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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 June 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 July 28, 2000, the Registrant had 36,325,741 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)
June 30, December 31,
2000 1999
-------- --------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 1,015 $ 286
Accounts receivable ............................... 25 7
Prepaid expenses and deposits ..................... 50 49
Inventory ......................................... 207 284
Other.............................................. -- 3
-------- --------
Total current assets ......................... 1,297 629
EQUIPMENT AND IMPROVEMENTS .......................... 40 52
-------- --------
Total assets ................................. $ 1,337 $ 681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .......... $ 1,846 $ 2,045
Deferred revenue .................................. 100 100
Short-term note payable ........................... -- 198
-------- --------
Total current liabilities .................... 1,946 2,343
COMMITMENTS AND CONTINGENCIES ....................... -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(2000: 36,325,741; 1999: 31,522,109) ............. 24,011 21,494
Accumulated deficit ............................... (24,620) (23,156)
-------- --------
Total stockholders' equity (deficit) ......... (609) (1,662)
-------- --------
Total liabilities and stockholders'
equity (deficit) ............................ $ 1,337 $ 681
======== ========
See accompanying notes to financial statements
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EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Six months ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 106 $ 534 $ 458 $ 587
Cost of sales .................................... 61 5 252 22
------------ ------------ ------------ ------------
Gross profit ................................. 45 529 206 565
Selling, general and administrative .............. 906 1,456 1,662 2,563
------------ ------------ ------------ ------------
Loss from operations ......................... (861) (927) (1,456) (1,998)
Other, net ....................................... -- 3 (25) (1)
Interest expense ................................. -- (79) (6) (112)
Interest income .................................. 16 2 23 2
------------ ------------ ------------ ------------
Other income (expense) ........................... 16 (74) (8) (111)
------------ ------------ ------------ ------------
Net loss ......................................... $ (845) $ (1,001) $ (1,464) $ (2,109)
============ ============ ============ ============
Basic and diluted loss per share ................. $ (0.02) $ (0.04) $ (0.04) $ (0.08)
============ ============ ============ ============
Weighted average number of shares outstanding..... 36,305 27,679 34,849 26,838
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
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<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........ 683 345 -- 345
Fair value of options and warrant grants......... -- 77 -- 77
Net loss ........................................ -- -- (1,464) (1,464)
-------- -------- -------- --------
Balances, June 30, 2000 ......................... 36,325 $ 24,011 $(24,620) $ (609)
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements
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<PAGE>
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Six months ended
--------------------
June 30, June 30,
2000 1999
------- -------
Cash flows from operating activities:
Net cash used by operating activities .............. $(1,220) $(1,325)
Cash flows from investing activities:
Proceeds from sales of fixed assets ................ 5 --
Purchase of capital assets ......................... (13) (9)
------- -------
Net cash used by investing activities .......... (8) (9)
Cash flows from financing activities:
Issuance of common stock ........................... 1,857 661
Proceeds of short-term notes payable ............... 250 800
Payments of short-term note payable ................ (150) --
------- -------
Net cash provided by financing activities ...... 1,957 1,461
------- -------
Net increase in cash and cash equivalents ...... 729 127
Cash and cash equivalents at beginning of period ..... 286 63
------- -------
Cash and cash equivalents at end of period ........... $ 1,015 $ 190
======= =======
See accompanying notes to financial statements
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<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 six months ended June 30,
2000 and 1999, and the financial information as of June 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 at
least through 2000. We expect operations to generate negative cash flow
through at least 2000 and we currently have no credit line available to us.
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 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, such funds 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 six 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 June
30, 2000.
NOTE 4 - LEGAL PROCEEDINGS
We are a defendant in an action which 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 action alleges that
we tortiously interfered with Optima and Mercury's contractual relationship
with International Bioscience Corporation ("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
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development and distribution contract with Optima and Mercury. Plaintiffs
also seek injunctive relief to prevent IBC and its managers and directors
from allowing IBC to have further dealings with us. If we are not
successful in this action, we could lose the right to market, sell or
manufacture worldwide our hand sanitizer product and other products
currently under development. This would materially and adversely affect the
Company. The discovery in this action is proceeding.
On April 10, 2000, we filed suit in U.S. District Court for the Southern
District of Florida against IBC alleging breach and default on its
exclusive license agreement with us and seeking a declaration that the
exclusive license agreement is in full force and effect as well as
compensatory damages. Additionally, we asked the Court to issue an
injunction which would, if granted, require IBC to maintain the status quo
while the discovery process and litigation proceeds. Following our request
for a preliminary injunction, IBC purported to terminate the exclusive
license agreement. Through our license agreement, we have the exclusive
right to manufacture, sell and distribute products based on a formula
developed by IBC. We believe IBC has disregarded key provisions in our
exclusive license agreement.
On May 2, 2000, the U.S. District Court denied our request for a
preliminary injunction. The Court's decision does not affect the merits of
the case nor our claim for money damages against IBC, but defers them to a
full trial, which we expect to be held later this year. Our claim for the
full rights accorded to us under the exclusive license agreement, which is
the center of our dispute with IBC, will not impact our current operations.
The Court observed in its Order, and IBC acknowledged in its pleadings
filed with the Court, that our rights to sell the hand sanitizer in the
United States and Canada arise from different and separate agreements with
IBC, and such rights are not affected by this lawsuit.
If an unfavorable decision were to be rendered against us at the full
trial, our business could be materially and adversely affected. The trial
has been scheduled for June 2001.
NOTE 5 - NET REVENUES
Net revenues are comprised of the following:
Three months Six months
ended June 30, ended June 30,
----------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
Distribution rights $ -- $ 517 $ -- $ 517
Product sales 106 17 458 70
----- ----- ----- -----
Net revenues 106 534 458 587
===== ===== ===== =====
NOTE 6 - STOCKHOLDERS' EQUITY
The Company has granted options to employees, directors and others as well
as warrants to debt holders and investors. For option grants to
non-employees, the Company recognizes consulting or interest expense equal
to the fair value of the grant. At June 30, 2000, 7,973,000 options and
warrants were exerciseable at a weighted average price of $0.64 per share.
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<PAGE>
A summary of the status of stock options and warrants as of June 30, 2000,
and changes during the six 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 650,000 .55 1,538,000 .50
Exercised (285,000) .54 (455,000) .55
Expired (185,000) .81 -- --
---------- ------ ---------- ------
Outstanding at June 30, 2000 6,813,000 $ .69 3,488,000 $ .64
========== ====== ========== ======
</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
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
June 30, 2000, $140 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.
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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," 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 discontinued the distribution and marketing of our diagnostic
test kits. This shift in focus coincided with our acquisition of certain rights
to use a microbicide formulation from IBC, which is utilized in our hand
sanitizer and proposed products. The decision to discontinue marketing of our
prior line of diagnostic products and 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 at
least through 2000. We expect operations to generate negative cash flow at least
through 2000 and we currently have no credit line available to us. 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.
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We expect to generate substantially all of our revenues in the future from
increased sales of our current line of preventative products. Prior to the
initiation of our suit against IBC on April 10, 2000 for breach and default on
its exclusive licensing agreement with us, we relied on IBC to develop
additional preventative products for our Company. We now intend to develop
additional preventative products on our own that we can market utilizing the
formulation used in our hand sanitizer. See Note 4. Legal Proceedings in our
notes to our June 30, 2000 condensed consolidated financial statements.
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 half 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 JUNE 30, 2000 AND 1999
Our total revenues in the three months ended June 30, 2000 were $106,000
compared with $534,000 in the three months ended June 30, 1999. Product sales
increased in the three months ending June 30, 2000 to $106,000 from $17,000 in
the three months ending June 30, 1999 due primarily to reorder shipments to
Wal-Mart Stores, Inc., which represented approximately 68% of total revenues for
the three months ended June 30, 2000. However, total revenues decreased due to
receiving Southeast Asia distribution right payments in the amount of $517,000
in the second quarter of 1999 compared to $0 in the second quarter of 2000.
Our gross margin from product sales decreased to 42.5% in the quarter ended
June 30, 2000 from 70.6% in the quarter ended June 30, 1999 primarily due to
lower selling prices of the hand sanitizer in a higher volume retail environment
during the quarter ended June 30, 2000.
Selling, general and administrative expenses decreased to $906,000 in the
three months ended June 30, 2000 from $1,456,000 in the three months ended June
30, 1999 primarily due to the following:
* Consulting expenses decreased to $77,000 in the three months ended June 30,
2000 from $725,000 in the three months ended June 30, 1999 due to less
expense recorded for stock option grants to consultants and less reliance
on paid consultants in the three months ended June 30, 2000. Included in
consulting services for the three months ended June 30, 1999 is $330,000
incurred in connection with our Southeast Asia distribution agreement.
* Fees relating to third party distribution of our hand sanitizer decreased
to $15,000 in the three months ended June 30, 2000 compared with $111,000
in the three months ended June 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 royalties increased to $199,000 in the three months ended June
30, 2000 from $124,000 in the three months ended June 30, 1999 primarily
due to a guaranteed minimum royalty accrual of $184,000 in the three months
ended June 30, 2000 compared with $123,000 in 1999 and an increase from
sub-license royalty expenses associated with increased sales of our hand
sanitizer in the three months ended June 30, 2000 versus the three months
ended June 30, 1999. Our agreement with IBC, under which we acquired the
rights to market and distribute our current line of preventative products,
provides for future minimum guaranteed payments that increase significantly
in each year of the contract. See Note 9. Commitments and Contingencies in
our Annual Consolidated Financial Statements contained in our annual report
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on Form 10-KSB filed with the SEC on March 30, 2000. As a result, we expect
our expenses for royalties to increase significantly on an annual basis.
Unless we are successful in generating substantial additional sales of our
preventative products, we are also likely to continue to generate
substantial losses from operations. Our agreement with IBC is subject to
significant litigation risk. See Note 4. Legal Proceedings in our notes to
our June 30, 2000 condensed consolidated financial statements included
elsewhere in this document.
* Advertising and promotional expenses increased to $175,000 in the three
months ended June 30, 2000 from $94,000 in the three months ended June 30,
1999 due to the development of promotional enhancements including a new,
unique-to-the-category packaging specifically designed to re-energize the
hand sanitizer category for health and beauty retailers and a new
multi-purpose, ready-for-retail merchandiser for Preventx(R) Hand Sanitizer
& First-Aid Antiseptic. Additionally, we have initiated radio and print
advertisements in the quarter ended June 30, 2000.
Interest expense decreased to $0 in the three months ended June 30, 2000
from $79,000 in the three months ended June 30, 1999, which represented
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 three months ended June 30, 2000 of $845,000
compared to a net loss of $1,001,000 in the three months ended June 30, 1999.
The losses in the second quarters of 2000 and 1999 were due primarily to limited
revenues that were substantially exceeded by our costs of operation. Our net
loss per share for the three months ended June 30, 2000 was $0.02 compared to a
net loss per share of $0.04 in the three months ended June 30, 1999. The loss
per share decreased primarily as a result of the decrease in selling, general
and administrative expenses and an increase in the weighted average number of
shares outstanding to 36,305,000 in the three months ended June 30, 2000 from
27,679,000 in the three months ended June 30, 1999.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Our total revenues in the six months ended June 30, 2000 were $458,000
compared with $587,000 in the six months ended June 30, 1999. Product sales
increased in the six months ending June 30, 2000 to $458,000 from $70,000 in the
six months ending June 30, 1999 due to initial and reorder shipments to Wal-Mart
Stores, Inc. in 2000, which represented approximately 92% of total revenues for
the six months then ended. However, total revenues decreased due to receiving
Southeast Asia distribution right payments in the amount of $517,000 in the
first half of 1999 as compared to $0 in the first half of 2000.
Our gross margin from product sales decreased to 45.0% in the six months
ended June 30, 2000 from 68.6% in the six months ended June 30, 1999 primarily
due to lower selling prices of the hand sanitizer in a higher volume retail
environment during the six months ended June 30, 2000.
We incurred a net loss in the six months ended June 30, 2000 of $1,464,000
compared to a net loss of $2,109,000 in the six months ended June 30, 1999. The
losses in the first half of 2000 and 1999 were due primarily to limited revenues
that were substantially exceeded by our costs of operation. Our net loss per
share for the six months ended June 30, 2000 was $0.04 compared to a net loss
per share of $0.08 in the six months ended June 30, 1999. The loss per share
decreased primarily as a result of the decrease in selling, general and
administrative expenses and an increase in the weighted average number of shares
outstanding to 35,598,000 in the six months ended June 30, 2000 from 26,838,000
in the six months ended June 30, 1999.
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<PAGE>
Selling, general and administrative expenses decreased to $1,662,000 in the
six months ended June 30, 2000 from $2,563,000 in the six months ended June 30,
1999 primarily due to the following:
* Consulting expenses decreased to $138,000 in the six months ended June 30,
2000 from $969,000 in the six months ended June 30, 1999 primarily due to
less expense recorded for stock option grants to consultants and less
reliance on paid consultants in the six months ended June 30, 2000.
Additionally, we incurred, in connection with our Southeast Asia
distribution agreement, consulting services in the amount of $330,000 in
the six months ended June 30, 1999 as compared to $0 in the six months
ended June 30, 2000.
* Fees relating to third party distribution of our hand sanitizer decreased
to $69,000 in the six months ended June 30, 2000 compared with $270,000 in
the six months ended June 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 royalties increased to $408,000 in the six months ended June
30, 2000 from $248,000 in the six months ended June 30, 1999 primarily due
to a guaranteed minimum royalty accrual of $367,000 in the six months ended
June 30, 2000 compared with $245,000 in 1999 and an increase from
sub-license royalty expenses associated with increased sales of our hand
sanitizer in the six months ended June 30, 2000 versus the six months ended
June 30, 1999. Our agreement with IBC, under which we acquired the rights
to market and distribute our current line of preventative products,
provides for future minimum guaranteed payments that increase significantly
in each year of the contract. See Note 9 to our Annual Consolidated
Financial Statements contained in our annual report on Form 10-KSB filed
with the SEC on March 30, 2000. As a result, we expect our expenses for
royalties to increase significantly on an annual basis. Unless we are
successful in generating substantial additional sales of our preventative
products, we are also likely to continue to generate substantial losses
from operations. Our agreement with IBC is subject to significant
litigation risk. See Note 4. Legal Proceedings in our notes to our June 30,
2000 condensed consolidated financial statements included elsewhere in this
document.
* Expenses for distribution rights decreased to $0 in the six months ended
June 30, 2000 from $70,000 in the six months ended June 30, 1999 because a
1999 payment for the Canadian distribution rights to the IBC formulation
was not required in 2000.
Interest expense decreased to $6,000 in the six months ended June 30, 2000
from $112,000 in the six months ended June 30, 1999 due to greater amortization
of the fair value of warrants issued to promissory note holders and interest on
loans in 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. 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 June 30, 2000, cash and cash equivalents totaled $1,015,000, an
increase of $825,000 from June 30, 1999. Current liabilities at June 30, 2000,
consisting primarily of accounts payable and accrued liabilities, exceeded
current assets by $649,000.
During the six months ended June 30, 2000, net cash used in operating
activities was $1,220,000 primarily due to a net loss from continuing operations
of $1,459,000.
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In the six months ended June 30, 2000, net cash flow from financing
activities was $1,957,000 resulting from the sale of common stock and the
exercise of options and warrants in the amount of $1,857,000 and from the
issuance of short-term promissory notes totaling $250,000, with offsetting
payments of the notes in the amount of $150,000.
On February 23, 2000, we completed a private placement of 6,151,050 shares
of common stock that generated gross proceeds of $3,076,000, of which $1,452,000
was received in the six months ended June 30, 2000. These funds were used for
the payment of royalties, outstanding short-term promissory notes and for
working capital. As of June 30, 2000, we have paid all of our debt with cash or
by converting promissory notes into the Company's common stock and have reduced
past due accounts payable.
Our future minimum royalty requirements will significantly affect
liquidity. For example, the minimum guaranteed royalty of $735,000 for fiscal
year 2000 is due to IBC by January 2001. Additionally, we are required to pay
royalties to various licensors including IBC, depending on the product and
country of sale, of up to 14% of net sales.
As of June 30, 2000, we have no debt service or capital expenditure
obligations.
We anticipate a substantial increase in cash outlays associated with
increased marketing and sales of our Preventx(R) preventative product line.
Further, 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, product registration costs, advertising, inventory
purchases and a sales and marketing campaign. To maintain our current expenses
of approximately $3 million to $4 million per year and meet the costs associated
with our increased marketing, sales and development efforts, we will need to
raise additional capital during fiscal year 2000 or secure a line of credit.
Also, unless the FDA issues final regulations that are different than its
current proposed regulations with respect to our hand sanitizer, we may
experience an adverse affect on liquidity. In those cases, our financial
condition and results of operations will deteriorate and our business may
ultimately fail.
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 pursue a working capital line of
credit to be secured by our accounts receivable and inventory. We may also raise
funds through the issuance of either debt or equity instruments. However, such
funds may not be available on favorable terms or at all.
During 2000, in excess of $400,000 has been raised from the exercise of
outstanding stock options and warrants. However, this will 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 a defendant in an action which 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 action alleges that we
tortiously interfered with Optima and Mercury's contractual relationship with
International Bioscience Corporation ("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. Plaintiffs also seek injunctive relief to prevent IBC and
its managers and directors from allowing IBC to have further dealings with us.
If we are not successful in this action, we could lose the right to market, sell
or manufacture worldwide our hand sanitizer product and other products currently
under development. This would materially and adversely affect the Company. The
discovery in this action is proceeding.
On April 10, 2000, we filed suit in U.S. District Court for the Southern
District of Florida against IBC alleging breach and default on its exclusive
license agreement with us and seeking a declaration that the exclusive license
agreement is in full force and effect as well as compensatory damages.
Additionally, we asked the Court to issue an injunction which would, if granted,
require IBC to maintain the status quo while the discovery process and
litigation proceeds. Following our request for a preliminary injunction, IBC
purported to terminate the exclusive license agreement. Through our license
agreement, we have the exclusive right to manufacture, sell and distribute
products based on a formula developed by IBC. We believe IBC has disregarded key
provisions in our exclusive license agreement.
On May 2, 2000, the U.S. District Court denied our request for a
preliminary injunction. The Court's decision does not affect the merits of the
case nor our claim for money damages against IBC, but defers them to a full
trial. Our claim for the full rights accorded to us under the exclusive license
agreement, which is the center of our dispute with IBC, will not impact our
current operations. The Court observed in its Order, and IBC acknowledged in its
pleadings filed with the Court, that our rights to sell the hand sanitizer in
the United States and Canada arise from different and separate agreements with
IBC, and such rights are not affected by this lawsuit.
If an unfavorable decision were to be rendered against us at the full
trial, our business could be materially and adversely affected. While no
assurance can be given on the ultimate outcome, we believe we will be successful
should a full trial occur. The trial has been scheduled for June 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) A report on Form 8-K was filed on April 18, 2000 to report the suit we
filed against IBC for breach and default on its exclusive license
agreement with us.
A report on Form 8-K was filed on May 10, 2000 to report that our
lawsuit against IBC in U.S. District Court for the Southern District
of Florida will continue despite the Court's denial of our request for
a preliminary injunction that would have enjoined IBC from certain
anticipatory breaches of its exclusive license agreement with us.
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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)
8/9/00 /s/ Richard C. Adamany
------ ----------------------------------------
(Date) (Signature)
Richard C. Adamany
President, Chief Executive Officer
and Chief Financial Officer
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