MANAGEMENT’S
DISCUSSION AND ANALYSIS OF THE
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results
of Operations:
The
Company’s revenues for the quarter ended September 30, 2012 were $1,266,490, lower by $182,107 or 12.6% than the $1,448,597for
the same period the previous year. Revenues are comprised of the sale of Products and Services and Royalty and Contract payments.
Product
sales were $596,082 for the quarter ended September 30, 2012 as compared to $757,050 for the same period the year before, lower
by $160,968 (21.3%) primarily due to the timing of periodic (not monthly) sales. Our recently introduced Dragonhyde
®
DUST dissolvable hoof bath powder has been met with extreme interest at the World Dairy Expo and EuroTier (agricultural
tradeshows) in Madison, WI in October 2012 and in Germany in November 2012, respectively. We expect revenue increases over the
next few months from the staggered regional global roll out.
Services
revenues, comprising of contract coating services, for the three months ended September 30, 2012 was $321,771 or $28,628 (8.2%)
lower than the $350,399 the corresponding period the year before. While we expect a gradual decrease in Contract Services revenues
as customers convert over to become medical chemical polymer purchasers (for coating applications themselves or via a third party),
we have gained new customers to partially replace/offset the conversion of coating services revenues to product sales. These “converted”
customers can also allow for additional revenues from Supply and Support Agreements (see Royalty and Contract revenues following)
and/or purchase of our coating equipment (included as Product sales).
Royalty
and Contract revenues include royalties received and the periodic recurring payments from license, stand still and other agreements
other than for product and services. Included in Royalty and Contract revenues are revenues from support and supply agreements
which avails our customers to continued technical support and/or guaranteed access to our proprietary coatings and may include
the transfer of technical know-how (coatings procedures). Some of the royalties and support fees are based on the net sales of
the final item (to which the Hydromer technology is applied to) and are subject to the reporting of our customers. For the quarter
ended September 30, 2012, Royalty and Contract revenues were $348,637, compared to $341,148 the same period a year ago.
Total
Expenses for the quarter ended September 30, 2012 were $1,344,312 as compared with $1,534,786 the year before, a reduction of
$190,474 or 12.4%.
For
the quarter ended September 30, 2012, the Company’s Cost of Goods Sold was $360,149 as compared with $416,012 the year prior,
lower by $55,863 or 13.4%. Lower product sales during the current quarter, including that of lower margin products, accounted
for the decrease in Cost of Goods Sold.
Operating
expenses were $961,468 for the quarter ended September 30, 2012 as compared with $1,105,325 the year before, lower by $143,857
or 13.0%, the savings primarily coming from a lower staffing level, including in part due to the a re-strategization of marketing
and sales efforts, and lower marketing expenses from less travel and tradeshow exhibitions this year.
Interest
expense, interest income and other income are included in Other Expenses. Interest expense (primarily mortgage interest) for the
three months ended September 30, 2012 and September 30, 2011 were $49,414 and $50,652, respectively.
A
net loss of $77,822 ($0.02 per share) is reported for the quarter ended September 30, 2012 as compared to a net loss of $86,189
($0.02 per share) the year before.
Though
we saw a temporary revenue drop of $182,107 this quarter when compared with the corresponding quarter a year ago (primarily from
higher non-monthly revenues in the prior year’s period), we reduced operating expenses by $143,857 between the quarters,
much of that expense reduction being permanent (not based on timing), and thus will be continued in subsequent periods. We expect
continued improvements to revenues (from new products and agreements and from acquiring additional market share on existing products)
with expenses held stable to result in a return to profitability.
5
Financial
Condition:
The
working capital position as of September 30, 2012 was $780,677 as compared with $859,122 as of June 30, 2012 or a decrease of
$78,445 during the three month period.
For the three months ended September 30, 2012, operating activities provided
$185,400 in net cash.
The net collections of trade receivables ($242,020) less the increase in
inventories ($57,346) were the primary attributors to the cash provided by operating activities. The decrease to working capital
for the quarter was primarily due to the net of the collections of trade receivables and cash used during the quarter.
Investing
activities used $44,228 and financing activities used $13,941 during the three months ended September 30, 2012.
Investing
activities for the three months ended September 30, 2012 included $15,024 for capital expenditures and $29,204 towards the Company’s
patent estate. Reported under Financing activities was the repayment of the principal portion of the mortgage.
Depreciation
and amortization of property, plant and equipment and of the intangibles less the income tax benefit (deferred income tax) (both
non-cash items) aggregated $73,910 leading to a EBITDA for the quarter ended September 30, 2012 of $45,502. With a reduced operating
expense base plus projected revenue increases, we expect to overcome the two significant 2009 events (the significant supply &
support agreement cancellation and sales of medical device product lines) to result in a return to profitability.
Item
4
Disclosure
Controls and Procedures:
As
of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation
of our management, including the Chief Executive Officer and President and the Chief Financial Officer, of the effectiveness of
the design and operation of the disclosure controls and procedures.
Based
upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, our disclosure controls and procedures
were effective and that there were no changes to our Company’s internal control over financial reporting that have materially
affected, or is reasonably likely to materially affect the Company’s internal control over financial reporting during the
period covered by the Company’s quarterly report.