CONFORMED
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED August 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22720
CYCLO3PSS CORPORATION
(Name of Small Business Issuer as specified in its charter)
Delaware 87-0455642
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3646 West 2100 South
Salt Lake City, Utah 84120-1202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 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 .
Common Stock outstanding at October 14, 1999 - 18,847,817 shares of $.001 par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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<PAGE>
FORM 10-QSB
Financial Statements and Schedules
Cyclo3pss Corporation
For Three Months Ended August 31, 1999
The following financial statements and schedules of the registrant and
its consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
Page of
Form 10-QSB
Item 1. Financial Statements
Condensed Consolidated Balance Sheets.......................3
Condensed Consolidated Statements of Operations.............5
Condensed Consolidated Statements of Cash Flow..............7
Notes to Condensed Consolidated Financial Statements........8
Item 2. Management's Discussion and Analysis or
Plan of Operations.........................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings .........................................18
Item 2. Changes in Securities......................................18
Item 3. Defaults Upon Senior Securities............................18
Item 4. Submission of Matters to a Vote of Security Holders........18
Item 5. Other Information..........................................19
Item 6. Exhibits...................................................19
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CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
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(UNAUDITED)
August 31, February 28,
1999 1999
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Assets
Current assets:
Cash $46,284 $36,018
Accounts receivable 136,255 47,578
Inventories 53,480 65,348
Prepaid expenses 52,715 45,128
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Total current assets 288,734 194,072
Property and equipment, net 184,954 232,935
Other assets:
Acquired patents, net 97,810 109,210
Developed patents and other, net 61,529 57,390
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$633,027 $593,607
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<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets (continued)
(UNAUDITED)
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<TABLE>
<CAPTION>
Aug 31, February 28,
1999 1999
-----------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $277,589 $239,140
Accrued liabilities 135,190 149,033
Current portion of capital lease obligations 3,858 9,505
-----------------------------
Total current liabilities 416,637 397,678
Long-term portion of capital lease obligations -- 3,778
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Preferred stock issuable in series: par value $.01,
4,500,000 authorized:
Series "A" convertible preferred stock; 356,638
shares authorized; 356,638 shares issued and
outstanding 356 356
Series "B" convertible preferred stock; 30,000
shares authorized; 1,190 shares issued and
outstanding 12 12
Series "C" convertible preferred stock; 550 shares
authorized; 363 and 206 shares issued and
outstanding at August 31, 1999 and February 28,
1999, respectively 4 2
Class "A" preferred stock, par value $.01; 500,000
shares authorized; none issued or outstanding --- ---
Common stock, par value $.001; 55,000,000 shares
authorized; 17,779,482 shares issued at August 31,
1999 and 17,599,482 shares issued at February 28, 1999 17,779 17,599
Additional paid-in capital 18,035,601 17,860,958
Accumulated deficit (17,335,817) (17,185,231)
Less treasury stock, 264,000 common shares at cost (501,545) (501,545)
---------------------------
Total stockholders' equity 216,390 192,151
---------------------------
$633,027 $593,607
===========================
</TABLE>
See accompanying notes to condensed consolidated financial statements
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<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
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(UNAUDITED)
For the three months ended
August 31,
1999 1998
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Net revenues $169,203 $265,273
Costs and expenses:
Cost of sales 118,108 182,591
Research and development -- 91,716
Selling and marketing -- 93,490
General and administrative 234,978 482,634
Depreciation and amortization 29,896 104,250
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Total expenses 382,982 954,681
Loss from operations (213,779) (689,408)
Legal settlement expense (853,000) --
Interest income 3 1,624
Interest expense (229) (1,077)
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Net loss (1,067,005) (688,861)
Preferred stock dividends (8,499) (38,958)
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Net loss applicable to common stock $(1,075,504) $(727,819)
============== ==============
Net loss per common share (.06) (.04)
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Weighted average number of common shares
issued and outstanding 17,779,482 16,584,659
============== ==============
See accompanying notes to condensed consolidated financial statements
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<PAGE>
Condensed Consolidated Statements of Operations
----------------------------------------------------------------------------
(UNAUDITED)
For the six months ended
August 31,
1999 1998
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Net revenues $485,935 $588,664
Costs and expenses:
Cost of sales 248,107 460,696
Research and development -- 206,538
Selling and marketing -- 203,650
General and administrative 321,897 1,035,698
Depreciation and amortization 65,957 207,921
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Total expenses 635,961 2,114,503
Loss from operations (150,026) (1,525,839)
Legal settlement expense (853,000) --
Interest income 18 3,929
Interest expense (577) (2,501)
Net loss (1,003,585) (1,524,411)
Preferred stock dividends (16,998) (77,916)
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Net loss applicable to common stock $(1,020,583) $(1,602,327)
============== ==============
Net loss per common share (.06) (.10)
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Weighted average number of common shares
issued and outstanding 17,709,482 16,298,977
============== ==============
See accompanying notes to condensed consolidated financial statement
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<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Cash Flow
(UNAUDITED)
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<TABLE>
<CAPTION>
For the six months ended
August 31,
1999 1998
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(150,585) $(1,524,411)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 65,957 207,921
Changes in assets and liabilities:
Decrease in accounts receivable (88,677) 37,210
Increase in inventories 11,868 (6,604)
Decrease in prepaid expense (7,587) 13,588
Decrease in accounts payable and accrued liabilities 24,606 (599,656)
--------------------------------
Net cash used in operating activities (144,418) (1,871,952)
--------------------------------
Cash flows from investing activities:
Purchase of property and equipment (802) (39,944)
Addition to developed patents and other (9,914) (10,824)
--------------------------------
Net cash used in investing activities (10,716) (50,768)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred and common stock 156,825 1,500,820
Proceeds from issuance and exercise of stock options 18,000 11,800
Principal payments under capital lease obligations (9,425) (13,100)
--------------------------------
Net cash provided by financing activities 165,400 1,499,520
--------------------------------
Net increase (decrease) in cash 10,266 (423,200)
Cash at beginning of period 36,018 573,161
--------------------------------
Cash at end of period $46,284 $149,961
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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1. Summary of Significant Accounting Policies
Financial Statements
The accompanying interim consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Regulation
S-B. The balance sheet at February 28, 1999 represents the Company's audited
consolidated balance sheet at that date.
In the opinion of management, the accompanying condensed consolidated
financial statements contain all normal recurring adjustments necessary to
present fairly the financial position of Cyclo3pss Corporation ("Company") as
of August 31, 1999, and the results of its operations and its cash flows for
the interim periods ended August 31, 1999 and August 31, 1998. The operating
results for the interim periods are not necessarily indicative of the results
for a full year. These financial statements should be read in conjunction
with the Company's audited consolidated financial statements and notes
thereto included in the Company's Annual Report to Stockholders for the year
ended February 28, 1999.
Organization
The Corporation was formed in Delaware in 1927. In 1990, the Corporation was
reorganized as Cyclo3pss Medical Systems, Inc. In 1995, the Company changed
its name to Cyclo3pss Corporation. The Company is engaged in the manufacture,
sale and installation of ozone food processing products, ozone washing and
laundry sorting and counting systems for commercial and institutional
laundries, the manufacture and sale of specialty compounds and chemicals, and
research and development of technologies for sterilization and/or
disinfection of surgical, medical and other instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All intercompany balances and transactions
have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ
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<PAGE>
from those estimates.
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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1. Summary of Significant Accounting Policies (continued)
Net Income (Loss) per Common Share
Net income (loss) per common share is calculated after deduction of
preferred stock dividends divided by the weighted average number of shares of
common stock issued and outstanding during the period. Income (loss) per common
share for preferred stock dividends was not significant (less than one cent per
share). The Company excluded 5,551,451 and 5,519,173 options and warrants from
the weighted average shares outstanding computation at August 31, 1999 and
February 28, 1999, respectively as their effect would be anti-dilutive.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The items of other comprehensive income that are typically
required to be displayed are foreign currency items, minimum pension liability
adjustments, and unrealized gains and losses on certain investments in debt and
equity securities. There have been no items of other comprehensive income to
date.
2. Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization of
assets and satisfaction of liabilities in the normal course of business. The
Company has sustained significant net losses which have resulted in an
accumulated deficit at August 31, 1999 of $17,335,817 and $17,185,231 at
February 28, 1999, and periodic cash flow difficulties, all of which raise
substantial doubt of the Company's ability to continue as a going concern.
The net loss for the year ended February 28, 1999 was $3,232,857 and the
Company recorded net loss of $150,026 for the six months ended August 31, 1999.
The current liabilities are in excess of current assets by $127,903 and $203,606
at August 31, 1999 and February 28, 1999 respectively. To date, the Company has
funded its operations through the issuances of common and preferred stock. The
Company anticipates a net loss for the year ended February 28, 2000, and with a
cash balance of $46,284 at August 31, 1999 and expected cash requirements for
the year, there is substantial doubt as to the Company's ability to continue
operations.
The Company believes that these conditions have resulted from the inherent
risks associated with small technology companies. Such risks include, but are
not limited to, the ability to (a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, (b) attract
additional capital in order to finance growth, (C) further develop and
successfully market commercial products and (d) successfully compete with other
technology companies having financial, production
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<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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2. Basis of Presentation (continued)
and marketing resources significantly greater than those of the Company. The
Company is attempting to improve these conditions by way of financial
assistance through collaborative partnering agreements, issuances of
additional equity, debt arrangements, and product sales. Management believes
that appropriate funding will be generated and future product sales will
result from these opportunities and that the Company will continue operations
through the next fiscal year; however, no assurance can be given that sales
will be generated or that the additional necessary funding will be raised.
3. Contingencies
The Company recorded $853,000 in August 1999 as Legal settlement expense in
connection with the settlement agreement it reached with Mifal Klita et al.
in September of 1999. During the period from May through August 1996, the
Company sold its series B preferred stock in a private placement offering to
certain investors pursuant to the provisions of Regulation S. One of these
investors, Mifal Klita, a purported Canadian company, filed suit against the
Company demanding the removal of the restrictive investment legend which the
Company caused to be placed on common shares issued pursuant to the
conversion of series B preferred shares. The suit was filed in the Court of
Chancery in the State of Delaware, which ruled in favor of the Company on
April 8, 1997 and dismissed Mifal Klita's suit. Subsequently, Mifal Klita
refiled an amended suit in the Superior Court of the State of Delaware. The
final settlement agreement reached by the parties involved, entitled Mifal
Klita to the conversion of his series B preferred shares into unrestricted
common stock of the Company plus shares for legal fees and other provisions
stated in the original agreement. The unrestricted common stock will be
disbursed monthly over a two year period. The Company is not involved in any
other legal actions and claims at this time.
4. Segment Information
During the six months ended August 31, 1999 and 1998, the Company operated in
three principal industries; the manufacture, sale and installation of ozone
food processing products ("food safety products"); the manufacture, sale and
installation of ozone washing and laundry sorting and counting systems for
commercial and institutional laundries ("textile products"); and the
manufacture and sale of specialty chemicals ("biochemical products").
Operating profit is total revenue less operating expenses, excluding interest
expense and general corporate expenses. Corporate assets consist primarily of
cash and cash equivalents, other receivables, prepaid expenses, property and
equipment and corporate payables.
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<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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4. Segment Information (continued)
For six months ended
Aug 31, 1999 Aug 31, 1998
----------------------------
Net revenues
Food Safety products $111,535 $274,436
Textile products 136,594 129,914
Biochemical products 237,806 184,314
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Total Revenue $485,935 $588,664
======== ========
Operating income (loss) $ 55,422 $(86,076)
Food Safety products (85,726) (673,084)
Textile products 76,809 46,226
Biochemical products ----------- ----------
Total operating income (loss) 46,505 (712,934)
Corporate expenses (196,531) (812,905)
Interest income 18 3,929
Interest expense (577) (2,501)
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Net income (loss) $ (150,585) $ (1,524,411)
============ =============
Identifiable assets
Food Safety products $63,515 $92,898
Textile products 324,319 730,486
Biochemical products 152,203 278,168
General corporate assets 92,990 234,042
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Totals assets $633,027 $1,335,594
=========== ==========
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<PAGE>
PART I - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
General
Cyclopss Corporation is primarily engaged in the design, manufacturing,
assembly, sales and installation of ozone application technologies and
processes. The Company's main product lines offer an alternative to address food
safety concerns and laundry disinfection and efficiency. Ozone disinfectant
technology is proven to reduce microbial counts on food products without the
potential for the development of immunity or resistance by the microbial
organism and build up of chemicals on the final product. Ozone laundry systems
enable users to reduce costs associated with labor, water, energy, chemical,
textile replacement and wastewater.
The Company also markets an automated sorting and counting system for
commercial laundries. Other non-ozone based products offer by the Company
include more than 350 specialty chemicals and compounds. The Company holds
patents for medical sterilization processes and plans to resume research and
development activities in this field within the next few years, when sufficient
funds are available. . Results of Operations
The Company's revenues were $169,203 for the three months ended August 31,
1999 compared to $265,273 for the three months ended August 31, 1998. The
revenues were $485,935 for the six months ended August 31, 1999 compared to
$588,664 for the six months ended August 31, 1998. Three of the Company's wholly
owned subsidiaries currently contribute to the Company's gross revenues,
Eco-Pure Food Safety Systems, Inc. (EPFS), Cyclopss Laundry Systems, Inc. (CLS)
and Cyclopss Biochemical Corporation (CBC). The Company's gross margin for the
three months ended August 31, 1999 was $51,095 compared to $82,682 for the three
months ended August 31, 1998. The gross margin for the six months ended August
31, 1999 was $237,828 compared to $127,968 for the six months ended August 31,
1998. The Company has taken steps to control cost of sales by reducing
management, employees, production space, and any other unnecessary expense. The
Company expects revenue to increase in the upcoming quarters, due to managements
efforts to locate new customers. The Company also expects cost of sales to
increase at a relative proportion to the revenue. If revenues do not increase,
the Company will not continue to operate unless additional funds are available
from other sources.
Research and development expenses decreased to $0 for the three and six
months ended August 31, 1999 from $91,716 and $206,538 for the three and six
months ended August 31, 1998, respectively. The Company eliminated all research
and development costs during the six months ended August 31, 1999, due to lack
of necessary funds for this function. The Company believes it is necessary and
intends to resume its research and development efforts in the current year when
more funds are available or if it can locate strategic partners that are able to
fund research and development efforts.
Selling and marketing expenses decreased to $0 for the three and six months
ended August 31, 1999 from $93,490 and $203,650 for the three and six months
ended August 31, 1998, respectively. The Company took steps to eliminate
marketing staff and eliminated all advertising in order to help
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<PAGE>
conserve cash. Management believes that it is critical to periodically
support and supplement its sales efforts through advertising, public relations
and trade-show participation when sufficient funds are available.
General and administrative expenses decreased to $234,978 for the three
months ended August 31, 1999 from $482,634 for the three months ended August 31,
1998, due to a decrease in management employment, shareholder relations and
legal fees. General and administrative expenses decreased to $321,897 for the
six months ended August 31, 1999 from $1,035,698 for the six months ended August
31, 1998. Management has taken steps to reduce these costs in order to help
conserve the limited cash available. Management will continue to review and
control these costs, but believes general and administrative expenses in the
coming quarters of fiscal 2000 will increase due to management and human
resource requirements for the Company should sales and other commercial
activities increase, and should more funds become available.
Interest expense declined to $229 for the three months ended August 31,
1999 compared with $1,077 for the three months ended August 31, 1998, and it
declined to $577 for the six months ended August 31, 1999 compared with $2,501
for the six months ended August 31, 1998 due to the conversion of all long-term
debt to common stock and lower lease payments. The Company is not in a financial
position to borrow from traditional sources and anticipates low interest expense
in fiscal 2000. The Company has minimum debt and intends to fund its operations
through non-interest bearing capital sources, but there can be no assurance that
such funding will be available and if it is not available, the Company will
likely not be able to continue in operations.
The Company recorded net loss applicable to common stock for the three
months ended August 31, 1998 of $1,075,504 compared to $727,819 for the three
months ended August 31, 1998. Net loss applicable to common stock for the six
months ended August 31, 1998 of $1,020,583 compared to $1,602,327 for the six
months ended August 31, 1998. The Company recorded $853,000 in August 1999 as
loss on legal settlement in connection with the settlement agreement it reached
with Mifal Klita et al. in September of 1999. During the period from May through
August 1996, the Company sold its series B preferred stock in a private
placement offering to certain investors pursuant to the provisions of Regulation
S. One of these investors, Mifal Klita, a purported Canadian company, filed suit
against the Company demanding the removal of the restrictive investment legend
which the Company caused to be placed on common shares issued pursuant to the
conversion of series B preferred shares. The suit was filed in the Court of
Chancery in the State of Delaware, which ruled in favor of the Company on April
8, 1997 and dismissed Mifal Klita's suit. Subsequently, Mifal Klita refiled an
amended suit in the Superior Court of the State of Delaware. The final
settlement agreement reached by the parties involved, entitled Mifal Klita to
the conversion of his series B preferred shares into unrestricted common stock
of the Company plus shares for legal fees and other provisions stated in the
original agreement. The unrestricted common stock will be disbursed monthly over
a two year period. In order to help conserve cash, the Company has taken steps
to control costs by reducing management, promotional and investor relation
activities. The Company anticipates that it will operate at a loss for the year
ending February 28, 2000. However, if revenues of CLS, EFS and CBC increase, it
is anticipated that losses will begin to diminish.
The Company believes that three of its divisions, namely Eco-Pure Food Safety
Systems, Inc.,
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<PAGE>
Cyclopss Laundry Systems, Inc., and Cyclopss Biochemical, Inc. will
contribute to the Company's future revenue stream.
Liquidity and Capital Resources
As of the date of this filing, the Company has insufficient funds on hand
to continue its operations for the entire fiscal year ending February 28, 2000
unless significantly increased revenues and gross profits are achieved or
additional financing is obtained. Should the Company be unsuccessful in
achieving the increased level of revenues and gross profits required to pay its
operating expenses or in acquiring additional equity financing to pay the
shortfall, the Company will seek direction from the Board of Directors as to
what action must be taken, or what action should be taken to preserve the
Company's limited assets. Management is aggressively exploring additional
financing for the ongoing operations of the Company. There are no assurances
that the efforts to locate and secure additional financing will be successful,
and the failure to secure this financing would substantially alter management's
assumptions as presented heretofore and in the remainder of this section.
Cash used in operating activities was $144,419 for the six months ended
August 31, 1999 compared to $1,871,952 for the six months ended August 31, 1998.
The Company has significantly reduced its cash use rate in fiscal 2000, due to
the necessity of having to conserve available cash.
Cash expenditures for property and equipment and patents were $10,715 for
the six months ended August 31, 1999 compared to $50,768 for the six months
ended August 31, 1998. This decrease is also the result of the Company's attempt
to help conserve cash and reduce expenses.
Net cash provided by financing activities for the six months ended August
31, 1999 was $165,400, due mainly to issuance of 157 shares of preferred "C"
shares, as described further in this section. Cash provided by financing
activities for the six months ended August 31, 1998 was $1,499,520, due to the
issuance of 1,296,140 shares of common stock in a private placement offering
through First Financial Investment Securities, which raised $1,620,175
($1,395,004 in net proceeds).
Total assets increased to $633,027 for the six months ended August 31, 1999
from $593,607 for the year ended February 28, 1999, due to a slight increase in
the Company's cash position and a significant increase in accounts receivable
from $47,578 at February 28, 1999 to $136,255 at August 31, 1999. This increase
in accounts receivable is mainly due to the recording of sales since year end.
Total current liabilities slightly increased to $416,637 at August 31, 1999
from $397,678 at February 28, 1999, mainly due to a slight increase in accounts
payable. Long term liabilities decreased to $0 for the three months ended August
31, 1999 from $3,778 for the year ended February 28, 1999. This decrease was due
to the repayment of certain lease liabilities and the reclassification of the
remaining lease obligations to current obligations.
During the period of September 28, 1998 to April 15, 1999 the Company
authorized and offered its Series "C" preferred shares to accredited investors
in an offering made pursuant to Regulation S of the Securities Exchange Act, and
a Board Resolution on September 10, 1998. By the end of the offering, seven
subscribers purchased such shares in this offering for a total of $362,825 that
were accepted under the subscription plan. Series "C" preferred shares are
convertible to common shares at $.10 (ten cents) per share.
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<PAGE>
Year 2000 or Y2K Issue
The Year 2000 or Y2K issue refers to some computer systems' inability to
recognize the date field as the year 2000. As a result of these shortcomings,
some computers may be unable to process year-date data accurately beyond the
year 1999. There is substantial concern that if the Year 2000 problem is not
adequately addressed, there may be widespread problems with computer
applications in all areas of use, potentially affecting the global economy.
If the Company's internal systems and products do not correctly recognize
date information when the year changes to 2000, there could be an adverse impact
on the Company's operations. Additionally, if the Company's supplier, customers,
and other parties experience Y2K difficulties, the Company could be adversely
affected. The Company is continuing the process of assessing and correcting
potential Year 2000 problems with the Company's operations.
The Company has assessed the potential impact of this issue on its business
and operations as being minor. With regard to its information systems
(financial, supply, inventory, order, office support, etc.) the Company has
developed and begun implementing a plan to convert all necessary systems to be
ready for the year 2000. The Company does not believe the Year 2000 issue will
have a material effect on the Company's internal accounting and information
systems, most of which consist of relatively inexpensive off-the-shelf software
packages. Costs incurred to date to modify systems have been insignificant and
remaining costs to modify IT systems are expected to be less than $5,000.
With regard to its non-information system operations, the Company is in the
process of reviewing and correcting Y2K problems in the following areas:
products currently manufactured by the Company and manufacturing and engineering
systems. This review is approximately 95% complete and the Company has been able
to correct or plans to correct prior to 2000 each material Y2K issue identified
in the review.
With regard to potential Y2K issues for the Company's major material
suppliers, the Company is in the process of communicating with such parties.
Although not all major suppliers have indicated their Y2K compliance, the
Company has not yet identified any major supplier that believes it will be
unable to operate due to Y2K problems in 2000. Generally, the Company has
alternative sources for supplies in the event a supplier experiences such
difficulties and the Company does not presently anticipate material difficulties
in obtaining materials due to suppliers' Y2K problems.
With regard to major customers, the Company has had communications with
such parties and is reviewing responses regarding the Companies Y2K compliance.
To date, the Company has insufficient information from such parties to determine
the potential impact on the Company if such parties experience Y2K difficulties.
With regard to third-party utilities and services (for example, telephone
electrical, bankcard processing and shipping services), the Company has no plans
to evaluate the Y2K readiness of such providers.
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<PAGE>
The Company anticipates that the material risks related to its information
and non- information systems will be timely mitigated by current efforts being
made by the Company to identify and correct internal Y2K problems. However,
there is no guarantee that the Company will successfully identify or correct all
Y2K problems in a timely manner. In some cases, problems may be unforeseen, and
occur regardless of the testing and review that is done.
Additionally, a major potential Y2K risk to the Company's operations is
service disruption from third-party providers that supply telephone, electrical,
banking and shipping services. Any disruption of these critical services would
hinder the Company's ability to receive, process and ship orders.
Plan of Operation
The Company's Plan of Operation is solely subject to availability of
additional capital, of which there can be no assurance. The Company has
insufficient capital for operations; however, the Company has entered into a
Letter of Intent with a large strategic partner and a long term contract for
product development and royalties with a small appliance manufacturer, Otres,
Inc.
The Otres Inc., provides the Company with the first right of refusal to
develop new products in the future and a royalty stream based on the units sold
of products that are jointly developed. For these considerations the Company has
assisted Otres Inc. in the development and marketing of two new consumer
products based on ozone technology.
We are bound by stringent Confidential Disclosure Agreements to both the
strategic partner and Otres, Inc. to protect the Company's intellectual
properties. The strategic partner is a significant worldwide purveyor to the
target markets of the Company and the partner is funding ozone R&D projects with
the Company. Otres, Inc. has completed the design of two household products that
will be introduced to the consumer market within the next few months. The
Company anticipates its revenues as well as the source of those revenues to
change significantly through these two relationships. However, there can be no
assurance that a successful strategic partnership agreement can be negotiated as
a result of the Letter of Intent or that the new Otres products will gain
significant market acceptance.
During this last quarter, The Company successfully demonstrated the Eco
Wash system for the US Navy in San Diego at the Public Works Center. The system
was able to launder industrial wipe rags achieving higher absorbency than
produced with conventional laundry formulas. This result was achieved while
reducing hot water costs by 100%, water consumption by 51%, sewer costs by 100%,
chemical costs by 77%, labor by 29%, and electricity cost by 11%. These savings
resulted in a payback period of 10.7 months. From the successful demonstration,
the Naval Facilities Engineering Service Center is recommending that the other
PWC sites convert their operations to the Eco Wash system (potentially a total
of 50 systems). Since this demonstration, several new sites have been visited
and several more visits to new sites are planned for the third and fourth
quarters. Each site will average two Eco Wash 60 Laundry Systems, including a
washer and dryer, at approximately $75,000 each. At this time there are no
additional Eco Wash systems under contract and there is no assurances that
additional contracts are forthcoming.
- 16 -
<PAGE>
In late 1997 the electrical Power Research Institute (EPRI) declared ozone
as being Generally Regarded as Safe (GRAS) allowing food processors to use ozone
in the processing of certain food items. Quoting from a September 2, 1999 ozone
industry solicitation on behalf of EPRI: "Recently, FDA discovered a troublesome
ruling in their 1982 bottled water regulation that accorded GRAS status to ozone
use in bottled water. The 1982 bottled water ruling was issued inappropriately
under 184.1(b) (2), which indicated that all other food uses require regulation.
Therefore, although FDA has elected not to challenge the EPRI Expert Panel
declaration, the FDA cannot officially sanction GRAS status for the use of ozone
in food processing because of the prior 184.1(b) (2) ruling. To help resolve
this dilemma, EPRI is preparing to petition the FDA for approval of ozone under
the food additive regulations. In view of the significant food safety protection
provided by the use of ozone, FDA has agreed to receive this petition under the
new Expedited Review rules, which appears to be the best way to resolve the
regulatory problem." This discovery and its resolution can adversely affect
future sales and contracts for Eco Pure and others in the ozone industry.
The Company's expertise in ozone applications combined with the aggressive
public relations activities created substantial interest in the food
decontamination potential of the Company's technologies. However, those
interested parties anticipated proven turnkey solutions, and were not initially
prepared to contribute resources toward the development work and expenses
necessary to ultimately provide the solution. The Company has been aggressively
seeking customers and strategic partners who are sufficiently convinced of the
potential to pro-actively participate in necessary research and development
costs. These customers and strategic partners not only may provide revenues from
possible R&D contracts but also follow-on revenues from the purchase of systems
and processes. These installed systems will be used as demonstration sites, and
will further validate the technologies.
The Company currently has provided a major food producer with prototype
ECO-PURE test systems that have been installed in wet produce processing plants,
long-term produce storage facilities, short term banana and tomato ripening
rooms, and for use in treatment of herbal remedies and dietary supplements.
The Company continues to pursue strategic partners who are willing to
advance resources and expenses in contract R&D relationships that not only
provide revenues and working capital for the Company but, if successful, create
a captive customer for future products.
Until such time as additional monies are raised and the Company can execute
its broader sales and marketing plan, management anticipates its primary
revenues, if any, will be generated through the R&D contracts and the resulting
sale of systems engineered from, and sold to, the parties funding the specific
R&D activities.
Even with sufficient funds available, the ongoing challenge facing the
Company is that of educating government, industry and the end consumer about the
benefits of ozone. Ozone is a naturally-occurring phenomenon that is usually
associated with photochemical smog or an eroding level of protection in our
atmosphere. It is the Company's intent to provide this education and show the
beneficial side of ozone: decontamination. For industry, ozone is a cost
competitive and environmentally-friendly answer to microbial contaminates. For
the consumer, ozone kills harmful microorganisms quickly and leaves behind no
chemical residue.
- 17 -
<PAGE>
The Biochem products will continue to be driven by customer requests and
increased sales will be derived from contract product development. Current sales
activities will be evaluated and alternatives looked for to improve profit
margins. Joint efforts will continue with Foster Miller, Inc., in efforts to
create a market for Biochem's monomer to the aerospace industry.
Given the Company's generally illiquid cash position and limited capital,
there can be no assurances that the Company will be able to effectively execute
its plan of operations.
The Company had eleven full time and one part time employee as of August
31, 1999. The Company anticipates additional employees will be required in
engineering and sales during the next twelve months. The impact of the above
will be determined by the market demand for food safety and textile systems and
specialty chemicals.
The information set forth herein as to anticipated research and development
costs, equipment purchases and increase in employees are management's best
estimates based upon current plans. Actual expenditures may be greater or less
than such estimates depending on many factors including, but not limited to the
availability of new technologies, the completion or lack of completion of
certain strategic alliances, and the timing and successful completion of the
Company's stated requirement to acquire additional operating and growth capital,
industry initiatives, success of the Company's research and development efforts,
and other factors.
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. The private Securities litigation Reform Act of
1995 provides a safe harbor for forward looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following:
1. Market acceptance of the Company's products;
2. Obtaining sufficient additional operating capital in the form of debt or
equity; 3. The existence of an orderly market in the Company's securities; 4.
Increased sales of the various products of the Company; 5. Continued success in
the Company's research and development activities; and 6. Successful completion
of strategic alliances.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
A settlement agreement was reached with Mifal Klita et al. in September of
1999. During the period from May through August 1996, the Company sold its
series B preferred stock in a private placement offering to certain investors
pursuant to the provisions of Regulation S. One of these investors, Mifal Klita,
a purported Canadian company, filed suit against the Company demanding the
removal of the restrictive investment legend which the Company caused to be
placed on common shares issued pursuant to the conversion of series B preferred
shares. The suit was filed in the Court of Chancery in the State of Delaware,
which ruled in favor of the Company on April 8, 1997 and dismissed Mifal Klita's
suit. Subsequently, Mifal Klita refiled an amended suit in the Superior Court of
the State of Delaware. The final settlement agreement reached by the parties
involved, entitled Mifal Klita to the conversion of his series B preferred
shares into unrestricted common stock of the Company plus shares for legal fees
and other provisions stated in the original agreement. The unrestricted common
stock will be disbursed monthly over a two year period.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior SecuritieNone.
Item 4. Submission of Matters to a Vote of Security HoldNone.
Item 5. Other Information.
Item 6(a). Exhibits and Reports on Form 8None.
6(b). Exhibits and Reports on Form S-8. To register Executive
Employee Stock Option Agreements and grant of shares to
William R. Stoddard in Lieu of cash wages.
- 18 -
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCLO3PSS CORPORATION
Date: October 14, 1999 By/s/ William R. Stoddard
-----------------------
William R. Stoddard
Chief Executive Officer
Principal Executive Officer
Date: October 14, 1999 By/s/ Mondis Nkoy
----------------------------------
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
- 19 -
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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