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 March 31, 2012
Commission
File Number 001-31238
HYDROMER,
INC.
(Exact
name of registrant as specified in its charter)
New
Jersey
22-2303576
(State
of incorporation) (I.R.S. EmployerIdentification 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[x]
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
[x] 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 [x]
Class
Outstanding at March 31, 2012
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
March
31, 2012
Part I - Financial Information
|
Page No
|
|
Item
# 1 Condensed Consolidated Financial Statements
|
Condensed
Consolidated Balance Sheets as of March 31, 2012 & June 30, 2011
|
3
|
Condensed Consolidated Statements
of Operations for the three and nine months ended March 31, 2012 and 2011
|
4
|
Condensed
Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011
|
5
|
Notes to Condensed
Consolidated Financial Statements
|
6
|
Item
# 2 Management's Discussion and Analysis of Financial Condition and Results of Operations
|
7
|
Item
# 3 Quantitative and Qualitative Disclosures about Market Risk
|
N/A
|
Item
# 4 Controls and Procedures
|
9
|
|
|
Part
II - Other Information
|
N/A
|
Item
# 1 Legal Proceedings
|
N/A
|
Item
# 1A Risk Factors
|
N/A
|
Item
# 2 Unregistered Sales of Equity Securities and use of Proceeds
|
N/A
|
Item
# 3 Defaults upon Senior Securities
|
N/A
|
Item
# 4 Mine Safety Disclosures
|
N/A
|
Item
# 5 Other Information
|
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, pursuant to 18 U.S.C. Section 1350
|
12
|
32.2
|
Certification
of Robert Y. Lee, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350
|
12
|
Part
I – Financial Information
Item
# 1
HYDROMER,
INC. and CONSOLIDATED SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
March
31,
2012
UNAUDITED
|
June
30,
2011
|
Assets
|
|
|
|
|
Current
Assets:
|
|
|
|
|
Cash
and cash equivalents
|
$
|
517,359
.
|
$
|
502,597
.
|
Short-term
investments
|
|
-
.
|
|
50,000
.
|
Trade
receivables less allowance for doubtful accounts of $49,073 and $5,622 as of March 31, 2012 and June 30, 2011, respectively
|
|
805,457
.
|
|
774,753
.
|
Inventory
|
|
246,638
.
|
|
444,604
.
|
Prepaid
expenses
|
|
206,595
.
|
|
209,241
.
|
Deferred
tax asset
|
|
122,100
.
|
|
122,100
.
|
Other
|
|
12,317
.
|
|
13,547
.
|
Total
Current Assets
|
|
1,910,466
.
|
|
2,116,842
.
|
|
|
|
|
|
Property
and equipment, net
|
|
2,725,665
.
|
|
2,863,912
.
|
Deferred
tax asset, non-current
|
|
1,290,531
.
|
|
1,196,704
.
|
Intangible
assets, net
|
|
777,736
.
|
|
820,231
.
|
Total
Assets
|
$
|
6,704,398
.
|
$
|
6,997,689
.
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
Accounts
payable
|
$
|
398,596
.
|
$
|
387,094
.
|
Accrued
expenses
|
|
341,970
.
|
|
313,626
.
|
Current
portion of capital lease
|
|
12,197
.
|
|
18,687
.
|
Current
portion of deferred revenue
|
|
71,625
.
|
|
149,108
.
|
Current
portion of mortgage payable
|
|
54,956
..
|
|
51,720
.
|
Total
Current Liabilities
|
|
879,344
.
|
|
920,235
.
|
Deferred
tax liability
|
|
294,012
.
|
|
294,012
.
|
Long-term
portion of capital lease
|
|
9,813
.
|
|
15,398
.
|
Long-term
portion of deferred revenue
|
|
86,632
.
|
|
120,940
.
|
Long-term
portion of mortgage payable
|
|
2,670,882
.
|
|
2,714,817
.
|
Total
Liabilities
|
|
3,940,683
.
|
|
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 March
31, 2012 and June 30, 2011
|
|
3,721,815
.
|
|
3,721,815
.
|
Contributed
capital
|
|
633,150
.
|
|
633,150
.
|
Accumulated
deficit
|
|
(1,585,110
)
|
|
(1,416,538)
|
Treasury
stock, 10,917 common shares at cost
|
|
(6,140)
|
|
(6,140)
|
Total
Stockholders’ Equity
|
|
2,763,715
.
|
|
2,932,287
.
|
Total
Liabilities and Stockholders’ Equity
|
$
|
6,704,398
.
|
$
|
6,997,689
.
|
|
|
|
|
|
|
See
accompanying notes
.
HYDROMER,
INC. and CONSOLIDATED SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
|
|
Three
months Ended
March
31,
|
|
|
|
Nine
months Ended
March
31,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Revenues
|
|
|
|
|
|
|
|
|
Sale
of products
|
$
|
978,612
.
|
$
|
1,070,400
.
|
$
|
2,479,851
.
|
$
|
2,281,134
.
|
Service
revenues
|
|
317,325
.
|
|
274,326
.
|
|
1,038,972
.
|
|
1,044,715
.
|
Royalties
and contract revenues
|
|
285,704
.
|
|
206,316
.
|
|
904,123
.
|
|
687,210
.
|
Total
Revenues
|
|
1,581,641
.
|
|
1,551,042
.
|
|
4,422,946
.
|
|
4,013,059
.
|
Expenses
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
472,783
.
|
|
483,068
.
|
|
1,310,914
.
|
|
1,231,650
.
|
Operating
expenses
|
|
1,075,362
.
|
|
1,101,305
.
|
|
3,218,243
.
|
|
3,378,516
.
|
Other
expenses
|
|
46,948
.
|
|
58,961
.
|
|
153,188
.
|
|
157,523
.
|
Benefit
from income taxes
|
|
(6,155
)
|
|
(34,424
)
|
|
(90,827)
|
|
(243,856)
|
Total
Expenses
|
|
1,588,938
.
|
|
1,608,910
.
|
|
4,591,518
.
|
|
4,523,833
.
|
Net
Loss
|
$
|
(7,297)
|
$
|
(57,868)
|
$
|
(168,572
)
|
$
|
(510,774
)
|
Loss
Per Common Share
|
$
|
(0.00)
|
$
|
(0.01)
|
$
|
(0.04)
|
$
|
(0.11)
|
Weighted
Average Number of
Common Shares Outstanding
Common
Shares Outstanding assuming dilution
|
|
4,772,318
|
|
4,772,318
|
|
4,772,318
4,772,986
|
|
4,772,318
4,772,986
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
There
was no impact to earnings per share from dilutive securities
as
the resultant would have been anti-dilutive.
HYDROMER,
INC. and CONSOLIDATED SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
|
|
Nine
months Ended
March
31,
|
|
|
2012
|
|
2011
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
Net
Loss
|
$
|
(168,572)
|
$
|
(510,774)
|
|
Adjustments
to reconcile net loss to net cash Provided by (used in) operating activities
|
|
|
|
|
|
Depreciation
and amortization
|
|
321,381
.
|
|
303,122
.
|
|
Deferred
income taxes
|
|
(93,827)
|
|
(243,856)
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
Trade receivables
|
|
(30,704)
|
|
210,790
.
|
|
Inventory
|
|
197,966
.
|
|
(53,416)
|
|
Prepaid expenses
|
|
11,334
.
|
|
600
.
|
|
Other assets
|
|
1,230
.
|
|
6,400
.
|
|
Accounts payable and accrued liabilities
|
|
42,847
.
|
|
71,591
.
|
|
Deferred income
|
|
(111,791)
|
|
94,864
.
|
|
Income taxes payable
|
|
(3,000)
|
|
(2,080)
|
|
Net
Cash (Used in) Operating Activities
|
|
166,864
.
|
|
(122,759)
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
Cash
purchases of property and equipment
|
|
(39,037)
|
|
(110,254)
|
|
Cash
payments on patents and trademarks
|
|
(122,366)
|
|
(140,010)
|
|
Redemption
of matured short-term investments
|
|
50,000
.
|
|
440,000
.
|
|
Net
Cash (Used in) Provided by Investing Activities
|
|
(111,403)
|
|
189,736
.
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
Repayment
of long-term borrowings
|
|
(40,699)
|
|
(38,526)
|
|
Net
Cash (Used in) Financing Activities
|
|
(40,699)
|
|
(38,526)
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents:
|
|
14,762
.
|
|
28,451
.
|
|
Cash
and Cash Equivalents at Beginning of Period
|
|
502,597
.
|
|
843,610
.
|
|
Cash
and Cash Equivalents at End of Period
|
$
|
517,359
.
|
$
|
872,061
.
|
|
See
accompanying notes.
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 on Form 10-K for the year ended June 30, 2011.
Certain reclassifications have been made to the previous year’s results to present comparable financial
statements.
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
are 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 June 30, 2011. There were no reportable financial assets or liabilities as of March 31, 2012.
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
|
-
|
-
|
-
|
-
|
Long-Term
Debt:
As
reported in the December 31, 2011 SEC Form 10-Q as a Subsequent Event, on February 21, 2012, the Company was granted a waiver
on mortgage covenants not met as of December 31, 2011. The next covenant measurement date is June 30, 2012. Although a waiver
was granted by the lender, there is no certainty that future waivers would be granted.
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.
The
results for the nine months ended March 31, by segment are:
201
2
|
|
|
|
|
Revenues
|
$
3,385,796
.
|
$
1,037,150
.
|
|
$
4,422,946
.
|
Expenses
|
(2,648,039)
|
(851,299)
|
$
(1,183,007)
|
(4,682,345)
|
Pre-tax Income (Loss)
|
$
737,757
.
|
$
185,851
.
|
$
(1,183,007)
|
$
(259,399)
|
|
|
|
|
|
201
1
|
|
|
|
|
Revenues
|
$
3,027,098
.
|
$
985,961
.
|
|
$
4,013,059
.
|
Expenses
|
(2,668,485)
|
(878,866)
|
$
(1,220,338)
|
(4,767,689)
|
Pre-tax Income (Loss)
|
$
358,613
.
|
$
107,095
.
|
$
(1,220,338)
|
$
(754,630
)
|
|
|
|
|
|
Geographic
revenues were as follows for the nine months ended March 31,
|
2012
|
2011
|
Domestic
|
64%
|
59%
|
Foreign
|
36
%
|
41%
|
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 March 31, 2012 were $1,581,641, $30,599 or 2.0% higher than the $1,551,042 for
the same period the previous year. For the nine month period ended March 31, revenues were $4,422,946 during the current fiscal
year, as compared with $4,013,059 the year before or $409,887 better (10.2%). Revenues are comprised of the sale of Products and
Services and Royalty and Contract payments.
Product
sales were $978,612 for the quarter ended March 31, 2012 as compared to $1,070,400 for the same period the year before, a $91,788
(8.6%) decrease. Revenues for the quarter ended March 31, 2011 included stronger sales in Europe from our T-HEXX Animal Health
launch of our Dragonhyde
®
Hoof Bath Concentrate. For the nine month period, product sales were $2,479,851
for the 2012 year as compared with $2,281,134 for the 2011 year, higher by $198,717 (8.7%), due to increased demand in the T-HEXX
Animal Health line.
Services
revenues, comprising of contract coating services, for the three months ended March 31, 2012 were $317,325 or $42,999 better (15.7%)
than the $274,326 the corresponding period the year before. Timing delays reduced the service revenues for the prior year period.
For the nine month periods ended March 31, 2012 and 2011, services revenues were $1,038,972 and $1,044,715, respectively, or $5,743
lower (0.5%). Revenues from new agreements/customers this fiscal year offset the customers transitioning to customers of our medical
chemical polymer (product sales) or customers no longer in the market.
Classified
as Royalty and Contract revenues are royalties received and the periodic recurring payments from license, stand still and other
agreements other than for product and services. Also included in Royalty and Contract revenues are revenues from support and supply
agreements which avails our customers 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) and are subject to the reporting of our customers.
For the nine months ended March 31, 2012, Royalty and Contract revenues were $904,123, compared to $687,210 the same period a
year ago, an increase of $216,913 (31.6%). In this year’s results was $120,000 in new technology know-how transfers plus
new payments coming online arising from agreements the year(s) prior.
Total
Expenses for the quarter ended March 31, 2012 were $1,588,938 as compared with $1,608,910 the year before, a 1.2% decrease. For
the nine months ended March 31, 2012, Total Expenses were $4,591,518 as compared with $4,523,833 the previous year, higher by
1.5%.
For
the quarter ended March 31, 2012, the Company’s Cost of Goods Sold was $472,783 as compared with $483,068 the year prior,
lower by $10,285 or 2.1%. Despite 8.6% in lower product sales this quarter, a change in product mix plus lower pricing resulted
in only a 2.1% lower Cost of Sales. For the nine month period ended March 31, 2012, Cost of Goods Sold was $1,310,914 as compared
with $1,231,650 the same period a year ago. The $79,264 increase (6.4%) was due to higher product sales offset by lower manufacturing
labor costs.
Operating
expenses were $1,075,362 for the quarter ended March 31, 2012 as compared with $1,101,305 the year before, lower by $25,943 or
2.4%, due to lower Sales & Marketing expenditures this year (tradeshows, travel, advertising). For the nine months ended March
31, 2012, Operating expenses were $3,218,243 or $160,273 lower (4.7%) than the previous year’s $3,378,516. In addition to
lower Sales & Marketing expenditures, lower staffing levels and utilities usage attributed to the improvement
Interest
expense, foreign currency exchange gains/losses, interest income and other income are included in Other Expenses. Interest expense
(primarily mortgage interest) for the nine months ended March 31, 2012 and March 31, 2011 were $146,326 and $149,037, respectively.
A
net loss of $7,297 ($0.00 per share) is reported for the quarter ended March 31, 2012 as compared to a net loss of $57,868 ($0.01
per share) the year before. A net loss of $168,572 ($0.04 per share) is reported for the nine months ended March 31, 2012 as compared
to a net loss of $510,774 ($0.11 per share) the year before.
Revenue
growth of $409,887 (primarily from our T-HEXX Animal Health division and from the Royalties and contract revenues line) and reduced
Operating Expenses (lower staffing, reduced sales and marketing expenses as well as lower utilities costs) offset by $79,264
in higher Cost of Sales and a reduced Income Tax Benefit of $153,029 resulted in the $342,202 improvement to the bottom line.
Management expects this continued course of revenue growth with only minimal expense changes to be the trend.
For
the nine months ended March 31, 2012, EBITDA of $58,982 is reported, compared with -$451,508 for the nine months ended March
31, 2011; the difference attributed to the revenue growth and lower Operating Expenses.
Financial
Condition
Working
capital decreased $165,485 during the nine months ended March 31, 2012.
For
the nine months ended March 31, 2012, operating activities provided $166,864 in net cash.
For
the nine months ended March 31, 2012, cash provided by Operations (net loss as adjusted for non-cash expenses) was $58,982 with
the net change in operating assets and liabilities providing an additional $107,882, primarily from the reduction of inventory
levels previously built up from volume purchases.
Investing
activities used $111,403 in cash and financing activities used an additional $40,699 during the nine months ended March 31, 2012.
Investing
activities for the nine months ended March 31, 2012 included $39,037 for capital expenditures, $122,366 towards the Company’s
patent estate and the redemption of matured short-term investments of $50,000. Capital expenditures were lower this fiscal year-to-date
than as compared with the corresponding period a year ago as the previous year included new production equipment for the growing
T-HEXX division, including for new products. Reported under Financing activities was the repayment of the principal portion of
the mortgage.
The
Company has made significant inroads towards a return to profitability since the cancellation and subsequent replacement of a
significant supply & support agreement which impacted both revenues and cash by $780,000 annually and the sale of various
medical device product lines in 2009. The Company has previously overcome the lost profit contributions from the sales of product
lines. With continued revenue growth and expenditure control, we expect profitability to be near-term as we previously reported.
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 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
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.
By
:
/s/ Robert Y. Lee
,VP
Robert
Y. Lee
Principal
Accounting Officer & Chief Financial Officer
DATE:
May 15, 2012
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