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 NOVEMBER 30, 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.)
7105 South Highland Dr. #102
Salt Lake City, Utah 84121
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (801) 947-1101
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No .
Common Stock outstanding at January 11, 2002 - 37,348,040 shares of $.001 par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
FORM 10-QSB
Financial Statements and Schedules
Cyclo3pss Corporation
For Three and Nine Months Ended November 30, 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 . . . . . . . . . . . . . . . . . . . . 22
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . 22
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . 22
Item 4. Submission of Matters to a Vote of Security Holders . . . 22
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 22
Item 6. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 22
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CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
November 30 February 28
2001 2001
(unaudited)
Assets
Current assets:
Cash $ 106,054 $ 62,022
Accounts receivable,net 24,123 28,850
Work in progress inventory 24,302 -
Notes receivable from OxiDyn - 80,000
Prepaid expenses 67 3,462
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Total current assets 154,546 174,334
Property and equipment, net 25,214 67,800
Other assets:
Acquired patents, net 9,107 36,407
Developed patents and other, net 26,914 36,693
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$ 215,781 $ 315,234
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CYCLO3PSS CORPORATION
Condensed Consolidated Balance Sheets
(continued)
November 30 February 28
2001 2001
(unaudited)
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable $ 149,902 $ 124,937
Accrued liabilities 183,551 119,351
Notes payable 695,000 1,000,000
Note payable to officer - 10,000
Deferred revenue 100,000 100,000
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Total current liabilities 1,128,453 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; no and 614
shares issued and outstanding November
30, and February 28, 2001, respectively - 6
Series "E"convertible preferred stock;
10,000 shares authorized; 500 shares and
no shares issued and outstanding 5 -
Common stock, par value $.001; 55,000,000
shares authorized; 37,348,040 and
30,352,826 shares issued and outstanding at
November 30, 2001 and February 28, 2001,
respectively 37,348 30,353
Additional paid-in capital 20,441,090 19,504,245
Deferred stock-based compensation - (1,969)
Stock subscription received - 190,000
Accumulated deficit (20,889,926)(20,260,500)
Less treasury stock, 264,000 common
shares at cost (501,545) (501,545)
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Total stockholders' equity (deficit) (912,672) (1,039,054)
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$ 215,781 $ 315,234
========== ==========
See accompanying notes to condensed consolidated financial statements
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CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
For the three months ended
November 30,
2001 2000
Net revenues $ 49,744 $ 74,729
Costs and expenses:
Cost of revenues 54,194 56,270
Research and development 2,366 17,793
Selling and marketing 31,028 27,264
General and administrative 109,696 131,363
Depreciation and amortization 21,450 21,250
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Total expenses 218,734 253,940
Loss from operations (168,990) (179,211)
Interest income 3,331 519
Interest expense (5,560) -
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Net Loss from continuing operations (171,219) (178,692)
Discontinued operation:
Gain on sale of discontinued operations 201,530 -
Loss from discontinued operations - (602)
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Net gain (loss) from discontinued operations 201,530 (602)
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Net Loss $ 30,311 $ (179,294)
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Basic and diluted net loss per common share:
Continued operations $ (.005) $ (.006)
Discontinued operations $ .006 $ -
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Net loss per common shares- basic and
diluted $ .001 $ (.006)
============ ===========
Weighted average number of common shares
issued and outstanding 36,372,343 28,610,961
============ ===========
See accompanying notes to condensed consolidated financial statements
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CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
For the nine months ended
November 30,
2001 2000
Net revenues $ 251,022 $ 157,136
Costs and expenses:
Cost of revenues 190,093 182,240
Research and development 27,181 51,638
Selling and marketing 109,189 92,846
General and administrative 719,550 575,089
Depreciation and amortization 63,630 104,408
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Total expenses 1,109,643 1,006,121
Loss from continuing operations (858,621) (849,085)
Interest income 5,140 2,697
Interest expense (5,560) (131)
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Net loss from continuing operations (859,041) (846,519)
Discontinued operation:
Gain on sale of discontinued operations 213,539 -
Income from discontinued operations 16,076 23,341
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Net gain from discontinued operations 229,615 23,341
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Net Loss $ (629,426) $ (823,178)
============ ===========
Basic and diluted net loss per common share:
Continued operations $ (.025) $ (.031)
Discontinued operations $ .007 $ .001
Net loss per common shares- basic and
diluted $ (.018) $ (.030)
============ ============
Weighted average number of common shares
issued and outstanding 34,740,376 27,236,575
============ ============
See accompanying notes to condensed consolidated financial statements
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CYCLO3PSS CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the nine months ended
November 30,
2001 2000
Cash flows from operating activities:
Net loss $ (629,426) $ (823,178)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization 63,630 120,195
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 (213,539) -
Write off of note receivable 200,386 -
Changes in assets and liabilities:
Accounts receivable 4,727 (148,491)
Work in progress inventory (24,302) -
Prepaid expenses 3,395 349
Accounts payable and accrued
liabilities 89,165 (429,099)
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Net cash used in operating activities (478,995) (1,103,164)
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Cash flows from investing activities:
Disposals (purchases) of property and
equipment, net (3,357) 6,215
Proceeds from sale of discontinued
operations 235,000 -
Increase to notes receivable from OxiDyn (120,386) -
Addition to developed patents and other (2,069) (46,803)
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Net cash provided (used) in investing
activities 109,188 (40,588)
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Cash flows from financing activities:
Proceeds from issuance of common stock 100,000 150,000
Proceeds from issuance of warrants - 196,000
Proceeds from exercise of stock options 45,839 8,477
Proceeds from issuance of notes payable 278,000 750,000
Payment on note payable to officer (10,000) -
Principal payments under capital lease
obligations - (3,084)
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Net cash provided by financing activities 413,839 1,101,393
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Net increase (decrease) in cash 44,032 (42,359)
Cash at beginning of period 62,022 107,565
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Cash at end of period $ 106,054 $ 65,206
========== =========
Non-cash financing activities:
Issuance of common stock for stock
subscription $ 190,000 $ -
Conversion of note payable to preferred
stock 500,000 -
Conversion of note payable to common
stock 83,000 -
Conversion of preferred stock to common
stock 6 -
See accompanying notes to condensed consolidated financial statements.
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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 nine months ended November 30, 2001 are not
necessarily indicative of the results that may be expected for the full year
ended February 28, 2002. 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 an additional $100,000 for a total 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 second quarter of fiscal 2002.
-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 to sell primarily all of the assets of Cyclopss
Biochemical Corporation, a wholly owned subsidiary, for $285,000. The
Principals of Paragon, LLC are the employees of Cyclopss Biochemical
Corporation. The Company received $30,000 as a down payment and financed the
balance of $255,000 over five years, at 8% interest, secured by Paragon's
assets.
The terms of the sale agreement allow for a discount in the purchase price of
$50,000 if all amounts due under the note receivable, less the purchase price
discount, are paid prior to a specific date. The Company received a final
payment of $205,000 from Paragon, LLC during the third quarter of fiscal 2002
in connection with this sale, and recorded a total gain of $213,539 on the
sale of the biochemical products business.
The biochemical products business has been accounted for as a discontinued
operation 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
nine months ended November 30, 2001 and 2000. No allocation of general
corporate overhead has been made to discontinued operations relating to this
business.
2. Basis of Presentation
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern, which contemplates the realization
of assets and satisfaction of liabilities in the normal course of business.
The Company has sustained significant net losses which have resulted in an
accumulated deficit at November 30, 2001 of $20,889,926 and $20,260,500 at
February 28, 2001, has significant cash flow difficulties, and is in default
on debt covenants related to the outstanding notes payable, 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 $629,426 for the nine months ended November 30,
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 $106,054 at
November 30, 2001 and expected cash requirements for the year, there is doubt
as to the Company's ability to continue operations.
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CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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.
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 second quarter of fiscal 2002 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 subsidiary, Cyclopss Biochemcial Corporation, to Paragon,
LLC(see Note 1). The Company now only operates in one segment.
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CYCLO3PSS CORPORATION
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 that 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 5 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.
During fiscal 2002, the Company issued notes payable totaling $278,000 related
to a private placement offering. The notes bear interest at an annual
interest rate of 10% and have a term of six months. In connection with the
issuance of the notes payable the Company is required to issue common stock
for an amount equal to 2% of the face value of the notes payable. During the
second quarter of fiscal 2002, the Company issued 19,750 shares of common
stock under this arrangement and recorded interest expense of $3,752, based on
the fair value of the common stock issued in conjunction with the financing.
The Company has accrued interest of $1,808 at November 30, 2001 related to its
commitment under the note agreements to issue approximately 10,200 shares of
common stock for the $120,000 in notes payable issued during the third quarter
of fiscal 2002. During the third quarter of fiscal 2002, $83,000 of the above
notes payable were converted into 544,688 shares of common stock.
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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. Other ozone-related products
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 the
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 to sell primarily all of the assets of Cyclopss
Biochemical Corporation, a wholly owned subsidiary. The principals of
Paragon, LLC are the employees of Cyclopss Biochemical Corporation. During the
nine months ended November 30, 2001, the Company received a total of $235,000
from Paragon, LLC in connection to this sale, and recorded a gain of $213,539
on the sale of the biochemical products business.
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 on
June 28, 2001. The FDA also issued a ruling on retained water in raw meat and
poultry products that will become effective January 9, 2002. The ruling will
allow beef, pork and lamb producers to use water post-evisceration where it is
an inevitable part of a process to meet food safety requirements. Until this
ruling raw meat producers were not able to use water or water-based
sanitizers. These two rulings will open up a wide range of applications of
aqueous ozone to be used in raw meet and poultry processing.
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 $49,744 for the three months ended November 30,
2001 compared to $74,729 for the three months ended November 30, 2000. The
revenues were $251,022 for the nine months ended November 30, 2001 compared to
$157,136 for the nine months ended November 30, 2000. While revenue for the
third quarter of fiscal 2002 decreased from the same period in the prior year
due to timing of the completion of, and composition of the Company's
contracts, revenues increased for the nine months ended November 30, 2001 over
the same period in the prior year due to the Company's effort to generate more
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income and find institutions willing to pay for the Company's research
efforts. The Company's gross margin for the three months ended November 30,
2001, was $(4,450) compared to $18,459 for the three months ended November 30,
2000. The Company's gross margin for the nine months ended November 30, 2001,
was $60,929 compared to $(25,104) for the nine months ended November 30, 2000.
The change in gross margin is based on the composition of the Company's
contracts as research and development contracts generally have a lower gross
margin than equipment sales contracts. 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.
Research and development expenses decreased to $2,366 and $27,181 for the
three and nine months ended November 30, 2001 respectively from $17,793 and
$51,638 for the three and nine months ended November 30, 2000. This decrease
is due the Company's reduced research and development activity.
Selling and marketing expenses increased to $31,028 and $109,189 for the three
and nine months ended November 30, 2001 respectively from $27,264 and $92,845
for the three and nine months ended November 30, 2000. This increase is due
to the management's efforts to produce an increase in sales and further market
the Company's products and technology.
General and administrative expenses decreased to $109,696 for the three months
ended November 30, 2001 from $131,363 for the three months ended November 30,
2000. General and administrative expenses increased to $719,550 for the nine
months ended November 30, 2001 from $575,089 for the nine months ended
November 30, 2000. The increase in general and administrative expenses for
the nine month period ended November 30, 2001 is primarily due to the write
off of the note receivable and other advances to OxiDyn totaling $200,386. The
decrease in general and administrative expenses for the three months ended
November 30, 2001 resulted from management more closely monitoring and
controlling expenses due to significant cash flow constraints. 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 in the second quarter and was paid in full in October
of 2001, was $16,076 and $23,341 for the nine months ended November 30, 2001
and 2000, respectively. The decrease in net income is due to continuous
declining sales of biochemical products, which could be recorded by the
Company before the sale of this subsidiary. The Company recorded a gain on
the sale of the biochemical products business of $201,530 and $213,539 for the
three and nine months ended November 30, 2001, respectively.
-15-
The Company recorded net income for the three months ended November 30, 2001
of $30,311, which resulted primarily from the gain on sale of Cyclopss
Biochemical Corporation. The loss recorded for the three months ended November
30, 2000 was $179,896. The Company recorded a net loss applicable to common
stock for the nine months ended November 30, 2001 of $629,426. The loss
recorded for the nine months ended November 30, 2000 was $823,781. The Company
continues to incur losses from operations as revenue from product sales,
royalties, and consulting are not sufficient to offset the continued cost of
operations.
Liquidity and Capital Resources
Cash used in operating activities was $478,995 for the nine months ended
November 30, 2001 compared to $1,103,164 for the nine months ended November
30, 2000. This decrease is primarily due to the cash received from the sale of
Cyclopss Biochemical Corporation resulting in a gain on sale of $213,539, the
$200,386 write-off of receivables from OxiDyn and no common stock issued for
services in fiscal 2002 compared to $177,060 in stock issued for services in
fiscal 2001. In addition, the Company extended payables in fiscal 2002 while
in fiscal 2001 significant efforts were made to pay down outstanding payables.
Net cash provided by financing activities for the nine months ended November
30, 2001, was $413,839. An additional $100,000 was received on a private
placement offering related to the proposed acquisition of OxiDyn. The Company
also received $278,000 as of November 30, 2001 in connection with a private
placement offering of 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 $288,000 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
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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 $215,781 for the nine months ended November 30, 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 $1,128,453 at November 30, 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, offset by additional
net borrowings of $185,000 and an increase of approximately $89,000 in
accounts payable and accrued liabilities.
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
contracts and product sales. So far this fiscal year, as of November 30,
2001, the Company has negotiated and executed six separate development
contracts with Kohler Co., Kaz, Inc., Nelson Laboratories, Pharmacia, Proctor
& Gamble and ConAgra. Revenues recorded through November 30, 2001 under the
above contracts totaled approximately $150,000. The Company expects future
revenues of approximately $275,000 under these contracts. 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.
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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 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.
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
18
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.
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.
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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.
The information set forth herein as to anticipated research and development
costs, equipment purchases and increase in employees are management's best
estimates based upon current plans. Actual expenditures may be greater or
less than such estimates depending on many factors including, but not limited
to, the availability of new technologies, the completion or lack of completion
of certain strategic alliances, and the timing and successful completion of
the Company's stated requirement to acquire additional operating and growth
capital, industry initiatives, success of the Company's research and
development efforts, and other factors.
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. The private Securities litigation Reform Act of 1995
provides a safe harbor for forward looking statements. In order to comply
with the terms of the safe harbor, the Company notes that a variety of factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include, but are not limited to, the following:
1. Successful commercialization of the Company's proprietary technologies
and intellectual property;
2. Market acceptance of the Company's products;
3. Obtaining sufficient additional operating capital in the form of debt or
equity;
4. The existence of an orderly market in the Company's securities;
5. Increased sales of the various products of the Company;
6. Continued success in the Company's research and development activities;
7. Successful completion of strategic alliances;
8. Ability to attract and maintain qualified management, operations and
engineering personnel; and
9. Successful transformation to the Company's new business model.
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Subsequent Events
Extension of Convertible Promissory Note
Subsequent to the end of the reporting period the Company began discussions
with Procter & Gamble regarding the extension of the February 2002 due date of
a Convertible Promissory note in the amount of $500,000 of which Procter &
Gamble is the holder. The terms being discussed as of the filing date would
call for the Company to pay the interest earned as of the maturity date, and
Procter & Gamble extending the due date of the note for up to 18 months. The
re-negotiation is being aided in part by Procter & Gamble's interest in
commercializing one of the Companies more mature technologies and the
anticipation of a resulting Licensing and Royalty Agreement being entered into
between the parties. There can be no assurances however that the parties will
successfully re-negotiate the terms of the note, nor can there be any
assurances that the parties will enter into an acceptable Licensing and
Royalty agreement.
Underwriting Letter of Intent
On December 20th, 2001, the Company executed a Letter of Intent for the
underwriting of up to $3,000,000 worth of shares of the Company's common stock
by Delano Group Securities, LLC., a registered securities broker dealer with
primary offices in Chicago, Illinois. The proceeds of the underwriting would
potentially be used to fund ongoing operations if needed, and to finance some
small acquisitions being entertained by the Company. The underwriting would be
subject to the terms and conditions of an Investment Agreement, which as of
the time of this filing, has not been constructed nor has it been agreed to by
the parties. There can be no assurances that Delano and the Company will
successfully negotiate an Investment Agreement acceptable to both parties, nor
can there be any assurances a registration of the Company's shares would be
allowed effective by the Securities Exchange Commission
21
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
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYCLO3PSS CORPORATION
Date: January 14, 2002 By/s/ William R. Stoddard
William R. Stoddard
Chief Executive Officer
Principal Executive Officer
Date: January 14, 2002 By/s/ Mondis Nkoy
Mondis Nkoy
Controller, Corporate Secretary
Principal Financial Officer
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