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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 March 31, 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 May 12, 2000, the Registrant had 36,304,551 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
March 31, December 31,
2000 1999
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,595 $ 286
Accounts receivable 32 7
Prepaid expenses and deposits 2 49
Finished goods inventory 229 284
Other -- 3
-------- --------
Total current assets 1,858 629
EQUIPMENT AND IMPROVEMENTS 35 52
-------- --------
Total assets $ 1,893 $ 681
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 1,574 $ 2,045
Deferred revenue 100 100
Short-term notes payable -- 198
-------- --------
Total current liabilities 1,674 2,343
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, authorized 100,000,000 shares,
without par value; issued and outstanding
(2000: 36,304,551 ; 1999: 31,522,109) 23,994 21,494
Accumulated deficit (23,775) (23,156)
-------- --------
Total stockholders' equity (deficit) 219 (1,662)
-------- --------
Total liabilities and stockholders'
equity (deficit) $ 1,893 $ 681
======== ========
See accompanying notes to financial statements
2
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
----------------------
March 31, March 31,
2000 1999
-------- --------
Net revenues $ 352 $ 53
Cost of sales 191 17
-------- --------
Gross profit 161 36
Selling, general and administrative 756 1,107
-------- --------
Loss from operations (595) (1,071)
Interest expense (6) (33)
Interest income 7 --
Other, net (25) (4)
-------- --------
Other expense (24) (37)
-------- --------
Net loss $ (619) $ (1,108)
======== ========
Basic and diluted loss per share $ (0.02) $ (0.04)
======== ========
Weighted average number of shares outstanding 35,587 26,812
======== ========
See accompanying notes to financial statements
3
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
Common Stock
------------------- Accumulated
Shares Amount Deficit Total
-------- -------- -------- --------
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 662 333 -- 333
Fair value of option and warrant grants -- 72 -- 72
Net loss -- -- (619) (619)
-------- -------- -------- --------
Balances, March 31, 2000 36,304 $ 23,994 $(23,775) $ 219
======== ======== ======== ========
See accompanying notes to financial statements
4
EMPYREAN BIOSCIENCE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
--------------------
March 31, March 31,
2000 1999
------- -------
Cash flows from operating activities:
Net cash used by operating activities $ (647) $ (992)
Cash flows from investing activities:
Proceeds from sales of fixed assets 5 --
Purchase of fixed assets (6) (2)
------- -------
Net cash used by investing activities (1) (2)
------- -------
Cash flows from financing activities:
Issuance of common stock 1,857 212
Proceeds of short-term notes payable 250 800
Payments of short-term notes payable (150) --
------- -------
Net cash provided by financing activities 1,957 1,012
------- -------
Net increase in cash and cash equivalents 1,309 18
Cash and cash equivalents at beginning of period 286 63
------- -------
Cash and cash equivalents at end of period $ 1,595 $ 81
======= =======
Noncash financing and investing activities:
Issuance of common stock for debt and royalties $ 571 $ --
See accompanying notes to financial statements
5
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 three months ended March
31, 2000 and 1999, and the financial information as of March 31, 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 March
31, 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
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 International Bioscience Corp. (IBC) alleging
breach and default on its exclusive licensing agreement with us and seeking
a declaration that the exclusive license agreement is in full force and
6
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 licensing 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 licensing 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 lotion 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
date has not yet been set.
NOTE 5 - REVENUES
Net revenues are comprised of the following:
Three months ended
-----------------
Mar 31, Mar 31,
2000 1999
------ ------
Distribution rights $ -- $ --
Product sales 352 53
------ ------
Net revenues 352 53
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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 expense equal to the fair
value of the grant. Warrants in the Company's common stock are issued to
investors, lenders and consultants. At March 31, 2000, 8,147,000 options
and warrants were exerciseable at a weighted average price of $0.62 per
share.
A summary of the status of stock options and warrants as of March 31, 2000,
and changes during the three months ended on that date is presented below.
Options Warrants
------------------- -------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
---------- ------ ---------- ------
Outstanding at January 1, 2000 6,633,000 $ .71 2,405,000 $ .48
Granted 540,000 .57 1,538,000 .50
Exercised (285,000) .54 (455,000) .55
Expired -- -- -- --
---------- ------ ---------- ------
Outstanding at March 31, 2000 6,888,000 $ .70 3,488,000 $ .48
========== ====== ========== ======
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.
7
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
March 31, 2000, $94 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.
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 QUARTERLY REPORT, INCLUDING THE
NOTES TO THE CONDENSED 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 PENDING LITIGATION.
ADDITIONAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE EXPRESSED IN SUCH FORWARD LOOKING STATEMENTS ARE PRESENTED IN OUR ANNUAL
REPORT ON FORM 10-KSB FILED WITH THE SEC ON MARCH 30, 2000.
The following discussion and analysis provides information regarding
Empyrean's financial position and its results of operations for the periods
shown. This discussion should be read in conjunction with Empyrean's 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 Trichomonas
diagnostic test kit. This shift in focus coincided with our acquisition of
certain rights to use a microbicide formulation from International Bioscience
Corporation utilized in our Preventx(R) hand sanitizer and proposed products.
Since that time, we no longer actively market any of our diagnostic products.
The decision to discontinue active 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.
8
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. These
factors raise doubts about our ability to continue as a going concern and our
audit report contained in our annual report on Form 10-KSB filed with the SEC on
March 30, 2000 contains 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 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 had intended on relying on IBC to
develop additional preventative products. Now, with our suit pending against
IBC, we intend to develop additional preventative products that we can market
utilizing the formulation used in our hand sanitizer product. See Note 4. Legal
Proceedings in our notes to condensed consolidated financial statements.
In addition to cost of goods sold, which we expect to vary somewhat
proportionately 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 Empyrean's total revenues for 1999 and the first quarter
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 QUARTERS ENDED MARCH 31, 2000 AND 1999
Our total revenues in the quarter ended March 31, 2000 were $352,000
compared with $53,000 in the quarter ended March 31, 1999. Revenues increased in
the quarter ended March 31, 2000 due to initial and reorder shipments to
Wal-Mart Stores, Inc., which represented approximately 97% of total revenues for
the quarter then ended.
Our gross margin decreased to 45.7% in the quarter ended March 31, 2000
from 67.9% in the quarter ended March 31, 1999 primarily due to lower selling
prices of the hand sanitizer in a higher volume retail environment during the
quarter ended March 31, 2000.
We incurred a net loss in the quarter ended March 31, 2000 of $619,000
compared to a net loss of $1,108,000 in the quarter ended March 31, 1999. The
losses in the first quarter 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 quarter ended March 31, 2000 was $0.02 compared to a net
loss per share of $0.04 in the quarter ended March 31, 1999. The loss per share
decreased primarily as a result of the increase in sales and decrease in
selling, general and administrative expenses and an increase in the weighted
average number of shares outstanding to 35,587,000 in the quarter ended March
31, 2000 from 26,812,000 in the quarter ended March 31, 1999.
Selling, general and administrative expenses decreased to $756,000 in the
quarter ended March 31, 2000 from $1,107,000 in the quarter ended March 31, 1999
primarily due to the following:
* Salaries and benefits decreased to $143,000 in the quarter ended March
31, 2000 from $196,000 in the quarter ended March 31, 1999 due to a
temporary reduction in our work force resulting from our relocation to
Ohio in January 2000.
* Consulting expenses decreased to $82,000 in the quarter ended March
31, 2000 from $245,000 in the quarter ended March 31, 1999 primarily
due to less expense recorded for stock option grants to consultants
and less reliance on paid consultants in the quarter ended March 31,
2000.
* Fees relating to third party distribution of our Preventx product
decreased to $58,000 in the quarter ended March 31, 2000 compared with
$160,000 in the quarter ended March 31, 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.
9
* Expenses for royalties increased to $211,000 in the quarter ended
March 31, 2000 from $125,000 in the quarter ended March 31, 1999
primarily due to a guaranteed minimum royalty of $184,000 in the
quarter ended March 31, 2000 compared with $122,000 in 1999 and an
increase in sub-license royalty expenses associated with increased
sales of Preventx in the quarter ended March 31, 2000 versus the
quarter ended March 31, 1999. Our agreement with International
Bioscience Corporation, 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 1999 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 condensed consolidated financial statements included
elsewhere in this document.
* Expenses for distribution rights decreased to $0 in the quarter ended
March 31, 2000 from $70,000 in the quarter ended March 31, 1999 due to
the 1999 payment for the Canadian distribution rights to the IBC
formulation.
* We incurred advertising and promotion expenses of $41,000 in the
quarter ended March 31, 2000 compared to $139,000 in the quarter ended
March 31, 1999. The decrease was due primarily to a gain on settlement
of outstanding invoices with our former advertising agency.
Interest expense decreased to $6,000 in the quarter ended March 31, 2000
from $33,000 in the quarter ended March 31, 1999 due to greater amortization of
the fair value of warrants issued to promissory note holders 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 and 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 or
secure a line of credit, we will be required to continue our reliance on
investor financing to fund our operations. At March 31, 2000, cash and cash
equivalents totaled $1,595,000, an increase of $1,514,000 from March 31, 1999.
Also as of March 31, 2000, current assets exceeded current liabilities,
consisting primarily of accounts payable and accrued liabilities, by $184,000.
During the quarter ended March 31, 2000, net cash used in operating
activities was $647,000 primarily due to a net loss from continuing operations
of $595,000.
In the quarter ended March 31, 2000, net cash flow from financing
activities increased by 93%, from the comparable quarter in 1999, to $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
that generated gross proceeds of $3,076,000, of which $1,452,000 was received in
the quarter ended March 31, 2000. These funds were used for the payment of
royalties, minimum license fees, outstanding short-term promissory notes and for
working capital. As of May 14, 2000, we have satisfied all of our debts 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 effect
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.
10
As of May 12, 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 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.
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. Given the Company's
history of successfully attracting investors to fund operations, management
believes that seeking additional equity and debt financing is a viable plan.
Additionally, we believe our relationship with Wal-Mart Stores, Inc. will
provide a more stable foundation on which to promote and obtain future funding.
Recently, funds have been raised from the exercise of outstanding stock
options and warrants. We have raised in excess of $400,000 in the quarter ended
March 31, 2000 from these capital raising efforts. However, this will not negate
the need to raise additional funds through issuance of debt and equity
instruments or with credit lines.
YEAR 2000 COMPLIANCE
As of May 1, 2000, the Company did not experience material disruption or
other significant problems in its information technology systems. In addition,
as of the same date, we are not aware of any material year 2000 compliance
issues relating to information technology systems of third parties which the
Company maintains material relationships including our contract manufacturer,
independent warehouse and third party billing provider.
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 International Bioscience Corp. (IBC) alleging breach
and default on its exclusive licensing 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 licensing 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 licensing
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 lotion 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 date has not yet been set.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) A report on Form 8-K was filed on April 18, 2000 to report the suit we
filed against International Bioscience Corporation 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 International Bioscience Corporation (IBC) in U.S. District Court
for the Southern District of Florida will continue despite the Court's
denial of its request for a preliminary injunction that would have enjoined
IBC from certain anticipatory breaches of its exclusive licensing agreement
with Empyrean.
13
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)
5/12/00 /s/ Richard C. Adamany
- ------- ----------------------------------------
(Date) (Signature)
Richard C. Adamany
President, Chief Executive Officer
And Chief Financial Officer
13