and Chief
Executive Officer in November 1999. Since June 1997 he has held a series of
interim senior management positions in development stage bio-pharmaceutical
companies including Redox Pharmaceuticals Corporation, Novavax, Inc. and
Paracelsian, Inc. From June 1995 to November 1997, he was a director and
executive vice-president of Protyde Pharmaceuticals, Inc. From June 1991 to
February 1998, he was general partner of MATCO & Associates, a
bio-pharmaceutical industry consulting firm for corporate partnering,
technology assessment and market valuation. He has held business
development positions with Cytogen Corporation and Creative Biomolecules
and was a research and development manager with Johnson & Johnson. Dr.
Tachovsky received a B.S. degree in biology from Gonzaga University; a M.S.
degree in management from Lesley College; and a Ph.D. degree in
microbiology from the University of Rochester School of Medicine.
PATRICIA G. KRISS, M.B.A., joined us in January of 2000 from
Kendall-Jackson Winery, where she was employed since January 1995, serving
initially as Director of Finance and since 1997, as Corporate Treasurer.
From 1984 to 1994, she was employed by Bay View Federal Bank where she held
a number of increasingly responsible management positions, ultimately
becoming Senior Vice President of Finance. Earlier in her career, Ms. Kriss
served as Chief Financial Officer of Atlantex Industries, a manufacturing,
sales and distribution company located in New Jersey, and Vice President of
Harris, Bretall & McEldowney, Inc., an investment management firm located
in San Francisco. Ms. Kriss received a B.S. degree in Business from the
University of Missouri and an M.B.A. degree in finance from the College of
Notre Dame.
RANDALL L. CARPENTER, M.D., joined us as a director in January 2001. Since
2001 he has been the Chief Executive Officer and a member of the Board of
Directors for Sention, Inc., a pharmaceutical development company focused
on the discovery and development of drugs to treat memory impairment and
other central nervous system disorders. From 1998 though 2000, Dr.
Carpenter served as Vice President, Clinical Research & Development for
Adolor Corporation, a publicly held biopharmaceutical company. Dr.
Carpenter was the Director, 1998, and Associate Director, 1997 of Astra
USA, and Astra Pain Control, now AstraZeneca, an international research
based pharmaceutical company engaged in the development, manufacture and
marketing of prescription pharmaceutical products. He has also served as an
adjunct Associate Professor in the Department of Anesthesiology at Duke
University Medical Center since 1998. From 1994 to 1997, he was an
Associate Professor in the Department of Anesthesia at the Bowman Gray
School of Medicine of Wake Forest University. Dr. Carpenter received his
M.D. degree from the University of Michigan Medical School.
28
PAUL V. MAIER, M.B.A., joined us as a director in July 2000. Since 1992 he
has been the Senior Vice President and Chief Financial Officer of Ligand
Pharmaceuticals, Inc., a specialty pharmaceutical company, and has been a
director and Chief Executive Officer of several of its subsidiaries. Mr.
Maier also served as a Director, Vice Chairman and Treasurer of The
Wellness Community in San Diego, California from 1993 until April 2003. Mr.
Maier received a B.S. degree in Business Logistics from Pennsylvania State
University and an M.B.A. degree from Harvard University.
BRUCE R. MANNING, R.PH., joined us as a director in July 2001. Mr. Manning
is the president of New England Biomedical Research, Inc., or NEBR, a
consulting firm organized to provide regulatory affairs and product
development services to the pharmaceutical, medical device and
biotechnology industries. Prior to founding NEBR in 1990, he was vice
president of regulatory affairs and product development for Astra
Pharmaceutical Products. During his 20-year career with Astra, he was part
of teams responsible for development and obtaining regulatory approval for
over 150 medical products. Mr. Manning's extensive experience with the FDA
began early in his career when he was employed by the agency as a reviewer.
He is a registered pharmacist with a B.S. degree in Pharmacy from the
Massachusetts College of Pharmacy in Boston.
DENNIS K. METZLER joined us as a director in January 2002. Mr. Metzler is
an attorney and entrepreneur with over 30 years of business experience.
Since 1989 Mr. Metzler has been President of Metzler Enterprises, Inc., a
firm that engages in real estate development and various investment
activities. From 1977 to 1989 Mr. Metzler was Chief Executive Officer and
co-owner of his family's diversified and integrated farming business, H.P.
Metzler & Sons, based in Fresno, California. Prior to that Mr. Metzler
practiced law in Los Angeles for twelve years with the law firm of Shutan
and Trost (now Sidley, Austin, Brown & Wood). He received his J.D. degree
from the University of Southern California Law School.
All members of our Board hold office until the election and qualification
of their successors, or until death, resignation or removal. Randall L.
Carpenter, Joseph R. Ianelli, Paul V. Maier, Bruce R. Manning and Dennis K.
Metzler are independent directors. Officers serve at the discretion of our
Board of Directors.
BOARD COMMITTEES
We have five standing committees: the executive committee, the audit
committee, the compensation & benefits committee, the scientific committee
and the legal & insurance committee.
EXECUTIVE COMMITTEE
Our Executive Committee was formed to attend to and report to our Board of
Directors on day-to-day operating, financial, regulatory and other matters.
The committee consists of Higgins D. Bailey, Joseph R. Ianelli and Thomas
G. Tachovsky. Patricia G. Kriss also participates in the committee as a
member of management. The duties of the Executive Committee members are in
addition to their duties as executive officers and/or members of our Board
of Directors.
AUDIT COMMITTEE
Our audit committee attends to and reports to our board of directors with
respect to matters regarding our independent public accountants, including,
without limitation: annual review of its charter; approving the firm to be
engaged as our independent public accountants for the next fiscal year;
reviewing with our independent public accountants the scope and results of
its audit and any related management letter; consulting with our
independent public accountants and our management with regard to our
accounting methods and adequacy of our internal accounting controls;
approving the professional services rendered by our independent public
accountants; reviewing the independence, management consulting services and
fees of our independent public accountants; inquiring about significant
risks or exposures and methods to minimize such risk; ensuring effective
use of audit resources, and preparing and supervising the Securities and
Exchange Commission reporting requirements. Our audit committee currently
consists of Paul V. Maier, Bruce R. Manning and Joseph R. Ianelli, who are
all independent directors. Our audit committee is required to meet at least
four times in each fiscal year.
29
COMPENSATION & BENEFITS COMMITTEE
Our Compensation & Benefits committee was formed to attend to and report to
our board of directors with respect to the appropriate compensation of our
directors and executive officers and is responsible for administering all
of our employee benefit plans. The Compensation & Benefits Committee
currently consists of Joseph R. Ianelli, Bruce R. Manning and Dennis K.
Metzler.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Our Nominating and Corporate Governance Committee, which was previously our
Legal and Insurance Committee, was formed to attend to and report to our
Board of Directors with respect to establishing criteria for the selection
and selecting individuals qualified to become directors, developing
corporate governance principles and reviewing the Company's Directors' and
Officers' Liability insurance coverage. The Nominating and Corporate
Governance Committee currently has no policies or procedures regarding the
consideration of director nominees received from our security holders. The
Nominating and Corporate Governance Committee is also responsible for
reviewing and recommending appropriate coverage levels for the Company's
directors and officers liability insurance. The Nominating and Corporate
Governance Committee currently consists of Dennis K. Metzler, Paul V. Maier
and Joseph R. Ianelli. The Nominating and Corporate Governance Committee
held three meetings during 2002.
SCIENTIFIC COMMITTEE
The scientific committee was formed by the board of directors to attend to
and report to the board of directors with respect to clinical trials and
scientific issues. The scientific committee currently consists of Thomas G.
Tachovsky, Randall L. Carpenter and Bruce R. Manning. The Board may
establish other committees to facilitate the management of our business.
As of August 15, 2003, the Board has determined that a majority of the
members of the Board are "independent" within the meaning of the rules and
regulations of the SEC. In addition, the audit committee has determined
that Paul V. Maier qualifies as an audit committee finance expert within
the meaning of the rules and regulations of the SEC.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning
compensation paid to our chief executive officer and our chief financial
officer for the calendar years 2000, 2001 and 2002. The listed individuals
shall be referred to herein as the "Named Executive Officers."
SUMMARY COMPENSATION TABLE
Long-term
Compensation Awards
-------------------
Annual Securities
Compensation Underlying
Options
Name and Position Year Salary($) (# shares)
- ----------------- ---- --------- ----------
Thomas G. Tachovsky, 2002 $242,000 42,000
President and Chief Executive Officer 2001 $220,000 123,200
2000 $200,000 -0-
Patricia G. Kriss, (1) 2002 $151,250 13,750
Chief Financial Officer, Vice President of 2001 $137,500 109,500
Finance & Administration, Secretary/Treasurer 2000 $100,000 20,000
_____________________
(1) Options granted in 2001 include options to purchase 70,000 shares of common
stock that become exercisable upon the achievement specific performance
objectives.
30
STOCK OPTION GRANTS
In 2002, the Named Executive Officers were granted a total of 55,750
options to purchase our common stock. Of these options, 35,750 represent
performance bonuses, and are exercisable at $2.05 per share for a period of
five years and were fully vested as of June 14, 2002. The remaining 20,000
of these options were granted to Dr. Tachovsky to replace 20,000 options he
assigned to Ms. Kriss in 2000 and are exercisable at $3.05 per share
The following table sets forth certain information regarding grants of
stock options to the Named Executive Officers during 2002. The market price
of our common stock on the date of grant for each of these options was
$3.05.
Potential Realizable
Value at Assumed Rate of
Stock Appreciation for
Option Term
Underlying Granted to Exercise
Options Employees in Price(s) Expiration
Name Granted Fiscal Year ($/share) Date 5% 10%
---- ------- ----------- --------- ---- -- ---
Thomas G. Tachovsky 22,000 39.47% $ 2.05 6/14/07 $ 40,538 $ 62,965
20,000 35.87% $ 3.05 6/14/07 $ 36,853 $ 57,241
Patricia G. Kriss 13,750 24.67% $ 2.05 6/14/07 $ 25,337 $ 39,353
AGGREGATED OPTIONS EXERCISED DURING LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
The following table sets forth information concerning the number and
intrinsic value of stock options held by the Named Executive Officers on
December 31, 2002. Year-end values are based on the fair market value of
$0.31 per share as of December 31, 2002, as reported on the OTC Bulletin
Board. They do not reflect the actual amounts, if any, that may be realized
upon the future exercise of remaining stock options and should not be
considered indicative of future stock performance. No Named Executive
Officer exercised any options during 2002.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year-end Options at Fiscal Year-end
-------------------------- --------------------------
Thomas G. Tachovsky 245,200 300,000 $ -0- $ -0-
Patricia G. Kriss 73,250 70,000 $ -0- $ -0-
DIRECTOR COMPENSATION
Our non-employee directors receive $1,000 for each meeting of our Board of
Directors they attend in person, $500 for each meeting of our Board of
Directors they participate in by telephone conference and $500 for each
committee meeting they participate in, either in person or by telephone
conference. We also reimburse our directors for out-of-pocket expenses
incurred to attend meetings of the Board of Directors or its committees. In
addition, on April 1, 2002, each of our directors other than Dr. Tachovsky
received options to purchase 20,000 shares of our common stock. Such
31
options were fully vested as of March 31, 2003, remain exercisable for a
period of five years after the date of grant and have an exercise price of
$3.85 per share. In addition, on January 1, 2002, our Chairman, Dr. Bailey,
and our Vice Chairman, Mr. Ianelli, received options to purchase 40,000 and
30,000 shares of our common stock, respectively. Such options were fully
vested as of December 31, 2002, remain exercisable for a period of five
years after the date of grant and have an exercise price of $1.05 per
share.
EXECUTIVE EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Dr. Tachovsky on December 1,
1999, under which Dr. Tachovsky serves as our President and Chief Executive
Officer. Dr. Tachovsky was granted options in conjunction with his
employment agreement to purchase up to 400,000 shares of common stock at a
purchase price of $5.00 per share. These shares vest over time based on the
achievement of specified performance objectives. If the performance
objectives are not met, Dr. Tachovsky will not be eligible to vest in these
performance vesting shares. Dr. Tachovsky assigned options to purchase
20,000 shares of our common stock to Patricia G. Kriss, our Chief Financial
Officer. In the event of a change of control, merger or consolidation, all
unvested options shall become fully vested at the effective date of such
merger, consolidation or change of control. Dr. Tachovsky's employment
agreement may be terminated by either party at any time, with or without
cause, by providing written notice and is not for any specific period of
time. In the event of termination of the employment agreement, all
non-vested options will also terminate.
EQUITY COMPENSATION PLANS
The following table provides information as of December 31, 2002 with
respect to the shares of our common stock that may be issued under our
existing equity compensation plans:
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE EXERCISE FUTURE ISSUANCE UNDER
ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS
OPTIONS, WARRANTS AND RIGHTS OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
RIGHTS REFLECTED IN COLUMN (A))
PLAN CATEGORY (a) (b) (c)
------------------------ ----------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by our -- -- 393,780
stockholders(1)
Equity compensation 1,455,119 $3.34 0
plans not approved by
our stockholders(2)
Total 1,455,119 $3.34 393,780
------------------------ ----------------------------- ---------------------------- ----------------------------
(1) Consists solely of the 1998 Compensatory Stock Plan.
(2) Consists of option grants to officers, directors and employees pursuant to
individual non-qualified stock option agreements. These option grants have
exercise prices ranging from $1.00 per share to $6.00 per share. Each
option generally vests in installments over the optionee's period of
service, although some options vest upon the achievement of certain
milestones related to the development of our products and some options are
fully vested on the date of grant. The options will vest on an accelerated
basis in the case of any merger or consolidation of the Company with or
into another corporation or any other type of reorganization which results
in a change of control whereby the Company's board of directors prior to
the reorganization represents less than a majority of the Company's board
of directors after the reorganization. Each option generally has a maximum
term of five to ten years. In addition, upon the death of an optionee, any
options that the optionee was entitled to exercise on the date of death
will be exercisable until the stated expiration date of the optionee's
option by the person or persons to whom the optionee's rights pass under a
will or by the laws of descent and distribution. All of the options are
non-statutory options under the Federal tax laws.
32
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 10, 2003, by:
o each person known by us to own beneficially 5% or more of our
common stock,
o each of our executive officers and directors, and
o all of our executive officers and directors as a group.
The beneficial ownership is determined in accordance with the rules of SEC
and generally includes voting or investment power with respect to
securities. Shares of common stock issuable on exercise of currently
exercisable or convertible securities or securities exercisable or
convertible within 60 days after the anticipated closing of this offering
(February 13, 2004) are deemed beneficially owned and outstanding for
computing the percentage owned by the person holding such securities, but
are not considered outstanding for computing the percentage of any other
person. Except as indicated by footnote, and subject to community property
laws where applicable, the persons or entities named in the table have sole
voting and investment power with respect to all shares of common stock
shown as beneficially owned by them. The address of each person below is
45926 Oasis Street, Indio, California 92201.
33
NUMBER OF PERCENTAGE
SHARES NUMBER OF OF SHARES
BENEFICIALLY EXERCISABLE BENEFICIALLY
NAME OF BENEFICIAL OWNERS OWNED OPTIONS OWNED
- ------------------------- ----- ------- -----
5% STOCKHOLDERS
- ---------------
Thomas T. Anderson............................ 1,394,093 - 12.07%
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Higgins D. Bailey............................. 1,301,316 (1) 405,834 14.28%
Randall L. Carpenter.......................... 1,334 40,000 *
Joseph R. Ianelli............................. -- 123,334 1.06%
Patricia G. Kriss............................. 10,250 (2) 73,250 *
Paul V. Maier................................. 6,003 40,000 *
Bruce R. Manning.............................. -- 36,667 *
Dennis K. Metzler............................. 5,000 25,000 *
Thomas G. Tachovsky........................... 19,000 (3) 245,200 2.24%
All directors and executive officers as
a group (8 persons)......................... 1,342,903 989,285 19.63%
__________________________
* Less than 1%
(1) Includes shares owned in joint tenancy with Shirley A. Bailey, the
spouse of Dr. Bailey.
(2) Includes shares owned jointly by Patricia G. Kriss and Ronald F. Kriss
and shares held by Ronald F. Kriss, spouse of Ms. Kriss.
(3) Includes shares held jointly with Lynn Baird, spouse of Dr. Tachovsky.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We sublease approximately 800 square feet of office space from Thomas T.
Anderson, one of our principal stockholders. The rent on the sublease is
$800 per month. We believe this is a competitive lease rate for similar
real estate in the area where the office is located. All ongoing and future
affiliated transactions will be made or entered into on terms that are no
less favorable to us than those we could obtain from unaffiliated third
parties and all such transactions, and any forgiveness of loans, will be
approved by a majority of our independent, disinterested directors.
34
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our certification of incorporation and bylaws require us to indemnify our
directors and officers, to the fullest extent authorized or permitted by
applicable law, in any suit or proceeding, whether civil, criminal,
administrative or investigative, relating to that person's service as a
director or officer of the Company. Additionally, we may have certain
obligations under state law to indemnify its employees, including its
officers, for actions taken in their capacity as an employee of the
Company. Insofar as indemnification for liabilities arising under the
Securities Act of 1933, or the "Act," may be permitted to directors,
officers and controlling persons of the small business issuer pursuant to
the foregoing provisions, or otherwise, we have 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.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 70,000,000 shares of capital
stock, divided into the following classes: (i) 50,000,000 shares of common
stock, $0.0001 par value per share, and (ii) 20,000,000 shares of preferred
stock, $0.0001 par value per share.
The following summary is qualified in its entirety by reference to our
certificate of incorporation, certificate of designation of Series A'
Preferred stock, and bylaws, copies of which are filed as exhibits to our
previous filings with the SEC and incorporated herein by reference.
COMMON STOCK
As of September 30, 2003, there were 11,545,341 shares of common stock
outstanding, 2,396,619 shares of common stock issuable upon exercise of
outstanding options and 3,283,500 shares of common stock issuable upon
exercise of outstanding warrants. Upon completion of this offering there
will be 31,545,341 shares of common stock outstanding assuming the sale of
20,000,000 shares.
Subject to the preferences that may be applicable to any preferred stock
outstanding at the time, the holders of common stock are entitled to the
following:
Voting. The holders of shares of our common stock are entitled to one vote
for each share on all matters on which the holders of common stock are
entitled to vote. There is no cumulative voting for the election of
directors.
Dividends. Holders of common stock are entitled to receive dividends out of
assets legally available for the payment of dividends at the times and in
the amounts as the Board from time to time may determine.
Liquidation. Holders of the common stock are entitled to share ratably in
our net assets upon liquidation or dissolution after payment or provision
for the liquidation preferences of our preferred stock and all other
liabilities.
Each outstanding share of common stock is, and all shares of common stock
to be outstanding upon completion of this offering will be, upon payment
therefore, duly and validly issued, fully-paid and non-assessable.
PREFERRED STOCK
Our Board is authorized, without action by our stockholders, to designate
and issue up to 20,000,000 shares of preferred stock in one or more series.
Our Board can also fix the rights, preferences and privileges of the shares
of each series of preferred stock, and any qualifications, limitations and
restrictions on these shares. The Board has designated 3,210,487 shares as
Series A' Preferred and, as of September 30, 2003, 3,210,487 shares of
Series A' Preferred stock were issued and outstanding. No other shares of
preferred stock were outstanding as of that date.
35
SERIES A' PREFERRED STOCK
The holders of Series A' Preferred stock are entitled to the following:
Voting. The holders of our shares of Series A' Preferred stock are not
entitled to vote upon matters submitted to our stockholders.
Dividends. The holders of our shares of Series A' Preferred stock are
entitled to receive an annual dividend equal to eight percent of the value
of each share, which value has been set at $1.00 per share. This dividend
is non-cumulative. These dividends are only payable from earnings.
Redemption. The Series A' Preferred stock is to remain issued and
outstanding until no later than January 16, 2015 (the "Series A
Redemption/Cancellation Period"), at which time the Series A' Preferred
stock shall have been redeemed in whole or in part from "designated
available earnings" as determined by the Board of Directors, or cancelled.
All outstanding shares of Series A' Preferred stock are subject to
mandatory redemption by us each fiscal year during the Series A
Redemption/Cancellation Period. Each stockholder holding Series A'
Preferred stock is entitled to participate on a pro rata basis in any
mandatory redemption. This redemption right is non-cumulative. The total
number of shares of Series A' Preferred stock to be redeemed in each fiscal
year during the Series A Redemption/Cancellation Period is determined by
dividing: (x) the "designated available funds" amount for that fiscal year;
by (y) the number of issued and outstanding shares of Series A' Preferred
stock as of the last day of such fiscal year. "Designated available funds"
are determined by our Board of Directors and are an amount designated by
our Board of Directors out of funds, if any, equal to more than 20% but
less than 50% of our "earnings" and in no event in excess of "net cash flow
from operating activities," as such terms are defined under GAAP.
In addition, we may from time to time at our option redeem or otherwise
acquire any or all outstanding shares of Series A' Preferred stock for cash
of $1.00 per share on a pro rata basis.
Liquidation. In the event of any voluntary or involuntary liquidation,
dissolution or winding-up of our affairs during the Series A
Redemption/Cancellation Period, after payment or provision for payment of
our debts and other liabilities, the holders of Series A' Preferred stock
are entitled to receive, prior and in preference to any distribution of any
of our assets or surplus funds to the holders of our common stock or other
preferred stock, by reason of their ownership thereof, an amount equal to
$1.00 for each share, as appropriately adjusted to reflect any stock split,
stock dividend, combination, recapitalization and the like.
All preferential amounts to be paid to the holders of the Series A'
Preferred stock are to be paid or set apart for payment before the payment
or setting apart for payment of any amount for (or the distribution of any
of our assets to) the holders of other preferred stock or common stock, and
the holders of such other preferred stock or common stock shall share
ratably all of our remaining assets with no further right of participation
accruing to any holder of Series A' Preferred stock. If the assets or
surplus funds to be distributed to the holders of the Series A' Preferred
stock are insufficient to permit the payment to such holders of their full
preferential amount in the event of a liquidation, dissolution or winding
up of our affairs, the assets and surplus funds legally available for
distribution are to be distributed ratably among the holders of the Series
A' Preferred stock in proportion to the full preferential amount each such
holder would otherwise be entitled to receive.
OPTIONS
As of September 30, 2003, options to purchase up to 2,766,619 shares of our
common stock, at an average exercise price of $2.44 per share, were
outstanding and 2,396,619 were exercisable. The following table provides a
summary of our outstanding options.
36
Wtd. average
remaining
Option Number Options contractual
exercise price per share of shares exercisable life in years
------------------------ --------- ----------- -------------
$0.75 50,000 50,000 2.42
$1.00 177,700 177,700 3.01
$1.50 65,000 65,000 3.02
$2.00 147,169 147,169 2.71
$2.05 230,750 160,750 3.54
$3.00 625,000 625,000 2.92
$3.05 20,000 20,000 3.96
$3.85 140,000 140,000 3.76
$4.00 811,000 811,000 0.54
$5.00 460,000 160,000 2.08
$6.00 40,000 40,000 2.59
------- ----------- ----------- ------
$2.44 2,766,619 2,396,619 2.14
======= =========== =========== ======
WARRANTS
As of September 30, 2003, warrants to purchase up to 3,283,500 shares of
our common stock, at an average exercise price of $8.63 per share, were
outstanding and exercisable. The following table provides a summary of our
outstanding warrants.
Wtd. average
remaining
Warrant Number Warrants contractual
exercise price per share of shares exercisable life in years
------------------------ --------- ----------- -------------
$3.00 700,000 700,000 1.40
$4.00 83,500 83,500 1.42
$8.75 200,000 200,000 2.22
$10.50 2,300,000 2,300,000 2.22
------- ----------- ----------- ------
$8.63 3,283,500 3,283,500 2.02
======= =========== =========== ======
At September 30, 2003, holders of outstanding options and warrants
representing the right to purchase a total of 3,588,500 shares of common
stock have certain registration rights, and options and warrants
representing the right to purchase a total of 6,015,119 shares of common
stock contain certain cashless exercise provisions.
37
INVESTOR SUITABILITY REQUIREMENTS
GEOGRAPHIC REQUIREMENTS
This offering is limited to investors located in the states identified
below. Additionally, we are limiting this offering in certain states to
only "accredited investors," who are high net worth and/or sophisticated
investors, as more fully described below.
o Arizona *++ o Indiana * o Mississippi * o South Carolina
o California * o Iowa * o New Jersey o Texas
o Colorado o Maryland o New York
o Illinois o Michigan * o Oklahoma *
______________
* Offering limited to "accredited investors."
++ Investors in Arizona must meet certain additional accreditation
standards described below.
ACCREDITATION REQUIREMENTS
Investors located in Arizona, California, Indiana, Iowa, Michigan,
Mississippi and Oklahoma must be accredited to participate in this
offering. An investor is an "accredited investor" only if such investor
meets one or more of the following:
(i) the investor is a natural person who has net worth, or joint net worth
with that person's spouse exceeding $1,000,000 at the time of purchase;
(ii) the investor is a natural person who individually had income in excess
of $200,000 in each of the two most recent years, or joint income with that
person's spouse in excess of $300,000 in each of those years, and who
reasonably expects income in excess of those levels in the current year;
(iii) the investor is a director or executive officer of the Company;
(iv) the investor is either (a) a bank as defined in Section 3(a)(2) of the
Securities Act , or a savings and loan association or other institution as
defined in Section 3(a)(5)(A) of the Securities Act , whether acting in its
individual or fiduciary capacity; (b) any broker or dealer registered
pursuant to Section 15 of the Securities Exchange Act of 1934 as amended;
(c) an insurance company as defined in Section 2(13) of the Securities Act;
(d) an investment company registered under the Investment Company
Securities Act of 1940 or a business development company as defined in
Section 2(a)(48) of such Securities Act; (e) a Small Business Investment
Company licensed by the United States Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Securities Act of
1958; (f) a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions, for the benefit of its employees, if such plan has total
assets in excess of $7,000,000; (g) an employee benefit plan within the
meaning of Title I of the Employee Retirement Income Security Act of 1974,
as amended, if the investment decision is made by a plan fiduciary, which
is either a bank, a savings and loan association, insurance company, or
registered investment advisor, or if the plan has assets in excess of
$7,000,000, or if a self-directed plan, with the investment decisions made
solely by persons that are accredited investors;
(v) the investor is a private business development company under Section
202(a)(22) of the Investment Advisers Securities Act of 1940;
(vi) the investor is any organization described in Section 501(c)(3) of the
Internal Revenue Code and certain other corporations, Massachusetts or
similar business trust, or partnership, not formed for the specific purpose
of acquiring the securities offered, with total assets in excess of
$7,000,000;
(vii) the investor in any trust with total assets in excess of $7,000,000,
not formed for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person as defined in Section
230. 506(b)(2)(ii) of Regulation D promulgated under the Securities Act; or
38
(viii) the investor is any entity in which all of the equity owners are
accredited investors.
In the case of a husband and wife subscribing jointly, satisfaction of the
net worth standards must be determined by aggregating their net worth and
satisfaction of the income standards must be determined by joint or
individual tax returns, as the case may be. Any other persons subscribing
for shares jointly, including members of partnerships formed for the
purpose of purchasing shares, must each satisfy the applicable net worth
and income standards without regard to the other joint purchasers. In the
case of a subscriber that is itself a partnership (other than a partnership
formed for the purpose of purchasing shares) or a trust, the applicable net
worth and income standards must be satisfied by the entity. In the case of
a subscriber purchasing as custodian for a minor, the applicable net worth
and income standards must be satisfied by the custodian.
Each subscriber will be required to satisfy the investor suitability
standards set forth above. An investment in the shares is only suitable for
those investors who have adequate means to provide for their current needs
and personal contingencies and who have no need for liquidity in this
investment. Furthermore, investors must demonstrate an appropriate level of
financial sophistication. Investors should recognize that the suitability
standards set forth above are minimum requirements and that the
satisfaction of these standards does not necessarily mean that investment
in the shares is suitable for an investor meeting these standards. We
reserve the right to reject any subscription for any reason whatsoever.
We will require each investor to make representations and warranties
relating to the suitability of an investment in the shares for each
investor as set forth in the form of subscription agreement attached as
Annex A to this prospectus. We may also make or cause to be made such
further inquiry as we deem appropriate. We may, in our absolute discretion,
reject subscriptions, in whole or in part, or allot to a particular
investor fewer than the number of shares for which the investor subscribed.
We reserve the right to modify or increase the suitability standards with
respect to certain investors, in order to comply with any applicable state
or local laws, rules or regulations or otherwise.
REQUIREMENTS FOR INVESTORS IN ARIZONA
In addition to satisfying the investor suitability standards described
above, investors in Arizona must have either: (i) a gross income of at
least $150,000 individually (or $200,000 with the investor's spouse) in the
prior year and a reasonable expectation of such income in the current year;
or (ii) a net worth of at least $350,000 (or $400,000 with the investor's
spouse) excluding the investor's home, home furnishings and automobiles,
and the investment must not exceed 10% of the investor's net worth
(combined with the investor's spouse, if applicable).
INVESTOR SUITABILITY STANDARDS REPRESENT MINIMUM REQUIREMENTS FOR INVESTORS
AND THE SATISFACTION OF THESE STANDARDS DOES NOT NECESSARILY MEAN THE
SHARES ARE A SUITABLE INVESTMENT FOR ANY INVESTOR.
Each prospective investor should consult with his, her or its own attorney,
accountant and/or financial advisor to discuss the implications of the
information contained herein and the merits and risks of an investment in
the shares. WE reserve the right to make OUR own DETERMINATION, in OUR sole
discretion, as to whether any prospective investor meets the above
suitability standards.
PLAN OF DISTRIBUTION
THE OFFERING
We are offering for sale through our placement agent, InvestLinc
Securities, LLC, a minimum of $500,000 in shares and a maximum of
$3,000,000 in shares, excluding the over-allotment option described below.
This is a best efforts offering and is being made only to "accredited
investors," as described under the heading "Investor Suitability
Requirements." The minimum purchase is $1,000, unless we agree to accept a
smaller purchase. All proceeds from subscriptions will be held in an escrow
account pending acceptance of at least the minimum offering amount of
$500,000. The offering period will expire on the earliest of the following
(the "Termination Date"):
39
o the sale of all shares offered under this prospectus;
o as agreed between us and the placement agent; and
o February 13, 2004.
If the Minimum Offering has been completed on or before the Termination
Date, then the Termination Date may, at our discretion, be extended for up
to 60 days in order to complete up to the Maximum Offering of $3,000,000.
If the Minimum Offering has not been completed and we have not received the
sale proceeds by the Termination Date, the escrow agent will promptly
return all amounts, without interest, previously placed in escrow. See
"Escrow of Funds" below.
We have paid the placement agent a retainer of $15,000 and 28,571
unregistered, restricted shares of our common stock. The placement agent
will also receive a commission equal to 8% of the gross proceeds from
shares sold to investors and a five-year warrant to purchase 7% of the
number of shares sold in this offering at a price per share equal to the
price of the shares sold in this offering. In addition, we have agreed to
indemnify the placement agent and various other persons against certain
liabilities in connection with this offering, including liabilities arising
under the Securities Act.
ESCROW OF FUNDS
All proceeds with respect to subscriptions for the shares will be deposited
in an escrow account to be established with a bank or other financial
institution that is not affiliated with us, our officers or directors or
our placement agent. The escrow of the funds will continue until the
earlier to occur of: (A) the deposit and acceptance by us of subscriptions
of at least $500,000, or (B) the termination of this offering. All
subscriptions held in escrow are irrevocable by the subscriber. If
circumstances result in the termination of this offering (including due to
a failure to reach the Minimum Condition by the Termination Date), all
escrowed funds will be returned without interest to the subscribers and
without deduction for expenses. Funds placed in the escrow account will not
be subject to claims of our creditors, placement agent or affiliates unless
and until the proceeds are released to us.
OVER-ALLOTMENT OPTION
As part of our agreement with InvestLinc Securities, we have agreed to sell
up to an additional $300,000 of common stock under this prospectus for up
to 30 days after the offering is completed, but only if the Maximum
Offering has been reached. If the offering ends without reaching the
Maximum Offering, we will not sell any additional shares under the
over-allotment option.
SUBSCRIPTION AGREEMENT AND PROCEDURES
All subscriptions must be made by the execution and delivery of a
subscription agreement, a form of which is attached to this prospectus as
Annex A. By executing the subscription agreement, each purchaser will agree
to pay the purchase price of the shares subscribed for at the closing at
which such subscription is accepted. We have the right to revoke any offers
made under this prospectus and to refuse to sell shares to a particular
subscriber if the subscriber does not promptly supply all information we
request or if we disapprove the sale. Subscriptions are not binding until
accepted. We will refuse any subscription by giving written notice to the
subscriber by personal delivery or first-class mail. We may reject any
subscription at any time prior to acceptance, in whole or in part, in our
sole discretion.
In order to subscribe for shares, a prospective investor must deliver the
following documents to the placement agent:
1. a complete and executed subscription agreement, in the form attached to
this prospectus as Annex A;
2. a complete and executed investor suitability questionnaire, in the form
provided by the Company; and
3. The full amount of the subscription price paid in United States dollars
in cash or by check, bank draft or money order made payable to the escrow
agent.
40
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Heller Ehrman White & McAuliffe LLP, San Diego, California.
EXPERTS
The balance sheets of the Company as of December 31, 2001 and 2002, 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, 2002, except for the
statements of operations, changes in stockholders' equity (deficit), and
cash flows of the Company for the period from August 27, 1984 (inception)
through December 31, 1999, included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the Company's ability to
continue as a going concern). The statements of operations, changes in
stockholders' equity (deficit), and cash flows of the Company for the
period from August 27, 1984 (inception) through December 31, 1999 (not
presented separately herein) have been audited by Causey Demgen & Moore
Inc., independent auditors, as stated in their report included herein. Such
financial statements of the Company are included herein in reliance upon
the respective reports of such firms given upon their authority as experts
in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2, including exhibits, schedules and amendments, under
the Securities Act with respect to the shares of common stock to be sold in
this offering. This prospectus does not contain all the information
included in the registration statement. For further information about us
and the shares of our common stock to be sold in this offering, please
refer to this registration statement. Complete exhibits have been filed
with our registration statement on Form SB-2.
You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any
other information from our filings at the Securities and Exchange
Commission's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You can request copies of these documents, upon payment of a
duplicating fee, by writing to the Securities and Exchange Commission.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information about the public reference rooms. Our filings with the
Securities and Exchange Commission, including our registration statement,
are also available to you on the Securities and Exchange Commission's Web
site, http://www.sec.gov.
We are subject to the information and reporting requirements of the
Securities Exchange Act of 1934, and file and furnish to our stockholders
annual reports containing financial statements audited by our independent
auditors, make available to our stockholders quarterly reports containing
unaudited financial data for the first three quarters of each fiscal year,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other
information on file at the public reference rooms.
You can also request copies of these documents, for a copying fee, by
writing to the Commission.
41
INDEX TO FINANCIAL STATEMENTS
PAGE
----
YEARS ENDED DECEMBER 31, 2001 AND 2002
- --------------------------------------
Independent Auditors' Report.................................................F-2
Report of Independent Certified Public Accountants...........................F-3
Balance Sheets...............................................................F-4
Statements of Operations.....................................................F-5
Statements of Changes in Stockholders' Equity (Deficit)......................F-6
Statements of Cash Flows.....................................................F-9
Notes to Financial Statements...............................................F-11
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003
- -------------------------------------------------------
Balance Sheets (unaudited)..................................................F-23
Statements of Operations (unaudited)........................................F-24
Statements of Changes in Stockholders' Equity (Deficit) (unaudited).........F-26
Statements of Cash Flows (unaudited)........................................F-27
Notes to Financial Statements (unaudited)...................................F-29
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Entropin, Inc.
We have audited the accompanying balance sheets of Entropin, Inc. (a development
stage company) as of December 31, 2001 and 2002, 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, 2002. 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. The Company's financial statements for
the period from August 27, 1984 (inception) through December 31, 1999 were
audited by other auditors whose report, dated February 4, 2000, expressed an
unqualified opinion on those statements. The financial statements for the period
from August 27, 1984 (inception) through December 31, 1999 reflect a net loss
applicable to common stockholders of $14,993,971 of the related total. The other
auditors' report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for such prior period, is based solely on the
report of such other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 and the report of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of Entropin, Inc. as of December 31, 2001 and 2002, 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, 2002, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements for the year ended December 31, 2002 have
been prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Company's recurring losses
from operations and requirement for additional funding raise substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
March 4, 2003
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
of Entropin, Inc.
We have audited the statements of operations, changes in stockholders' equity
(deficit) and cash flows for the period from August 27, 1984 (inception) through
December 31, 1999 of Entropin, Inc. (a development stage company) none of which
are presented separately herein. 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 auditing standards generally accepted
in the United States of America. 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 results of operations of Entropin, Inc. and its cash
flows for the period from August 27, 1984 (inception) through December 31, 1999,
in conformity with accounting principles generally accepted in the United States
of America.
/s/ CAUSEY DEMGEN & MOORE INC.
CAUSEY DEMGEN & MOORE INC.
Denver, Colorado
February 4, 2000
F-3
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
Years ended December 31,
ASSETS 2001 2002
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 4,609,562 $ 2,906,853
Short-term investments 4,098,692 990,000
Accrued interest receivable 33,327 5,954
------------- -------------
Total current assets 8,741,581 3,902,807
Patent costs, less accumulated amortization of
$132,997 (2001) and $163,869 (2002) 329,035 410,641
Property and equipment, net 11,197 12,210
Prepaid assets and deposits 40,954 3,126
------------- -------------
Total assets $ 9,122,767 $ 4,328,784
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 142,986 $ 62,450
Series A redeemable preferred stock, $.001 (2001) and $.0001
(2002) 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 (2001)
and $.0001 (2002) par value, 400,000 shares authorized,
168,500 (2001) and 143,500 (2002) shares issued and
outstanding, $5.00 per share redemption value 825,049 712,547
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.001 (2001) and $.0001 (2002) par value,
50,000,000 shares authorized, 9,798,480 (2001) and
9,912,587 (2002) shares issued and outstanding 9,798 991
Additional paid-in capital 29,037,558 29,801,165
Unearned stock compensation (62,780) (72,479)
Deficit accumulated during the development stage (24,040,331) (29,386,377)
------------- -------------
Total stockholders' equity 4,944,245 343,300
------------- -------------
Total liabilities and stockholders' equity $ 9,122,767 $ 4,328,784
============= =============
F-4
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2001 and 2002
and for the Period from August 27, 1984 (Inception) Through December 31, 2002
December 31, Inception through
2001 2002 December 31, 2002
------------- ------------- -----------------
Costs and expenses:
Research and development $ 2,315,076 $ 3,048,063 $ 14,693,578
General and administrative 1,973,401 2,403,835 14,892,366
------------- ------------- -------------
Operating loss (4,288,477) (5,451,898) (29,585,944)
------------- ------------- -------------
Other income (expense):
Interest income 497,462 190,102 1,466,128
Interest expense -- -- (242,811)
------------- ------------- -------------
Total other income, net 497,462 190,102 1,223,317
------------- ------------- -------------
Net loss (3,791,015) (5,261,796) (28,362,627)
Dividends applicable to Series B
preferred stockholders (96,384) (91,033) (1,068,145)
------------- ------------- -------------
Net loss applicable to common stockholders $ (3,887,399) $ (5,352,829) $(29,430,772)
============= ============= =============
Basic and diluted net loss per common share $ (.40) $ (.54) $ (4.86)
============= ============= =============
Weighted average common shares outstanding 9,739,000 9,874,000 6,057,000
============= ============= =============
F-5
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2001 and 2002
and for the Period from August 27, 1984 (Inception) Through December 31, 2000
Deficit
accumulated Total
Additional Unearned during the stockholders'
Common stock paid-in Stock stock development equity
Shares Amount capital subscriptions compensation stage (deficit)
----------- ------- ------------ ---------- ------------ ------------- -------------
Balance, August 27, 1984
(inception) -- $ -- $ -- $ -- $ -- $ -- $ --
Cash contribution from
stockholder -- -- 50,000 -- -- -- 50,000
Cash received for common
stock subscription -- -- -- 150,000 -- -- 150,000
Stock contributions from
stockholders -- -- 927,000 -- -- -- 927,000
Shares issued pursuant to
recapitalization 480,051 480 219,620 -- -- -- 220,100
Shares issued pursuant to
private placements 1,508,700 1,509 4,163,931 -- -- -- 4,165,440
Shares and warrants issued
pursuant to secondary
offering 2,180,000 2,180 13,678,154 -- -- -- 13,680,334
Conversion of promissory
notes to common stock 100,831 101 201,561 -- -- -- 201,662
Unearned stock compensation
pursuant to issuance of
common stock options -- -- 7,734,722 -- (7,734,722) -- --
Amortization and valuation
adjustment of unearned
stock compensation -- -- -- -- 7,647,286 -- 7,647,286
Shares issued from exercise
of common stock options
and warrants 72,986 73 79,927 -- -- -- 80,000
Common stock warrants canceled
in exchange for cash -- -- (330,000) -- -- -- (330,000)
Shares issued for cash 1,252,802 1,253 303,747 (150,000) -- -- 155,000
Shares issued for services 3,990,954 3,989 140,723 -- -- -- 144,712
Issuance of Series B preferred
stock with a beneficial
conversion feature -- -- 613,750 -- -- (613,750) --
Shares issued for Series B
preferred stock dividend 47,100 48 235,452 -- -- (235,500) --
Conversion of Series B
preferred stock to common
stock 55,000 55 264,649 -- -- -- 264,704
Accretion to mandatory
redemption amount for
Series B preferred stock -- -- (41,571) -- -- -- (41,571)
Net loss for the period from
August 27, 1984 (inception)
through December 31, 2000 -- -- -- -- -- (19,309,816) (19,309,816)
----------- ------- ------------ ---------- ------------ ------------- -------------
Balance, December 31, 2000 9,688,424 9,688 28,241,665 -- (87,436) (20,159,066) 8,004,851
F-6
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2001 and December 31, 2002
and for the Period from August 27, 1984 (Inception) Through December 31, 2000
Deficit
accumulated Total
Additional Unearned during the stockholders'
Common stock paid-in stock development equity
Shares Amount capital compensation stage (deficit)
----------- ------- ------------ ------------ ------------- -------------
Unearned stock compensation
pursuant to issuance of
common stock options -- -- 435,322 (435,322) -- --
Amortization and valuation
adjustment of unearned
stock compensation -- -- -- 459,978 -- 459,978
Shares issued from exercise
of common stock options 195 -- 292 -- -- 292
Shares issued for services 69,811 70 175,500 -- -- 175,570
Conversion of Series B
preferred stock to common
stock 22,000 22 106,181 -- -- 106,203
Shares issued for Series B
preferred stock dividend 18,050 18 90,232 -- (90,250) --
Accretion to mandatory
redemption amount for
Series B preferred stock -- -- (11,634) -- -- (11,634)
Net loss for the year -- -- -- -- (3,791,015) (3,791,015)
----------- ------- ------------ ------------ ------------- -------------
Balance, December 31, 2001 9,978,480 9,797 29,037,558 (62,780) (24,040,331) 4,944,245
F-7
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended December 31, 2001 and December 31, 2002
and for the Period from August 27, 1984 (Inception) Through December 31, 2000
Deficit
accumulated Total
Additional Unearned during the stockholders'
Common stock paid-in stock development equity
Shares Amount capital compensation stage (deficit)
----------- ------- ------------ ------------ ------------- -------------
Change in par value of
common stock in connection
with reincorporation in
Delaware -- (8,878) 8,878 -- -- --
Unearned stock compensation
pursuant to issuance of
common stock options -- -- 539,962 (539,962) -- --
Amortization and valuation
adjustment of unearned
stock compensation -- -- -- 530,263 -- 530,263
Shares issued from exercise
of common stock options 59,604 60 (60) -- -- --
Shares issued for services 12,653 7 18,080 -- -- 18,087
Conversion of Series B
preferred stock to common
stock 25,000 3 122,407 -- -- 122,410
Accretion to mandatory
redemption amount for
Series B preferred stock -- -- (9,908) -- -- (9,908)
Net loss for the year -- -- -- -- (5,261,796) (5,261,796)
----------- ------- ------------ ------------ ------------- -------------
Balance, December 31, 2002 9,912,587 $ 991 $29,801,165 $ (72,479) $(29,386,377) $ 343,301
=========== ======= ============ ============ ============= =============
F-8
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001 and 2002
and for the Period From August 27, 1984 (Inception) Through December 31, 2002
December 31, Inception through
2001 2002 December 31, 2002
------------ ------------ -----------------
Cash flows from operating activities:
Net loss $(3,791,015) $(5,261,796) $(28,362,627)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 30,761 28,115 223,380
Loss on disposal of assets -- 1,837 1,837
Services received in exchange for stock,
stock options and warrants 596,990 548,350 9,864,338
Services received in exchange for
compensation agreements -- -- 2,231,678
Decrease (increase) in accrued interest receivable 198,312 27,373 (5,954)
(Decrease) increase in accounts payable (89,491) (80,536) 270,147
Other (37,955) 47,736 55,487
------------ ------------ -------------
Net cash used in operating activities (3,092,398) (4,688,921) (15,721,714)
------------ ------------ -------------
Cash flows from investing activities:
Maturities (purchases) of short-term investments, net 1,722,377 3,108,692 (990,000)
Patent costs (30,866) (112,478) (574,510)
Purchase of property and equipment (8,030) (10,002) (130,516)
------------ ------------ -------------
Net cash provided by (used in) investing activities 1,683,481 2,986,212 (1,695,026)
------------ ------------ -------------
Cash flows from financing activities:
Proceeds from shares issued pursuant to recapitalization -- -- 220,100
Proceeds from issuance of common stock and warrants 292 -- 18,281,066
Proceeds from issuance of preferred stock -- -- 1,142,750
Proceeds from stockholder loans -- -- 809,677
Proceeds from stockholder advances -- -- 98,873
Repayments of stockholder advances -- -- (98,873)
Payment for cancellation of common stock warrant -- -- (330,000)
Proceeds from convertible notes payable -- -- 200,000
------------ ------------ -------------
Net cash provided by financing activities 292 -- 20,323,593
------------ ------------ -------------
Net (decrease) increase in cash (1,408,625) (1,702,709) 2,906,853
Cash and cash equivalents at beginning of period 6,018,187 4,609,562 --
------------ ------------ -------------
Cash and cash equivalents at end of period $ 4,609,562 $ 2,906,853 $ 2,906,853
============ ============ =============
F-9
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Inception through
2001 2002 December 31, 2002
---- ---- -----------------
Cash paid for interest $ - $ - $ 242,811
Supplemental disclosure of non-cash investing and financing activities:
During the year ended December 31, 1998, the Company issued 3,210,487
shares of Series A preferred stock in exchange for an aggregate $1,710,487
of notes payable to stockholders plus accrued interest and a $1,500,000
compensation agreement.
During the year ended December 31, 1999, the Company converted promissory
notes payable with outstanding principal and interest balances totaling
$201,662 into 100,831 shares of common stock.
During the years ended December 31, 2001 and 2002 and the period from
August 27, 1984 (inception) through December 31, 2002, the Company issued
69,811, 12,653 and 4,073,418 shares of common stock for services totaling
$175,570, $18,087 and $338,369, respectively.
During the years ended December 31, 2001 and 2002 and the period from
August 27, 1984 (inception) through December 31, 2002, the Company issued
18,050, 16,850 and 82,000 shares, respectively, of common stock at $5.00
per share as payment of accrued dividends on Series B preferred stock.
During the years ended December 31, 2001 and 2002 and the period from
August 27, 1984 (inception) through December 31, 2002, the Company issued
22,000, 25,000 and 102,000 shares of common stock for conversion of an
equal number of shares of Series B preferred stock totaling $106,203,
$122,410 and $493,317, respectively.
F-10
NOTES TO FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
- --------------------------------------------------------------
Organization and basis of presentation:
Entropin, Inc. (the "Company"), a Delaware corporation, was organized as a
California corporation in August 1984. The Company is a pharmaceutical
research and development company focused on the development of its
proprietary compound ENT-103(R) as a potent therapy for pain. Activities
from inception include research and development, seeking the U.S. Food and
Drug Administration, or FDA, approval for its proprietary compounds,
including its current drug, ENT-103, as well as fund raising.
The Company's financial statements have been presented on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and
development activities. This has resulted in significant operating losses
and an accumulated deficit at December 31, 2002 of $29,386,377. Management
anticipates additional operating losses for the foreseeable future. In
addition, if the Company's outstanding Series B preferred shares have not
been converted to shares of common stock prior to their July 15, 2003
mandatory redemption date, the Company will be required to redeem them at
an approximate cost of $717,500. These factors among others may indicate
that the Company will be unable to continue as a going concern for a
reasonable period of time. The financial statements do not include any
adjustments related to the recoverability of recorded asset amounts that
may be necessary should the Company be unable to continue as a going
concern. The Company will need to raise significant additional funds to
continue its planned development activities. In the absence of positive
cash flows from operations, the Company is highly dependent on its ability
to secure additional funding through the issuance of debt or equity
instruments or corporate partnering arrangements. If adequate funds are not
available, the Company may be forced to significantly curtail its
operations or to obtain funds through entering into collaborative
agreements or other arrangements that may be on unfavorable terms. The
Company's failure to raise sufficient additional funds on favorable terms,
or at all, would have a material adverse effect on its business, results of
operations and financial position. The Company's ultimate continued
existence is currently dependent on its ability to complete development of,
obtain approval for, and successfully market its proprietary compound
ENT-103.
Because the Company has not yet completed product development, obtained
regulatory approval, or verified the market acceptance and demand for any
products it may develop, its activities have been accounted for as those of
a "development stage enterprise" as set forth in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises".
During 1998, the Company consummated an agreement and plan of merger with
Vanden Capital Group, Inc. ("Vanden"), a Colorado corporation, under which
Vanden acquired all of the issued and outstanding common shares of the
Company (see Note 5). The Company was merged into Vanden, and Vanden
changed its name to Entropin, Inc. For accounting purposes, the acquisition
has been treated as a recapitalization of the Company, based upon
historical cost, and a reverse acquisition with the Company as the
acquirer.
The Company completed the recapitalization during 1998. The Company also
completed private offerings of 245,500 shares of Series B convertible
preferred stock for gross proceeds of $1,227,500, $200,000 of convertible
notes payable, and 1,508,700 shares of common stock for gross proceeds of
$4,664,800. In addition, the Company raised approximately $13,700,000
through a secondary offering and sale of the underwriter's over-allotment
during the first half of 2000.
F-11
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 affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Income taxes:
The Company provides for income taxes utilizing the asset and liability
approach under which deferred income taxes are recognized based upon
currently enacted tax laws and rates applicable to the periods in which the
taxes are expected to become payable. A valuation allowance is established
for deferred income tax assets when their realization is not reasonably
assured.
Property and equipment:
Office furniture and equipment is recorded at cost. Depreciation commences
as items are placed in service and is computed using the straight-line
method over their estimated useful lives of three years.
Leasehold improvements are recorded at cost and amortized using the
straight-line method over the shorter of their estimated useful life or the
related lease term.
Research and development costs:
Research and development costs are expensed as incurred.
Patents:
Patents are stated at cost less accumulated amortization which is
calculated on a straight-line basis over their useful lives, estimated by
management to average 16 years. Costs associated with internally developed
patents (with the exception of legal costs) are expensed in the period
incurred.
The Company currently holds fifty six issued and pending patent
applications worldwide, including seven issued U.S. patents and 37 foreign
patents and has three patents pending. The issued patents include two
material composition patents covering the molecules contained in Esterom(R)
solution (including ENT-102) which expire in 2012 and 2013. The Company has
also filed a patent application with the United States Patent Office along
with international counterparts that describes a method for the enrichment
of the compounds covered in our composition of matter patents. This patent
application describes a method for the production of Esterom(R) solution
and its components, including ENT-102
In August 2002, the Company filed a patent describing the manufacturing
process for ENT-102. This patent application describes the preparation of
commercial quantities of ENT-102 and other related compounds. In December
2002, the Company filed a composition of matter patent application for
ENT-103.
Impairment of long-lived assets:
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such
assets or intangibles may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an
asset to future undiscounted net cash flows expected to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to
sell.
F-12
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 December 31, 2002, the Company's short-term
investments consisted entirely of certificates of deposit that are carried
at amortized cost with an average remaining maturity period of 64 days.
Concentrations of credit risk:
The Company invests its excess cash principally in certificates of deposit.
The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields
and interest rates. The Company has not experienced any losses on its cash
equivalents or short-term investments.
Stock-based compensation:
The Company follows the fair value method of accounting for employee stock
based compensation provided for in Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". Compensation
cost for stock option grants is measured as the fair value of the options
using the Black-Scholes option pricing model. Amounts recorded for options
granted to non-employees are determined in accordance with Statement of
Financial Accounting Standards No. 123 and EITF 96-18 based on the fair
value of the consideration or the fair value of the equity instruments
issued, whichever is more reliably measured. Deferred charges related to
options granted to non-employees are periodically remeasured as the
underlying options vest and are included as unearned stock compensation in
the stockholders' equity section of the balance sheet.
Fair value of financial instruments:
The carrying amounts of cash, cash equivalents, short-term investments,
receivables and accounts payable are considered to be representative of
their respective fair values because of their short-term nature. The
Company believes that it is not practical to estimate the fair market value
of its Series A and Series B preferred stock because of the numerous
features unique to these securities, as described in Note 4, without
incurring excessive costs.
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.
F-13
Segment reporting:
The Company currently operates in a single segment. In addition, financial
results are prepared and reviewed by management as a single operating
segment. The Company continually evaluates its operating activities and the
method utilized by management to evaluate such activities and will report
on a segment basis when appropriate to do so.
Recent accounting pronouncements:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations". SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The adoption of SFAS No. 141
did not have a material effect on the Company's results of operations or
financial position.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill and other intangible assets
with indefinite lives no longer be amortized, but instead tested for
impairment at least annually. In addition, the standard addresses how
intangible assets that are acquired individually or with a group of other
assets, other than as part of a business combination, should be accounted
for upon their acquisition. The adoption of SFAS No. 142 effective January
1, 2002 did not have a material effect on the Company's results of
operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", and the accounting and reporting provisions of
APB Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of a Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", for the
disposal of a segment of a business (as previously defined in that
Opinion). The adoption of SFAS No. 144 effective January 1, 2002 did not
have a material effect on the Company's results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN 45 requires
that a liability be recorded in the guarantor's balance sheet upon issuance
of a guarantee. In addition, FIN 45 requires certain disclosures about each
of the entity's guarantees. The disclosure provisions of FIN 45 are
effective for annual and interim periods that end after December 15, 2002.
The recognition provisions of FIN 45 are applicable prospectively to
guarantees entered after December 31, 2002. The Company does not believe
that the adoption of FIN 45 will have a material effect on its results of
operations or financial position.
F-14
2. Related party transactions
- -----------------------------
Lease agreement:
The Company subleases on a month-to-month basis approximately 800 square
feet of office space from a principal stockholder, at $800 per month. Rent
expense related to the sublease was $9,600, $9,600 and $47,114 for the
years ended December 31, 2001 and 2002 and for the period from August 27,
1984 (inception) through December 31, 2002, respectively.
Conversion of long-term debt - stockholders:
During January 1998, the Company converted $1,710,487 of long-term debt and
accrued interest, incurred for cash advances and past services associated
with research and development, into 1,710,487 shares of 8% non-voting,
non-cumulative Series A preferred stock at $1.00 per share (see Note 4).
The debt was owed to significant stockholders.
3. Income taxes
- ---------------
The Company has not recorded income tax expense or benefit for the years
ended December 31, 2001 and 2002 and the period from August 27, 1984
(inception) through December 31, 2002. This differs from the income tax
benefit that would result from applying the federal statutory rate of 34%
to net loss for these periods primarily as a result of a valuation
allowance provided for deferred income tax assets and losses incurred
through 1998 while the Company was reporting as an S Corporation for income
tax purposes.
At December 31, 2002, the Company has net operating loss carry-forwards of
approximately $15,482,000 for federal purposes and $13,612,000 for state
purposes. The federal and state net operating loss carry-forwards begin to
expire in 2018 and 2004, respectively. At December 31, 2001 and 2002,
deferred income tax balances and the related valuation allowance are as
follows:
2001 2002
------------ ------------
Deferred income tax assets (liabilities) resulting from:
Net operating loss carry-forwards $ 4,397,000 $ 6,034,000
Research and development credit carry-forwards 583,000 457,000
Basis difference in patent costs and
property and equipment (117,000) (152,000)
Accrual to cash basis adjustments 11,000 21,000
Unearned stock compensation 3,473,000 3,454,000
Capital loss contribution 28,000 --
Capitalized research and development costs -- 49,000
------------ ------------
Total 8,375,000 9,863,000
Less valuation allowance (8,375,000) (9,863,000)
------------ ------------
$ -- $ --
============ ============
A full valuation allowance has been established for deferred income tax
assets, as utilization of the loss carry-forwards and realization of other
deferred income tax assets is not reasonably assured.
F-15
4. Redeemable preferred stock
- -----------------------------
In December 1997, the Board of Directors approved an amendment to the
Company's articles of incorporation to authorize the issuance of 10,000,000
shares of $.001 par value preferred stock in various series. In June 2002,
the Company reincorporated in Delaware and changed the par value of its
preferred stock from $.001 to $.0001 per share.
In January 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 stockholders, accrued interest,
and a $1,500,000 compensation agreement. The annual 8% dividend is based
upon a $1.00 per share value and is only payable out of earnings. The
Series A preferred stock is redeemable from 20% to 50% of annual earnings,
as long as redemption amounts do not exceed net cash flow from operating
activities. Prior to February 14, 2003, the Series A preferred stock
agreement required any redemption by the Company to be in the form of cash
at a value of $1.00 per share and was to be automatically cancelled on
January 16, 2005. On February 14, 2003, the Company entered into separate
agreements with each of the holders of its Series A preferred stock, in
which these stockholders agreed to exchange each outstanding share of
Series A preferred stock for one share of Series A' preferred stock. The
terms of the Series A' preferred stock are the same as the terms of the
Series A preferred stock except the redemption provision of the Series A'
preferred stock allows us to redeem the Series A' preferred stock in cash,
common stock or any combination thereof and extends the redemption period
to January 15, 2015. Because the Company can redeem the Series A' preferred
stock with common stock at its discretion, the Company can include the
outstanding Series A' preferred stock balance in the Company's
stockholders' equity effective February 14, 2003. Had the exchange been
completed effective as of December 31, 2002, the resulting inclusion of the
outstanding Series A' preferred stock balance in the Company's
stockholders' equity would have increased total stockholders' equity as of
December 31, 2002 to $3,553,787.
In July 1998, the Company completed a private placement of 245,500 shares
of Series B preferred stock at $5.00 per share, for total net proceeds of
$1,142,750. The Series B preferred stock is designated as redeemable 10%
cumulative non-voting convertible preferred stock with $.0001 par value.
The shares are convertible on a one-for-one basis into common stock. The
$613,750 intrinsic value of this beneficial conversion feature was recorded
by allocating this portion of the total net proceeds to additional paid-in
capital, with an equal amount treated as an immediate deemed dividend to
the preferred stockholders. The dividends accrue at the rate of $.50 per
share per annum and are paid annually commencing July 15, 1999. At the
Company's election, annual dividends were paid in shares of the Company's
common stock at $5.00 per share at July 15, 1999, 2000, 2001 and 2002. A
total of 102,000 Series B preferred shares have been converted as of
December 31, 2002. All unconverted shares are subject to mandatory
redemption at $5.00 per share on or before July 15, 2003. As of December
31, 2002, 143,500 shares of Series B preferred stock remained outstanding.
If these shares have not been converted to shares of common stock prior to
the mandatory redemption date, we will be required to redeem them at a cost
of approximately $717,500. The Company is accreting its Series B preferred
stock up to the mandatory redemption amount. Such accretion amounts are
treated as deemed dividends to preferred stockholders.
5. Stockholders' equity
- -----------------------
Recapitalization:
In December 1997, the Company entered into an agreement and plan of merger
with Vanden to exchange all of the issued and outstanding common shares of
the Company, in exchange for 5,220,000 shares of Vanden's $.001 par value
common stock, in a reverse acquisition.
F-16
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 during January 1998 and is presented on the statement of
changes in stockholders' equity as an issuance of 480,051 shares of common
stock for cash proceeds of $220,100 pursuant to recapitalization. In
connection with the recapitalization, the Company issued options to
purchase 180,001 shares of its $.001 par value common stock for cash of
$100 and options to purchase an additional 180,001 shares of common stock
for $2.80 per share, as required by a management advisory services contract
as compensation for arranging the merger. The difference between the fair
value of the stock, estimated by the Company to be $2.75 per share, and the
purchase price for the initial 180,001 shares was treated as additional
cost of the merger and charged to capital, consistent with accounting for
the reverse acquisition as a recapitalization. The net effect of this
transaction was to record an increase and related decrease to additional
paid-in capital of $495,000. The remaining options to acquire 180,001
shares were exercisable for a five-year period and expired in October 2002.
Following the exchange, the Company's stockholders owned approximately 95%
of the outstanding common stock of Vanden. The reverse acquisition has been
accounted for as a recapitalization of the Company based upon historical
cost. Accordingly, the common stock and additional paid-in capital amounts
have been restated on the statements of changes in stockholders' equity to
give retroactive effect to the recapitalization.
Reincorporation:
In June 2002, the Company changed its state of incorporation from Colorado
to Delaware. The reincorporation was approved by the holders of a majority
of its outstanding shares. The reincorporation was accomplished by merging
with and into Entropin, Inc., a Delaware corporation and our formerly
wholly-owned subsidiary. Each share of common stock of the Colorado
corporation was converted into one share of common stock of the Delaware
corporation. Each share of Series A preferred stock of the Colorado
corporation was converted into one share of Series A preferred stock of the
Delaware corporation. Each share of Series B preferred stock of the
Colorado corporation was converted into one share of Series B preferred
stock of the Delaware corporation.
Private placements:
In January 1998, the Company completed a private placement of 300,000
shares of its common stock at $2.75 per share for proceeds of $825,000.
In April 1999, the Company completed a private placement of 497,500 shares
of its common stock at $2.00 per share for proceeds of $995,000.
In June 1999, the Company completed a private placement of 304,750 shares
of its common stock at $4.00 per share for proceeds of $1,219,000.
In September 1999, the Company completed a private placement of 406,450
shares of its common stock at $4.00 per share for proceeds of $1,625,800.
Secondary 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
costs 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 Company may
redeem the warrants at $.25 per warrant. The Company also issued to the
underwriter warrants to purchase up to 200,000 shares at an exercise price
of $8.25 per share and an option 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 $1,185,000 from the over-allotment 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.
F-17
Stock options and warrants:
In 2000, the Company provided stock option agreements to two directors to
purchase 20,000 shares of the Company's common stock exercisable for five
years at $6.00 per share. The options vested ratably on a monthly basis
commencing February 1, 2000, and ending on February 1, 2001.
In 1998, the Company provided a stock option agreement to purchase 450,000
shares of the Company's common stock at $1.50 per share to an organization
retained to provide assistance in taking Esterom(R) through the clinical
trial and NDA approval process. In July 2000, upon completion of enrollment
in the initial Phase III clinical trial, the Company terminated its
agreements with this organization. The termination agreement allowed the
organization to retain fully vested options to purchase 75,000 shares of
the Company's common stock at $1.50 per share and options to purchase
15,195 shares at $1.50 that the organization had previously assigned to its
employees and advisors. In addition, the Company granted the organization
fully vested options to purchase 90,000 shares at $2.50 per share. The
Company canceled previously issued options to purchase 359,805 shares of
its common stock at $1.50 per share. The organization invoked its cashless
exercise provision to exercise its option to purchase 75,000 shares at
$1.50 in January 2001.
In 2000, the Board of Directors approved a compensation plan for members of
the Company's Scientific and Medical Advisory Board, which included stock
options aggregating 8,000 shares in exchange for services. The options are
exercisable at $2.00 per share and vested in equal portions in December
2001 and 2002. The options expire five years from the dates they became
exercisable.
In 2001, the Company provided stock option agreements to each of its
directors to purchase 1,666.67 shares of its common stock for each month of
service as a director exercisable until February 1, 2006, at $2.00 per
share. The options vest ratably on a monthly basis commencing February 1,
April 1, or July 1, 2001, based on each director's service period, and
ending upon the earlier of April 1, 2002 or the termination of the
recipient's term as a director.
In 2001, the Board of Directors approved a compensation plan for the
Chairman and Vice Chairman of the Board for services provided to the
Company, to be paid in stock options with market values of $40,000 and
$30,000, respectively. The options are exercisable until January 1, 2006,
at $1.00 per share and vest ratably over a twelve month period.
In 2001, the Company provided a stock option agreement to purchase 100,000
shares of common stock to its president and chief operating officer at an
exercise price of $2.05 per share. The options vest upon completion of
specific performance milestones and expire five years from the date they
become exercisable.
In 2001, the Company provided a stock option agreement to purchase 95,000
shares of common stock to its vice president and chief financial officer at
an exercise price of $2.05 per share. The options vest upon completion of
specific milestones and expire five years from the date they become
exercisable.
In 2001, the Company provided a stock option agreement to purchase 23,200
shares of common stock to its president and chief operating officer
exercisable at $1.00 per share for a period of five years.
In 2001, the Company provided a stock option agreement to purchase 14,500
shares of common stock to its vice president and chief financial officer
exercisable at $1.00 per share for a period of five years.
In 2001, the Company provided a stock option agreement to a new director to
purchase 1,666.67 shares of its common stock for each month of service as a
director, exercisable until February 1, 2006, at $2.00 per share. The
options vested and became exercisable ratably on a monthly basis from
January 1, 2002 to April 1, 2002.
F-18
In 2002, the Board of Directors approved a compensation plan for the
Chairman and Vice Chairman of the Board for services provided to the
Company, to be paid in stock options with market values of $40,000 and
$30,000, respectively. The options are exercisable until January 1, 2007,
at $1.05 per share and vest ratably over a twelve month period.
In 2002, the Company provided stock option agreements to each of its
directors (except the Company's president and chief executive officer) to
purchase 1,666.67 shares of its common stock for each month of service
(20,000 shares per each year of service) as a director exercisable until
April 1, 2007, at $3.85 per share. The options vest ratably on a monthly
basis commencing April 1, 2002, and ending upon the earlier of April 1,
2003 or the termination of the recipient's term as a director.
In 2002, the Company provided a stock option agreement to purchase 40,000
shares of common stock to its president and chief executive officer for
services provided to the Company. The 40,000 options were fully vested at
grant and exercisable for a period of five years with 20,000 exercisable at
$2.05 per share and 20,000 exercisable at $3.05 per share.
In 2002, the Company provided a stock option agreement to purchase 13,750
shares of common stock to its vice president and chief financial officer
for services provided to the Company. The options were fully vested at
grant and exercisable at $2.05 per share for a period of five years.
In December 2002, the Company granted options to acquire 100,000 shares of
the Company's common stock to a consulting organization retained to provide
investor relations services to the Company. The options were fully vested
at grant with 50,000 options exercisable at $0.75 per share and 50,000
options exercisable at $1.50 per share until December 1, 2005.
The following is a summary of stock option activity:
Options Exercisable
-------------------
Option Wtd avg. Wtd avg.
Number price per exercise Number exercise
of shares share price of shares price
--------- ----- ----- --------- -----
Balance, December 31, 1997
Granted 1,505,002 $.001 to $4.00 $2.26
Canceled (180,001) $0.001 $0.001
------------ -------
Balance, December 31, 1998 1,325,001 $2.56 713,528 $3.31
Granted 1,371,000 $3.00 to $5.00 $4.07
Exercised (20,000) $4.00 $4.00
Canceled (55,000) $3.00 to $4.00 $3.36
------------ -------
Balance, December 31, 1999 2,621,001 $3.43 1,647,669 $3.52
Granted 138,000 $2.00 to $6.00 $3.49
Exercised (95,000) $4.00 $4.00
Canceled (359,805) $1.50 $1.50
------------ -------
Balance, December 31, 2000 2,304,196 $3.14 1,849,335 $3.44
Granted 441,869 $1.00 to $2.05 $1.78
Exercised (195) $1.50 $1.50
------------ -------
Balance, December 31, 2001 2,745,870 $2.96 2,210,859 $3.32
Granted 365,750 $1.00 to $3.85 $2.34
Exercised (165,000) $1.50 to $2.50 $2.05
Expired (180,001) $2.80 $2.80
------------ -------
Balance, December 31, 2002 2,766,619 $2.90 2,356,619 $3.20
============
F-19
The following is a summary of stock warrant activity:
Wtd avg.
Number Warrant price exercise
of shares per share price
--------- --------- -----
Balance, December 31, 1998 --
Granted 1,200,181 $3.00 to $4.00 $3.17
Canceled (205,000) $3.00 to $4.00 $3.02
----------- -------
Balance, December 31, 1999 995,181 $3.20
Granted 2,500,000 $8.75 to $10.50 $10.36
Exercised (10,000) $4.00 $4.00
Canceled (101,681) $4.00 $4.00
----------- -------
Balance, December 31, 2000 3,383,500 $8.46
Canceled (100,000) $3.00 $3.00
----------- -------
Balance, December 31, 2001
and December 31, 2002 3,283,500 $8.63
===========
The following is additional information with respect to those options and
warrants outstanding at December 31, 2002:
Wtd avg.
remaining
Option Number Options contractual
exercise price per share of shares exercisable life in years
------------------------ --------- ----------- -------------
$0.75 50,000 50,000 2.92
$1.00 177,700 137,700 3.50
$1.50 65,000 65,000 3.51
$2.00 147,169 142,169 3.21
$2.05 230,750 160,750 3.21
$3.00 625,000 625,000 3.41
$3.05 20,000 20,000 4.45
$3.85 140,000 105,000 4.25
$4.00 811,000 811,000 1.04
$5.00 460,000 160,000 2.57
$6.00 40,000 40,000 3.09
---------- ---------- -----
2,766,619 2,356,619 2.61
========== ==========
F-20
Wtd avg.
remaining
Warrant Number Warrants contractual
exercise price per share of shares exercisable life in years
------------------------ --------- ----------- -------------
$3.00 700,000 700,000 1.40
$4.00 83,500 83,500 1.42
$8.75 200,000 200,000 2.22
$10.50 2,300,000 2,300,000 2.22
---------- ----------
3,283,500 3,283,500 2.02
========== ==========
At December 31, 2002, outstanding options and warrants aggregating
3,588,500 shares have certain registration rights and options and warrants
aggregating 6,010,119 shares contain certain cashless exercise provisions.
The fair value of issued but unearned options has been recorded as
additional paid-in capital and unearned stock compensation. Unearned stock
compensation was amortized to research and development and general and
administrative expense over the term of the related agreements, as follows:
Year ended December 31, Inception through
2001 2002 December 31, 2002
---- ---- -----------------
Research and development $ 15,597 $ 2,866 $ 897,765
General and administrative 444,381 527,397 7,739,762
--------- --------- -----------
$ 459,978 $ 530,263 $ 8,637,527
========= ========= ===========
6. Commitments and contingencies
- --------------------------------
Compensation agreements:
In 1993, the Company entered into a thirty-year compensation agreement with
certain limited partners owning 64.28% of the I.B.C. Limited Partnership
("I.B.C."). The limited partnership participated in the early development
of Esterom(R) and owned the rights to three patents and certain
intellectual property rights. Under the terms of the agreement, the Company
acquired these patents and intellectual property rights in exchange for
certain compensation to the limited partners, which is dependent upon the
Company's receipt of a marketing partner's technological access fee and
royalty payments. The limited partnership was subsequently dissolved.
Compensation under the agreement includes a bonus payment of $96,420 to be
paid at the time the Company is reimbursed by a pharmaceutical company for
past expenses paid for development of Esterom(R) and/or products derived
from the acquired patents and developed by the Company, 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, 2002, no amounts have been
earned or accrued with respect to this agreement.
F-21
In a separate agreement with certain former I.B.C. limited partners, the
Company has agreed to pay the partners 35.72% of a decreasing earned
payment (3% to 1% on cumulative annual sales of Esterom(R) and/or products
derived from the acquired patents and developed by the Company) until
October 10, 2004. From October 10, 2004 until October 10, 2014, the Company
will pay the partners 17.87% of the earned payment. In accordance with the
agreement, the Company has agreed to pay these former limited partners the
amount of $40,000 and a minimum earned payment of $3,572 per calendar
quarter beginning on December 1, 1989. Such minimum payment is only payable
when the Company is either reimbursed for expenditures for the development
of Esterom(R) and/or products derived from the acquired patents and
developed by the Company, or from the first revenue received by the Company
from net sales of Esterom(R) and/or products derived from the acquired
patents and developed by the Company. The quarterly payments are to be
applied against the earned payment due the limited partners. The Company
will receive a credit against the earned payments of 50% of monies expended
in connection with preparing, filing, obtaining, and maintaining patents
involved with the acquired rights.
Development and supply agreements:
In July 2000, the Company entered into an agreement with a clinical
research organization to assist in the clinical and regulatory processes
for the preparation, submission, filing and approval of a NDA. The Company
agreed to compensate the organization on an hourly basis at pre-approved
consulting rates, plus reasonable and necessary expenses. The agreement may
be terminated at any time by mutual written consent of the parties.
In addition, the Company contracts with various organizations to provide
research, development, manufacturing and packaging services on an as needed
basis.
Litigation:
In February 2003, a complaint was filed in the Superior Court of the State
of California against the Company and certain of its executive officers
seeking unspecified damages and alleging that the defendants violated
federal and state securities laws. The Company believes the claims are
without merit and intends to defend the action vigorously. However, there
can be no assurance that the Company will succeed in defending or settling
this action. Additionally, there can be no assurance that the action will
not have a material adverse effect on the Company's business. As of the
date of this report, the Company is not a party to any other material legal
proceedings.
F-22
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(Unaudited)
September 30, September 30,
ASSETS 2002 2003
- ------ ------------- -------------
Current assets:
Cash and cash equivalents $ 3,203,767 $ 1,547,051
Short-term investments 1,469,808 --
Accrued interest receivable 17,987 --
Prepaid insurance 60,625 --
------------- -------------
Total current assets 4,752,187 1,547,051
Patent costs, less accumulated amortization of
$147,398 (2002) and $181,379 (2003) 394,988 444,739
Property and equipment, net 15,337 7,551
------------- -------------
Total assets $ 5,162,512 $ 1,999,341
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Accounts payable $ 131,850 $ 53,831
Series A redeemable preferred stock, $.0001 par value;
3,210,487 shares authorized, 3,210,487 (2002) and none (2003)
shares issued and outstanding, $1.00 per share redemption value 3,210,487 --
Series B redeemable convertible preferred stock, $.0001 par value; 400,000
shares authorized, 168,500 (2002) and none (2003) shares issued and
outstanding, $5.00 per share redemption value 825,049 --
Contingencies (Note 2)
Stockholders' equity:
Series A' redeemable preferred stock, $.0001 par value;
3,210,487 shares authorized, issued and outstanding,
$1.00 per share redemption value -- 3,210,487
Common stock, $.0001 par value; 50,000,000 shares
authorized, 9,880,770 (2002) and 11,545,341 (2003)
shares issued and outstanding 988 1,155
Additional paid-in capital 29,643,053 30,871,699
Unearned stock compensation (169,290) (115)
Deficit accumulated during the development stage (28,479,625) (32,137,716)
------------- -------------
Total stockholders' equity 995,126 1,945,510
------------- -------------
Total liabilities and stockholders' equity $ 5,162,512 $ 1,999,341
============= =============
F-23
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003 (UNAUDITED)
2002 2003
---- ----
Costs and expenses:
Research and development $ 755,977 $ 43,599
General and administrative 563,271 632,350
------------- -------------
Operating loss (1,319,248) (675,949)
------------- -------------
Other income (expense):
Interest income 67,389 3,719
Series B preferred stock redemption conversion incentive -- (126,310)
------------- -------------
Total other income (expense), net 67,389 (122,591)
------------- -------------
Net loss (1,251,859) (798,540)
Dividends applicable to Series B
preferred stockholders (21,063) (2,289)
------------- -------------
Net loss applicable to common stockholders $ (1,272,922) $ (800,829)
============= =============
Basic and diluted net loss per common share $ (.13) $ (.07)
============= =============
Weighted average common shares outstanding 9,878,000 10,928,000
============= =============
F-24
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003 (UNAUDITED)
September 30, Inception through
2002 2003 September 30, 2003
---- ---- ------------------
Costs and expenses:
Research and development $ 2,650,072 $ 548,066 $ 15,241,644
General and administrative 1,880,547 2,033,255 16,925,621
------------- ------------- ------------------
Operating loss (4,530,619) (2,581,321) (32,167,265)
------------- ------------- ------------------
Other income (expense):
Interest income 175,575 20,542 1,486,670
Interest expense -- -- (242,811)
Series B preferred stock redemption conversion incentive -- (126,310) (126,310)
------------- ------------- ------------------
Total other income (expense), net 175,575 (105,768) 1,117,549
------------- ------------- ------------------
Net loss (4,355,044) (2,687,089) (31,049,716)
Dividends applicable to Series B
preferred stockholders (63,188) (35,039) (1,103,184)
------------- ------------- ------------------
Net loss applicable to common stockholders $ (4,418,232) $ (2,722,128) $ (32,152,900)
============= ============= ==================
Basic and diluted net loss per common share $ (.45) $ (.26) $ (5.16)
============= ============= ==================
Weighted average common shares outstanding 9,860,000 10,410,000 6,227,000
============= ============= ==================
F-25
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 (UNAUDITED)
Deficit
Unearned accumulated
Series A' redeemable Additional stock during the Total
preferred stock Common stock paid-in compen- development stockholders'
Shares Amount Shares Amount capital sation stage equity
------ ------ ------ ------ ------- ------ ----- ------
Balance, January 1, 2003 -- $ -- 9,912,587 $ 991 $ 29,801,165 $(72,479) $(29,386,377) $ 343,300
Conversion of Series A
preferred stock to
Series A' preferred
stock 3,210,487 3,210,487 -- -- -- -- -- 3,210,487
Amortization and valuation
adjustment of unearned
stock compensation -- -- -- -- 230 72,364 -- 72,594
Shares issued for Series B
preferred stock dividend -- -- 12,850 1 64,249 -- (64,250) --
Shares issued for services -- -- 384,571 39 167,321 -- -- 167,360
Conversion of Series B
preferred stock to
common stock -- -- 1,235,333 124 843,169 -- -- 843,293
Accretion to mandatory
redemption amount for
Series B preferred stock -- -- -- -- (4,435) -- -- (4,435)
Net loss for the period -- -- -- -- -- -- (2,687,089) (2,687,089)
---------- ----------- ----------- ------- ------------- --------- ------------- ------------
Balance, September 30, 2003 3,210,487 $3,210,487 11,545,341 $1,155 $ 30,871,699 $ (115) $(32,137,716) $ 1,945,510
========== =========== =========== ======= ============= ========= ============= ============
F-26
ENTROPIN, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2003
AND FOR THE PERIOD FROM AUGUST 27, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2003
September 30, Inception through
2002 2003 September 30, 2003
---- ---- ------------------
Cash flows from operating activities:
Net loss $ (4,355,044) $ (2,687,089) $ (31,049,716)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 27,667 31,515 254,895
Series B preferred stock redemption conversion incentive -- 126,310 126,310
Loss on disposal of assets -- -- 1,837
Services received in exchange for stock,
stock options and warrants 405,925 239,954 10,104,292
Services received in exchange for
compensation agreements -- -- 2,231,678
Decrease in accrued interest receivable 15,340 5,954 --
(Decrease) increase in accounts payable (11,136) (8,619) 261,528
Other (22,797) 3,126 58,615
------------- ------------- ------------------
Net cash used in operating activities (3,940,045) (2,288,849) (18,010,561)
------------- ------------- ------------------
Cash flows from investing activities:
Maturities of short-term investments, net 2,628,884 990,000 --
Patent costs (88,384) (60,953) (635,463)
Purchase of property and equipment (6,251) -- (130,517)
------------- ------------- ------------------
Net cash provided by (used in) investing activities 2,534,249 929,047 (765,980)
------------- ------------- ------------------
Cash flows from financing activities:
Proceeds from shares issued pursuant to recapitalization -- -- 220,100
Proceeds from issuance of common stock and warrants -- -- 18,281,066
Proceeds from issuance of preferred stock -- -- 1,142,750
Proceeds from stockholder loans -- -- 809,676
Proceeds from stockholder advances -- -- 98,873
Repayments of stockholder advances -- -- (98,873)
Payment for cancellation of common stock warrant -- -- (330,000)
Proceeds from convertible notes payable -- -- 200,000
------------- ------------- ------------------
Net cash provided by financing activities -- -- 20,323,592
------------- ------------- ------------------
Net (decrease) increase in cash and cash equivalents (1,405,796) (1,359,802) 1,547,051
Cash and cash equivalents at beginning of period 4,609,562 2,906,853 --
------------- ------------- ------------------
Cash and cash equivalents at end of period $ 3,203,766 $ 1,547,051 $ 1,547,051
============= ============= ==================
F-27
(Continued from preceding page)
Supplemental disclosure of cash flow information:
Nine Months Ended September 30, Inception through
2002 2003 September 30, 2003
---- ---- ------------------
Cash paid for interest
during the period $ -- $ -- $ 242,811
Supplemental disclosure of non-cash investing and financing activities:
During the period from August 27, 1984 (inception) through September 30,
2003, the Company issued 3,210,487 shares of Series A preferred stock in
exchange for an aggregate $1,710,487 of notes payable to stockholders plus
accrued interest and a $1,500,000 compensation agreement.
During the period from August 27, 1984 (inception) through September 30,
2003, the Company converted promissory notes payable with outstanding
principal and interest balances totaling $201,662 into 100,831 shares of
common stock.
During the nine months ended September 30, 2002 and 2003, and the period
from August 27, 1984 (inception) through September 30, 2003, the Company
issued 16,850, 12,850, and 94,850 shares of common stock at $5.00 per share
as payment of accrued dividends on Series B preferred stock.
During the nine months ended September 30, 2002 and 2003, and the period
from August 27, 1984 (inception) through September 30, 2003, the Company
issued none, 1,235,333 and 1,337,333 shares of common stock totaling $0,
$843,293 and $1,336,610, respectively, for conversion of shares of Series B
preferred stock.
F-28
NOTES TO FINANCIAL STATEMENTS
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 ("GAAP") for interim financial information and with the
instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted under such rules and regulations. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, the financial statements
reflect all adjustments considered necessary for a fair presentation. The
results of operations for the nine months ended September 30, 2002 and 2003 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 our annual report on Form 10-KSB/A for the year ended December 31,
2002 as filed with the Securities and Exchange Commission on April 30, 2003.
1. Organization and selected accounting policies
- ------------------------------------------------
Organization and basis of presentation:
The Company, a Delaware corporation, was organized as a California
corporation in August 1984. The Company is a pharmaceutical research and
development company focused on the development of its proprietary compound,
ENT-103, as a pain therapy. Activities from inception include research and
development, seeking the U.S. Food and Drug Administration, or FDA,
approval for its proprietary compounds, including its current drug
candidate, ENT-103, as well as fundraising.
The Company's financial statements have been presented on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company is in the
development stage and has been primarily involved in research and
development activities. This has resulted in significant operating losses
and an accumulated deficit at September 30, 2003 of $32.1 million.
Management anticipates additional operating losses for the foreseeable
future. These factors, among others, may indicate that the Company will be
unable to continue as a going concern for a reasonable period of time. The
financial statements do not include any adjustments related to the
recoverability of recorded asset amounts that may be necessary should the
Company be unable to continue as a going concern. The Company will need to
raise significant additional funds to continue its planned development
activities. In the absence of positive cash flows from operations which the
Company expects will not be possible for several years, if at all, the
Company is and will remain highly dependent on its ability to secure
additional funding through the issuance of debt or equity instruments or
corporate partnering arrangements. If adequate funds are not available, the
Company may be forced to significantly curtail or terminate its operations
or to obtain funds through entering into collaborative agreements or other
arrangements that may be on unfavorable terms. The Company's failure to
raise sufficient additional funds on favorable terms, or at all, would have
a material adverse effect on its business, results of operations and
financial position. The Company's continued existence is currently
dependent on its ability to successfully raise additional capital and
complete development of, obtain approval for, and successfully market its
proprietary compound ENT-103.
On October 31, 2003, the Company filed a registration statement with the
Securities and Exchange Commission ("SEC") on Form SB-2 registering 20
million shares of common stock for sale in a registered offering. The
Company cannot guarantee that this offering will be successful or that it
will be able to raise the needed capital.
F-29
Because the Company has not yet completed product development, obtained
regulatory approval, or verified the market acceptance and demand for any
products it may develop, its activities have been accounted for as those of
a "development stage enterprise" as set forth in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises".
During 1998, the Company consummated an agreement and plan of merger with
Vanden Capital Group, Inc. ("Vanden"), a Colorado corporation, under which
Vanden acquired all of the issued and outstanding common shares of the
Company. The Company was merged into Vanden, and Vanden changed its name to
Entropin, Inc. For accounting purposes, the acquisition has been treated as
a recapitalization of the Company, based upon historical cost, and a
reverse acquisition with the Company as the acquirer.
During 1998, the Company also completed private offerings of 245,500 shares
of Series B convertible preferred stock for gross proceeds of $1,227,500,
$200,000 of convertible notes payable, and 1,508,700 shares of common stock
for gross proceeds of $4,664,800. During the first half of 2000, the
Company raised approximately $13,700,000 through a secondary offering.
Stockholders' equity:
On July 15, 2003, all outstanding shares of our Series B preferred stock
were subject to redemption at the original purchase price of $5.00 per
share, along with all accrued and unpaid dividends. As of August 11, 2003,
the holders of all outstanding shares of Series B preferred stock exchanged
their shares of Series B preferred stock for common stock at a ratio of
9.4967 shares of common stock issued for each share of Series B preferred
stock tendered, pursuant to a recapitalization agreement with the Company.
Accordingly, the Company issued 1,220,333 shares of common stock at a
market price of $0.63 and recorded a redemption conversion incentive of
$126,310 reflecting the excess of the value of the common stock issued over
the redemption obligation. There are no longer any shares of Series B
preferred stock outstanding as of August 11, 2003, and the Company's
redemption obligation to the prior holders of Series B preferred stock has
terminated.
In February 2003, the Company's Board of Directors approved and authorized
a Certificate of Designations of Series A' preferred stock. The Company
subsequently entered into separate agreements with each of the holders of
its Series A preferred stock, in which these stockholders agreed to
exchange each outstanding share of Series A preferred stock for one share
of Series A' preferred stock. The terms of the Series A' preferred stock
are the same as the terms of the Series A preferred stock, except the
redemption provision of the Series A' preferred stock allows the Company to
redeem the Series A' preferred stock in cash, common stock or any
combination thereof and extends the redemption period to January 15, 2015.
Adding the option to redeem these preferred shares in common stock allowed
the Company to include the Series A' preferred stock in stockholders'
equity.
F-30
Use of estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Patents:
The Company believes that patents and other proprietary rights are
important to its business. It is the Company's policy to file patent
applications to protect its technology, inventions and improvements to
inventions that are considered important to the development of its
business. Patents are amortized on a straight-line basis over an estimated
useful life of 17 years.
Stock-based compensation:
The Company follows the fair value method of accounting for employee
stock-based compensation provided for in Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation". Compensation
cost for stock option grants is measured as the fair value of the options
using the Black-Scholes option pricing model. Amounts recorded for options
granted to non-employees are determined in accordance with Statement of
Financial Accounting Standards No. 123 and EITF 96-18 based on the fair
value of the consideration or the fair value of the equity instruments
issued, whichever is more reliably measured. Deferred charges related to
options granted to non-employees are periodically remeasured as the
underlying options vest and are included as unearned stock compensation in
the stockholders' equity section of the balance sheet.
Loss per share:
Net loss per common share is computed using the weighted average number of
common shares outstanding. Basic and diluted net loss per common share
amounts are equivalent for the periods presented as the inclusion of common
stock equivalents in the number of shares used for the diluted computation
would be anti-dilutive. Dividends on preferred stock, consisting of 10%
cumulative dividends and deemed dividends related to the beneficial
conversion feature and mandatory redemption accretion of Series B preferred
stock, are added to net loss for the purpose of determining net loss and
net loss per share amounts applicable to common stockholders.
Segment reporting:
The Company currently operates in a single segment. In addition, financial
results are prepared and reviewed by management as a single operating
segment. The Company continually evaluates its operating activities and the
method utilized by management to evaluate such activities and will report
on a segment basis when appropriate to do so.
Recent accounting pronouncements:
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others" ("FIN 45"). FIN 45 requires that a liability be recorded for the
fair value of the obligation in the guarantor's balance sheet upon issuance
of a guarantee. In addition, FIN 45 requires certain disclosures about each
of the entity's guarantees. The disclosure provisions of FIN 45 are
effective for annual and interim periods that end after December 15, 2002.
The recognition provisions of FIN 45 are applicable prospectively to
guarantees entered after December 31, 2002. The adoption of FIN 45
effective January 1, 2003 did not have a material effect on the Company's
results of operations or financial position.
F-31
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation, Transition and
Disclosure" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of
transition for those entities that elect to voluntarily adopt the fair
value accounting provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS
No. 148 also requires more prominent disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee
compensation as well as pro forma disclosure of the effect in interim
financial statements. The transition and annual disclosure provisions of
SFAS No. 148 are effective for fiscal years ending after December 15, 2002.
The interim disclosure requirements are effective for the first interim
period ending after December 15, 2002. The Company had previously adopted
the fair value accounting provisions of SFAS No. 123 and therefore the
adoption of SFAS No. 148 did not have a material effect on the Company's
results of operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity" ("SFAS No. 150"). This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
This statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective for the first
interim period beginning after June 15, 2003, with certain exceptions. The
adoption of SFAS No. 150, effective July 1, 2003, did not have a material
effect on the Company's results of operations or financial position.
2. Litigation
- -------------
In February 2003, a complaint was filed in the Superior Court of the State
of California the Company and certain of its executive officers seeking
unspecified damages. The suit alleges that the Company and certain of its
officers made false and misleading statements in publicly disseminated
press releases, registration statements and other filings with the SEC and
that one of its directors sold stock for personal gain in violation of
federal and state securities laws. The Company believes the claims are
without merit and has filed a motion for summary judgment with the court.
As of the date of this report, the Company is not a party to any other
material legal proceedings.
3. Nasdaq Delisting
- -------------------
Effective June 26, 2003, the Company's common stock and warrants were
delisted from the Nasdaq SmallCap Market for failure to comply with the
$1.00 minimum bid price requirement. The Company's common stock and
warrants now trade on the OTC Bulletin Board under the symbols "ETOP" and
"ETOPW," respectively. Trading on the OTC Bulletin Board could result in a
less liquid market available for existing and potential investors to trade
shares of the Company's common stock and warrants and could ultimately
further depress the trading price of the Company's common stock and
warrants. In addition, the Company may have more difficulty in raising
necessary additional funds as a result of not trading on the Nasdaq
SmallCap Market.
F-32
ANNEX A
FORM OF COMMON STOCK SUBSCRIPTION AGREEMENT
Entropin, Inc.
45926 Oasis Street
Indio, CA 92201
Ladies and Gentlemen:
This subscription agreement relates to the offer made by Entropin, Inc., a
Delaware corporation (the "Company"), to sell between $500,000 (the "Minimum
Offering") and $3,000,000 (the "Maximum Offering") in shares of Company common
stock, par value, $.0001 per share (the "Shares"), pursuant to the prospectus
filed with the SEC under Rule 424(b)(3) on _______ __, 2003, and as same may be
amended or supplemented from time to time (the "Prospectus"). The undersigned
has received a copy of the Prospectus and wishes to purchase Shares on the
terms, and subject to the conditions, set forth below and in the Prospectus. If
the Maximum Offering is reached, then for a period of 30 days from completion of
the offering, the Company may sell up to an additional $300,000 in shares of
Company common stock pursuant to an over-allotment option contained in the
Company's agreement with InvestLinc Securities LLC, the Company's placement
agent.
1. Subscription.
1.1 The undersigned hereby irrevocably subscribes, in accordance with
the terms and conditions of this Subscription Agreement (the "Agreement"), for
the purchase of the number of Shares, at the price per Share, set forth on the
signature page to the Agreement. The undersigned hereby delivers to the Company
(i) an executed copy of this Agreement, (ii) an executed copy of the Investor
Suitability Questionnaire, and (iii) personal, bank, cashier's check or wire
transfer for the aggregate purchase price, as reflected on the signature page to
this Agreement (the "Purchase Price") payable to "LaSalle Bank National
Association, Escrow Agent, for Entropin, Inc., as Escrow agent", as follows:
[Escrow Agent]
[Bank]
[ABA Routing No.]
[Account No.]
[Reference]
1.2 The Purchase Price and the executed Agreement will be held for the
benefit of the undersigned until accepted by the Company pursuant to Section 2
below. If the Agreement is not accepted by February 13, 2004 in accordance with
Section 2 of this Agreement (the "Termination Date"), then the Purchase Price
will be promptly returned to the undersigned, without interest.
1.3 After a determination has been made, based upon the undersigned's
representations herein and the Investor Suitability Questionnaire, that the
undersigned is a suitable purchaser of the Shares and the conditions set forth
in Section 2 are met, the Company will accept this Agreement and the Escrow
Agent will deliver the Purchase Price to the Company. Following delivery of the
Purchase Price, the Company shall promptly deliver to the undersigned a stock
certificate representing the number of Shares for which the undersigned hereby
subscribes (or, if the subscription is accepted for less than all the Shares
requested, a certificate representing the number of allotted Shares and a pro
rata refund of a portion of the Purchase Price).
A-1
2. Acceptance of Agreement. It is understood and agreed that the Company shall
have the right to accept or reject this Agreement, in whole or in part, for any
reason whatsoever upon receiving notice from the Escrow Agent that it has
received aggregate subscriptions for Shares in an amount that equals or exceeds
the Minimum Offering. If the Escrow Agent has not received subscriptions
totaling at least the Minimum Offering by the Termination Date, then the Company
will instruct the Escrow Agent to promptly return the Purchase Price to the
undersigned, without interest. If the Company has received subscriptions for at
least the Minimum Offering by the Termination Date, then it may extend the
offering period for up to an additional 60 days, or until it has received
subscriptions totaling the Maximum Offering.
3. Representations and Warranties of Subscriber. The undersigned hereby
represents and warrants to the Company (knowing that the Company will be relying
on these matters to determine the undersigned's suitability as an investor and
the availability of securities law exemptions) that:
3.1 The undersigned has received the Prospectus. Additionally, the
Company has afforded the undersigned or the undersigned's representative with
access to and an opportunity to obtain other information regarding the Company
requested by the undersigned. The undersigned has not relied on any oral
representations of any kind.
3.2 The undersigned is an "accredited investor" as that term is defined
in Rule 501 of Regulation D under the Securities Act of 1933 (the "Securities
Act"), meaning that the undersigned has either (i) an individual net worth or
joint net worth with the undersigned's spouse in excess of $1,000,000, or (ii)
an individual annual income in excess of $200,000 in each of the two most recent
years or a joint income with the undersigned's spouse in excess of $300,000 in
each of those years, and has a reasonable expectation of reaching the same
income level in the current year, or (iii) if a corporation, trust or
partnership not formed for the specific purpose of the investment in the Shares,
total assets in excess of $7,000,000. All statements made by the undersigned in
the Investor Suitability Questionnaire are true, complete and correct.
3.3 Immediately prior to the undersigned's execution of this Agreement,
the undersigned had such knowledge and experience in financial and business
matters (including experience with investments of a similar nature), that the
undersigned was capable of evaluating the merits and risks of an investment in
the Shares.
3.4 The undersigned recognizes that the purchase of the Shares is a
speculative investment that involves a high degree of risk, including but not
limited to those risks referred to in the Prospectus, and is suitable only for
persons with the financial capability of making and holding long-term
investments not readily reducible to cash.
3.5 The undersigned, if not an individual investor, is empowered and
duly authorized to enter into this Agreement under its governing document, trust
instrument, pension plan, charter, certificate of incorporation, bylaw provision
and the like.
3.6 The type of ownership in which the undersigned is applying to purchase
Shares is as follows: (Check One)
______ INDIVIDUAL OWNERSHIP (One signature required)
______ JOINT TENANTS WITH RIGHT OF SURVIVORSHIP (Both parties must sign)
______ TRUST (Please include name of trustee, date trust was formed and a copy
of the Trust Agreement or other authorization)
______ CORPORATION (Please include Certified Corporate Resolution authorizing
signature)
______ PARTNERSHIP (Please include a copy of the Statement of Partnership or
Partnership Agreement authorizing signature)
______ COMMUNITY PROPERTY (Two signatures required)
______ TENANTS-IN-COMMON (Both parties must sign)
A-2
4. Continuing Obligation to Furnish Information. These representations and
warranties are true, complete and accurate as of the date hereof and shall be
true, complete and accurate as of the date of delivery of the Purchase Price to
the Company and shall survive such delivery. If, in any respect, such
representations and warranties shall not be true and accurate prior to receipt
of notice of acceptance of this Agreement, the undersigned shall give written
notice of such fact to the Company, specifying which representations and
warranties are not true and accurate and the reasons therefore.
5. Miscellaneous.
5.1 Survival. The representations and warranties made herein shall
survive the consummation of the transaction contemplated hereby.
5.2 Governing Law. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of California, without
regard to principles of conflicts of laws.
5.3 Entire Agreement; Amendment. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof, and
supersedes all other written or oral agreements, understandings and
negotiations. This Agreement may not be amended except by a writing signed by
both the Company and the undersigned.
5.4 Attorneys' Fees. If any action at law or in equity (including
arbitration) is necessary to enforce or interpret the terms of any of the
Transaction Agreements, the prevailing party shall be entitled to reasonable
attorney's fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
5.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
A-3
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
___ day of _______________, 200__.
__________________________________ __________________________________
Print Name
__________________________________
__________________________________ Address
Signature
__________________________________ __________________________________
Title (if applicable) Taxpayer ID Number
SUBSCRIPTION INFORMATION
__________________________________ __________________________________
Number of Shares Purchased Price Per Share
__________________________________
Aggregate Purchase Price
SUBSCRIPTION ACCEPTED:
Entropin, Inc.,
a Delaware corporation
By: ______________________________
Name: ____________________________
Title: ___________________________
Date: ____________________________
[SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT]
A-4
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 5 of the registrant's Certificate of Incorporation (the
"Certificate") provides that, except to the extent prohibited by the Delaware
General Corporation Law (the "DGCL"), no director shall be personally liable to
the Corporation or any of its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Article 8 of the Certificate provides that the Company shall indemnify
its directors and officers to the fullest extent authorized or permitted by law,
as now or hereafter in effect, and such right to indemnification shall continue
as to a person who has ceased to be a director or officer of the Company and
shall inure to the benefit of his or her heirs, executors and personal or legal
representatives; PROVIDED, HOWEVER, that, except for proceedings to enforce
rights to indemnification, the Company shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors. The right to indemnification conferred by Article
8 includes the right to have paid by the Company the expenses incurred in
defending or otherwise participating in any proceeding in advance of its final
disposition. The Company may also, to the extent authorized from time to time by
the Board of Directors, provide rights to indemnification and to the advancement
of expenses to employees and agents of the Company similar to those conferred in
Article 8 to the Company's directors and officers.
The Company's bylaws contain the following provisions regarding the
indemnification of the Company's officers and directors:
(A) The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the
administrative or investigative (other than an action by or in the right of
the Company)) by reason of the fact that such person is or was a director
or officer of the Company, or is or was a director or officer of the
Company serving at the request of the Company as a director of officer,
employee or agent of another Company, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit
or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be 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 such person's conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect to any criminal action or proceeding, had reasonable cause to
believe that such person's conduct was unlawful.
(B) The Company shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Company to procure a judgment in
its favor by reason of the fact that such person is or was a director or
officer of the Company, or is or was a director or officer of the Company
serving at the request of the Company as a director, officer, employee or
agent of another Company, partnership, joint venture, trust, employee
benefit plan or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection with
the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Company; except that no
indemnification shall be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the Company
unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
i
(C) Any indemnification under the Company's bylaws (unless ordered by a
court) shall be made by the Company only as authorized in the specific case
upon a determination that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable
standard of conduct set forth above in paragraph (A) or (B), as the case
may be. Such determination shall be made, with respect to a person who is a
director or officer at the time of such determination, (i) by a majority
vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) by a committee of such
directors designated by a majority vote of such directors, even though less
than a quorum, or (iii) if there are no such directors, or if such
directors so direct, by independent legal counsel in a written opinion or
(iv) by the stockholders. Such determination shall be made, with respect to
former directors and officers, by any person or persons having the
authority to act on the matter on behalf of the Company. To the extent,
however, that a present or former director of officer of the Company has
been successful on the merits or otherwise in defense of any action, suit
or proceeding described above, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by such person in
connection therewith, without the necessity of authorization in the
specific case.
Additionally, certain provisions of the California Labor Code (the "Labor
Code") require an employer to indemnify its employees in certain
circumstances. These statutory obligations may require the registrant to
indemnify its officers and other employees as set forth in the Labor Code.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the registrant are as follows. All amounts
other than the SEC registration fee are estimates.
AMOUNT TO BE
PAID
------------
SEC registration fee................................. $ 324
Blue sky fees........................................ 5,000
Legal fees and expenses.............................. 75,000
Accounting fees and expenses......................... 5,000
Printing and engraving............................... 25,000
Transfer agent fees.................................. 5,000
Miscellaneous........................................ 10,000
-----------
Total....................................... $ 125,324
===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since October 1, 2000, the registrant has sold the following securities
in transactions that were not registered under the Securities Act of 1933:
o In April 2003, the registrant issued 225,000 shares of common
stock to Mirador Consulting in partial consideration for investor
relations services to be provided by Mirador. This issuance was
deemed to be exempt from registration under the Act in reliance
upon the exemption provided by Section 4(2) of the Act and/or
Regulation D promulgated under the Act. This issuance was made
without general solicitation or advertising. The recipient was a
sophisticated investor and had adequate access to information
about the registrant. No underwriters or broker-dealers were
involved in connection with the issuances of these securities.
o In August 2003, the registrant issued 28,571 shares of common
stock to InvestLinc Capital Services LLC as partial consideration
for its services as placement agent in this offering. This
issuance was deemed to be exempt from registration under the Act
in reliance upon the exemption provided by Section 4(2) of the Act
and/or Regulation D promulgated under the Act. This issuance was
made without general solicitation or advertising. The recipient
was a sophisticated investor and had adequate access to
information about the registrant. No underwriters or
broker-dealers were involved in connection with the issuances of
these securities.
ii
o In August 2003, the registrant issued 1,220,333 shares of common
stock upon conversion of outstanding shares of the registrant's
Series B Preferred Stock. This issuance was deemed to be exempt
from registration under Section 3(a)(9) of the Securities Act of
1933.
ITEM 27. EXHIBITS
EXHIBIT DESCRIPTION
- ------------ -------------------------------------------------------------
1.1 Amended and Restated Investment Banking Agreement, dated as of
December 11, 2003, between Entropin, Inc. and InvestLinc
Securities LLC
3.1 Certificate of Incorporation of Entropin, Inc. (2)
3.2 Bylaws of Entropin, Inc. (2)
3.3 Certificate of Designations of Series A' Preferred Stock of
Entropin, Inc. (1)
5.1 Opinion of Heller Ehrman White & McAuliffe LLP *
10.1 Lease Agreement, dated February 1, 1998, between the Registrant
and Thomas T. Anderson (4)
10.2 Stock Option Plan (3)
10.3 1998 Compensatory Stock Plan (5)
10.4 Form of Common Stock Subscription Agreement (attached to
prospectus as Annex A)
10.5 Escrow Agreement, dated December 15, 2003, between Entropin,
Inc. and LaSalle Bank National Association, a national banking
association, as escrow agent.
10.6 Employment Agreement, dated December 1, 1999, between Entropin,
Inc. and Thomas Tachovsky
23.1 Consent of Heller Ehrman White & McAuliffe LLP (contained in
Exhibit 5.1) *
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Causey Demgen & Moore Inc.
24.1 Power of Attorney *
__________________
* Previously filed.
(1) Incorporated by reference from the Registrant's Annual Report on Form
10-KSB for the year ended December 31, 2002.
(2) Incorporated by reference from the like numbered exhibits as filed with
Registrant's Current Report on Form 8-K on June 26, 2002.
(3) 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.
iii
(4) Incorporated by reference from the like numbered exhibits filed with the
Registrant's Annual Report on Form 10-KSB, dated April 15, 1998, as
amended.
(5) Incorporated by reference from the like numbered exhibit as filed with the
Registrant's Registration Statement on Form S-8 as filed on December 30,
1998.
ITEM 28. UNDERTAKINGS
The registrant hereby undertakes that it will:
(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. Notwithstanding the foregoing,, any increase
or decrease in volume of securities offered (if the total dollar value
of securities offered would not exceed that which was registered) any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective 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.
The undersigned registrant hereby undertakes to provide to the Placement
Agent at the closing specified in the Placement Agent agreement,
certificates in such denominations and registered in such names as required
by the Placement Agent to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 SEC 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 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 Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933 the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or
(4), or 497(h) under the Securities Act of 1933, shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933 each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
***
iv
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Indio, California on this 17th day of
December, 2003.
ENTROPIN, INC.
By: /s/ Thomas G. Tachovsky
----------------------------------------
Name: Thomas G. Tachovsky
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933 this Registration
Statement has been signed by the following persons in the capacities indicated
on December 17, 2003:
SIGNATURE TITLE(S)
- --------- --------
/s/ Thomas G. Tachovsky President, Chief Executive Officer and Director
- --------------------------- (principal executive officer)
Thomas G. Tachovsky
/s/ Patricia G. Kriss Chief Financial Officer, Vice President of Finance &
- --------------------------- Administration and Secretary/Treasurer
Patricia G. Kriss (principal financial and accounting officer)
* Chairman of the Board, Director
- ---------------------------
Higgins D. Bailey
* Vice Chairman of the Board, Director
- ---------------------------
Joseph R. Ianelli
* Director
- ---------------------------
Randall L. Carpenter
* Director
- ---------------------------
Paul V. Maier
* Director
- ---------------------------
Bruce R. Manning
* Director
- ---------------------------
Dennis K. Metzler
* By: /s/ Patricia G. Kriss
------------------------------
Patricia G. Kriss
Attorney-in-Fact
vi