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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 2000
[ ] Transition Report Pursuant to 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission file number 0-27839
EMPYREAN BIOSCIENCE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Wyoming 86-0973095
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
23800 Commerce Park Road, Suite A, Cleveland, Ohio 44122
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (216) 360-7900
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act, during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
As of November 13, 2000, the Registrant had 41,796,222 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
September 30, December 31,
2000 1999
-------- --------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ....................... $ 233 $ 286
Accounts receivable ............................. 30 7
Prepaid expenses and deposits ................... 15 49
Inventory ....................................... 231 284
Other ........................................... -- 3
-------- --------
Total current assets .......................... 509 629
Equipment and improvements ...................... 41 52
-------- --------
Total assets .................................. $ 550 $ 681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ........ $ 2,057 $ 2,045
Deferred revenue ................................ 100 100
Short-term notes payable ........................ -- 198
-------- --------
Total current liabilities ..................... 2,157 2,343
COMMITMENTS AND CONTINGENCIES ..................... -- --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(2000: 41,346,222; 1999: 31,522,109) .......... 28,966 21,494
Accumulated deficit ............................. (30,573) (23,156)
-------- --------
Total stockholders' equity (deficit) .......... (1,607) (1,662)
-------- --------
Total liabilities and stockholders'
equity (deficit) ............................ $ 550 $ 681
======== ========
See accompanying notes to financial statements
2
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues .................................... $ 49 $ 63 $ 496 $ 650
Cost of sales ................................... 27 11 267 34
-------- -------- -------- --------
Gross profit .............................. 22 52 229 616
Selling, general and administrative ............. 978 906 2,159 2,891
Royalties ....................................... (345) 124 64 372
Litigation settlement expense ................... 5,360 -- 5,434 --
-------- -------- -------- --------
Operating expenses ........................ 5,993 1,030 7,657 3,263
Loss from operations ...................... (5,971) (978) (7,428) (2,647)
Other, net ...................................... 10 (1) (14) (2)
Interest expense ................................ (1) (45) (6) (156)
Interest income ................................. 8 1 31 3
-------- -------- -------- --------
Other income (expense) .................... 17 (45) 11 (155)
-------- -------- -------- --------
Net loss ........................................ $ (5,954) $ (1,023) $ (7,417) $ (2,802)
======== ======== ======== ========
Basic and diluted loss per share ................ $ (0.15) $ (0.04) $ (0.20) $ (0.10)
======== ======== ======== ========
Weighted average number of shares outstanding.... 39,207 28,456 36,305 27,519
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock
--------------------- Accumulated
Shares Amount Deficit Total
------ ------ ------- -----
<S> <C> <C> <C> <C>
Balances, January 1, 2000 ................................. 31,522 $ 21,494 $(23,156) $ (1,662)
Common stock issued for cash .............................. 2,904 1,452 -- 1,452
Stock options and warrants exercised for cash ............. 740 405 -- 405
Common stock issued for royalties ......................... 476 238 -- 238
Common stock issued for debt and services ................. 704 360 -- 360
Common stock issued for litigation settlement ............. 5,000 3,300 -- 3,300
Fair value of options granted for litigation settlement.... -- 1,595 -- 1,595
Fair value of other option and warrant grants ............. -- 122 -- 122
Net loss .................................................. -- -- (7,417) (7,417)
-------- -------- -------- --------
Balances, September 30, 2000 .............................. 41,346 $ 28,966 $(30,573) $ (1,607)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
-------------------------------
September 30, September 30,
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net cash used by operating activities ............. $(1,998) $(1,719)
Cash flows from investing activities:
Proceeds from sales of fixed assets .................. 5 --
Purchase of capital assets ............................. (17) (9)
------- -------
Net cash used by investing activities ............. (12) (9)
Cash flows from financing activities:
Issuance of common stock ............................. 1,857 1,008
Proceeds of short-term notes payable ................. 250 800
Payments of short-term note payable .................. (150) --
------- -------
Net cash provided by financing activities.......... 1,957 1,808
------- -------
Net increase (decrease) in cash
and cash equivalents ............................ (53) 79
Cash and cash equivalents at beginning of period........ 286 63
------- -------
Cash and cash equivalents at end of period ............. $ 233 $ 142
======= =======
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
EMPYREAN BIOSCIENCE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein for the quarters and nine month
periods ended September 30, 2000 and 1999, and the financial information as
of September 30, 2000, is unaudited. However, such information reflects all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary for the fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
interim financial statements and the notes thereto should be read in
conjunction with the annual audited financial statements as of December 31,
1999. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The accompanying condensed consolidated financial statements include
Empyrean Bioscience, Inc. and its wholly-owned subsidiary, Empyrean
Diagnostics, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
NOTE 2 - GOING CONCERN
We incurred net losses in 1998 and 1999 and expect to incur net losses in
2000 and at least through 2001. We expect operations to generate negative
cash flow in 2000 and through at least 2001. We do not have existing
capital resources or credit lines available that are sufficient to fund our
operations and capital requirements as presently planned over the next
twelve months. In November 2000, we secured a one-year, $1,000 revolving
line of credit from a bank, secured by the signature guarantees of several
officers and directors and their wives, which in turn are guaranteed by the
assets of the Company. We believe this line of credit will be sufficient to
meet our cash flow requirements until early 2001, at which time we plan to
raise additional equity financing and repay outstanding borrowings under
the line of credit. We may also pursue a working capital line of credit to
be secured by our accounts receivable and inventory. We plan to raise funds
through the issuance of either debt or equity instruments. However, a
working capital line of credit and/or equity or debt financing may not be
available on favorable terms or at all. These factors raise doubts about
our ability to continue as a going concern and our audit report contained
in our 1999 annual report on Form 10-KSB filed with the U.S. Securities and
Exchange Commission on March 30, 2000 contains an explanatory paragraph
with respect to this matter.
NOTE 3 - SHORT-TERM NOTES PAYABLE
In February 2000, the Company entered into promissory note agreements in
the aggregate amount of $250 with various officers and directors. The
promissory notes were due and payable nine months from the loan date and
had a fixed interest rate of 10%, payable monthly. On February 23, 2000,
promissory notes in the amount of $298, including $198 due and payable as
of December 31, 1999, were converted into 596,000 shares of common stock.
The remaining promissory note in the amount of $150 was paid in full in
March 2000. The Company has no promissory notes due and payable as of
September 30, 2000.
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<PAGE>
NOTE 4 - LEGAL PROCEEDINGS
We are the plaintiff in an action that was filed in the United States
District Court, Southern District of Florida Case No.00-8300. In this
action in federal court, the Company brought suit against International
Bioscience Corporation (IBC), David Thornburgh, M.D., and Sara Gomez for
fraud in the inducement, tortious interference with a business relationship
and breach of contract in connection with the Company's original license
from IBC of certain technology. In August 2000, we announced that all legal
disputes between IBC and our company have been resolved. We entered into a
settlement agreement with IBC on August 9, 2000. This case against IBC has
been settled by the filing of a Stipulation of Dismissal with the United
States District Court on August 17, 2000 (see Note 8).
Optima Holding Co. Ltd. intervened in our lawsuit against IBC, claiming
that it has an exclusive prior right to use the same technology by virtue
of a joint venture agreement entered into between IBC and Optima. Optima
has asserted claims against us for injunctive relief, conversion and
tortious interference with a business relationship. On August 18, 2000,
Optima, together with Mercury Technology Corp. (Delaware) and Mercury
Technology Corp. (Bahamas) (collectively "Mercury") amended its original
intervention complaint to add two counts of patent infringement against
both us and IBC, alleging that we willfully infringed U.S. Patent Nos.
3,594,468 and 4,321,277. Empyrean and IBC have each filed motions in the
federal action seeking the dismissal of Mercury's patent infringement
claims. Mercury has since dropped its claim of infringement of U.S. Patent
No. 3,594,468. As noted above, although we have settled our claims against
IBC and have filed a dismissal of the federal action, this may not dismiss
the intervention by Optima and Mercury.
We are also a defendant in an action that was filed by Optima Holding Co.,
Ltd. and Mercury Technology Corp. on July 28, 1998 in the Circuit Court of
the Eleventh Judicial District, Dade County, Florida. This state court
action alleges that we tortiously interfered with Optima and Mercury's
contractual relationship with IBC. Optima and Mercury claim that they had
prior rights to the IBC formulation and products and that we induced IBC to
breach that agreement. Optima and Mercury have requested an unspecified
amount of damages against us. In a separate action that has now been
consolidated with the first action in the same court, IBC has requested a
declaratory judgment that IBC properly terminated its development and
distribution contract with Optima and Mercury. Optima and Mercury also seek
injunctive relief to prevent IBC and its managers and directors from
allowing IBC to have further dealings with us. The state court action was
informally abated while the parties pursued their remedies in the federal
action. If the federal action is dismissed, it is likely that the state
court action will resume. If we are not successful in the state court
action, or in the federal action, we could lose the right to market, sell
or manufacture our hand sanitizer product and other products currently
under development. Should any court judgment be entered precluding our
rights to the products, IBC has agreed as part of our overall litigation
settlement to secure its obligations to us by granting us the highest
priority perfected security interest IBC is permitted to assign in IBC's
rights in commercializing the products in the United States.
7
<PAGE>
NOTE 5 - NET REVENUES
Net revenues are comprised of the following:
Three months ended Nine months ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2000 1999 2000 1999
----- ----- ----- -----
Product sales ................. $ 49 $ 30 $ 496 $ 100
Distribution rights ........... -- 33 -- 550
----- ----- ----- -----
Net revenues ............. 49 63 496 650
===== ===== ===== =====
NOTE 6 - STOCKHOLDERS' EQUITY
On February 23, 2000, the Company completed a private placement of
6,151,050 shares of common stock that generated gross proceeds of $3,076.
Of this amount, cash proceeds of $750 and $1,452 were received in the
fourth quarter of 1999 and the first quarter of 2000, respectively, and
$874 resulted from the conversion of promissory notes and royalties payable
to common stock. As of September 30, 2000, we have paid all of our debt
with cash or by converting promissory notes into the Company's common
stock.
The Company has granted options to employees, directors and others. The
Company has also granted warrants to debt holders and investors. For
options granted to non-employees, the Company recognizes consulting,
interest, or litigation settlement expense equal to the fair value of the
options. At September 30, 2000, 10,411,710 options and warrants were
exercisable at a weighted average price of $0.69 per share.
A summary of the status of stock options and warrants as of September 30,
2000, and changes during the nine months ended on that date is presented
below.
<TABLE>
<CAPTION>
Options Warrants
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 2000 ....... 6,633,000 $ .70 2,405,000 $ .67
Granted ............................ 3,263,000 .76 1,538,000 .50
Exercised .......................... (285,000) .54 (455,000) .55
Expired ............................ (188,000) .80 -- --
---------- ----- ---------- -----
Outstanding at September 30, 2000 .... 9,423,000 $ .69 3,488,000 $ .68
========== ===== ========== =====
</TABLE>
Stock options and warrants were not included in the computation of diluted
loss per share for the periods presented because to do so would have been
antidilutive.
NOTE 7 - RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $345 in 1999 consisting of
involuntary termination benefits of $263 and other related reorganization
costs of $82. This charge resulted from a business reorganization approved
by the Board of Directors in December 1999 that included a facility
closure, relocation of the corporate headquarters into a more cost
8
<PAGE>
effective location, severance costs for two Arizona based personnel and the
write down of abandoned fixed assets to estimated fair value less cost to
sell. As of December 31, 1999, both employees had been terminated and
severance payments and benefits are payable to December 31, 2000. As of
September 30, 2000, $209 in reorganization costs have been paid and applied
against the restructuring accrual. The remaining reorganization costs
consist of severance payments and are expected to be paid prior to December
31, 2000.
NOTE 8 - LITIGATION SETTLEMENT EXPENSE
In April 2000, the Company filed suit in the U.S. District Court for the
Southern District of Florida against IBC alleging breach and default on its
exclusive license agreement with us. The Company announced the resolution
of all legal disputes with IBC in August 2000. Under the terms of the
settlement, Empyrean retains the rights to licensed products in the United
States, IBC retains the rights to licensed products in Brazil, and a 50/50
joint venture company formed by Empyrean and IBC obtains rights to licensed
products in the rest of the world. We intend to account for the joint
venture under the equity method of accounting. Empyrean is obligated to use
IBC's GEDA(R) trademark on all its products. IBC has the right to use
Empyrean's Preventx(R) trademark on its products. In addition, the
settlement includes a new product license agreement between Empyrean and
IBC that increases the royalty rate from 2% of net sales to 5% of net sales
in the United States beginning August 9, 2000 but eliminates the minimum
royalties called for under the prior license agreement beginning January 1,
2000. Empyrean will also receive a 5% royalty on IBC's net sales in Brazil.
Additionally, IBC has agreed to raise up to $10,000, if necessary, for
future clinical trials for a microbicidal contraceptive gel and Empyrean
has agreed to expend up to $10,000, if necessary, in the future to market
the licensed products.
In conjunction with this settlement, the Company issued 5,000,000 shares of
common stock and granted 2,226,000 options to purchase common stock to IBC
at an exercise price of $0.83 per share. The market value of the common
stock issued was $3,300 and the fair value of the options on the date of
grant equaled $1,417. In addition, the Company incurred $539 of legal and
other expenses related to the suit and its settlement and awarded stock
options with a fair value of $178 to a director for his role in negotiating
the settlement. These amounts, totaling $5,434, were expensed as litigation
settlement expense. In addition, an accrual for minimum royalties to IBC of
$358 that was established in the first and second quarters of 2000 was
reversed in the third quarter as a result of the elimination of minimum
royalties retroactive to January 1, 2000.
NOTE 9 - CASH FLOW STATEMENT
During 2000, the Company has entered into the following non-cash
transactions:
* The Company issued 5,000,000 shares of common stock, valued at $3,300,
and granted 2,226,000 options to purchase common stock, valued at
$1,417, to IBC in conjunction with the resolution of all legal claims
between the two companies and the establishment of a new 50/50 joint
venture by the two companies. The Company also granted 250,000 options
to purchase common stock, valued at $178, to a director for his role
in negotiating the settlement with IBC.
* The Company issued 1,072,050 shares of common stock, valued at $536,
to various parties for the conversion of promissory notes and
royalties payable by the Company to common stock.
* The Company issued 108,063 shares of common stock, valued at $62, and
granted 257,500 options to purchase common stock, valued at $122, to
various consultants and other parties in compensation for services and
loans provided to the Company.
NOTE 10 - SUBSEQUENT EVENT
In November 2000, the Company secured a one-year, $1,000 revolving line of
credit from a bank with an interest rate equal to the bank's prime rate
plus 1/2%. The line of credit is secured by the signature guarantees of
several officers and directors and their wives, which in turn are secured
by the assets of the Company. In return for their guarantees, the Company
granted these officers and directors, collectively, 450,000 shares of the
Company's common stock. As of November 13, 2000, no borrowings under the
line of credit were outstanding.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
THIS FORM 10-QSB, INCLUDING THE NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AND THIS "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," CONTAINS FORWARD LOOKING STATEMENTS. WE
MAY MAKE ADDITIONAL WRITTEN AND ORAL FORWARD LOOKING STATEMENTS FROM TIME TO
TIME IN FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, IN OUR PRESS
RELEASES, OR OTHERWISE. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTENDS,"
"FORECAST," "PROJECT," "PLAN," "HOPE," AND SIMILAR EXPRESSIONS IDENTIFY FORWARD
LOOKING STATEMENTS. THESE STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO, THE
ANTICIPATED OUTCOME OF CONTINGENT EVENTS, INCLUDING LITIGATION, REGULATORY
PROCEEDINGS OR RULEMAKING, PROJECTIONS OF REVENUES, INCOME, LOSS, OR CAPITAL
EXPENDITURES, PLANS FOR FUTURE OPERATIONS, GROWTH AND ACQUISITIONS, FINANCING
NEEDS OR PLANS AND THE AVAILABILITY OF FINANCING, AND PLANS RELATING TO PRODUCTS
OR PRODUCT DEVELOPMENT AS WELL AS ASSUMPTIONS RELATING TO THE ABOVE SUBJECTS.
FORWARD LOOKING STATEMENTS REFLECT OUR CURRENT VIEWS CONCERNING FUTURE
EVENTS AND FINANCIAL PERFORMANCE AND SPEAK ONLY AS OF THE DATE THE STATEMENTS
ARE MADE. THESE FORWARD LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED, THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY, OR
UNDERLYING THE FORWARD LOOKING STATEMENTS. STATEMENTS IN THIS FORM 10-QSB,
INCLUDING THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AND THIS
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," DESCRIBE FACTORS, AMONG OTHERS, THAT COULD CONTRIBUTE TO OR CAUSE
SUCH DIFFERENCES. SUCH FACTORS INCLUDE, AMONG OTHER FACTORS, THE ACCEPTABILITY
OF EXISTING AND POTENTIAL PRODUCTS IN THE MARKETPLACE, THE ABILITY TO OBTAIN
SUFFICIENT CAPITAL TO FUND OPERATIONS AND THE OUTCOME OF POTENTIAL LITIGATION.
The following discussion and analysis provides information regarding our
financial condition and results of operations for the periods shown. This
discussion should be read in conjunction with our Unaudited Condensed
Consolidated Financial Statements and related Notes thereto included elsewhere
in this document.
INTRODUCTION
In 1998, we acquired certain rights to use a microbicide formulation from
International Bioscience Corporation. We market, sell and distribute innovative
personal care products based on this formulation that are intended to prevent
the spread of infectious disease. In the future, we may also market, sell and
distribute products based upon other third party or purchased formulations. To
date, we have introduced one product, which is marketed as both the Preventx(R)
hand sanitizer and first-aid antiseptic and the Coleman(R) hand sanitizer and
first-aid antiseptic with the Advanced Preventx(R) Formula, and is sold in both
lotion and towelette forms. Sales of the towelettes began in the fourth quarter
of 2000. In accordance with the settlement of our suit with IBC, new product
development is vested in the joint venture formed with IBC. Our marketing
personnel and IBC's scientific personnel share new product development
responsibilities. Additional preventative products will be developed that we can
market utilizing the formulation used in our hand sanitizer including a
disinfectant surface spray, baby wipes, and a microbicidal contraceptive gel.
Our disinfectant surface spray that is based on the IBC formulation must obtain
regulatory approval from the EPA, which we estimate will take at least 12
months. IBC plans to apply for an Investigative New Drug (IND) number from the
FDA for the baby wipes subsequent to the receipt of an IND number for the
microbicidal contraceptive gel. An IND number will enable IBC to commence
testing that will be recognized by the FDA. We estimate that the testing and
approval process for the baby wipes will take at least six months from the
receipt of the IND number. The application process to obtain an IND number for
the microbicidal contraceptive gel is underway. The gel must undergo clinical
trials and obtain regulatory approval prior to marketing. The gel will be tested
to determine its effectiveness in preventing HIV as well as other sexually
transmitted diseases, all of which have different rates of transmission as well
as gestation periods for infection within the human body. As a result, we
anticipate the clinical trials for certain sexually transmitted diseases will
require a minimum of six months while other sexually transmitted diseases such
as HIV will require at least 18 months from the receipt of the IND number. We
hope to have the clinical trials begin in the fourth quarter of 2000.
10
<PAGE>
The limited revenues and substantial start-up costs associated with
introducing our new line of preventative products have significantly affected
our current financial condition and operations. We have had limited revenues and
have sustained substantial losses from operations in recent years and have an
accumulated deficit.
We incurred net losses in 1998 and 1999 and expect to incur net losses in
2000 and at least through 2001. We expect operations to generate negative cash
flow in 2000 and at least through 2001 and we do not have existing capital
resources or credit lines available that are sufficient to fund our operations
and capital requirements as presently planned over the next twelve months. These
factors raise doubts about our ability to continue as a going concern and our
audit report in our annual report on Form 10-KSB filed with the SEC on March 30,
2000 contained an explanatory paragraph with respect to this matter.
We expect to generate substantially all of our revenues in the future from
increased sales of our current line of Preventx(R) preventative products as well
as additional preventative products that we can market utilizing the formulation
used in our hand sanitizer and other third-party formulations.
In addition to cost of goods sold, which we expect to vary somewhat
proportionately with sales over time, significant cost and expense items include
salaries and benefits, consulting fees, royalties, distribution rights, office
and administration, advertising, and legal and accounting, all of which, in
total, significantly exceeded our total revenues for 1999 and the first nine
months of 2000. Accordingly, we do not believe comparing costs as a percentage
of revenues from year to year is meaningful.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Our total revenues in the three months ended September 30, 2000 were $49
compared with $63 in the three months ended September 30, 1999. Product sales
increased in the three months ending September 30, 2000 to $49 from $30 in the
three months ending September 30, 1999 due primarily to shipments to Wal-Mart
Stores, Inc., which represented approximately 43% of total revenues for the
three months ended September 30, 2000. However, total revenues decreased due to
receiving a Southeast Asia distribution rights payment in the amount of $33 in
the third quarter of 1999 compared to $0 in the third quarter of 2000.
Our gross margin from product sales decreased to 45% in the quarter ended
September 30, 2000 from 62% in the quarter ended September 30, 1999. Sales
during the quarter ended September 30, 2000 were primarily made to retail
customers, which generally yield higher volumes but lower selling prices than
the institutional channel into which we sold in the third quarter of 1999.
Additionally, product costs are higher in the retail channel due to the cost of
labeling and packaging to effectively reach the end consumer.
Operating expenses increased to $5,993 in the three months ended September
30, 2000 from $1,030 in the three months ended September 30, 1999 primarily due
to the following:
* Litigation settlement expenses of $5,360 related to the lawsuit and
subsequent settlement agreement with IBC were incurred in the quarter ended
September 30, 2000 compared to $0 in the quarter ended September 30, 1999.
* An accrual for minimum royalties to IBC of $358 that was established in the
first and second quarters of 2000 was reversed in the third quarter as a
result of the settlement of our lawsuit with IBC and the elimination of
minimum royalties retroactive to January 1, 2000. As a result, expenses for
royalties were negative $(345) in the three months ended September 30, 2000
compared to $124 in the three months ended September 30, 1999. The quarter
11
<PAGE>
ended September 30, 1999 included a minimum IBC royalty accrual of $122.
Partially offsetting this benefit is an increase in the IBC royalty rate
from 2% of net sales to 5% of net sales beginning August 9, 2000,
sub-license royalty expenses associated with increased sales of our hand
sanitizer in the three months ended September 30, 2000 versus the three
months ended September 30, 1999, and royalties related to licensing
agreements with Coleman Corporation and Sunbeam Corporation that were not
in place in the quarter ended September 30, 1999.
* Sales promotion and advertising expenses increased to $252 in the quarter
ended September 30, 2000 from $189 in the quarter ended September 30, 1999
as a result of increased new product development costs, redesigned
point-of-purchase product displays, radio and print advertisements, and the
development of a web site for on-line consumer sales.
* Fees for legal services increased to $258 in the quarter ended September
30, 2000 from $121 in the quarter ended September 30, 1999. The increase
was due primarily to expenses related to the filing of an amended
registration statement with the U.S. Securities and Exchange Commission and
the receipt of year-to-date legal billings from a principal law firm that
exceeded our previous estimates.
* Fees relating to third party distribution of our hand sanitizer decreased
to $8 in the three months ended September 30, 2000 compared with $105 in
the three months ended September 30, 1999. We reduced distribution costs by
changing to an Ohio-based third party distributor in March 2000, which also
provides infrastructure services including distribution, order entry,
warehousing, customer service and billing services.
Interest expense decreased to $1 in the three months ended September 30,
2000 from $45 in the three months ended September 30, 1999. Interest expense in
the quarter ended September 30, 2000 represented interest on financed insurance
premiums while interest expense in the quarter ended September 30, 1999
represented amortization of the fair value of warrants issued to promissory note
holders and interest on loans.
We incurred a net loss in the three months ended September 30, 2000 of
$5,954 compared to a net loss of $1,023 in the three months ended September 30,
1999. The losses in the third quarters of 2000 and 1999 were due primarily to
limited revenues that were substantially exceeded by our costs of operations,
and in 2000, the expense related to the lawsuit and settlement with IBC. Our net
loss per share for the three months ended September 30, 2000 was $0.15 compared
to a net loss per share of $0.04 in the three months ended September 30, 1999.
The loss per share increased primarily as a result of the factors affecting net
loss as discussed above, partially offset by an increase in the weighted average
number of shares outstanding to 39,207,143 in the three months ended September
30, 2000 from 28,455,659 in the three months ended September 30, 1999.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Our total revenues in the nine months ended September 30, 2000 were $496
compared with $650 in the nine months ended September 30, 1999. Product sales
increased in the nine months ending September 30, 2000 to $496 from $100 in the
nine months ending September 30, 1999 due primarily to shipments to Wal-Mart
Stores, Inc. in 2000, which represented approximately 64% of total revenues for
the nine months then ended. However, total revenues decreased due to receiving
Southeast Asia distribution right payments in the amount of $550 in the first
nine months of 1999 as compared to $0 in the first nine months of 2000.
Product sales were lower in the third quarter of 2000 compared with the
first and second quarters of the year as there were no major shipments of
initial stocking orders, such as the shipments to Wal-Mart of Preventx(R) and
Coleman(R) products in the first and second quarters. We anticipate that our
sales efforts will reverse this trend in the fourth quarter of 2000.
Our gross margin from product sales decreased to 46% in the nine months
ended September 30, 2000 from 50% in the nine months ended September 30, 1999.
Sales during the nine months ended September 30, 2000 were primarily made to
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retail customers, which generally yield higher volumes but lower selling prices
than the institutional channel into which we sold in the nine months ended
September 30, 1999. Additionally, product costs are higher in the retail channel
due to the cost of labeling and packaging to effectively reach the end consumer.
Operating expenses increased to $7,657 in the nine months ended September
30, 2000 from $3,263 in the nine months ended September 30, 1999 primarily due
to the following:
* Litigation settlement expenses of $5,434 related to the lawsuit and
subsequent settlement agreement with IBC were incurred in the nine months
ended September 30, 2000 compared to $0 in the nine months ended September
30, 1999.
* Expenses for royalties decreased to $64 in the nine months ended September
30, 2000 from $372 in the nine months ended September 30, 1999, primarily
due to the elimination of the guaranteed minimum royalty with IBC beginning
with the fiscal year 2000. A minimum IBC royalty accrual of $365 was
included in the results for the nine months ended September 30, 1999.
Partially offsetting this benefit is an increase in the IBC royalty rate
from 2% of net sales to 5% of net sales beginning August 9, 2000,
sub-license royalty expenses associated with increased sales of our hand
sanitizer in the nine months ended September 30, 2000 versus the nine
months ended September 30, 1999, and royalties related to licensing
agreements with Coleman Corporation and Sunbeam Corporation that were not
in place in the first nine months of 1999.
* Consulting expenses decreased to $441 in the nine months ended September
30, 2000 from $1,222 in the nine months ended September 30, 1999 primarily
due to less expense recorded for stock option grants to consultants and
less reliance on paid consultants in the nine months ended September 30,
2000. Additionally, we incurred, in connection with our Southeast Asia
distribution agreement, consulting services in the amount of $330 in the
nine months ended September 30, 1999 as compared to $0 in the nine months
ended September 30, 2000.
* Fees relating to third party distribution of our hand sanitizer decreased
to $77 in the nine months ended September 30, 2000 compared with $375 in
the nine months ended September 30, 1999. We reduced distribution costs by
changing to an Ohio-based third party distributor in March 2000, which also
provides infrastructure services including distribution, order entry,
warehousing, customer service and billing services.
* Expenses for distribution rights decreased to $0 in the nine months ended
September 30, 2000 from $70 in the nine months ended September 30, 1999 due
to a payment for the Canadian distribution rights to the IBC formulation in
1999.
* Legal expenses increased to $353 in the nine months ended September 30,
2000 compared to $236 in the nine months ended September 30, 1999. The
increase was due primarily to expenses related to the filing of an amended
registration statement with the U.S. Securities and Exchange Commission.
Interest expense decreased to $6 in the nine months ended September 30,
2000 from $157 in the nine months ended September 30, 1999 due to greater
amortization of the fair value of warrants issued to promissory note holders and
interest on loans in 1999.
We incurred a net loss in the nine months ended September 30, 2000 of
$7,417 compared to a net loss of $2,802 in the nine months ended September 30,
1999. The losses in the first nine months of 2000 and 1999 were due primarily to
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limited revenues that were substantially exceeded by our costs of operations,
and in 2000, the expense related to the lawsuit and settlement with IBC. Our net
loss per share for the nine months ended September 30, 2000 was $0.20 compared
to a net loss per share of $0.10 in the nine months ended September 30, 1999.
The loss per share increased primarily as a result of the factors affecting net
loss as discussed above, partially offset by an increase in the weighted average
number of shares outstanding to 36,305,074 in the nine months ended September
30, 2000 from 27,519,375 in the nine months ended September 30, 1999.
LIQUIDITY AND FINANCIAL POSITION
To date, we have been unable to generate significant cash flows from our
business operations. As a result, we have funded our operations through investor
financing, including sales of common stock, convertible debentures, and the
exercise of warrants and options. During the fiscal years 1997, 1998, and 1999
and the nine months ended September 30, 2000, we raised a total of $7,528
through these means. We also issued stock to satisfy $5,352 of obligations,
including stock valued at $3,300 that was issued to settle the litigation with
IBC. In addition, the proceeds from promissory notes that were repaid in cash
during this time period were $296. Until such time as we are able to generate
significant cash flow from operations through increased sales of our products,
we will be required to continue our reliance on investor financing to fund our
operations. At September 30, 2000, cash and cash equivalents totaled $233, an
increase of $91 from September 30, 1999. Current liabilities at September 30,
2000, consisting primarily of accounts payable and accrued liabilities, exceeded
current assets by $1,648.
During the nine months ended September 30, 2000, net cash used in operating
activities was $1,998, primarily due to a net loss of $7,417. Non-cash expenses
of $5,079 were incurred in the period.
In the nine months ended September 30, 2000, net cash flow from financing
activities was $1,957, resulting from the sale of common stock and the exercise
of options and warrants in the amount of $1,857 and from the issuance of
short-term promissory notes totaling $250, with offsetting payments of the notes
in the amount of $150.
On February 23, 2000, we completed a private placement of 6,151,050 shares
of common stock that generated gross proceeds of $3,076. Of this amount, cash
proceeds of $750 and $1,452 were received in the fourth quarter of 1999 and the
first quarter of 2000, respectively, and $874 resulted from the conversion of
promissory notes and royalties payable to common stock. As of September 30,
2000, we have paid all of our debt with cash or by converting promissory notes
into the Company's common stock.
Our future royalty requirements will affect liquidity. We are required to
pay royalties to various licensors, including IBC, of up to 17% of net sales.
The settlement with IBC will have a favorable effect on near-term liquidity as a
result of the elimination of the minimum royalty payment. The previous license
agreement required a minimum royalty payment of $735 to be paid no later than
January 30, 2001. This payment is no longer required.
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As of September 30, 2000, we have no debt service or capital expenditure
obligations.
We have previously disclosed that we would need to raise additional capital
during fiscal year 2000 or secure a line of credit. In November 2000, we secured
a one-year, $1,000 revolving line of credit from a bank with an interest rate
equal to the bank's prime rate plus 1/2%. The line of credit is secured by the
signature guarantees of several officers and directors and their wives, which in
turn are secured by the assets of the Company. In return for their guarantees,
we have granted these officers and directors, collectively, 450,000 shares of
the Company's common stock. As of November 13, 2000, no borrowings under the
line of credit were outstanding. We believe that this line of credit will be
sufficient to meet our cash flow requirements until early 2001, at which time we
plan to raise additional equity financing and repay outstanding borrowings under
the revolving line of credit. However, there can be no assurance that such
equity financing will be available on favorable terms or at all.
We anticipate a substantial increase in cash outlays associated with
increased marketing and sales of our Preventx(R) preventative product line.
Although the IBC settlement requires us to use reasonable efforts to expend up
to $10,000 over five years to market licensed products in the territory, we
believe that 100% of our expenditures will qualify to satisfy this commitment
since we are purely a sales and marketing company whose products are derived
from the IBC formulation. We do not believe that incremental outlays beyond the
level projected in our business and marketing plans will be needed solely to
satisfy the IBC settlement commitment.
We will incur additional expenditures associated with the development of
additional preventative products that we can market utilizing the formulation
used in our hand sanitizer. These cash outlays could include, but are not
limited to, product testing, package design, advertising, point of sale
displays, inventory purchases and a sales and marketing campaign. Our investment
in working capital is also expected to increase as we broaden our product line
and obtain new customers. Additionally, the joint venture company formed as part
of the settlement with IBC is expected to incur net cash outlays for the first
few years and we may be obligated to make capital contributions to or arrange
financing for the joint venture. The amount of any such capital contribution or
financing requirement is as yet undetermined.
We do not have existing capital resources or credit lines available that
are sufficient to fund our operations and capital requirements as presently
planned over the next twelve months. We plan to raise additional funds through
the issuance of either debt or equity instruments. We may also pursue a working
capital line of credit to be secured by our accounts receivable and inventory.
However, such funds may not be available on favorable terms or at all. To repay
borrowings under the line of credit, maintain our current expense level of
approximately $3,000 to $4,000 per year and meet the costs associated with our
increased marketing, sales and development efforts, and capital contributions to
the joint venture, it is likely that we will need to raise a minimum of $3,000
to $5,000 of additional capital during fiscal year 2001, depending upon the
magnitude of funds generated from operations. We expect cash receipts from
customers to increase in 2001 due to greater anticipated sales volume from
additional customers and a broader product line. The 2001 financing requirement
may exceed our historical funding requirement, which averaged approximately
$2,400 per year in the fiscal years 1997, 1998, and 1999. Also, should the FDA
issue final regulations that are consistent with its current proposed
regulations with respect to our hand sanitizer, we may experience an adverse
effect on liquidity. Although we believe we would have twelve months to address
any changes which may be necessary regarding the labeling of our hand sanitizer,
the effort required to undertake the changes may cause our financial condition
and results of operations to deteriorate and our business may ultimately fail.
During 2000, in excess of $400,000 has been raised from the exercise of
outstanding stock options and warrants. However, this did not negate the need to
raise additional funds through issuance of debt and equity instruments or with
credit lines.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are the plaintiff in an action that was filed in the United States
District Court, Southern District of Florida Case No. 00-8300. In this action in
federal court, the Company brought suit against International Bioscience
Corporation (IBC), David Thornburgh, M.D., and Sara Gomez for fraud in the
inducement, tortious interference with a business relationship and breach of
contract in connection with the Company's original license from IBC of certain
technology. In August 2000, we announced that all legal disputes between IBC and
our company have been resolved. We entered into a settlement agreement with IBC
on August 9, 2000. This case against IBC has been settled by the filing of a
Stipulation of Dismissal with the United States District Court on August 17,
2000.
Optima Holding Co. Ltd. intervened in our lawsuit against IBC, claiming
that it has an exclusive prior right to use the same technology by virtue of a
joint venture agreement entered into between IBC and Optima. Optima has asserted
claims against us for injunctive relief, conversion and tortious interference
with a business relationship. On August 18, 2000, Optima, together with Mercury
Technology Corp. (Delaware) and Mercury Technology Corp. (Bahamas) (collectively
"Mercury") amended its original intervention complaint to add two counts of
patent infringement against both us and IBC, alleging that we willfully
infringed U.S. Patent Nos. 3,594,468 and 4,321,277. Empyrean and IBC have each
filed motions in the federal action seeking the dismissal of Mercury's patent
infringement claims. Mercury has since dropped its claim of infringement of U.S.
Patent No. 3,594,468. As noted above, although we have settled our claims
against IBC and have filed a dismissal of the federal action, this may not
dismiss the intervention by Optima and Mercury.
We are also a defendant in an action that was filed by Optima Holding Co.,
Ltd. and Mercury Technology Corp. on July 28, 1998 in the Circuit Court of the
Eleventh Judicial District, Dade County, Florida. This state court action
alleges that we tortiously interfered with Optima and Mercury's contractual
relationship with IBC. Optima and Mercury claim that they had prior rights to
the IBC formulation and products and that we induced IBC to breach that
agreement. Optima and Mercury have requested an unspecified amount of damages
against us. In a separate action that has now been consolidated with the first
action in the same court, IBC has requested a declaratory judgment that IBC
properly terminated its development and distribution contract with Optima and
Mercury. Optima and Mercury also seek injunctive relief to prevent IBC and its
managers and directors from allowing IBC to have further dealings with us. The
state court action was informally abated while the parties pursued their
remedies in the federal action. If the federal action is dismissed, it is likely
that the state court action will resume. If we are not successful in the state
court action, or in the federal action, we could lose the right to market, sell
or manufacture our hand sanitizer product and other products currently under
development. Should any court judgment be entered precluding our rights to the
products, IBC has agreed as part of our overall litigation settlement to secure
its obligations to us by granting us the highest priority perfected security
interest IBC is permitted to assign in IBC's rights in commercializing the
products in the United States.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) A report on Form 8-K was filed on August 17, 2000 to report the
settlement of all outstanding legal claims between Empyrean and International
Bioscience Corporation and the formation of a 50/50 joint venture company to
manufacture, market, sell and distribute products to prevent the spread of
infectious diseases throughout the world based on proprietary formulations
licensed from IBC.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
EMPYREAN BIOSCIENCE, INC.
(Registrant)
November 14, 2000 /s/ Richard C. Adamany
---------------------- ------------------------------------------
(Date) (Signature)
Richard C. Adamany
President and Chief Executive Officer
November 14, 2000 /s/ Brenda K. Brown
---------------------- ------------------------------------------
(Date) (Signature)
Brenda K. Brown
Vice President and Chief Financial Officer
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