SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended December 31, 2004
Commission File Number 0-10683
HYDROMER, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-2303576
---------------------------------------------------------------------------
(State of incorporation) (I.R.S. Employer
Identification No.)
35 Industrial Pkwy., Branchburg, New Jersey 08876-3424
------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 722-5000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock Without Par Value
------------------------------
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate the number of shares outstanding or each of the issuer's classes
of Common Stock as of the close of the period covered by this report.
Class Outstanding at December 31, 2004
------ --------------------------------
Common 4,617,987
HYDROMER, INC.
INDEX TO FORM 10-QSB
December 31, 2004
Page No.
Part I - Financial Information
Consolidated Financial Statements
Balance Sheets - December 31, 2004 & June 30, 2004........ 2
Statements of Income for the three months and six
months ended December 31, 2004 and 2003.................. 3
Statements of Cash Flows for the six months ended
December 31, 2004 and 2003............................... 4
Notes to Financial Statements............................. 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations...................... 6
Part II - Other Information......................................... 8
EXHIBIT INDEX
Exhibit No. Description of Exhibit
33.1 SEC Section 302 Certification - CEO certification.... 10
33.2 SEC Section 302 Certification - CFO certification.... 11
99.1 Certification of Manfred F. Dyck, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350......... 12
99.2 Certification of Robert Y. Lee, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350......... 12
-1-
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2004 2004
------------ -----------
UNAUDITED AUDITED
Assets
Current Assets:
Cash and cash equivalents................... $ 253,224 $ 142,476
Trade receivables less allowance for
doubtful accounts of $31,497 as of
December 31, 2004 and $10,727 as of
June 30, 2004.............................. 1,852,776 1,715,309
Inventory................................... 893,925 808,989
Prepaid expenses............................ 86,780 124,799
Deferred tax asset.......................... 160,101 141,798
Other....................................... 32,681 32,638
---------- ---------
Total Current Assets......................... 3,279,487 2,966,009
Property and equipment, net.................. 3,115,692 2,921,560
Intangible assets, net....................... 767,715 676,291
Goodwill, net................................ 238,172 238,172
--------- ---------
Total Assets $ 7,401,066 $ 6,802,032
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable............................ $ 563,461 $ 524,917
Short-term borrowings....................... 652,639 131,010
Accrued expenses............................ 302,327 246,019
Bonus payable............................... - 187,635
Current portion of deferred revenue......... 158,500 26,000
Current portion of mortgage payable......... 92,937 91,507
Income tax payable.......................... 40,110 88,317
--------- ---------
Total Current Liabilities.................... 1,809,974 1,295,405
Deferred tax liability....................... 203,222 191,500
Long-term portion of deferred revenue........ 173,500 104,000
Long-term portion of mortgage payable........ 1,317,562 1,363,723
--------- ---------
Total Liabilities 3,504,258 2,954,628
--------- ---------
Stockholders' Equity
Preferred stock - no par value,
authorized 1,000,000 shares, no shares
issued and outstanding - -
Common stock - no par value, authorized
15,000,000 shares; as of December 31,
2004, 4,628,904 shares issued and
4,617,987 shares outstanding; as of
June 30, 2004, 4,608,904 shares issued
and 4,597,987 shares outstanding........... 3,631,615 3,615,615
Contributed capital......................... 577,750 577,750
Accumulated deficit......................... (306,417) (339,821)
Treasury stock, 10,917 common shares
at cost.................................... (6,140) (6,140)
--------- ---------
Total Stockholders' Equity 3,896,808 3,847,404
--------- ---------
Total Liabilities and Stockholders' Equity $ 7,401,066 $ 6,802,032
========= =========
-2-
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
--------------------- ---------------------
UNAUDITED UNAUDITED
Revenues
Sale of products............. $1,202,592 $1,236,708 $2,273,755 $2,211,959
Service revenues............. 303,683 154,568 585,312 261,209
Royalties, options and
licenses.................... 675,421 590,410 1,268,959 1,148,383
--------- --------- --------- ---------
Total Revenues................ 2,181,696 1,981,686 4,128,026 3,621,551
Expenses
Cost of Sales................ 757,406 755,670 1,456,163 1,343,485
Operating Expenses........... 1,302,102 1,061,255 2,579,886 2,072,925
Other Expenses............... 25,780 31,214 47,560 61,952
Provision for Income Taxes... 39,618 53,404 11,012 53,663
--------- --------- --------- ---------
Total Expenses................ 2,124,906 1,901,543 4,094,621 3,532,025
--------- --------- --------- ---------
Net Income.................... $ 56,790 $ 80,143 $ 33,405 $ 89,526
========= ========= ========= =========
Earnings Per Common Share..... $ 0.01 $ 0.02 $ 0.01 $ 0.02
========= ========= ========= =========
Weighted Average Number of
Common Shares Outstanding.... 4,613,150 4,597,063 4,605,569 4,592,525
The effects of the common stock equivalents on diluted earnings per share
are not included as they have no impact.
-3-
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
2004 2003
--------- ---------
UNAUDITED UNAUDITED
Cash Flows From Operating Activities:
Net Income.............................. $ 33,405 $ 89,526
Adjustments to reconcile net income
to net cash provided by (used for)
operating activities
Depreciation and amortization......... 97,452 90,244
Deferred income taxes................. (6,581) (4,000)
Changes in Assets and Liabilities
Trade receivables.................... (137,467) (167,305)
Inventory............................ (84,936) (39,418)
Prepaid expenses..................... 38,019 16,201
Patents and Trademark................ (91,424) (36,372)
Other assets......................... (43) 13,263
Accounts payable and accrued
liabilities......................... 109,216 156,692
Income taxes payable................. (48,207) 37,133
Net Cash (Used for) Provided by -------- --------
Operating Activities.................. (90,566) 155,964
-------- --------
Cash Flows From Investing Activities:
Cash purchases of property and
equipment.............................. (291,584) (118,925)
-------- --------
Net Cash Used for Investing
Activities............................ (291,584) (118,925)
-------- --------
Cash Flows From Financing Activities:
Net borrowings against Line of
Credit................................. 521,629 56,683
Repayment of long-term borrowings...... (44,731) (597,774)
Proceeds from long-term borrowings..... - 555,000
Proceeds from the issuance of common
stock................................. 16,000 7,497
-------- --------
Net Cash Provided by Financing
Activities............................ 492,898 21,406
-------- --------
Net Increase in Cash and Cash Equivalents: 110,748 58,445
Cash and Cash Equivalents at Beginning of
Period.................................. 142,476 97,676
Cash and Cash Equivalents at End of ------- -------
Period.................................. $ 253,224 $ 156,121
======= =======
-4-
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
Notes to Consolidated Financial Statements
In the opinion of management, the accompanying unaudited financial statements
include all adjustments (consisting of only normal adjustments) necessary
for a fair presentation of the results for the interim periods. Certain
reclassifications have been made to the previous year's results to present
comparable financial statements.
Segment Reporting:
The Company operates two primary business segments. The Company evaluates the
segments by revenues, total expenses and earnings before taxes. Corporate
Overhead is excluded from the business segments as to not distort the
contribution of each segment.
The results for the six months ended December 31, by segment are:
Polymer Medical Corporate
Research Products Overhead Total
--------------------------------------------------
2004
Revenues................ $ 2,631,063 $ 1,496,963 - $ 4,128,026
Expenses................ (1,762,884) (1,683,097) $ (637,628) (4,083,609)
Earnings (Loss) before --------- --------- --------- ---------
Income Taxes........... $ 868,179 $ (186,134) $ (637,628) $ 44,417
========= ========= ========= =========
2003
Revenues................ $ 2,245,559 $ 1,375,992 - $3,621,551
Expenses................ (1,456,255) (1,451,412) (570,695) (3,478,362)
--------- --------- --------- ---------
Earnings (Loss) before
Income Taxes........... $ 789,304 $ (75,420) $ (570,695) $ 143,189
========= ========= ========= =========
The prior period segment information has been restated to conform to the
current year presentation.
Geographic revenues were as follows for the six months ended December 31,
2004 2003
------ ------
Domestic 82% 82%
Foreign 18% 18%
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's revenues for the quarter ended December 31, 2004 were $2,181,696
as compared to $1,981,686 for the same period last year or a 10.1% increase.
Revenues for the six months ended December 31, 2004 were $4,128,026, up 14.0%
from $3,621,551 the corresponding period a year ago. Revenues are comprised of
the sale of Products and Services and Royalty, Options and License payments.
Product sales and services were $1,506,275 for the quarter ended
December 31, 2004 as compared to $1,391,276 for the same period last
year, an increase of 8.3%. For the six months ended December 31,
2004, product sales and services were $2,859,067 as compared to
$2,473,168 the prior year, a 15.6% increase. Stronger sales in our
contract coating, R&D Services and Cosmetic product lines this year
contributed to the increase.
Royalty, license and option revenues from patented products were
$675,421 for the quarter, up 14.4% from $590,410 the same period a
year ago. For the six months ended December 31, 2004, royalty,
license and option revenues were $1,268,959, up 10.5% from $1,148,383
the same period a year ago.
As of December 31, 2004, our open sales order book was approximately
$982,000, which represents orders for delivery during the remainder
of the current fiscal year. Some of these orders are subject to
cancellation, however, the Company is of the opinion that no
substantial cancellations will occur. Our open order book excludes
though, future orders that would come up during the normal course of
business for immediate delivery also during this fiscal year.
Total Expenses for the quarter ended December 31, 2004 were $2,124,906 as
compared with $1,901,543 the year before, or an increase of 11.7%. For the
six months ended December 31, 2004, total Expenses were $4,094,621 as
compared with $3,532,025 the same period the year before, an increase of
15.9%
The Company's Cost of Goods Sold was $757,406 for the quarter ended
December 31, 2004 as compared with $755,670 the year prior, an
increase of 0.2%. On a year-to-date basis, cost of goods sold was
$1,456,163 this year as compared with $1,343,485 the corresponding
period a year ago, an increase of 8.4%. There was a higher cost of
goods sold corresponding to the increase in products and services
revenues.
Operating expenses were $1,302,102 for the quarter ended December 31,
2004 as compared with $1,061,255 the year before, an increase of
$240,847 or 22.7%. For the six month periods, operating expenses
were $2,579,886 this year as compared with $2,072,925 the previous
year. The addition of four scientists, a production manager and a QC
manager since March 1, 2004, as part of the Company's investment for
the future, resulted in an increase of $192,000 in higher personnel
costs. In addition, during this six month period, the Company
expended an additional $80,000 in litigation costs in its continued
infringement claim against a former licensee and other parties.
Interest expense for the six months ended December 31, 2004 and
December 31, 2003 were $50,934 and $63,745, respectively, lower this
period as a result of the lower interest rates: from the refinance of
the first mortgage in October 2003 and from the amortization of the
mortgage balances.
-6-
Income before Income Taxes was $96,408 for the current quarter as compared
with $133,547 the same period a year before. For the six months ended
December 31, 2004, Income before Income Taxes was $44,417 compared with
$143,189 a year ago.
Net Income of $56,790 ($0.01 per share) is reported for the quarter ended
December 31, 2004 as compared to Net Income of $80,143 ($0.02 per share)
the year before. For the six months ended December 31, 2004, Net Income
of $33,405 ($0.01 per share) is reported as compared to Net Income of
$89,526 ($0.02 per share) the year before.
Our reinvestment back into the Company (primarily from an increase in
R&D staffing) increased current operating expenses for planned
returns in the future.
Financial Condition
Working capital decreased $201,090 during the six months ended December 31,
2004. Management believes that its current working capital and available
line of credit, along with expected income and expense streams, are
sufficient to maintain its current level of operations.
Operating activities used $90,566 for the six month period ended December 31,
2004.
The Net income adjusted for non-cash expenses, provided $124,276 in
net cash. Working capital accounts utilized $214,842 in net cash:
primarily due to the increase in accounts receivables $137,467 and
$91,424 for patent expenses.
Investing activities used $291,584 on capital expenditures and financing
activities provided $492,898 during the six months ended December 31, 2004.
Capital expenditures (the adding of new production capabilities and
facilities to meet current demand as well as expanding our QA
laboratories and general building maintenance & improvements) were
the Company's investing activities this period.
The Company manages its working capital and other cash requirements
through utilization of its available short-term borrowings - a
revolving Line of Credit. During the six months ending December 31,
2004, the Company borrowed, net of repayments, $521,629 from the
Line-of-Credit.
Due to the Company's self-funding of capital expenditures, which was
un-typically high, the Company did not meet a ratio coverage covenant
on its mortgage loan. During the past twelve months the Company has
added new facilities and equipment in the areas of production,
research and development and Quality Assurance as well as repaired
its roof and replaced HVAC equipment. The Company is near completion
of this initiative which will be sufficient for the existing and near
future level of operations and R&D initiatives.
The Company's ability to repay the loan under the normal terms of
the loan is unhindered and they believe that this issue can be
resolved at no or minimal costs.
-7-
Disclosure Controls and Procedures
The evaluation of the Company's Internal Controls Environment concluded
that it was effective for the safeguarding of assets and in ensuring that
management is presented material information regarding the organization.
The evaluation also determined that there are areas that could be improved
upon, however, the controls and procedures in place were appropriate for the
type and size of the Company.
The Company has again reviewed its Internal Controls Environment during
the prior 90 days, and it has been determined that there have been no
significant changes in internal controls or in other factors that could
significantly affect the financial statements.
Litigation:
In May of 2004 the Company filed a suit in the District Court of New Jersey
against a former licensee of its T-Hexx products and against an agricultural
distributor selling certain products in the west and mid-west. The suit
alleges among other things, that the defendants infringed on various patents
belonging to the Company and illegally used Company trademarks. The former
licensee denied the allegations. The disbributor denied the allegations and
filed counterclaims against the Company alleging inequitable conduct in
obtaining and enforcing the patents and various anti-trust activities. The
matter has just begun discovery but the Company is of the opinion that such
counterclaims are totally wihout merit.
PART II - Other Information
The Company operates entirely from its sole location at 35 Industrial
Parkway in Branchburg, New Jersey, an owned facility secured by mortgages
through banks.
The existing facility will be adequate for the Company's operations for
the foreseeable future.
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibits - none
b) Reports on Form 8-K - Two Form 8-K's were filed during the quarter
ending December 31, 2004. One reported the Company's announcement
of earnings for the first quarter ending September 30, 2004. The
second Form 8-K reported the Company's announcement of receiving a
research grant from the National Institute of Health.
-8-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on his behalf by the
undersigned thereunto duly authorized.
HYDROMER, INC.
/s/ Robert Y. Lee
-----------------------
Robert Y. Lee
Chief Financial Officer
DATE: February 11, 2005
-9-