SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended September 30, 2011

 

Commission File Number 0-10683

 

HYDROMER, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey 22-2303576
(State of incorperation) (I.R.S. Employer Identification No.)
35 Industrial Pkwy, Branchburg, New Jersey  08876-3424
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: (908) 722-5000  

 

Securities registered pursuant to Section 12 (b) of the Act: None

 

Securities registered pursuant to Section 12 (g) of the Act:

 

Common Stock Without Par Value

(Title of class)

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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes √ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No √

Class Outstanding at September 30, 2011
Common 4,772,318

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains 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. Forward-looking statements include, among other things, business strategy and expectations concerning industry conditions, market position, future operations, margins, profitability, liquidity and capital resources. Forward-looking statements generally can be identified by the use of terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similar expressions or the negatives thereof. These expectations are based on management’s assumptions and current beliefs based on currently available information. Although the Company believes that the expectations reflected in such statements are reasonable, it can give no assurance that such expectations will be correct. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q and the Company does not have any obligation to update the forward looking statements. The Company’s operations are subject to a number of uncertainties, risks and other influences, many of which are outside its control, and any one of which, or a combination of which, could cause its actual results of operations to differ materially from the forward-looking statements.

 
 

 

 

HYDROMER, INC.

 

 

INDEX TO FORM 10-Q

September 30, 2011

 

Part 1 Financial Statements              
Item 1 Condensed Consolidated Financial Statements            
  Condensed Consolidated Balance Sheets as of September 30, 2011 and June 30, 2011               3
  Condensed Consolidated Statement of Operations for three months ended September 30, 2011 and 2010             4
  Condensed Consolidated Statement of Cash Flows for three months ended September 30, 2011 and 2010             5
  Notes to Condensed Consolidated Financial Statements             6
Item 2 Management's Discussion and Analysis of the Financial Condition and Results of Operations 8
 Item 3 Quantitative and Qualitative Disclosures about Market Risk N/A 
Item 4 Controls and Procedures             9
                     
Part 2  Other Information                
Item 1 Legal Preceedings               N/A
Item 2 Change in Securities             N/A
Item 3 Default of Senior Securities             N/A
Item 4 Submission of Motion to Vote of Security Holders         N/A
Item 5 Other Informaiton               N/A
Item 6 Exhibits                 9

 

EXHIBIT INDEX

 

Exhibit No.   Description of Exhibit            
31.1   SEC Section 302 Certification – CEO certification           10
31.2   SEC Section 302 Certification – CFO certification           11
32.1   Certification of Manfred F. Dyck, Chief Executive Officer,           12
    pursuant to 18 U.S.C. Section 1350            
32.2   Certification of Robert Y. Lee, Chief Financial Officer,           12
    pursuant to 18 U.S.C. Section 1350            

 

 

 

 
 

Part I – Condensed Consolidated Financial Statements

Item # 1

 

HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

September 30,

2011

(unaudited)

June 30,

2011

Assets        
Current Assets:        
Cash and cash equivalents $ 440,704 $ 502,597
Short-term investments   50,000   50,000
Trade receivables less allowance for doubtful accounts of $9,809 and $5,622 as of September 30, 2011 and June 30, 2011, respectively  

 

815,670

 

 

774,753

Inventory   384,807   444,604
Prepaid expenses   176,773   209,241
Deferred tax asset   159,910   122,100
Other   11,203   13,547
Total Current Assets   2,039,067   2,116,842
       
Property and equipment, net   2,820,336   2,863,912
Deferred tax asset, non-current   1,196,704   1,196,704
Intangible assets, net   801,053   820,231
Total Assets $ 6,857,160 $ 6,997,689
         
Liabilities and Stockholders’ Equity        
Current Liabilities:        
Accounts payable $ 403,166 $ 387,094
Accrued expenses   351,184   313,626
Current portion of capital lease   18,687   18,687
Current portion of deferred revenue   69,911   149,108
Current portion of mortgage payable   52,617   51,720
Total Current Liabilities   895,565   920,235
Deferred tax liability   294,012   294,012
Long-term portion of capital lease   11,058   15,398
Long-term portion of deferred revenue   109,504   120,940
Long-term portion of mortgage payable   2,700,923   2,714,817
Total Liabilities   4,011,062   4,065,402

 

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; 4,783,235 shares issued and 4,772,318 shares outstanding as of September 30, 2011 and June 30, 2011

 

 3,721,815

 

 

 3,721,815

Contributed capital   633,150   633,150
Accumulated deficit   (1,502,727)   (1,416,538)
Treasury stock, 10,917 common shares at cost   (6,140)   (6,140)
Total Stockholders’ Equity   2,846,098   2,932,287
Total Liabilities and Stockholders’ Equity $ 6,857,160 $ 6,997,689
           

 

 

 

 

 

 

 

See accompanying notes

3
 

 

HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

   

Three Months Ended

September 30,

 
   

2011

 

2010

 
Revenues          
Sale of products $ 757,050 $ 650,404  
Service revenues   350,399   369,321  
Royalties and contract revenues   341,148   236,167  
Total Revenues   1,448,597   1,255,892  
Expenses        
Cost of Sales   416,012   426,599  
Operating Expenses   1,105,325   1,199,292  
Other Expenses   51,259   49,879  
Benefit from Income Taxes   (37,810)   (164,928)  
Total Expenses   1,534,786   1,510,842  
Net Loss $ (86,189) $ (254,950)  
Loss Per Common Share $ (0.02) $ (0.05)  

Weighted Average Number of
Common Shares Outstanding

 

 

 

4,772,318

 

 

 

4,772,318

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

There was no impact to earnings per share from dilutive securities

as the resultant would have been anti-dilutive.

4
 

 

HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

   

Three months Ended

September 30,

   

2011

 

2010

 
Cash Flows From Operating Activities:          
Net Loss $ (86,189) $ (254,950)  
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation and amortization   111,978   101,244  
Deferred income taxes   (37,810)   (164,928)  
Changes in Assets and Liabilities:          
                Trade receivables   (40,917)   63,562  
                Inventory   59,797   (78,073)  
                Prepaid expenses   14,243   41,790  
                Other assets   2,344   12,398  
                Accounts payable and accrued liabilities   53,625   41,200  
                Deferred income   (90,633)   23,367  
Net Cash Used in Operating Activities    (13,562)    (214,390)  
           
Cash Flows From Investing Activities:          
Cash purchases of property and equipment   (22,273)   (46,896)  
Cash payments on patents and trademarks   (13,061)   (43,108)  
Redemption of matured short-term investments   -   440,000  
Net Cash (Used in) Provided by Investing Activities   (35,334)   349,996  
           
Cash Flows From Financing Activities:          
Repayment of long-term borrowings   (12,997)   (12,107)  

 

Net Cash Used in Financing Activities

  (12,997)   (12,107)  
           
Net (Decrease) Increase in Cash and Cash Equivalents:   (61,893)   123,499  
Cash and Cash Equivalents at Beginning of Period   502,597   843,610  
Cash and Cash Equivalents at End of Period $ 440,704 $ 967,109  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

5
 


HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

 

Notes to Condensed Consolidated Financial Statements

Basis of Presentation:

In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments (consisting of only normal adjustments) necessary for a fair presentation of the results for the interim periods. These condensed financial statements, including notes, have been prepared in accordance with the applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America. The condensed financial statements should be read in conjunction with the consolidated financial statements and other information contained in our Annual Report of Form 10-K for the year ended June 30, 2011.

 

Fair Value:

Some of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, receivables and payables. The carrying amount of the Company’s note obligation approximates its fair value, as the terms of the note is consistent with terms available in the market for instruments with similar risk.

 

In accordance with FASB ASC 820, “Fair Value Measurements and Disclosures”, the following table represents the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and June 30, 2011, respectively:

 

as of Sept. 30, 2011 Level 1 Level 2 Level 3 Total
Assets        
Short Term Investments $ 50,000     $ 50,000
Total Assets $ 50,000 - - $ 50,000
         
Liabilities - n/a - - - -

 

as of June 30, 2011 Level 1 Level 2 Level 3 Total
Assets        
Short Term Investments $ 50,000     $ 50,000
Total Assets $ 50,000 - - $ 50,000
         
Liabilities - n/a - - - -

 

Segment Reporting:

The Company operates two primary business segments. The Company evaluates the segments by revenues, total expenses and earnings before taxes. Corporate Overhead (primarily the salaries and benefits of senior management, support services (Accounting, Legal, Human Resources and Purchasing) and other shared services (building maintenance and warehousing)) are excluded from the business segments as to not distort the contribution of each segment. These segments are the lowest levels for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

 

  

 

6
 

The results for the three months ended September 30, by segment are:

  Polymer Research

Medical

Products

Corporate Overhead

 

Total

2011        
Revenues $ 1,092,324 $ 356,273   $ 1,448,597
Expenses     (885,546)        (286,360) $ (400,690)     (1,572,596)
     Pre-tax Income (Loss) $ 206,778 $ 69,913 $ (400,690) $ (123,999)
         
2010        
Revenues $ 921,326 $ 334,56   $ 1,255,892
Expenses        (980,130)        (246,837) $  (448,803)    (1,675,770)
     Pre-tax Income (Loss) $       (58,804) $ 87,729 $  (448,803) $ (419,878)
         

 

Geographic revenues were as follows for the three months ended September 30,

  2011 2010
Domestic 66% 64%
Foreign 34% 36%

 

Subsequent Events:

As reported in the June 30, 2011 10-K, a loan modification on the Company’s mortgage was entered into on October 13, 2011, eliminating covenants and defaults for June 30, 2011 (as a result of the net loss during the period) in exchange for the Company providing its accounts receivable and inventory as collateral.  

 

Although waivers/modifications were previously granted by the lender, there is no certainty that future waivers/modifications would be granted.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7
 

Item #2

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations

 

The Company’s revenues for the quarter ended September 30, 2011 were $1,448,597, $192,705 or 15.3% higher than the $1,255,892 for the same period the previous year. Revenues are comprised of the sale of Products and Services and Royalty and Contract payments.

 

Product sales were $757,050 for the quarter ended September 30, 2011 as compared to $650,404 for the same period the year before, a $106,646 (16.4%) increase: higher due to Dragonhyde® Hoof Bath Concentrate sales, a product launched in the spring of 2010 and equipment sales, a periodic activity. Higher medical polymer [coatings] sales (see Service Revenues below) were offset by lower product sales in our Industrial Anti-fog and Cosmetic lines (timing).

 

Services revenues, comprising of contract coating services, for the three months ended September 30, 2011 was $350,399 or $18,922 lower (5.1%) than the $369,321 the corresponding period the year before. Excluding new customers, we anticipate a continued decrease in Contract Services revenues as some customers are converting to be medical chemical polymer purchasers (for coatings applications themselves or via a third party), some involving their purchase of our coating equipment (see Product sales above). These “converted” customers can also allow for additional revenues from Supply and Support Agreements (see Royalty and Contract revenues following).

 

Royalty and Contract revenues include royalties received and the periodic recurring payments from license, stand still and other agreements other than for product and services. Included in Royalty and Contract revenues are revenues from support and supply agreements which avails our customers to continued technical support and/or guaranteed access to our proprietary coatings and may include the transfer of technical know-how (coatings procedures). Some of the royalties and support fees are based on the net sales of the final item (to which the Hydromer technology is applied to) and are subject to the reporting of our customers. For the quarter ended September 30, 2011, Royalty and Contract revenues were $341,148, compared to $236,167 the same period a year ago. The $104,981 improvement arose from new fees from recent supply and support agreements, as well as amortization of deferred revenues.

 

 

Total Expenses for the quarter ended September 30, 2011 were $1,534,786 as compared with $1,510,842 the year before, a 1.6% increase.

 

For the quarter ended September 30, 2011, the Company’s Cost of Goods Sold was $416,012 as compared with $426,599 the year prior, lower by $10,587 or 2.5%. Changes in staffing, including reductions, offset by higher material costs resulting from the higher product sales, accounted for the net decrease in Cost of Goods Sold.

 

Operating expenses were $1,105,325 for the quarter ended September 30, 2011 as compared with $1,199,292 the year before, lower by $93,967 or 7.8%, the savings primarily coming from a lower staffing level, including in part due to the divestiture of the medical device product lines in fiscal 2009 & 2010.

 

Interest expense, interest income and other income are included in Other Expenses. Interest expense (primarily mortgage interest) for the three months ended September 30, 2011 and September 30, 2010 were $50,652 and $51,679, respectively.

 

A net loss of $86,189 ($0.02 per share) is reported for the quarter ended September 30, 2011 as compared to a net loss of $254,950 ($0.05 per share) the year before. 

8
 

A revenue increase of $192,705 with only slightly higher expenses of $23,944 (including that of a lower $127,118 in Income Tax Benefits resulted in true cost reductions of $103,174) resulted in the swing year-over-year. Continued improvements are expected coming from achieving additional market share (increasing revenues) while expenses sees modest increases, primarily in expanded sales and marketing costs, including that of new sales representatives. 

 

Financial Condition

 

Working capital decreased $53,105 during the three months ended September 30, 2011.

 

For the three months ended September 30, 2011, operating activities used $13,562 in net cash.

 

The net loss, as adjusted for non-cash expenses of depreciation and amortization and deferred income taxes, used $12,021 in cash. The net change in operating assets and liabilities used an additional $1,541 in cash, with the primarily activities being the increase in trade receivables and accounts payable and accrued expenses as offset by lower inventories, prepaid assets and customer prepayments.

 

Investing activities used $35,334 and financing activities used $12,997 during the three months ended September 30, 2011.

 

Investing activities for the three months ended September 30, 2011 included $22,273 for capital expenditures and $13,061 towards the Company’s patent estate. Reported under Financing activities was the repayment of the principal portion of the mortgage.

 

We see a continued operational performance since the two significant events in 2009: the cancellation and subsequent replacement of a significant supply & support agreement impacting revenues and cash by $780,000 annually and the sales of various medical device product lines which reduced the subsequent contributions to profits. We believe that recovery is soon, having growth in our T-HEXX Animal Health product line and the [human] medical division help overcome the recent shortfalls.

 

Item # 4

 

Disclosure Controls and Procedures

 

As of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and President and the Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures.

 

Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, our disclosure controls and procedures were effective and that there were no changes to our Company’s internal control over financial reporting that have materially affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting during the period covered by the Company’s quarterly report.

 

PART II – Other Information

 

The Company operates entirely from its sole location at 35 Industrial Parkway in Branchburg, New Jersey, an owned facility secured by a mortgage through a bank.

The existing facility will be adequate for the Company’s operations for the foreseeable future.

 

Item # 6. Exhibits

 

Exhibit No. Description

31.1 Rule 13a-14(a) Certification of Chief Executive Officer and President

31.2 Rule 13a-14(a) Certification of Vice President of Finance and Chief Financial Officer

32.1 Section 1350 Certification of Chief Executive Officer and Chairman, President

32.2 Section 1350 Certification of Chief Financial Officer and Vice President of Finance

9
 

 

SIGNATURES

 

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on his behalf by the undersigned thereunto duly authorized.

 

 

 

HYDROMER, INC.

/s/ Robert Y. Lee, VP 

Robert Y. Lee

Principal Accounting Officer & Chief Financial Officer

 

 

 

DATE: November 17, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10