<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) Form 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
-------------------------------------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _______________________ to _____________________
Commission file number
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Kyzen Corporation
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(Exact name of the small business issuer as
specified in its charter)
Utah 87-0475115
- --------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
430 Harding Industrial Drive, Nashville, TN 37211
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(Address of principal executive offices) (Zip Code)
(Issuer's telephone number) (615) 831-0888
----------------------------------------------------
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS
State number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
5,006,681 shares of Class A Common Stock outstanding as of October 7, 1997
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Transitional Small Business Disclosure Format (Check one): [ ] Yes [ X ] No
Page 1 of 10
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INDEX
Page No.
--------
Part I Financial Information
Item 1. Financial Statements:
Balance Sheet as of December 31, 1996 and
September 30, 1997 (unaudited) 3
Statement of Operations for the nine months
ended September 30, 1996 (unaudited) and
1997 (unaudited) 4
Statement of Cash Flows for the nine months
ended September 30, 1996 (unaudited) and
1997 (unaudited) 5
Notes to Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Page 2 of 10
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KYZEN CORPORATION
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BALANCE SHEET
<TABLE>
<CAPTION>
DEC 31, SEP 30,
1996 1997
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 741,820 $ 601,403
Short-term investments 528,416 99,769
Accounts receivable, net of allowance for doubtful
accounts of $16,338 in 1996 and $10,964 in 1997 860,785 859,035
Costs and estimated losses in excess of billings
on uncompleted contracts 80,321 34,353
Inventory 205,126 479,656
Other 37,137 32,569
----------- -----------
Total current assets 2,453,605 2,106,785
Property and equipment, net 786,797 813,588
Patents, net 99,243 148,309
Interest receivable from related parties 124,839 158,823
----------- -----------
Total assets $ 3,464,484 $ 3,227,505
=========== ===========
LIABILITIES, REDEEMABLE STOCK AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and capital lease obligations, current $ 5,610 $ 5,875
Accounts payable and accrued expenses 432,088 490,032
Accounts payable to related parties 20,913 11,839
----------- -----------
Total current liabilities 458,611 507,746
Notes payable and capital lease obligations 6,697 3,250
----------- -----------
Total liabilities 465,308 510,996
Shareholders' equity (deficit):
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding at
December 31, 1996 and September 30, 1997, respectively
Class A Common Stock, $0.01 par value, 30,000,000 shares
authorized, 4,999,948 and 5,006,781 shares issued and
4,999,848 and 5,006,681 shares outstanding 50,000 50,068
Additional paid-in-capital 5,293,420 5,294,633
Treasury stock at cost (313) (313)
Accumulated deficit (2,343,931) (2,627,879)
----------- -----------
Total shareholders' equity 2,999,176 2,716,509
----------- -----------
Total liabilities and shareholders' equity $ 3,464,484 $ 3,227,505
=========== ===========
</TABLE>
Page 3 of 10
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KYZEN CORPORATION
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STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES $1,347,212 $1,475,254 $3,567,133 $4,066,317
Cost of sales 699,692 674,028 1,807,368 1,925,407
---------- ---------- ---------- ----------
GROSS PROFIT 647,520 801,226 1,759,765 2,140,910
OPERATING COSTS AND EXPENSES:
Selling, general and administrative expenses 704,741 685,908 1,953,947 2,127,476
Research and development expenses 102,577 106,518 446,841 352,326
---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 807,318 792,426 2,400,788 2,479,802
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (159,798) 8,800 (641,023) (338,892)
OTHER INCOME (EXPENSE):
Interest income 22,845 19,610 90,302 63,099
Interest expense (227) (467) (16,289) (8,155)
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) 22,618 19,143 74,013 54,944
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (137,180) $ 27,943 $ (567,010) $ (283,948)
========== ========== ========== ==========
Net income (loss) per Class A Common Share $ (0.03) $ 0.01 $ (0.11) $ (0.06)
========== ========== ========== ==========
Fully diluted net income (loss) per
Class A Common Share
Weighted average shares outstanding 4,968,713 5,089,454 4,934,577 5,004,505
========== ========== ========== ==========
</TABLE>
Page 4 of 10
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KYZEN CORPORATION
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STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
----------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (567,010) $(283,948)
Adjustments to reconcile net income to net cash provided / (used)
operating activities:
Depreciation and amortization 110,296 156,141
Non-cash interest charge 11,948
Decrease (increase) in accounts receivable (31,818) 1,750
Increase in inventory (187,078) (274,530)
Decrease (increase) in costs and estimated losses on long-term contracts (4,530) 45,968
Decrease (increase) in other current assets (19,771) 4,568
Increase in interest receivable from related parties (26,405) (33,984)
Increase in accounts payable and accrued expenses 223,867 48,870
----------- ---------
Net cash used by operating activities (490,501) (335,165)
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in short-term investments (239,480) 428,647
Purchase of fixed assets (268,959) (176,248)
Purchase of patent rights and related expenditures (13,971) (55,750)
----------- ---------
Net cash provided (used) by investing activities (522,410) 196,649
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of stock 1,435 1,281
Repurchase of Class A Common Stock (59,796)
Payment on note payable (2,962) (3,182)
----------- ---------
Net cash used by financing activities (61,323) (1,901)
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,074,234) (140,417)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,608,890 741,820
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 534,656 $ 601,403
=========== =========
</TABLE>
Cash used for interest payments was $345 and $4,325 for the three and nine
months ended September 30, 1996 and $467 and $8,620 for the three and nine
months ended September 30, 1997 respectively.
Page 5 of 10
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KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Kyzen Corporation ("Kyzen" or the "Company") was incorporated under the laws of
the State of Utah on March 9, 1990. Kyzen was formed to develop environmentally
safe chemical solutions to replace ozone-depleting chlorinated solvents. Kyzen
manufactures and sells specialized chemicals used for industrial cleaning
processes. The Company's operations are located in Nashville, Tennessee and
Manchester, New Hampshire.
The Company's operations are conducted within one business segment. Sales to
customers outside the United States totaled $250,552 and $288,995 for the
quarter and $518,722 and $710,595 for the nine months ended September 30, 1996
and 1997, respectively, representing approximately 15% and 17%, respectively of
net sales for the nine month periods then ended.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS, AND SHORT TERM INVESTMENTS
The Company considers all highly-liquid investment instruments purchased with an
original maturity of three months or less to be cash equivalents. By Company
policy, short-term investments consist primarily of investment grade commercial
paper, direct obligations of the U.S. Government and its agencies, and other
short-term investment funds.
CONCENTRATION OF CREDIT RISK
The Company sells its products to customers involved in a variety of industries
including electronics and computers. Kyzen performs continuing credit
evaluations of its customers and does not require collateral. Historically, the
Company has not experienced significant losses related to individual customers
or groups of customers in any particular industry or geographic area.
REVENUE RECOGNITION
Revenue from products or services is recognized based upon shipment of products
or performance of services. Revenue and profits on long-term construction
contracts are recognized using the percentage of completion method generally
based on costs incurred as a percentage of estimated total costs of the project.
Anticipated losses on long-term contracts are recognized as they become known.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying values of cash, short-term investments, accounts receivable, and
accounts payable approximate fair value due to the short-term maturities of
these assets and liabilities.
INVENTORIES
Inventories are valued at the lower of cost or market with cost determined using
the weighted average, first in, first out (FIFO) method.
INCOME TAXES
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the income tax basis of the Company's assets and
liabilities.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated on a straight-line
basis over the estimated useful lives (2 to 12 years) of the respective assets.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful life of the asset or the lease term.
PATENT COSTS
Patent costs, including the purchase of patent rights and legal costs incurred
related to successful and pending patents, are amortized using the straight-line
method over the useful lives of the patents, not exceeding 17 years.
Accumulated amortization amounted to $42,677 as of December 31, 1996, and
$49,361 as of September 30, 1997. Impairment of the accounting value of the
patent costs is measured on the basis of anticipated undiscounted cash flows
from operations. At December 31, 1996, and at September 30, 1997 no impairment
was indicated.
Page 6 of 10
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KYZEN CORPORATION
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NOTES TO UNAUDITED FINANCIAL STATEMENTS
RESEARCH AND DEVELOPMENT COSTS
The Company is involved in research and development activities relating to new
product development and new uses for its chemicals. The Company expenses
research and development costs as incurred.
PER SHARE DATA
Net income (loss) allocable to Class A Common Share is calculated based on
weighted average shares of Class A Common Stock outstanding. The weighted
average number of shares has been adjusted to reflect as outstanding, for each
period presented using the treasury stock method, all shares issued and issuable
upon the exercise of stock options.
INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements have been prepared without an
audit, and certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted, although the Company believes that
the disclosures herein are adequate to make the information presented not
misleading. These statements should be read in conjunction with the Company's
financial statements for the fiscal year ended December 31, 1996. The results
of operations for the three and nine month periods are not necessarily
indicative of results for the full fiscal year.
In the opinion of management, the accompanying interim financial statements
contain all adjustments necessary for a fair presentation of the Company's
financial position as of September 30, 1997; its results of operations for the
nine month period ended September 30, 1996 and 1997; and its cash flows for the
nine months ended September 30, 1996 and 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 - Earnings per Share ("SFAS
128"). SFAS 128 requires companies with complex capital structures that have
publicly held common stock or common stock equivalents to present both basic and
diluted earnings per share ("EPS") on the face of the income statement. The
presentation of basic EPS replaces the presentation of primary EPS previously
required by Accounting Principles Board Opinion No. 15 ("APB 15"). Basic EPS is
calculated as income available to common shareholders divided by the weighted
average number of shares outstanding during the period. Diluted EPS (previously
referred to as fully diluted EPS) is calculated using the "if converted" method
for convertible securities and the treasury stock method for options and
warrants as prescribed by APB 15. This statement is effective for financial
statements issued for interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. The Company will adopt the provisions of
this statement in the quarter ending December 31, 1997. Management believes the
provisions of this statement will not have a material effect on earnings per
share.
Page 7 of 10
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KYZEN CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
COMPARISON OF QUARTERS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Net sales for the third quarter ended September 30, 1997 from all business
activities increased approximately 10% or $128,042 to $1,475,254, while net
chemical sales increased approximately 27%. These increases are due to
increased sales volume of the Company's chemical cleaning agents to existing
customers and sales to new customers who are converting to the Company's
cleaning chemicals and processes.
Gross profit for the quarter ended September 30, 1997 increased approximately
24% or $153,706 to $801,226 as compared to $647,520 for the same quarter in
1996. This increase is attributable to increased foreign and domestic sales.
Gross profit margins from all business activities increased from approximately
48% to approximately 54% in the third quarter of 1997, reflecting a change in
product mix and sales of higher margin products.
Selling, general, and administrative expenses for the quarter ended September
30, 1997 decreased approximately 3% or $18,833 to $685,908 as compared to
$704,741 for the same quarter of 1996. This decrease reflects reduced spending
on general and administrative expenses during the third quarter of 1997.
Research and development expenses for the quarter ended September 30, 1997
remained constant for the quarters ended September 30, 1996 and 1997,
respectively.
Operating income increased $168,598 from a loss of $159,798 to income of $8,800
for the quarter ended September 30, 1996 and 1997, respectively. This increase
is due to increased sales and decreased expenses in the third quarter of 1997
from the third quarter of 1996.
Interest income for the quarter ended September 30, 1997 decreased 14% to
$19,610 from $22,845 for the third quarter 1996. This $3,235 decrease is due to
lower cash balances during the third quarter of 1997 as a result of the
investment of cash into the operations of the business.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997
Net sales for the nine months ended September 30, 1997 from all business
activities increased approximately 14% or $499,184 to $4,066,317, while chemical
sales increased approximately 20%. These increases are due to increased sales
volume of the Company's chemical cleaning agents to existing customers as well
as sales to new customers who are converting from other cleaning processes and
chemicals to cleaning agents produced by the Company. Sales of equipment,
processes and peripheral systems have increased due to increased sales and
marketing efforts.
Gross profit for the nine months ended September 30, 1997 increased 22% or
$381,145 to $2,140,910 as compared to $1,759,765 in the same nine month period
of 1996. This increase is attributable to increased sales volume of the
Company's cleaning agents, as well as increased sales of equipment, processes,
and peripheral systems. Gross profit margins from all business activities
increased from 49% in the first nine months of 1996 to 53% in the first nine
months of 1997, reflecting a change in product mix and sales of higher margin
products.
Selling, general, and administrative expenses for the nine months ended
September 30, 1997 increased 9% or $173,529 to $2,127,476 as compared to
$1,953,947 for the first nine months of 1996. This increase is due to increases
in selling expenses as the Company expanded its sales efforts, offset by
decreases in general and administrative expenses.
Research and development expenses for the nine months ended September 30, 1997
decreased 21% or $94,515 to $352,326 from $446,841 for the nine months ended
September 30, 1996. This decrease resulted from research and development
expenses in the first nine months of 1996 related to the development of a new
machine product line, that were not expended during the first nine months of
1997.
Operating loss for the nine months ended September 30, 1997 decreased 47% or
$302,131 to a loss of $338,892 from a loss of $641,023 for the nine months ended
September 30, 1996. This decrease is due primarily to the higher sales and
profit margins and decreased research and development expenses in the first nine
months of 1997 over the first nine months of 1996.
Interest income for the nine months ended September 30, 1997 decreased 30% to
$63,099 from $90,302 for the first nine months of 1996. This $27,203 decrease
is due to lower cash balances during the first nine months 1997 as a result of
the investment of cash into the operations of the business.
Page 8 of 10
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KYZEN CORPORATION
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Interest expense for the first nine months 1997 decreased 50% to $8,155 from
$16,289 in the first nine months 1996. The decrease of $8,134 in interest
expense reflects the results of the extinguishment of debt.
FORWARD-LOOKING STATEMENTS
Management has included below certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended. When used,
statements which are not historical in nature, including the words "anticipate,"
"estimate," "should," "expect," "believe," "intend," and similar expressions are
intended to identify forward-looking statements. Such statements are, by their
nature, subject to certain risks and uncertainties. Among the factors that
could cause actual results to differ materially from those projected are the
following: business conditions and the general economy as they affect interest
rates; business conditions as they affect manufacturers and distributors of
chemical raw materials; the federal, state and local regulatory environment;
availability of debt and equity capital with favorable terms and conditions;
availability of new expansion and acquisition opportunities; changes in the
financial condition or corporate strategy of the Company's primary customers;
and the ability of the Company to develop new, competitive product lines.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are the remaining proceeds from its
initial public offering in 1995. The Company's primary uses of funds are
research and development of new product lines, purchase of capital equipment,
and sales and marketing activities.
As of September 30, 1997 the Company had working capital of $1,599,039 compared
to $1,994,994 as of December 31, 1996. This represents a decrease of $395,955
or 20% from December 31, 1996. This decrease resulted primarily from the
funding of operations and purchase of fixed assets.
In March 1996, the Company obtained a line of credit from a commercial bank in
the amount of $500,000 secured by the Company's accounts receivable and a cash
balance. As of September 30, 1997, there was no balance outstanding on this
line of credit.
Cash used by operations of $335,165 in the first nine months of 1997 represented
a $155,336 decrease from cash used by operations of $490,501 during the same
period in 1996. This decrease resulted from smaller losses from operations
offset partially by an increase in inventory.
Cash provided by investing activities of $196,649 in the nine months ended
September 30, 1997 represented a $719,059 increase over cash used by investing
activities during the first three quarters of 1996 of $522,410. This increase
was due to the reduced purchasing of fixed assets and selling of short-term
investments during the first nine months of 1997.
Cash used by financing activities amounted to $1,901 in the nine months ended
September 30, 1997, compared to $61,323 used by financing activities during the
same period of 1996. Approximately $60,000 of Class A Common Stock was
repurchased in 1996 which did not occur in 1997.
The Company anticipates, based on currently proposed plans and assumptions
relating to its operations and expansion plans, that the current cash balances,
together with projected cash flow from operations, will be sufficient to satisfy
its contemplated cash requirements for at least twelve months from the end of
the fiscal year. In the event that the Company's plans change, its assumptions
change or prove to be inaccurate (due to unanticipated expenses, delays, or
otherwise) the Company could be required to seek additional financing from
public or private debt and equity markets prior to such time. There can be no
assurance, however, that these sources will be available to the Company on
favorable terms, and unfavorable markets could limit the Company's ability to
obtain additional financing. Additionally, the Company plans to continue to
investigate potential acquisition candidates that are consistent with the
Company's growth strategies.
The Company's cash requirements for the remainder of 1997 and beyond will depend
primarily upon the level of sales, product development, sales and marketing
expenditures, timing of expansion plans and capital expenditures.
Page 9 of 10
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KYZEN CORPORATION
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
KYZEN CORPORATION
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(Registrant)
Date 10/22/97 /s/ Kyle J. Doyel
----------------------------------- -------------------------------------
(Signature)
Kyle J. Doyel
President and Chief Executive Officer
Date 10/22/97 /s/ Benjamin D. Wolfley
----------------------------------- ------------------------------------
(Signature)
Benjamin D. Wolfley
Treasurer and Chief Accounting Officer
Page 10 of 10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM KYZEN
CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 601,403
<SECURITIES> 99,769
<RECEIVABLES> 869,999
<ALLOWANCES> (10,964)
<INVENTORY> 479,656
<CURRENT-ASSETS> 2,106,785
<PP&E> 1,255,499
<DEPRECIATION> (441,911)
<TOTAL-ASSETS> 3,227,505
<CURRENT-LIABILITIES> 507,746
<BONDS> 0
0
0
<COMMON> 50,068
<OTHER-SE> 2,666,441
<TOTAL-LIABILITY-AND-EQUITY> 3,227,505
<SALES> 4,066,317
<TOTAL-REVENUES> 4,066,317
<CGS> 1,925,407
<TOTAL-COSTS> 1,925,407
<OTHER-EXPENSES> 2,479,802
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (54,944)
<INCOME-PRETAX> (283,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (283,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (238,948)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
