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, 2007
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 March 31, 2007
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Common 4,670,664
HYDROMER, INC.
INDEX TO FORM 10-QSB
March 31, 2007
Page No.
Part I - Financial Information
# 1 Consolidated Financial Statements
Balance Sheets - March 31, 2007 & June 30, 2006 2
Statements of Income for the three months and nine months ended
March 31, 2007 and 2006 3
Statements of Cash Flows for the nine months ended March 31,
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 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
March 31, June 30,
2007 2006
UNAUDITED AUDITED
Assets
Current Assets:
Cash and cash equivalents $ 247,364 $ 434,865
Trade receivables less allowance for doubtful accounts of $57,624 and
$44,479 as of March 31, 2007 and June 30, 2006, respectively 773,095 1,198,089
Inventory 939,393 988,086
Prepaid expenses 163,616 118,436
Deferred tax asset 8,976 8,976
Income tax refund receivable 54,548 91,436
Other 112,698 127,776
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Total Current Assets 2,299,690 2,967,664
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Property and equipment, net 3,283,781 3,377,473
Deferred tax asset, non-current 655,969 507,426
Intangible assets, net 915,305 849,262
Other, non-current - 114,377
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Total Assets $ 7,154,745 $ 7,816,202
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 558,110 $ 635,010
Short-term borrowings 700,164 656,255
Accrued expenses 319,009 374,043
Current portion of deferred revenue 28,941 128,941
Current portion of mortgage payable 205,909 202,204
Income tax payable 9,869 1,100
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Total Current Liabilities 1,822,002 1,997,553
Deferred tax liability 271,058 271,058
Long-term portion of deferred revenue 70,182 93,176
Long-term portion of mortgage payable 1,939,037 2,093,437
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Total Liabilities 4,102,279 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; 4,681,581
shares issued and 4,670,664 shares outstanding as of March 31, 2007
and 4,655,081 shares issued and 4,644,164 shares outstanding as of
June 30, 2006 3,639,315 3,639,315
Contributed capital 577,750 577,750
Accumulated deficit (1,158,459) (849,947)
Treasury stock, 10,917 common shares at cost (6,140) (6,140)
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Total Stockholders' Equity 3,052,466 3,360,978
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Total Liabilities and Stockholders' Equity $ 7,154,745 $ 7,816,202
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2
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended Nine Months Ended
March 31, March 31,
2007 2006 2007 2006
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
----------------------------------- ----------------------------- -----------------------------
Revenues
Sale of products $ 1,006,875 $ 1,134,148 $ 3,531,205 $ 3,350,277
Service revenues 394,857 347,825 1,124,759 838,589
Royalties and Contract Revenues 395,981 439,112 1,253,409 1,476,555
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Total Revenues 1,797,713 1,921,085 5,909,373 5,665,421
----------------------------------- ----------------------------- -----------------------------
Expenses
Cost of Sales 773,469 851,911 2,369,712 2,472,643
Operating Expenses 1,310,201 1,448,766 3,855,143 4,072,855
Other Expenses / (Income) 43,711 (247,174) 131,229 (181,390)
Benefit from Income Taxes (109,302) (45,023) (138,199) (237,554)
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Total Expenses 2,018,079 2,008,480 6,217,885 6,126,554
----------------------------------- ----------------------------- -----------------------------
Net Loss $ (220,366) $ (87,395) $ (308,512) $ (461,133)
----------------------------------- ----------------------------- -----------------------------
Loss Per Common Share $ (0.05) $ (0.02) $ (0.07) $ (0.10)
Weighted Average Number of Common
Shares Outstanding 4,657,120 4,644,164 4,648,435 4,637,582
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
Nine Months Ended
March 31,
2007 2006
UNAUDITED UNAUDITED
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Cash Flows From Operating Activities:
Net Loss $ (308,512) $ (461,133)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities
Depreciation and amortization 302,171 266,430
Deferred income taxes (148,543) (192,600)
Changes in Assets and Liabilities:
Trade receivables 424,994 144,700
Inventory 48,693 (68,908)
Prepaid expenses (45,180) (106,428)
Other assets 129,455 (314,772)
Accounts payable and accrued liabilities (131,934) 124,424
Deferred income (122,994) (77,364)
Income taxes payable 45,657 -
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Net Cash Provided by (Used for) Operating Activities 193,807 (685,651)
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Cash Flows From Investing Activities:
Cash purchases of property and equipment (83,614) (267,096)
Cash payments on patents and trademarks (190,908) (137,651)
Cash purchases of short-term investments - (392,633)
Maturity of short-term investments - 400,000
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Net Cash Used for Investing Activities (274,522) (397,380)
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Cash Flows From Financing Activities:
Net borrowings against Line of Credit 43,909 208,195
Repayment of long-term borrowings (150,695) (129,446)
Proceeds from the issuance of common stock - 7,700
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Net Cash (Used for) Provided by Financing Activities (106,786) 86,449
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Net Decrease in Cash and Cash Equivalents: (187,501) (996,582)
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 $ 247,364 $ 380,074
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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 nine months ended March 31, by segment are:
Polymer Medical Corporate
Research Products Overhead Total
2007
Revenues $ 3,264,708 $ 2,644,665 $ 5,909,373
Expenses (2,813,142) (2,425,388) $ (1,117,554) (6,356,084)
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Pre-tax Income (Loss) $ 451,566 $ 219,277 $ (1,117,554) $ (446,711)
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2006
Revenues $ 3,222,757 $ 2,442,664 $ 5,665,421
Expenses (2,558,212) (2,687,553) $ (1,118,343) (6,364,108)
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Pre-tax Income (Loss) $ 664,545 $ (244,889) $ (1,118,343) $ (698,687)
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Geographic revenues were as follows for the nine months ended March 31,
2007 2006
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Domestic 86% 83%
Foreign 14% 17%
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 March 31, 2007 were $1,797,713,
down 6.4% from the $1,921,085 for the same period last year. Revenues for the
nine months ended March 31, 2007 were $5,909,373, or 4.3% higher than the
$5,665,421 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 $1,401,732 for the quarter ended March 31,
2007 as compared to $1,481,973 for the same period the year before, a
decrease of $80,241 or 5.4%. For the nine months ended March 31, 2007,
product sales and services were $4,655,964, up 11.2% (or $467,098) from the
$4,188,866 the year before. Increase demand in contract coating services,
private labeled 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 March
31, 2007, Royalty and Contract revenues were $395,981, down $43,131 or 9.8%
from the $439,112 the same period a year ago. Royalty and Contract revenues
were $1,253,409 and $1,476,555 for the nine month periods ended March 31,
2007 and 2006, respectively. Included in the September 2006 quarter was an
additional $175,000 in support fees for the May and June 2006 periods, a
delayed recognition due to the timing of agreement finalization.
As of March 31, 2007, our open sales order book was approximately $961,000.
During the month of April 2007, additional orders of approximately
$1,200,000 were received, some calling for delivery over the following
twelve months. Although some of the sales orders can be cancelled prior to
production, the Company is of the opinion that no substantial cancellations
will occur. In addition, in the Company's line of business, a part of its
sales are from orders that call for immediate or very short-term delivery.
The open sales order book value does not reflect such future orders as they
have not yet been received.
Total Expenses for the quarter ended March 31, 2007 were $2,018,079 as compared
with $2,008,480 the year before, a 0.5% increase. For the nine months ended
March 31, 2007, total Expenses were $6,217,885 as compared with $6,126,554 the
same period the year before, or higher by 1.5%.
The Company's Cost of Goods Sold was $773,469 for the quarter ended March
31, 2007 as compared with $851,911 the year prior, lower by 9.2%. On a
year-to-date basis, Cost of Goods Sold was $2,369,712 for fiscal 2007 as
compared with $2,472,643 in fiscal 2007, $102,931 or 4.2% lower. The
elimination of a medical device product line during the second quarter
(transferred to the customer's internal facilities), reduced manufacturing
labor while we continued to supply coating formulations.
Operating expenses were $1,310,201 for the quarter ended March 31, 2007 as
compared with $1,448,766 the year before, down $138,565 or 9.6%. For the
nine months ended March 31, 2007, Operating expenses were $3,855,143 as
compared with $4,072,855 the year before, down $217,712 or 5.3%. Included
in the prior year's amount was $247,000 in legal costs arising from the
patent infringement litigation initiated against a former licensee and
other parties, the settlement of which is included in Other Income.
Interest expense, interest income and other income are included in Other
Expenses. Interest expense for the nine months ended March 31, 2007 and
March 31, 2006 were $143,259 and $120,814, respectively, up from a higher
utilization of the line-of-credit facility and higher interest rates.
Interest income for the nine months ended March 31, 2007 and March 31, 2006
were $12,001 and $18,967, respectively, lower from a decrease in investable
funds during the period. The settlement of the patent infringement
litigation in the fiscal 2006 third quarter is reported as Other Income.
A net loss of $220,366 ($0.05 per share) is reported for the quarter ended March
31, 2007 as compared to a loss of $87,395 ($0.03 per share) the year before. For
the nine months ended March 31, 2007, a net loss of $308,512 ($0.07 per share)
is reported as compared to a net loss of $461,133 ($0.10 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 $991,000 or 25.7% 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 and still
under evaluation.
6
Financial Condition
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Working capital decreased $492,423 during the nine months ended March 31, 2007.
Net operating activities provided $193,807 for the nine month period ended March
31, 2007.
The net loss as adjusted for non-cash expenses, used $154,884 in cash. The
collections of accounts receivables as offset by the earning of income on
amounts previously collected, provided for a $302,000 source of cash.
Investing activities used $274,522 and financing activities used $106,786 during
the nine months ended March 31, 2007.
During the nine months, the Company expended $83,614 on capital
expenditures and $190,908 into its patent estate. The Company also borrowed
an additional $43,909 from its revolving line of credit and paid down
long-term borrowings by $150,695.
Recent delays by our customers in approving or commencing their R&D projects
have delayed our expected income streams, hindering our ability to start or
continue other revenue generating initiatives, some in which expenditures have
already been made in anticipation of the forthcoming projects. R&D projects of
this nature are imperative to the Company's ability to maintain its current
level of operations, including further R&D and continuing evaluation of the
Company's recent developments for use in the cardiac and neurovascular areas, as
normal sales, services and contract revenues alone are not sufficient at its
current levels. One such need is for in-vivo pig studies of our F202
non-leaching anti-thrombogenic coating onto cardiovascular stents. The Company
is investigating various financial initiatives to cover its re-investment
expenditures until they become revenue generating.
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 March 31, 2007.
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 ,VP
Robert Y. Lee
Chief Financial Officer
DATE: May 9, 2007
8