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, 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 September 30, 2006
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Common 4,644,164
HYDROMER, INC.
INDEX TO FORM 10-QSB
September 30, 2006
Page No.
Part I - Financial Information
# 1 Consolidated Financial Statements
Balance Sheets - September 30, 2006 & June 30, 2006 2
Statements of Income for the three months ended
September 30, 2006 and 2005 3
Statements of Cash Flows for the three months ended
September 30, 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 8
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
September 30, June 30,
2006 2006
UNAUDITED AUDITED
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Assets
Current Assets:
Cash and cash equivalents $ 205,377 $ 434,865
Trade receivables less allowance for doubtful accounts of
$44,479 as of September 30, 2006 and June 30, 2006 1,130,497 1,198,089
Inventory 916,808 988,086
Prepaid expenses 80,275 118,436
Deferred tax asset 8,976 8,976
Income tax refund receivable 123,524 91,436
Other 125,156 127,776
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Total Current Assets 2,590,613 2,967,664
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Property and equipment, net 3,343,480 3,377,473
Deferred tax asset, non-current 507,426 507,426
Intangible assets, net 876,278 849,262
Other, non-current 117,730 114,377
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Total Assets $ 7,435,527 $ 7,816,202
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 549,622 $ 635,010
Short-term borrowings 711,972 656,255
Accrued expenses 271,571 374,043
Current portion of deferred revenue 102,611 128,941
Current portion of mortgage payable 205,537 202,204
Income tax payable 969 1,100
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Total Current Liabilities 1,842,282 1,997,553
Deferred tax liability 271,058 271,058
Long-term portion of deferred revenue 70,972 93,176
Long-term portion of mortgage payable 2,041,072 2,093,437
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Total Liabilities 4,225,384 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 September 30, 2006 and June 30, 2006 3,639,315 3,639,315
Contributed capital 577,750 577,750
Accumulated deficit (1,000,782) (849,947)
Treasury stock, 10,917 common shares at cost (6,140) (6,140)
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Total Stockholders' Equity 3,210,143 3,360,978
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Total Liabilities and Stockholders' Equity $ 7,435,527 $ 7,816,202
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2
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
2006 2005
UNAUDITED UNAUDITED
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Revenues
Sale of products $ 1,208,200 $ 1,054,750
Service revenues 368,480 245,283
Royalties and contract revenues 451,093 561,171
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Total Revenues 2,027,773 1,861,204
Expenses
Cost of Sales 847,585 817,348
Operating Expenses 1,356,879 1,381,733
Other (Income) / Expenses 43,120 33,564
Benefit for Income Taxes (68,976) (126,290)
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Total Expenses 2,178,608 2,106,355
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Net Loss $ (150,835) $ (245,151)
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Loss Per Common Share $ (0.03) $ (0.05)
Weighted Average Number of
Common Shares Outstanding 4,644,164 4,625,542
The effects of the common stock equivalents on diluted earnings per share are
not included as their effect would be anti-dilutive.
3
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
2006 2005
UNAUDITED UNAUDITED
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Cash Flows From Operating Activities:
Net Loss $ (150,835) $ (245,151)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities
Depreciation and amortization 105,418 96,796
Deferred income taxes - (126,290)
Changes in Assets and Liabilities:
Trade receivables 67,592 498,681
Inventory 71,278 (97)
Prepaid expenses 38,160 12,953
Other assets (734) (7,967)
Accounts payable and accrued liabilities (187,857) (148,026)
Deferred income (48,534) (47,204)
Income taxes payable (32,219) 6,773
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Net Cash (Used for) Provided by Operating Activities (137,731) 40,468
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Cash Flows From Investing Activities:
Cash purchases of property and equipment (24,273) (47,176)
Cash payments on patents and trademarks (74,168) (53,451)
Cash purchases of short-term investments - (392,633)
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Net Cash Used for Investing Activities (98,441) (493,260)
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Cash Flows From Financing Activities:
Net borrowings against Line of Credit 55,717 (206,663)
Repayment of long-term borrowings (49,033) (34,078)
Proceeds from the issuance of common stock - 4,400
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Net Cash Provided by (Used for) Financing Activities 6,684 (236,341)
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Net Decrease in Cash and Cash Equivalents: (229,488) (689,133)
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 $ 205,377 $ 687,523
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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.
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 three months ended September 30, by segment are:
Polymer Medical Corporate
Research Products Overhead Total
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2006
Revenues $1,034,620 $ 993,153 $ 2,027,773
Expenses (971,011) (907,264) $ (369,309) (2,247,584)
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Pre-tax Income (Loss) $ 63,609 $ 85,889 $ (369,309) $ (219,811)
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2005
Revenues $1,108,114 $ 753,090 $ 1,861,204
Expenses (909,361) (937,049) $ (386,235) (2,232,645)
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Pre-tax Income (Loss) $ 198,753 $ (183,959) $ (386,235) $ (371,441)
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Geographic revenues were as follows for the three months ended September 30,
2006 2005
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Domestic 86% 91%
Foreign 14% 9%
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 September 30, 2006 were $2,027,773,
up 8.9% from the $1,861,204 for the same period last year. Revenues are
comprised of the sale of Products and Services and Royalty and Contract
payments.
Product sales and services were $1,576,680 for the quarter ended September
30, 2006 as compared to $1,300,033 for the same period the year before, an
increase of $276,647 or 21.3%. The increase in demand in our contract
coating business and an inventory call from one of our medical device OEM
customers accounted for the increase during the period.
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, 2006, Royalty and Contract revenues were $451,093, down
$110,078 or 19.6% from the $561,171 the same period a year ago. The
September 2005 quarter included an additional $175,000, representing
support fees for May and June 2005, which was recorded in the
July-September quarter as the agreement was finalized in that period.
As of September 30, 2006, our open sales order book was approximately
$944,000. Although some of these orders are subject to cancellation, 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.
Total Expenses for the quarter ended September 30, 2006 were $2,178,608 as
compared with $2,106,355 the year before, an increase of 3.4%.
The Company's Cost of Goods Sold was $847,585 for the quarter ended
September 30, 2006 as compared with $817,348 the year prior, an increase of
3.7%. The higher volume of products sold resulted in the higher cost of
sales.
Operating expenses were $1,356,879 for the quarter ended September 30, 2006
as compared with $1,381,733 the year before, lower by $24,854 or 1.8%.
Included in the prior year's amount was $77,000 in litigation costs on an
infringement claim against a former licensee and other parties, which was
settled in early 2006, offset by approximately $55,000 higher in salaries
expense in Research and Development.
Interest expense, included in Other Expenses, for the three months ended
September 30, 2006 and September 30, 2005 were $47,937 and $41,216,
respectively.
A net loss of $150,835 ($0.03 per share) is reported for the quarter ended
September 30, 2006 as compared to a net loss of $245,151 ($0.05 per share) the
year before.
In this fiscal quarter, we saw higher product and services revenues, when
compared with the same period a year ago, reflecting the continued demand
for our products and services. Even our Royalty and Contract revenues were
higher this year when discounting the 2005 May and June fees included in
the quarter ended September 30, 2005. Re-investment expenditures (research
and development, patents) accounted for approximately 25.1% of the current
period's operating expenses. Our re-investment expenditures over the past
few years has lead to some exciting new developments in the areas of
thrombogenicity and cell mitosis, for use in the cardiovascular and
neurovascular fields. The findings of our developments were announced in
October 2006 and a patent application on these technologies was filed in
November. New techonologies in the medical field typically are longer-range
initiatives through our customers, who would commercialize them into the
markets. Though the bulk of the "rewards" to our investment may be a few
years down the road, there is immediate opportunity in the current duration
from R&D projects, stand-still agreements and others.
6
Financial Condition
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Working capital decreased $221,780 during the three months ended September 30,
2006.
Net operating activities used $137,731 for the three month period ended
September 30, 2006.
The net loss as adjusted for non-cash expenses, used $45,417 in net cash.
The cash used for accounts payable and accrued liabilities, as off-set by
the decrease in accounts receivables rounded out the use of cash in
operating activities.
Investing activities used $98,441 and financing activities provided $6,684
during the three months ended September 30, 2006.
During the three months, the Company expended $24,273 on capital
expenditures and $74,168 into its patent estate. The Company also repaid
down its long-term borrowings by $49,033 while utilizing an additional
$55,717 from its revolving line of credit during the period.
The Company's $750,000 Line of Credit is due to mature on January 31, 2007. The
Company is seeking to renew this credit facility or seek alternative
financing/cash sources to enable a smooth transition until its new developments
repays for its investment costs.
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 no Form 8-K's filed during the
quarter ending September 30, 2006.
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: November 13, 2006
8