hydiform10qsb12312007.htm
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, 2007

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, 2007
 
Common
  
4,772,318




HYDROMER, INC.


INDEX TO FORM  10-QSB
December 31, 2007

   
Page No.
Part I  -  Financial Information
    
     
    # 1  Consolidated Financial Statements
    
     
        Balance Sheets - December 31, 2007 & June 30, 2007
  
2
     
        Statements of Income for the three months and six months ended
    
          December 31, 2007 and 2006
  
3
     
        Statements of Cash Flows for the six months ended
    
          December 31, 2007 and 2006
  
4
     
        Notes to Financial Statements
  
5
     
    # 2  Management's Discussion and Analysis of the Financial Conditionand Results of Operations
  
 6
     
    # 3  Controls and Procedures
  
7
     
     
Part II  -  Other Information
    
     
    # 1  Legal Proceedings
  
N/A
     
    # 2  Change in Securities
  
N/A
     
    # 3  Default of  Senior Securities
  
N/A
     
    # 4  Submission of Motion to Vote of Security Holders
  
N/A
     
    # 5  Other Information
  
N/A
     
    # 6  Exhibits and Reports on form 8-K
  
7


EXHIBIT INDEX

Exhibit No.
Description of Exhibit
    
33.1
  
9
       
33.2
  
10
       
99.1
  
 11
 
 
  
 
99.2 
  
11
 
 
  
 



- 1 -
Part I – Financial Information
Item # 1

HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
   
December 31,
2007
UNAUDITED
    
June 30,
2007
AUDITED
  
Assets
            
Current Assets:
            
Cash and cash equivalents
    $ 172,695      $ 146,338  
Trade receivables less allowance for doubtful accounts of $67,644 as of
  December 31, 2007 and $62,044 as of June 30, 2007
     932,458       1,121,752  
Inventory
     910,320       956,711  
Prepaid expenses
     80,608       120,448  
Deferred tax asset
     8,976       8,976  
Other
     1,468       13,484  
Total Current Assets
     2,106,525       2,367,709  
                 
Property and equipment, net
     3,338,735       3,295,992  
Deferred tax asset, non-current
     657,949       609,730  
Intangible assets, net
     926,613       910,303  
Total Assets
    $ 7,029,822      $ 7,183,734  
                 
Liabilities and Stockholders’ Equity
                
Current Liabilities:
                
Accounts payable
    $ 441,973      $ 537,338  
Short-term borrowings
     461,626       514,096  
Accrued expenses
     295,086       358,301  
Current portion of capital lease
     15,961       -  
Current portion of deferred revenue
     108,481       32,215  
Current portion of mortgage payable
     222,537       215,394  
Income tax payable
     6,284       9,160  
Total Current Liabilities
     1,551,948       1,666,504  
Deferred tax liability
     261,958       261,958  
Long-term portion of capital lease
     47,786       -  
Long-term portion of deferred revenue
     48,570       62,978  
Long-term portion of mortgage payable
     1,764,947       1,878,040  
Total Liabilities
     3,675,209       3,869,480  
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 December 31, 2007 and 4,698,825 shares issued and 4,687,908 shares outstanding as June 30, 2007
     3,721,815       3,643,815  
Contributed capital
     633,150       633,150  
Accumulated deficit
     (994,212 )     (956,571 )
Treasury stock, 10,917 common shares at cost
     (6,140 )     (6,140 )
Total Stockholders’ Equity
     3,354,613       3,314,254  
Total Liabilities and Stockholders’ Equity
    $ 7,029,822      $ 7,183,734  

- 2 -
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME




   
Three Months Ended
December 31,
    
Six Months Ended
December 31,
  
   
2007
UNAUDITED
    
2006
UNAUDITED
    
2007
UNAUDITED
    
2006 UNAUDITED
  
Revenues
                        
Sale of products
   $ 943,558     $ 1,316,130     $ 2,139,261     $ 2,524,330  
Service revenues
     413,094       361,422       784,319       729,902  
Royalties and Contract Revenues
     401,874       406,335       794,159       857,428  
Total Revenues
     1,758,526       2,083,887       3,717,739       4,111,660  
 
Expenses
                                
Cost of Sales
     707,317       748,658       1,510,808       1,596,243  
Operating Expenses
     1,134,681       1,188,063       2,208,887       2,544,942  
Other Expenses / (Income)
     38,197       44,398       81,040       87,518  
(Benefit from) Provision for from Income Taxes
     (35,354 )     40,079       (45,354 )     (28,897 )
 
Total Expenses
     1,844,841       2,021,198       3,755,381       4,199,806  
 
Net (Loss) Income
   $ (86,315 )   $ 62,689     $ (37,642 )   $ (88,146 )
 
(Loss) Earnings Per Common Share
 
 
  
$
 
 
(0.02
 
 
).
 
 
  
$
 
 
0.01
 
.
    
$
 
 
(0.01
 
 
)
 
 
  
$
 
 
(0.02
 
 
)
 
 
Weighted Average Number of Common Shares Outstanding
     4,747,984       4,644,164       4,725,337       4,644,164  

The effects of the common stock equivalents on diluted earnings per share
 are not included as their effect would be anti-dilutive.
The diluted earnings per share for the three months ended December 31, 2006
is $0.01 per share
based on the effect of 164,000 dilutive shares (stock options)

 
 
 
 
 
 
 
 
 
 

 

- 3 -


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


   
Six Months Ended
December 31
  
   
2007
UNAUDITED
    
2006
UNAUDITED
  
Cash Flows From Operating Activities:
            
Net Loss
   $ (37,642 )   $ (88,146 )
Adjustments to reconcile net loss to net cash provided by (used for) operating activities
                
Depreciation and amortization
     209,622       197,909  
Deferred income taxes
     (48,219 )     (28,897 )
Changes in Assets and Liabilities:
                
Trade receivables
     189,294       215,955  
Inventory
     46,391       78,359  
Prepaid expenses
     39,840       50,212  
Other assets
     12,016       14,479  
Accounts payable and accrued liabilities
     (158,579 )     (127,433 )
Deferred income
     61,858       (115,790 )
Income taxes payable
     (2,876 )     36,735  
Net Cash Provided by Operating Activities
     311,705       233,383  
                 
Cash Flows From Investing Activities:
                
Cash purchases of property and equipment
     (98,248 )     (44,728 )
Cash payments on patents and trademarks
     (106,680 )     (136,910 )
Net Cash Used for Investing Activities
     (204,928 )     (181,638 )
                 
Cash Flows From Financing Activities:
                
Net borrowings against Line of Credit
     (52,470 )     (124,720 )
Repayment of long-term borrowings
     (105,950 )     (99,268 )
Proceeds from the issuance of common stock
     78,000       -  
Net Cash Used for Financing Activities
     (80,420 )     (223,988 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents:
     26,357       (172,243 )
Cash and Cash Equivalents at Beginning of Period
     146,338       434,865  
Cash and Cash Equivalents at End of Period
   $ 172,695     $ 262,622  
                 
 Supplemental Non-Cash Investing & Financing Activites:
     Equipment acquired under Capital Lease
   $ 63,747       -  



- 4 -


HYDROMER, INC. and CONSOLIDATED SUBSIDIARY

Notes to Consolidated Financial Statements

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

Subsequent Events:
In January 2008, the Company renewed its Line of Credit facility to a final maturity of September 30, 2008.  The renewed credit facility, effective at $575,000, will have the line reduced $12,500 each month beginning March 1, 2008 and carries a rate of LIBOR + 3.75%.  The rate of the Company's Line of Credit facility at December 31, 2007 was 7.63% (LIBOR + 3.00%).

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
  
2007
                        
Revenues
   $ 2,102,470     $ 1,615,269           $ 3,717,739  
Expenses
     (1,620,718 )     (1,392,965 )   $ (787,052 )     (3,800,735 )
     Pre-tax Income (Loss)
   $ 481,752     $ 222,304     $ (787,052 )   $ (82,996 )
                                 
2006
                                
Revenues
   $  2,231,934     $  1,879,726             $ 4,111,660  
Expenses
     (1,850,442 )     (1,637,221 )   $ (741,040 )     (4,228,703 )
     Pre-tax Income (Loss)
   $  381,492     $  242,505     $ (741,040 )   $ (117,043 )
                                 


Geographic revenues were as follows for the six months ended December 31,
 
2007
2006
Domestic
 82%
86%
Foreign
 18%
14%




- 5 -
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 December 31, 2007 were $1,758,526, down 15.6% from the $2,083,887 for the same period last year.  Revenues for the six months ended December 31, 2007 were $3,717,793, or 9.6% lower than the $4,111,660 in the corresponding period a year ago.  Revenues are comprised of the sale of Products and Services and Royalty and Contract payments.

Product sales and services were $1,356,652 for the quarter ended December 31, 2007 as compared to $1,677,552 for the same period the year before, a decrease of $320,900 or 19.1%.  The quarter’s revenues the year before included the periodic revenues from T-Hexx Dry private label orders (which for this fiscal year, was included in the quarter ended September 30, 2007.)  For the six months ended December 31, 2007, product sales and services were $2,923,580, down 10.2% (or $330,652) from the $3,254,232 the year before.  Delayed 2007 sales into January 2008 (approximately $80,000 in delayed sales due to toll manufacturing delays, or for one order, awaiting prepayment) was further compounded by an inventory call the year before in 2006 of $162,000 (one of our medical device customers moved production from our facilities to their foreign site; along with this permanent reduction in revenues is a corresponding reduction to our production costs) resulted in the total revenue decrease.

Royalty and Contract revenues include royalties received and the periodic recurring payments from license, option and other agreements for other than product and services.  Included in Royalty and Contract revenues are revenues from support and supply agreements.  For the quarter ended December 31, 2007, Royalty and Contract revenues were $401,874, down $4,461 or 1.1% from the $406,335 the same period a year ago.  Royalty and Contract revenues were $794,159 and $857,428 for the six month periods ended December 31, 2007 and 2006, respectively.  Included in the 2006 period were the final amortization of a technology transfer agreement and a standstill agreement aggregating $52,500.

As of December 31, 2007, our open sales order book was approximately $1,360,000.  Although some of the sales orders can be cancelled prior to production, the Company is of the opinion that no substantial cancellations will occur.  Excluded from the open sales order book are future orders that call for immediate or very short-term delivery.  As an example, the open sales amount for Contract Coating Services at December 31, 2007 was approximately $156,000.  Contract Coating Services revenues for January 2008 was $193,000 while open sales at the end of January 2008 was $139,000.


Total Expenses for the quarter ended December 31, 2007 were $1,844,841 as compared with $2,021,198 the year before, an 8.7% decrease.  For the six months ended December 31, 2007 (fiscal 2008), total Expenses were $3,755,381 as compared with $4,199,806 the same period the year before, or lower by 10.6%.

The Company’s Cost of Goods Sold was $707,317 for the quarter ended December 31, 2007 as compared with $748,658 the year prior, lower by 5.5%.  On a year-to-date basis, Cost of Goods Sold was $1,510,808 for fiscal 2008 as compared with $1,596,243 in fiscal 2007, $85,435 or 5.4% lower.  Lower product sales, in part due to the elimination of a medical device product line in fiscal 2007 (transferred to the customer’s internal facilities), reduced manufacturing labor while we continued to supply coating formulations.  This cost reduction was offset by overtime and increased staffing to meet customer demand for our contract coating services while equipment was being built to further automate the process in anticipation of future cost reductions.

Operating expenses were $1,134,681 for the quarter ended December 31, 2007 as compared with $1,188,063 the year before, down $53,383 or 4.5%.  For the six months ended December 31, 2007, Operating expenses were $2,208,887 as compared with $2,544,942 the year before, down $336,055 or 13.2%.  Lower staffing levels reduced salaries expense during the current period as compared with the corresponding period a year ago.

Interest expense, interest income and other income are included in Other Expenses.  Interest expense for the six months ended December 31, 2007 and December 31, 2006 were $87,348 and $96,492, respectively, down from a lower utilization of the line-of-credit facility.  Interest income for the six months ended December 31, 2007 and December 31, 2006 were $1,358 and $8,945, respectively, lower from a decrease in investable funds during the period.

A net loss of $86,315 ($0.02 per share) is reported for the quarter ended December 31, 2007 as compared to net income of $62,689 ($0.01 per share) the year before.  For the six months ended December 31, 2007, a net loss of $37,642 ($0.01 per share) is reported as compared to a net loss of $88,146 ($0.02 per share) the year before.

Despite $393,921 in lower revenues this fiscal year-to-date, $162,000 from the transfer of production to our customer’s facilities and having at least $80,000 delayed into January 2008, cost reductions, primarily reduced staffing levels, and a higher Income Tax Benefit, resulted in an improved bottom line result.  Included in the current period’s Operating Expenses are re-investment expenditures of the Company: research and development and the amortization of patent expenditures costs which can provide for future returns.  For the six months ended December 31, 2007, these re-investment expenditures accounted for approximately $557,000 or 25.2% of the operating expenses.  Research developments in our antimicrobial technologies, patent pending, from a few years ago are creating extreme current interest after being introduced a few years ago.  Our more recent developments are in the areas of thrombogenicity and cell mitosis, for use in the cardiovascular and neurovascular fields.   These patent pending developments are still under evaluation.  Planned in vivo (animal) studies on our cardiovascular stent coatings have been delayed due to the allocation of research resources towards the potentially revenue generating anti-microbial projects.
 
 
- 6 -
Financial Condition

Working capital decreased $146,628 during the six months ended December 31, 2007.

Net operating activities provided $311,705 for the six month period ended December 31, 2007.

The net loss as adjusted for non-cash expenses, provided $123,762 in cash.  The collections of accounts receivables and amounts in advance, provided for a $251,152 source of cash.

Investing activities used $204,928 and financing activities used $80,420 during the six months ended December 31, 2007.

During the six months, the Company expended $161,995 on capital expenditures including equipment of $63,747 acquired via a capital lease, and $106,680 into its patent estate.  The Company repaid $52,470 towards its revolving line of credit and $105,950 to its long-term borrowings.  Common stock was issued for $78,000 during the current period.

Following the restructuring program a few years ago in which the new developments in the areas of anti-thrombogenicity and anti-cell mitosis arose, adding to the legacy lubricious coatings and hydrogels and more recent anti-microbial technologies, the Company is able to streamline its operations and reduce costs without a major impact to ongoing revenues.  This enabled to Company to improve its financial position, however continued new revenue streams from paid R&D projects or new customers or product lines or from higher volumes in addition to available financing credit in the interim is imperative to the continued success of the Company.


Item # 3

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

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

 
a)
Exhibits – none

 
b)  
Reports on form 8-K – There were no Form 8-K’s filed during the quarter ending December 31, 2007.
 
 
- 7 -
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 13, 2008
    






 
 
 
 
 
 
 
 
 
 
 
 

 

- 8 -