UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the Quarterly Period Ended: March 31, 1995 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)
941 Clint Moore Road
Boca Raton, Florida 33487 (407) 994-6191
(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 report), 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 April 25, 1995: 22,626,816
Page 1 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1995 and December 31, 1994
Condensed consolidated statements of operations -- Three months ended March 31,
1995 and 1994
Condensed consolidated statements of cash flows -- Three months ended March 31,
1995 and 1994
Notes to condensed consolidated financial statements -- March 31, 1995
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Page 2 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1995 Dec. 31, 1994
-----------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 6,018,799 $ 5,723,664
Trade accounts receivable 129,798 2,044,604
Inventories 4,160,184 3,260,010
Prepaid expenses and other
current assets 128,492 100,670
-----------------------------
Total current assets 10,437,264 11,128,948
Property and equipment, net 104,855 109,386
Investment in joint venture 200,000 -
Deferred product costs, less
accumulated amortization of
$3,466,583 and $3,389,667 at
1995 and 1994, respectively 2,494,333 2,571,249
-----------------------------
$13,236,452 $13,809,583
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 341,995 $ 395,862
Accrued liabilities 203,330 400,262
-----------------------------
Total current liabilities 545,325 796,124
Stockholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized;
22,624,316 and 22,616,816
shares issued and outstanding
at 1995 and 1994, respectively 226,243 226,168
Additional paid-in capital 20,355,318 20,348,361
Accumulated deficit (7,890,434) (7,561,070)
-----------------------------
Total stockholders' equity 12,691,127 13,013,459
-----------------------------
$13,236,452 $13,809,583
=============================
Note: The balance sheet at December 31, 1994 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 consolidated financial statements.
Page 3 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended March 31, 1995 and 1994
1995 1994
-----------------------------
Net sales $1,117,725 $ 430,288
Cost of sales 347,078 100,804
-----------------------------
Gross profit 770,647 329,484
-----------------------------
Expenses:
Royalty expense 55,864 21,448
Research and development 70,211 64,876
Selling, general & administrative 405,501 270,496
Depreciation & amortization 84,037 84,480
-----------------------------
615,613 441,300
-----------------------------
Operating income (loss) 155,034 (111,816)
Interest and investment income 81,161 33,516
-----------------------------
Net income (loss) $ 236,195 $ (78,300)
=============================
Net income (loss) per
common share $ .01 $ (.00)
=============================
Weighted average number of
common shares outstanding 23,210,433 21,400,204
=============================
See notes to condensed consolidated financial statements.
Page 4 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1995 and 1994
1995 1994
------------------------------
Operating activities:
Net cash provided by operating activities $1,056,243 $ 107,158
------------------------------
Investing activities:
Purchase of U.S. Treasury Bills (3,948,098)
Capital expenditures (2,590) (27,879)
Investment in joint venture (200,000) -
------------------------------
Net cash used in
investing activities (202,590) (3,975,977)
------------------------------
Financing activities:
Proceeds from issuance
of common stock, net 7,032 322,813
Cash dividends paid (565,559) -
------------------------------
Net cash (used in) provided by
financing activities (558,527) 322,813
------------------------------
Net increase (decrease) in cash
and cash equivalents 295,126 (3,546,006)
Cash and cash equivalents at
beginning of period 5,723,664 3,686,824
------------------------------
Cash and cash equivalents at
end of period $6,018,790 $ 140,818
==============================
See notes to condensed consolidated financial statements.
Page 5 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1995
Note A -- Basis of Presentation
The accompanying unaudited condensed consolidated 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, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1995
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1995. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Registrant and
Subsidiaries' annual report on Form 10-K for the year ended December 31, 1994.
Note B -- Inventories
Inventories consist of the following:
March 31, 1995 December 31, 1994
---------------------------------
Finished goods $1,031,926 $1,661,600
Work in progress 187,751 234,125
Raw materials and components 2,940,507 1,364,285
---------------------------------
$4,160,184 $3,260,010
=================================
Note C -- Investment in Joint Venture
On January 17, 1995, Hydron Technologies, Inc. ("HyTech") entered into an
agreement with two other companies to form a joint venture known as Hydromercial
Partners (the Joint Venture). Each company has a one-third interest in the
profits and losses of the Joint Venture, which has an initial term of two (2)
years, subject to renewal on an annual basis thereafter upon unanimous consent
of all of the Joint Venture participants.
The purpose of the Joint Venture is to provide and sell HyTech's polymer-based
skin care line by means of a thirty (30) minute commercial (Infomercial) which
the joint venture will produce. The initial capital of the Joint Venture,
$600,000, was contributed in equal shares by the Joint Venture participants, and
is being used to produce the Infomercial and conduct test marketing.
Page 6 of 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Hydron Technologies, Inc. ("HyTech") is the owner of a broad range of consumer
and oral health care products using Hydron(Registered) polymers, a
scientifically-proven moisture attracting ingredient, and also owns a
non-prescription drug delivery system for topically applied pharmaceuticals,
which uses the polymer. HyTech holds U.S. and international patents on the only
known means to suspend the Hydron polymer in a stable emulsion that is
cosmetically acceptable for use in personal care/cosmetics products, creating a
new moisturizing technology for the personal care/cosmetics and pharmaceutical
industries. HyTech sells specialty personal care/cosmetics products, and to a
lesser extent oral health care products, most of which are covered by patent,
license and royalty agreements. HyTech has entered into a License Agreement with
QVC, Inc. (the "QVC License Agreement"), which gives the electronic retailer the
exclusive right to purchase licensed products from HyTech for sale in the
Western Hemisphere, and a License Agreement with National Patent Development
Corp., which provides that HyTech will generally pay royalties on its sales to
National Patent and receive royalties from National Patent from sales of certain
of that company's products. HyTech is developing other personal care/cosmetics
and oral health care products using Hydron polymers, as well as products that
use Hydron polymer technology as a drug delivery system, which HyTech intends to
market through third parties or its own efforts.
Results of Operations
Net sales for the three (3) months ended March 31, 1995 were $1,117,725, or 160%
higher than net sales of $430,288 for the corresponding period of the fiscal
year ended December 31, 1994 ("Fiscal 1994"). The increase is due primarily to
the continued marketing on the QVC television shopping network of HyTech's
products, which included four (4) items in HyTech's Best Defense by Hydron skin
care line sold to QVC during the first quarter of Fiscal 1994, and had expanded
to ten (10) items in the skin care line, including HyTech's first hair care
product, sold to QVC in the first three months of Fiscal 1995. In addition, for
approximately six (6) weeks after the commencement (January 1994) of a lawsuit
by Ocular Sciences, Inc. against HyTech and National Patent Development
Corporation regarding use of the Hydron trademark, no sales were made to QVC by
HyTech, although QVC was accepting backorders for HyTech's products. It appears
that QVC was assessing the nature of the claims made by the plaintiff in the
lawsuit, pending its own investigation of the matter. The marketing program was
fully reinstated in March 1994. The lawsuit was settled in August 1994 and both
parties agreed to dismiss all claims against the other and agreed to continue to
market their existing respective product lines under the Hydron name. No damages
were paid by either party.
Substantially all of the sales during the relevant periods were to QVC.
Management anticipates that sales to QVC will continue to grow as HyTech further
extends its skin care line, adds other product lines, and broadens its marketing
efforts to include other forms of electronic and conventional retailing.
Page 7 of 11
Results of Operations (continued)
Absent the consummation of marketing or distribution arrangements with third
parties other than QVC, the percentage of sales to QVC and HyTech's dependence
upon QVC as a substantial customer will also increase.
During January 1995, wholly owned subsidiaries of HyTech and QVC along with
another company, formed a joint venture to produce and distribute a 30-minute
"infomercial" for HyTech's products, which is tentatively scheduled to be
broadcast on various networks commencing late in the second quarter of the
fiscal year ending December 31, 1995 (Fiscal 1995).
HyTech has agreed to supply the Informercial Joint Venture with product for sale
through the Informercial at HyTech's cost. Management believes that the
Infomercial, if successful, is a cost effective method of building brand
awareness of HyTech's Hydron polymer-based skin care line despite selling
product to the Infomercial Joint Venture at cost, because subsequent orders for
product by customers who initially purchased directly from the Infomercial will
be made through QVC, wherein HyTech will receive its customary gross profit
margins. Management expects the Infomercial to significantly broaden HyTech's
market for its consumer products.
HyTech's gross profit for the three (3) months ended March 31, 1995 decreased
eight (8) percent to 69% from 77% for the corresponding period of Fiscal 1994,
primarily due to fluctuations in the mix of products sold to QVC in those
periods.
Research and development ("R&D") expenses reflect HyTech's efforts to identify
new product opportunities, develop and package the products for commercial sale,
perform appropriate efficacy and safety tests, and conduct consumer panel
studies and focus groups. R&D expenses increased eight (8) percent to $70,211 in
the first quarter of Fiscal 1995, compared to $64,876 for the same period in
Fiscal 1994. This increase reflects HyTech's continual development of new
products.
Selling, general and administrative expenses for the three (3) months ended
March 31, 1995 increased by 50% to $405,501 from $270,496 for the corresponding
period of Fiscal 1994. This increase is attributable to an overall increase in
salary requirements, expansion of full-time staff and other selling and
administrative costs necessary to administer HyTech's growth.
Interest and investment income in the first quarter of Fiscal 1995 rose 142%, to
$81,161 from $33,516 for the same period in Fiscal 1994. This increase is due
primarily to the investment of additional cash from operations. HyTech maintains
a conservative investment strategy, deriving investment income primarily from
U.S. Treasury securities.
Page 8 of 11
Liquidity and Financial Resources
HyTech's overall financial condition remains strong as reflected in the
Condensed Consolidated Balance Sheets at March 31, 1995 compared to December 31,
1994. In the first three months of Fiscal 1995, cash and cash equivalents
increased $295,126, primarily due to net cash provided by operations
($1,056,243), offset by an investment in Hydromercial Partners ($200,000) and
the payment of the quarterly dividend ($565,559).
HyTech's cash flow from operations was a direct result of its marketing efforts
with QVC. The QVC License Agreement provides that QVC purchase products directly
from HyTech for resale to consumers, and that HyTech receive payment from QVC
thirty (30) days after HyTech's shipment of goods to QVC.
On January 27, 1995, HyTech's Board of Directors declared a quarterly cash
dividend of two and one-half cents ($.025) per share. This dividend was paid on
March 31, 1995 to shareholders of record on March 17, 1995.
HyTech's deferred product costs have accumulated primarily from the various
agreements made with National Patent, and amounts capitalized as deferred
product costs have been based on the consideration given by HyTech to National
Patent in the form of common stock, which has been valued based on market prices
on the dates of the various agreements with National Patent.
Management believes that the amount of deferred product costs, primarily
incurred as a result of the various agreements with National Patent, will be
realized by HyTech through direct sales of its products, sale of distribution
rights and future royalties. Based upon HyTech's current sales activity, the
progress being made in developing new Hydron polymer-based products and the
market potential for these products, management believes that there has been no
permanent impairment to the carrying value of the assets and that the costs
should continue to be amortized over their respective useful lives, principally
20 years as they pertain to the National Patent agreements. Such evaluations of
the carrying value and the period over which the amount is amortized are under
continual review by HyTech.
Based on HyTech's present cash position, absence of any short or long term
debt, third-party contractual approach to manufacturing and R&D, and present
business strategy, management believes that HyTech has adequate resources to
meet normal, recurring obligations as they become due. Further, in view of the
thirty (30) day payment terms in connection with sales to QVC, management does
not anticipate any difficulty in financing foreseeable inventory requirements.
However, management recognizes that HyTech does not have the financial resources
to sustain a major national advertising campaign to market its products. In view
of the foregoing, management has obtained with QVC and Hydromercial Partners,
and continues to seek internationally, marketing, licensing and distribution
agreements with third parties which have greater financial resources and that
can enhance HyTech's product introductions with appropriate national marketing
support programs.
The effect of inflation has not been significant upon either the operations or
financial condition of HyTech.
Page 9 of 11
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 11 - Computation of Earnings Per Share
(b) Reports on Form 8-K - During the quarter covered by this report, HyTech
filed the following current reports on Form 8-K: Date of report - January 21,
1995, reporting items 5 and 7; and date of report - January 26, 1995, reporting
item 5.
Page 10 of 11
SIGNATURES
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.
By: /s/ Thomas G. Burns
Thomas G. Burns, Vice President-
Finance and Chief Financial Officer
Dated: April 28, 1995
Page 11 of 11
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Exhibit (11) - Statement Re: Computation of Earnings Per Share
Three Months Three Months
Ended Ended
March 31, March 31,
1995 1994
------------ ------------
PRIMARY
Average shares outstanding 22,496,553 21,400,204
Net effect of dilutive stock
options - based on the
treasury stock method using
average market price 713,880
---------- ----------
Totals 23,210,433 21,400,204
========== ==========
Net income $ 236,195 $ (78,300)
========== ==========
Per share amount $ 0.01 $ (0.00)
========== ==========
FULLY DILUTED
Average shares outstanding 22,496,553 21,400,204
Net effect of dilutive stock
options - based on the
treasury stock method using
year-end market price 720,065
---------- ----------
Totals 23,216,618 21,400,204
========== ==========
Net income $ 236,195 $ (78,300)
========== ==========
Per share amount $ 0.01 $ (0.00)
========== ==========
Exhibit 11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 6,018,799
<SECURITIES> 0
<RECEIVABLES> 129,798
<ALLOWANCES> 0
<INVENTORY> 4,160,184
<CURRENT-ASSETS> 10,437,264
<PP&E> 252,976
<DEPRECIATION> 148,121
<TOTAL-ASSETS> 13,236,452
<CURRENT-LIABILITIES> 545,325
<BONDS> 0
0
0
<COMMON> 226,243
<OTHER-SE> 20,355,318
<TOTAL-LIABILITY-AND-EQUITY> 13,236,452
<SALES> 1,117,725
<TOTAL-REVENUES> 1,198,886
<CGS> 347,078
<TOTAL-COSTS> 347,078
<OTHER-EXPENSES> 615,613
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 236,195
<INCOME-TAX> 0
<INCOME-CONTINUING> 236,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,195
<EPS-PRIMARY> $0.01
<EPS-DILUTED> $0.01
</TABLE>
