UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(Mark One)
/X/ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: March 31, 2007
Or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission File Number: 0-6333
HYDRON TECHNOLOGIES, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
New York 13-1574215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
4400 34th Street N, Suite F
Saint Petersburg, FL 33714 (727)342-5050
--------------------------- -------------
(Address of Principal Executive Offices) (Registrant's telephone number)
Indicate by check mark whether the Registrant (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 reports), and (2) has been subject to such filing
requirements for the past 90 days. _X_ Yes ___ No.
Number of shares of common stock outstanding as of June 1, 2007: 16,218,136
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
EXPLANATORY NOTE
We are filing an amended and restated Form 10QSB for the period ended March 31,
2007 as a result of our amendment and restatement of our financial statements
for such period to correct an error in recognition of income and related expense
for a sale that was erroneously included in that period which properly will be
included in our financial statements for the period ending June 30, 2007. We
discovered the error in the course of preparing our detailed financial forecasts
for the second quarter and subsequent periods.
The amount of the sale in question was $59,626 and reduced net sales by such
amount for the quarter ended March 31, 2007 and also reduced the Company's gross
profits by $50,682. The previously issued financial statements included in our
Form 10QSB for the quarter ended March 31, 2007 have been restated to correct
this error. The reversal of the sale and subsequent re-review and restatement
had other financial statement impact on the Company's financial statements for
the quarter ended March 31, 2007, including operating loss, loss before income
taxes and minority interest and net loss. The inventories as of March 31, 2007
have been increased by $8,944. The statement of cash flows for the three months
ended March 31, 2007 has also been restated.
The effect of the restatement is the following:
NET SALES
---------
As originally reported ..... $376,759
As restated ................ $317,133
COST OF SALES
-------------
As originally reported ..... $143,224
As restated ................ $134,280
GROSS PROFIT
------------
As originally reported ..... $233,535
As restated ................ $182,853
NET (LOSS)
----------
As originally reported ..... $112,236
As restated ................ $162,918
To reflect the impact of the re-review and restatement, this Form 10QSB/A
discloses the re-review and amends and restates the previously issued
Consolidated Financial Statements and the Notes to the Consolidated Financial
Statements (Item 1), as well as Management's Discussion and Analysis of
Financial Condition and Results of Operations (Item 2) and Controls and
Procedures (Item 3).
The filing of this Form 10QSB/A shall not be deemed an admission that the
original filing, when made, included any untrue statement of a material fact or
omitted to state a material fact necessary to make a statement therein not
misleading.
1
HYDRON TECHNOLOGIES, INC.
QUARTERLY PERIOD ENDED, MARCH 31, 2007
INDEX TO FORM 10-QSB/A
TABLE OF CONTENTS
PAGE
Part I. Financial Information
------------------------------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheet at March 31, 2007 (unaudited) .......... 3
Consolidated Statements of Operations for the Three ............... 4
months ended March 31, 2007 and 2006 (unaudited)
Consolidated Statements of Cash Flows for Three ................... 5
months ended March 31, 2007 and 2006 (unaudited)
Notes to Consolidated Financial Statements (unaudited) ............ 6
Item 2. Management's Discussion and Analysis of Financial Condition ....... 18
and Results of Operations
Item 3. Controls and Procedures ........................................... 24
Part II. Other Information
--------------------------
Item 1. Legal Proceedings ................................................. 25
Item 2. Changes in Securities and Use of Proceeds ......................... 25
Item 3. Defaults Upon Senior Securities ................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ............... 26
Item 5. Other Events ...................................................... 26
Item 6. Exhibits .......................................................... 27
Signatures ................................................................. 30
2
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents .................................. $ 11,039
Trade accounts receivable, net ............................. 134,357
Inventories ................................................ 242,822
Prepaid expenses and other current assets .................. 11,808
------------
Total current assets ................................... 400,026
Property and equipment, net .................................. 111,518
Deferred product costs, net .................................. 121,646
Intangible assets, net ....................................... 177,977
Restricted cash .............................................. 82,497
Deposits ..................................................... 29,652
------------
Total Assets ........................................... $ 923,316
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable ........................................... $ 238,693
Loans payable, net. ........................................ 156,426
Royalties payable .......................................... 22,940
Deferred revenues .......................................... 98,161
Accrued liabilities ........................................ 272,959
Current portion of obligation under capital leases ......... 27,176
------------
Total current liabilities .............................. 816,355
Long term liabilities
Obligation under capital lease payable ..................... 17,203
Minority interest in consolidated partnership .............. 217,161
Commitments and contingencies
Shareholders' deficit
Preferred stock - $.01 par value 5,000,000 shares
authorized; no shares issued or outstanding .............. -
Common stock - $.01 par value
30,000,000 shares authorized; 16,115,336
shares, issued and outstanding ........................... 161,153
Additional paid-in capital ................................. 21,633,998
Accumulated deficit ........................................ (21,914,738)
Treasury stock, at cost 10,000 shares ...................... (7,816)
------------
Total Shareholders' deficit ............................ (127,403)
------------
Total liabilities and shareholders' deficit ............ $ 923,316
============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2007 2006
------------ ------------
Net sales ...................................... $ 317,133 $ 375,467
Cost of sales .................................. 134,280 145,723
------------ ------------
Gross profit ................................... 182,853 229,744
Expenses
Royalty expense .............................. - 7,500
Research and development ..................... 3,871 1,010
Selling, general & administration ............ 312,833 363,526
Depreciation & amortization .................. 23,459 25,410
------------ ------------
Total expenses ............................. 340,163 397,446
------------ ------------
Operating loss ................................. (157,310) (167,702)
Interest (expense), net of interest income
of $319 and $620 .............................. (10,160) (27,073)
------------ ------------
Loss before income taxes and
minority interest .......................... (167,470) (194,775)
Income taxes expense ........................... - -
Minority interest in net loss of subsidiary .... 4,552 9,050
------------ ------------
Net loss ..................................... $ (162,918) $ (185,725)
============ ============
Basic and diluted loss per share
Net loss per common share .................... $ (0.01) $ (0.02)
============ ============
Weighted average shares
outstanding (basic and diluted) .............. 14,509,025 12,201,936
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
2007 2006
--------- ---------
OPERATING ACTIVITIES
Net loss ............................................. $(162,918) $(185,725)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority interest .................................. (4,552) (9,050)
Depreciation and amortization ...................... 23,459 25,410
Compensation expense from stock option awards ...... 1,365 5,214
Deferred financing costs ........................... 2,262 3,567
Interest expense ................................... 15,120 34,776
Change in operating assets and liabilities
Restricted cash .................................... 7,658 7,778
Trade accounts receivable .......................... (71,181) 25,733
Inventories ........................................ 26,431 27,614
Prepaid expenses and other current assets .......... (7,509) 2,583
Deposits ........................................... (400) (575)
Accounts payable ................................... (150,533) 34,606
Royalties payable .................................. (5,168) 955
Deferred revenues .................................. (31,871) (36,935)
Accrued interest ................................... (3,174) (13,230)
Accrued liabilities ................................ (8,694) 15,057
--------- ---------
Net cash used in operating activities .............. (369,705) (62,222)
FINANCING ACTIVITIES
Stock offering, proceeds ........................... 380,000 -
Payments on capital leases ......................... (6,196) (5,357)
Proceeds from exercise of stock options ............ - 44,535
--------- ---------
Net cash provided by financing activities .......... 373,804 39,178
Net increase (decrease) in cash and cash equivalents 4,099 (23,044)
Cash and cash equivalents at beginning of period ....... 6,940 36,281
--------- ---------
Cash and cash equivalents at end of period ............. $ 11,039 $ 13,237
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Stock issued to pay accrued interest ................. $ 15,120 $ 34,776
Warrants issued in connection with private offering .. $ 380,000 $ -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HYDRON TECHNOLOGIES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2007 AND 2006
NOTE A - NATURE OF OPERATIONS
Organization of Business
Hydron(R) Technologies, Inc. (the "Company") manufactures and sells
consumer and professional products, primarily in the personal care/cosmetics
field. The Company holds the exclusive license from Indevus Pharmaceuticals Inc
(Idev) who on April 17,2007 acquired Valera Pharmaceuticals (VLRX), the assignee
of GP Strategies Corporation (formerly National Patent Development Corporation)
("GPS") to a Hydron(R) polymer-based drug delivery system for topically applied,
nonprescription pharmaceutical products, which the Company uses to develop
proprietary products or to license to third parties. The Company owns U.S. and
international patents on a method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products.
The Company also owns a patent entitled "Compositions and Methods for
Delivery of Skin Cosmeceuticals." This patent covers the Company's unique
self-adjusting pH emulsion system.
The Company also owns U.S. and international patents on a method to
infuse oxygen into the skin and tissue topically without using the blood stream.
The oxygenation technology was submitted to the Food & Drug Administration to
obtain the necessary approvals for medical applications; however, at this time,
the necessary steps for final approval has not been determined and this project
is currently on hold.
Basis of Presentation and Going Concern
The unaudited consolidated financial statements included in this report
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission for interim reporting and include all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation. These financial
statements have not been audited.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to such rules and regulations for interim
reporting. The Company believes that the disclosures contained herein are
adequate to make the information presented not misleading. However, these
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report for the year ended
December 31, 2006, which is included in the Company's Form 10-KSB for the year
ended December 31, 2006. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
The accompanying consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations.
6
The Company anticipates that present working capital balances and
internally generated funds will be sufficient to meet our working capital needs
for the next three months or longer based on management decisions and sales. The
Company's independent accountants issued a "going concern" opinion on the
Company's December 31, 2006 financial statements, since the Company has incurred
significant losses over the past five years and generates a negative cash flow
on a monthly basis.
On July 1, 2005, the Company acquired Clinical Results, Inc. (CRI), a
St. Petersburg, Florida-based company. CRI was a privately held product
development laboratory and contract manufacturer of cosmaceutical and other
personal care products. CRI's clients ranged from mass market retailers to
marketers of high end brands, and certain health food store brands.
Management believes that Hydron Technologies will benefit from lower
manufacturing costs, and be better positioned to build its catalog and internet
business, as well as expand the sale of its skin care treatments beyond its
historical direct response TV and catalog operations, by utilizing CRI's broker
network. The Company's ultimate ability to attain profitable operations is
dependent upon obtaining additional financing or achieving a level of sales
adequate to support its cost structure.
Accordingly, there are no assurances that the Company will be
successful in achieving the above objectives, or that such objectives, if
realized, will enable the Company to obtain profitable operations or continue as
a going concern.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Hydron
Technologies, Inc. and its wholly-owned subsidiary CRI purchased as of July 1,
2005, and its majority owned limited liability limited partnership, Hydron
Royalty Partners, LLLP. All significant inter-company transactions have been
eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The credit risk
associated with cash equivalents is considered low due to the credit quality of
the issuers of the financial instruments.
The cash and cash equivalent balances at March 31, 2007 are covered by
the Federal Deposit Insurance Commission.
Restricted cash
At March 31, 2007, the Company had restricted cash of $82,497, all of
which were covered by the Federal Deposit Insurance Commission, which represents
funds from a consolidated entity, that are not available for use in the
Company's normal operations.
7
Concentration of Credit Risk
Trade accounts receivable are due primarily from contract manufacturing
customers and are usually paid to the Company within 30 days after receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral, although in some cases it requires deposits or
advances.
Inventories
Inventories are valued at the lower of cost or market, on a first-in,
first-out (FIFO) basis and include finished goods, components and raw materials.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets (or asset groups) over the remaining
depreciation/amortization period. The Company recognizes an impairment loss if
the carrying value of the asset exceeds the expected future cash flows. During
the period ended March 31, 2007, management determined there was no impairment
of long-lived assets.
Property and Equipment
Property and equipment, consisting primarily of furniture and
equipment, is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from four to six
years.
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the
purchase and development of patents and product rights. The deferred product
costs are being amortized over their estimated useful lives of five to seventeen
years using the straight-line method.
Common Stock, Common Stock Options
Prior to January 1, 2006, the Company accounted for employee
stock-based compensation using the intrinsic value method supplemented by pro
forma disclosures in accordance with APB 25 and SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.148 "Accounting
for Stock-Based Compensation--Transition and Disclosures." Under the intrinsic
value method, the recorded stock-based compensation expense was related to the
amortization of the intrinsic value of stock options issued and other
equity-based awards issued by the Company. Options granted with exercise prices
equal to the grant date fair value of the Company's stock have no intrinsic
value and therefore no expense was recorded for these options under APB 25.
Other equity-based awards for which stock-based compensation expense was
recorded were generally grants of restricted stock awards which were measured at
fair value on the date of grant based on the number of shares granted and the
quoted price of the Company's common stock. Such value was recognized as an
expense over the corresponding service period.
8
Effective January 1, 2006 the Company adopted SFAS 123R using the
modified prospective approach and accordingly prior periods have not been
restated to reflect the impact of SFAS 123R. Under SFAS 123R, stock-based awards
granted prior to its adoption will be expensed over the remaining portion of
their vesting period. These awards will be expensed under the accelerated
amortization method using the same fair value measurements which were used in
calculating pro forma stock-based compensation expense under SFAS 123. For
stock-based awards granted on or after January 1, 2006, the Company will
amortize stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a four year vesting period. SFAS
123R requires that the deferred stock-based compensation on the consolidated
balance sheet on the date of adoption be netted against additional paid-in
capital.
For the period ended March 31, 2007, the Company recorded stock-based
compensation expense of $1,365. For the period ended March 31, 2006, the Company
recognized $5,214 of stock-based compensation expense under the intrinsic value
method.
Earnings (loss) Per Share
The financial statements are presented in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Basic
earnings per share is computed using the weighted average number of common
shares outstanding during the period. Diluted earnings per share reflect the
potential dilution from the exercise or conversion of securities into common
stock.
Revenue Recognition
The Company recognizes revenue when:
o Persuasive evidence of an arrangement exists,
o Shipment has occurred,
o Price is fixed or determinable, and
o Collectibility is reasonably assured.
Subject to these criterion, the Company recognizes revenue at the time
of shipment of the relevant merchandise. The Company offers its individual
consumer customers a thirty-day warranty and estimates an allowance for sales
returns based on historical experience with product returns. For the Company's
formulation and contract manufacturing business, revenue is recognized when the
work is complete, the client approves the formula by written correspondence, and
the product is shipped.
Shipping and Handling Fees
The Company follows the provisions of Emerging Issues Task Force Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling is included as a
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.
9
Cost of Sales
Prior to the acquisition of CRI, products were manufactured through
third parties under contract and cost of sales included the cost of ingredients,
packaging material, assembly and processing costs. Currently, with manufacturing
capability, most products are manufactured in house. Inbound freight, internal
transfers, and component handling costs are charged to cost of sales. Costs
associated with shipping product to customers is included in cost of sales. The
cost of warehousing finished product that is available for sale is included in
selling, general and administrative expenses.
Research and Development Costs
Research and development expenditures, consist of costs incurred in
performing research and development activities, and are expensed as incurred.
For the periods ended March 31, 2007 and 2006, expenses charged to Research and
Development were $3,871 and $1,010, respectively.
Advertising
Advertising costs are expensed as incurred and are included in
"Selling, general and administrative expenses." Advertising expenses amounted to
approximately $469 and $31,635 for the periods ended March 31, 2007 and 2006,
respectively.
NOTE C - INVENTORIES
Inventories consisted of the following at March 31, 2007:
Finished Goods ................................ $ 17,632
Raw materials and components .................. 523,338
---------
540,970
Less : inventory valuation allowance .......... (298,148)
---------
Inventories, net .............................. $ 242,822
=========
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at March 31, 2007:
Accounts Receivable ........................... $ 154,357
Less : Allowance for Doubtful accounts ........ (20,000)
---------
Accounts Receivable, Net ...................... $ 134,357
=========
10
NOTE E - SHARE BASED COMPENSATION
The Company recognized $1,365 in share based compensation expense for
the three month period ended March 31, 2007. Options to purchase 10,000 shares
were granted to employees during the three months ended March 31, 2007.
For the stock-based awards granted on or after January 1, 2006, the
Company is amortizing stock-based compensation expense on a straight-line basis
over the requisite service period, which is generally a one year vesting period.
The fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the period ended March 31, 2007:
Risk-free interest rate ....... 4.9%
Expected life ................. 5 years
Expected volatility ........... 338%
Expected dividend yield ....... 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. As the Company's stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in Management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
NOTE F - LOANS PAYABLE
On June 14, 2005, the Company borrowed an aggregate of One Hundred
Fifty Thousand Dollars ($150,000) (collectively, the "Loans") from three
individual lenders (collectively, the "Lenders"), including individuals who are
(i) the Chairman of the Board and Interim President, and (ii) a second director
of the Company.
In connection with the Loans, the Company issued to each of the Lenders
a promissory note in the principal amount of Fifty Thousand Dollars ($50,000)
(individually, a "Note" and collectively, the "Notes") providing for (a)
quarterly payments of interest at ten percent (10%) per annum and (b) repayment
of principal in a balloon payment on the second anniversary of the date of the
Notes. Under the terms of the Notes, the Company may elect to pay quarterly
interest to the holders of the Notes in shares of common stock, $.01 par value,
of the Company (the "Common Stock"), in an amount calculated by dividing the
amount of interest due and payable by ten cents ($.10). The Notes also provide
that, in the event of a default by the Company under the Notes, the holders may
elect to receive payment of principal and accrued and unpaid interest in shares
of Common Stock, in an amount calculated by dividing the amount of principal and
accrued and unpaid interest payable by the "Average Market Price" for a share of
Common Stock. Under the terms of the Notes, "Average Market Price" means the
average closing sale price for a share of Common Stock measured over the last
ten trading days of the month preceding the interest payment date or, if no
trading in the Common Stock has occurred during such period, the average closing
sale price on the last date on which a share of Common Stock was sold in
over-the-counter trading in the Common Stock. In the event that no shares of
Common Stock have traded in the over-the-counter market for a period of six
months or more, the Average Market Price shall be the fair market price for a
share of Common Stock as determined in good faith by the Board of Directors of
the Company. In October 2005, the Company elected to pay the accrued interest
11
due on the Notes of $11,040 in stock of the Company and issued 44,000 shares at
$.25 to the Note holders. In January 2006, the Company elected to pay the
accrued interest due on the Notes of $13,230 in stock of the Company and issued
37,800 shares at $.35 to the Note holders. In March 2006, the Company elected to
pay the accrued interest due on the notes of $21,546 in stock of the Company and
issued 37,800 shares at $.57 to the Note holders. In July 2006, the Company
elected to pay the accrued interest due on the notes of $16,254 in stock of the
Company and issued 37,800 shares at $.43 to the Note holders. In January 2007,
the Company elected to pay the accrued interest due on the notes of $15,120 in
stock of the Company and issued 37,800 shares at $.17 to the Note holders, and
37,800 shares at $.23 to the Note holders. At March 31, 2007, the Company had
accrued $6,426 of interest on the notes due to the Note holders. In May 2007,
the Company elected to pay the accrued interest due on the notes and issued
37,800 shares at $.17 to the Note holders.
In addition, in connection with the Loans, each Lender received a
Common Stock Purchase Warrant (collectively, the "Warrants") entitling the
holder to purchase One Hundred Thousand (100,000) shares of Common Stock at an
exercise price of ten cents ($.10) per share for a five-year period. The
warrants were valued using the Black Scholes model at $24,000, which is being
amortized as interest expense over the life of the notes.
The Notes and the Warrants each provide that in the event that the
Company shall grant "piggy back" registration rights to any other party to cause
the Company's Common Stock or any security exercisable or exchangeable for, or
convertible into, shares of Common Stock to be included in a registration
statement filed by the Company for sale by any selling shareholder or by the
Company, the Company will grant the holders of the Notes and Warrants similar
registration rights.
On May 20, 2007, the Company agreed to extend and amend certain of the
terms of the loans (collectively, the "Loan Extension") made to the Company on
June 14, 2005 (collectively, the "Original Loans") by Mr. Saul, Richard Banakus,
the Chairman and a director of the Company, and Regis Synan (individually, a
"Lender" and collectively, the "Lenders") in the amounts of $50,000, $50,000 and
$50,000, respectively. Under the terms of the Loan Extension, the Lenders agreed
to extend the maturity date of the Original Loans from June 14, 2007 to June 14,
2008. In consideration for the Loan Extension, the Company agreed to grant each
Lender a common stock warrant (the "Loan Extension Warrants") exercisable for
Seventy Five Thousand (75,000) shares of the Common Stock for a five-year period
at an exercise price of $0.20 per share of Common Stock. In addition, the
Lenders agreed to continue to allow the Company to pay quarterly interest in
cash or in shares of Common Stock. In the case of interest paid in shares of
Common Stock, the Company agreed to modify the valuation for such shares to
$0.20 per share of Common Stock. The Board of Directors of the Company approved
the Loan Extension and the Loan Extension Warrants unanimously with Messrs. Saul
and Banakus abstaining from the vote, and agreed to reserve sufficient shares of
Common Stock in the event of the exercise of the Loan Extension Warrant.
Loans Payable consisted of the following at March 31, 2007:
2007
--------
Loan Payable ................................ $150,000
Accrued interest ............................ 6,426
--------
$156,426
========
12
NOTE G - ACCRUED LIABILITIES
Accrued liabilities represent expenses that apply to the reported
period and have not been billed by the provider or paid by the Company.
Accrued liabilities consisted of the following at March 31, 2007:
Dividends payable ........................... $ 83,163
Director fees payable ....................... 116,020
Professional fees ........................... 38,844
Other ....................................... 34,932
--------
$272,959
========
NOTE H - EQUITY
On February 1, 2007, the Company, commenced an offering ("Offering") of
up to 3,300,000 units ("Units") comprised of one (1) share ("Share") of its
Common Stock and one (1) warrant ("Warrant") for the purchase of one (1) share
of Common Stock having a total gross purchase price of $330,000. On February 1,
2007 the Company closed on the sale of 2,100,000 Units resulting in gross
proceeds to the Company of $210,000. On February 5, 2007, the Company closed on
the sale of an additional 1,100,000 Units resulting in gross proceeds to the
Company of $110,000. On February 8, 2007 the Company closed on the sale of an
additional 100,000 Units resulting in gross proceeds to the Company of $10,000.
On March 21, 2007 the Company closed on the sale of an additional
500,000 Units resulting in gross proceeds to the Company of $50,000.
Under the terms of the Offering, the Company has agreed that in the
event that the Company shall grant "piggy back" registration rights to any other
party to cause the Company's Common Stock or any security exercisable or
exchangeable for, or convertible into, shares of Common Stock to be included in
a registration statement filed by the Company for sale by any selling
shareholder or by the Company, the Company will grant the holders of the Shares
and Warrants similar registration rights.
Each purchaser of Units is an "accredited investor" as defined in Rule
501(a) under the Securities Act of 1933, as amended (the "Securities Act"). The
Company issued the Shares and the Warrants without registration under the
Securities Act in reliance on the exemptions from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act, as well as
preemption from applicable state registration requirements under Section 18(a)
of the Securities Act.
The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.
NOTE I - RELATED PARTY
During the three month period ended March 31, 2007, the Company
commenced and closed on an Offering (see Note H). Among the individuals
purchasing Units in the Offering are (i) Richard Banakus, the Chairman acting
President and a director of the Company, who purchased 350,000 Units, and (ii)
Ronald J. Saul, a director of the Company who with his spouse purchased
1,350,000 Units.
13
On May 20, 2007, the Company agreed to extend and amend certain of the
terms of the loans (collectively, the "Loan Extension") made to the Company on
June 14, 2005 (collectively, the "Original Loans") by Mr. Saul, Richard Banakus,
the Chairman and a director of the Company, and Regis Synan (individually, a
"Lender" and collectively, the "Lenders") in the amounts of $50,000, $50,000 and
$50,000, respectively. Under the terms of the Loan Extension, the Lenders agreed
to extend the maturity date of the Original Loans from June 14, 2007 to June 14,
2008. In consideration for the Loan Extension, the Company agreed to grant each
Lender a common stock warrant (the "Loan Extension Warrants") exercisable for
Seventy Five Thousand (75,000) shares of the Common Stock for a five-year period
at an exercise price of $0.20 per share of Common Stock. In addition, the
Lenders agreed to continue to allow the Company to pay quarterly interest in
cash or in shares of Common Stock. In the case of interest paid in shares of
Common Stock, the Company agreed to modify the valuation for such shares to
$0.20 per share of Common Stock. The Board of Directors of the Company approved
the Loan Extension and the Loan Extension Warrants unanimously with Messrs. Saul
and Banakus abstaining from the vote, and agreed to reserve sufficient shares of
Common Stock in the event of the exercise of the Loan Extension Warrant.
On May 20, 2007, the Board of Directors approved the grant to Mr. Saul
of an option to purchase Two Hundred Thousand (200,000) shares of Common Stock
(the "Option Grant"), with a grant date effective May 18, 2007, the last trading
date for the Common Stock prior to the grant, for a five-year period at an
exercise price of $0.2115 per share of Common Stock, being the average of the
high and low sale prices for a share of Common Stock averaged over the last ten
days on which the Common Stock traded and having such other terms as provided in
the Company's 2003 Stock Plan. The Board made the Option Grant to compensate Mr.
Saul for services provided and to be provided by him in connection with the
Company's financial and treasury operations, as well as the production of its
products. Mr. Saul will assume certain of Dr. Reitz's responsibilities on an
interim basis.
On May 22, 2007, Ronald J. Saul, a director of Hydron Technologies,
Inc., a New York corporation (the "Company"), lent the Company One Hundred
Thousand Dollars ($100,000) (the "Loan"). The term of the Loan is six months and
bears interest at the rate of ten percent (10%). Interest on the Loan is payable
monthly and may be paid in cash, or at the option of the Company, in shares of
common stock of the Company ("Common Stock"), valued for this purpose at the
average of the high and low sale prices for a share of Common Stock averaged
over the last ten days on which the Common Stock traded. In addition, in
consideration of the Loan, the Company has granted Mr. Saul a common stock
warrant (the "Loan Warrant") exercisable for One Hundred Thousand (100,000
shares of Common Stock for a five-year period at an exercise price of $0.2115
per share of Common Stock. The Board of Directors of the Company approved the
Loan and the Loan Warrant unanimously with Mr. Saul abstaining from the vote,
and agreed to reserve sufficient shares of Common Stock in the event of the
exercise of the Loan Warrant. The purpose of the Loan was to provide the Company
with additional cash to remain current on its operating expenses, help
reestablish credit terms with the Company's vendors, reduce outstanding payables
and purchase additional raw materials on more advantageous terms.
14
NOTE J - GOING CONCERN AND MANAGEMENT'S PLAN
The accompanying consolidated financial statements were prepared
assuming that the Company will continue as a going concern. This basis of
accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations.
The Company anticipated that present working capital balances and
internally generated funds will not be sufficient to meet our working capital
needs for the next three months. It will be necessary to sell selected assets,
or obtain an infusion of capital. The Company's independent accountants issued a
"going concern" opinion on the Company's December 31, 2006 financial statements,
since the Company has incurred significant losses over the past five years and
generates a negative cash flow on a monthly basis.
On February 1, 2007, the Company, commenced an offering ("Offering") of
up to 3,300,000 units ("Units") comprised of one (1) share ("Share") of its
Common Stock and one (1) warrant ("Warrant") for the purchase of one (1) share
of Common stock having a total gross purchase price of $330,000. On February 1,
2007 the Company closed on the sale of 2,100,000 Units resulting in gross
proceeds to the Company of $210,000. On February 5, 2007, the Company closed on
the sale of an additional 1,100,000 Units resulting in gross proceeds to the
Company of $110,000. On February 8, 2007 the Company closed on the sale of an
additional 100,000 Units resulting in gross proceeds to the Company of $10,000.
On March 21, 2007 the Company closed on the sale of an additional 500,000 Units
resulting in gross proceeds to the Company of $50,000.
The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.
The Company's working capital deficit was approximately ($416,000) at
March 31, 2007, including cash and cash equivalents of $11,039. Cash used in
operating activities was $369,705 and cash provided by financing activities was
$373,804 during the period ended March 31, 2007.
The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three shareholders in June 2005 (see Note F), the loan
payable of $100,000 borrowed from a shareholder in May 2007 (see Note K), and
two capital leases for equipment purchases of $44,379. The Company has a
substantial overdue trade accounts payables balance. There are no capital
expenditures under construction and no long-term commitments other than royalty
payments under an agreement with Valera Pharmaceuticals, Inc. The Company does
not have any lines of credit. There are no purchase order commitments that
exceed 90 days.
Management's plan includes implementing one or more of the following
elements:
o Emphasize and expand the marketing and manufacturing of private
label products.
o Implement new direct sales and networking initiatives.
o Emphasize Catalog sales, including sales made over the Internet,
since these sales have higher profit margins.
o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.
15
o Team with third parties to build the advertising and promotion of
the Hydron(R) brand, as the Company does not have the financial
resources to sustain a national advertising campaign to support
distribution of its production into retail stores.
o Develop and market new product lines based on the Company's
proprietary technologies.
o Continue to reduce overhead and operating costs.
o Obtain an infusion of capital that will sustain the Company's
operation until the newly established licensing initiatives can
produce positive cash flow.
There can be no assurances that management's plan will be successful
and the Company's actual results could differ materially. No estimate has been
made to the financial statements to account for the possibility that the plan
may be unsuccessful.
NOTE K - SUBSEQUENT EVENTS
On May 20, 2007, the Company agreed to extend and amend certain of the
terms of the loans (collectively, the "Loan Extension") made to the Company on
June 14, 2005 (collectively, the "Original Loans") by Mr. Saul, Richard Banakus,
the Chairman and a director of the Company, and Regis Synan (individually, a
"Lender" and collectively, the "Lenders") in the amounts of $50,000, $50,000 and
$50,000, respectively. Under the terms of the Loan Extension, the Lenders agreed
to extend the maturity date of the Original Loans from June 14, 2007 to June 14,
2008. In consideration for the Loan Extension, the Company agreed to grant each
Lender a common stock warrant (the "Loan Extension Warrants") exercisable for
Seventy Five Thousand (75,000) shares of the Common Stock for a five-year period
at an exercise price of $0.20 per share of Common Stock. In addition, the
Lenders agreed to continue to allow the Company to pay quarterly interest in
cash or in shares of Common Stock. In the case of interest paid in shares of
Common Stock, the Company agreed to modify the valuation for such shares to
$0.20 per share of Common Stock. The Board of Directors of the Company approved
the Loan Extension and the Loan Extension Warrants unanimously with Messrs. Saul
and Banakus abstaining from the vote, and agreed to reserve sufficient shares of
Common Stock in the event of the exercise of the Loan Extension Warrant.
On May 22, 2007, Ronald J. Saul, a director of Hydron Technologies,
Inc., a New York corporation (the "Company"), lent the Company One Hundred
Thousand Dollars ($100,000) (the "Loan"). The term of the Loan is six months and
bears interest at the rate of ten percent (10%). Interest on the Loan is payable
monthly and may be paid in cash, or at the option of the Company, in shares of
common stock of the Company ("Common Stock"), valued for this purpose at the
average of the high and low sale prices for a share of Common Stock averaged
over the last ten days on which the Common Stock traded. In addition, in
consideration of the Loan, the Company has granted Mr. Saul a common stock
warrant (the "Loan Warrant") exercisable for One Hundred Thousand (100,000)
shares of Common Stock for a five-year period at an exercise price of $0.2115
per share of Common Stock. The Board of Directors of the Company approved the
Loan and the Loan Warrant unanimously with Mr. Saul abstaining from the vote,
and agreed to reserve sufficient shares of Common Stock in the event of the
exercise of the Loan Warrant. The purpose of the Loan was to provide the Company
with additional cash to remain current on its operating expenses, help
reestablish credit terms with the Company's vendors, reduce outstanding payables
and purchase additional raw materials on more advantageous terms.
16
Dr. R. Douglas Reitz, an Executive Vice President of the Company, who
had responsibilities that included oversight over production of the Company's
products, resigned on May 17, 2007. Dr. Reitz was employed by the Company
pursuant to an employment agreement dated as of July 1, 2005 (the "Employment
Agreement"). In connection with Mr. Reitz's resignation, on May 30, 2007 the
Company provided him with a proposed Separation Agreement ("Separation
Agreement") which, among other things, would provide Dr. Reitz with severance
payments equal to his standard weekly salary as set forth in the Employment
Agreement for a two-week period, payable weekly in accordance with the Company's
payroll schedule commencing following the seven-day revocation period provided
in the Separation Agreement, in consideration for certain releases and
agreements. As of the date of this Report, Dr. Reitz has agreed to the terms of
the Separation Agreement as of May 30, 2007, subject to the expiration of the
seven-day revocation period which ends June 6, 2007.
As a related matter, on May 20, 2007, the Board of Directors approved
the grant to Mr. Saul of an option to purchase Two Hundred Thousand (200,000)
shares of Common Stock (the "Option Grant"), with a grant date effective May 18,
2007, the last trading date for the Common Stock prior to the grant, for a
five-year period at an exercise price of $0.2115 per share of Common Stock,
being the average of the high and low sale prices for a share of Common Stock
averaged over the last ten days on which the Common Stock traded and having such
other terms as provided in the Company's 2003 Stock Plan. The Board made the
Option Grant to compensate Mr. Saul for services provided and to be provided by
him in connection with the Company's financial and treasury operations, as well
as the production of its products. Mr. Saul will assume certain of Dr. Reitz's
responsibilities on an interim basis.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read with the consolidated
financial statements and related notes contained in this quarterly report on
Form 10-QSB ("Form 10-QSB"). All statements other than statements of historical
fact included in this Form 10-QSB are, or may be deemed to be, forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements involve
known and unknown risks, uncertainties and other factors that may cause the
Company's actual results, levels of activity, performance or achievements to be
materially different than any expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential," "continue," or the negative of
these terms or other comparable terminology. Important factors that could cause
actual results to differ materially from those discussed in such forward-looking
statements include: 1. General economic factors including, but not limited to,
changes in interest rates and trends in disposable income; 2. Information and
technological advances; 3. Cost of products sold; 4. Competition; and 5. Success
of marketing, advertising and promotional campaigns. The Company is subject to
specific risks and uncertainties related to its business model, strategies,
markets and legal and regulatory environment You should carefully review the
risks described in this Form 10-QSB and in other documents the Company files
from time to time with the SEC. You are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date of this Form
10-QSB. The Company undertakes no obligation to publicly release any revisions
to the forward-looking statements to reflect events or circumstances after the
date of this document.
BUSINESS
During early 2005, the Company returned its focus to the development
and sales of its skin care products. For several years prior, the Company's
research and development efforts were concentrated on products and medical
applications utilizing its patented tissue oxygenation technology, and on
accumulating data for a Food & Drug Administration (FDA) application related to
this technology. On January 10, 2005, the Company attended a Pre-Investigational
Device Exemption meeting with the FDA in the belief that a clear pathway for
safety and clinical research requirements could be determined at that time;
however, a defined methodology could not be agreed upon at that time. As a
result of that meeting, and in consideration of the Company's limited working
capital, management decided to refocus its efforts on non-medical technologies.
The Company continues to believe that its tissue oxygenation technology has
significant potential, and expects to re-institute research and development in
that area when working capital allows.
The Company's current focus is on furthering development and sales of
its other proprietary products, including a newly patented evaporating
emulsifier technology for use in cosmetic treatments and acne products, a number
of patented polymer skin care formulas using a moisture-attracting ingredient
(the "Hydron(R) polymer") that provide superior skin moisturization benefits and
sunscreen delivery, and a patented formula for a wrinkle reduction serum.
18
Currently, the Company markets a broad range of cosmetic and oral
health care products using a moisture-attracting ingredient (the "Hydron(R)
polymer") and a topical delivery system for active ingredients including
pharmaceuticals. The Company holds U.S. and international patents on, what
management believes is, the only known cosmetically acceptable method to suspend
the Hydron polymer in a stable emulsion for use in personal care/cosmetic
products. The Company is developing other personal care/cosmetic products for
consumers using its patented technology and would, when appropriate, either seek
licensing arrangements with third parties, or develop and market proprietary
products through its own efforts. Management believes that because of their
unique properties, products that utilize the Hydron polymer have the potential
for wide acceptance in consumer and professional health care markets.
On July 1, 2005, the Company purchased Clinical Results, Inc. ("CRI"),
for two million (2,000,000) shares of the Company's common stock. Through the
purchase of CRI the Company has entered the business of proprietary formulations
and contract manufacturing for other consumer product companies.
LIQUIDITY
The Company anticipates that present working capital balances and
internally generated funds will not be sufficient to meet our working capital
needs for the next three months. It will be necessary to sell selected assets,
or obtain an infusion of capital. The Company's independent accountants issued a
"going concern" opinion on the Company's December 31, 2006 financial statements,
since the Company has incurred significant losses over the past five years and
generates a negative cash flow on a monthly basis.
On February 1, 2007, the Company, commenced an offering ("Offering") of
up to 3,300,000 units ("Units") comprised of one (1) share ("Share") of its
Common Stock and one (1) warrant ("Warrant") for the purchase of one (1) share
of Common stock having a total gross purchase price of $330,000. On February 1,
2007 the Company closed on the sale of 2,100,000 Units resulting in gross
proceeds to the Company of $210,000. On February 5, 2007, the Company closed on
the sale of an additional 1,100,000 Units resulting in gross proceeds to the
Company of $110,000. On February 8, 2007 the Company closed on the sale of an
additional 100,000 Units resulting in gross proceeds to the Company of $10,000.
On March 21, 2007 the Company closed on the sale of an additional 500,000 Units
resulting in gross proceeds to the Company of $50,000.
The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.
The Company's working capital deficit was approximately ($416,000) at
March 31, 2007, including cash and cash equivalents of $11,039. Cash used in
operating activities was $369,705 and cash provided by financing activities was
$373,804 during the period ended March 31, 2007.
The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three shareholders in June 2005 (see Note F), the loan
payable of $100,000 borrowed from a shareholder in May 2007 (see Note K), and
two capital leases for equipment purchases of $44,379. The Company has a
substantial overdue trade accounts payables balance. There are no capital
expenditures under construction and no long-term commitments other than royalty
payments under an agreement with Valera Pharmaceuticals, Inc. The Company does
not have any lines of credit. There are no purchase order commitments that
exceed 90 days.
19
Management's plan includes implementing one or more of the following
elements:
o Emphasize and expand the marketing and manufacturing of private
label products.
o Implement new direct sales and networking initiatives.
o Emphasize Catalog sales, including sales made over the Internet,
since these sales have higher profit margins.
o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.
o Team with third parties to build the advertising and promotion of
the Hydron(R) brand, as the Company does not have the financial
resources to sustain a national advertising campaign to support
distribution of its production into retail stores.
o Develop and market new product lines based on the Company's
proprietary technologies.
o Continue to reduce overhead and operating costs.
o Obtain an infusion of capital that will sustain the Company's
operation until the newly established licensing arrangements can
produce positive cash flow.
There can be no assurances that management's plan will be successful
and the Company's actual results could differ materially. No estimate has been
made to the financial statements to account for the possibility that the plan
may be unsuccessful.
HYDRON(R) BRANDED SKIN CARE PRODUCTS
The Company has been developing various consumer products using Hydron
polymers since 1986. The Company's products are designed to address concerns
about the visible signs of aging, and include Hydron(R) skincare, hair care,
bath and body and sun care lines. The Company currently has forty three
individual branded products available in the following product categories: skin
care (34 products), hair care (6 products), bath and body (12 products), dental
(3 products) and sun care (2 products). These products are also packaged into
collections and sold at a more favorable value than the individual products sold
separately. All of the products are available through the Hydron catalog and web
site at www.hydron.com ("Catalog"). The Company also markets a number of
customized formulations under private label and contract manufacturing for
various outside brands.
Management believes that the Company's moisturizers and skin treatments
are unique and offer the following competitive benefits: they self-adjust to
match the skin's optimal pH balance soon after they are applied to the skin;
they become water-insoluble on the skin's surface, and unlike all other
water-based cremes and lotions, are not removed by the skin's perspiration or
plain water; they are oxygen-permeable, allowing the skin to breathe; they do
not emulsify the skin's natural moisturizing agents, as do conventional cremes
and lotions; and they attract and hold water, creating a cushion of moisture on
the skin's surface that promotes penetration of other beneficial product
ingredients, all while leaving no greasy after-feel.
20
The Company's products are independently tested by dermatologists and,
in their opinion, are considered to be safe, non-irritating and applicable to
most skin types. Products for use around the eye area are also ophthalmologist
tested and safe for contact lens wearers. Most of the Company's branded
moisturizing products are based on the Company's patented emulsion system, which
permits the product ingredients to deliver their intended benefits over an
extended period of time and in a more efficient manner.
Management believes that the Hydron(R) emulsion system can enhance the
effectiveness of topical over-the-counter medications. The emulsion system is
designed to deposit a polymer film on the skin's surface which has a number of
advantages over traditional lotions: it promotes hydration of the outer layer of
skin, improves penetration into the skin's pores, and has good tactility and
flexibility. The Company expects to continue to focus research and development
resources on proprietary technology-based products as determined by management's
assessment of consumer demand.
Catalog and Web Sales - The Company offers personal care products for
sale directly to consumers. Augmenting direct mail, the Company sells its
products on the World Wide Web and regularly transmits E-mail broadcasts to its
customer base. Catalog and Web sales represented approximately 43% of Hydron's
total sales for the three months ended March 31, 2007 and 41% of sales the three
months ended March 31, 2006. The Company is continuing to explore new ways to
enhance Catalog and Web sales and operations, including direct sales
initiatives.
Private Label Contracting - Since March 1, 2001, the Company has been a
supplier to Reliv International, Inc ("Reliv") to develop and manufacture a line
of private label skin care products under their brand name, ReversAge(R). Reliv
is a public company traded on NASDAQ (symbol RELV). Private label sales
represented approximately 9% of Hydron's total sales for the three months ended
March 31, 2007 and 23% of sales for the three months ended March 31, 2006.
Contract Manufacturing - Through its acquisition of CRI, the Company
now manufactures consumer products for a number of companies. Products include
proprietary formulations for skin and hair care. During the three month period
ending March 31, 2007, contract manufacturing revenue represented 42% of
Hydron's total sales and 32% for the three months ended March 31, 2006.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - 2007 VERSUS 2006
Total net sales for the three months ended March 31, 2007 were
$317,133, an decrease of $58,334 or 16% from net sales of $375,467 for the three
months ended March 31, 2006. Catalog and Web sales for the three months ended
March 31, 2007 were $137,185, a decrease of $18,487 or 12% from sales of the
three months ended March 31, 2006 of $155,672. Private Label and Contract
Manufacturing net sales for the three months ended March 31, 2007 were $162,480,
a decrease of $44,413 or 21% from sales the three months ended March 31, 2006 of
$206,893. Shipping and handling revenues for the three months ended March 31,
2007 were $17,085, an increase of $4,254 or 33% from shipping and handling
revenues for the three months ended March 31, 2006 of $12,831.
The decrease in catalog sales was the result of the slow attrition of
the Company's customer base without marketing spending to replace those
customers. Private Label Manufacturing sales decreased due to the timing of
shipments to contact manufacturing customers.
21
Cost of sales was $134,280 for the three months ended March 31, 2007, a
decrease of $11,443, or 8%, from cost of sales of $145,723 for the three months
ended March 31, 2006. Cost of sales was 42% of total sales the three months
ended March 31, 2007, compared to 39% for the three months ended March 31, 2006.
The increase in the cost of sales percentage reflects the impact of decreased
private label and contract manufacturing sales. Cost of sales for private label
sales was in direct proportion to the sales level. Cost increases are not
material to catalog sales and the private label contracts provide for a pass
through of any cost increases incurred in that segment Shipping and handling
costs for the first quarter of 2007 were $18,129, a decrease of $511, or 3%,
from shipping and handling cost of $18,640 for the same period in 2006. This
decrease reflects the decline in catalog sales plus savings realized by
performing more of the shipping and handling tasks in-house.
The Company's overall gross profit margin decreased to 58% of net sales
for the three months ended March 31, 2006 versus 61% for the three months ended
March 31, 2006. This reflects the costs discussed above.
Royalty expenses for the three months ended March 31, 2007 were $0 and
$7,500 for the three months ended March 31, 2006. An aggregate of $22,940 was
accrued and unpaid as of March 31, 2007. This amount is adequate to cover any
royalties that are payable through March 2007.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, obtain regulatory approval, develop and
package the products for commercial sale, perform appropriate efficacy and
safety tests, and conduct consumer panel studies and focus groups. R&D expenses
were $3,871 for the three months ended March 31, 2007, an increase of $2,861 or
283% from R&D expenses of $1,010 for the three months ended March 31, 2006. The
amount of annual R&D expenses will vary year to year depending on the Company's
research requirements.
Selling, general and administrative ("SG&A") expenses for the three
months ended March 31, 2007 were $312,833, representing a decrease of $50,693 or
14% from SG&A expenses of $363,526 for the three months ended March 31, 2006.
Employment expense was $150,440 for the three months ended March 31, 2007, a
decrease of $22,642, or 13%, from $173,082 for the three months ended March 31,
2006. This decrease is due primarily to staff reductions and pay cuts by
management as cost cutting initiatives. Advertising and promotional expenses was
$469 for the three months ended March 31, 2007, a decrease of $34,320, or 99%
from $34,789 for the three months ended March 31, 2006. This decrease is due to
all advertising is now done via email and the internet in 2007 versus new
advertising initiatives which were taken by the Company in 2006 were ceased.
Insurance expense was $6,557 for the three months ended March 31, 2007, a
decrease of $15,361 or 70% from $21,918 for the three months ended March 31,
2006. The decrease was due to reducing certain insurance coverage's. Repairs and
Maintenance expense was $25,002 for the three months ended March 31, 2007, an
increase of $20,857 or 503% from $4,145 for the three months ended March 31,
2006. The increase is due to additional costs for CAM on the Company's three
leases and charges associated with a clean up project. All other expenses were
$130,532 for the three months ended March 31, 2007, an increase of $941 or 1%
from $129,591 for the three months ended March 31, 2006.
Depreciation and amortization expense was $23,459 for the three months
ended March 31, 2006, a decrease of $1,951 from $25,410 for the three months
ended March 31, 2006.
22
Net interest (expense) was ($10,160) for the three months ended March
31, 2007 compared to net interest (expense) of ($27,073) for the three months
ended March 31, 2006. The decrease in interest expense was due primarily to the
interest on the loan payable and amortization of related debt discount.
Minority interest in net loss for the three months ended March 31, 2007
was $4,552 compared to $9,050 the three months ended March 31, 2006. This
minority interest is created from a consolidated limited liability partnership,
Hydron Royalty Partners, LLLP, established by the Company in August 2004.
The Company had a net loss of $162,918 for the three months ended March
31, 2007, representing a decrease of $22,807 or 12% from the net loss of
$185,725 for the three months ended March 31, 2006, primarily as a result of the
factors discussed above.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, management evaluates these estimates, including those
related to bad debts, inventories, investments, intangible assets, income taxes,
restructuring, and contingencies and litigation. Management bases these
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies are
significant in preparation of our financial statements.
Allowance for Sales Returns
---------------------------
The Company records product sales when persuasive evidence of an
arrangement exists, shipment has occurred, the price to the buyer is fixed or
determinable, and collectibility is reasonably assured. Catalog sales are sold
on a cash basis with a 30-day guarantee. Returns have been less than $10,000
annually for the last five years. A provision is made at the time sales are
recognized for the estimated cost of product warranties. Private label sales are
sold on account and are collected in 30 to 45 days. If there is a production or
packaging problem, the Company would correct the problem and replace the product
sold. To minimize that possibility, the Company inspects all production batches
before they are packaged to ensure quality, efficacy, and consistency.
Inventory Valuation
-------------------
Shifting sales from one item in our product line to another or minimum
production requirements may create a situation where inventory levels of
specific items may exceed the annual sales of that item. This can create
inventory levels in excess of net realizable value. Management regularly reviews
inventory quantities on hand and, where necessary, records provisions for excess
and obsolete inventory based on either estimated forecast of product demand or
historical usage of the product. If sales do not materialize as planned or
decline below historic levels, management increases the reserve for excess
(quantities in excess of one year's sales) and obsolete inventory. This would
reduce earnings and cash flows.
23
Packaging changes are planned far in advance in order to limit the
impact of out-dated or obsolete components. Private label customers are required
to prepay the cost of packaging materials in order to take advantage of volume
discounts and protect the Company from any sudden packaging changes.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of this period, the Company carried out an evaluation,
under the supervision and with the participation of management, including its
Chief Executive Officer whose responsibilities include serving as the Company's
principal financing officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e). Based upon that evaluation, the Chief Executive Officer concluded
that the Company had material weaknesses associated with insufficient personnel
resources with appropriate accounting experience and lack of controls relating
to inventory valuation and segregation of inventory. On May 24, 2007, management
of the Company concluded that the financial statements included in the Company's
quarterly report on Form 10-QSB for the quarter ended March 31, 2007 should be
restated and that they could no longer be relied upon. In connection with work
being done on the Company's detailed financial forecasts for the second quarter
and subsequent periods, management discovered an error relating to the premature
recognition of a sale in the first quarter that should not have been recognized
until the second quarter. The amount of the sale in question was $59,626 and
reduced net sales by such amount for the quarter ended March 31, 2007 and also
reduced the Company's gross profits by $50,682. The reversal of the sale had
other financial statement impact on the Company's financial statements for the
quarter ended March 31, 2007, including operating loss, loss before income taxes
and minority interest and net loss. The inventories as of March 31, 2007 have
been increased by $8,944. The statement of cash flows for the three months ended
March 31, 2007 has also been restated.
Management attributes the error to inadequacies in the Company's
procedures for booking sales following receipt of firm commitments for orders
and weaknesses in the controls for testing the adequacy of these procedures.
Management believes that these inadequate procedures and weak controls are
attributable in part to insufficient personnel resources with appropriate
accounting experience.
Management is currently seeking to add personnel with appropriate
accounting experience and to implement improved procedures for sales recognition
and inventory valuation and segregation of inventory, including a perpetual
inventory system, and to implement controls that address these material
weaknesses in 2007.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
The Certifying Officer has also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
24
Our management, including the Certifying Officer, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake.
Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of
the control. The design of any systems of controls also is based in part upon
certain assumptions about the likelihood of future events, and their can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, control may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On February 1, 2007, the Company, commenced an offering ("Offering") of
up to 3,300,000 units ("Units") comprised of one (1) share ("Share") of its
Common Stock and one (1) warrant ("Warrant") for the purchase of one (1) share
of Common stock having a total gross purchase price of $330,000. On February 1,
2007 the Company closed on the sale of 2,100,000 Units resulting in gross
proceeds to the Company of $210,000. On February 5, 2007, the Company closed on
the sale of an additional 1,100,000 Units resulting in gross proceeds to the
Company of $110,000. On February 8, 2007 the Company closed on the sale of an
additional 100,000 Units resulting in gross proceeds to the Company of $10,000.
On March 21, 2007 the Company closed on the sale of an additional 500,000 Units
resulting in gross proceeds to the Company of $50,000.
The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Meeting of the Shareholders of the Company was held on November 15,
2004, in Boca Raton, Florida (the "Meeting"). At the Meeting, the shareholders
of the Company voted on proposals to (i) elect a Board of four directors to
serve until the Company`s next meeting of shareholders and until their
successors are elected and qualified and approved the Company's 2003 Stock Plan.
The results of the voting appointed the following Directors:
Richard Banakus
Joshua Rochlin
Karen Gray
Ronald J. Saul
The Shareholders also approved the adoption of the Company's 2003 Stock
Plan and ratified the Audit Committee's selection of Daszkal Bolton LLP as the
Company's independent Certified Public Accountants for the year ended December
31, 2004. There was no shareholder meeting held in 2006.
Mr. Joshua Rochlin resigned from the Board of Directors of Hydron
Technologies, Inc. effective March 31, 2005 due to his increased commitments at
Marc Ecko Enterprises. Mr. David Pollock was appointed to replace him on July 1,
2005.
No meeting of shareholders of the Company was held in 2006. Directors
elected by the shareholders at the last annual meeting, as well as David
Pollock, the director elected by the Board of Directors, have continued in
office. Moreover, in light of the absence of a meeting of shareholders, the
Board of Directors has appointed Sherb & Co. as the Company's independent
accounting firm.
ITEM 5. OTHER EVENTS
Departure of Directors or Certain Officers; Election of Directors; Appointment
of Certain Officers; Compensatory Arrangements of Certain Officers.
Dr. R. Douglas Reitz, an Executive Vice President of the Company, who
had responsibilities that included oversight over production of the Company's
products, resigned on May 17, 2007. Dr. Reitz was employed by the Company
pursuant to an employment agreement dated as of July 1, 2005 (the "Employment
Agreement"). In connection with Mr. Reitz's resignation, on May 30, 2007, the
Company provided him with a proposed Separation Agreement ("Separation
Agreement") which, among other things, would provide Dr. Reitz with severance
payments equal to his standard weekly salary as set forth in the Employment
Agreement for a two-week period, payable weekly in accordance with the Company's
payroll schedule commencing following the seven-day revocation period provided
in the Separation Agreement, in consideration for certain releases and
agreements. As of the date of this Report , Dr. Reitz has agreed to the terms of
the Separation Agreement as of May 30, 2007, subject to the expiration of the
seven-day revocation period which ends June 6, 2007.
26
As a related matter, on May 20, 2007, the Board of Directors approved
the grant to Mr. Saul of an option to purchase Two Hundred Thousand (200,000)
shares of Common Stock (the "Option Grant"), with a grant date effective May 18,
2007, the last trading date for the Common Stock prior to the grant, for a
five-year period at an exercise price of $0.2115 per share of Common Stock,
being the average of the high and low sale prices for a share of Common Stock
averaged over the last ten days on which the Common Stock traded and having such
other terms as provided in the Company's 2003 Stock Plan. The Board made the
Option Grant to compensate Mr. Saul for services provided and to be provided by
him in connection with the Company's financial and treasury operations, as well
as the production of its products. Mr. Saul will assume certain of Dr. Reitz's
responsibilities on an interim basis.
ITEM 6. EXHIBITS
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
3.1 Restated Certificate of Incorporation of Dento-Med Industries, Inc.
("Dento-Med"), as filed with the Secretary of State of New York on
March 4, 1981.(1)
3.2 Certificate of Amendment of the Certificate of Incorporation of
Dento-Med as filed with the Secretary of State of New York on September
7, 1984.(2)
3.3 By-laws of the Company, as amended March 17, 1988.(3)
3.4 Certificate of Change of Dento-Med as filed with the Secretary of State
of New York on July 14, 1988.(2)
3.5 Certificate of Amendment of the Restated Certificate of Incorporation
of Dento-Med, as filed with the Secretary of State of New York on
November 14, 1988.(4)
3.6 Certificate of Amendment of the Restated Certificate of Incorporation
of Dento-Med, as filed with the Secretary of State of New York on July
30, 1993.(5)
3.7 Certificate of Amendment of the Restated Certificate of Incorporation
of Hydron Technologies, Inc., as filed with the Secretary of State of
New York on April 10, 2002.(2)
4.1 Non-Qualified Stock Option Plan.(6)
4.2 Registration Rights Agreement dated July 11, 2002, by and between
Hydron Technologies, Inc. and Life International Products, Inc.(2)
4.3 Warrant Agreement dated November 14, 2003 between Hydron Technologies,
Inc. and the parties named therein.(2)
7.1 Letter of Sherb & Co LLP dated May 25, 2007 addressed to the United
States Securities Exchange Commission. (15)
10.1 Subscription Agreement dated November 22, 2002 between Hydron
Technologies, Inc. and the subscribers named therein.(2)
10.2 Subscription Agreement dated September 31, 2003 between Hydron
Technologies, Inc. and the subscribers named therein.(2)
27
10.3 Agreement dated July 11, 2002 between Hydron Technologies, Inc. and
Life International Products, Inc.(2)
10.4 1997 Nonemployee Director Stock Option Plan.(7)
10.5 Bridge Loan Term Sheet for Interim Loans Between Hydron Technologies,
Inc and Members of the Board of Directors.(2)
10.6 2003 Stock Plan(8)
10.7 Note dated June 14, 2005 in the principal amount of $50,000 payable to
payable to Richard Banakus (9)
10.8 Note dated June 14, 2005 in the principal amount of $50,000 payable to
Ronald J. Saul and Antonette G. Saul, jointly (9)
10.9 Note dated June 14, 2005 in the principal amount of $50,000 payable to
Regis Synan (9)
10.10 Common Stock Purchase Warrant dated June 14, 2005 in favor of Richard
Banakus (9)
10.11 Common Stock Purchase Warrant dated June 14, 2005 in favor of Ronald J.
Saul and Antonette G. Saul, jointly (9)
10.12 Common Stock Purchase Warrant dated June 14, 2005 in favor of Regis
Synan (9)
10.13 Purchase and Sale Agreement by and among Clinical Results, Inc., David
Pollock and Douglas Reitz and Hydron Technologies, Inc., dated July 1,
2005 (10)
10.14 Employment Agreement for David Pollock (10)
10.15 Employment Agreement for Richard Douglas Reitz (10)
10.16 Form of Assignment (11)
10.17 Subscription Agreement dated January 31, 2007 between Hydron
Technologies, Inc. and Richard Banakus (13)
10.18 Subscription Agreement dated January 31, 2007 between Hydron
Technologies, Inc. and Ronald J. Saul and Antonette G. Saul, jointly
(13)
10.19 Subscription Agreement dated February 5, 2007 between Hydron
Technologies, Inc. and Ronald J. Saul and Antonette G. Saul, jointly
(13)
10.20 Common stock Purchase Warrant dated February 1, 2007 in favor of
Richard Banakus (13)
10.21 Common stock Purchase Warrant dated February 1, 2007 in favor of Ronald
J. Saul and Antonette G. Saul, jointly (13)
10.22 Common stock Purchase Warrant dated February 5, 2007 in favor of Ronald
J. Saul and Antonette G. Saul, jointly (13)
28
10.23 Subscription Agreement dated March 21, 2007 between Hydron
Technologies, Inc. and Ronald J. Saul and Antonette G. Saul, jointly
(14)
10.24 Common stock Purchase Warrant dated March 21, 2007 in favor of Ronald
J. Saul and Antonette G. Saul, jointly (14)
16. Letter from Daszkal Bolton LLP dated December 4, 2006 to the Securities
and Exchange Commission (12)
23.1 Consent of Independent Registered Public Accounting Firm- Daszkal
Bolton LLP
23.2 Consent of Independent Registered Public Accounting Firm - Sherb & Co.
LLP
31.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 and Item 307 of Regulation S-K (filed herewith)
32.1 Certification of Chief Executive Officer, Principal Financial and
Accounting Officer Pursuant to 18 U.S.C., Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
99. Press Release dated July 6, 2005 incorporated by reference to Form 8-K
filed on July 8, 2005.
_________
(1) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1985.
(2) Incorporated by reference to the Company's report on Form S-3 filed
February 11, 2004.
(3) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1987.
(4) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1988.
(5) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1993.
(6) Incorporated by reference to the Company's report on Form 10-K for the year
ended December 31, 1986.
(7) Incorporated by reference to the Company's Definitive Proxy Statement on
Schedule 14A for the year ended December 31, 1996.
(8) Incorporated by reference to the Company's Definitive Proxy Statement for
the year ended December 31, 2003.
(9) Incorporated by reference to Form 8-K filed June 20, 2005
(10) Incorporated by reference to Form 8-K filed July 8, 2005
(11) Incorporated by reference to Form 8-K filed November 2, 2005
29
(12) Incorporated by reference to Form 8-K filed December 5, 2006
(13) Incorporated by reference to Form 8-K filed February 7, 2007
(14) Incorporated by reference to Form 8-K filed March 21, 2007
(15) Incorporated by reference to Form 8-K filed May 20, 2007
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYDRON TECHNOLOGIES, INC.
/s/: David Pollock
------------------
David Pollock
Chief Executive Officer
Principal Financial and Accounting Officer
Dated: June 5, 2007
30