SEC Filing- EDGAR Online OTC BB:OZON
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October 16, 1998
CYCLO3PSS CORP (OZON)
Quarterly Report (SEC form 10QSB)
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
General
Cyclopss Corporation is primarily engaged in ozone application technologies and processes. The Company's main product lines offer an alternative for food safety, particularly microbial reductions on meat, poultry, fruits and vegetables. Additional products offered by the Company enable manufacturers to eliminate microbial build up in and on food processing equipment, while other ozone-related products marketed by the Company to commercial and institutional laundry markets enable users to reduce costs associated with labor, water, energy, chemicals, and wastewater disposal.
The Company also markets an automated sorting and counting system for commercial laundries. Other non-ozone based products offer by the Company include more than 350 specialty chemicals and compounds.
The Company has developed but not marketed two medical sterilization products to date. Due to the demand for alternative disinfection systems for food safety and cost saving equipment for the commercial laundry markets, the Company shifted its focus from medical sterilization, to more immediate, less or non-encumbered target markets food, laundry and chemical compounds.
Results of Operations
The Company's revenues were $588,664 for the six months ended August 31, 1998 compared to $551,619 for the six months ended August 31, 1997. The revenues for the three months ended August 31, 1998 were $265,273 compared to $249,228 for the three months ended August 31, 1997. Three of the Company's wholly owned subsidiaries currently contribute to the Company's gross revenues, Eco-Pure Food Safety Systems, Inc. (EPFS), Cyclopss Laundry Systems, Inc. (CLS) and Cyclopss Biochemical Corporation (CBC). The Company's gross margin for the six months ended August 31, 1998 was $127,968 compared to $128,245 for the six months ended August 31, 1997. The gross margin for the three months ended August 31, 1998 was $82,682 compared to $71,044 for the three months ended August 31, 1997. The Company expects revenue to continue to increase.
Research and development expenses increased to $206,538 for the six months ended August 31, 1998 from $152,023 for the six months ended August 31, 1997. Research and development expenses for the three months ended August 31, 1998 were $91,716, a slight increase from $74,159 for the three months ended August 31, 1997. The Company believes it is necessary and intends to increase its research and development efforts in the current year in order to complete the development process of food processing systems and to comply with USDA protocols to validate these systems.
Selling and marketing expenses increased to $203,650 for the six months ended August 31, 1998 from $164,274 for the six months ended August 31, 1997. Selling and marketing expenses for the three months ended August 31, 1998 were $93,490, compared to $116,822 for the three months ended August 31, 1997. The Company placed its advertising in a variety of general business and
food-related trade publications, to maximize its exposure during what is continuing to be a period of increased scrutiny over food safety issues. Management believes that it is critical to periodically support and supplement its sales efforts through advertising, public relations campaigns and trade- show participation.
General and administrative expenses increased to $1,035,698 for the six months ended August 31, 1998 from $657,867 for the six months ended August 31, 1997, due to an increase in management employment, shareholder relations and legal fees. General and administrative expense for the three months ended August 31, 1998 were $482,634, an increase to $386,760 for the three months ended August 31, 1997 for the same reasons. Management took steps to reduce general and administrative costs to help conserve cash in August, 1998.
Interest expense declined to $2,501 for the six months ended August 31, 1998 compared to $101,059 for the six months ended August 31, 1997, and it declined to $1,077 for the three months ended August 31, 1998 compared to $42,852 for the three months ended August 31, 1997, due to the conversion of long-term debt to common stock.
The Company believes that three of its divisions, namely Eco-Pure Food Safety Systems, Inc., Cyclopss Laundry Systems, Inc., and Cyclopss Biochemical, Inc. will be the major contributors to the Company's future revenue stream. In order to achieve sales growth acceptable to management, the Company will primarily focus on these three areas of the Company.
Liquidity and Capital Resources
As of August 31, 1998 the Company had insufficient funds on hand to continue its operations for the entire fiscal year ending February 28, 1999. Under direction from the Board of Directors, in August, 1998 the Company eliminated several non-essential positions, reducing the number of employees by roughly half and overhead by 80%. Also, on September 1, 1998 chairman/CEO Gary Bratcher resigned to help the Company conserve cash and reduce overhead. On September 10, 1998 the board of directors authorized issuance of Series "C" convertible preferred stock with a $.01 par value and a stated value of $1,000 per share. These shares are convertible into common shares at 70% to 90% of the average stock price. The shares provide for payment of cumulative dividends at 10% annually, paid in stock. The offering was opened on October 1, 1998. The Company is currently in process of closing this offering. Despite the additional funds that may be raised from the issuance of preferred stock, currently in progress, the Company under it's present plan of operations, does not have sufficient liquidity and capital resources to continue in operation through February 28, 2000.
On October 2, 1998 the Company was de-listed from the Nasdaq Small-Cap Market, since it did not meet the new quantitative maintenance requirements for continued listing on the Nasdaq Stock Market. This decision was made by a Nasdaq Listing Qualification Panel and the Company appealed this decision on October 12, 1998. Because the Company has funded its operations through the sale of its securities, the failure to be listed on Nasdaq will likely have an adverse effect on the ability of the Company to raise additional capital.
Cash used in operating activities was $1,871,952 for the six months ended August 31, 1998 compared to $700,905 for the six months ended August 31, 1997. The Company's use of cash has been more aggressive this year, as the Company experienced significant general and administrative and marketing expenses associated with the development and promotion of its Eco-Pure Food Safety Systems.
Cash expenditures for property and equipment and other assets were $50,768 for the six months ended August 31, 1998 compared to $9,281 for the six months ended August 31, 1997. This increase was the result of the Company increasing purchases of research equipment, patent fees and certain leasehold improvements.
During the period of March 9, 1998 to June 15, 1998, the Company authorized and offered its restricted common shares to accredited investors in an offering made pursuant to a Board Resolution on February 27, 1998 through First Financial Investment Securities Inc. Subscribers purchased 1,395,140 of such shares in this offering for a total of $1,743,925 or $1,500,820 after costs. These shares were sold for $1.25 each and each share carries a warrant. This redeemable warrant entitles the holder to purchase one share of common stock at a price of $3.75 per share. This offering resulted an increase in net cash provided by financing activities for the six months ended August 31, 1998 to $1,499,520 compared to cash used in financing activities of $11,435 for the six months ended August 31, 1997.
Total assets decreased to $1,335,594 for the six months ended August 31, 1998 from $1,960,141 for the year ended February 28, 1998, due to a decrease in the Company's cash position and a decrease in accounts receivable from $113,090 at February 28, 1998 to $75,880 at August 31, 1998.
Total current liabilities decreased to $197,073 at August 31, 1998 from $806,286 at February 28, 1998, a decrease of $609,213. Long term liabilities decreased to $9,735 for the three months ended August 31, 1998 from $13,278 for the year ended February 28, 1998. This decrease was due to reclassification of long term lease obligations to current obligations and reflects the efforts of management to reduce the debt burden of the Company and pay down existing obligations.
Plan of Operation
The Company's Plan of Operation is subject to the availability of additional capital, of which there can be no assurance. As stated elsewhere in the Form 10-QSB, the Company continues to operate at a significant loss and continues to have insufficient capital for its operations.
Food Safety Systems
In June of 1997, ozone was granted the status as "generally recognized as safe" or "GRAS", allowing food processors to use ozone in the processing of certain food items. This, together with a period of increased scrutiny over food safety issues, created a groundswell of demand for alternative food decontamination technologies. One Cyclo3pss designed food safety system is already in the process of being installed for a major food company. The Company believes this sale will result in further opportunities with this and other food related companies.
One major challenge that the Company faces is that of educating 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 without residual chemicals. For industry,
ozone is a cost competitive and environmentally-friendly answer to
microbial decontamination. For the consumer, ozone kills harmful
microorganisms quickly and leaves behind no chemical residue.
Laundry Systems
The Company will continue to market its ozone laundry washing systems, Eco-Wash. The Company will also continue to upgrade existing customers' sorting and counting system, (VAC Soil Counting System) with recent technological changes. The Company believes the products developed and marketed by this subsidiary will enjoy increased market potential in coming years due to:
* Competitive laundry markets will create a need for cost reduction and increased productivity; * Further environmental restrictions placed on discharge water quality; * Increased emphasis on sanitation and disinfection in the laundry industry; and * Increased concern regarding environmental issues associated with the laundry industry.
Specialty Chemicals
The Company's Biochem subsidiary will be provided additional marketing and promotional assistance in order to increase sales and product development. Current sales activities will be evaluated and alternatives sought to improve profit margins. Joint efforts will continue with Foster Miller, Inc., to market Biochem's monomer to the aerospace industry.
The focus for the fiscal year 1999 will be sales in the three target areas and the Company will apply the resources necessary to accomplish this. The Company anticipates a spending level of approximately $1,000,000 on research and development activities required to continue with product validation and food trials. Sales and marketing activities will be budgeted at $1,500,000 to allow for sales staff, advertising and trade shows. General and administrative expenses should be in the $2,000,000 range for the year.
The Company had 11 full time employees as of August 31, 1998. The Company anticipates additional employees will be required in engineering and sales during the next twelve months. The impact of the above will be determined by the market demand for food safety and textile systems and specialty chemicals.
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 publishes 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 such 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.
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