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, 2006
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
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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 December 31, 2006
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Common 4,644,164
HYDROMER, INC.
INDEX TO FORM 10-QSB
December 31, 2006
Page No.
Part I - Financial Information
# 1 Consolidated Financial Statements
Balance Sheets - December 31, 2006 & June 30, 2006 2
Statements of Income for the three months and six months
ended December 31, 2006 and 2005 3
Statements of Cash Flows for the six months ended
December 31, 2006 and 2005 4
Notes to Financial Statements 5
# 2 Management's Discussion and Analysis of the Financial Condition
and Results of Operations 6
# 3 Controls and Procedures 7
Part II - Other Information
# 1 Legal Proceedings N/A
# 2 Change in Securities N/A
# 3 Default of Senior Securities N/A
# 4 Submission of Motion to Vote of Security Holders N/A
# 5 Other Information N/A
# 6 Exhibits and Reports on form 8-K 7
EXHIBIT INDEX
Exhibit No. Description of Exhibit
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33.1 SEC Section 302 Certification - CEO certification 9
33.2 SEC Section 302 Certification - CFO certification 10
99.1 Certification of Manfred F. Dyck, Chief Executive Officer,
pursuant to 18 U.S.C. Section 1350 11
99.2 Certification of Robert Y. Lee, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350 11
1
Part I - Financial Information
Item # 1
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2006 2006
UNAUDITED AUDITED
Assets
Current Assets:
Cash and cash equivalents $ 262,622 $ 434,865
Trade receivables less allowance for doubtful
accounts of $57,624 and $44,479 as of December
31, 2006 and June 30, 2006, respectively 982,134 1,198,089
Inventory 909,727 988,086
Prepaid expenses 68,223 118,436
Deferred tax asset 8,976 8,976
Income tax refund receivable 54,548 91,436
Other 108,502 127,776
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Total Current Assets 2,394,732 2,967,664
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Property and equipment, net 3,305,055 3,377,473
Deferred tax asset, non-current 536,323 507,426
Intangible assets, net 905,409 849,262
Other, non-current 119,171 114,377
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Total Assets $ 7,260,690 $ 7,816,202
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 623,816 $ 635,010
Short-term borrowings 531,535 656,255
Accrued expenses 257,801 374,043
Current portion of deferred revenue 55,059 128,941
Current portion of mortgage payable 208,924 202,204
Income tax payable 947 1,100
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Total Current Liabilities 1,678,082 1,997,553
Deferred tax liability 271,058 271,058
Long-term portion of deferred revenue 51,268 93,176
Long-term portion of mortgage payable 1,987,450 2,093,437
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Total Liabilities 3,987,858 4,455,224
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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;, 4,655,081 shares issued and 4,644,164
shares outstanding as of December 31, 2006 and
June 30, 2006 3,639,315 3,639,315
Contributed capital 577,750 577,750
Accumulated deficit (938,093) (849,947)
Treasury stock, 10,917 common shares at cost (6,140) (6,140)
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Total Stockholders' Equity 3,272,832 3,360,978
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Total Liabilities and Stockholders' Equity $ 7,260,690 $ 7,816,202
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2
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Six Months Ended
December 31, December 31,
2006 2005 2006 2005
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
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Revenues
Sale of products $ 1,316,130 $ 1,161,379 $ 2,524,330 $ 2,216,129
Service revenues 361,422 245,481 729,902 490,764
Royalties and Contract Revenues 406,335 476,272 857,428 1,037,443
------------ ------------ ------------ ------------
Total Revenues 2,083,887 1,883,132 4,111,660 3,744,336
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Expenses
Cost of Sales 748,658 803,384 1,596,243 1,620,732
Operating Expenses 1,188,063 1,242,355 2,544,942 2,624,089
Other Expenses 44,398 32,221 87,518 65,784
Provision for (Benefit from) Income Taxes 40,079 (66,241) (28,897) (192,531)
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Total Expenses 2,021,198 2,011,719 4,199,806 4,118,074
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Net Income (Loss) $ 62,689 $ (128,587) $ (88,146) $ (373,738)
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Earnings (Loss) Per Common Share $ 0.01 $ (0.03) $ (0.02) $ (0.08)
Weighted Average Number of Common Shares
Outstanding 4,644,164 4,643,217 4,644,164 4,634,362
Except for the quarter ended December 31, 2006, the effects of the common stock
equivalents on diluted earnings per share are not included as their effect would
be anti-dilutive. For the quarter ended December 31, 2006, there was no effect
of the common stock equivalents on diluted earnings per share.
3
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
2006 2005
UNAUDITED UNAUDITED
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Cash Flows From Operating Activities:
Net Loss $ (88,146) $ (373,738)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities
Depreciation and amortization 197,909 172,844
Deferred income taxes (28,897) (192,600)
Changes in Assets and Liabilities:
Trade receivables 215,955 232,961
Inventory 78,359 (16,410)
Prepaid expenses 50,212 26,092
Other assets 14,479 (37,986)
Accounts payable and accrued liabilities (127,433) (176,618)
Deferred income (115,790) -
Income taxes payable 36,735 2,328
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Net Cash Provided by (Used for) Operating
Activities 233,383 (363,127)
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Cash Flows From Investing Activities:
Cash purchases of property and equipment (44,728) (88,943)
Cash payments on patents and trademarks (136,910) (84,866)
Cash purchases of short-term investments - (392,633)
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Net Cash Used for Investing Activities (181,638) (566,442)
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Cash Flows From Financing Activities:
Net borrowings against Line of Credit (124,720) 78,270
Repayment of long-term borrowings (99,268) (81,174)
Proceeds from the issuance of common stock - 7,700
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Net Cash (Used for) Provided by Financing
Activities (223,988) 4,796
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Net Decrease in Cash and Cash Equivalents: (172,243) (924,773)
Cash and Cash Equivalents at Beginning of Period 434,865 1,376,656
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Cash and Cash Equivalents at End of Period $ 262,622 $ 451,883
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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.
Subsequent Events:
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On January 24, 2007, the Company renewed its Line of Credit facility to a new
maturity of January 31, 2008. The renewed credit facility, effective at
$737,500, will have the line reduced $12,500 each month beginning February 28,
2007 and carries a rate of LIBOR + 3%.
Segment Reporting:
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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
2006
Revenues $ 2,231,934 $ 1,879,726 $ 4,111,660
Expenses (1,850,442) (1,637,221) $ (741,040) (4,228,703)
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Pre-tax Income (Loss) $ 381,492 $ 242,505 $ (741,040) $ (117,043)
============= ============= =========== =============
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2005
Revenues $ 2,203,554 $ 1,540,782 $ 3,744,336
Expenses (1,812,623) (1,771,260) $ (726,722) (4,310,605)
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Pre-tax Income (Loss) $ 390,931 $ (230,478) $ (726,722) $ (566,269)
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Geographic revenues were as follows for the six months ended December 31,
2006 2005
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Domestic 86% 84%
Foreign 14% 16%
5
Item #2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Results of Operations
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The Company's revenues for the quarter ended December 31, 2006 were $2,083,887,
up 10.7% from the $1,883,132 for the same period last year. Revenues for the six
months ended December 31, 2006 were $4,111,660, or 9.8% higher than the
$3,744,336 in the corresponding period a year ago. Revenues are comprised of the
sale of Products and Services and Royalty and Contract payments.
Product sales and services were $1,677,552 for the quarter ended December
31, 2006 as compared to $1,406,860 for the same period the year before, an
increase of $270,692 or 19.2%. Private label orders of our T-Hexx Dry
(periodic revenues) this quarter along with an increase in demand in our
contract coating business accounted for the increase during the period. For
the six months ended December 31, 2006, product sales and services were
$3,254,232, up 20.2% (or $547,339) from the $2,706,893 the year before.
Increase demand in contract coating services, the private label T-Hexx Dry
sales and an inventory call on Biosearch OEM medical devices were behind
the revenue increase.
Royalty and Contract revenues include royalties received and the periodic
recurring payments from license, option and other agreements for other than
product and services. Included in Royalty and Contract revenues are
revenues from support and supply agreements. For the quarter ended December
31, 2006, Royalty and Contract revenues were $406,335, down $69,937 or
14.7% from the $476,272 the same period a year ago. Royalty and Contract
revenues were $857,428 and $1,037,443 for the six month periods ended
December 31, 2006 and 2005, respectively. Included in the September 2005
quarter was an additional $175,000 in support fees for the May and June
2005 periods, a delayed recognition due to the timing of agreement
finalization.
As of December 31, 2006, our open sales order book was approximately
$936,000, which does not include any [future] orders that would come up
during the normal course of business and filled immediately or during the
quarter. Although some of the sales orders can be cancelled prior to
production, the Company is of the opinion that no substantial cancellations
will occur.
Total Expenses for the quarter ended December 31, 2006 were $2,021,198 as
compared with $2,011,719 the year before, a 0.5% increase. For the six months
ended December 31, 2006, total Expenses were $4,199,806 as compared with
$4,118,074 the same period the year before, up 2.0%.
The Company's Cost of Goods Sold was $748,658 for the quarter ended
December 31, 2006 as compared with $803,384 the year prior, lower by 6.8%.
The transfer of a medical device product line (to the customer's internal
facilities) reduced manufacturing labor during the quarter, though we
continue to supply the coating formulations. On a year-to-date basis, Cost
of Goods Sold was $1,596,243 for fiscal 2007 as compared with $1,620,732 in
fiscal 2006, $24,490 or 1.5% lower.
Operating expenses were $1,188,063 for the quarter ended December 31, 2006
as compared with $1,242,355 the year before, down $54,292 or 4.4%. For the
six months ended December 31, 2006, Operating expenses were $2,544,942 as
compared with $2,624,089 the year before, down $79,147 or 3.0%. Included in
the prior year's amount was $165,000 (arising from the patent infringement
litigation initiated against a former licensee and other parties), offset
by approximately $68,000 in higher Research and Development expenses
(salaries and supplies) and $16,000 in higher utilities costs.
Included in Other Expenses are Interest expense and Interest income.
Interest expense for the six months ended December 31, 2006 and December
31, 2005 were $96,492 and $80,849, respectively, up from a higher
utilization of the line-of-credit facility. Interest income for the six
months ended December 31, 2006 and December 31, 2005 were $8,945 and
$13,539, respectively, lower from a decrease in investable funds during the
period.
Net income of $62,689 ($0.01 per share) is reported for the quarter ended
December 31, 2006 as compared to a net loss of $128,587 ($0.03 per share) the
year before. For the six months ended December 31, 2006, a net loss of $88,146
($0.02 per share) is reported as compared to a net loss of $373,738 ($0.08 per
share) the year before.
Higher product and services revenues, from the continued growth in our
contract coating services along with the periodic private label T-Hexx Dry
sales and an inventory call of medical devices in conjunction with the
production transfer to our customer, combined with a relatively flat
expense level yielded the improvement to the bottom line results this
fiscal year-to-date. Re-investment expenditures (research and development,
patents) accounted for approximately 26.1% of the operating expenses. Our
current projects include exciting new developments in the areas of
thrombogenicity and cell mitosis, for use in the cardiovascular and
neurovascular fields. These developments are patent pending.
6
Financial Condition
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Working capital decreased $253,461 during the six months ended December 31,
2006.
Net operating activities provided $233,383 for the six month period ended
December 31, 2006.
The net loss as adjusted for non-cash expenses, provided for $80,866 in net
cash. The collections of accounts receivables as offset by the earning of
income on amounts previously collected, provided for an additional $100,165
source of cash.
Investing activities used $181,638 and financing activities used $223,988 during
the six months ended December 31, 2006.
During the six months, the Company expended $44,728 on capital expenditures
and $136,910 into its patent estate. The Company also repaid $124,720 to
its revolving line of credit and paid down long-term borrowings by $99,268.
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.
Item # 3
Disclosure Controls and Procedures
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As of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of our management,
including the Chief Executive Officer and President and the Chief Financial
Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures.
Based upon this evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, our disclosure controls and procedures were effective
and that there were no changes to our Company's internal control over financial
reporting that have materially affected, or is reasonably likely to materially
affect the Company's internal control over financial reporting during the period
covered by the Company's quarterly report.
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 - There were four Form 8-K's filed during the
quarter ending December 31, 2006, each announcing the Company's new
technological developments.
7
SIGNATURES
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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
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Robert Y. Lee
Chief Financial Officer
DATE: February 8, 2007