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, 1996 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)
1001 Yamato Road, Suite 403
Boca Raton, Florida 33431 (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 15, 1995: 22,639,816
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- March 31, 1996 and December 31, 1995
Condensed consolidated statements of operations -- Three months ended March
31, 1996 and 1995
Condensed consolidated statements of cash flows -- Three months ended March
31, 1996 and 1995
Notes to condensed consolidated financial statements -- March 31, 1996
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
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
March 31, 1996 Dec. 31, 1995
----------------------------
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ 2,734,015 $ 4,346,587
Investment in Treasury Bills 1,949,212 -
Trade accounts receivable 2,027,871 1,002,969
Inventories 3,107,476 3,998,304
Prepaid expenses and other
current assets 173,380 130,907
----------------------------
Total current assets 9,991,954 9,478,767
Property and equipment, net 614,571 620,317
Investment in joint venture 191,623 221,366
Deferred product costs, less
accumulated amortization of
$3,774,350 and $3,697,400 at
1996 and 1995, respectively 2,187,111 2,264,061
Deposits 404,654 407,600
----------------------------
$13,389,913 $12,992,111
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 195,301 $ 235,645
Accrued liabilities 383,389 194,918
----------------------------
Total current liabilities 578,690 430,563
Stockholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized;
22,639,816 shares issued and
outstanding at 1996 and 1995 226,398 226,398
Additional paid-in capital 17,547,635 18,113,632
Accumulated deficit (4,962,810) (5,778,482)
----------------------------
Total stockholders' equity 12,811,223 12,561,548
----------------------------
$13,389,913 $12,992,111
============================
Note: The balance sheet at December 31, 1995 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.
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months Ended March 31, 1996 and 1995
1996 1995
-------------------------------------
Net sales $ 3,031,981 $ 1,117,725
Cost of sales 1,219,601 347,078
-------------------------------------
Gross profit 1,812,380 770,647
-------------------------------------
Expenses:
Royalty expense 141,215 55,864
Research and development 131,243 70,211
Selling, general & administrative 633,163 405,501
Depreciation & amortization 108,432 84,037
-------------------------------------
1,014,053 615,613
-------------------------------------
Operating income 798,327 155,034
Interest and investment income 63,488 81,161
Joint Venture equity pick-up (29,743) -
-------------------------------------
Income before income taxes 832,072 236,195
Income tax expense 16,400 -
-------------------------------------
Net income $ 815,672 $ 236,195
=====================================
Net income per common share $ .04 $ .01
=====================================
Weighted average number of
common shares outstanding 22,723,129 23,210,433
=====================================
See notes to condensed consolidated financial statements.
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31, 1996 and 1995
1996 1995
----------------------------
Operating activities:
Net cash provided by operating activities $ 928,373 $ 1,056,243
----------------------------
Investing activities:
Purchase of U.S. Treasury Bills (1,949,212) -
Capital expenditures (25,736) (2,590)
Investment in joint venture - (200,000)
----------------------------
Net cash used in
investing activities (1,974,948) (202,590)
----------------------------
Financing activities:
Proceeds from issuance
of common stock, net - 7,032
Cash dividends paid (565,997) (565,559)
----------------------------
Net cash used in
financing activities (565,997) (558,527)
----------------------------
Net (decrease) increase in cash
and cash equivalents (1,612,572) 295,126
Cash and cash equivalents at
beginning of period 4,346,587 5,723,664
----------------------------
Cash and cash equivalents at
end of period $ 2,734,015 $ 6,018,790
============================
See notes to condensed consolidated financial statements.
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 1996
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, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996. 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, 1995.
Note B -- Inventories
Inventories consist of the following:
March 31, 1996 December 31, 1995
-------------------------------------------
Finished goods $2,147,957 $3,044,890
Work in progress 150,568 162,794
Raw materials and components 808,951 790,620
-------------------------------------
$3,107,476 $3,998,304
=====================================
Note C -- Investment in Joint Venture
During 1995, Hydron Technologies, Inc. ("HyTech") entered into an agreement with
two other companies to form a joint venture, Hydromercial Partners (the Joint
Venture). Each company shares equally 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.
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 1996
Note C - Investment in Joint Venture (continued)
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). The
initial capital of the Joint Venture, $600,000, was contributed in equal amounts
by the Joint Venture participants, and was used to produce the Infomercial and
conduct test marketing. An additional $300,000 was contributed, in equal amounts
by the Joint Venture participants, in 1995 to purchase additional airtime. Sales
of products by HyTech to the Joint Venture totalled approximately $314,000 in
the three months ended March 31, 1996.
Note D - Income Taxes
The provision for the three (3) months ended March 31, 1996 represents the
Alternative Minimum Tax due after utilization of the available net operating
loss carryforwards. There was no tax provision for the three (3) months ended
March 31, 1995 due to the utilization of net operating loss carryforwards.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
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., which gives the electronic retailer the exclusive right to purchase
licensed products from HyTech for sale in North America, South America and
Central America, 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, 1996 were $3,031,981, or 171%
higher than net sales of $1,117,725 for the corresponding period of the fiscal
year ended December 31, 1995 ("Fiscal 1995"). The increase is primarily the
result of QVC purchasing patterns, in addition to increased sales to the
Infomercial Joint Venture and QVC's European affiliate (QVC Europe). QVC's
purchasing patterns, which are primarily affected by the timing of Hydron Care
programming, do not necessarily mirror retail sales by QVC to consumers.
As of December 31, 1994, QVC held approximately $1.8 million more of HyTech's
inventory, at QVC's cost, than it held in inventory at December 31, 1995. QVC's
large inventory position as of the beginning of Fiscal 1995, along with
additional purchases from HyTech, were substantially reduced through retail
sales by QVC to consumers in the first quarter of Fiscal 1995, which included
seven (7) hours of Hydron Care programming. QVC's small inventory position at
the beginning of Fiscal 1996 necessitated additional purchases from HyTech for
the three (3) hours of Hydron Care programming in the first quarter of Fiscal
1996. In addition, QVC purchased additional products from HyTech in the first
quarter of Fiscal 1996 for back-end sales by QVC to consumers and in
anticipation of Hydron Care programming on QVC in April 1996. However, due to
reduced airtime, retail sales of Hydron products by QVC to consumers were lower
in the first quarter of Fiscal 1996 than in the first quarter of Fiscal 1995.
Notwithstanding the reduced airtime, back-end sales (which consist primarily of
reorders) of Hydron products by QVC to consumers increased by 17% over the same
period.
Results of Operations (continued)
The License Agreement with QVC automatically renews on May 1, 1996 as QVC has
currently met the required minimum purchases. The minimum purchase requirements
under the renewed Agreement increase by approximately 60% over the previous
minimum purchase requirements. In order for QVC to reach the increased minimums,
management believes that QVC will require significantly more airtime to sell
HyTech's products, on a quarterly basis, than it received in the first quarter
of Fiscal 1996. No obligation exists for QVC to purchase product under the terms
of the QVC license Agreement, except to maintain exclusive rights, and no
assurances can be given that QVC will meet the escalating minimum purchase
levels for subsequent years in order to maintain such exclusive rights.
Based on discussions with QVC, management expects substantially more airtime in
the second quarter of Fiscal 1996 than in the first quarter of Fiscal 1996.
Management is also currently in discussions with QVC to increase on-air
programming by focusing primarily on new program formats, line extensions and
special promotions. However no assurances can be given that QVC will grant
HyTech additional on-air selling time; and failure to receive such additional
on-air selling time could negatively impact sales. Management anticipates that
increased sales to the Infomercial Joint Venture, albeit at lower gross margins,
together with an increase in back-end sales, may offset any such decrease in
sales, if any.
Substantially all of the sales during the relevant periods were to QVC and its
related entities. 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 remain
significant.
HyTech's gross profit for the three (3) months ended March 31, 1996 decreased
nine (9) percentage points to 60% from 69% for the corresponding period of
Fiscal 1995, primarily due to fluctuations in the mix of products sold to QVC in
those periods. In June 1995, HyTech re-packaged eight of its individual skin
care products in a single collection to encourage wider consumer usage.
Management believes that this slightly lower margin item generally expands
potential re-order business, which will lead to increased sales of the
individual products at higher margins. This marketing strategy is a concerted
effort by management to further broaden the number of consumers using HyTech's
products, as well as to increase the distribution of the complete Hydron product
line. Management believes that once consumers sample a wider variety of HyTech's
products, they are more likely to reorder more of such products, either in the
entire collection, or individual products at higher prices.
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, the majority of which are performed by
outside consultants, increased 87% to $131,243 in the first quarter of Fiscal
1996, compared to $70,211 for the same period in Fiscal 1995. This increase
reflects HyTech's continual development of new products.
Results of Operations (continued)
Selling, general and administrative expenses for the three (3) months ended
March 31, 1996 increased by 56% to $633,163 from $405,501 for the corresponding
period of Fiscal 1995. This increase is attributable to an overall increase in
salary requirements, including the addition of customer service personnel,
increased warehousing costs and advertising expenses, primarily relating to the
production and distribution of HyTech's quarterly newsletter, which was
introduced in September 1995.
Interest and investment income in the first quarter of Fiscal 1996 decreased
22%, to $63,488 from $81,161 for the same period in Fiscal 1995. This decrease
is due primarily to lower cash balances and lower interest rates. HyTech
maintains a conservative investment strategy, deriving investment income
primarily from U.S. Treasury securities.
The Joint Venture equity pick-up of $29,743 for the three (3) months ended March
31, 1996 represents HyTech's proportionate share of the Infomercial Joint
Venture's loss for the same period.
Net income increased 245% to $815,672 for the first quarter of Fiscal 1996
compared to $236,195 for the same period in Fiscal 1995. This increase was the
result primarily of the factors discussed above.
Liquidity and Financial Resources
HyTech's overall financial condition remains strong as reflected in the
Condensed Consolidated Balance Sheets at March 31, 1996 compared to December 31,
1995. In the first three months of Fiscal 1995, cash and cash equivalents, when
combined with short-term investments in Treasury Bills, increased by $336,640 to
$4,683,227 at March 31, 1996 as compared to $4,346,587 at December 31, 1995.
This increase is due primarily to net cash provided by operations of $928,373
offset by the payment of the quarterly dividend of $565,997.
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.
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.
Liquidity and Financial Resources (continued)
However, management recognizes that HyTech does not have the financial resources
to sustain a major national advertising campaign to market its products in a
conventional retail mode. In view of the foregoing, management has obtained with
QVC, 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.
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 - None
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 15, 1996
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Exhibit (11) - Statement Re: Computation of Earnings Per Share
Three Months Three Months
Ended Ended
March 31, March 31,
1996 1995
---------- ----------
PRIMARY
Average shares outstanding 22,639,816 22,496,553
Net effect of dilutive stock
options -- based on the
treasury stock method using
average market price 83,313 713,881
---------- ----------
Totals 22,723,129 23,210,434
========== ==========
Net income $ 815,672 $ 236,195
=========== ===========
Per share amount $ 0.04 $ 0.01
=========== ===========
FULLY DILUTED
Average shares outstanding 22,639,816 22,496,553
Net effect of dilutive stock
options -- based on the
treasury stock method using
period-end market price 413,326 720,065
---------- ----------
Totals 23,053,142 23,216,618
========== ==========
Net income $ 815,672 $ 236,195
=========== ===========
Per share amount $ 0.04 $ 0.01
=========== ===========
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<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
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