HYDI form 10QSB 09-30-2007
 
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 September 30, 2007
 
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 September 30, 2007
Common
  
4,717,908





HYDROMER, INC.


INDEX TO FORM 10-QSB
September 30, 2007

     
Page No.
Part I - Financial Information
       
 
# 1 Consolidated Financial Statements
  
       
   
Balance Sheets - September 30, 2007 & June 30, 2007
2
       
   
Statements of Income for the three months ended
 
   
September 30, 2007 and 2006
3
       
   
Statements of Cash Flows for the three months ended
  
   
September 30, 2007 and 2006
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
7
       
 
# 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
  
33.1
9
33.2
10
     
99.1
11
     
99.2
11
     





- 1 -

Part I - Financial Information
Item # 1

HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


   
September 30,
2007
UNAUDITED
  
   June 30,
2007
AUDITED
 
Assets
          
Current Assets:
          
Cash and cash equivalents
  
$
238,953
  
$
146,338
  
Trade receivables less allowance for doubtful accounts of $65,396 as of
    September 30, 2007 and $62,044 as of June 30, 2007
    
977,613
    
1,121,752
  
Inventory
    
907,371
    
956,711
  
Prepaid expenses
   
85,272
    
120,448
  
Deferred tax asset
    
8,976
    
8,976
  
Other
    
254
    
13,484
  
Total Current Assets
    
2,218,439
    
2,367,709
  
               
Property and equipment, net
    
3,346,119
    
3,295,992
  
Deferred tax asset, non-current
    
619,730
    
609,730
  
Intangible assets, net
    
906,368
    
910,303
  
 
Total Assets
  
$
7,090,656
  
$
7,183,734
  
               
Liabilities and Stockholders’ Equity
              
Current Liabilities:
              
Accounts payable
  
$
430,989
  
$
537,338
  
Short-term borrowings
    
480,532
    
514,096
  
Accrued expenses
   
251,335
    
358,301
  
Current portion of capital lease
    
15,961
    
-
  
Current portion of deferred revenue
   
73,165
    
32,215
  
Current portion of mortgage payable
    
218,943
    
215,394
  
Income tax payable
   
9,160
    
9,160
  
Total Current Liabilities
    
1,480,085
    
1,666,504
  
Deferred tax liability
    
261,958
    
261,958.
  
Long-term portion of capital lease
    
47,786
    
-
  
Long-term portion of deferred revenue
    
55,774
    
62,978
  
Long-term portion of mortgage payable
   
1,822,126
    
1,878,040
  
Total Liabilities
    
3,667,729
    
3,869,480
  
 
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; 4,728,825 shares issued and 4,717,908 shares outstanding as of September 30, 2007 and 4,698,825 shares issued and 4,687,908 shares outstanding as June 30, 2007
   
3,703,815
    
3,643,815
  
Contributed capital
    
633,150
    
633,150
  
Accumulated deficit
    
(907,898
)
  
(956,571
)
Treasury stock, 10,917 common shares at cost
    
(6,140
)
  
(6,140
)
Total Stockholders’ Equity
    
3,422,927
    
3,314,254
  
Total Liabilities and Stockholders’ Equity
  
$
7,090,656
  
$
7,183,734
  



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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME



   
Three Months Ended
September 30,
  
   
2007
UNAUDITED
  
2006
UNAUDITED
  
Revenues
          
Sale of products
  
$
1,195,703
  
$
1,208,200
  
Service revenues
    
371,225
    
368,480
  
Royalties and contract revenues
    
392,285
    
451,093
  
Total Revenues
    
1,959,213
    
2,027,773
  
 
Expenses
              
Cost of Sales
    
803,491
    
847,585
  
Operating Expenses
    
1,074,207
    
1,356,879
  
Other Expenses
   
42,842
    
43,120
  
Benefit for Income Taxes
    
(10,000
)
  
(68,976
)
 
Total Expenses
    
1,910,540
    
2,178,608
  
 
Net Income (Loss)
  
$
48,673
  
$
(150,835
)
 
Earnings (Loss) Per Common Share
  
$
0.01
  
$
(0.03
)
Diluted Earnings (Loss) Per Common Share
   
0.01
    
n/a
  
Weighted Average Number of
  Common Shares Outstanding
  Common Shares Outstanding assuming dilution
    
4,702,365
4,936,365
    
4,644,164
n/a
  




The effects of the common stock equivalents on diluted earnings per share
are not included for the three months ended September 30, 2006
as their effect would be anti-dilutive.

- 3 -


HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


   
Three Months Ended
September 30,
  
   
2007
UNAUDITED
  
2006
UNAUDITED
  
Cash Flows From Operating Activities:
          
Net Income (Loss)
  
$
48,673
  
$
(150,835
)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities
              
Depreciation and amortization
    
95,256
    
105,418
  
Deferred income taxes
   
(10,000
)
  
-
  
Changes in Assets and Liabilities:
              
Trade receivables
    
144,139
    
67,592
  
Inventory
    
49,340
    
71,278
  
Prepaid expenses
    
35,176
    
38,160
  
Other assets
    
13,230
    
(734
)
Accounts payable and accrued liabilities
    
(213,315
)
  
(187,857
)
Deferred income
    
33,746
 
  
(48,534
)
Income taxes payable
    
-
    
(32,219
)
 
Net Cash Provided by (Used for) Operating Activities
    
196,245
    
(137,731
)
               
 
Cash Flows From Investing Activities:
              
Cash purchases of property and equipment
    
(109,336
)
  
(24,273
)
Cash payments on patents and trademarks
    
(32,112
)
  
(74,168
)
 
Net Cash Used for Investing Activities
    
 
(141,448
 
)
  
(98,441
)
               
Cash Flows From Financing Activities:
              
Net (repayments) borrowings against Line of Credit
    
(33,564
)
  
55,717
  
Borrowings under Capital Lease
    
63,747
    
-
  
Repayment of long-term borrowings
    
(52,365
)
  
(49,033
)
Proceeds from the issuance of common stock and options
    
60,000
    
-
  
 
Net Cash Provided by Financing Activities
    
37,818
    
6,684
  
               
Net Increase (Decrease) in Cash and Cash Equivalents:
    
92,615
    
(229,488
)
Cash and Cash Equivalents at Beginning of Period
    
146,338
    
434,865
  
Cash and Cash Equivalents at End of Period
  
$
238,953
  
$
205,377
  



- 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.
 
Common Stock Subscription:
In August 2007, the Company sold $60,000 of restricted Common Stock in a private (non-public), unregistered offering pursuant to Section 4(2) of the Securities Act of 1933. The proceeds are intended to finance a 28 day in-vivo study of cardiovascular stents coated with the Company’s Cell Anti-mitosis and Anti-thrombogenic coating, at a facility that is subject to regulations and guidelines promulgated or released by the FDA. 
 
Mr. Dieter Heinemann, a Director of the Company purchased 20,000 shares for $40,000 on August 14, 2007. 10,000 shares were purchased by Manfred F. Dyck, the Company’s Chairman of the Board, President and CEO on August 22, 2007 for $20,000. 5-year options were granted along with the purchase: Mr. Heinemann receiving 10,000 options and Mr. Dyck, 5,000 options. Each option allows for the purchase of one share of restricted Common stock at $3.00/share, exercisable immediately.
 
There were no underwriting discounts or commissions. The Company received the full proceeds of $60,000.
 
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 three months ended September 30, by segment are:
   
Polymer Research
  
Medical
Products
  
Corporate Overhead
  
 
Total
  
2007
                 
Revenues
  
$
1,175,964
  
$
783,249
        
$
1,959,213
  
Expenses
    
(852,872
)
  
(694,823
)
$
(372,845
)
  
(1,920,540
)
  Pre-tax Income (Loss)
  
$
323,092
  
$
88,426
  
$
(372,845
)
$
38,673
  
                           
2006
                         
Revenues
  
$
1,034,620
  
$
993,153
    
 
$
2,027,773
  
Expenses
    
(971,011
)
  
(907,264
)
$
(369,309
)
  
(2,247,584
)
  Pre-tax Income (Loss)
  
$
63,609
  
$
85,889
  
$
(369,309
)
$
(219,811
)
                           



Geographic revenues were as follows for the three months ended September 30,
 
2007
2006
Domestic
80%
86%
Foreign
20%
14%




- 5 -

Item #2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company’s revenues for the quarter ended September 30, 2007 were $1,959,213, down slightly by 3.4% from the $2,027,773 for the same period the year before. Revenues are comprised of the sale of Products and Services and Royalty and Contract payments.

Product sales and services were $1,566,928 for the quarter ended September 30, 2007 as compared to $1,576,680 for the same period the year before, a decrease of $9,752 or 0.6%. The periodic private label T-HEXX DRY teat sealant revenues in the current fiscal quarter was offset by the higher medical device sales from an inventory call the year before.

Royalty and Contract revenues includes 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 September 30, 2007, Royalty and Contract revenues were $392,285, down $58,808 or 13.0% from the $451,093 the same period a year ago. The prior year amount includes the final amortization of a technology transfer fee and a stand still agreement aggregating to $40,000.
 
As of September 30, 2007, our open sales order book was approximately $1,307,000. Although some of these orders are subject to cancellation, the Company is of the opinion that no substantial cancellations will occur. The open order book does not include future orders calling for immediate delivery that would come up during the normal course of business.


Total Expenses for the quarter ended September 30, 2007 were $1,910,540 as compared with $2,178,608 the year before, a decrease of $268,068 or 12.3%.

The Company’s Cost of Goods Sold was $803,491 for the quarter ended September 30, 2007 as compared with $847,585 the year prior, a decrease of $44,094 or 5.2%. The difference in product mix along with lower production costs, including the phase out of a product line transferred to our customer’s in-house production, resulted in the lower cost of sales.

Operating expenses were $1,074,207 for the quarter ended September 30, 2007 as compared with $1,356,879 the year before, lower by $282,672 or 20.8%. Lower staffing levels resulted in lower salaries expense during the current period as compared with the corresponding period a year ago.

Interest expense, included in Other Expenses, for the three months ended September 30, 2007 and September 30, 2006 were $44,912 and $47,937, respectively.


Net income of $48,673 ($0.01 per share) is reported for the quarter ended September 30, 2007 as compared to a net loss of $150,835 ($0.03 per share) the year before.

While product and services revenues were essentially flat for the comparative first quarters, production costs were lower due to the product mix and the elimination of a product line. However, the improved results for the current quarter came essentially from the restructuring and re-alignment of personnel scope: shifting our bio-polymer focus towards the cardiovascular and neurological arenas with results to date to include our patent pending anti-thrombogenic and cell anti-mitosis technologies. For such new developments to avail, we need to invest in Research & Development. During the quarter ending September 30, 2007, R&D spends amounted to $225,000, or 21% of Operating Expenses. Such R&D expenditures does provide an added incentive to the Company beyond its developments and the revenues derived there from: R&D tax credits. For the quarter ending September 30, 2007, a tax benefit of $10,000 is recorded for such tax credits. (There was no tax provision required for the quarter ended September 30, 2007 due to the carryforward of NOL’s [credits]).






- 6 -


 
Financial Condition

Working capital increased $37,149 during the three months ended September 30, 2007.

Net operating activities provided $196,245 for the three month period ended September 30, 2007.

The net income as adjusted for non-cash expenses, provided for $133,929 in net cash. The cash used for accounts payable and accrued liabilities, was off-set by the decrease in accounts receivables, inventory and prepaid assets.

Investing activities used $141,448 and financing activities provided $37,818 during the three months ended September 30, 2007.

During the three months, the Company expended $109,336 on capital expenditures and $32,132 into its patent estate.  Long-term borrowings of $52,365 were repaid along with $33,564 to the Company’s revolving line of credit during the period.   During the current quarter, new equipment was procured under a capital lease agreement for $63,747.

The Company’s Line of Credit is due to mature on January 31, 2008. The Company is seeking to renew this credit facility or seek alternative financing/cash sources.


Item # 3

Disclosure Controls and Procedures

  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 # 2.
 
Change in Securities
 
  In August 2007, the Company sold 30,000 shares of restricted stock at $2.00/share in a private (non-public), unregistered offering pursuant to Section 4(2) of the Securities Act of 1933. Please see the footnotes for additional information.

Item # 6. Exhibits and Reports on form 8-K:
 
a)  
Exhibits - none
 
b)  
Reports on form 8-K - The Company filed four Form 8-K’s during the quarter ending September 30, 2007. Each 8-K reported press releases issued by the Company on new Coating Services, Supply and/or Support Agreements.

- 7 -


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: November 14, 2007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
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