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 March 31, 2005
Commission File Number 0-10683
HYDROMER, INC.
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(Exact name of registrant as specified in its charter)
New Jersey 22-2303576
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(State of incorporation) (I.R.S. Employer
Identification No.)
35 Industrial Pkwy, Branchburg, New Jersey 08876-3424
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(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
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(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 March 31, 2005
--------- -----------------------------
Common 4,623,942
HYDROMER, INC.
INDEX TO FORM 10-QSB
March 31, 2005
Page No.
Part I - Financial Information
Consolidated Financial Statements
Balance Sheets - March 31, 2005 & June 30, 2004...... 2
Statements of Income for the three months and nine
months ended March 31, 2005 and 2004................ 3
Statements of Cash Flows for the nine months ended
March 31, 2005 and 2004............................. 4
Notes to Financial Statements........................ 5
Management's Discussion and Analysis of the Financial
Condition and Results of Operations................. 7
Part II - Other Information.................................. 9
EXHIBIT INDEX
Exhibit No. Description of Exhibit
31.1 SEC Section 302 Certification - CEO certification.... 11
31.2 SEC Section 302 Certification - CFO certification.... 12
32.1 Certification of Manfred F. Dyck, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350......... 13
32.2 Certification of Robert Y. Lee, Chief Financial
Officer, pursuant to 18 U.S.C. Section 1350......... 13
-1-
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2005 2004
UNAUDITED AUDITED
Assets --------- --------
Current Assets:
Cash and cash equivalents..................... $ 170,692 $ 142,476
Trade receivables less allowance for doubtful
accounts of $21,060 as of March 31, 2005 and
$10,727 as of June 30, 2004.................. 1,834,614 1,715,309
Inventory..................................... 833,206 808,989
Prepaid expenses.............................. 170,864 124,799
Deferred tax asset............................ 152,601 141,798
Other......................................... 33,104 32,638
--------- ---------
Total Current Assets........................... 3,195,081 2,966,009
Property and equipment, net.................... 3,127,142 2,921,560
Intangible assets, net......................... 778,343 676,291
Goodwill, net.................................. 238,172 238,172
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Total Assets $ 7,338,738 $ 6,802,032
========= =========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable.............................. $ 624,298 $ 524,917
Short-term borrowings.......................... 521,981 131,010
Accrued expenses .............................. 205,120 246,019
Bonus payable.................................. - 187,635
Current portion of deferred revenue............ 158,500 26,000
Current portion of mortgage payable............ 92,811 91,507
Income tax payable............................. 78,654 88,317
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Total Current Liabilities...................... 1,681,364 1,295,405
Deferred tax liability......................... 223,222 191,500
Long-term portion of deferred revenue.......... 152,000 104,000
Long-term portion of mortgage payable.......... 1,295,137 1,363,723
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Total Liabilities 3,351,723 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 March 31, 2005,
4,634,859 shares issued and 4,623,942
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........................... (216,210) (339,821)
Treasury stock, 10,917 common shares at cost.. (6,140) (6,140)
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Total Stockholders' Equity 3,987,015 3,847,404
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Total Liabilities and Stockholders' Equity $ 7,338,738 $ 6,802,032
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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
---------------------- ---------------------
Revenues
Sale of products............ $1,372,727 $1,448,217 $3,646,382 $3,660,176
Service revenues............ 244,111 316,397 829,523 577,606
Royalties, options and
licenses................... 651,500 623,337 1,920,459 1,771,720
---------------------- ---------------------
Total Revenues.............. 2,268,338 2,387,951 6,396,364 6,009,502
Expenses
Cost of Sales............... 869,268 826,782 2,325,431 2,170,267
Operating Expenses.......... 1,203,428 1,189,047 3,783,314 3,261,972
Other Expenses.............. 26,892 27,987 74,452 89,939
Provision for Income Taxes.. 78,544 135,887 89,556 189,550
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Total Expenses.............. 2,178,132 2,179,703 6,272,753 5,711,728
---------------------- ---------------------
Net Income................... $ 90,206 $ 208,248 $ 123,611 $ 297,774
====================== =====================
Earnings Per Common Share.... $ 0.02 $ 0.05 $ 0.03 $ 0.06
Weighted Average Number of
Common Shares Outstanding... 4,623,214 4,597,987 4,611,365 4,594,346
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
Nine Months Ended
March 31,
2005 2004
UNAUDITED UNAUDITED
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Cash Flows From Operating Activities:
Net Income.............................. $ 123,611 $ 297,774
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization.......... 146,177 135,913
Deferred income taxes.................. 20,919 (4,000)
Changes in Assets and Liabilities
Trade receivables..................... (119,305) (345,784)
Inventory............................. (24,217) 62,024
Prepaid expenses...................... (46,065) (14,315)
Patents and Trademark................. (102,052) (37,107)
Other assets.......................... (466) 6,887
Accounts payable and accrued
liabilities.......................... 51,346 283,273
Income taxes payable.................. (9,663) 165,020
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Net Cash Provided by Operating
Activities......................... 40,285 549,685
-------- --------
Cash Flows From Investing Activities:
Cash purchases of property and
equipment.............................. (351,758) (223,836)
-------- --------
Net Cash Used for Investing
Activities......................... (351,758) (223,836)
-------- --------
Cash Flows From Financing Activities:
Net borrowings against Line of Credit... 390,971 (149,437)
Repayment of long-term borrowings....... (67,282) (619,457)
Proceeds from long-term borrowings...... - 555,000
Proceeds from the issuance of common
stock.................................. 16,000 7,497
-------- --------
Net Cash Provided by (used for)
Financing Activities............... 339,689 (206,397)
-------- --------
Net Increase in Cash and Cash Equivalents: 28,216 119,452
Cash and Cash Equivalents at Beginning of
Period.................................. 142,476 97,676
-------- --------
Cash and Cash Equivalents at End of
Period................................... $ 170,692 $ 217,128
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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 nine months ended March 31, by segment are:
Polymer Medical Corporate
Research Products Overhead Total
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2005
Revenues................... $ 4,065,309 $ 2,331,055 $ 6,396,364
Expenses................... (2,501,288) (2,747,266) $ (934,643) (6,183,197)
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Earnings (Loss) before
Income Taxes........ $ 1,564,021 $ (416,211) $ (934,643) $ 213,167
========= ========== ======== ==========
Polymer Medical Corporate
Research Products Overhead Total
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2004
Revenues.................... $ 3,801,160 $ 2,208,342 $ 6,009,502
Expenses.................... (2,232,866) (2,365,260) $ (924,052) (5,522,178)
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Earnings (Loss) before
Income Taxes............. $ 1,568,294 $ (156,918) $ (924,052) $ 487,324
========== ========== ========== =========
Geographic revenues were as follows for the nine months ended March 31,
2005 2004
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Domestic 83% 82%
Foreign 17% 18%
-5-
Subsequent Events:
In April 2005, the Company finalized contracts with a total value of
$340,000 entailing a transfer of technology know-how, a contract amendment
fee [on a pre-existing contract] and a resource dedication/increased output
fee. These agreements, in which the associated costs were expended in prior
periods, cumulated almost two years of discussions. The Company has
completed its obligations under these agreements and has received the cash
in April 2005.
Also in April, the Company entered into a seventeen year license and supply
agreement with another customer for $50,000, minimum quarterly royalties
plus the then value of coating supplies, subject to cancellation with 30
days notice by the licensee. Although the $50,000 license fee has been
received, it is recorded as deferred revenue until earned over the life of
the agreement.
Such transactions are representative of the nature of some of the
transactions the Company typically engages in: a high value and/or long-term
revenue stream against sunk costs (including capitalized patented costs).
While some of these agreements can be negotiated quickly, some, though not
the norm, may take a much longer time frame.
On May 6, 2005 Hydromer's patent 4,642,267 expired. This patent was the
subject of four (4) licenses with a total annual income to Hydromer of
approximately $2.1 million. Management is negotiating with these licensees
to replace the patent license with a supply/support/know-how arrangement to
recoup some of the lost revenue.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's revenues for the quarter ended March 31, 2005 were $2,268,338
as compared to $2,387,951 for the same period last year or a 5.0% decrease.
Revenues for the nine months ended March 31, 2005 were $6,396,364, up 6.4%
from $6,009,502 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 $1,616,838 for the quarter ended
March 31, 2005 as compared to $1,764,614 for the same period
last year, a decrease of 8.4%. Included in the three months
ended March 31, 2004 was a private label order of $176,148 which
did not occur in the corresponding quarterly period this year.
For the nine months ended March 31, 2005, product sales and
services were $4,475,905 as compared to $4,237,782 the prior
year, a 5.6% increase. Stronger sales in our contract coating
services this year contributed to the increase.
Royalty, license and option revenues from patented products were
$651,500 for the quarter, up 4.5% from $623,337 the same period
a year ago. For the nine months ended March 31, 2005, royalty,
license and option revenues were $1,920,459, up 8.4% from
$1,771,720 the same period a year ago. New licensee agreements
accounted for an increase of $72,000 or 4.1%, reflecting the
continual strong demand for our patented technology.
As of March 31, 2005, our open sales order book was
approximately $1,585,000, a significant part of 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 March 31, 2005 were $2,178,132 as
compared with $2,179,703 the year before, or a decrease of 0.1%. For the
nine months ended March 31, 2005, Total Expenses were $6,272,753 as compared
with $5,711,728 the same period the year before, an increase of 9.8%.
The Company's Cost of Goods Sold was $869,268 for the quarter
ended March 31, 2005 as compared with $826,782 the year prior, an
increase of 5.1%. On a year-to-date basis, cost of goods sold was
$2,325,431 this year as compared with $2,170,267 the corresponding
period a year ago, an increase of 7.1%. Increases to our labor
cost, including healthcare benefits, in addition to the increase
in the year-to-date services revenues resulted in higher cost of
goods sold.
Operating expenses were $1,203,428 for the quarter ended March 31, 2005
as compared with $1,189,047 the year before, an increase of 1.2%. For
the nine month periods, operating expenses were $3,783,314 this year
as compared with $3,261,972 the previous year. The addition of four
scientists, a production manager, a plant engineer and a QC manager
since March 1, 2004, as part of the Company's investment for the
future, resulted in an increase of $329,000 in higher personnel
costs. In addition, during this nine month period, the Company
expended an additional $100,000 in litigation costs in its
continued infringement claim against a former licensee and other
parties.
Interest expense, included in other expenses, for the nine months
ended March 31, 2005 and March 31, 2004 were $78,200 and $90,379,
respectively, lower this year-to-date as a result of lower interest
rates from the refinance of the first mortgage in October 2003 and
from the amortization of the mortgage balances.
-7-
Net Income of $90,206 ($0.02 per share) is reported for the quarter ended
March 31, 2005 as compared to Net Income of $208,248 ($0.05 per share) the
year before. For the nine months ended March 31, 2005, Net Income of
$123,611 ($0.03 per share) is reported as compared to Net Income of $297,774
($0.06 per share) the year before.
Our reinvestment back into the Company (primarily from an
increase in R&D staffing) increased current operating expenses
for expected returns in the future. Our developmental projects,
including those Medical related, are typically long-term
initiatives where the costs come way before any revenues are
returned.
Financial Condition
Working capital decreased $156,887 during the nine months ended March 31,
2005.
Net operating activities provided for $40,285 for the nine month period
ended March 31, 2005.
The Net Income adjusted for non-cash expenses, provided $290,707
in net cash. Working capital accounts utilized $148,369 in net cash:
primarily due to the increase in accounts receivables of $119,305.
Investing activities used $351,758 on capital expenditures and financing
activities provided $339,689 during the nine months ended March 31, 2005.
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. These
activities are substantially complete and the Company believes
that the current infrastructure is sufficient for the near term.
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 nine months
ending March 31, 2005, the Company borrowed, net of repayments,
$390,971 from the Line-of-Credit.
The Company has not yet obtained final resolution to a ratio
coverage covenant matter from the quarter ended December 31,
2004, though it expects to do so, at minimal or no cost,
shortly.
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.
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.
-8-
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 - A Form 8-K was filed during the quarter
ending March 31, 2005 announcing earnings for the quarter
ending December 30, 2004
-9-
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: May 16, 2005