U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2001
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: $0.001
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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. X
The Issuer's revenues for the fiscal year ended February 28, 2001 were
$439,350
As of June 1, 2001, 32,120,349 shares of the Issuer's common stock were
issued and outstanding of which 25,795,632 shares were held by non-affiliates.
As of June 1, 2001, the aggregate market value of shares held by non-
affiliates (based upon the closing price reported by OTC Bulletin Board) was
approximately $3,600,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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Forward-Looking and Cautionary Statements
This Annual Report on Form 10-KSB contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
of 1995, which provides a "safe harbor" for these types of statements. To the
extent statements in this Annual Report involve, without limitation, product
development and introduction plans, the Company's expectations for growth,
estimates of future revenue, expenses, profit, cash flow, balance sheet items,
sell-through or backlog, forecasts of demand or market trends for the
Company's various product categories and for the industries in which the
Company operates or any other guidance on future periods, these statements are
forward-looking and involve matters which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
expressed in or implied by such forward looking statements. These risks and
uncertainties include product development or production difficulties or delays
due to supply constraints, technical problems or other factors; technological
changes; the effect of global, national and regional economic conditions; the
impact of competitive products and pricing; changes in demand; increases in
component prices or other costs; and a number of other risks including those
identified by the Company throughout Item I and elsewhere in this report, and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications.
The Company assumes no obligation to update forward-looking statements.
Risk Factors
The following risk factors are inherent in and affect the business of the
Company:
1. Ability to Continue as a Going Concern. As a result of the Company's
financial condition, the Company's independent auditors have included an
explanatory paragraph in their report on the Company's financial statements
for the year ended February 28, 2001, with respect to the Company's ability to
continue as a going concern. The Company's ability to continue in the normal
course of business is dependent upon its access to additional capital and the
success of future operations. Uncertainties as to these matters raised
substantial doubt about the Company's ability to continue as a going concern
at the date of such report. The net loss for the year ended February 28, 2001
was $1,114,855. In the past the Company has been able to receive funding
necessary for its operations through the issuance of convertible debt and
common and preferred stock. The Company anticipates a net loss for the year
ended February 28, 2002, and with a cash balance of $62,022 at February 28,
2001 and expected cash requirements for the coming year, there is substantial
doubt as to the Company's ability to continue operations.
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The Company is attempting to improve these conditions by way of royalty
revenues generated from licensing agreements, financial assistance through
collaborative partnering agreements, issuances of additional equity, debt
arrangements, and limited direct product sales. Management believes that
either appropriate revenues will be generated and future product sales and
royalties will result from these opportunities, or the Company will be able to
raise sufficient funds through debt or equity financings to allow the Company
to continue operations over the next fiscal year; however, no assurances can
be given that sufficient revenues will be generated or additional funding will
become available.
2. History of Operating Losses; Uncertainty of Future Profitability. The
Company has never operated at a profit. The Company has sold a limited number
of products and has generated a limited amount of revenue from its operations.
Although the Company has instituted aggressive cash management practices and
severely reduced operating costs, even with the prospects of royalty revenue
and limited direct sale of products, there can be no assurance that the
Company will generate revenue from its operations sufficient to achieve
profitability within its coming fiscal year.
3. Future Capital Requirements and Negative Cash Flow. The Company's
operations to date have consumed substantial amounts of cash. The negative
cash flow from operations is expected to continue during the immediate future.
The Company anticipates a need to raise additional funds in order to conduct
its operations, develop its products and subsequently to establish
manufacturing and marketing licenses and contracts for its products. The
Company may seek funding through public or private financing, including equity
financing, and through collaborative arrangements. Adequate funds, whether
obtained through financial markets or from collaborative or other arrangements
with corporate partners or other sources, may not be available when needed or
on terms acceptable to the Company and may result in significant dilution to
existing stockholders. Insufficient funds may require the Company to delay,
scale back or eliminate some or all of its research and product development
programs, impacting the ability to license these products to third parties for
commercialization. The Company's future cash requirements will be affected by
the results of research and development, results of relationships with
corporate collaborators, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances, the
regulatory process and other factors.
4. Lengthy Revenue Cycle. Currently, the Company is focusing the
majority of its efforts and financial resources on the ongoing consumer
product development and licensing of its food processing and laundry system
products and technologies as a means of generating revenue. Installing and
integrating new laundry systems requires substantial investments by the
Company's potential licensees and customers. In addition, customers often
require a significant number of product presentations and demonstrations, as
well as substantial interaction with the Company's senior management, before
reaching a sufficient level of confidence in the system's performance
characteristics and compatibility with the licensee's or customer's target
applications. Accordingly, the Company's products and any licensing
arrangements typically require lengthy sales cycles during which the Company
may expend substantial funds and management time and effort with no assurance
that revenues will result.
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5. Rapid Technological Change; Dependence on Product Development. The
industries in which the Company is engaged are characterized by rapid
technological change and evolving industry standards. As a result, the
Company must continue to enhance its existing products and develop and
manufacture new products and upgrades with improved capabilities, which has
required and will continue to require substantial investments in research and
development by the Company to advance a number of state-of-the-art
technologies. Continuous investments in research and development also will be
required to respond to the emergence of new technologies. The failure to
develop and market new products, to enhance existing products and arrange
appropriate licenses for the products, would have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the Company's competitors can be expected to continue to develop and
introduce new and enhanced products, any of which could cause a decline in
market acceptance of the Company's products or a reduction in the Company's
royalty streams as a result of intensified price competition.
The Company's potential success in developing and selling new and enhanced
products depends upon a variety of factors, including accurate prediction of
future customer requirements, introduction of new products on schedule,
cost-effective manufacturing and product performance in the field. The
Company's new product decisions and development commitments are made in part
by the product licensee and must anticipate performance to satisfy the
requirements of the market. Failure to predict accurately customer
requirements and to develop new generations of products to meet those
requirements would have a sustained material adverse effect on the Company's
business, financial condition and results of operations. New product
transitions could adversely affect sales of existing systems. Product
introductions could contribute to quarterly fluctuations in operating results
as orders for new products commence, and orders for existing products or
enhancements of existing products fluctuate.
6. Uncertain Market Acceptance of Products. There can be no assurance that
the products created for the Company's customers will gain any significant
market acceptance and market share even if required regulatory approvals are
obtained. Market acceptance may depend on a variety of factors, including
educating consumers and customers regarding the use of a new product or
procedure or overcoming objections to certain effects of the product. Market
acceptance and market share also are affected by the timing of market
introduction of competitive products. Accordingly, the relative speed with
which the Company's customers can develop products, gain regulatory approval
and reimbursement acceptance, and supply commercial quantities of the product
to the market are expected to be important factors in market acceptance and
market share. The failure to gain market acceptance of products could have a
material adverse effect on the Company's business, results of operations, and
financial condition.
7. Design and Manufacturing Process Risks. While the Company has
experience in designing and manufacturing products, the Company may still
experience technical difficulties and delays with the design and manufacturing
of its products. Such difficulties could cause significant delays in the
production of products by third party licensees or the Company and have a
material adverse effect on the Company's revenues. In some instances, payment
by a manufacturing customer is dependent on the Company's ability to meet
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certain design and production milestones in a timely manner. Also, some major
contracts can be canceled if purchase orders there under are not completed
when due. Potential difficulties in the design and manufacturing process that
could be experienced by the Company include difficulty in meeting required
specifications, difficulty in achieving necessary manufacturing efficiencies,
and difficulties in obtaining materials on a timely basis. Such design and
manufacturing difficulties could have a material adverse effect on the
Company's business, financial condition and result of operations.
8. Expansion of Marketing Activities; Limited Distribution. The Company
currently has no domestic direct sales force. The Company has already and
anticipates that it will continue to negotiate marketing and or manufacturing
licenses in which the Company will rely on the existing sales and marketing
capabilities of its partners in order to fully cover its target markets,
particularly as additional proprietary devices become commercially available.
There can be no assurance that the Company will be able to compete effectively
in attracting or obtaining a marketing partner. There can be no assurance that
the Company or its potential marketing partner will be successful in marketing
or selling the Company's services and products. The Company's ability to sell
its devices in certain areas may depend on alliances with independent
manufacturing representatives.
9. Product Recalls. If a device that is designed by the Company is
found to be defective, whether due to design or manufacturing defects or
improper use of the product, the device may need to be recalled, possibly at
the Company's expense even though the Company may not be the manufacturer.
Furthermore, the adverse effect of a product recall on the Company might not
be limited to the cost of a recall. For example, a product recall could cause
a general investigation of the Company by applicable regulatory authorities as
well as cause other customers to review and potentially terminate their
relationships with the Company. Recalls, especially if accompanied by
unfavorable publicity or termination of customer contracts, could result in
substantial costs, loss of revenues, and a diminution of the Company's
reputation, each of which would have a material adverse effect on the
Company's business, results of operations, and financial condition.
10. Risk of Product Liability. The manufacture and sale of products
entails an inherent risk of product liability although it is the Company's
intent to pass that liability on to its manufacturing and marketing licensees
when appropriate. The Company does maintain product liability insurance with
limits of $1,000,000 per occurrence and $1,000,000 in the aggregate. There
can be no assurance that such insurance is adequate to cover potential claims
or that the Company will be able to obtain product liability insurance on
acceptable terms in the future, or that any product liability insurance
subsequently obtained will provide adequate coverage against all potential
claims. A successful claim brought against the Company in excess of its
insurance coverage, or any material claim for which insurance coverage was
denied or limited, could have a material adverse effect on the Company's
business, results of operations and financial condition. Additionally, the
Company generally provides a design defect warranty and in some instances
indemnifies its customers for failure to conform to design specifications and
against defects in materials and workmanship. While there have been no
warranty claims to date, any substantial claim against the Company under such
warranties or indemnification could have a material adverse effect on the
Company's business, results of operations and financial condition.
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11. Significant Industry Competition. The markets for the products the
Company currently offers and will offer in the future, are and will be, highly
competitive. Numerous manufacturers and distributors, and retailers compete
for customers throughout the United States and Internationally in these
industries. Many of the Company's competitors are substantially larger and
more experienced than the Company, have longer operating histories and have
materially greater financial and other resources than the Company. There can
be no assurance that the Company will be able to compete successfully with its
more established and better capitalized competitors.
12. Government Regulation. All of the Company's operations are subject to
a variety of governmental regulation just as all companies are subject to
governmental regulation. The Company's food processing and safety systems are
regulated by the United States Department of Agriculture ("USDA") and its Food
Safety Inspection Service ("FSIS") division as well as the Food and Drug
Administration ("FDA") and other federal, foreign and state regulatory
agencies. Domestic and foreign government regulatory and certification
authorities may delay or prevent product introductions and may require
additional studies or tests prior to product introduction.
13. Patent Protection. The Company's patent and trade secret rights are
of material importance to the Company and its future prospects because the
Company relies on these rights to protect proprietary technology. Patents
granted may not provide meaningful protection from competitors. Even if a
competitor's products were to infringe patents owned by the Company, it would
be costly for the Company to enforce its rights in an infringement action and
would divert funds and other resources from the Company's operations.
Furthermore, no assurance can be given that the Company's products or
processes will not infringe any patents or other intellectual property rights
of third parties. If the Company's products or processes do infringe the
rights of third parties, no assurance can be given that the Company can obtain
a license from the intellectual property owner on commercially reasonable
terms or at all.
The Company also relies on trade secrets that it seeks to protect, in part,
through confidentiality agreements with employees, consultants and its current
and potential customers. No assurance can be given that these agreements will
not be breached, that the Company will have adequate remedies for any breach,
or that the Company's trade secrets will not otherwise become known to or
independently developed by competitors. As the Company intends to enforce its
patents, trademarks and copyrights and protect its trade secrets, it may be
involved from time to time in litigation to determine the enforceability,
scope and validity of these rights. Any such litigation could result in
substantial cost to the Company and diversion of effort by the Company's
management and technical personnel.
14. Dependence Upon Key Personnel. The Company's success is dependent
upon numerous factors including the active and continued participation of its
management team. The loss of services of current management, for any reason,
would have a negative impact on the future success of the Company. The
Company has no key man insurance on its officers and directors. Furthermore,
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there can be no assurance that the Company will be able to continue to attract
and retain the qualified personnel necessary for the development of its
business. The Company's continued expansion into areas and activities
requiring additional expertise, such as regulatory compliance, manufacturing,
monitoring and distribution of ozone washing systems for the food industry is
expected to place increased demands on the Company's resources. The Company's
activities are expected to require additional personnel with expertise in
these areas and the development of additional expertise by existing personnel.
The failure to acquire or retain such personnel, or develop such expertise
could adversely affect the prospect for the Company's success.
15. Dividends. The Company has never paid a dividend on its Common Stock
and there can be no assurance that it will ever pay a dividend on its Common
Stock. Any future cash dividends will depend on earnings, if any, the
Company's financial requirements and other factors. The Company presently has
no intention of paying cash dividends but rather intends to reinvest all
available residual cash flow generated into the operations of the business.
16. Authorization of Preferred Stock and Anti-Takeover Effect Risk. The
Company's Certificate of Incorporation authorizes the issuance of "blank
check" preferred stock with such designations, rights and preferences as may
be determined from time to time by the Board of Directors. Accordingly, the
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
that could adversely affect the voting power or other rights of the holders of
the Company's Convertible Preferred Stock and Common Stock. Also, the voting
power and percentage of stock ownership of the shareholders of the Company's
outstanding capital stock can be substantially diluted by such preferred stock
issuance.
In addition, the issuance of such preferred stock may have the effect of
rendering more difficult or discouraging an acquisition of the Company or
changes in control of the Company. There can be no assurance that the Company
will not issue preferred stock in the future. Other than the authorization of
"blank check" preferred stock, the Company does not have any other provisions
in the Company's Certificate of Incorporation, Stock Option Plans, and/or
Employment Agreements, which may have an anti-takeover effect. The issuance
of preferred stock with anti-takeover provisions may discourage bidders from
making offers at a premium to the market price. In addition, the mere
existence of an anti-takeover device may have a depressive effect on the
market price of the Company's stock.
17. Research and Product Development Test Results. The Company has
achieved a significant reduction in the incidence of certain bacteria (E.coli
and Salmonella) and other pathogens in its laboratory and product development
tests of its sterilizers, produce wash systems. In addition, the Company has
achieved significant operations efficiencies, including reductions in chemical
usage, hot water usage, power usage, and enhanced cleaning results in on-site
tests of its ozone laundry systems. These results were obtained in controlled
research and development environments and/or on-site tests conducted under
somewhat controlled circumstances. While the Company believes that the test
results are accurate, comparable results may or may not necessarily be
obtained when the technology and products are used in a consumer or industrial
environment.
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18. General Factors. The Company's business may be affected from time to
time by such matters as changes in general economic, industrial and
international conditions; change in tax laws and tax rates, changes in prices
and costs; and other factors of a general nature which may have an adverse
effect on the Company's business. The Company currently does not have a
disaster recovery plan in effect, and is vulnerable to damage from fire,
floods, earthquakes, power loss, telecommunication failures and other events.
A disaster could severely harm the business if the business is interrupted for
an indeterminate length of time.
PART 1
ITEM 1. Description of Business
General
Cyclopss Corporation (the "Company") historically has been engaged in a
fully integrated business model providing the design, manufacturing, assembly,
sales and installation of ozone application technologies and processes. The
Company's principal technology provides an alternative to address food safety
and sanitation concerns and laundry disinfection and efficiency. Ozone
technology is proven to reduce microbial counts on most products without the
potential for the development of immunity or resistance by the organism and
without leaving residual chemical contaminants. Laundry systems using ozone
technology enable users to reduce costs associated with labor, water, energy,
chemical, textile replacement and wastewater. The Company recently has
changed its business model to include the licensing of proprietary
technologies to partners who have resources and infrastructures better suited
to successfully commercialize certain of the Company's technologies or
products. The Company intends to reduce the historical emphasis on the fully
integrated model of design, manufacturing, assembly and sales of applications
of its ozone technology to a model that emphasizes licensing, partnering or
creating strategic alliances with other entities whereby the Company
contributes or licenses its proprietary technologies. As an example of the
revised strategy, in fiscal 2000 the Company entered into a Technology
Licensing Agreement with Consolidated Stills and Sterilizers of Boston, MA.
The agreement licenses the ozone medical instrument sterilization technology
developed and patented by the Company for an initial licensing fee and future
royalties. The Company anticipates negotiating like arrangements on other of
its proprietary technologies when the circumstances are beneficial. Cyclopss
will continue to engage in all integrated functions required in the synthesis,
manufacturing and marketing of its specialty chemical products.
NOTE: Ozone is a gas that is created naturally in the atmosphere by
ultraviolet light or lightning. In the process the oxygen molecule (O2) is
split into two atoms of oxygen (O) that then combine with another oxygen
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molecule to form ozone molecule (O3). This is an unstable molecule that
reverts to regular oxygen within a short time period. Ozone is one of the
most powerful oxidants, sterilants, and deodorants known and can be created
artificially and applied to beneficial use through a technological process.
The Company has two active wholly-owned subsidiaries:
Cyclopss Medical Systems, Inc.
Cyclopss Biochemical Corporation
and three inactive wholly owned subsidiaries:
Eco-Pure Food Processing System ("Eco-Pure"
Cyclopss Wasterwater Systems, Inc. ("Wastewater")
Cyclopss Laundry Systems, Inc. ("Laundry")
Historically, revenues and cash flow from operations have not been
sufficient to support the significant direct and allocated overhead costs
associated with the Company's efforts to operate all of its five subsidiaries
and their integrated operations as separate business units. These costs
included substantial research and development, design, manufacturing,
installation, services, sales, personnel, organizational and other costs
associated with a fully integrated business model. Accordingly, management has
decided to combine the operations of the Eco-Pure, Wastewater and Laundry
Systems subsidiaries under the management and operations of the Medical
Systems subsidiary. The Eco-Pure, Wastewater and Laundry subsidiaries remain
as legal entities, but to conserve cash and minimize management involvement,
all operations, product development, sales, management and etc. of these three
subsidiaries are now combined under the Medical Systems subsidiary.
Management believes that its new business model provides for more efficient
operations that will conserve cash and management time. Management also
believes this action will promote more rapid market entry and acceptance of
its technology through the utilization of the strengths and existing
infrastructures of other industry providers wherein the Cyclopss component
becomes an incremental cost of the product's sale and support. This model is
designed to allow the Company access to revenues generated through licensing
and royalty streams, while keeping the overhead low and the valuable human
resources focused.
Cyclopss Medical Systems, Inc.
The Company has developed technologies and products it believes may be
effective alternatives to current methods of sterilizing medical instruments
and devices. This subsidiary historically has offered two product lines: Ster-
O-Zone and Sterox. Ster-O-Zone is an ozone gas sterilizer and Sterox is a
patented liquid sterilant/disinfectant.
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The Company spent approximately six years researching, developing and
constructing pre-production prototypes of the Ster-O-Zone unit. Research and
development was suspended in fiscal 1998 due to budget and cash flow
constraints. The Company, on January 6, 1995, submitted a 510(k) Premarket
Notification application to the Food & Drug Administration ("FDA"). The FDA
has since accepted the application for review and has begun the customary
process of requesting additional information for evaluation. In late fiscal
2000, the Company entered into a technology licensing agreement with
Consolidated Stills and Sterilizers of Boston, MA. The agreement licenses the
ozone medical instrument sterilization technology developed and patented by
the Company for use in Ster-O-Zone 100, which is the Company's ozone based gas
sterilization technology. The terms of the license agreement include an
initial licensing fee of $100,000 and ongoing royalties of 3% of gross
revenues, once Consolidated Stills and Sterilizers has completed development
and is generating revenue from the Company's technology. Consolidated Stills
and Sterilizer is a well-known and respected developer, manufacturer and
distributor of medical sterilizers for over 50 years, with a sales and
distribution organization that encompass North America and over 60 countries
worldwide. Also during fiscal 2000, Consolidated Stills and Sterilizers
contracted with the Company for $38,500 to produce an eight cubic foot
prototype ozone sterilizer using Consolidated Stills and Sterilizers' standard
model sterilization vessel. This prototype serves as an initial test bench for
development and validation of Consolidated Stills and Sterilizers' new product
application to FDA.
The Company recorded $100,000 in deferred revenue and $38,500 in sales for
year-end February 29, 2000, related to its transaction with Consolidated
Sills. Consolidated Sills is finalizing the application of the Company's
technology to their commercial products. Moreover, the agreement with
Consolidated Sills allows for that Company to offset any royalty payments
against the first $100,000 license payment. Accordingly, the Company has not
yet recorded the initial $100,000 in deferred revenue as revenue and no
royalties have been recorded.
As stated above, the Company has combined the operations of its three inactive
subsidiaries, Eco-Pure, Wastewater and Laundry Systems under the management
and operations of the Medical Systems subsidiary. These combined operations
also generated $188,714 in sales for year ended February 28, 2001, for other
miscellaneous products and services the Company currently offers, including an
ozone washing system to the United States Navy and certain consulting services
with respect to food cleaning systems.
The Company was awarded a patent on Sterox and anticipates further
development and testing on this product in the future. The Company also is
considering the possibility of co-venturing additional development and
marketing of Sterox with a strategic partner.
The Company believes that certain conditions exist which creates an
opportunity for new alternatives to current sterilization methods:
* Increased public and professional concern regarding the transmission of
infectious diseases;
* Competitive pressures in the health care industry, which will require
increased cost containment and productivity;
* Increased decentralization of the delivery of patient care, including many
procedures being performed in non-hospital facilities that do not have ready
access to central sterilization services; and
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* Greater environmental concern regarding the handling and disposal of toxic
waste, and the residuals resulting from traditional sterilization
methodologies.
Cyclopss Biochemical Corporation
In 1994, the Company acquired Chem BioChem Research, ("CBC") a specialty
chemical company. This wholly-owned subsidiary has developed approximately
350 products for sale to commercial and research institutions and offers
contract research and development services.
The Biochemical division continues to produce and market specialized
chemicals and research and development services to scientists and chemical
companies around the world. Catalog sales to retail distributors and
individual researchers continues to be a vital element of our business. The
Company recorded $250,636 and $378,861 in sales for Cyclopss Biochemical
Corporation for years end February 28, 2001and February 29, 2000,
respectively.
The manufacturing facilities used by this subsidiary do not currently meet
Good Laboratory Practices (GLP) or Good Manufacturing Practices (GMP);
therefore, the chemical compounds produced therein are not sold for use in
human trials or studies. Instead, most are sold through larger chemical
distribution companies for research purposes only.
Research and Development Activities
Cyclopss' research and development program is driven by a strategic plan
and corporate partners. Objectives of the research with respect to
applications of ozone technology, now combined under the Medical Systems
subsidiary, are to develop new product concepts, demonstrate ozone's
disinfection efficacy and determine the conditions for ozone's safe and
optimum application. Cyclopss BioChem specialty chemical research is focused
on synthesizing new products for catalog sales and new proprietary products
and procedures for specific customers.
Ozone research is conducted on new product development identified by
customers or by Cyclopss, that represents our market focus - consumer products
and commercial medical, food and laundry systems. For many customer research
and development projects, Cyclopss has signed non-disclosure agreements that
prevent us from revealing the customer's name, location, and, in some cases,
their product. In determining the efficacy of ozone, indicator microorganisms
are used to monitor the effect of ozone compared to current practices. Once
biocidal efficacy has been demonstrated and the ozone delivery process
optimized, an engineering model prototype for an ozone product is delivered to
the customer for them to manufacture and a royalty arrangement is negotiated.
Alternatively, the customer is presented with the research results along with
a proposal for a pilot project to be implemented in their facility.
Since implementation of the new business model to perform contract research
and development and license ozone technology, Cyclopss has developed several
products for customers including the Otres Toothbrush and Sponge Sanitizers
and a disinfection system for a medical device.
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The toothbrush and sponge sanitizer was originally developed in
collaboration with Otres, LLC, a marketing and product development partner.
However, Otres has not performed as originally envisioned in our license
agreement. Otres has experienced problems manufacturing the products and has
failed to reach expected production levels. Cyclopss continues to seek
alternatives to realize the full revenue potential offered by the Otres
products.
The medical device manufacturer, which is co-developing the disinfection
system for a medical device, has recently completed building "alpha" units
incorporating Cyclopss' ozone technology. This product has an anticipated
market release at the end of 2001. We are presently in negotiations with the
medical device company for manufacturing and licensing rights related to the
ozone subsystem of the device.
Contract research and development projects contributed directly to
$87,847 and $276,909 of the total revenue reported for the Company for the
years ended February 28, 2001 and February 29, 2000, respectively. Technical
accomplishments this past year in Research and Development include:
Design and development of a low-cost ozone generator for consumer
appliances: Cyclopss redesigned and optimized an ozone generator with our
Taiwan partner, Rich Electric. The new generator has become the basis for a
number of consumer products utilizing ozone technology involving products for
deodorizing fabrics, self-sanitizing appliances, purifying water and washing
food and surfaces.
Design and development of a Modular Eco Wash laundry system for the US
Navy: Cyclopss developed a modular system in partnership with Alliance Laundry
Systems and Proctor & Gamble. The design is based on the successful ozone
laundry system built in fiscal 2000 to retrofit two existing washer/extractors
at the Navy Public Works Center in San Diego. The first modular system was
built and installed in the Pearl Harbor Public Works Center in Hawaii. A
feature of the new modular design is the capability to remotely monitor and
control operations. Alliance Laundry Systems provides the 125-lb
washer/extractor and the 175-lb dryer/tumbler modified for ozone application,
while Cyclopss provides the ozone technology that enhances the efficacy and
efficiency of the washing system, and Proctor and Gamble formulated an ozone
compatible surfactant to use in the ozone wash formula. Tests indicate that
industrial rags cleaned using the ozone process are significantly cleaner as
measured by absorbency. The petroleum smell is nearly eliminated and the rags
are more pliable. The ozone process also produced significantly less water
pollution and 27% lower overall operating costs. These savings result from
the elimination of the need for hot water, reductions in water use, shorter
cycle times, and less laundry chemicals. The US Navy has approximately 40
sites that are potential customers for the Eco Wash System.
Design and development of the Kitchen Companion product line: Cyclopss
worked with Rich Electric to develop a counter-top appliance to wash fruits,
vegetables, and poultry. Efficacy to 99% was achieved for reducing the
incidence of E.coli and Salmonella bacteria on inoculated produce and poultry.
An engineering model has been developed and production planning is underway.
12
The Company is seeking partners to manufacture, commercialize and distribute
this product. An under-counter water purification system also has been
developed that provides >99.998 reduction of Pseudomonas within approximately
five minutes. The system can provide bottled-water quality water or ozonated
water for treating produce that can achieve 99% reduction of pathogens on
produce in a one-minute spray treatment. .
Applications for Kobelco D-Ozone System: Cyclopss was selected by Schreck,
Inc. to be the exclusive distributor for the D-Ozone system for North America.
Unlike conventional methods, the D-Ozone system creates dissolved ozone
directly in water through an electrolysis process. No high-concentration
ozone gas is produced that subsequently has to be dissolved in water.
Cyclopss developed a design for a turkey carcass washer and demonstrated 99%
reduction of E.coli and Salmonella bacteria. This system application
addresses a major problem with Salmonella contamination in ground turkey and
will be tested in 2001 by a major turkey producer.
Biochemical's research and development falls into three categories:
established product improvement; new product development; and contract
research and development. The Company's staff routinely attempts to develop
improvements in synthesis procedures of established chemical products. New
biochemical products appear nearly every day in the scientific community. The
Company's goal is to recognize those with the highest commercial potential and
to develop economically viable syntheses for these materials. Contract
research and development is a major focus of the Biochemical Corporation.
These efforts include the design and implementation of synthesis strategies,
revision and development of customer processes, and scale-up of reaction
sequences.
Cyclopss' research and development organization consists of a
microbiologist, two organic chemists, and one electrical engineer under the
direction of the Vice President of Research and Development. Two of the staff
earned their Ph.D. in physics, and one in Chemistry. The Company incurred
$67,055 in research and development expenses during the fiscal year ended
February 28, 2001 compared to $131,050 during the fiscal year ended February
29, 2000. The reduction of research and development expenses was due to cash
constraints together with the redirection of the Company's efforts to find
strategic partners willing to fund the majority of the Company's research and
development efforts and license the developed application under royalty
arrangements.
Manufacturing
The Company's strategy is that its proprietary technologies become an
integral part of products produced, manufactured, and commercialized by its
strategic partners. The Company currently assembles and tests each of its
proto-type products in-house or at the time of assembly in the field. In
certain instances, the Company relies on outside vendors for various parts and
subassemblies and does not intend to be a basic manufacturer. The Company
intends to outsource all final manufacturing activities to third parties. The
Company is looking at technology partnerships similar to the one currently
negotiated with Proctor & Gamble and Otres, Inc. to handle all the
manufacturing and final commercialization that will allow the Company to
receive royalties from the sale of consumer products that are produced and
manufactured by third parties.
13
Competition
The Company's ozone-based food safety systems and laundry systems compete
directly with chlorine and other chemical and physical treatments. The
Company's ozone systems have shown the ability to reduce operating costs,
including water, power and chemical usage as well as residual chemical
contamination that many other food washing and laundry systems generate.
Chlorine based systems are used extensively throughout food processing and
textile washing. However, scientific research demonstrates that chlorine is
becoming less effective in destroying certain microorganisms, such as
crytosporidium. Furthermore, extensive use of chlorine has caused ground water
contamination in certain areas. Other competitive treatment methods in food
are: irradiation, propylene oxide, ethylene oxide, methyl bromide,
pasteurization and steam pasteurization.
The Company's specialty consumer products for sterilization of toothbrushes
and kitchen sponges are unique products with limited markets and fragmented
competition. The Company believes that there may be other competitors
developing similar products and processes.
The Company's laundry products systems are in competition with several
small producers of ozone washing systems. These competitors include
International EcoSciences, Guestcare, and Envirozone. The Company believes
that each of these competitors also are small, early stage enterprises. The
Company believes that its research and development activities over the past
nine years as well as its newly adopted business model will gain it a
competitive advantage in those markets targeted.
The Company's specialty chemicals are unique products with limited markets
and fragmented competition, as well. The Company competes directly with many
large chemical laboratories, most if not all of which have significantly
greater resources, laboratory equipment, technology and products offerings.
Proprietary Technology, Patents, and Trademarks
The Company has developed technologies that it believes will enable it to
offer effective ozone laundry and food washing systems, as well as support
product development in certain other disinfection and sterilization
applications. The Company's gas sterilization technology has been developed
around an ozone generation technology acquired by the Company in January 1994.
Utilizing such ozone generation technology as the "core" for the development
of the Company's ozone products, the Company has engineered technology
applications with various components and modules. The Company has and will
continue to seek patent protection for various components, technologies and
systems it develops when appropriate, and will attempt to protect other
components, technologies and systems through trade secret protection.
Patent Applications. To date, the Company has filed sixteen patent
applications with the United States Patent and Trademark Office. As of June
14
1, 2001, thirteen of these patents have been granted, three of the patents are
still pending and one of the submissions has been denied by the Patent Office
and the Company has determined not to resubmit such application. The patent
submissions relate to various component parts or technologies used in the
Company's sterilization, laundry products, food processing, consumer products,
and chemical compounds.
The twelve patents granted and grant dates are identified as shown in the
following list:
Title Grant Date
1. Method for Producing Ethynylated Aromatic Compounds. .05-12-1987
2. Laundry Transfer and Counting Apparatus. . . . . . . .07-18-1989
3. Ozone Generator. . . . . . . . . . . . . . . . . . . .09-08-1992
4. Ozone Sterilization System Secondary Safety Chamber. .11-30-1993
5. Limited Restriction Quick Disconnect Valve . . . . . .01-25-1994
6. Ozone Sterilization System Spent Agent Destruct. . . .08-02-1994
7. Ozone Sterilization Vapor Humidification Component . .09-06-1994
8. Fluid Chemical Biocide . . . . . . . . . . . . . . . .04-04-1995
9. Laundry Ozone Injection System . . . . . . . . . . . .05-06-1997
10. Cold Water Ozone Disinfection. . . . . . . . . . . . .11-30-1997
11. Cold Water Wash Formula. . . . . . . . . . . . . . . .12-28-1999
12. Cold Water Disinfection of Foods . . . . . . . . . . .03-13-2001
Foreign patent proceedings, where applicable, have been initiated for
patents that have been granted in the United States.
The currently pending patent applications are identified and dated as
shown in the following list:
Title Application Date
1. Porous Material Disinfection Method. . . . . . . 01-14-2000
2. Method for optimizing ozone production in a corona
discharge ozone generator . . . . . . . . . . . 01-14-2000
3. Small Water Ozonation System. . . . . . . . . . .12-21-2000
Trademarks. The Company has filed trademark applications with the United
States Patent and Trademark Office for the trademarks "STER-03-ZONETM", "Eco-
PureTM", "VAC Soil Counting SystemTM", Eco-WashTM". All of these applications
have been allowed but the trademarks have not yet been issued. Other
trademark applications such as "Retr-O-ZoneTM", "SteroxTM", "Ozo-cleanTM" and
"Zono-chemTM" have been abandoned or rejected. Additional trademark
applications have been made for the "Ozone For The EarthTM", "Eco-PureTM" and
ozone symbol for its marketing programs.
All of the Company's intellectual properties as outlined above, were used
as collateral in the issuance of the Secured Convertible Loan financing the
15
Company received from Procter & Gamble in February 2000. There is additional
information regarding the terms of this transaction under Liquidity and
Capital Resources.
Employees
The Company and its subsidiaries employed ten full-time employees as of June
1, 2001. None of the Company's employees are covered by a collective
bargaining agreement. The Company has no retirement or post-employment
benefit plans for its employees. All of the Company's employees are located
in the United States.
ITEM 2. Properties
The Company leases 9,150 square feet of office and laboratory space at 3646
West 2100 South, Salt Lake City, Utah 84120, of which 5,600 square feet have
been subleased to an unrelated third party. The subleasee pays approximately
$2,662 per month for use of the sublease space. The master lease expires
December 31, 2001 and requires monthly lease payments of $5,607 plus
additional assessments for property maintenance and management fees. A wholly
owned subsidiary of the Company, Cyclopss Biochemical, occupies approximately
2,750 square feet with the administrative offices utilizing approximately 800
square feet. The Company has a one-year option to renew the lease with a five
percent (5%) rent increase, which it does not intend to renew on the 800
square feet of administrative space. The current commercial real estate market
is overbuilt at the current time and Management believes more suitable and
less expensive space can be located. Under the new business model, the
Company's current facilities exceed current needs of the Salt Lake City
administrative office. The Company, however, will negotiate a new lease on the
laboratory space for Cyclopss Biochemical due to the fact that the costs of
relocating and rebuilding the lab facility are prohibitive. In the event that
the Company's administrative business operations expand in the future, it
anticipates that it will be able to find suitable additional facilities at
reasonable and competitive rates.
In addition to the Salt Lake location, the research and development
division of the Company, under the direction of Durand Smith, currently leases
approximately 2,000 square feet of space in Albuquerque, New Mexico. The lease
expires February 2002 and has a one-year option to renew the lease with a five
percent (5%) rent increase. It requires monthly lease payment of $1,300.
ITEM 3. LEGAL PROCEEDINGS
Mifal Klita, et al. 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 Securities and
Exchange Commission 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
16
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, in September 1999, entitled Mifal Klita to
the conversion of the Series "B" preferred shares into unrestricted common
stock of the Company plus shares for legal fees and other provisions stated in
the original agreement. These additional costs of $853,000 were recorded as
legal settlement expense in the fiscal 2000 consolidated Statement of
Operations. The Company negotiated a final cash settlement of $250,000 in
January 2000 with Leitinger Corporation another holder of the same Series "B"
preferred. The Company paid this obligation in full on April 17, 2000.
The Company is not aware of any other legal actions or outstanding or
asserted or unasserted claims against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
An Annual Meeting of the Company's shareholders was held August 28,
2000. The Meeting was held to consider and vote upon election of directors.
1. Election of directors:
Votes for Votes Against Abstain
William R. Stoddard 18,159,352 17,100 78,984
Michael J. Lakis, Jr. 18,158,522 55,500 78,984
Steve Sarich, Jr. 18,164,058 12,364 78,984
Durand M. Smith 18,157,222 19,200 78,984
Richard C. Nelson 18,173,822 2,600 78,984
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Market for Common Stock
The Company's common stock is currently listed on the OTC Bulletin Board
under the symbol "OZON". There is limited trading activity in the Company's
common stock and the quotations set forth below reflect such limited activity.
There can be no assurance that stock quotations will not fluctuate greatly in
the future in the event trading activity increases or decreases. The
information contained in the following table was obtained from the Bulletin
Board Stock Market and from various broker-dealers and shows the range of
representative trading prices for the Company's common stock for the periods
indicated. The prices represent quotations between dealers and do not include
retail mark up, mark down or commission, and do not necessarily represent
actual transactions:
17
Year Ended Year Ended Through
February 29, 2000 February 28, 2001 June 1, 2001
High Low High Low High Low
First Quarter $ 0.38 $ 0.09 $1.50 $0.27 $ 0.19 $ 0.09
Second Quarter 0.34 0.16 0.80 0.25
Third Quarter 0.22 0.06 0.48 0.11
Fourth Quarter 0.73 0.06 0.25 0.11
Holders
The number of record holders of the Company's common stock as of June 1,
2000 was 432. The Company believes the actual number of beneficial
shareholders exceeds 1,800. There are numerous shareholders that hold the
Company's common stock in the "street name" of their various stock brokerage
houses.
Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying cash dividends in the foreseeable future.
The Company has paid interest and dividends in the form of additional shares
of common stock to Procter & Gamble and other convertible debt and preferred
stock holders as required by the preferred stock and debt agreements. It is
the present intention of management to utilize all available funds for the
development of the Company's business and to not pay any cash dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
General
Cyclopss Corporation is primarily engaged in ozone application
technologies and processes. The Company believes that its technologies and
product lines offer cost effective, energy efficient, environmentally benign
alternatives for cleaning and disinfection products and systems. We believe
our technologies are easily scalable from consumer appliances up through
industrial systems. The products and technologies address certain food safety
concerns, particularly microbial reductions on poultry, fruits and vegetables.
Additional products offered by the Company enable manufacturers to eliminate
microbial build up in and on plant equipment, while other ozone-related
products are marketed by the Company to commercial and institutional laundry
operators to enable users to reduce costs associated with labor, water,
energy, chemicals, and wastewater disposal. The Company has developed consumer
product proto-types ranging from the sanitization of kitchen sponges and
toothbrushes, to countertop drinking water processors and food sanitizers.
18
The non-ozone based products offered by the Company's wholly owned
subsidiary Cyclopss Biochemical include more than 350 specialty chemicals and
compounds.
Letter of Intent to Acquire OxiDyn, Inc.
In October 2000, the Company entered into a letter of intent to acquire
OxiDyn Incorporated (OxiDyn), a North Carolina based manufacturer of ozone
based clean-in-place and sanitizing rinsing systems for the beverage and
bottling industry. A preliminary acquisition agreement was executed in
February 2001, subject to final negotiation, which calls for the Company to
issue shares of common stock determined by dividing OxiDyn's net book value by
the average closing price of the Company's common stock during the five-day
trading period immediately prior to the closing date of the acquisition. The
acquisition is pending, however, there can be no assurance that the proposed
acquisition will close.
In November 2000, the Company loaned $80,000 to OxiDyn to meet its
current operating requirements. In order to provide the above funding, the
acquisition agreement called for the Company to complete a private placement
offering of at least $300,000 at a price of $0.195 per share, which was to be
purchased by OxiDyn's investors and shareholders. The Company received cash
of $190,000 related to the offering prior to February 28, 2001, which was
reported as a stock subscription received in the financial statements.
Subsequent to February 28, 2001, the Company completed the private placement
offering receiving gross proceeds of $290,000, including the subscription
received, and issued 1,487,179 shares of common stock.
Proctor and Gamble Agreements
The Company has entered into an agreement with Procter & Gamble and
Otres, Inc. for Cyclopss to administer the relationship between the parties
regarding co-marketing agreements with Otres and the Crest and Dawn divisions
of Proctor & Gamble. The Otres contract provides for an on-going royalty
payment to Cyclopss on gross sales of developed appliances, and a First Right
of Refusal for Cyclopss to contract all future product development under the
same royalty arrangement. While the intent of the parties was clearly defined,
Otres had numerous financial and production problems causing severe delays in
market entry and low volumes of product sales. As of the date of this filing
the Company has received negligible royalties payments and is in dispute with
Otres as to the royalty rate per unit called for in the agreement. Although
this working model has not significantly benefited the Company to date it did
provide the template for the Company's Plan of Operation executed during the
period relating to this filing as adopted and discussed below.
The Company had entered into a Convertible Secured Loan for $ 1,000,000 with
Procter & Gamble that provided funds of $250,000 in the fourth quarter of
fiscal 2000 and $750,000 in the second quarter of fiscal 2001. The loan
accrued interest at 8% and is collateralized by a first security interest in
all of the Company's Intellectual Properties and was due and on or before
February 28, 2001. The loan agreement granted a conversion right to Proctor &
Gamble 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
stock at anytime during the term of the loan, and at the sole discretion of
19
Proctor & Gamble. The Company recognized its inability to repay the loan by
the end of its third quarter, notified Proctor & Gamble, and negotiated a
revised loan agreement. On February 4, 2001 the Company entered into a
Conversion and Amendment Agreement with Proctor & Gamble that extended the due
date for a portion of the loan amount equal to $500,000 to February 28, 2002
and a conversion of the remaining $500,000 loan principal into 500,000 shares
of Series "E" convertible preferred stock, which occurred in March 2001. The
accrued interest on the notes of $97,397 was converted into 593,777 shares of
common stock in February 2001.
Under the terms of the loan agreements, the Company is subject to
various covenants, including maintaining minimum liquid assets in the form of
cash or marketable securities of $100,000. At February 28, 2001 and subsequent
to that date, the Company is in default with the minimum liquid assets
covenant and, therefore, the loan may be called at any time. Proctor & Gamble
has and is fully appraised of the Company's inability to comply with the loan
agreement and, while their can be no assurances that they will continue to do
so, as of the date of this filing has made no attempt to hamper the operations
of the Company nor call the loan in default.
The Company has engaged in several diverse development and testing
contracts with departments of Proctor & Gamble and anticipates moving towards
the commercialization of certain of the Company's industrial products. Under
the terms of the Company's loan agreement, Proctor & Gamble has been granted
an exclusive right of first refusal for the licensing of all current and
future technologies of the Company. Under that right of first refusal, the
Company submitted four separate technology ideas or products concepts to
Proctor & Gamble during the reporting period. Of the four, two technology
ideas are actively under evaluation at Proctor & Gamble. The Company's
commercial ECO-WASH cold-water laundry system was presented to the Commercial
Products Group at Proctor & Gamble and the Company is negotiating with Proctor
& Gamble for their participation in the commercialization effort. The second
product, a "Kitchen Companion", is still being reviewed as of the date of
this filing.
Of the other two product concepts that were submitted and released by
Proctor & Gamble, one was submitted to and reviewed by another major consumer
appliance manufacturer during the fourth quarter and as of the March 15th,
2002 has since become subject of a product development agreement. The Company
anticipates negotiating a license and royalty agreement with this appliance
manufacturer. Additionally the Company has entered into another product
development agreement with that same manufacturer for a product concept of
their own that calls for a licensing and royalty agreement at completion.
The fourth of those product concepts is, as of the date of this filing
has been submitted for review to another major consumer appliance company, for
which the Company had an open, existing product development contract from
fiscal 2000.
The Company is not in a position to disclose the development partners
and/or the products currently being developed due to the restrictions of its
confidentiality agreements. The Company's partners are of the opinion that
they would be harmed should their interest in the technologies and the product
concepts prematurely become known to their competitors and the public in
general.
20
The following discussion and analysis should be read in conjunction with
the financial statements and notes attached hereto. Included in the Company's
consolidated financial statements are the Company's recurring losses from
operations and periodic cash flow difficulties, which raise substantial doubt
about its ability to continue as a going concern.
Results of Operations
The Company's sales during the year ended February 28, 2001, were
$439,350 compared to $751,542 for the year ended February 29, 2000, a decrease
of $312,192, (42%). Two of the Company's wholly owned subsidiaries
contributed to the Company's gross revenues, Cyclopss Medical Systems, Inc.
(CMS) and Cyclopss Biochemical Corporation (CBC). CBC's revenues were
$250,636 for the year ended February 28, 2001, and $378,861 for the year ended
February 29, 2000, a decrease of $128,224 (34%) due to the decrease in orders
placed by its customers. CMS reported revenue of $188,714 for the year ended
February 28, 2001, for a Naval Eco-Wash installation in Pearl Harbor, Hawaii,
as well as successful consulting agreements with various strategic partners.
CMS revenue in fiscal 2000 was $38,500 related to research and development of
a prototype that was built for Consolidated Stills and Sterilizer. Revenues
related to Cyclopss Laundry Systems and Eco-Pure Food Safety Systems, Inc.
were $201,147 and $133,034, respectively for fiscal 2000. As discussed under
the business section these subsidiaries were inactive during fiscal 2001 and
all ongoing operations and activities of these subsidiaries have been
incorporated in the Medical Systems subsidiary.
Cost of sales declined to $328,050 for fiscal 2001 from the previous
year of $433,598, a reduction of $105,548 (24%), due in part from the
elimination of service personnel in an overall effort to reduce costs and
execute the Company's new business model.
Research and development expenses decreased to $67,055 for fiscal 2000
from $131,050 for the previous year, a reduction of $63,995 (49%). This
decrease is due to the Company's efforts to reduce research expenses and
obtain strategic partners that are willing to fund research related costs. The
Company believes it is necessary to increase research and development efforts
for fiscal 2002, whether on a contract basis or from its own resources as
available, in order to complete the development and commercialization of its
food processing and consumer products.
Selling and marketing expenses increased to $114,702 for fiscal 2000
from $107,458 for the previous year, an increase of $7,244 (7%). The increase
in marketing efforts was essential in order to present opportunities to
various strategic partners. 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 $815,894 for fiscal
2001 compared with $871,148 for the previous year, a reduction of $55,254
(6%). During the year, the Company instituted measures to control these costs
by reducing legal, promotional and investor relation activities. Management
will continue to review and control these costs, but believes general and
administrative expenses in fiscal 2002 will increase due to management and
human resource requirements for the Company, assuming sales and other
commercial activities increase and funding becomes available.
21
Interest expense increased to $97,528 for fiscal 2001 compared with $875
for fiscal 2000. The substantial increase is due to interest on note payable
to Proctor & Gamble. Interest on the note payable to Proctor & Gamble was
paid in the form of additional common equity, as permitted by the indenture
agreement with that Company.
The Company suffered a net loss attributable to common stockholders for
fiscal 2001 of $1,132,855 or $0.04 cents per share as compared to $2,194,760,
or $0.11 per share for fiscal 2000. The decrease in the net loss and net loss
per share is attributable to a significant decrease of costs and expenses,
primarily legal settlement expense, as all outstanding litigation against the
Company was settled. Additionally, the net loss per common share decreased
due to an increase in the weighted average number of common shares outstanding
by 8,802,766 shares in fiscal 2001. The Company anticipates that it will
operate at a loss for the year ending February 28, 2002.
Impact of Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue recognition in Financial Statements. SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. The impact of adopting SAB 101 did not
have a material impact on the Company's financial position, cash flows or
results of operations.
Liquidity and Capital Resources
As of the date of this filing, the Company has sustained significant net
losses which have resulted in an accumulated deficit at February 28, 2001, of
$20,260,500 and has experienced periodic cash flow difficulties, all of which
raise substantial doubt about the Company's ability to continue as a going
concern.
The net loss for the year ended February 28, 2001 was $1,114,855. In
the past the Company has been able to obtain funding necessary for its
operations through the issuances of common and preferred stock. The Company
anticipates a net loss for the year ended February 28, 2002, and with a cash
balance of $62,022 at February 28, 2001 and expected cash requirements for the
coming year, there is substantial doubt as to the Company's ability to
continue operations.
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 received and future product sales will result
from these opportunities and that the Company will continue operations over
the next fiscal year; however, no assurances can be given that sales will be
generated or that additional necessary funding will be raised. The Company
anticipates it will receive limited royalties from some of its licensed
products within fiscal year 2002 and expects the majority of its revenues to
stem from development contracts and product sales.
22
The Company was in default for the bulk of fiscal 2001 under certain
terms and conditions of a $1,000,000 convertible note payable with Procter &
Gamble, which had provided working capital for the Company. The Company
successfully renegotiated the terms of loan and in March 2001 converted
$500,000 of the loan principal into 500,000 shares of Series "E" convertible
preferred stock. The due date on the remaining $500,000 loan principal
balance was extended to February 28, 2002. Further, the Company converted
accrued interest of $97,397 into 593,777 shares of common stock. The loan is
collateralized by a first security interest in all of the Company's
intellectual properties and carries a right of first refusal for the Company's
sale or licensing of technology. The Company has engaged in several diverse
development and testing contracts in association with various departments of
Proctor & Gamble. However, Proctor & Gamble has not significantly directly
contributed to the Company's revenues during the reporting period. The
agreement grants Proctor & Gamble the right to convert all or any part of the
outstanding loan, including all or any part of interest due, into shares in
the Company's common stock at anytime during the term of the loan.
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 debt or equity financing to pay the shortfall, the
Company will seek direction from the Board of Directors as to what action
would need to be taken.
Total assets decreased to $315,234 for the year ended February 28, 2001
from $466,984 for the year ended February 29, 2000, primarily due to decreases
in inventory and the depreciation and amortization of fixed assets and
patents.
Total current liabilities increased to $1,354,288 at February 28, 2001
from $1,060,173 at February 29, 2000 due primarily to the Proctor & Gamble
note payable, which increased from $250,000 in prior year to $1,000,000 for
February 28, 2001, and an offsetting decrease in accounts payable and current
liabilities of $471,147. Cash received from Proctor & Gamble was used in
operations of the Company and to pay past due payables.
Shares issued and outstanding for February 28, 2001 were 30,352,826,
compared to 25,226,066 for the prior year. Common shares increased by 382,000
and 177,800 shares due to the exercising of warrants and stock options,
respectively, and 350,000 common shares were issued for services.
Additionally, 3,623,183 and 6,088,197 common shares were issued in fiscal 2001
and 2000, respectively, in connection with the conversion of Series "B" and
"C" preferred stock. Further, 593,777 common shares were issued upon the
conversion of $97,397 of accrued interest on the Proctor and Gamble note
payable.
Cash used in operating activities was $1,177,574 for the year ended
February 28, 2001 compared with $371,917 for the year ended February 29, 2000,
an increase of $805,657 (217%). This significant increase is primarily due to
payment of outstanding payables in 2001 from the cash proceeds received from
the Company's debt financing, compared to an increase in payables of $318,220
in 2000 when the Company did not have the liquidity to meet payables as due.
In addition, in 2000 much of the legal settlement costs were in the form of
additional equity, which did not utilize cash resources.
23
Cash expenditures for property and equipment and patents, net of
proceeds from sales, were $18,668 for the year ended February 28, 2001
compared with $34,356 for the year ended February 29, 2000. This decrease was
mainly the result of lower costs invested in acquiring and developing patents
offset by a minor amount of $4,128 received from the sale of unused property
and equipment
Net cash provided by financing activities was $1,150,699 for fiscal
2001. This amount compares to $477,820 for fiscal 2000. The increase in funds
received were primarily related to $750,000 in proceeds received related to
the note payable to Proctor and Gamble. Additionally, the Company received
$191,000 from the exercise of a warrant and $190,000 from a stock subscription
received related to the private placement offering related to the proposed
acquisition of OxiDyn, discussed above.
Subsequent Events
Subsequent to year-end the Company has negotiated and executed four
separate product development contracts with third parties totaling
approximately $270,000. These contracts involve the development of
disinfection applications of the Company's ozone technology for consumer and
industrial products. Approximately $110,000 in cash has been received
subsequent to year-end related to these contracts.
On May 1, 2001 the Board of Directors authorized a private placement
offering of approximately $200,000 in convertible promissory notes at an
annual interest rate of 10%. The Note holders will have the right to convert
the principal amount into restricted common shares at the fair market value of
the stock determined on the date the notes are issued. Interest will be
payable in additional shares of restricted common stock. Approximately
$80,000 has been received to-date under this private placement offering.
Plan of Operation
The Company historically has acted as both the developer of its
technologies and as the manufacturer and marketer of those technologies.
Management believes that the customers within the Company's target markets are
intrigued by the performance and potential of the Company's technology and
products. However, our size and operating capabilities does not support the
confidence required for the Company's targeted customers to purchase the
Company's products. 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 current plan of operations it will act as a limited
manufacturer and marketer of its products and also will market its
intellectual properties and development capabilities as a technology provider.
Our efforts will be directed toward research, development, and creation of new
proprietary technologies and product opportunities utilizing our intellectual
property and development expertise with ozone technologies. We intend to
license our technology and/or work with third parties to form strategic
24
alliances, research partnerships, or other means to commercialize our
technology. We anticipate that our future revenue streams will result
primarily from licensing and royalty agreements with other companies that will
manufacture, distribute, market and commercialize products utilizing our
technologies. Targeted partners include equipment and appliance
manufacturers, suppliers and manufacturers of disposable or consumable
products, and other enterprises that will utilize our licensed intellectual
property.
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 its industry partners for design and
development work required in modifying 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.
The Company's initial execution of a variation of the business model
was illustrated by the relationship between the Company, Proctor & Gamble and
Otres, Inc. Cyclopss established a working relationship with Proctor & Gamble
early in 1999. In May of 1999, the Company was approached by the principals of
Otres to assist in the development and validation of a toothbrush sanitizer
and a kitchen sponge sanitizer utilizing ozone technology. The management of
the Company determined the products could be of great interest to Proctor &
Gamble and, after having appropriate confidentiality documents executed, Otres
agreed to allow the Company to introduce the product concepts to Proctor &
Gamble. Proctor & Gamble 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 Proctor & Gamble
engaged the Company for further technology development. This resulted in the
Company receiving revenues of approximately $98,000 in fiscal 2000 from its
venture partners for the development and testing of the appliances. The
Company continues to manage the relationship with Proctor & Gamble for Otres
under contract, and contributed to the execution of co-marketing agreements
between Otres and the CREST Division of P&G for the toothbrush sanitizer, and
Otres and the DAWN Division of P&G for dish washing soap that were announced
at the International Home Appliance Show in Chicago on January 16, 2000. The
Company has negotiated to receive an ongoing royalty of approximately 3% of
gross sales from the sale of these appliances, which provides the potential
for future revenues with minimal related costs. Due to internal problems at
Otres the products have yet to become fully commercialized. The revenue
produced by the royalty stream has been minimal as of the filing date. The
Company continues to assist Otres in solving its internal problems and
positioning the products for successful commercialization.
A License and Royalty Agreement executed at year-end 2001 with
Consolidated Sills and Sterilizers of Boston, Mass. is also an illustration of
the Company's new business plan. The agreement called for an up-front license
fee and ongoing royalty, and includes revenues from the production of a
prototype for Consolidated Stills and Sterilizers and for consulting fees for
work done going forward on the project. The FDA approval process facing
Consolidated is formidable and the Company can make no prediction as to when
the ozone sterilizer may be available to the health-care industry, but the
financial burden is Consolidated's and the Company will receive a 3% royalty
on any future gross sales of products utilizing our technology.
25
During fiscal 2000, the Company 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 an estimated payback period to the US Navy for the product
installation of 10.7 months. From the successful demonstration, the Naval
Facilities Engineering Service Center is recommending that the other Public
Works Center sites convert their operations to the Eco Wash system
(potentially a total of 40 sites) Since the demonstration of the Company's
ozone washing system several new sites have been visited and negotiations are
ongoing. Each site will average two Eco Wash 60 Laundry Systems, including a
washer and dryer, at approximately $75,000 each. The Company completed the
sale of an Eco Wash system to the US Navy's Public Works Center in Pearl
Harbor, Hawaii, which resulted in revenue of $76,664 in fiscal 2001. At this
time there are no additional Eco Wash systems under contract and, despite
ongoing negotiations, there are no assurances that additional contracts are
forthcoming. The Company anticipates receiving additional request for
proposals from the Navy for additional systems and has partnered with a large
international commercial laundry equipment manufacturer for installation and
support.
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 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 has prepared a petition to 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
received this petition under the new Expedited Review rules, which appears to
be the best way to resolve the regulatory problem. A ruling on the matter was
anticipated by February 28, 2001, but has not been handed down as of the date
of this filing.
Subsequent to year end but prior to reporting date the Company was
granted a very broad patent by the United States Patent office relating to the
use of water, ozone and food grade surfactants for use in all food processing
activities. The patent is extremely important to the Company's ability to
defend a position of proprietary processes for development and subsequent
licensing should the expected FDA ruling be granted. While the impact on the
Company can only be determined when that final ruling is handed down, should
the ruling be in favor of ozone's use, the Company believes that there may be
a resurgence of the interest expressed by potential strategic partners
experienced after the GRAS declaration.
26
Subsequent to year-end the Company has negotiated and executed four
separate product development contracts with third parties totaling
approximately $270,000. These contracts involve the development of
disinfection applications of the Company's ozone technology for consumer and
industrial products. Approximately $110,000 in cash has been received
subsequent to year-end related to these contracts.
On May 1, 2001 the Board of Directors authorized a private placement
offering of approximately $200,000 in convertible promissory notes at an
annual interest rate of 10%. The Note holders will have the right to convert
the principal amount into restricted common shares at the fair market value of
the stock determined on the date the notes are issued. Interest will be
payable in additional shares of restricted common stock. Approximately
$80,000 has been received to-date under this private placement offering.
The Company continues to seek customers and strategic partners who are
sufficiently convinced of the potential of its technologies to pro-actively
participate in necessary research and development costs. These customers and
strategic partners not only may provide revenues from research and development
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 washing 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. Commercialization of these successful test processes is likely
reliant on the anticipated FDA ruling.
Even with sufficient funds available, the ongoing challenge facing the
Company is that of educating 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.
We anticipate that the sale of Biochemical products will continue to be
driven by customer requests and any additional sales will be derived from
contract product development. Current sales activities will be evaluated and
alternatives looked for to improve profit margins. Joint efforts with Foster
Miller, Inc., in attempting to create a market for Biochemical's polymer
system for use by the aerospace industry have been abandoned due to limited
funds available to Foster Miller. The Company has begun the search for an
appropriate partner to continue that development effort.
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
27
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. A regulatory climate that permits the Company's technologies and products
to obtain commercial acceptance
6. Continued success in the Company's research and development activities;
and
7. Successful completion of strategic alliances.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For information required with respect to this Item 7, see "Consolidated
Financial Statements and Schedules" on pages F-1 through F-27 of this report.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes or disagreements between the Company and
Ernst & Young LLP, its Independent Auditors, during the year ended February
28, 2001.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A. Identification of Directors and Executive Officers. The current
directors and officers of the Company who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
28
Name Age Position
William R. Stoddard 49 President, CEO
Durand M. Smith 53 Director, Vice President of
Research and Development
Mondis Nkoy 37 Controller, Corporate Secretary
Michael J. Lakis, Jr. 64 Director
Richard C. Nelson 70 Director
Steve Sarich, Jr. 79 Director
William A. Anawaty 52 Director
John V. Winings 59 Director
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
William R. Stoddard. Mr. Stoddard has been an officer and director of
the Company since 1990. From 1986 to 1989, Mr. Stoddard was the Chief
Financial Officer of Medivest, Inc. and its subsidiaries. From 1988 to 1990,
he was Chief Financial Officer of Medivest Aviation Group, Inc.
Durand M. Smith, Ph.D. Dr. Smith has been the Vice President of
Research and Development for the Company since March 1998 and has been a
director of the Company since April 1999. Dr. Smith is the former Manager of
Advanced Space Programs for General Electric's Aerospace and Defense Group
(1973-1988) and Vice President of Engineering for Ithaco Inc, a spacecraft-
hardware-engineering firm (1988-1993). Dr. Smith also served as COO of Orion
International Technologies (1993-1996), an engineering services company. Prior
to joining Cyclopss, Dr. Smith served as the Governor's Science Advisor for
the State of New Mexico.
Mondis Nkoy. Ms. Nkoy has been employed as Controller by the Company
since September 1996. She was also elected as corporate Secretary in October
1996. For the three years prior to her appointment as controller she worked as
an assistant to the controller of the Company. Previous to this time she was
working to complete her education and received a Bachelor of Science Degree
from the University of Utah with a major in Mathematics and a minor in
Computer Science.
Michael J. Lakis. Mr. Lakis joined the board of directors on December
1, 1997. Most recently, he served as President and Chief Operating Officer -
North America for Del Monte Fresh Produce Company. Prior to this post, Mr.
Lakis was with Chiquita Brands Inc., where he gained over 37 years of
experience, including serving as President from 1979 to 1992.
29
Richard C. Nelson. Mr. Nelson joined the Company on March 24, 1999.
Mr. Nelson is Vice President Emeritus and Consultant of Hyatt Hotels and
Resorts. In June 1996, he retired from the day-to-day operations as Vice
President and Managing Director of the Grand Hyatt Washington, a 900 room
hotel he opened in 1987.
Steve Sarich. Mr. Sarich has been a director of the Company since July
1993. Mr. Sarich is, and has been for the last 15 years, president of 321
Investment Co. Mr. Sarich is a director of Omega Environmental, Wall Data,
Back Technologies, Inc., Ark Systems, Inc., Flo Scan Instrument, Multiple
Zones International and Talus Imaging Co. Mr. Sarich has been president of
Arctic Ventures, Inc. and C.S.S. Management Co. since 1988.
William A. Anawaty. Mr. Anawaty joined the company on August 28,
2000. Mr. Anawaty is the founder and President of Anari, Inc. Prior to his
founding Anari, Inc., Mr. Anawaty served in a variety of positions with the US
Treasury Department, including International Legal Counsel, Director of
Special Programs and finally, Executive Assistant to the Deputy Secretary.
John V. Winings. Mr. Winings joined the board in March of 2000. He is a
business change executive in manufacturing/engineering firms, with 25 years of
experience in large manufacturing companies such as Action Implementors, Inc.
and RCS Technologies, Inc. He has been the President/CEO of OxiDyn since
August of 1997.
B. Compliance With Section 16(a). Section 16 of the Securities
Exchange Act of 1934 requires the filing of reports for sales of the Company's
common stock made by officers, directors, and 10% or greater shareholders. A
Form 4 must be filed within 10 days after the end of the calendar month in
which a sale or purchase occurred. Based upon review of Forms 4 filed with
the Company, no such transactions took place and disclosure is required in
this Form 10-KSB.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information concerning
compensation for services rendered for the past three years to the Company's
Chief Executive Officer and to the Company's most highly compensated executive
officers other than the CEO, whose annual salary and bonus exceeded $100,000:
Long Term Compensation
Annual Compensation Awards Payouts
Name and Other All
principal Annual Option/ LTIP Other
position Year $ $ Compen- Stock SAR's Payouts Compen-
Salary Bonus sation Awards$ # $ sation
------------------------------------------------------------------------------
William R.
Stoddard 2001 $150,000 -0- -0- -0- -0- -0- -0-
President 2000 $150,000(2)-0- -0- 2,654,354 (1) -0- -0- -0-
1999 $150,000(2)-0- -0- 450,000 (1) -0- -0- -0-
Durand M.
Smith 2001 $120,000 -0- -0- -0- -0- -0- -0-
Chairman 2000 $120,000 -0- -0- 1,105,981 (1) -0- -0- -0-
Vice 1999 $120,000 -0- -0- 1,105,981 (1) -0- -0- -0-
President,
Research and
Development
30
Garr
Bratcher 2001 -0- -0- -0- -0- -0- -0- -0-
Chairman, 2000 -0- -0- -0- -0- -0- -0- -0-
CEO
(March 1999
to 1999 $235,000 -0- -0- -0- -0- -0- -0-
August 1999)
(1) Options to acquire shares of common stock
(2) William R. Stoddard deferred $31,875 and $59,375 of his annual
salary in fiscal 2000 and 1999, respectively, due to cash constraints of the
Company. All deferred salaries were paid during 2001.
Stock Options Granted to Executives
On April 19, 1999, a stock option grant was made for 450,000 common
shares to Mr. Stoddard at $0.10 per share. At the same time, additional
options were granted to Dr. Durand Smith for 350,000 common shares at $0.10
per share. These options vested on the date of grant and were exercisable on
that date. A Form S-8 was filed on May 13, 1999 to register common shares
underlying these options. All of the above stock options were cancelled in
May 1999.
On June 1, 1997, a grant was made to Mondis Nkoy, Corporate Secretary,
for 15,000 common shares at $0.94, the closing market price for that day.
These shares were exercisable one year after the grant date at 5,000 shares a
year, for three years. On April 19, 1999, these 15,000 shares were repriced to
$0.10 per share and the options became immediately vested. The underlying
shares were registered on the Form S-8 mentioned above, on May 13, 1999. All
of the above stock options expired unexercised during fiscal 2001.
On December 6, 1999, a stock option grant was made for 2,654,354 common
shares to Mr. Stoddard at $0.065 per share. At the same time, additional
options were granted for Dr. Durand Smith for 1,105,981 common shares at
$0.065 per share and for Mondis Nkoy for 442,392 common shares at $0.065.
These options vested on the date of grant and were exercisable on that date. A
Form S-8 was filed on March 7, 2000 to register common shares underlying these
options.
No stock options were granted to officers of the Company during fiscal
2001.
As of February 28, 2001, Durand Smith exercised 70,000 of the options
granted to him at $0.065 per share and Mondis Nkoy exercised 55,000 of the
options granted to her at $0.065 per share. The shares of common stock
underlying the granted Options were registered by the Company with the filing
of Forms S-8 dated May 13, 1999, and March 7, 2000, which are incorporated
herein by reference.
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of
options during the last fiscal year by persons named in the Summary
Compensation Table, the number of unexercised options held by such persons at
the end of the last fiscal year, and the value of such unexercised options as
of such date:
31
Nature of Value of Unexercised
Shares Acquired Values Unexercised In-the-money Options
on exercise Realized Options at at 2/28/2001 ($)(1)
Name (#) ($) 2/28/01 (#)
Exer Unexer Exercisable Unexer
cisable cisable cisable
William R.
Stoddard -0- -0- 3,104,354 -0- $159,261 -0-
Mondis Nkoy 55,000 8,400 387,392 -0- $23,244 -0-
Durand Smith 70,000 8,750 1,385,981 -0- $62,153 -0-
1. An "In-the-Money" stock option is an option for which the market price of
the Company's Common Stock underlying the option on February 29, 2000 exceeded
the option exercise price. The value shown is calculated by multiplying the
number of unexercised options by the difference between (i) the closing price
for the Common Stock on Small Cap Bulletin Board Market on February 28, 2001
($0.125) and (ii) the exercise price of the stock options ($0.065 for Mr.
Stoddard's 2,654,354, Mr. Smith's 1,035,981 and Ms. Nkoy's 387,392 exercisable
options).
Compensation of Directors
The Company's non-employee directors are paid $500 for each Board of
Directors Meeting attended and $250 for each telephonic meeting. On August
26, 1993, the Company's Board of Directors approved a Non-Employee Director's
Stock Option Plan that provides for the issuance of a maximum of 75,000 shares
of the Company's common stock pursuant to the exercise of options granted
under the Plan. The Plan provides that each non-employee director will be
issued an option to purchase 5,000 shares of the Company's common stock on the
date of the Company's Annual Meeting of Stockholders, commencing in 1994.
After an option is granted, it will be exercisable for a period of five years.
The Options granted under this plan are exercisable at $1.85 per share. This
Non-Employee Director's Stock Option Plan was approved by the Company's
stockholders at the Annual Meeting of Stockholders held December 10, 1993.
The shares of the Company's common stock underlying these options were
registered by the Company with the filing of Form S-8 dated August 31, 1994,
which is incorporated herein by reference. Effective September 1, 1996 the
Company's Board of Directors approved an additional 25,000 options to be
granted, 5,000 shares each to Non-Employee Directors on the date of the
Company's Annual Meeting of Stockholders in 1997. After these options were
granted, they are exercisable for a period of five years. The Options granted
under this additional plan are exercisable at $1.07 per share, which is deemed
to have been the fair market value of the Company's common stock on September
1, 1996, the date the plan was approved and enacted. Due to the cash
restraints of the Company, the board compensation was accrued for about a year
and a half, or sixteen telephonic meetings, and was paid pursuant a board
resolution on November 24, 1999, in Company's stock at $0.065 per share. These
shares were registered by the Company with the filing of Form S-8 dated March
7, 2000, which is incorporated herein by reference.
Stock Incentive Plan
On December 21, 1992, the Company's Board of Directors approved the 1992
Stock Incentive Plan (the "Plan") that provides for the issuance of a maximum
of 270,000 shares of the Company's Common Stock pursuant to the exercise of
options granted under the Plan. Options granted under the Plan are intended
to comply with Section 422 of the Internal Revenue Code of 1986. On May 9,
1994, the Plan was amended by the Board of Directors. Such amendments did not
32
increase the number of options that may be issued, change the persons who may
be granted options or in any way materially affect the Plan. The Plan is
administered by the Board of Directors or a committee of the Board which
selects the persons to whom options are granted and the terms of the options.
The Plan provides that the option price may not be less than 100% of the fair
market price on the date the option is granted and that no option may be
exercisable for longer than 10 years. The 1992 Stock Incentive Plan was
approved by the Company's stockholders at the Annual Meeting of Stockholders
held December 10, 1993. Options under the Plan may be granted to directors
and key employees of the Company. The shares of common stock underlying the
Options granted under the Plan were registered by the Company with the filing
of Form S-8 dated August 31, 1994, which is incorporated herein by reference.
Options Granted under the Plan.
As of February 28, 2001, there are 165,858 stock options granted and
outstanding and 2,800 stock options that have been exercised, which leave
101,342 shares available for grant under the Plan. Subsequent to February 28,
2001, the Board of Directors approved an increase in the number of shares of
common stock available under the Plan to 500,000 shares.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock owned beneficially as of June 1, 2001, by (I) each
director of the Company, (ii) all officers and directors as a group and (iii)
each person known by the Company to beneficially own 5% or more of the
outstanding shares of the Company's Common Stock:
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership(1) Class Ownership
William R. Stoddard(2)(3) 3,750,957 9.9%
3646 West 2100 South
Salt Lake City, UT 84120
Procter & Gamble(9) 2,972,973 7.8%
One Procter & Gamble Plaza
Cincinnati, OH 45202
Steve Sarich, Jr.(2)(4) 1,280,881 3.4%
505 Madison Street
Suite 220
Seattle, WA 98104
33
Mondis Nkoy(2)(5) 392,392 1.0%
3646 West 2100 South
Salt Lake City, UT 84120
Michael J. Lakis (6)(2) 330,107 0.9%
3646 West 2100 South
Salt Lake City, UT 84120
Durand Smith (7)(2) 1,456,981 3.8%
3646 West 2100 South
Salt Lake City, UT 84120
Richard C. Nelson (8)(2) 61,536 0.2%
3646 West 2100 South
Salt Lake City, UT 84120
All Officers and Directors
as a Group (7 Persons) 10,245,827 27.0%
(1) As of June 1, 2001, there were 32,120,349 shares of the Company's common
stock issued and outstanding and entitled to vote at the annual meeting.
Additionally, there are currently exercisable options and warrants to purchase
5,761,116 shares of the Company's common stock. Therefore, under the rules of
the Securities and Exchange Commission, there are deemed to be 37,881,465
shares of the Company's common stock issued and outstanding for purposes of
the table above. The shares issuable upon the exercise of the options can
only be voted at a shareholders meeting if the options are exercised and the
shares issued prior to the record date for the meeting. The shares issuable
upon the conversion of promissory notes can only be voted at a shareholders
meeting if the notes are converted and the shares issued prior to the record
date of the meeting.
(2) These individuals are the directors and/or officers of the Company as of
June 1, 2000.
(3) Mr. Stoddard is the record owner of 618,031 of these shares. The
balance of 3,750,957 shares includes 3,104,354 shares that may be acquired by
Mr. Stoddard from the Company pursuant to an employment stock option and
28,572 shares that may be purchased pursuant to a currently exercisable
warrant as of June 1, 2000. All of such options are currently exercisable.
(4) The 1,280,881 shares of total beneficial ownership shown for Mr. Sarich
includes 1,237,309 shares owned of record by Mr. Sarich and an affiliated
Company (321 Investments), 15,000 shares which may be acquired upon exercise
of a currently exercisable stock option and 28,572 shares which may be
purchased pursuant to a currently exercisable Warrant as of June 1, 2000. All
of such options and warrants are currently exercisable.
(5) The 392,392 shares of total beneficial ownership shown for Ms. Nkoy
includes 5,000 shares owned of record by Ms. Nkoy, the controller and the
Corporate Secretary of the Company and 387,392 shares which may be acquired by
Ms. Nkoy from the Company pursuant to employment stock option agreements. All
of these options are currently exercisable.
(6) Mr. Lakis is a director who is currently the record owner of 330,107
shares. He has no exercisable stock options as of June 1, 2001, nor has he
been granted any options as of June 1, 2001.
(7) The 1,456,981 shares of total beneficial ownership shown for Dr. Smith
includes 71,000 shares owned of record by Dr. Smith, a director and employee
(vice president of research and development) of the Company and 1,385,981
shares which may be acquired by Dr. Smith from the Company pursuant to
employment stock option agreements. All of these options are currently
exercisable.
34
8) Mr. Nelson is a Director who is currently the record owner of 61,536
shares. He has no exercisable stock options as of June 1, 2001, nor has he
been granted any options as of June 1, 2001.
9) Procter & Gamble, under the terms of the $1,000,000 loan agreement, may
convert the loan amount, plus interest to common shares, at $.37 cents per
share. More information about this agreement is under the Liquidity and
Capital Resources section of Management's Discussion and Analysis.
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Parents of Company
The only parents of the Company, as defined in Rule 12b-2 of the
Exchange Act, are the officers and directors of the Company. For information
regarding the share holdings of the Company's officers and directors, see Item
4.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Exhibits
The exhibits which are filed with this Form 10-KSB or incorporated
herein by reference are set forth in the Exhibits Index which appears on page
37.
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 13, 1999 to register stock options
and shares issued to management on April 19, 1999.
On November 30, 2000 the Company filed a Report on Form 8-K reporting
the Company had entered into a "Term Sheet/Letter of Agreement" to acquire
OxiDyn Incorporated on October 6, 2000.
35
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCLO3PSS CORPORATION
Date: May 29, 2000 By/s/William R. Stoddard
William R. Stoddard
CEO & Chairman
Principal Executive Officer
Date: May 29, 2000 By/s/ Mondis Nkoy
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Office
SIGNATURES
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Signature Capacity Date
/s/ William R. Stoddard President May 29, 2001
William R. Stoddard
/s/ Steve Sarich Jr. Director May 29, 2001
Steve Sarich, Jr.
36
/s/ Richard C. Nelson Director May 29, 2001
Richard C. Nelson
/s/ Michael J. Lakis Director May 29, 2001
Michael J. Lakis
/s/ Durand M. Smith Director May 29, 2001
Durand M. Smith
/s/ William Anawaty Director May 29, 2001
37
INDEX TO EXHIBITS
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference.
Exhibit Page Number or
Number Description Method of Filing
3.1 Amended and Restated Certificate of
Incorporation Form 10-SB, 1993 (1)
3.2 Bylaws Form 10-SB, 1993 (1)
3.2 Amended Certificate of Incorporation Form 8-K, Feb. 1995 (4)
10.1 Agreement with Clean Tech International,
Inc. Form 10-SB, 1993 (1)
10.2 Agreement with Chem Biochem Research,
Inc. Form 10-SB, 1993 (1)
10.3 1992 Stock Incentive Plan Form 10-SB, 1993 (1)
10.4 Stock Option - Dale Winger Form 10-SB, 1993 (1)
10.5 Lease Agreement Form 10-SB, 1993 (1)
10.6 Employment Agreement - John M. Williams Form 10-SB, 1993 (1)
10.7 Employment Agreement - William R.
Stoddard Form 10-SB, 1993 (1)
10.8 Form Indemnification Agreement
(Identical agreement for all officers
and directors) Form 10-SB, 1993 (1)
10.9 Clean Tech Merger Agreement Form 10-SB, 1993 (1)
10.10 Intex Acquisition Agreement Form 8-K, July 1994 (2)
10.11 Non-Employee Director 1993 Stock Option
Plan Form S-8, August 1994 (3)
11.1 Earnings Per Share Calculation Not Applicable
16.1 Change of Independent Auditors Form 8-K, January 1996(5)
16.2 Consulting Agreement of John Sloan Form 8-K, August 1996 (6)
21.1 Subsidiaries of Registrant Attached (7)
23 Consent of Ernst & Young, LLP Attached
(1) Filed as an Exhibit to the Registrant's Registered Statement on Form
10-SB and incorporated herein by reference
(2) Filed as an Exhibit to the Registrant's Form 8-K dated July 11, 1994
incorporated herein by reference
(3) Filed as an Exhibit to the Registrant's Form S-8 dated August 31, 1994
incorporated herein by reference
(4) Filed as an Exhibit to the Registrant's Form 8-K dated February 2, 1995
incorporated herein by reference
(5) Filed as an Exhibit to the Registrant's Form 8-K dated January 8, 1996
incorporated herein by reference
(6) Filed as an Exhibit to the Registrant's Form 8-K dated August 20, 1996
incorporated herein by reference
(7) Filed as an Exhibit to the Registrant's Form 10-KSB dated for the year
ended February 29, 2000 incorporated herein by reference
39
Consolidated Financial Statements
Cyclo3pss CorporationTruVision, Inc.
Years Ended February 28, 2001 and February 29, 2000
with Report of Independent Auditors
Cyclo3pss Corporation
Consolidated Financial Statements
Years Ended February 28, 2001 and February 29, 2000
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . . . . F-2
Consolidated Financial Statements:
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . F-5
Consolidated Statements of Stockholders' Equity (Deficit) . . . . F-6
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements . . . . . . . . . . . . F-9
Report of Independent Auditors
The Board of Directors and Stockholders
Cyclo3pss Corporation
We have audited the accompanying consolidated balance sheets of Cyclo3pss
Corporation and subsidiaries as of February 28, 2001 and February 29, 2000,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Cyclo3pss Corporation and subsidiaries at February 28, 2001 and February
29, 2000, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, the Company's
recurring losses from operations and periodic cash flow difficulties raise
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are described in Note 2. The
consolidated financial statements for the year ended February 28, 2001 do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that might result from the outcome of this uncertainty.
Salt Lake City, Utah
June 1, 2001
Consolidated Balance Sheets
February 28 February 29
2001 2000
Assets
Current assets:
Cash $ 62,022 $ 107,565
Accounts receivable, less allowance for
doubtful accounts of $18,975 in 2001 and
$23,420 in 2000, respectively 28,850 70,723
Note receivable from OxiDyn 80,000 -
Inventories - 17,930
Prepaid expenses 3,462 5,815
Total current assets 174,334 202,033
Property and equipment, net 67,800 135,521
Other assets:
Acquired patents, net 36,407 72,807
Developed patents, net 36,693 56,623
$ 315,234 $ 466,984
F-3
February 28 February 29
2001 2000
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 124,937 $ 256,955
Accrued liabilities 119,351 449,440
Note payable 1,000,000 250,000
Note payable to officer 10,000 -
Current portion of capital lease obligations - 3,778
Deferred revenue 100,000 100,000
Total current liabilities 1,354,288 1,060,173
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock:
Preferred stock issuable in series:
par value $0.01, 4,500,000 authorized:
Series "A" preferred stock; 35,638 shares
authorized, issued and outstanding
(liquidation preference of $71,276) 356 356
Series "B" convertible preferred stock;
30,000 shares authorized, 614 and 900
shares issued and outstanding in 2001
and 2000, respectively (liquidation
preference of $1,110,814) 6 9
Series "C" convertible preferred stock;
550 shares authorized, no and 75 shares
issued and outstanding in 2001 and 2000,
respectively - 1
Class "A" preferred stock, par value $0.01;
500,000 shares authorized; none issued or
outstanding - -
Common stock, par value $0.001; 55,000,000
shares authorized; 30,352,826 shares and
25,226,066 shares issued in 2001 and 2000,
respectively 30,353 25,226
Additional paid-in capital 19,504,245 19,028,409
Deferred stock-based compensation (1,969) -
Stock subscription received 190,000
Accumulated deficit (20,260,500) (19,145,645)
Treasury stock, 264,000 common shares at
cost (501,545) (501,545)
Total stockholders' equity (deficit) (1,039,054) (593,189)
$ 315,234 $ 466,984
See accompanying notes to consolidated financial statements
F-4
Cyclopss Corporation
Consolidated Statements of Operations
Year Ended
February 28 February 29
2001 2000
Revenues:
Products sales $349,940 $614,196
Services 89,410 137,346
Total revenues 439,350 751,542
Costs and expenses:
Cost of products sold 261,601 367,828
Cost of services 66,449 65,770
Research and development 67,055 131,050
Selling and marketing 114,702 107,458
General and administrative 815,894 871,148
Depreciation and amortization 139,851 151,000
1,465,552 1,694,254
Loss from operations (1,026,202) (942,712)
Interest income 4,845 298
Interest expense (97,528) (875)
Litigation settlement expense - (1,156,000)
Other income 4,030 138,875
Net loss (1,114,855) (1,960,414)
Preferred stock dividends (18,000) (234,346)
Net loss attributable to common stockholders $(1,132,855) $(2,194,760)
Basic and diluted net loss per common share $ (0.04) $(0.11)
Weighted-average number of common shares - basic
and diluted 28,375,628 19,572,862
See accompanying notes to consolidated financial statements.
F-5
Cyclo3pss Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Series "B" Series "C"
Series "A" Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
Shares Amounts Shares Amounts Shares Amounts
Balances at February 28, 1999 35,638 $ 356 1,187 $12 206 $ 2
Issuance of common stock for cash - - - - - -
Issuance of common stock for
services - - - - - -
Issuance of common stock upon
exercise of stock options - - - - - -
Issuance of Series "C" convertible
preferred stock - - - - 157 2
Conversions of Series "B"
preferred stock to common stock - - (287) (3) - -
Conversions of Series "C"
preferred stock to common stock - - - - (288) (3)
Legal settlement with Series "B"
preferred stockholders - - - - - -
Net loss - - - - - -
Recognition of paid-in-kind stock
dividends on Series "B"
preferred stock (See Note 8) - - - - - -
Balances at February 29, 2000 35,638 356 900 9 75 1
Issuance of common stock for
services - - - - - -
Issuance of common stock upon
conversion of accrued interest - - - - - -
Issuance of common stock upon
exercise of warrants - - - - - -
Issuance of common stock upon
exercise of stock options - - - - - -
Conversions of Series "B"
preferred stock to common stock - - (286) (3) - -
Conversions of Series "C"
preferred stock to common stock - - - - (75) -
Deferred stock-based compensation - - - - - -
Amortization of deferred stock
based compensation - - - - - -
Stock subscription received in cash - - - - - -
Net loss - - - - - -
Recognition of paid-in-kind
stock dividends on Series "B"
preferred stock (See Note 8) - - - - - -
Balances at February 28, 2001 35,638 $ 356 614 $ 6 - $ -
F-6
CONTINUED
Cyclo3pss Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Additional Deferred
Common Stock Paid-in Stock-Based
Shares Amount Capital Compensation
Balances at February 28, 1999 17,599,482 $17,599 $17,860,958 $ -
Issuance of common stock for cash 1,142,857 1,143 78,857 -
Issuance of common stock for
services 391,530 392 31,357 -
Issuance of common stock upon
exercise of stock options 4,000 4 496 -
Issuance of Series "C" convertible
preferred stock - - 156,823 -
Conversions of Series "B"
preferred stock to common stock 3,204,197 3,204 (3,201) -
Conversions of Series "C"
preferred stock to common stock 2,884,000 2,884 (2,881) -
Legal settlement with Series "B"
preferred stockholders - - 906,000 -
Net loss - - - -
Recognition of paid-in-kind stock
dividends on Series "B"
preferred stock (See Note 8) - - - -
Balances at February 28, 2001 25,226,066 25,226 19,028,409 -
Issuance of common stock for
services 350,000 350 176,710 -
Issuance of common stock upon
conversion of accrued interest 593,777 594 96,803 -
Issuance of common stock upon
exercise of warrants 382,000 382 190,618 -
Issuance of common stock upon
exercise of stock options 177,800 178 13,299 -
Conversions of Series "B"
preferred stock to common stock 2,878,933 2,879 (2,876) -
Conversions of Series "C"
preferred stock to common stock 744,250 744 (743) -
Deferred stock-based compensation - - 2,025 (2,025)
Amortization of deferred stock
based compensation - - - 56
Stock subscription received in cash - - - -
Net loss - - - -
Recognition of paid-in-kind
stock dividends on Series "B"
preferred stock (See Note 8) - - - -
Balances at February 28, 2001 30,351,826 $30,353 $19,504,245 $ (1,969)
F-7
CONTINUED
Cyclo3pss Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
Stock Treasury Stock
Subscription Accumulated (Common)
Received Deficit Shares Amounts Total
Balances at February 28, 1999 - $(17,185,231) 264,000 $(501,545) $192,151
Issuance of common stock for
cash - - - - 80,000
Issuance of common stock for
services - - - - 31,749
Issuance of common stock upon
exercise of stock options - - - - 500
Issuance of Series "C"
convertible preferred stock - - - - 156,825
Conversions of Series "B"
preferred stock to common stock - - - - -
Conversions of Series "C"
preferred stock to common stock - - - - -
Legal settlement with Series "B"
preferred stockholders - - - - 906,000
Net loss - (1,960,414) - -(1,960,414)
Recognition of paid-in-kind stock
dividends on Series "B"
preferred stock (See Note 8) - - - - -
Balances at February 29, 2000 - (19,145,645) 264,000 (501,545) (593,189)
Issuance of common stock for
services - - - - 177,060
Issuance of common stock upon
conversion of accrued interest - - - - 97,397
Issuance of common stock upon
exercise of warrants - - - - 191,000
Issuance of common stock upon
exercise of stock options - - - - 13,477
Conversions of Series "B"
preferred stock to common stock - - - - -
Conversions of Series "C"
preferred stock to common stock - - - - -
Deferred stock-based compensation- - - - -
Amortization of deferred stock
based compensation - - - - 56
Stock subscription received
in cash 190,000 - - - 190,000
Net loss - (1,114,855) - -(1,114,855)
Recognition of paid-in-kind
stock dividends on Series "B"
preferred stock (See Note 8) - - - - -
Balances at February 28,
2001 $190,000 $(20,260,500)264,000$(501,545)$(1,039,054)
F-7
Cyclopss Corporation
Consolidated Statements of Cash Flows
Year Ended
February 28 February 29
2001 2000
Cash flows from operating activities:
Net loss $ (1,114,855)$(1,960,414)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 66,275 89,648
Amortization 73,576 61,352
Common stock issued for services 177,060 31,749
Stock-based compensation 56 -
Legal settlement expense with Series "B"
shareholder - 906,000
Loss on disposition of property and equipment 4,843 12,722
Write off of inventory 17,930 -
Changes in assets and liabilities:
Accounts receivable 39,898 (23,145)
Inventories - 47,418
Prepaid expenses and other 2,353 44,533
Accounts payable and accrued liabilities (364,710) 318,220
Deferred revenue - 100,000
Net cash used in operating activities (1,097,574) (371,917)
Cash flows from investing activities:
Note receivable from Oxidyn (80,000) -
Purchase of property and equipment (5,550) (4,954)
Proceeds from sale of property and equipment 4,128 -
Increase in developed patents (17,246) (29,402)
Net cash used in investing activities (98,668) (34,356)
Cash flows from financing activities:
Proceeds from issuance of common stock - 80,000
Proceeds from exercise of warrants 191,000 -
Proceeds from exercise of stock options 13,477 500
Proceeds from stock subscription received 190,000 -
Proceeds from issuance of preferred stock - 156,825
Proceeds from note payable 750,000 250,000
Proceeds from note payable to officer 10,000 -
Principal payments under capital lease obligations (3,778) (9,505)
Net cash provided by financing activities 1,150,699 477,820
Net increase (decrease) in cash (45,543) 71,547
Cash at beginning of year 107,565 36,018
Cash at end of year 62,022 $107,565
Supplemental disclosures:
Interest paid in cash $ 131 $ 868
Non-cash investing and financing activities:
Receipt of furniture and fixtures as settlement of
accounts receivable $ 1,975 $ -
Conversion of preferred stock into common stock 4 6
Conversion of accrued interest into common stock 97,397 -
Deferred stock-based compensation 2,025 -
See accompanying notes to consolidated financial statements.
F-8
Cyclo3pss Corporation
Notes to Consolidated Financial Statements
February 28, 2001
1. Summary of Significant Accounting Policies
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). 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 the sterilization
and/or disinfection of surgical and medical 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.
Letter of Intent to Acquire OxiDyn Incorporated
In October 2000, the Company entered into a letter of intent to acquire OxiDyn
Incorporated (OxiDyn), a North Carolina based manufacturer of ozone based
clean-in-place and sanitizing rinsing systems for the beverage and bottling
industry. A preliminary acquisition agreement was executed in February 2001,
subject to final negotiation, which calls for the Company to issue shares of
common stock determined by dividing OxiDyn's net book value by the average
closing price of the Company's common stock during the five day trading period
immediately prior to the closing date of the acquisition. The acquisition is
pending, however, there can be no assurance that the proposed acquisition will
close.
In November 2000, the Company loaned $80,000 to OxiDyn to meet its current
operating requirements. In order to provide the above funding, the
acquisition agreement called for the Company to complete a private placement
offering of at least $300,000 at a price of $0.195 per share, which was to be
purchased by OxiDyn's investors and shareholders. The Company received cash
of $190,000 related to the offering prior to February 28, 2001, which was
reported as a stock subscription received in the financial statements.
Subsequent to February 28, 2001, the Company completed the private placement
offering receiving gross proceeds of $290,000, including the subscription
received, and issued 1,487,179 shares of common stock.
F-9
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Cash
Cash consists primarily of cash in banks and money-market account with
insignificant interest rate risk. The carrying amount of cash reported on the
balance sheets approximates the fair value.
Concentration of Credit Risk
The Company's financial instruments consist primarily of cash and trade
accounts receivable. Risks associated with cash are mitigated by banking with
federally insured credit worthy institutions. The Company sells its products
primarily to, and has trade receivables with, industrial and healthcare
laundries, chemical manufacturers and universities in the United States and
abroad. Less than 10% of product sales are to foreign customers.
As a general policy, collateral is not required for accounts receivable;
however, the Company performs ongoing credit evaluations of its customers and
maintains allowances for possible losses which, when realized, have been
within the range of management's expectation. Historical losses have not been
material.
Inventories
Inventories consist of raw materials and are stated at the lower of cost or
market, cost being determined using the first-in, first-out (FIFO) method.
During the year ended February 28, 2001, the Company wrote off its remaining
inventory resulting in a loss of $17,930.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation and amortization is determined using the straight-line method
over the estimated useful lives of the assets ranging from three to seven
years. Assets acquired pursuant to capital lease obligations are amortized
over the assets' estimated useful lives. Leasehold improvements are amortized
over the lesser of the estimated useful lives or the remaining lease term.
Maintenance and repairs are expensed as incurred.
F-10
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Intangible Assets
Intangible assets consist primarily of patents that are recorded at the lower
of cost or their net realizable value. Acquired and developed patents are
amortized on a straight-line basis over the shorter of their estimated useful
lives or the remaining stated life of the patent. Accumulated amortization for
acquired and developed patents was $370,715 and $297,139 at February 28, 2001
and February 29, 2000, respectively.
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets to be Disposed Of, the
Company reviews long-lived and intangible assets for impairment whenever
events or circumstances indicate the carrying value of an asset may not be
recoverable. Based on the Company's review there has been no impairment of
long-lived or intangible assets.
Income Taxes
The Company provides for income taxes based on the liability method required
by SFAS No. 109, Accounting for Income Taxes. Under the liability method,
deferred tax assets and deferred tax liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
deferred tax liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
deferred tax liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date.
Fair Value of Financial Instruments
The carrying amount of accounts receivable, notes receivable and debt
instruments approximate their fair value.
Revenue Recognition
We apply the provisions of SAB 101 when recognizing revenue. SAB 101 states
that revenue generally is realized or realizable and earned when all of the
following criteria are met: a) persuasive evidence of an arrangement exists,
b) delivery has occurred or services have been rendered, c) the seller's price
to the buyer is fixed or determinable, and d) collectibility is reasonably
assured.
F-11
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Revenue Recognition (continued)
Revenue for product sales is recognized upon installation, acceptance by the
customer, and after contractual obligations, if any, are fulfilled. Revenue
related to washing and laundry systems is recognized under the percentage of
completion method. The Company also provides certain services on a time and
materials basis. Revenue related to upfront license fees is deferred and
recognized over the term of the respective license. Royalty revenue is
recognized upon receipt.
Deferred revenue is comprised of prepaid license fees received from the
license of certain of the Company's technologies. Revenues from license fees
are to be recognized in connection with royalty revenues to be credited.
Advertising Costs
Advertising costs are expensed during the year in which they are incurred.
Advertising expenses were $6,082 and $318, respectively for the years ended
February 28, 2001 and February 29, 2000.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and related Interpretations
in accounting for its employee stock options rather than adopting the
alternative fair value accounting provided for under SFAS No. 123, Accounting
for Stock-Based Compensation.
Under APB No. 25, when the exercise price of the Company's stock options
equals the estimated fair market value of the underlying stock on the date of
grant, generally no compensation expense is recognized. The Company has
adopted SFAS No. 123 for disclosure-only purposes.
Stock compensation expense for options granted to non-employees has been
determined in accordance with EITF 96-18 as the fair value of the
consideration received or the fair value of the equity investments issued,
whichever is more reliably measured. The measurement of stock-based
compensation to non-employees is subject to periodic adjustment as the
underlying securities vest.
F-12
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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.
Net Loss Per Common Share
Basic net loss per common share is calculated by dividing net loss for the
period by the weighted-average number of the Company's common shares
outstanding. Because the Company reported a net loss for each of the fiscal
years ended February 28, 2001 and February 29, 2000, all common stock
equivalents are anti-dilutive and accordingly have been excluded from the
earnings per common share computation.
Options and warrants to purchase 5,985,558 and 9,717,900 shares of common
stock were outstanding at February 28, 2001 and February 29, 2000,
respectively, but were not included in the computation of diluted earnings per
common share because they were anti-dilutive. Additionally, the Company has
convertible debt and convertible preferred stock that was not included in the
computation of diluted earnings per common share because their respective
converted shares would be anti-dilutive. The convertible debt would convert
into 2,979,247 shares of common stock at February 28, 2001. The convertible
preferred stock has a conversion price that is determined based on an average
trading price, which is established at the date of conversion. Based on the
average trading price as determined at February 28, 2001, the preferred stock
would convert into 6,895,003 shares of common stock.
F-13
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (continued)
Comprehensive Income
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 were no items of other
comprehensive income in 2001 or prior.
Impact of Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue recognition in Financial Statements. SAB
101 provides guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. All registrants are expected to apply the
accounting and disclosure described in SAB 101. The Company has adopted SAB
101 and there was no impact on the Company's revenue recognition policies or
amounts recorded as revenue resulting from the adoption.
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 that have resulted in an
accumulated deficit at February 28, 2001 of $20,260,500, has periodic cash
flow difficulties, and is in default on debt covenants, all of which raise
substantial doubt of the Company's ability to continue as a going concern.
The net loss applicable to common shareholders for the year ended February 28,
2001 was $1,132,855. In the past the Company has been able to obtain funding
necessary for its operations through the issuances of common and preferred
stock. With a cash balance of $62,022 at February 28, 2001 and expected cash
requirements for the coming 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
F-14
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
2. Basis of Presentation (continued)
compete with other technology companies having financial, production 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
over the next fiscal year; however, no assurances can be given that sales will
be generated or that the additional funding will be raised.
3. Property and Equipment
Property and equipment consists of the following:
February 28 February 29
2001 2000
Equipment $ 534,510 $ 618,821
Furniture and fixtures 18,878 58,981
Leasehold improvements 108,275 111,005
661,663 788,807
Less: accumulated depreciation
and amortization (593,863) (653,286)
$ 67,800 $ 135,521
The final payments due under the Company's capital leases were made during
fiscal 2001. Property and equipment under capital leases at February 29, 2000
was $25,902 with related accumulated depreciation of $16,836.
During fiscal 2001, the Company received furniture and fixtures in full
settlement of an accounts receivable balance of $6,420. The Company
immediately sold the furniture and fixtures items that were received for cash
of $1,975. The remaining accounts receivable balance of $4,445 was written off
as uncollectible.
F-15
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
4. Accrued Liabilities
Accrued liabilities consist of the following:
February 28 February 29
2001 2000
Accrued payroll and payroll taxes $ 46,239 $150,877
Accrued vacation 39,160 17,598
Accrued legal expense - 250,000
Other 33,952 30,965
$119,351 $449,440
5. Long-Term Debt
In December 1999, the Company negotiated a letter of intent with a strategic
partner that provided for two separate financings. The first, an unsecured
promissory note for $250,000, was executed and funded in concert with the
signing of the letter of intent. The second financing is a convertible secured
loan for $750,000, which was funded in the second quarter of fiscal 2001. The
loan agreement is collateralized by a first security interest in all of the
Company's intellectual property and was due and payable in one year from its
execution. The loan and accrued interest is convertible, in whole or in part,
into the Company's common stock at anytime during the loan term at a price per
share of approximately $0.34, which represents the average closing price of
the Company's common stock for the immediate ten consecutive days prior to the
execution of the convertible note payable.
In February 2001, the Company renegotiated the loan whereby the unpaid accrued
interest on the notes of $97,397 was converted into 593,777 shares of common
stock and $500,000 of the principal balance would be converted into 500,000
shares of Series "E" convertible preferred stock, which occurred in March
2001. Under the terms of the renegotiated loan agreement, the remaining
$500,000 principal balance is due February 28, 2002.
Under the terms of the loan agreements, the Company is subject to various
covenants, including maintaining minimum liquid assets in the form of cash or
marketable securities of $100,000. At February 28, 2001 and subsequent to that
date, the Company is in default with the minimum liquid assets covenant and,
therefore, the loan may be called at any time.
F-16
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
6. Commitments
The Company leases office facilities and office equipment under noncancelable
operating leases. The Company has subleased a portion of its office
facilities under a non-cancelable lease that expires in December 2001.
Sublease income per the year ended February 28, 2001 was $4,030. The future
minimum lease payments under these lease obligations are as follows at
February 28, 2001:
Minimum
Lease Sublease
payments Income
2002 $ 88,670 $ (16,620)
2003 17,780 -
2004 1,696 -
2005 1,696 -
2006 848 -
Total $ 110,690 $ (16,620)
Rent expense under these leases was $91,665 and $97,531 for the years ended
February 28, 2001 and, February 29, 2000, respectively.
Effective March 15,2001, the Company subleased a portion of its office
facilities under a non-cancelable lease that expires in December 2001.
Sublease income under the agreement will be $1,000 per month.
The Company had certain capital leases for equipment, which were paid off
during the year ended February 28, 2001. Interest expensed for capital lease
obligations was $131 and $868 for the years ended February 28, 2001 and
February 29, 2000, respectively.
7. Income Taxes
As of February 28, 2001, the Company had federal and state net loss
carryforwards of approximately $17,904,000 and $8,028,000, respectively. The
Company also had federal research and development tax credit carryforwards of
approximately $152,000. The net operating loss and credit carryforwards will
expire at various dates beginning on 2003 through 2021, if not utilized.
Utilization of the net operating losses and credits may be subject to a
substantial annual limitation due to the "change in ownership" provisions of
the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
F-17
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
7. Income Taxes (continued)
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of February 28, 2001 and February 29,
2000 are as follows:
February 28 February 29
2001 2000
Deferred tax assets:
Net operating loss carryforwards $ 6,352,000 $ 6,084,000
Research credit carryforwards 152,000 149,000
Other 11,000 45,000
6,515,000 6,278,000
Deferred tax liabilities:
Tax depreciation (36,000)
Net deferred tax assets 6,515,000 6,242,000
Valuation allowance (6,515,000) (6,242,000)
$ - $ -
The net valuation allowance increased by $273,000 and $563,000 during the
years ended February 28, 2001 and February 29, 2000, respectively.
8. Stockholders' Equity
Preferred Stock
Series "A"
Series "A" preferred stock is non-voting stock and was convertible into common
stock for a period expiring two years from the date of issuance of the shares.
The conversion period has expired for all shares of Series "A" preferred
stock. The Board of Directors authorized 35,638 shares of Series "A" preferred
stock for issuance at $2.00 per share. In the event of a liquidation,
dissolution or winding up of the affairs of the Company, the holders of Series
"A" preferred stock shall be entitled to receive the principal amount paid to
the Company before any distribution shall be made to the holders of common
stock. Additionally, holders of Series "A" preferred stock shall be entitled
to receive, as declared by the Board of Directors, non-cumulative cash
dividends prior to the declaration and payment of dividends on the Company's
common stock. No dividends have been declared.
F-18
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Preferred Stock (continued)
Series "B"
On May 30, 1996, the Board of Directors authorized for issuance 30,000 shares
of Series "B" convertible preferred stock with a $0.01 par value and a stated
value of $1,000 per share. The Company originally issued 3,170 total shares
of Series "B" convertible preferred stock. These shares are convertible after
45 days from the subscription date into common shares at 65% to 70% of the
"Average Stock Price" as designated by the Board of Directors. The "Average
Stock Price" is further defined as the lesser of the average daily closing bid
prices of common shares for the period of five consecutive trading days
immediately preceding the date of subscription or the five consecutive trading
days immediately preceding the date of conversion of the Series "B"
convertible shares. However, these shares do not have voting rights or
preemptive rights to acquire other securities. The shares provide for payment
of cumulative dividends at 8% annually, payable in cash or stock at the
Company's option, and include a liquidation preference equal to $1,350 per
share together with all accrued and unpaid dividends.
For the year ended February 29, 2000, 287 shares of Series "B" convertible
preferred stock were converted into a total of 3,204,197 shares of common
stock. For the year ended February 28, 2001, 286 shares of Series "B"
convertible preferred stock was converted into a total of 2,878,933 shares of
common stock.
At February 28, 2001 and February 29, 2000, the Company had aggregate unpaid
preferred stock dividends of $281,914 and $263,914, respectively. The Company
intends to elect to pay these dividends in shares of common stock, or as in-
kind dividends. Therefore, upon issuance of the common stock the Company will
record the par value of the shares issued with a corresponding charge to
additional paid in capital.
Series "C"
On September 10, 1998, the Board of Directors authorized for issuance 550
shares of Series "C" convertible preferred stock with a $0.01 par value and a
stated value of $1,000 per share. Each Series "C" preferred share is
convertible from the subscription date into 10,000 common shares. These shares
do not have voting rights or preemptive rights to acquire other securities.
These shares are entitled to registration rights and provide for a liquidation
preference equal to $1,000 per share.
F-19
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Preferred Stock (continued)
Series "C" (continued)
The Company issued 206 and 157 shares of Series "C" convertible preferred
stock during the year ended February 28, 1999 and February 29, 2000,
respectively. During the year ended February 29, 2000, 288 shares of Series
"C" convertible preferred stock were converted into 2,884,000 shares of common
stock. During the year ended February 28, 2001, the remaining 75 shares of
Series "C" convertible preferred stock were converted into 744,250 shares of
common stock.
Because the Series "C" preferred shares had conversion rights at a discount
from the market price on the date of subscription, the Company has reflected a
beneficial conversion feature in the form of a deemed dividend of $216,346 in
the Statement of Operations for the year ended February 29, 2000 to the Series
"C" preferred stockholders.
Series "E"
In January 2001, the Board of Directors authorized for issuance 1,000,000
shares of Series "E" convertible preferred stock with a $0.01 par value and a
stated value of $1.00 per share. These shares are convertible immediately
after issuance into common shares at by dividing the aggregate value of the
Series "E" convertible preferred shares to be converted by the "Average Stock
Price" as designated by the Board of Directors. The "Average Stock Price" is
further defined as the average daily closing bid prices of common shares for
the period of five consecutive trading days immediately preceding the date of
subscription of the Series "E" convertible shares. However, these shares do
not have voting rights or preemptive rights to acquire other securities. The
shares provide for payment of cumulative dividends at 10% annually, payable in
cash or stock at the Company's option, and include a liquidation preference
equal to $1.00 per share together with all accrued and unpaid dividends. The
Company made redeem the Series "E" convertible shares at its option, on or
after 145 days from the date of issuance at a price of $1.00 per share, plus
any accrued and unpaid dividends.
In March 2001, the Company issued 500,000 shares of Series "E" convertible
preferred stock for the conversion of $500,000 of notes payable.
f-20
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Common Stock
On April 15, 1999, the Board of Directors issued 180,000 shares of common
stock to the CEO for services provided to the Company. The shares were given
in lieu of $18,000 for salary. In addition, on November 4, 1999, the Company
granted 211,530 shares to the Board of Directors for services rendered. The
Company has recorded compensation expense to reflect the transactions.
On December 1, 1999, the Company issued 1,142,857 common shares to two
directors in exchange for cash of $80,000.
In February 2001, the Company received cash of $190,000 related to a
subscription for a private placement offering in conjunction with its proposed
acquisition of OxiDyn.
As of February 28, 2001, the Company had reserved shares of common stock for
future issuance as follows:
Stock options 4,882,427
Warrants 1,103,131
Conversion of note payable 2,979,247
Conversion of preferred stock 6,895,003
Total 15,859,808
The convertible preferred stock has a conversion price that is determined
based on an average trading price, which is established at the date of
conversion. The amount of common stock reserved for the conversion of
preferred stock is estimated based on the average trading price as determined
at February 28, 2001.
Stock Options
On December 21, 1992, the Company adopted the 1992 Stock Incentive Plan (the
1992 Plan) that provides for the issuance of options to employees to purchase
up to an aggregate of 270,000 common shares. All options are generally granted
at no less than the fair market value of the common shares on the date of
grant, as determined by the Board of Directors. The options vest beginning one
year subsequent to the date of grant and expire on the earlier of seven years
from the date of vesting or termination of employment. As of February 28,
2001, there are 165,858 stock options granted and outstanding and 2,800 stock
options that have been exercised, which leave 101,342 shares available for
grant under the 1992 Plan. Subsequent to February 28, 2001, the Board of
F-21
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Stock Options (continued)
Directors approved an increase in the total number of shares of common stock
available under the 1992 Plan to 500,000 shares.
The Company also issues stock options that are outside of the Company's 1992
Plan. In fiscal 2000, the Board of Directors and shareholders approved the
issuance of stock options to purchase 4,202,727 common shares to three
officers of the Company at an exercise price of $0.065 per share. These stock
options were immediately exercisable and 125,000 of these options were
exercise during fiscal 2001. Prior to fiscal 2000, the Board of Directors and
shareholders approved the issuance of various stock options to the officers
and members of the Board of Directors, of which, stock options to purchase
437,500 shares of common stock at $1.85 per share and 100,000 shares of common
stock at $1.07 per share are outstanding at February 28, 2001. All of the
above options are exercisable at February 28, 2001.
A summary of stock option activity, and related information for the years
ended February 28, 1999 and 2000 follows:
Outstanding Stock Options Weighted-
Number of Price Average
Shares Per Share Exercise Price
Balance at February 28, 1999 1,034,375 $0.10-$5.44 $1.72
Options granted 4,349,955 $0.07-$0.16 $0.07
Options exercised (4,000) $0.13 $0.13
Options canceled (59,375) $0.25-$5.44 $1.93
Balance at February 29, 2000 5,320,955 $0.07-$5.44 $0.37
Options granted 40,000 $0.37-$0.85 $0.49
Options exercised (127,800) $0.07-$0.13 $0.07
Options canceled (452,070) $0.13-$5.44 $1.66
Balance at February 29, 2001 4,781,085 $0.07-$1.85 $0.25
The weighted-average fair value of options granted in the year ended February
28, 2001 and February 29, 2000, was $0.54 and $0.07, respectively.
Additionally, SFAS No. 123 requires that companies with wide ranges between
the high and low exercise prices of its stock options segregate the exercise
prices into ranges that are meaningful for assessing the timing and number of
additional shares that may be issued and the cash that may be received as a
result of the option exercises.
F-22
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Stock Options (continued)
The options outstanding and currently exercisable by exercise price at
February 28, 2001 are as follows:
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
(Years)
$0.07-$0.08 4,197,727 3.9 $0.07 4,117,727 $0.07
$0.13-$0.16 5,858 5.3 $0.14 2,808 $0.13
$0.37 30,000 7.0 $0.37 - -
$0.85 10,000 6.1 $0.85 - -
$1.07 100,000 5.5 $1.07 100,000 $1.07
$1.85 437,500 1.3 $1.85 437,500 $1.85
4,781,085 3.7 $0.25 4,658,035 $0.25
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of
that Statement. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 2001 and 2000, respectively: risk-free interest rates
of 6.64% and 5.89%; dividend yield of 0%; volatility factors of the expected
market price of the Company's common stock of 1.339 and 2.133; and a weighted-
average expected life of the options of 7.75 and 5.00 years. Because the
effect of SFAS No. 123 is prospective, the initial impact on pro forma net
income may not be representative of compensation expense in future years. The
Company's pro forma results are as follows:
2001 2000
Net loss attributable to common stockholders:
As reported $(1,132,855) $(2,194,760)
Pro forma (1,141,432) (2,219,130)
Net loss per common share
As reported $ (0.04) $ (0.11)
Pro forma $ (0.04) $ (0.11)
F-23
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
8. Stockholders' Equity (continued)
Warrants
At February 28, 2001, the Company had outstanding warrants to purchase common
stock as follows:
Number of Exercise
Warrants Issued Shares to be Price Per Date Date
In conjunction with/to Purchased share Issued Expires
Debt issuance 264,000 $2.00 Various 1997 Various 2002
Private placement
agent 100,000 $1.25 October 1997 October 2001
Private placement
agent 111,611 $1.25 February 1998 February 2002
Mifal Klita legal
settlement 627,520 $0.09 November 1999 November 2001
1,103,131
During the year ended February 28, 2001, warrants to purchase 382,000 shares
of common stock were exercised at a price of $0.50 per share for gross
proceeds of $191,000. These warrants were originally issued in connection
with a private placement offering in October 1997. The remaining warrants to
purchase 618,000 shares of common stock that were issued in the private
placement offering expired unexercised in December 2000.
9. Contingencies
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 Securities and Exchange Commission Regulation S.
One of the 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, in September 1999,
entitled Mifal Klita to the conversion of the Series "B" preferred shares into
unrestricted common stock of the Company plus shares for legal fees and other
provisions stated in the original agreement and an option to purchase 627,520
shares of common stock at $0.085 per share, exercisable over two years from
the settlement date. The stock options were valued using a black-scholes
option pricing model. These additional costs of $906,000 were
F-24
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
9. Contingencies (continued)
recorded as legal settlement expense in the accompanying fiscal 2000
consolidated statement of operations. The unrestricted common stock will be
disbursed monthly over a two year period. Another investor, Leitinger
Corporation, of Series "B" preferred stock negotiated a final cash settlement
of $250,000 in January 2000, which was paid in April 2000.
The Company is not aware of any other legal actions or outstanding asserted or
unasserted claims against the Company.
10. Segment Information
During fiscal 2000, the Company operated in three principal industries; the
manufacture, sale and installation of ozone food processing products ("food
processing 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"). Operations related to medical products
were suspended in early fiscal 1998 in order to conserve available cash. In
fiscal 2001, the Company realigned its operations in to two segments, "ozone
products" and "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.
For the year ended February 28, 2001, two customers accounted for
approximately 71%, of total net revenues for ozone products, and one of these
customers accounted for approximately 41% of total net revenues for ozone
products. Three customers accounted for 86% of total net revenues for the
biochemical products, and one of these customers accounted for approximately
58% of total net revenues for biochemical products.
For the year ended February 29, 2000, five customers accounted for
approximately 86% of total net revenues for ozone products, and one of these
customers accounted for approximately 29% of total net revenues for ozone
products. One customer accounted for approximately 41%, of total net revenues
for biochemical products.
F-25
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
10. Segment Information (continued)
Industry Data Year Ended
Cyclo3pss Corporation and Subsidiaries February 28 February 29
2001 2000
Net sales and other income:
Ozone products $ 188,714 $ 372,681
Biochemical products 250,636 378,861
Total revenue 439,350 751,542
Interest income and other 8,875 139,173
Total revenue and other income $ 448,225 $ 890,715
Operating loss (income)
Ozone products $ (77,437) $ (122,521)
Biochemical products 40,090 281,174
Total operating loss (income) (37,347) 158,653
Corporate expenses 1,054,674 1,800,886
Interest expense 97,528 875
Net loss $1,114,855 $1,960,414
Identifiable assets
Ozone products $ 114,258 $ 234,399
Biochemical products 63,539 111,811
177,797 346,210
General corporate assets 137,437 120,774
Total assets $ 315,234 $ 466,984
Depreciation and amortization expense
Ozone products $ 103,215 $ 100,498
Biochemical products 20,966 20,534
Corporate 15,670 29,969
Capital expenditures
Ozone products $ - $ -
Biochemical products - 4,274
Corporate 5,550 680
F-26
Cyclop3ss Corporation
Notes to Consolidated Financial Statements
11. Subsequent Events
Subsequent to year-end the Company has negotiated and executed four separate
product development contracts with third parties totaling approximately
$270,000. These contracts involve the development of disinfection
applications of the Company's ozone technology for consumer and industrial
products. Approximately $110,000 in cash has been received subsequent to
year-end related to these contracts.
On May 1, 2001 the Board of Directors authorized a private placement offering
of approximately $200,000 in convertible promissory notes at an annual
interest rate of 10%. The Note holders will have the right to convert the
principal amount into restricted common shares at the fair market value of the
stock determined on the date the notes are issued. Interest will be payable
in additional shares of restricted common stock. Approximately $80,000 has
been received to-date under this private placement offering.
F-27