- -------------------------------------------------------------------------------
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 November 30, 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
----------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3646 West 2100 South
Salt Lake City, Utah 84120-1202
--------------------------- ------------
(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 January 14, 2000 - 22,119,617 shares of $.001 par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
- -------------------------------------------------------------------------------
<PAGE>
FORM 10-QSB
Financial Statements and Schedules
Cyclo3pss Corporation
For Three and Nine Months Ended November 30, 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 .........................................20
Item 2Changes in Securities.....................................20
Item 3Defaults Upon Senior Securities...........................20
Item 4Submission of Matters to a Vote of Security Holders.......20
Item 5Other Information.........................................20
Item 6Exhibits..................................................20
- 2 -
<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
(UNAUDITED)
- ------------------------------------------------------------------------------
November 30, February 28,
1999 1999
------------- -------------
Assets
Current assets:
Cash $60,091 $36,018
Accounts receivable 90,950 47,578
Inventories 53,530 65,348
Prepaid expenses 3,000 45,128
---------------------------
Total current assets 207,571 194,072
Property and equipment, net 166,806 232,935
Other assets:
Acquired patents, net 92,110 109,210
Developed patents and other, net 64,429 57,390
---------------------------
$530,916 $593,607
============= =============
- 3 -
<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets (continued)
(UNAUDITED)
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 30, February 28,
1999 1999
---------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $331,461 $239,140
Accrued liabilities 203,696 149,033
Accrued litigation settlement 853,000 ---
Current portion of capital lease obligations 5,539 9,505
---------------------------
Total current liabilities 1,393,696 397,678
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; 1,040 and 1,190 shares issued
and outstanding at November 30, 1999 and
February 28, 1999, respectively 11 12
Series "C" convertible preferred stock; 550 shares
authorized; 250 and 206 shares issued and
outstanding at November 30, 1999 and February 28,
1999, respectively 3 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; 20,949,252 shares issued at November
30,1999 and 17,599,482 shares issued at February
28, 1999 20,949 17,599
Additional paid-in capital 18,046,184 17,860,958
Accumulated deficit (18,428,738) (17,185,231)
Less treasury stock, 264,000 common shares at cost (501,545) (501,545)
---------------------------
Total stockholders' equity (9,778) 192,151
---------------------------
$530,916 $593,607
===========================
See accompanying notes to condensed consolidated financial statements
</TABLE>
- 4 -
<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
(UNAUDITED)
-----------------------------------------------------------------------------
For the three months ended
November 30,
1999 1998
-------------- --------------
Net revenues $268,543 $70,589
Costs and expenses:
Cost of sales 97,573 83,254
Research and development -- 3,135
Selling and marketing -- --
General and administrative 382,739 556,104
Depreciation and amortization 27,981 94,648
-------------- --------------
Total expenses 508,293 737,141
Loss from operations (239,750) (666,552)
Interest income -- 54
Interest expense (169) (713)
-------------- --------------
Net loss (239,919) (667,211)
Preferred stock dividends (8,499) (88,534)
-------------- --------------
Net loss applicable to common stock $(248,418) $(755,745)
============== ==============
Basic and dilutive net loss per common share $(.01) $(.04)
-------------- --------------
Weighted average number of common shares
issued and outstanding 19,325,599 18,025,784
============== ==============
---------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements
- 5 -
<PAGE>
Condensed Consolidated Statements of Operations
-----------------------------------------------------------------------------
(UNAUDITED)
For the nine months ended
November 30,
1999 1998
-------------- --------------
Net revenues $754,478 $659,254
Costs and expenses:
Cost of sales 345,680 543,951
Research and development -- 209,673
Selling and marketing -- 203,650
General and administrative 709,705 1,591,802
Depreciation and amortization 88,868 302,569
-------------- --------------
Total expenses 1,144,253 2,851,645
Loss from operations (389,775) (2,192,391)
Litigation settlement expense (853,000) --
Interest income 15 3,983
Interest expense (747) (3,213)
-------------- --------------
Net loss (1,243,507) (2,191,621)
Preferred stock dividends (25,497) (116,450)
-------------- --------------
Net loss applicable to common stock $(1,269,004) $(2,308,071)
============== ==============
Basic and dilutive net loss per common share $(.07) $(.14)
-------------- --------------
Weighted average number of common shares
issued and outstanding 18,254,854 16,753,956
============== ==============
---------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statement
- 6 -
<PAGE>
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Cash Flows
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the nine months ended
November 30,
1999 1998
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,243,507) $(2,191,621)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 88,870 302,569
Litigation settlement 853,000 --
Shares issued to board in lieu of compensation 13,750 --
Impairment of intangible assets -- 273,951
Changes in assets and liabilities:
Decrease in accounts receivable (43,372) 64,749
Increase in inventories 11,818 (1,504)
Decrease in prepaid expense 42,128 34,569
Decrease in accounts payable and accrued liabilities 146,982 (549,044)
--------------------------------
Net cash used in operating activities (130,331) (2,066,331)
--------------------------------
Cash flows from investing activities:
Purchase of property and equipment (802) (41,445)
Addition to developed patents and other (11,876) (11,011)
--------------------------------
Net cash used in investing activities (12,678) (52,456)
--------------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred and common stock 156,825 1,673,321
Proceeds from issuance and exercise of stock options 18,000 11,800
Principal payments under capital lease obligations (7,743) (17,692)
--------------------------------
Net cash provided by financing activities 167,082 1,667,429
--------------------------------
Net increase (decrease) in cash 24,073 (451,358)
Cash at beginning of period 36,018 573,161
--------------------------------
Cash at end of period $60,091 $121,803
================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
- 7 -
<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------------------------------
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 November 30, 1999, and the results of its operations and its cash flows
for the interim periods ended November 30, 1999 and November 30, 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 from those estimates.
- 8 -
<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (continued)
Loss per Common Share
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. Loss per common share attributed to
preferred stock dividends was not significant (less than one cent per share).
The Company excluded 10,771,561 and 5,519,173 options and warrants from the
weighted average shares outstanding computation at November 30, 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 November 30, 1999 of $18,428,738 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 $1,243,507 for the nine months ended November
30, 1999. The current liabilities are in excess of current assets by
$1,186,125 and $203,606 at November 30, 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 $60,091 at
November 30, 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
- 9 -
<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------------------------------
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 additional common 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. Under a formula
defined in the settlement, the remaining obligation under this settlement has
been reflected as a current liability as resolution and settlement of the
liability may be accelerated according to the terms of the settlement
agreement. The Company is not involved in any other legal actions and claims
at this time.
4. Segment Information
During the nine months ended November 30, 1999 and 1998, the Company operated
in four 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"); the manufacture
and sale of specialty chemicals ("biochemical products"), and the manufacture
and sale of medical sterilizers ("medical 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 inventory.
- 10 -
<PAGE>
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
- ------------------------------------------------------------------------------
4. Segment Information (continued)
For nine months ended
Nov 30, 1999 Nov 30, 1998
------------------------------------
Net revenues
Food Safety products $139,050 $283,308
Textile products 190,522 173,910
Medical products 119,250 --
Biochemical products 305,656 202,036
------------------------------------
Total Revenue $754,478 $659,254
====================================
Operating income (loss)
Food Safety products $ 47,536 $(120,561)
Textile products (181,793) (917,665)
Medical products 119,250 --
Biochemical products 71,075 (43,161)
------------------------------------
Total operating income (loss) 56,068 (1,081,387)
Corporate expenses (1,298,843) (1,111,004)
Interest income 15 3,983
Interest expense (747) (3,213)
------------------------------------
Net income (loss) $ (1,243,507) $ (2,191,621)
====================================
Identifiable assets
Food Safety products $78,762 $34,344
Textile products 172,931 530,558
Biochemical products 107,334 151,008
General corporate assets 171,889 170,995
------------------------------------
Totals assets $530,916 $ 886,905
====================================
- 11 -
<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 has entered into a Technology
Licensing Agreement with Consolidated Stills and Sterilizers of Boston, MA to
license the ozone medical instrument sterilization technology developed and
patented by the Company for use in Ster-O-Zone 100. The terms include an
initial licensing fee and ongoing royalties from Consolidated Stills and
Sterilizers once they have perfected the technology and are producing sales.
. Results of Operations
The Company's revenues were $268,543 for the three months ended November 30,
1999 compared to $70,589 for the three months ended November 30, 1998. The
revenues were $754,478 for the nine months ended November 30, 1999 compared
to $659,254 for the nine months ended November 30, 1998. Four of the
Company's wholly owned subsidiaries contributed to the Company's gross
revenues, Eco-Pure Food Safety Systems, Inc. (EPFS), Cyclopss Laundry
Systems, Inc. (CLS), Cyclopss Medical Systems, Inc. (MED) and Cyclopss
Biochemical Corporation (CBC). The Company's gross margin for the three
months ended November 30, 1999 was $170,970 compared to $(12,665) for the
three months ended November 30, 1998. The gross margin for the nine months
ended November 30, 1999 was $408,798 compared to $115,303 for the nine months
ended November 30, 1998. The Company has taken steps to control cost of sales
by reducing 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 nine
months ended November 30, 1999 from $3,135 and $209,673 for the three and
nine months ended November 30, 1998, respectively. The Company eliminated all
research and development costs during the nine months ended November 30,
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 funds are available or if it can locate strategic
partners that are able to fund research and development efforts.
- 12 -
<PAGE>
Selling and marketing expenses decreased to $0 for the three and nine months
ended November 30, 1999 from $0 and $203,650 for the three and nine months
ended November 30, 1998, respectively. The Company eliminated its marketing
staff and eliminated all advertising in order to conserve remaining 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. However, the
current cash constraints do not permit any sales and marketing activities.
General and administrative expenses decreased to $382,739 for the three
months ended November 30, 1999 from $556,104 for the three months ended
November 30, 1998, due to a decrease in management employment, shareholder
relations and legal fees. General and administrative expenses decreased to
$709,705 for the nine months ended November 30, 1999 from $1,591,802 for the
nine months ended November 30, 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 $169 for the three months ended November 30,
1999 compared with $713 for the three months ended November 30, 1998, and it
declined to $747 for the nine months ended November 30, 1999 compared with
$3,213 for the nine months ended November 30, 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 $853,000 in August 1999 as an additional expense 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. The remaining
amounts due under the settlement agreement have been reflected in accrued
liabilities.
The Company recorded net loss applicable to common stock for the three months
ended November 30, 1998 of $248,418 compared to $755,745 for the three months
ended November 30, 1998. Net loss applicable to common stock for the nine
months ended November 30, 1998 of $1,269,004
- 13 -
<PAGE>
compared to $2,358,071 for the nine months ended November 30, 1998. In order
to help conserve cash, the Company has taken steps to control costs by
reducing employees and management, and eliminating sales and marketing and
reducing 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, MED and CBC increase, it is
anticipated that losses will begin to diminish.
The Company believes that all four of its divisions, namely Eco-Pure Food
Safety Systems, Inc., Cyclopss Laundry Systems, Inc., Cyclopss Medical
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 $130,331 for the nine months ended
November 30, 1999 compared to $2,066,331 for the nine months ended November
30, 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 $12,678 for the
nine months ended November 30, 1999 compared to $52,456 for the nine months
ended November 30, 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 nine months ended November
30, 1999 was $167,082, due mainly to issuance of 157 shares of preferred "C"
shares, as described further in this section. Cash provided by financing
activities for the nine months ended November 30, 1998 was $1,667,429, 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 decreased to $530,916 for the nine months ended November 30,
1999 from $593,607 for the year ended February 28, 1999, due to a decrease in
prepaid expenses, normal amortization of intangibles and depreciation of
fixed assets. This reduction was offset by a slight increase in cash and
accounts receivable from increased sales.
Total current liabilities increased to $1,393,696 at November 30, 1999 from
$397,678 at February 28, 1999, mainly due to an increase in accounts payable
and recording of $853,000 as accrued
- 14 -
<PAGE>
litigation settlement, as explained previously at the end of "results of
operations". Long term liabilities decreased to $0 for the nine months ended
November 30, 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.
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,
there was a concern that some computers might be unable to process year-date
data accurately beyond the year 1999.
Additionally, if the Company's suppliers, customers, and other parties
experienced 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 did not experience
any Y2K related problems as all remediation and corrective actions were
successful.
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 issues with any major supplier. Generally, the
Company has alternative sources for supplies in the event a supplier
experiences such difficulties and the Company has not experienced any
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 not identified any Y2K matters with customers.
The Company will continue to evaluate its system and will continue to
communicate with customers and suppliers but anticipates no Y2K matters will
arouse since none have been reported to date.
Plan of Operation
The Company's Plan of Operation is to rely solely on the availability of
additional capital to fund ongoing operations, of which there can be no
assurance. The Company as of the date this filing has insufficient capital
for long term operations. However, the Company has entered into a Letter of
Intent with The Procter & Gamble Company of Cincinnati, Ohio, (see Subsequent
Events below)
- 15 -
<PAGE>
which has provided short term working capital and should the transaction
contemplated within that Letter of Intent be fully executed, the Company will
be provided an opportunity to engage its new business model of operation as
described below. However, should this transaction not be executed the Company
will have no other option but to move forward in filing a petition to provide
a safe harbor to protect the assets of the Company.
The Company historically has acted as both the developer of its technologies
and then as the manufacturer and marketer of those technologies. It has
become apparent that the customers within the markets pursued by the Company
are intrigued by the performance and potential of the products. However, the
size and operating capabilities of the Company doesn't support the confidence
required for the Company's targeted customers to become purchasers. The
Company's targeted industrial customer base is accustomed to doing business
with vendors and suppliers of a size and stability that reasonably assures
business continuity and internal product support. The single exception to
this discrimination as to our limited size has been the U S Navy who is
mandated to provide business opportunity for small business enterprises such
as Cyclopss.
Under the Company's new plan of operations it will no longer attempt to act
as a manufacturer or marketer of its technologies but will instead act as a
technology provider. Its efforts will be directed toward the creation of
technology bridges between companies already providing products and services
to those industries which will utilize the Company's technology products to
produce new complete processes. These ventures will include suppliers of
equipment and appliances and suppliers of disposable or consumable products
modified to utilize the Company's proprietary technologies under licensing
and royalty agreements. The end result will create interlocking process
systems that will be both effective and economic. Additionally the process
systems will be sold and serviced by vendors and suppliers already accepted
by the target markets. This model provides the manufacturers with technology
and new product offerings and provides the Company with a royalty revenue and
commercialization of its technologies through already existing manufacturing,
sales and service infrastructures.
The Company will continue to provide low volume production of ozone systems
to customers like the US Navy, and the Company also anticipates it will be
compensated by one or more of the industry participants for design and
development work required in modifying their existing products to accommodate
the incorporation of the Company's proprietary technologies. This model
allows the Company to keep the number of employees limited to specific
requirements of the technology application, and converts the Company into a
technology purveyor.
This business model is illustrated by the current business relationship
between the Company, P&G and Otres, Inc. Cyclopss had established a working
relationship with P&G early in 1999. In May of 1999 it was approached by the
principals of Otres who engaged the Company to assist in the development and
validation of a toothbrush sanitizer and a kitchen sponge sanitizer utilizing
ozone. The management of the Company determined the products could be of
great interest to P&G and, after having appropriate confidentiality documents
executed, Otres agreed to allow the Company to introduce the product concepts
to P&G. P&G determined they had products that would lend themselves to a
co-marketing relationship with the Otres appliances as long as the product
development was responsibly executed and the technology application proved
safe and effective. Both Otres and P&G engaged the Company for these
activities. This resulted in the Company receiving revenues of approximately
$98,000 from both venture partners for the development and testing of the
appliances. The Company manages the relationship with P&G for Otres under
contract,
- 16 -
<PAGE>
and contributed to the execution of co-marketing agreements between Otres and
CREST(R) for the toothbrush sanitizer, and Otres and DAWN(R) for dish washing
soap that will be announced at the International Home Appliance Show in
Chicago, on January 16, 2000. The Company negotiated for and will receive an
ongoing royalty of 3% from the sale of the appliances which provides the
potential for significant future revenues with minimal related costs of sale.
Should the Company receive the proceeds from the financing contemplated in
the P&G Letter of Intent, it anticipates moving the Research and Development
activities to New Mexico. The Company has already arranged the assistance
available to them from the New Mexico Department of Economic Development for
the relocation. This enhances and supports the Company emergence as a
respected technology purveyor. The Company will maintain a limited
administrative staff in its current offices in Salt Lake City, Utah, as well
as the Biochem division which continues to increase its revenues.
This plan, if successfully executed, provides ongoing operating revenues
derived from contract development, with the potential of significant license
and royalty revenues generated by the success of its partners in
commercializing the processes.
The Company has recently entered into a very similar contract development and
licensing arrangement with Consolidated Stills and Sterilizers of Boston, MA
on its proprietary Ozone Gas Medical Sterilization Technology, and
anticipates shipping the prototype in early February 2000.
The Company anticipates its revenues as well as the source of those revenues
to change significantly through these relationships. However, there can be no
assurance that a successful financing can be completed as a result of the
Letter of Intent or that the new Otres products even assisted by the
marketing strengths of P&G will gain significant market acceptance to provide
significant revenues.
The Company has 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 convention 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.
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 are no assurances that
additional contracts are forthcoming.
In late 1997 the electrical Power Research Institute (EPRI) declared ozone as
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
- 17 -
<PAGE>
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 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 royalty revenues from the purchase of systems and processes.
The Company has provided major agricultural producers 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 on
going royalty revenues.
Even with sufficient funds available, the ongoing challenge facing the
Company is that of educating its potential partners, 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.
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 November
30, 1999. The Company anticipates no additional employees will be required
during the next twelve months.
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.
- 18 -
<PAGE>
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.
Subsequent Events
The Company had been operating under a non binding investigational Letter of
Intent with The Procter & Gamble Company of Cincinnati, Ohio, executed on
June 3, 1999. The content and context of that document regarded and was the
result of a technical due diligence initiated by P&G in late December 1998.
The relationship was not disclosed prior to this filing due to stringent
confidentiality requirements.
Under the confidentiality of this relationship and while investigating the
technologies and products of the Company, P&G was subsequently introduced,
with the consent of its client Otres, to the proprietary products being
developed under contract by the Company for its client Otres. Initial
interest was expressed by P&G prompting Otres and the Company to enter into
an additional contract that called for the Cyclopss Management to administer
the relationship between the parties. The result affected co-marketing
agreements for Otres with both the Crest and Dawn divisions of P&G. The
contract also provides for an on going royalty payment to Cyclopss on the
gross sales of the appliances, and a First Right of Refusal for Cyclopss to
contract all future product development under the same royalty arrangement.
This working model prompted the business model as described in the Plan of
Operations above.
The severe financial condition of the Company was disclosed to P&G during the
last week November 1999. Procter & Gamble responded immediately and after
conferring with the Company's Management negotiated and subsequently entered
into a new Letter of Intent on December 10, 1999. The agreement allows for
two separate finances by P&G to the Company. The first, a small Unsecured
Promissory Note, was executed and funded in concert with the signing of The
Letter of Intent in order to relieve the immediate and critical cash
requirements of the Company. The second contemplated financing is a
Convertible Secured Loan which will provide long term working capital for the
Company. Should the Company successfully meet the pre loan conditions of this
transaction, and P&G elect to move forward in its execution, it is currently
scheduled to be concluded in the first
- 19 -
<PAGE>
quarter of calendar 2000. The loan will be secured by a first security
interest in all of the Company's Intellectual Properties and will be due and
payable in full on the one year anniversary date of its execution. The
Company contemplates engaging in several diverse development and testing
contracts within various departments of P&G.
The Agreement grants a conversion right to P&G allowing for the conversion of
all or any part of the outstanding loan, including all or any part of
interest due into shares in the Company's common shares of stock at anytime
during the term of the loan, and at the sole discretion of Procter & Gamble.
In addition, under the terms of the agreement, P&G will be granted an
Exclusive First Right of Refusal for the Licensing of all the current and
future technologies of the Company.
THERE ARE NUMEROUS AND RIGOROUS CONDITIONS THAT MUST BE MET BY THE COMPANY TO
THE SOLE AND COMPLETE SATISFACTION OF PROCTER & GAMBLE PRIOR TO THE
SUCCESSFUL CONCLUSION OF THE FINANCING AND SUBSEQUENT CONTEMPLATED
RELATIONSHIP. THE LETTER OF INTENT IS NON-BINDING AND THERE CAN NO ASSURANCES
THAT THERE WILL BE ANY ADDITIONAL CONTRACTUAL BUSINESS RELATIONSHIP BETWEEN
THE PARTIES OTHER THAN THE SMALL WORKING CAPITAL LOAN DISCLOSED ABOVE.
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. Exhibits and Reports on Form 8-K andNone.
- 20 -
<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: January 14, 2000 By/s/ William R. Stoddard
-----------------------
William R. Stoddard
Chief Executive Officer
Principal Executive Officer
Date: January 14, 2000 By/s/ Mondis Nkoy
----------------------------------
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTS FROM
CYCLO3PSS CORPORATION'S FINANCIAL STATEMENTS AND IS QUALIRIFED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 60,091
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-2000
<PERIOD-START> SEP-01-1999
<PERIOD-END> NOV-30-1999
<EXCHANGE-RATE> 1
<CASH> 60,091
<SECURITIES> 0
<RECEIVABLES> 90,950
<ALLOWANCES> 3,000
<INVENTORY> 53,530
<CURRENT-ASSETS> 207,571
<PP&E> 166,806
<DEPRECIATION> 69,504
<TOTAL-ASSETS> 530,916
<CURRENT-LIABILITIES> 540,694
<BONDS> 0
0
370
<COMMON> 20,949
<OTHER-SE> 501,545
<TOTAL-LIABILITY-AND-EQUITY> 530,916
<SALES> 754,478
<TOTAL-REVENUES> 754,478
<CGS> 345,680
<TOTAL-COSTS> 1,144,253
<OTHER-EXPENSES> (853,732)
<LOSS-PROVISION> (389,775)
<INTEREST-EXPENSE> 747
<INCOME-PRETAX> (1,243,507)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,243,507)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (25,497)
<NET-INCOME> (1,269,004)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
