HYDI form10QSB 12-31-2005

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549

FORM 10-QSB

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

For the quarter ended December 31, 2005
 
Commission File Number 0-10683

HYDROMER, INC.
(Exact name of registrant as specified in its charter)
     New Jersey        
      22-2303576    
(State of incorporation)
 (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)
 
Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such report(s), and (2) has been subject to such filing requirements for the past 90 days
 
.
 
Yes
 
x
 
No
 
¨
 

 
Indicate the number of shares outstanding or each of the issuer’s classes of Common Stock as of the close of the period covered by this report.
 

 
Class
 
Outstanding at December 31, 2005
Common
4,644,164
 
 
 
 

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HYDROMER, INC.


INDEX TO FORM 10-QSB
December 31, 2005

 
Page No.
Part I - Financial Information
  
   
Consolidated Financial Statements
  
   
Balance Sheets - December 31, 2005 & June 30, 2005
2
   
Statements of Income for the three months and six months ended
 
December 31, 2005 and 2004
3
   
Statements of Cash Flows for the six months ended
  
December 31, 2005 and 2004
4
   
Notes to Financial Statements
5
   
Management's Discussion and Analysis of the Financial Condition
  
and Results of Operations
6
   
   
   
Part II - Other Information
8



EXHIBIT INDEX
     
Exhibit No.
Description of Exhibit
  
10
11
     
 
 
12
 
 
12





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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS


 
December 31,
2005
UNAUDITED
June 30,
2005
AUDITED
Assets
        
Current Assets:
        
Cash and cash equivalents
$
451,883.
$
1,376,656..
Short-term investments
  
397,968.
 
-
Trade receivables less allowance for doubtful accounts of $32,753 as of
December 31, 2005 and June 30, 2005
  
 
987,297.
  
 
1,220,258..
Inventory
  
1,111,337.
  
1,094,927..
Prepaid expenses
  
100,670.
  
126,762..
Deferred tax asset
  
34,589.
  
91,989..
Other
  
47,492.
  
14,841..
Total Current Assets
  
3,131,236.
  
3,925,433..
Property and equipment, net
  
3,252,116.
  
3,276,258..
Deferred tax asset, non current
  
                     250,000
  
-
Intangible assets, net
  
805,247.
  
780,140..
Goodwill, net
  
238,172.
  
238,172..
 
Total Assets
 
$
 
7,676,771.
 
$
 
8,220,003  
         
Liabilities and Stockholders’ Equity
        
Current Liabilities:
        
Accounts payable
$
464,964.
$
466,993..
Short-term borrowings
  
284,933.
  
206,663..
Accrued expenses
  
194,696.
  
280,944..
Bonus payable
  
-
  
77,267..
Current portion of deferred revenue
  
188,151.
  
161,317..
Current portion of mortgage payable
  
195,805.
  
178,029..
Income Taxes payable
  
2,328.
  
-
Total Current Liabilities
  
1,330,877.
  
1,371,213..
Deferred tax liability
  
243,864.
  
243,864..
Long-term portion of deferred revenue
  
139,071.
  
176,979..
Long-term portion of mortgage payable
  
2,196,342.
  
2,295,292..
Total Liabilities
  
3,910,154.
  
4,087,348..
 
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;
as of December 31, 2005, 4,655,081 shares issued and 4,644,164 shares outstanding; as of June 30, 2004, 4,608,904  
     shares issued and 4,597,987 shares outstanding
  
 
 
3,639,315.
  
 
 
3,631,615..
Contributed capital
  
577,750.
  
577,750..
Accumulated deficit
  
(444,308)
  
(70,570).
Treasury stock, 10,917 common shares at cost
  
(6,140)
  
(6,140).
Total Stockholders’ Equity
  
3,766,617.
  
4,132,655..
Total Liabilities and Stockholders’ Equity
$
7,676,771.
$
8,220,003..

 


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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME





 
 
 Three Months Ended
 
 Six Months Ended
 
 
 December 31,
 
 December 31,
 
 
2005
UNAUDITED
 
2004
UNAUDITED
 
2005
UNAUDITED
 
2004
UNAUDITED
Revenues
 
 
 
 
 
 
 
 
Sale Sale of products
ServService revenues
$
1,161,379
245,481
$
1,202,592
303,683
$
2,216,129
490,764
$
2,273,755
585,312
RoyRoyalties and Contract Revenues
 
476,272
 
675,421
 
1,037,443
 
1,268,959
Total Revenues
 
 
1,883,132
 
 
2,181,696
 
 
3,744,336
 
 
4,128,026
 
Expenses
 
 
 
 
 
 
 
 
Cost of Sales
 
 
803,384
 
 
757,406
 
 
1,620,732
 
 
1,456,163
Operating Expenses
 
 
1,242,355
 
 
1,302,102
 
 
2,624,089
 
 
2,579,886
Other Expenses
 
32,221
 
25,780
 
65,784
 
47,560
(Benefit) Provision for Income Taxes
 
 
(66,241)
 
 
39,618
 
 
(192,531)
 
 
11,012
 
Total Expenses
 
2,011,719
 
2,124,906
 
4,118,074
 
4,094,621
 
Net (Loss) Income
 
$
 
(128,587)
 
$
 
56,790
 
$
 
(373,738)
 
$
 
33,405
(Loss) Earnings Per Common Share
$
(0.03)
$
0.01
$
(0.08)
$
0.01
 
Weighted Average Number of
Common Shares Outstanding
 
 
 
4,643,217
 
 
 
4,613,150
 
 
 
4,634,362
 
 
 
4,605,569
    




The effects of the common stock equivalents on diluted earnings per share
are not included as they have no impact.

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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS





   
Six Months Ended
December 31,
   
2005
UNAUDITED
  
2004
UNAUDITED
Cash Flows From Operating Activities:
        
Net (Loss) Income
$
(373,738)
$
33,405
Adjustments to reconcile net (loss) income to net cash provided by (used for) operating activities
        
Depreciation and amortization
  
113,085 
  
97,452
Deferred income taxes
  
(192,600)
  
(6,581)
Changes in Assets and Liabilities
        
Trade receivables
  
232,961
  
(137,467)
Inventory
  
(16,410)
  
(84,936)
Prepaid expenses
  
26,092
  
38,019
Patents and Trademark
  
(25,107)
  
(91,424)
Other assets
  
(37,986)
  
(43)
Accounts payable and accrued liabilities
  
(176,618)
  
109,216
Income taxes payable
  
2,328
  
(48,207)
 
Net Cash Used for Operating Activities
  
 
(447,993)
  
 
(90,566)
 
Cash Flows From Investing Activities:
        
Cash purchases of property and equipment
  
(88,943)
  
(291,584)
Cash purchases of short-term investments
  
(392,633)
  
    -
 
Net Cash Used for Investing Activities
 
  
 
(481,576)
 
  
 
(291,584)
 
Cash Flows From Financing Activities:
        
Net borrowings against Line of Credit
  
78,270
  
521,629
Repayment of long-term borrowings
  
(81,174)
  
(44,731)
Proceeds from the issuance of common stock
  
7,700
  
16,000
               Net Cash Provided by Financing Activities
  
4,796
  
492,898
Net (Decrease) Increase in Cash and Cash Equivalents:
  
(924,773)
  
110,748
Cash and Cash Equivalents at Beginning of Period
  
1,376,656
  
142,476
 
Cash and Cash Equivalents at End of Period
 
$
 
451,883
 
$
 
253,224



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HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

Notes to Consolidated Financial Statements

In the opinion of management, the accompanying unaudited financial statements include all adjustments (consisting of only normal adjustments) necessary for a fair presentation of the results for the interim periods. Certain reclassifications have been made to the previous year’s results to present comparable financial statements.

Segment Reporting:
The Company operates two primary business segments. The Company evaluates the segments by revenues, total expenses and earnings before taxes. Corporate Overhead is excluded from the business segments as to not distort the contribution of each segment.

The results for the six months ended December 31, by segment are:
 
Polymer Research
Medical Products
Corporate Overhead
 
Total
2005
      
Revenues
 $     2,203,554  $     1,540,782  $     3,744,336 
Expenses
 (1,812,623)  (1,771,260)  $     (726,722)  (4,310,605) 
Pre-tax Loss
 $     390,931  $     (230,478)  $     (726,722)  $     (566,269) 
         
2004
        
Revenues
 $     2,613,612  $     1,514,414    $     4,128,026 
Expenses
 (1,674,740)  (1,682,874)  $     (725,995)  (4,083,609) 
Pre-tax Income (Loss)
 $     938,872  $     (168,460)  $     (725,995)  $     44,417 
         

The prior period segment information has been restated to conform to the current year presentation.

Geographic revenues were as follows for the six months ended December 31,
 
2005
2004
Domestic
 84%  82% 
Foreign
 16%  18% 


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company’s revenues for the quarter ended December 31, 2005 were $1,883,132 as compared to $2,181,696 for the same period last year or a 13.7% decrease. Revenues for the six months ended December 31, 2005 were $3,744,336, down 9.3% from $4,128,026 the corresponding period a year ago. Revenues are comprised of the sale of Products and Services and Royalty and Contract payments.

Product sales and services were $1,406,860 for the quarter ended December 31, 2005 as compared to $1,506,275 for the same period last year, a decrease of $99,415 or 6.6% lower. For the six months ended December 31, 2005, product sales and services were $2,706,893 as compared to $2,859,067 the prior year, a 5.3% decrease or $152,174. The absence of paid R&D services this year compared with the prior year ($233,737) was the primary variance. One of the R&D customers last year converted over to contract coating services.

Royalty and Contract revenues includes royalties received and the payments from license, option and other agreements which calls for periodic recurring payments for other than product and services. Included in Royalty and Contract revenues are revenues from support and supply agreements. For the quarter, Royalty and Contract revenues were $476,272, down 29.5% from $675,421 the same period a year ago. For the six months ended December 31, 2005, Royalty and Contract revenues were $1,037,443, down 18.2% from $1,268,959 the same period a year ago. The expiration of the Company’s ‘267 patent in May 2005 eliminated approximately $525,000 in quarterly royalty revenues from four licensees. The Company was successful in reaching new agreements with three of the four former licensees during the quarter ended September 30, 2005. A tentative agreement with the fourth former licensee was reached during the quarter ended December 31, 2005. The new agreements, primarily supply and availability agreements, provided approximately $492,000 and $437,000 for the quarters ended September 30, and December 31, 2005, respectively.

As of December 31, 2005, our open sales order book for delivery this fiscal year was approximately $1,520,000. Although some of these orders are subject to cancellation, the Company is of the opinion that no substantial cancellations will occur. Our open order book excludes though, future orders that would come up during the normal course of business for immediate delivery also during the fiscal year.


Total Expenses for the quarter ended December 31, 2005 were $2,011,719 as compared with $2,124,906 the year before, a decrease of 5.3%. For the six months ended December 31, 2005, total Expenses were $4,118,074 as compared with $4,094,621 the same period the year before, essentially flat with an increase of 0.6%.

The Company’s Cost of Goods Sold was $803,384 for the quarter ended December 31, 2005 as compared with $757,406 the year prior, an increase of 6.1%. On a year-to-date basis, cost of goods sold was $1,620,732 this year as compared with $1,456,163 the corresponding period a year ago, an increase of 11.3%. The change in the mix of higher cost margin products sold this year in addition to higher direct labor costs (including fringe benefits) resulted in a higher cost of goods sold.
 
Operating expenses were $1,242,355 for the quarter ended December 31, 2005 as compared with $1,302,102 the year before, lower by $59,747 or 4.6%. For the six month periods, operating expenses were $2,624,089 this year as compared with $2,579,886 the previous year, higher by $44,203 or 1.7%. The Company expended an additional $165,000 in litigation costs this fiscal year-to-date in its continued infringement claim against a former licensee and other parties, as compared with $80,000 the corresponding six months a year ago. The total direct legal burden to the Company on this action to-date is $418,000, and should begin to tail-off as settlement agreements to resolve this matter are being finalized and is expected to be announced in the next few weeks. Irrespective of the settlement, our legal actions to protect our intellectual property ceased the infringement by the defending parties allowing the Company to realize additional sales during the past few years.

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Interest expense, included in Other Expenses, for the six months ended December 31, 2005 and December 31, 2004 were $80,849 and $50,934, respectively, higher as a result of the mortgage refinance on June 30, 2005. The refinance provided to the Company an additional $1,091,643 in funds which the Company is using for working capital requirements and investments in short-term instruments.


A net loss of $128,587 ($0.03 per share) is reported for the quarter ended December 31, 2005 as compared to net income of $56,790 ($0.01 per share) the year before. For the six months ended December 31, 2005, a net loss of $373,738 ($0.08 per share) is reported as compared to Net Income of $33,405 ($0.01 per share) the year before.


Although the Company’s sales are not cyclical, our revenues have been historically higher in the second half of our fiscal year. The lack of paid R&D services combined with higher costs and expenses, part of which being investment back into the Company (primarily from an increase in R&D staffing), increased current operating expenses for expected returns in the future. Our self-funded developmental projects, including those in cardiovascular and neurological applications, are typically long-term initiatives where the costs are incurred before any revenues are returned.


Financial Condition

Working capital decreased $753,861 during the six months ended December 31, 2005.

Net operating activities used $447,993 for the six month period ended December 31, 2005.

The net loss as adjusted for non-cash expenses, used $453,253 in net cash, including an income tax benefit of $192,600 recorded as a deferred tax asset, mostly non-current. The net cash provided from working capital accounts was $5,260: primarily from to the decrease in accounts receivables by $232,961 as offset by a decrease in accounts payable and accrued liabilities and deferred income of $176,618 and the increase in patent and trademarks and other assets by $63,093.

Investing activities used $481,576 and financing activities provided $4,796 during the six months ended December 31, 2005.

During the quarter, the Company purchased $392,633 in 6-month U.S. Treasury Bills, recorded as short-term investments, and expended $88,943 on capital expenditures. The Company also repaid down long-term borrowings by $81,174 while utilizing an additional $78,270 from its revolving line of credit during the period.

Management believes that its current working capital and available line of credit, along with expected income and expense streams, are sufficient to maintain its current level of operations.


Disclosure Controls and Procedures

The evaluation of the Company’s Internal Controls Environment concluded that it was effective for the safeguarding of assets and in ensuring that management is presented material information regarding the organization. The evaluation also determined that there are areas that could be improved upon; however, the controls and procedures in place were appropriate for the type and size of the Company.

- 8 -
 
The Company has again reviewed its Internal Controls Environment during the prior 90 days, and it has been determined that there have been no significant changes in internal controls or in other factors that could significantly affect the financial statements.
 
PART II - Other Information

 
The Company operates entirely from its sole location at 35 Industrial Parkway in Branchburg, New Jersey, an owned facility secured by mortgages through banks.
 
The existing facility will be adequate for the Company’s operations for the foreseeable future.
 

Item 6. Exhibits and Reports on form 8-K:

a)
Exhibits - none
   
b)  
Reports on form 8-K - There were four Form 8-K’s filed during the quarter ending          
        December 31, 2005. Two announced supply agreements, one on a new FDA
510(k) clearance and one announcing the earnings for the quarter ending
September 30, 2005.

- 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  
 
Robert Y. Lee
 
Chief Financial Officer


DATE: February 6, 2006






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