January 15, 1998
CYCLO3PSS CORP (OZON)
Quarterly Report (SEC form 10QSB)
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company has been involved in research and development and marketing several products since 1987, including the Eco-PureTM food processing system, Ozo3-CleanTM System 2000 ozone washing system, VAC Soil Counting System, specialty organic chemicals and custom synthesis. From the period since reactivation (March 2, 1987) to November 30, 1997, the Company had incurred a cumulative net loss of $13,366,396. The Company expects to continue to incur losses into the
next fiscal year. The Company's current cash assets may not be sufficient to fund its long term operations and accordingly the Company will need to either generate positive cash flow from operations or raise additional debt or equity capital in order to
fund its future operation and to meet the requirements to maintain its listing on the NASDAQ Small Cap market. There can be no assurance that the Company will be able to obtain additional capital to fund operations or maintain its NASDAQ listing in the future. The Company's financial position is discussed further below.
The Company's future operating results will depend on many factors, including acceptance of the Company's food processing technologies, laundry technologies, systems, equipment and attendant products in the various markets for the Company's products and the timing of FDA marketing clearance, if received, for the Company's medical sterilization and disinfection products, which require such clearance, and the demand for such products at that time. Additional factors include the Company's ability to manufacture and market its products on a cost-effective basis, the level of competition which it encounters in its various marketplaces, the ability of the Company to develop product enhancements and new products in order to achieve and maintain market share, and its ability to obtain adequate financing.
Results of Operations
The Company's revenues were $1,113,093 for the nine months ended November 30, 1997, and $264,080 for the nine months ended November 30, 1996, an increase of 421.4%. The revenues for the three months ended November 30, 1997 were $561,474 compared to $48,101 for the three months ended November 30, 1996, an increase of 1,167.2%. Two of the Company's wholly owned subsidiaries are currently contributing to the Company's revenues, CyclO3PSS Textile Systems, Inc. ("CTS") and CyclO3PSS Biochemical Corporation (CBC). The Company's gross margin for the nine months ended November 30, 1997 was $184,254 compared to $50,751 for the nine months ended November 30, 1996. This significant increase in gross margin is attributable to increased sales of CTS due to increasing acceptance of its technologies by its customers, and increased sales of CBC due to increasing interest in and use of its products and services by medical researchers and chemical suppliers and CBC's reputation for quality.
In fact, Research and development expenditures were $203,918 for the nine months ended November 30, 1997, and $637,798 for the nine months ended November 30, 1996. Research and development expenditures were $51,895 for the three months ended November 30, 1997, and $236,850 for the three months ended November 30, 1996. The Company anticipates the research and development cost will continue to decrease, as more products are brought to market.
The Company incurred general and administrative expenses of $1,224,827 for the nine months ended November 30, 1997, compared to $901,514 for the nine months ended November 30, 1996. General and administrative expenses for the three months ended November 30, 1997 were $566,958 and $330,330 for the three months ended November 30, 1996. This increase is due primarily to the recognition of $168,000 in deferred compensation expense for consulting fees for the nine months ended November 30, 1997. At quarter end November 30, 1997, the Company had 24 full time employees, compared to 19 full time employees at quarter end November 30, 1996. As the Company completes development of certain products and prepares for commercialization, the human resource requirements of the Company will increase.
The Company incurred selling and marketing expenses of $241,932 for the nine months ended November 30, 1997, compared to $135,034 for the nine months ended November 30, 1996. The selling and marketing expenses for the three months ended November 30, 1997 were $77,658 compared to $50,631 for the three months ended November 30, 1996. This increased expense is due to additional marketing and sales efforts for the textiles operations (CTS) and the attendant costs related to trade shows such as the Clean Show 97 for the textile industry and AAMI for medical and health care industries.
For the nine months ended November 30, 1997, the Company had interest income of $43,266 compared to interest income for the nine months ended November 30, 1996, of $30,154. The interest income for the three months ended November 30, 1997 was $19,775 compared to $18,540 for the three months ended November 30, 1996. This increase was due to an increase in the amount of cash on hand for the nine months ended November 30, 1997 compared to 1996. The Company incurred $109,625 in interest expense for the nine months ended November 30, 1997 including $33,599 attributable to equipment leasing arrangements and $76,026 in interest on long-term debt. The Company anticipates that interest expense will decrease due to the conversion of the convertible debt to common stock.
The Company's net loss for the nine months ended November 30, 1997 was $1,886,409 as compared to $2,132,943 for the nine months ended November 30, 1996. The Company's net loss for the three months ended November 30, 1997 was $745,762 as compared to $810,532 for the three months ended November 30, 1996. The Company anticipates that it will operate at a loss for the year ended February 28, 1998. However, it is anticipated that the losses will start to decrease as the revenues of CTS and CBC continue to increase.
Liquidity and Capital Resources
The Company has successfully completed a private placement of 1,250,000 of units of common stock and redeemable warrants to purchase common stock with First Financial Investment Securities, Inc., a registered broker dealer firm with headquarters in Austin, Texas, resulting in net proceeds to the Company of $1,065,000. This private placement was for a total of 1,000,000 units, at a price of $1.25 per unit. Each unit consists of one share of the Company's common stock, one redeemable class "A" Warrant entitling the holder to purchase one share of common stock at a price of $2.60 per share and one redeemable Class "B" Warrant entitling the holder to purchase one share of common stock at a price of $2.75 per share. Class "A" Warrants are redeemable by the Company at $.005 per Redeemable Warrant on 10 days prior written notice, provided that the average closing bid price of the Common Stock equals or exceeds $2.85 per share for 10 consecutive trading days ending within 10 days prior to the notice of redemption. Class "B" Warrants are redeemable by the Company at $.005 per Redeemable Warrant on 30 days prior written notice, provided that the average closing bid price of the Common Stock equals or exceeds $3.25 per share for 10 consecutive trading days ending within 10 days prior to the notice of redemption.
Cash used in operating activities was $1,318,427 for the nine months ended November 30, 1997, compared to $1,462,977 for the nine months ended November 30, 1996. Cash used for the nine months ended November 30, 1997 was comprised of cash on hand and collections of accounts receivable, which is comprised of VAC soil counting sales, health care and ozone washing systems sales and service from CyclO3PSS Textile Systems, Inc. and contract development and chemical compound sales from CyclO3PSS Biochemical Corporation.
The Company received $1,065,000 in cash from issuance of common stock during the nine months ended November 30, 1997, as described above, compared to $277 from issuance of common stock, $2,755,000 from issuance of preferred stock and $351,000 from issuance of convertible debt for the nine months ended November 30, 1996.
Total assets decreased to $2,863,424 at November 30, 1997 from $3,024,846 at February 28, 1997, primarily due to the decrease in the Company's cash, which was the result of continued losses from operations.
Plan of Operation
The plan of operation during the next 12 months includes the following:
1. Aggressively market the Company's Ozone Food Processing Systems, the ECO-PureTM , to the food processing market.
2. Continue to market the Company's Ozone Laundry Systems to the Health care market and the commercial and Industrial
Laundry marketplaces.
3. Continue research and development, testing and implementation of ozone systems for the food processing industries. Ozone was recently given the status of "generally regarded as safe" or "GRAS" by the FDA.
4. Continue testing and validation and initiate sales and installation of the Company's Health care Ozone Laundry Systems with Health care providers in the United States and Internationally.
5. Complete design and development and embark upon marketing of the Company's Ozone Laundry Systems for institutional users such as hotels, resorts, prisons, etc.
6. Continue to increase marketing, sales and installation of the Company's VAC laundry counting and sorting systems to commercial, industrial, institutional and Health care customers.
7. Complete validation testing of the Company's liquid chemical sterilant, SterOxTM, preparatory to completion of a licensing agreement with an established medical product manufacturing/marketing company and/or preparation and submission of a 510(k) Pre market Notification to the FDA.
8. Produce data and design elements in support of desired labeling claims for FDA officials reviewing the Company's 510(k) Premarket Notification for the STER-O3- ZONE 100TM.
9. Continued development of products and enhancements for the Company's textile operations.
10. Increased marketing and continued growth of contract research and development within the BioChemical group and the ongoing manufacture and sales of their current and future products.
11. Engage brokerage firms to assist the Company in more effectively marketing its shares to the investing public, including the
preparation of an analyst report on the Company and its technologies.
12. Seek additional capital. With additional financing in place, there may be additional diversification of the Company's business activities through future acquisitions or product development. The Company has entered into an engagement agreement with First Financial Investment Securities, Inc., a registered broker dealer firm with headquarters in Austin, Texas.
Although the Company will be primarily engaged in the aggressive sales and support of its completed products, it anticipates that research and development expenses will be ongoing, and could range from $800,000 to $1,000,000 during the next twelve months in support and completion of key future products.
The Company currently anticipates that its expenditures for equipment will range from $200,000 - $400,000 during the next twelve months based upon current manufacturing assumptions, assuming that the required financing is obtained and available.
The Company had 24 full time and 2 part-time employees as of November 30, 1997. The Company anticipates that no more than six additional employees will be hired during the next twelve months, and then, only as the market acceptance of the Company's food processing and textile systems accelerates. It is anticipated that general and administrative expenses would not increase by more than $200,000 on an annualized basis as a result of any such increase in employees.
The information set forth herein as to anticipated research and development costs, equipment purchases and increase in employees are management's best estimate 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 requirements to acquire additional operating and growth capital.
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 additional operating capital in the form of debt or equity;
3. The ability to achieve and maintain the requirements necessary to continue listing its shares on the NASDAQ Small Cap market, where they are currently listed. A loss of such listing would negatively impact the existence of an orderly market in the Company's securities; and
4. Increased sales of the various products of the Company. |
