hydiform10qsb03312008.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 March 31, 2008

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 March 31, 2008
Common
      4,772,318




HYDROMER, INC.


INDEX TO FORM  10-QSB
March 31, 2008
 
   
Page No.
Part I  - Financial Information  
     
 
# 1  Consolidated Financial Statements
  
     
 
           Balance Sheets - March 31, 2008 & June 30, 2007
2
     
 
           Statements of Income for the three months and nine months ended
  
 
                  March 31, 2008 and 2007
3
     
 
           Statements of Cash Flows for the nine months ended
  
 
                  March 31, 2008 and 2007
4
     
 
           Notes to Financial Statements
5
     
 
# 2  Management's Discussion and Analysis of the Financial Condition
  
 
                   and 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

   
March 31,
    
June 30,
  
   
2008
    
2007
  
   
UNAUDITED
    
AUDITED
  
Assets
            
             
Current Assets:
            
      Cash and cash equivalents
   $ 145,074     $ 146,338  
        Trade receivables less allowance for doubtful accounts of $67,643 and $62,044 as of March
      31, 2008 and June 30, 2007, respectively
     975,488       1,121,752  
        Inventory
     842,561       956,711  
        Prepaid expenses
     159,707       120,448  
        Deferred tax asset
     8,976       8,976  
        Other
     7,161       13,484  
Total Current Assets
     2,138,967       2,367,709  
                 
Property and equipment, net
     3,339,382       3,295,992  
Deferred tax asset, non-current
     654,601       609,730  
Intangible assets, net
     931,755       910,303  
Total Assets
   $ 7,064,705     $ 7,183,734  
                 
Liabilities and Stockholders’ Equity
                
Current Liabilities:
                
        Accounts payable
   $ 513,224     $ 537,338  
        Short-term borrowings
     457,397       514,096  
        Accrued expenses
     280,188       358,301  
        Current portion of capital lease
     12,772      
-
  
        Current portion of deferred payable
     82,751       32,215  
        Current portion of mortgage payable
     226,487       215,394  
        Income tax payable
     5,286       9,160  
Total Current Liabilities
     1,578,105       1,666,504  
Deferred tax liability
     261,958       261,958  
Long-term portion of capital lease
     69,328       -  
Long-term portion of deferred revenue
     50,030       62,978  
Long-term portion of mortgage payable
     1,706,549       1,878,040  
Total Liabilities
     3,665,970       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 March 31, 2008 and 4,698,825 shares issued and 4,687,908
      shares outstanding as of June 30, 2007
     3,721,815       3,643,815  
        Contributed capital
     633,150       633,150  
        Accumulated deficit
     (950,090 )     (956,571 )
        Treasury stock, 10,917 common shares at cost
     (6,140 )     (6,140 )
Total Stockholders’ Equity
     3,398,735       3,314,254  
Total Liabilities and Stockholders’ Equity
   $ 7,064,705     $ 7,183,734  

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




   
Three Months Ended
March 31,
  
Nine Months Ended
March 31,
  
   
2008
UNAUDITED
    
2007
UNAUDITED
    
2008
UNAUDITED
    
2007
UNAUDITED
  
Revenues
                        
Sale of products
   $ 1,167,022     $ 1,006,875     $ 3,306,283     $ 3,531,205  
Service revenues
     545,831       394,857       1,330,150       1,124,759  
Royalties and Contract Revenues
     392,884       395,981       1,187,043       1,253,409  
Total Revenues
     2,105,737       1,797,713       5,823,476       5,909,373  
Expenses
                                
Cost of Sales
     829,127       773,469       2,339,935       2,369,712  
Operating Expenses
     1,191,447       1,310,201       3,400,334       3,855,143  
Other Expenses
     36,133       43,711       117,173       131,229  
Provision for (Benefit from) Income Taxes
     4,908       (109,302 )     (40,447 )     (138,199 )
Total Expenses
     2,061,615       2,018,079       5,816,995.       6,217,885  
Net Income (Loss)
   $ 44,122     $ (220,366 )   $ 6,481     $ (308,512 )
Income (Loss) Per Common Share
   $ 0.01     $ (0.05 )   $ 0.00     $ (0.07 )
Weighted Average Number of
         Common Shares Outstanding
     4,772,318       4,657,120       4,740,884       4,648,435  



The effects of the common stock equivalents on diluted earnings per share for the 2007 periods
 are not included as their effect would be anti-dilutive.
For 2008, there was no impact to earnings per share from dilutive securities.


 
 
 
 
 
 

 

- 3 -
HYDROMER, INC. and CONSOLIDATED SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS


   
Nine Months Ended
March 31,
  
   
2008
UNAUDITED
    
2007
UNAUDITED
  
Cash Flows From Operating Activities:
            
Net Income (Loss)
   $ 6,481     $ (308,512 )
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities
                
Depreciation and amortization
     317,325       302,171  
Deferred income taxes
     (44,871 )     (148,543 )
Changes in Assets and Liabilities:
                
Trade receivables
     146,264       424,994  
Inventory
     114,150       48,693  
Prepaid expenses
     (39,259 )     (45,180 )
Other assets
     6,323       129,455  
Accounts payable and accrued liabilities
     (102,227 )     (131,934 )
Deferred income
     37,588       (122,994 )
Income taxes payable
     (3,874 )     45,657  
Net Cash Provided by Operating Activities
     437,900       193,807  
                 
Cash Flows From Investing Activities:
                
Cash purchases of property and equipment
     (139,601 )     (83,614 )
Cash payments on patents and trademarks
     (160,466 )     (190,908 )
Cash purchases of short-term investments
     -.       -.  
Maturity of short-term investments
     -       -  
Net Cash Used for Investing Activities
     (300,067 )     (274,522 )
                 
Cash Flows From Financing Activities:
                
Net borrowings against Line of Credit
     (56,699 )     43,909  
Repayment of long-term borrowings
     (160,398 )     (150,695 )
Proceeds from the issuance of common stock
     78,000       -.  
Net Cash Used for Financing Activities
     (139,097 )     (106,786 )
                 
Net Decrease in Cash and Cash Equivalents:
     (1,264 )     (187,501 )
Cash and Cash Equivalents at Beginning of Period
     146,338       434,865  
Cash and Cash Equivalents at End of Period
   $ 145,074     $ 247,364  

 
Supplemental Non-Cash Investing & Financing Activities:
            
          Equipment acquired under Capital Lease
   $ 80,747       -  

- 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 Event:
In May 2008, the Company received an one year extension, valued at $1.2 million, to its 2005 Supply and Support Agreement with Cordis Neurovascular, extending the agreement into August 2009.


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 nine months ended March 31, by segment are:
   
Polymer Research
    
Medical
Products
    
Corporate Overhead
    
Total
  
2008
                        
Revenues
   $ 3,196,180     $ 2,627,296           $ 5,823,476  
Expenses
     (2,384,019 )     (2,308,429 )   $ (1,164,994 )     (5,857,442 )
     Pre-tax Income (Loss)
   $ 812,161     $ 318,867     $ (1,164,994 )   $   (33,966 )
                                 
                                 
2007
                                
Revenues
   $ 3,264,708     $ 2,644,665             $ 5,909,373  
Expenses
     (2,813,142 )     (2,425,388 )   $ (1,117,554 )     (6,356,084 )
     Pre-tax Income (Loss)
   $    451,566     $   219,277.     $ (1,117,554 )   $ (446,711 )
                                 



Geographic revenues were as follows for the nine months ended March 31,
 
2008
2007
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 March 31, 2008 were $2,105,737, 17.1% higher than the $1,797,713 for the same period the previous year.  Revenues for the nine months ended March 31, 2008 were $5,823,476 or 1.5% lower than the $5,909,373 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 $1,712,853 for the quarter ended March 31, 2008 as compared to $1,401,732 for the same period the year before, an increase of $311,121 or 22.2%.  For the nine months ended March 31, 2008, product sales and services were $4,636,433, flat (-0.4% or $19,531 lower) from the $4,655,964 the year before.  The increase in demand of contract coating services this year offset the inventory call (customer shifted production to their foreign facilities while purchasing all the remaining inventory at that time) on a Biosearch OEM medical device line the previous year.

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 March 31, 2008, Royalty and Contract revenues were $392,884, identical to the $395,981 the same period a year ago.  Royalty and Contract revenues were $1,187,043 and $1,253,409 for the nine month periods ended March 31, 2008 and 2007, respectively.  The 2007 period included the tail end of a standstill agreement and a technology transfer agreement.

As of March 31, 2008, our open sales order book was approximately $1,086,000.  During the month of April 2008, over $700,000 of additional orders were received, some calling for immediate delivery and others for over the following twelve months.  The open sales order book at April 30, 2008 was approximately $1,425,000.  Although some of the sales orders can be cancelled prior to production, the Company is of the opinion that no substantial cancellations will occur.
 
 
Total Expenses for the quarter ended March 31, 2008 were $2,061,615 as compared with $2,018,079 the year before, a 2.2% increase.  For the nine months ended March 31, 2008, total Expenses were $5,816,995 as compared with $6,217,885 the same period the year before, or lower by 6.4%.

The Company’s Cost of Goods Sold was $829,127 for the quarter ended March 31, 2008 as compared with $773,469 the year prior, higher by 7.2%, reflecting the increase in product and service revenues.  On a year-to-date basis, Cost of Goods Sold was $2,339,935 for fiscal 2008 as compared with $2,369,712 in fiscal 2007, $29,777 or 1.3% lower.  The change in product line mix (elimination of a medical device product line during 2007 - transferred to the customer’s internal facilities, whereas there was growth in contracting coating services in 2008), reduced material costs.

Operating expenses were $1,191,447 for the quarter ended March 31, 2008 as compared with $1,310,201 the year before, down $118,754 or 9.1%.  For the nine months ended March 31, 2008, Operating expenses were $3,400,334 as compared with $3,855,143 the year before, down $454,809 or 11.8%.  Lower staffing levels accounted for the lower expenses.

Interest expense, interest income and other income are included in Other Expenses.  Interest expense for the nine months ended March 31, 2008 and March 31, 2007 were $129,877 and $143,259, respectively, down due to lower utilization and interest rates of the line-of-credit facility.


Net income of $44,122 ($0.01 per share) is reported for the quarter ended March 31, 2008 as compared to a loss of $220,366 ($0.05 per share) the year before.  For the nine months ended March 31, 2008, net income of $6,481 ($0.00 per share) is reported as compared to a net loss of $308,512 ($0.07 per share) the year before.

Although revenues were essentially flat (a 1.5% difference or $85,897 variance on almost $ 6 million in revenues for both nine month periods), staff reductions, mainly in R&D, resulted in a $412,745 swing to pre-tax income.  Such staff reductions were from normal attrition (resignation and retirement) and job elimination (due to changes to R&D requirements/scope/direction).  Re-investment expenditures of Research and development and patents expenditures accounted for approximately $806,987 or 23.7% of the operating expenses.


- 6 -
Financial Condition

Working capital decreased $140,343 during the nine months ended March 31, 2008.
 
Net operating activities provided $437,900 for the nine month period ended March 31, 2008.

Net income as adjusted for non-cash expenses, provided $278,935 in cash.  The collections of accounts receivables provided an additional $146,264 source of cash.

Investing activities used $300,067 and financing activities used $139,097 during the nine months ended March 31, 2008.

During the nine months, the Company expended $139,601 on capital expenditures and $160,466 into its patent estate.  The Company also paid down $56,699 against its revolving line of credit, paid down long-term borrowings by $160,398 and received $78,000 from the exercise of stock options.

Following the organizational rebuilding, which occurred primarily during fiscal 2006 (July 1, 2005 – June 30, 2006) in which a new foundation, including new patent pending anti-thrombogenic and anti-cell adhesion/proliferation technologies, was established for the future, the Company is setup for a new forefront.  Now no longer focused primarily in lubricious coatings, its legacy technological base, the Company has a broader range of product offerings [under the previously mentioned foundation], along with its more recent anti-microbial technologies, to leverage against in the years to come.  This rebuilding entailed, in part, the addition of a new intellectual and skill base of scientists.  The cost of the rebuilding program, without the aid of any external funding, along with only a flat revenue line and a reduced revolving line of credit, resulted in a tight financial environment.  Under such situation, and based on the upcoming development pipeline schedule and having completed the majority of the base developments, unfortunately, a part of our talent pool was reduced.  Until new product developments support revenue growth, which we anticipate to begin within a year, the Company will continue to monitor its financial resources, including the requirement to replace its current revolving line of credit, through additional revenues and cost reduction initiatives.



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 March 31, 2008.


- 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, VP
 
Robert Y. Lee
 
Chief Financial Officer
   
   
   
DATE: May 13, 2008
  




 
 
 
 
 
 
 
 
 
 
 
 
 

 

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