UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(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, 2006
Or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Period from __________ to __________
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 May 9, 2006: 12,201,936
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X].
TABLE OF CONTENTS PAGE
Part I. Financial Information
------------------------------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -- March 31, 2006 ............ 3
Condensed Consolidated Statement of Operations --
Three months ended March 31, 2006 and 2005 ........................ 4
Condensed Consolidated Statements of Cash Flow --
Three months ended March 31, 2006 and 2005 ........................ 5
Notes to Condensed Consolidated Financial Statements .............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 14
Item 3. Controls and Procedures ........................................... 20
Part II. Other Information
--------------------------
Item 6. Exhibits and reports on Form 8K ................................... 22
2
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(unaudited)
MARCH 31, 2006
--------------
ASSETS
Current Assets
Cash and cash equivalents ................................ $ 13,237
Trade accounts receivable, net ........................... 121,397
Inventories .............................................. 378,550
Prepaid expenses and other current assets ................ 28,610
------------
Total current assets ............................. 541,794
Property and equipment, net ................................... 128,452
Deferred product costs, net ................................... 152,392
Intangible assets, net ........................................ 213,688
Restricted cash ............................................... 104,556
Deposits ...................................................... 8,154
------------
Total Assets ..................................... $ 1,149,036
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable ......................................... 368,004
Loans payable, net ....................................... 137,037
Royalties payable ........................................ 30,467
Deferred revenues ........................................ 97,598
Accrued liabilities ...................................... 269,784
Current portion of capital leases payable ................ 23,488
------------
Total current liabilities ............................ 926,378
Long tern liabilities
Capital lease payable .................................... 44,379
Minority interest in consolidated partnership ............ 240,813
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; 12,201,936 shares
issued and 9,320,336 shares outstanding .............. 122,019
Additional paid-in capital ............................... 21,208,699
Accumulated deficit ...................................... (21,385,436)
Treasury stock, at cost 10,000 ........................... (7,816)
------------
Total Shareholders' deficit .......................... (62,534)
------------
Total liabilities and shareholders deficit ........... $ 1,149,036
============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2006 2005
------------ ------------
Net sales ...................................... $ 375,467 $ 255,914
Cost of sales .................................. 145,723 97,259
------------ ------------
Gross profit ................................... 229,744 158,655
Expenses
Royalty expense ........................... 7,500 7,725
Research and development .................. 1,010 38,970
Selling, general & administration ......... 363,525 275,274
Depreciation & amortization ............... 25,410 9,137
------------ ------------
Total expenses ........................ 397,445 331,106
------------ ------------
Operating loss ................................. (167,702) (172,452)
Interest (expense) income - net ................ (27,073) 422
------------ ------------
Loss before income taxes and minority
interest ................................. (194,775) (172,030)
Income taxes expense ........................... - -
Minority interest in net loss of subsidiary .... 9,050 8,545
------------ ------------
Net loss .............................. $ (185,725) $ (163,484)
============ ============
Basic and diluted loss per share
Net loss per common share ................. $ (0.02) $ (0.02)
============ ============
Weighted average shares
outstanding (basic and diluted) ........... 12,201,936 9,320,336
============ ============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
THREE MONTHS ENDED MARCH 31,
2006 2005
--------- ---------
Operating activities
Net loss ........................................ $(185,725) $(163,484)
Adjustments to reconcile net loss to
net cash used in operating activities
Minority Interest ........................... (9,050) (8,545)
Depreciation and amortization ............... 25,410 9,137
Compensation expense from stock option awards 5,214 -
Deferred financing costs .................... 3,567 -
Interest expense ............................ 34,776 -
Change in operating assets and liabilities
restricted cash ............................. 7,778 -
Trade accounts receivables .................. 25,733 8,096
Inventories ................................. 27,614 2,773
Prepaid expenses and other current assets ... 2,583 25,143
Deposits .................................... (575) -
Accounts payable ............................ 34,606 (48,104)
Royalties payable ........................... 955 (1,381)
Deferred revenues ........................... (36,935) 50,392
Accrued interest ............................ (13,230) -
Accrued liabilities ......................... 15,057 13
--------- ---------
Net cash used in operating activities ......... (62,222) (125,960)
Net cash from investing activities ............ - -
Financing activities
Repayment of loans payable .................... - (372)
Payments on capital leases .................... (5,357) -
Proceeds from exercise of stock options ....... 44,535 -
--------- ---------
Net cash provided by (used in) financing
activities ..................................... 39,178 (372)
Net decrease in cash and cash equivalents ..... (23,044) (126,332)
Cash and cash equivalents at beginning of period .. 36,281 339,679
--------- ---------
Cash and cash equivalents at end of period ........ $ 13,237 $ 213,347
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Stock issued to pay accrued interest ............ $ 34,776 -
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
NOTE A - BASIS OF PRESENTATION
The 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 condensed or 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, 2005, which is included in the Company's Form 10-KSB for
the year ended December 31, 2005. The financial data for the interim periods
presented may not necessarily reflect the results to be anticipated for the
complete year.
NOTE B - 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.
Cash and cash equivalents includes $13,237 which is covered by the
Federal Deposit Insurance Commission.
6
Restricted cash
At March 31, 2006, the Company had restricted cash of $104,556
($100,000 of which is 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.
Concentration of Credit Risk
Trade accounts receivable are due primarily from contract manufacturing
customers and are usually paid to the Company within 45 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 (first-in, first-out) or
market, 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 periods ended March 31, 2006 and 2005, there were no deemed 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.
7
Common Stock, Common Stock Options and Net Loss Per Share
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.
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 condensed
consolidated balance sheet on the date of adoption be netted against additional
paid-in capital.
For the three months ended March 31, 2006, the Company recorded
stock-based compensation expense of $5,214 which increased net loss by $5,214.
For the three months ended March 31, 2005, the Company recognized $0 of
stock-based compensation expense under the intrinsic value method.
The table below reflects the pro forma impact of valuing compensation
expense of awards at fair value :
8
Three months ended
March 31, 2005
--------------
Net loss, as reported .................. $ (163,484)
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards, net of related tax effects ..... -
-----------
Pro Forma net loss ..................... $ (163,484)
===========
Basic and diluted loss per share
As reported ......... $ (0.02)
===========
Pro forma ........... $ (0.02)
===========
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 criteria, 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 and the client approves the formula by written correspondence.
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. The cost of warehousing
finished product that is available for sale is included in selling, general and
administrative expenses.
NOTE C - INVENTORIES
Inventories consist of the following at March 31, 2006:
Finished Goods ........................... $ 80,000
Raw materials and components ............. 589,304
---------
669,304
Less : inventory valuation allowance ..... (290,754)
---------
Inventories, net ......................... $ 378,550
=========
NOTE D - ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following at March 31, 2006:
Accounts Receivable ...................... $ 146,397
Less : Allowance for Doubtful accounts ... (25,000)
---------
Accounts Receivable, Net ................. $ 121,397
=========
NOTE E - SHARE BASED COMPENSATION
The Company recognized $5,214 in share based compensation expense for
the period ended March 31, 2006. Options to purchase 9,500 shares were granted
to employees during the three months ended March 31, 2006.
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 four 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, 2006:
10
Risk-free interest rate .... 4.3%
Expected life .............. 5 YEARS
Expected volatility ........ 124%
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 - LOAN 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 (x) over the
last ten trading days of the month preceding the interest payment date or, (y)
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
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 $.57 to the Note holders
11
In addition, in connection with the Loans, each Lender received a
Common Stock Purchase Warrant (collectively, the "Warrants") entitling the
holder to purchase One Hundred Thousand (100,000) shares of Common Stock at an
exercise price of ten cents ($.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.
Loans Payable consisted of the following at March 31, 2006:
Loan Payable ............................. $ 150,000
Less :Deferred financing costs ........... (12,963)
---------
Loan Payable, net .................. $ 137,037
=========
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, 2006:
Dividends payable ........................ $ 83,163
Director fees payable .................... 101,020
Professional fees ........................ 46,962
Other .................................... 38,639
---------
Total Accrued liabilities .......... $ 269,784
=========
12
NOTE H - GOING CONCERN
The accompanying condensed 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 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, 2005 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 is a privately held product
development laboratory and contract manufacturer of cosmeceutical and other
personal care products. CRI's clients range 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.
Management anticipates that any impact of the acquisition on cash flow
will not be realized for nine to twelve months. 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 I - SUBSEQUENT EVENTS
Subsequent to March 31, 2006, the Company received a $60,000 payment
for formulation services that its subsidiary Clinical Results, Inc had
previously preformed. When certain additional consulting services are completed,
the Company expects to receive another milestone payment and may receive
continuing royalties thereafter.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
During early 2005, the Company returned its focus to the development
and sales of its skin care products. For several years prior to 2005, 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.
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.
14
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 (24 products), hair care (6 products), bath and body (11 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.
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.
The Company discovered that the Hydron emulsion system also adjusts pH
on the skin to match the pH of the stratum corneum, the skin's surface layer.
The pH range of the emulsion system is ideal for promoting the skin's natural
healing process and enzyme production responsible for rebuilding the skin's
lipid barrier. In January 2006, the Company was granted U.S. Patent Number
6,984,391 for its Compositions and Method for Delivery of Skin Cosmeceuticals to
cover this technology, which also applies to a new acne treatment system.
15
Catalog 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 sales represented approximately 41% of Hydron's total sales for
the three months ended March 31, 2006 and 73% of sales the three months ended
March 31, 2006. The Company is continuing to explore new ways to enhance Catalog
sales and operations.
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 23% of Hydron's total sales for the three months ended
March 31, 2006 and 15% of sales for the three months ended March 31, 2005. .
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 six months of
combined operations ending December 31, 2005, non-Hydron Technologies, Inc.
related contract manufacturing revenue represented 30% of Hydron's total sales
and 32 % of sales for the three months ended March 31, 2006.
International - The Company sells limited quantities of its products to
an Australia-based health and beauty products distributor for retail sale in
salon stores and medical offices in Australia and New Zealand. The Company also
distributes dental products in Spain and, to a lesser extent, other countries.
RESULTS OF OPERATIONS
Results of Operations - 2006 versus 2005
Total net sales for the three months ended March 31, 2006 were
$375,467, an increase of $119,553 or 47% from net sales of $255,914 for the
three months ended March 31, 2005. Catalog Sales net sales for the three months
ended March 31, 2006 were $155,672, a decrease of $31,950 or 17% from sales of
the three months ended March 31, 2005 of $187,622. Private Label and Contract
Manufacturing net sales for the three months ended March 31, 2006 were $206,893,
an increase of $167,431 or 424% from sales the three months ended March 31, 2005
of $39,462. Shipping and handling revenues for the three months ended March 31,
2006 were $12,831, a decrease of $14,810 or 54% from shipping and handling
revenues for the three months ended March 31, 2005 of $27,641.
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 increased due to the acquisition of
Clinical Results, Inc. on July 1, 2005. Clinical Results is in the early stages
of its manufacturing facility and has helped contribute to the overall revenue.
16
Cost of sales was $145,723 for the three months ended March 31, 2006,
an increase of $48,464, or 50%, from cost of sales of $97,259 for the three
months ended March 31, 2005. Cost of sales was 39% of total sales the three
months ended March 31, 2006, compared to 38% for the three months ended March
31, 2005. The increase in the cost of sales percentage reflects the impact of
private label 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
2006 were $18,640, a decrease of $13,330, or 42%, from shipping and handling
cost of $31,970 for the same period in 2005. 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 61% of net sales
for the three months ended March 31, 2006 versus 62% for the three months ended
March 31, 2005. This reflects the costs discussed above, less the relative mix
of higher margin catalog sales versus lower margin private label sales.
Royalty expenses for the three months ended March 31, 2006 were $7,500
and $7,725 for the three months ended March 31, 2005. An aggregate of $30,467
was accrued and unpaid as of March 31, 2006. This amount is adequate to cover
any royalties that are payable through March 2006.
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 $1,010 for the three months ended March 31, 2006, a decrease of $37,960 or
97% from R&D expenses of $38,970 for the three months ended March 31, 2005. This
decrease was due principally to the Company eliminating the use of outside FDA
consultants in association with its oxygenation technology during 2005 versus
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, 2006 were $363,525, representing an increase of $88,251
or 32% from SG&A expenses of $275,274 for the three months ended March 31, 2005.
Employment expense was $173,082 for the three months ended March 31, 2006, an
increase of $42,038, or 32%, from $131,044 for the three months ended March 31,
2005. This increase was due primarily to the acquisition of Clinical Results,
Inc. on July 1, 2005 which includes new management and office support and the
bringing in house of more functions. Postage expense was $3,735 for the three
months ended March 31, 2006, a decrease of $7,306, or 66%, from $11,041 for the
three months ended March 31, 2004. This decrease was related principally to a
new catalog marketing strategy, which reduces mailing frequency to customers who
have not purchased in the last 24 months. Advertising and promotional expenses
was $34,789 for the three months ended March 31, 2006, an increase of $18,185,
or 110% from $16,604 for the three months ended March 31, 2005. This increase is
17
due to new advertising initiatives taken by the Company to increase sales. Sales
commissions expenses was $2,874 for the three months ended March 31, 2006, an
increase of $2,874, or 100% from $0 for the three months ended March 31, 2005.
The increased sales commissions reflect the addition of a commissioned sales
representative. Professional expenses (legal and audit) was $37,259 for the
three months ended March 31, 2006, an increase of $10,259 or 38% from $27,000
for the three months ended March 31, 2005. The increase in professional fees
involved additional costs associated with the audit for 2005. All other expenses
were $111,786 for the three months ended March 31, 2006, an increase of $22,201
or 25% from $89,585 for the three months ended March 31, 2005.
Depreciation and amortization expense was $25,410 for the three months
ended March 31, 2006, an increase of $16,273 from $9,137 for the three months
ended March 31, 2005. The increase was due primarily to the amortization of the
intangible of the purchase of CRI.
Net interest (expense) was ($27,073) for the three months ended March
31, 2006 compared to net interest income of $422 for the three months ended
March 31, 2005. The increase in interest expense was due primarily to the
interest on the loan payable and amortization of related debt discount.
Minority interest in net loss the three months ended March 31, 2006 was
$9,050 compared to $8,545 the three months ended March 31, 2005. 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 $185,725 for the three months ended March
31, 2006, representing an increase of $22,241 or 14% from the net loss of
$163,484 for the three months ended March 31, 2005, primarily as a result of the
factors discussed above.
LIQUIDITY AND FINANCIAL RESOURCES
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 and maybe longer based on management decisions and
order flow. Beyond that point, it may 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, 2005 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 CRI, a St. Petersburg,
Florida-based company. CRI is a privately held product development laboratory
and contract manufacturer of cosmeceuticals and other personal care products.
CRI's clients range from mass-market retailers to marketers of high-end brands,
and of certain health food store brands.
18
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.
Management anticipates that any impact of the acquisition on cash flow
will not be realized for six to nine months. 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.
The Company's working capital deficit was approximately ($280,028) at
March 31, 2006, including cash and cash equivalents of approximately $13,237.
Cash used by operating activities during the three months ended March 31, 2006
was $62,222. This was offset by proceeds from financing activities of $39,178.
The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three investors in May 2005 (see Note F), and two
capital leases for equipment purchases of $73,224. Effective August 5, 2005, the
Company relocated its offices to St Petersburg, Fl. 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 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.
19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of the Company's financial
condition and results of operations should be read with the condensed
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.
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, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. 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. Management is currently
seeking personnel resources with appropriate accounting experience, as well as
implementing a perpetual inventory system which should mitigate these material
weaknesses in 2006.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) 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.
20
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.
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.
21
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits:
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)
(b) Reports on Form 8-K:
None
22
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: May 15, 2006
23