CONFORMED
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED AUGUST 31, 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
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(Name of Small Business Issuer as specified in its charter)
Delaware 87-0455642
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
3646 West 2100 South
Salt Lake City, Utah 84120-1202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 972-9090
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
Common Stock outstanding at October 14, 2001 - 36,851,348 shares of $.001 par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
FORM 10-QSB
Financial Statements and Schedules
Cyclo3pss Corporation
For Three Months Ended August 31, 2001
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
PART I - FINANCIAL INFORMATION
Page of
Form 10-QSB
Item 1. Financial Statements
Condensed Consolidated Balance Sheets. . . . . . . . . . . .3
Condensed Consolidated Statements of Operations. . . . . . .5
Condensed Consolidated Statements of Cash Flows. . . . . . .7
Notes to Condensed Consolidated Financial Statements . . . .8
Item 2. Management's Discussion and Analysis and
Plan of Operations . . . . . . . . . . . . . . . . . . . . 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 21
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 21
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders . . . 21
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 21
-2-
CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
August 31 February 28
2001 2001
Assets
Current assets:
Cash $ 11,446 $ 62,022
Accounts receivable 18,261 28,850
Notes receivable from OxiDyn - 80,000
Notes receivable from Paragon, net of
allowance of $251,530 - -
Prepaid expenses 621 3,462
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Total current assets 30,328 174,334
Property and equipment, net 30,861 67,800
Other assets:
Acquired patents, net 18,207 36,407
Developed patents and other, net 31,233 36,693
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$ 110,629 $ 315,234
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-3-
CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)(continued)
August 31 February 28
2001 2001
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 212,590 $ 124,937
Accrued liabilities 194,157 119,351
Notes payable 658,000 1,000,000
Note payable to officer - 10,000
Deferred revenue 100,000 100,000
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Total current liabilities 1,164,747 1,354,288
Commitments and contingencies
Stockholders' deficit:
Preferred stock:
Preferred stock issuable in series: par
value $.01, 4,500,000 shares authorized:
Series "A" convertible preferred stock;
356,638 shares authorized; 356,638 shares
issued and outstanding 356 356
Series "B" convertible preferred stock;
30,000 shares authorized; 320 and 614
shares issued and outstanding August 31, and
February 28, 2001, respectively 3 6
Series "E"convertible preferred stock;
10,000 shares authorized; 500 shares
issued and outstanding 5 -
Common stock, par value $.001; 55,000,000
shares authorized; 35,326,267 and
30,352,826 shares issued and outstanding at
August and February 2001 respectively 35,326 30,353
Additional paid-in capital 20,331,974 19,504,245
Deferred stock-based compensation - (1,969)
Stock subscription received - 190,000
Accumulated deficit (20,920,237)(20,260,500)
Less treasury stock, 264,000 common
shares at cost (501,545) (501,545)
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Total stockholders' equity (deficit) (1,054,118) (1,039,054)
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$ 110,629 $ 315,234
========== ==========
See accompanying notes to condensed consolidated financial statements
-4-
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended
August 31,
2001 2000
Net revenues $ 24,614 $ 6,321
Costs and expenses:
Cost of revenues 60,837 73,932
Research and development 17,772 20,389
Selling and marketing 40,005 35,985
General and administrative 409,080 201,041
Depreciation and amortization 21,453 20,439
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Total expenses 549,147 351,786
Loss from continuing operations (524,533) (345,465)
Interest income 1,702 1,684
Interest expense - (44)
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Net loss from continuing operations (522,831) (343,465)
Discontinued operation:
Gain on sale of discontinued operations 12,009 -
Loss from discontinued operations (4,595) (25,091)
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Net gain (loss) from discontinued operations 7,414 (25,091)
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Net Loss $ (515,417) $ (368,916)
============ ===========
Basic and diluted net loss per common share:
Continued operations $ (.01) $ (.01)
Discontinued operations $ (.00) $ (.00)
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Net loss per common shares- basic and
diluted $ (.01) $ (.01)
=========== ===========
Weighted average number of common shares
issued and outstanding 34,869,020 27,159,853
=========== ===========
See accompanying notes to condensed consolidated financial statements
-5-
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
For the six months ended
August 31,
2001 2000
Net revenues $ 201,278 $ 82,408
Costs and expenses:
Cost of revenues 135,899 125,971
Research and development 24,815 33,845
Selling and marketing 78,161 65,581
General and administrative 609,854 443,725
Depreciation and amortization 42,180 83,158
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Total expenses 890,909 452,280
Loss from continuing operations (689,631) (669,875)
Interest income 1,809 2,175
Interest expense - (131)
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Net loss from continuing operations (687,822) (667,828)
Discontinued operation:
Gain on sale of discontinued operations 12,009 -
Loss from discontinued operations 16,076 23,943
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Net gain (loss) from discontinued operations 28,085 23,943
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Net Loss $ (659,737) $ (643,885)
============ ===========
Basic and diluted net loss per common share:
Continued operations $ (.02) $ (.02)
Discontinued operations $ (.00) $ (.00)
Net loss per common shares- basic and
diluted $ (.02) $ (.02)
=========== ============
Weighted average number of common shares
issued and outstanding 33,946,605 27,236,575
=========== ============
See accompanying notes to condensed consolidated financial statements
-6-
CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the six months ended
August 31,
2001 2000
Cash flows from operating activities:
Net loss $ (659,737) $ (643,885)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 42,180 93,766
Common Stock issued for services - 177,060
Stock based compensation 1,969 -
Common stock issued for legal
settlement 25,000 -
Gain on sale of discontinued
operations (12,009) -
Write off of note receivable 200,386 -
Changes in assets and liabilities:
Accounts receivable 10,589 9,238
Prepaid expenses 2,841 (5,120)
Accounts payable and accrued
liabilities 162,459 (435,167)
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Net cash used in operating activities (226,322) (804,108)
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Cash flows from investing activities:
Purchase of property and equipment (851) (11,713)
Proceeds from sale of discontinued
operations 33,470 -
Increase to notes receivable from OxiDyn (120,386) -
Addition to developed patents and other (2,191) (31,728)
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Net cash used in investing activities (89,958) (43,441)
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Cash flows from financing activities:
Proceeds from issuance of common stock 100,000 -
Proceeds from issuance of warrants - 196,000
Proceeds from exercise of stock options 17,704 5,578
Proceeds from issuance of notes payable 158,000 750,000
Payment on note payable from officer (10,000) -
Principal payments under capital lease
obligations - (2,944)
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Net cash provided by financing activities 265,704 948,934
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Net increase (decrease) in cash (50,576) 101,385
Cash at beginning of period 62,022 107,565
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Cash at end of period $ 11,446 $ 208,950
========== =========
Non-cash financing activities:
Issuance of common stock for stock
subscription 190,000 -
Conversion of note payable into preferred
stock $ 500,000 $ -
Conversion of preferred stock into common
stock 3 2
See accompanying notes to condensed consolidated financial statements.
-7-
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 for commercial and institutional laundries, and research and
development of technologies for the sterilization and/or disinfection of
surgical and medical instruments, as well as ozone based consumer appliances.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany balances and transactions have
been eliminated.
The accompanying unaudited condensed consolidated financial statements are
stated in accordance with the instructions to Form 10-QSB and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.
Operating results for the six months ended August 31, 2001 are not necessarily
indicative of the results that may be expected for the full year. The
unaudited condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
February 28, 2001.
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", requires that all items that are recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The items of other comprehensive income that are
typically required to be displayed are foreign currency items, minimum pension
liability adjustments, and unrealized gains and losses on certain investments
in debt and equity securities. There have been no items of other
comprehensive income to date.
-8-
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to previously reported amounts to
conform to the current presentation.
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 called 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.
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. The Company advanced an
additional $120,386 in cash to OxiDyn subsequent to February 2001 to meet
additional operating requirements.
OxiDyn has been unable to meet various expected operational target milestones
over the past twelve months, raising doubt that the proposed acquisition will
close. Therefore, the Company wrote off the note receivable and other funds
advanced totaling $200,386 during the three months ended August 31, 2001.
-9-
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
Asset purchase and sale agreement with Paragon, LLC
On June 15, 2001, the Company entered into an asset purchase and sale
agreement with Paragon, LLC. The Principals of which are the employees of
Cyclopss Biochemical Corporation. The purchase price was $285,000, which was
established as the fair value for the Company, and approved by the board of
directors. The Company received $30,000 as a down payment and financed the
balance of $255,000 over five years, at 8% interest, secured by the Paragon's
assets.
The terms of the sale agreement allow for a discount in the purchase price of
$50,000 or $40,000 if all amounts due under the note receivable, less the
purchase price discount, are paid prior to September 1, 2001 or December 31,
2001, respectively.
The Company expects to recognize a gain on the sale of the biochemical
products business, but due to the extended payment terms on the note
receivable, the gain on sale will be recognized as payments are received. The
Company received a total of $33,470 related to the purchase price and through
the date of this filing has recorded a gain on sale of discontinued operations
of $12,009.
The biochemical products business has been accounted for as discontinued
operations and accordingly, the results of operations are segregated from
continuing operations in the accompanying 2001 statements of operations.
Revenue, operating costs and expenses, other income and expenses of this
business has been reclassified to discontinued operations for the three and
six months ended August 31, 2001 and 2000. No allocation of general corporate
overhead has been made to discontinued operations relating to this business.
-10-
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
2. Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.
The Company has sustained significant net losses which have resulted in an
accumulated deficit at August 31, 2001 of $20,920,237 and $20,260,500 at
February 28, 2001, and 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 for the year ended February 28, 2001 was $1,114,855 and the
Company recorded a net loss of $659,737 for the six months ended August 31,
2001. To date, the Company has funded its operations through the issuances of
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 $11,446 at August
31, 2001 and expected cash requirements for the year, there is substantial
doubt as to the Company's ability to continue operations.
The Company believes that these conditions have resulted from the inherent
risks associated with small technology companies. Such risks include, but are
not limited to, the ability to: a) generate sales of its product at levels
sufficient to cover its costs and provide a return for investors, b) attract
additional capital in order to finance growth, c) further develop and
successfully market commercial products and d) successfully compete with
other technology companies having financial, production and marketing
resources significantly greater than those of the Company.
The Company is attempting to improve these conditions by way of financial
assistance through collaborative partnering agreements, issuances of
additional equity, debt arrangements, and product sales. Management believes
that appropriate funding will be generated and future product sales will
result from these opportunities and that the Company will continue operations
through the next fiscal year; however, no assurance can be given that sales
will be generated or that the additional necessary funding will be raised.
-11-
CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
3. Contingencies
The Company is not a party to and presently is not aware of any pending claims
or existing litigation. The Company issued 250,000 shares of common stock
during the three months ended August 31, 2001 as final adjustment of a
previous legal settlement, for which the Company recorded a non-cash charge of
$25,000. Previous settled matters are described in the Company's Form 10-KSB
for the year ended February 28, 2001.
4. Segment Information
On March 7, 2000 the Company internally realigned its ozone businesses,
collapsing these separate business units into a single entity. The Company
operated in two principal industries; the manufacture, sale and installation
of ozone products ("ozone products"); and the manufacture and sale of
specialty chemicals ("biochemical products").
On June 15, 2001 the Company sold the assets and business related to its
biochemical products (see Note 1). The Company now only operates in one
segment.
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.
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.
-12-
PART I - ITEM 2
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 that the
technologies are easily scalable from consumer appliances up through
industrial systems. The products provide systems to address food safety,
particularly microbial reductions on meat and 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 enable users to reduce costs associated with labor, water, energy,
chemicals, and wastewater disposal. The Company has developed consumer
product prototypes ranging from the sanitization of kitchen sponges and
toothbrushes, to counter top drinking water processors and food sanitizers.
In October 2000, the Company entered into a letter of intent for
acquisition/merger of 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, as of the date of this
filing, and all indications are that the transaction will not close.
In November 2000, the Company loaned $80,000 to OxiDyn to meet its current
operating requirements, which is to be repaid upon the closing of the
acquisition. In order to provide the above funding, the acquisition agreement
called for the Company to complete a private placement of its common stock
with an offering of at least $300,000 at a price of $0.19 per common share.
This offering was to be purchased by OxiDyn's investors and shareholders. The
Company received cash of $190,000 related to the offering as of February 28,
2001. Subsequent to February 28, 2001 the Company received an additional
$100,000, the offering was closed, and 1,487,179 shares of common stock were
issued. The Company advanced an additional $120,386 in cash to OxiDyn
subsequent to February 28, 2001 to OxiDyn to meet additional operating
requirements. As the completion of the acquisition is questionable, the
Company wrote off the note receivable and other advances totaling $200,386.
-13-
On June 15, 2001, the Company entered into an asset purchase and sale
agreement with Paragon, LLC. The Principals of which are the employees of
Cyclopss Biochemical Corporation. The purchase price was $285,000, which was
established as the fair value for the Company, and approved by the board of
directors. The Company received $30,000 as a down payment and financed the
balance of $255,000 over five years, at 8% interest, secured by the Paragon's
assets.
Consumers, food producers and processors, both large and small, are searching
for new technologies to address food safety and sterilization concerns. Both
consumers and food processors, who have relied heavily on chlorination and
other chemicals to decontaminate foods and household items, are being forced
to consider alternatives to chlorine and those other toxic chemicals. The
Company believes that ozone products offer a lower cost and more
environmentally-friendly and consumer accepted form of decontamination and
sterilization than many other chemical treatments and irradiation. The FDA
issued a final ruling allowing for the use of ozone in all food processing
onJune 28, 2001.
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 Form 10-KSB for February 28, 2001, and other risks identified from
time to time in the Company's filings with the Securities and Exchange
Commission, press releases and other communications. Information on the
Procter & Gamble Agreements and the Acquisition of OxiDyn, Inc. can also be
found in the Form 10-KSB for February 28, 2001. The Company assumes no
obligation to update forward-looking statements.
Results of Operations
The Company's revenues were $24,614 for the three months ended August 31, 2001
compared to $6,321 for the three months ended August 31, 2000. The revenues
were $201,278 for the six months ended August 31, 2001 compared to $82,408 for
the six months ended August 31, 2000. This increase was due to the Company's
efforts to generate more income and find institutions willing to pay for the
Company's research efforts. The Company's gross margin for the three months
ended August 31, 2001, was $(36,223) compared to $(67,611) for the three
months ended August 31, 2000. The Company's gross margin for the six months
ended August 31, 2001, was $65,379 compared to $(43,563) for the six months
ended August 31, 2000. This increase is due to the increase in product sales
as described above. The Company continues to closely monitor expenses to
minimize all unnecessary operating costs. The Company expects to start
receiving royalty payments from the sale of consumer products as described
further in this section.
-14-
Research and development expenses decreased to $17,772 and $24,815 for the
three and six months ended August 31, 2001 respectively from $20,389 and
$33,845 for the three and six months ended August 31, 2000. This decrease is
due the Company's reduced research and development activity and efforts to
have strategic partners pay for the Company's research activities.
Selling and marketing expenses increased to $40,005 and $78,161 for the three
and six months ended August 31, 2001 respectively from $35,985 and $65,581 for
the three and six months ended August 31, 2000. This increase is due to the
Managements effort to produce an increase in sales.
General and administrative expenses increased to $409,080 for the three months
ended August 31, 2001 from $201,041 for the three months ended August 31,
2000. General and administrative expenses increased to $609,854 for the six
months ended August 31, 2001 from $443,725 for the six months ended August 31,
2000. The increase in general and administrative expenses for the three and
six month period ended August 31, 2001 is primarily due to the write off of
the note receivable and other advances to OxiDyn totaling $200,386. Management
is closely monitoring and controlling expenses. However legal and accounting
expenses related to being a public company continue to escalate, and new
accounting requirements and SEC regulations are being adopted with increasing
regularity. These expenses while burdensome are crucial to providing and
maintaining a market for the Company's securities. These expenses are
expected to increase in fiscal 2002, with other potential increases due to
management and human resource requirements for the Company should commercial
activities increase, and more funds become available for this use.
Net income from discontinued operations related to the biochemical products
business, which was sold subsequent to May 31, 2001, was $16,076 and $23,946
for the six months ended August 31, 2001 and 2000, respectively. The decrease
in net income is due to continuous declining sales of biochemical products.
The Company recorded a net loss applicable to common stock for the three
months ended August 31, 2001 of $515,417. The loss recorded for the three
months ended August 31, 2000 was $368,916. The Company recorded a net loss
applicable to common stock for the six months ended August 31, 2001 of
$659,737. The loss recorded for the six months ended August 31, 2000 was
$643,885.
Liquidity and Capital Resources
Cash used in operating activities was $226,322 for the six months ended August
31, 2001 compared to $804,108 for the six months ended August 31, 2000. This
decrease is partly due to an increase in accounts payable and accrued
liabilities and no common stock issued for services in fiscal 2002 compared to
$177,060 in fiscal 2001.
-15-
Net cash provided by financing activities for the six months ended August 31,
2001, was $265,704 due to an additional $100,000 received on a private
placement offering related to the proposed acquisition of OxiDyn. The Company
also received $158,000 as of August 31, 2001 in connection with a private
placement offering of approximately $200,000 in convertible promissory notes
at an annual interest rate of 10%. The note holders have the right to convert
the principal amount into restricted common shares at the fair market value of
the stock on the date of conversion. Approximately $183,000 has been received
from this private placement offering as of the date of this filing.
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 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
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.
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.
Total assets decreased to $110,629 for the six months ended August 31, 2001
from $315,234 for the year ended February 28, 2001, mainly due to a decrease
related to the write off of the notes receivable from OxiDyn and the
utilization of assets in operating activities. Total current liabilities
decreased to $1,164,747 at August 31, 2001 from $1,354,288 at February 28,
2001, mainly due to the conversion of $500,000 of notes payable to equity by
Procter and Gamble, as described earlier in this section. This decrease was
offset by additional notes payable of $158,000 and increases in accounts
payable and accrued liabilities resulting from ongoing operations of the
Company.
The Company is attempting to generate more cash 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 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 bulk of its revenues to stem from development
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contracts and product sales. So far this fiscal year, as of August 31, 2001,
the Company has negotiated and executed four separate development contracts
with Kohler Co., Kaz, Inc., Nelson Laboratories, and ConAgra, with total
current and future expected revenues under these contracts of approximately
$295,000. Subsequent to August 31, 2001 the Company has negotiated and begun a
development contract with Pharmacia for $30,000. These contracts involve the
development of disinfection applications of the Company's ozone technology for
consumer and industrial products.
Should the Company be unsuccessful in achieving the increased level of
revenues and gross profits required to pay its operating expenses or in
acquiring additional equity financing to pay the shortfall, the Company will
seek direction from the Board of Directors as to what action would need to be
taken.
Plan of Operation
The Company historically has acted as both the developer of its technologies
and as the manufacturer and marketer of those technologies. It has become
apparent that the customers within the markets pursued by the Company are
intrigued by the performance and potential of the products and technologies.
However, the size and operating capabilities of the Company 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 United States 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 will also market its
intellectual properties and development capabilities as a technology provider.
Our efforts will be directed toward the creation of technology bridges and
partnership and licensing arrangements with companies that provide products
and services. The Company will utilize its technology to produce new complete
ozone related processes and products. These anticipated ventures,
partnerships and licensing arrangements are expected to include suppliers of
equipment and appliances and suppliers of disposable or consumable products
modified to utilize the Company's proprietary technologies under licensing and
royalty agreements. The end result will create interlocking process systems
that we believe will be both effective and economic. Additionally the process
systems will be sold and serviced by vendors and suppliers already accepted by
the target markets.
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This model provides the manufacturers with technology and new product
offerings and provides the Company with royalty revenue and commercialization
of its technologies through already existing manufacturing, sales and service
infrastructures.
The Company will continue to provide low volume production of ozone systems to
customers like the United States Navy, and the Company also anticipates it
will be compensated by one or more of the industry partners for design and
development work required in modifying their existing products to accommodate
the incorporation of the Company's proprietary technologies. This model
allows the Company to keep the number of employees limited to specific
requirements of the technology application, and converts the Company into a
technology purveyor.
.
The Company's initial execution of a variation of this business model was
illustrated by the relationship between the Company, Procter & Gamble and
Otres, Inc. Cyclopss established a working relationship with Procter & 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. The management of the Company
determined the products could be of great interest to Procter & Gamble and,
after having appropriate confidentiality documents executed, Otres agreed to
allow the Company to introduce the product concepts to Procter & Gamble.
Procter & 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 Procter & Gamble engaged the Company for
these activities. This resulted in the Company receiving revenues of
approximately $98,000 from both venture partners for the development and
testing of the appliances. The Company continues to manage the relationship
with Procter & Gamble for Otres under contract, and contributed to the
execution of co-marketing agreements between Otres and CREST for the
toothbrush sanitizer, and Otres and DAWN for dish washing soap that were
announced at the International Home Appliance Show in Chicago on January 16,
2000. The Company negotiated to receive an ongoing royalty of approximately
3% from the sale of these appliances, which is expected to provide future
revenues with minimal related costs incurred by the Company. Due to internal
problems at Otres the products have yet to become fully commercialized. The
revenue produced by the expected 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 success. In June, 2001 the FDA
granted its approval of the Otres Toothbrush Sanitizer.
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 future
work performed 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.
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The plan provides for ongoing operating revenues derived from limited
manufacturing and direct sales of the companies' industrial products, ongoing
contract product development, with the future revenues derived primarily
through license and royalty streams generated by the success of its selected
strategic partners in commercializing the products.
The Company anticipates its revenues as well as the source of those revenues
to change significantly through establishment of these types of relationships.
However, there can be no assurance that the current loan to Procter & Gamble
can be serviced upon its due date nor can there be any assurance that any of
the Company's products will be accepted in such numbers that will generate
adequate revenues and cash flow sufficient to cover the ongoing costs of
operation.
On March 13, 2001 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 since an FDA ruling was
granted on June 28, 2001, that allows the use of ozone in the processing of
certain food items. The Company is in a enviable position and expects a
resurgence of the interest previously expressed by potential strategic
partners in the food processing sector.
The Company continues to seek customers and strategic partners such as, Kohler
Co., Kaz, Inc., and Nelson Laboratories, who are sufficiently convinced of the
potential to collaboratively 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 systems that have been installed in wet produce processing plants, long-
term produce storage facilities, short term banana and tomato ripening rooms,
and for use in treatment of herbal remedies and dietary supplements. The
Company will seek to commercialize these successful test processes based on
the new FDA ruling discussed above.
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.
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The information set forth herein as to anticipated research and development
costs, equipment purchases and increase in employees are management's best
estimates based upon current plans. Actual expenditures may be greater or
less than such estimates depending on many factors including, but not limited
to, the availability of new technologies, the completion or lack of completion
of certain strategic alliances, and the timing and successful completion of
the Company's stated requirement to acquire additional operating and growth
capital, industry initiatives, success of the Company's research and
development efforts, and other factors.
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>From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The private Securities litigation Reform Act of 1995
provides a safe harbor for forward looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following:
1. Market acceptance of the Company's products;
2. Obtaining sufficient additional operating capital in the form of debt or
equity;
3. The existence of an orderly market in the Company's securities;
4. Increased sales of the various products of the Company;
5. Continued success in the Company's research and development activities;
and
6. Successful completion of strategic alliances
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities and Use of Proceeds None.
Item 3. Defaults Upon Senior Securities. See discussion on page 12,
Note 5 to the Condensed Consolidated Financial Statements
included herein and page 16 "Liquidity and Capital Resources,"
with respect to the discussion concerning the default on the
loan convents of the Proctor and Gamble Senior Secured note.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None
Item 6 Exhibits and Reports on Form 8-K and S-8. None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCLO3PSS CORPORATION
Date: October 15, 2001 By/s/ William R. Stoddard
William R. Stoddard
Chief Executive Officer
Principal Executive Officer
Date: October 15, 2001 By/s/ Mondis Nkoy
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
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