UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended: June 30, 2002
or
[ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 For the Period from __________ to __________
Commission File Number: 0-6333
------
HYDRON TECHNOLOGIES, INC.
-------------------------
(Exact name of Registrant as specified in its charter)
New York 13-1574215
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2201 West Sample Road, Building 9, Suite 7B
Pompano Beach, FL 33073 (954) 861-6400
----------------------- --------------
(Address of Principal Executive Offices) (Registrant's telephone number)
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 reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No.
Number of shares of common stock outstanding as of June 30, 2002: 4,975,136
HYDRON TECHNOLOGIES, INC.
Index
Part I. Financial Information
-----------------------------
Item 1. Financial Statements (Unaudited) 2
Condensed Balance Sheets -- June 30, 2002 and December 31, 2001 2
Condensed Statements of Operations -- Three and six months ended
June 30, 2002 and 2001 3
Condensed Statements of Cash Flows -- Six months ended June 30,
2002 and 2001 4
Notes to Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. Other Information 13
--------------------------
Exhibits and Reports on Form 8-K.
Signatures 14
i
HYDRON TECHNOLOGIES, INC.
Condensed Balance Sheets
June 30, 2002 December 31, 2001
(Unaudited) (Note)
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 49,995 $ 167,067
Trade accounts receivable 105,596 61,444
Inventories 1,018,963 1,164,297
Prepaid expenses and other current assets 26,432 43,450
------------ ------------
Total current assets 1,200,986 1,436,258
Property and equipment, less accumulated
depreciation of $540,533 and $534,533 at
2002 and 2001, respectively 21,374 27,374
Deposits 28,390 28,203
Deferred product costs, less accumulated
amortization of $5,626,021 and $5,482,021 at
2002 and 2001, respectively 416,060 544,347
------------ ------------
Total Assets $ 1,666,810 $ 2,036,182
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 198,352 $ 116,559
Deferred revenues 82,410 148,646
Accrued liabilities 395,602 388,033
------------ ------------
Total current liabilities 676,364 653,238
Commitments and contingencies -- --
Shareholders' equity
Common stock - $.01 par value
30,000,000 shares authorized; 5,035,336 shares
issued; and 4,975,136 shares outstanding 50,353 50,353
Preferred stock - $.01 par value
5,000,000 shares authorized; no shares issued
or outstanding -- --
Additional paid-in capital 19,501,837 19,501,837
Accumulated deficit (18,122,586) (17,730,088)
Treasury stock, at cost; 60,200 shares (439,158) (439,158)
------------ ------------
Total Shareholders' equity 990,446 1,382,944
------------ ------------
Total liabilities and shareholders equity $ 1,666,810 $ 2,036,182
============ ============
Note: The balance sheet at December 31. 2001 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See notes to condensed financial statements.
2
HYDRON TECHNOLOGIES, INC.
Statement of Operations
(Unaudited)
Three months ended June 30 Six months ended June 30
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net Sales $ 502,148 $ 517,157 $ 882,404 $ 846,850
Cost of sales 180,655 142,433 266,235 198,041
----------- ----------- ----------- -----------
Gross profits 321,493 374,724 616,169 648,809
Expenses
Royalty expense 25,309 26,574 44,395 43,058
Research and development 15,113 24,764 32,990 40,143
Selling, general & administration 404,465 360,470 781,935 725,070
Depreciation & amortization 75,000 99,600 150,000 199,200
----------- ----------- ----------- -----------
Total expenses 519,887 511,408 1,009,320 1,007,471
----------- ----------- ----------- -----------
Operating loss (198,394) (136,684) (393,151) (358,662)
Interest income 353 2,742 651 4,556
----------- ----------- ----------- -----------
Loss before income taxes (198,041) (133,942) (392,500) (354,106)
Income taxes expense -- -- -- --
----------- ----------- ----------- -----------
Net loss $ (198,041) $ (133,942) $ (392,500) $ (354,106)
=========== =========== =========== ===========
Basic and diluted loss per share
Net loss per common share $ (0.04) $ (0.03) $ (0.08) $ (0.07)
=========== =========== =========== ===========
See notes to condensed financial statements.
3
HYDRON TECHNOLOGIES, INC.
Statements of Cash Flow
(Unaudited)
Six months ended June 30
--------------------------
2002 2001
----------- -----------
Operating Activities
Net Loss $ (392,500) $ (354,106)
Adjustments to reconcile net loss to
Net Cash used by operating activities
Depreciation and amortization 150,000 199,200
Change in operating assets and liabilities
Trade accounts receivables (44,152) 73,147
Inventories 145,334 109,886
Prepaid expenses and other current assets 17,017 26,246
Deposits (187) 45,169
Accounts payable 81,793 (31,119)
Deferred revenues (66,236) 306,600
Accrued liabilities 7,572 30,177
----------- -----------
Net cash provided (used) by operating activities (101,359) 405,200
Investing activities
Deferred product costs (15,713) --
----------- -----------
Net cash provided (used) by investing activities (15,713) --
Financing activities
Net cash provided (used) by financing activities -- --
----------- -----------
Net increase (decrease) in cash and cash equivalents (117,072) 405,200
Cash and cash equivalents at beginning of period 167,067 190,946
----------- -----------
Cash and cash equivalents at end of period $ 49,995 $ 596,146
=========== ===========
See notes to condensed financial statements.
4
Note A -- Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management of Hydron Technologies, Inc. (the "Company"), all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month and
six month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the financial statements and footnotes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Note B - Inventories
Inventories consist of the following:
June 30, December 31,
2002 2001
---------- ----------
Finished goods $ 358,039 $ 543,880
Raw material and components 660,924 620,417
---------- ----------
$1,018,963 $1,164,297
========== ==========
Note C - Distribution
The majority of the Company's products are currently sold in the United States
through Hydron direct marketing channels (proprietary Catalog and the World Wide
Web site). The Company also sells its products to private label customers,
television retailers and, to a lesser extent, internationally through salons and
doctors offices.
While in prior years television retail was the primary focus for the marketing
and distribution of the Company's products, Management believes that the
Company's exclusive agreements with television retailers had limited the
marketing opportunities to build its business through additional sales channels.
Under exclusive contracts with television retailers the Company neither
controlled its airtime nor the selling priorities of those television retailers,
effectively handicapping the Company's ability to influence sales trends.
The Company began diversifying away from television retailers in 2001 with
continued focus on developing the Catalog business and the addition of a private
label customer to provide additional cash flow. Further, the Company has been
pursuing new international distribution and new products that would
significantly augment Hydron's direct marketing efforts. This development
includes filing a patent in February 2002 on new acne formulas that provide
marked performance improvements versus other over-the-counter products currently
on the market.
5
Note C - Distribution (continued)
- Catalog Sales
The Company's full color Catalog offers personal care products for sale directly
to consumers. The Catalog also provides information on new products, educates
consumers on proper skin care and facilitates consumer re-ordering. The Company
sells its products on the World Wide Web and regularly transmits E-mail
broadcasts to its customer base. Catalog sales represents approximately 60% of
Hydron's total annual sales. The Company is continuing to explore new ways to
enhance Catalog sales and operations.
- Private Label Contracting
Effective March 1, 2001, the Company entered into an agreement with Reliv
International, Inc ("Reliv") to develop and manufacture a line of private label
skin care products under their brand name, ReversAge(R). Five products were
introduced in August 2001 at a national sales meeting to Reliv's multi-tier
marketing distribution network. A sixth new product was introduced in February
2002. The agreement requires minimum product purchases and advance payments to
cover packaging and design costs. Reliv is a public company traded on NASDAQ
(symbol RELV). Private label sales represent approximately 20% of Hydron's total
annual sales.
- International
The Company also sells product to an Australia-based health and beauty products
distributor for retail salon stores and medical offices in Australia and New
Zealand.
The Company entered into a distribution agreement with a distributor in Taiwan
in April 2001. The first shipment to Taiwan was in May 2001. The Company also
distributes dental products into Spain and, to a lesser extent, other countries.
Although this category is not significant at this time, Management is committed
to the expansion of international sales and believes that international sales
represent one of the foundations for the future growth of the Company.
- Retail
The Company has established minor levels of retail distribution. Initially,
utilizing excess inventory, the Company has sold product on a limited,
promotional basis to several retailers during first and second quarters
utilizing current packaging configurations. It is anticipated that any
significant retail effort of core Hydron products would require investment in
repackaging.
Note D - Earnings Per Share
Options and warrants to purchase 206,500 shares of common stock were outstanding
at June 30, 2002, but were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive to the net loss per share
for the period.
The Board of Directors has approved the issuance of an additional 482,500
options; subject to the approval of a stock option plan amendment at the next
shareholders' meeting. These options have not been reflected in the June 30,
2002 calculations since there are insufficient options available without the
shareholders actions.
6
Note E - Going Concern
The accompanying condensed financial statements were prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of operations. The Company's ultimate ability to attain
profitable operations is dependent upon obtaining additional financing or to
achieve a level of sales adequate to support its cost structure.
Accordingly, there are no assurances that the Company will be successful in
achieving the above plans, or that such plans, if consummated, will enable the
Company to obtain profitable operations or continue as a going concern.
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
----------------------------
We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The listing is not
intended to be a comprehensive list of all our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations is
discussed throughout management's Discussion and Analysis of financial Condition
and results of Operations where such policies affect our reported and expected
financial results. For detailed discussion on the application of these and other
accounting policies, see the Notes to the Financial Statements in the Company's
December 31, 2001 Form 10K. Note that our preparation of the financial
statements requires us to make estimates and assumptions that affect the
reported amount of assets and liabilities, disclosure of contingent assets and
liabilities at the date of our financial statements, and the reported amount of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of our financial statements, and the reported amount of revenue and
expenses during the reported period. There can be no assurance that actual
results will not differ from those estimates.
Revenue Recognition and Product Warranty
Revenue from product sales is recognized at the time of shipment. Provision is
made in the period of the sale for estimated product returns from the ultimate
end user.
Research and Development
Research and development costs are charged to operations when incurred and are
included in operating expenses.
Advertising
Advertising costs are expensed as incurred and are included in "selling, general
and administrative expenses."
Business
--------
Hydron Technologies, Inc. markets a broad range of consumer and oral health care
products using a moisture-attracting ingredient (the "Hydron(R) polymer"), and
owns a non-prescription drug delivery system for topically applied
pharmaceuticals, which uses such polymer. The Company holds U.S. and
international patents on, what Management believes is, the only known
cosmetically acceptable method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products. The Company is developing
other personal care/cosmetic products for consumers using its patented
technology and would, when appropriate, either seek licensing arrangements with
third parties, or develop and market proprietary products through its own
efforts. Management believes that because of their unique properties, products
that utilize the Hydron polymer have the potential for wide acceptance in
consumer and professional health care markets.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business (continued)
--------------------
The Company has been engaged in the development of various consumer products
using Hydron polymers since 1986. The Company's products are designed to address
concerns about aging, and include Hydron skincare, hair care, bath and body and
sun care. The Company currently has thirty-nine individual products available in
the following product lines: skin care (22 products), hair care (7 products),
bath and body (8 products) and sun care (2 products). These products are also
packaged into collections and sold at a more favorable value than the individual
products sold separately. All of the products are sold directly by the Company
to consumers through the Hydron Catalog and Web site www.hydron.com ("Catalog").
Management believes that the Company's product lines are unique and offer the
following competitive benefits: the moisturizers self-adjust to match the skin's
optimal pH balance soon after they are applied to the skin; they become
water-insoluble on the skin's surface, and unlike all other water-based cremes
and lotions, are not removed by the skin's perspiration or plain water; they are
oxygen-permeable, allowing the skin to breathe; they do not emulsify the skin's
natural moisturizing agents, as do conventional cremes and lotions; and they
attract and hold water, creating a cushion of moisture on the skin's surface
that promotes penetration of other beneficial product ingredients, all while
leaving no greasy after-feel.
The Company's products are dermatologist tested and approved for all skin types.
Products for use around the eye area are also ophthalmologist tested and safe
for contact lens wearers. Most of the Company's moisturizing products are based
on the Company's patented emulsion system, which permits the product ingredients
to deliver their intended benefits over an extended period of time and in a more
efficient manner.
Management believes that the Company's patented Hydron emulsion system can
enhance the effectiveness of over-the-counter medications applied to the skin.
The system is designed to deposit a uniform film on the skin's surface and to
have a relatively low affinity for the drug associated with the application.
Management believes that the Hydron system has a number of advantages over
traditional lotions as it promotes hydration of the stratum corneum (the outer
layer of skin), which improves penetration into the skin's pores, and has good
tactility and flexibility. The Company expects to continue to focus research and
development resources on additional Hydron polymer-based products, as well as
other proprietary technology-based products as determined by Management's
assessment of consumer demand.
In 2000, the Company discovered that the Hydron emulsion system also adjusts pH
on the skin to match the pH of the stratum corneum, the skin's surface layer. It
is evident in recent skin research (Kligman 2002) that the pH range of the
emulsion system is essential for contributing to the skin's natural healing
process and enzyme production responsible for rebuilding the skin's lipid
barrier.
Hydron filed for patent protection in February 2002 for a unique delivery system
for over-the-counter (OTC) acne drug ingredients. The new system is believed to
significantly reduce the harshness and irritation caused by most acne products
currently in the marketplace. The Brand will be developed under the registered
Aclime(R) trademark. The Company is currently finalizing packaging and
evaluating alternative distribution channels for the line, including: direct
marketing, limited retail and infomercials.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business (continued)
--------------------
The market for acne treatment is growing, particularly among adults who are one
of the primary targets for the Aclime(R) brand. According to current market data
(Kalorama 2000), the core acne consumer market is about 25 million consumers. Up
to 47% of adult women experience at least occasional breakouts. Retail sales of
OTC acne treatments account for $380 million in sales and an industry analyst
estimates an additional $300 million is accounted for by direct marketing,
primarily through infomercials. An additional $650 million is spent in the
prescription market in the United States.
Since August 2000, the Company has been researching and developing new
technology that provides a method for the delivery of oxygen into the skin and
tissue at depths considered medically therapeutic without the use of the
bloodstream. The Company filed for patent protection as of February 2001. The
patent application is pending.
The approach to tissue oxygenation developed by Hydron is unique. It utilizes an
existing technology that infuses liquid with oxygen at 20+ times normal levels
to create a super-oxygenated liquid filled with micro-bubbles of highly
pressurized oxygen. When placed in contact with the skin, the highly saturated
fluid and micro-bubbles are transferred directly to the skin through osmosis and
kinetic diffusion.
Research and development efforts to date have included clinical testing,
in-vitro bacteriological testing, packaging prototypes, and stability testing.
Clinical testing was conducted at the University of Massachusetts Medical
School, Department of Thoracic Surgery produced an average increase in
subcutaneous tissue oxygenation of 54% in healthy individuals.
The skin treatment is expected to have numerous applications in wound healing
and anti-aging skincare treatments. Current medical research shows that each
year, in the United States alone, several medical problems associated with
oxygen deprivation to the skin and tissues can affect over 16 million diabetics,
two million burn patients, 600,000 individuals with impaired circulatory systems
and countless others suffering from chronic wounds to diaper rash to fluid for
transporting organs for transplant. Oxygen in the cosmeceutical arena also is an
essential factor in aging as the facial skin loses about 40% of oxygen caring
capacity by age 65.
Subsequent to June 30, the Company reached an agreement for licensing existing
machine technology from Life International Products, Inc. that included issuance
of 325,000 shares of new Hydron stock and future royalty payments. This will
allow Hydron to be able to manufacture future products under Hydron's Tissue
Oxygenation pending patent. The company plans additional efficacy testing to
further evaluate the technology and future potential products. It is anticipated
that efficacy testing will require an additional 12 to 24 months.
Currently, the Company's cash flow is insufficient to exploit these new
opportunities and therefore is exploring alternative methods to finance their
continued development.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
---------------------
Net sales for the three months ended June 30, 2002 were $502,148; a decrease of
$15,009, or 3%, from net sales of $517,157 for the three months ended June 30,
2001. Net sales for the six months ended June 30, 2002 were $882,404; an
increase of $35,555 or 4% from net sales of $846,850 for the three months ended
June 30, 2001.
Catalog net sales for the three months ended June 30, 2002 were $297,471; a
decrease of $35,118, or 11%, from catalog net sales of $332,589 for the three
months ended June 30, 2001. Catalog net sales for the six months ended June 30,
2002 were $631,071, a decrease of $7,202 or 1% from catalog net sales of
$638,273 for the six months ended June 30, 2001. The decrease in catalog sales
for the three months ended June 30, 2002 and six months ended June 30, 2002 was
the result of less effective second quarter catalog promotional activities.
Non-catalog net sales, including HSN, QVC, contract sales and international, for
the three months ended June 30, 2002 were $204,677; an increase of $20,110, or
11%, from non-catalog net sales of $184,568 for the three months ended June 30,
2001. The quarterly non-catalog sales increase reflects the shift in sales to
lower margin private label customers. The Company sold limited products to
television retailers during the second quarter 2002 as compared to $181,147 for
the three months ended June 30, 2001. Television retailer contracts have been
terminated, since the exclusivity was too restrictive.
The Company's overall gross profit margin for the three months ended June 30,
2002 was 64%, as compared to 72% for the three months ended June 30, 2001. The
decrease in gross profit margins for the period reflects a shift in product mix
and the fact that non-catalog sales with lower margins made up a larger portion
of the Company's total sales.
R&D expenses for the three months ended June 30, 2002 were $15,113; a decrease
of $9,651, or 39%, from R&D expenses of $24,764 for the three months ended June
30, 2001. The amount of R&D expenses per year varies, depending on the nature of
the development work during each year, as well as the number and type of
products under development at such time.
Selling, general and administrative ("SG&A") expenses for the three months ended
June 30, 2002 were $404,465; an increase of $43,995, or 12%, from SG&A expenses
of $360,470 for the three months ended June 30, 2001. The increase was
principally due to increased sales commissions and legal expenses.
Interest and investment income for the three months ended June 30, 2002 was
$353, a decrease of $2,389, or 87%, from interest and investment income of
$2,742 for the three months ended June 30, 2001. This decrease is due to lower
cash balances in the 2002 period compared to the 2001 period. The Company
maintains a conservative investment strategy, deriving investment income
primarily from U.S. Treasury securities.
The net loss for the three months ended June 30, 2002 was $198,041, an increase
of $64,099, or 60%, as compared to a net loss of $133,942 for the three months
ended June 30, 2001. The decrease in the net loss resulted primarily from the
factors discussed above.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Financial Resources
---------------------------------
The Company's working capital was approximately $524,622 at June 30, 2002,
including cash and cash equivalents of approximately $49,995. There were no
investing or financing activities for the three months ended June 30, 2002.
The Company has incurred significant losses over the past four years. The
ability of the Company to continue as a going concern is dependent on increasing
sales and reducing operating expenses.
Management's plan to increase sales and reduce operating expenses includes
several specific actions. Catalog sales will continue to be emphasized since
they have higher profit margins and represent markets that are growing more
rapidly than the Company's traditional television market. Direct marketing
techniques will be used to reach new and current consumers such as promotions
mailed to targeted consumers, Web site specials, promotions to other Web site
customers, and direct e-mail promotions to new customers.
In addition, the Company added a significant Private Label customer of Hydron
based formulas, with a proprietary nutritional complex of additives, that began
ordering in the second quarter, 2001. This customer competes in the multi-Level
Marketing category and has been successful for 13 years.
The Company is also pursuing international distribution agreements that will
expand the company's distribution around the world. Finally, the Company will
continue to develop Tissue Oxygenation and other technology that it believes
will improve its long-term success in this category.
As noted in the year-end Report of Independent Certified Public Accountants,
dated March 18, 2002, the Company experienced losses from operations in 2001,
2000, and 1999. These matters raise substantial doubt about the Company's
ability to continue as a going concern. There can be no assurances that
Management's Plan will be successful and the Company's actual results could
differ materially. No estimate has been made should Management's plan be
unsuccessful. The effect of inflation has not been significant upon either the
operations or financial condition of the Company.
Cautionary Statement Regarding Forward Looking Statements
---------------------------------------------------------
Certain statements contained in this Report on Form 10-Q are 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, including statements
regarding the Company's expectations, hopes, intentions, beliefs or strategies
regarding the future. Forward looking statements include the Company's
liquidity, anticipated cash needs and availability, and the anticipated expense
levels under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations." All forward looking statements included in
this document are based on information available to the Company on the date of
this Report, and the Company assumes no obligation to update any such forward
looking statement. It is important to note the Company's actual results could
differ materially from those expressed or implied in such forward looking
statements. You should also consult the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 as well as those factors listed from time to
time in the Company's other reports filed with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934 and the Securities
Act of 1933.
12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
99-1 Certificate of the Chief Executive Officer of Hydron
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99-2 Certificate of the Chief Financial Officer of Hydron
Technologies, Inc. pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Current report on Form 8-K
None.
13
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HYDRON TECHNOLOGIES, INC.
/s/ WILLIAM A. FAGOT
------------------------------
William A. Fagot
Chief Financial Officer
Dated: August 14, 2002
14