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, 1999
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 (561) 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 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 August 23, 1999: 4,985,136
Page 1 of 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- June 30, 1999 and December 31, 1998
Condensed consolidated statements of operations -- Three months ended June
30, 1999 and 1998; six months ended June 30, 1999 and 1998
Condensed consolidated statements of cash flows -- Six months ended June
30, 1999 and 1998
Notes to condensed consolidated financial statements -- June 30, 1999
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 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidated Balance Sheets
June 30, 1999 December 31, 1998
----------------------------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,479,022 $ 2,127,781
Trade accounts receivable 169,122 428,817
Inventories 1,666,055 1,751,353
Prepaid expenses and other
current assets 158,684 72,610
----------------------------------
Total current assets 3,472,883 4,380,561
Property and equipment, net 391,437 550,773
Investment in joint venture 59,530 53,534
Deferred product costs, less
accumulated amortization of
$4,768,820 and $4,623,451 at
1999 and 1998, respectively 1,205,609 1,350,978
Deposits 222,208 305,587
----------------------------------
$ 5,351,667 $ 6,641,433
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 202,781 $ 261,581
Accrued liabilities 368,589 405,281
----------------------------------
Total current liabilities 571,370 666,862
Shareholders' equity:
Common stock -- $.01 par value;
30,000,000 shares authorized; 5,035,336
and 4,960,336 shares issued at 1999 and
1998, respectively: 4,985,136 and
4,910,136 shares outstanding at 1999
and 1998, respectively 50,353 49,603
Additional paid-in capital 19,501,837 19,429,931
Accumulated deficit (14,340,548) (13,073,618)
Treasury stock, at cost; 50,200 shares (431,345) (431,345)
----------------------------------
Total shareholders' equity 4,780,297 5,974,571
----------------------------------
$ 5,351,667 $ 6,641,433
==================================
</TABLE>
Note: The balance sheet at December 31, 1998 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 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months and Six Months Ended June 30, 1999 and 1998
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 623,092 $1,024,465 $ 1,209,174 $ 2,335,683
Cost of sales 199,849 463,366 386,399 1,006,772
---------- ---------- ----------- -----------
Gross profit 423,243 561,099 822,775 1,328,911
---------- ---------- ----------- -----------
Expenses:
Royalty expense 38,821 63,514 74,559 119,408
Research and
development 62,072 128,826 166,523 247,155
Selling, general
& administrative 1,044,040 572,532 1,662,131 1,178,159
Depreciation &
amortization 118,970 128,224 241,138 256,581
---------- ---------- ----------- -----------
1,263,903 893,096 2,144,351 1,801,303
---------- ---------- ---------- -----------
Operating loss (840,660) (331,997) (1,321,576) (472,392)
Interest income 24,809 36,755 48,650 67,719
Joint venture equity pick-up 3,127 13,447 5,996 33,479
---------- ---------- ----------- -----------
Loss before income taxes (812,724) (281,795) (1,266,930) (371,194)
Income tax expense -- -- -- --
---------- ---------- ----------- -----------
Net loss $ (812,724) $ (281,795) $(1,266,930) $ (371,194)
========== ========== =========== ===========
Basic and diluted loss
per share - Net loss
per common share $ (.16) $ (.06) $ (.26) $ (.08)
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended June 30, 1999 and 1998
1999 1998
----------------------------
Operating activities:
Net cash provided by (used in)
operating activities $ (648,759) $ 224,301
----------------------------
Investing activities:
Capital expenditures, net -- 1,416
Distribution from joint venture -- 275,000
----------------------------
Net cash provided by
investing activities -- 276,416
----------------------------
Financing activities:
Proceeds from issuance
of common stock, net -- --
----------------------------
Net cash used in
financing activities -- --
----------------------------
Net increase (decrease) in cash
and cash equivalents (648,759) 500,717
Cash and cash equivalents at
beginning of period 2,127,781 2,133,722
----------------------------
Cash and cash equivalents at
end of period $ 1,479,022 $ 2,634,439
============================
See notes to condensed consolidated financial statements.
Page 5 of 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1999
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 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 and six month periods ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
Note B -- Inventories
Inventories consist of the following:
June 30, 1999 December 31, 1998
-----------------------------------
Finished goods $ 910,566 $ 909,928
Work in progress 161,774 199,374
Raw materials and components 593,715 642,051
-----------------------------------
$ 1,666,055 $ 1,751,353
===================================
Note C -- Marketing And Distribution Agreements
The Company entered into a license agreement with QVC, Inc. ("QVC License
Agreement") in 1993, whereby QVC was granted exclusive rights to market and
distribute the Company's proprietary consumer products using Hydron polymers in
the Western Hemisphere. In 1996, the Company and QVC modified the QVC License
Agreement ("Amended License Agreement"), whereby the Company reacquired certain
retail marketing rights to the Hydron product line. Such retail marketing rights
included prestige retail channels of distribution such as traditional department
and specialty stores, boutique stores and beauty salons, as well as catalog
sales. QVC was entitled to receive a commission from the Company on any such
sales. In addition, the Amended License Agreement increased the minimum product
purchase requirements QVC was required to meet, on an annual basis over a
two-year term ended May 31, 1998, to maintain its exclusive rights to market
Hydron consumer products in the Western Hemisphere, through all channels of
distribution except as noted above. QVC did not meet the annual minimum product
purchase requirements to maintain exclusivity for the year ended May 31, 1997.
Page 6 of 18
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note C -- Marketing And Distribution Agreements (continued)
On June 11, 1997, the Company and QVC renegotiated the Amended License Agreement
("Renegotiated License Agreement") pursuant to which the term of the Amended
License Agreement was extended for one year, to May 31, 1999.
Under the terms of the Renegotiated License Agreement, QVC was required to meet
certain minimum product purchase requirements during each two-year period during
the term of the agreement, as well as annual minimum product purchase
requirements, to maintain its exclusive rights. No obligation existed for QVC to
purchase the Company's product, except to maintain such exclusive rights, and no
assurances could be given that QVC would meet the escalating minimum purchase
levels for subsequent years in order to maintain such exclusive rights. If QVC
had met the stipulated minimum product purchase requirements, then the
Renegotiated License Agreement would have renewed automatically. If QVC did not
meet the annual minimum product purchase requirements, the Company could elect
to continue or terminate the Renegotiated License Agreement as of the end of
each contract year during the term.
Although QVC did not satisfy the minimum product purcahse requirements for the
period ended May 31, 1998, the Company elected to continue the Renegotiated
License Agreement at that time. Effective May 31, 1999, the Company terminated
the Renegotiated License Agreement as a result of QVC's failure to satisfy the
annual minimum product purchase requirements for the period ended May 31, 1999.
Under the terms of the Renegotiated License Agreement, QVC had a period of 30
days, commencing with the Company's notice to QVC of its decision to terminate,
to satisfy the minimum product purchase requirements. As the deficiency was not
cured during that time, the Renegotiated License Agreement terminated May 31,
1999. Under the terms of the Renegotiated License Agreement, following
termination thereof, the Company cannot market or sell certain Hydron products
through direct response television in the Western Hemisphere, for a period of
three months ending September 1, 1999. In addition, QVC can continue to sell
certain of the Company's products on a non-exclusive basis, to customers who had
previously purchased and wish to reorder Hydron products, for a period of two
years commencing June 1, 1999.
The Company is currently negotiating the terms of a marketing and distribution
agreement with Home Shopping Club LP ("Home Shopping"), which is expected to
become effective September 1, 1999 (the "Home Shopping Agreement"). Pursuant to
the Home Shopping Agreement, the Company will grant Home Shopping an exclusive
worldwide license to market and distribute certain of the Company's proprietary
consumer products through various forms of electronic retailing, and a
non-exclusive license to market Hydron products through all other methods of
distribution in certain countries outside the United States. It
Page 7 of 18
<PAGE>
Note C -- Marketing And Distribution Agreements (continued)
is currently anticipated that the Home Shopping Agreement will require Home
Shopping to make minimum product purchases i) during the period ending 12 months
following the date on which the products first air on Home Shopping's television
programs (the "Initial Term"), and ii) during the second 12 months following the
date of the first airing, should Home Shopping exceed a certain threshold amount
in retail sales of Hydron products to consumers during the Initial Term. The
term of the Home Shopping Agreement may be automatically renewed after the
Initial Term for an indefinite number of successive one-year periods, subject to
Home Shopping's achieving certain escalating threshold levels in product
purchases. However, beginning in the third contract year, Home Shopping will no
longer be required to make minimum product purchases except to maintain
exclusivity. The Company expects to launch its products on Home Shopping's
television programs in September 1999.
In addition to selling Hydron products on-air, Home Shopping is expected to
provide brand development, and marketing promotion and support for the products,
including direct mail, sampling, outbound telemarketing, package inserts,
advertising and publicity programs, the costs and expenses of which are to be
shared equally by Home Shopping and the Company.
Although management believes that there are other avenues for selling the
Company's products, including the Hydron catalog, the failure of the Company to
enter into the Home Shopping Agreement, or the loss of Home Shopping as a
customer, would have a material adverse effect on the Company's business.
The Company has also entered into a Spokesperson Services Agreement with Greyson
International, Inc. ("Greyson") and Harvey Tauman ("Tauman"), the Company's
former president and an employee of Greyson, to have Tauman market the Company's
products in connection with Home Shopping and to serve as the Company's on-air
spokesperson. This agreement shall remain effective, subject to certain
conditions, until two years after the date of Tauman's first appearance
promoting Hydron products on Home Shopping's television programs. For providing
the services of Tauman, Greyson shall receive a fee based on a percentage of the
Company's monthly recorded sales of its products to Home Shopping.
Page 8 of 18
<PAGE>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1999
Note D -- Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income (loss) is both the numerator
for basic earnings per share (income
available to common shareholders) and the
numerator for diluted earnings per share
(income available to common shareholders
after assumed conversions or exercise
of outstanding options and warrants,
if dilutive) $ (812,724) $ (281,795) $(1,266,930) $ (371,194)
======================================================
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 4,940,631 4,910,136 4,925,467 4,910,136
Effect of dilutive securities: Stock options
and warrants -- -- -- --
------------------------------------------------------
Denominator for dilutive earnings per share
(adjusted weighted-average) 4,940,631 4,910,136 4,925,467 4,910,136
======================================================
Basic earnings per share $ (.16) $ (.06) $ (.26) $ (.08)
======================================================
Diluted earnings per share $ (.16) $ (.06) $ (.26) $ (.08)
======================================================
</TABLE>
Options and warrants to purchase 269,700 shares of common stock were outstanding
at June 30, 1999, but were not included in the computation of diluted earnings
per share because the effect would be antidilutive to the net loss per share for
the period.
Page 9 of 18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
Hydron Technologies, Inc. (the "Company") develops and markets a broad range of
personal care products, including skin care, hair care, bath and body, and
topical over-the-counter pharmaceutical products, based on its proprietary and
patented Hydron polymer technology. 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 has concentrated its sales and development
activities primarily on the application of these biocompatible, hydrophilic
polymers in various personal care/cosmetic products for consumers and, to a
lesser extent, oral health care products for dental professionals.
The Company is negotiating the terms of a Marketing and Distribution Agreement
with Home Shopping Club LP ("Home Shopping"), which is expected to become
effective September 1, 1999 (the "Home Shopping Agreement"). The Home Shopping
Agreement grants certain exclusive worldwide rights to Home Shopping to purchase
licensed products from the Company for sale through various forms of electronic
retailing. The Company also continues to sell certain of its products to QVC,
Inc. ("QVC"), for QVC to sell on a non-exclusive basis to existing customers who
had previously purchased and wish to re-order Hydron products, under the terms
of the Company's former license agreement with QVC, which the Company terminated
effective May 31, 1999 (the "Former License Agreement"). QVC has the right to
sell certain Hydron products to such customers until June 1, 2001.
In addition, the Company has entered into a Spokesperson Services Agreement with
Greyson International, Inc. ("Greyson") and Harvey Tauman ("Tauman"), the
Company's former president and an employee of Greyson, to have Tauman market the
Company's products in connection with Home Shopping and to serve as the
Company's on-air spokesperson. The Company has also entered into a License
Agreement with National Patent Development Corp., which provides for reciprocal
royalty payments based on the sale of certain of each party's products.
The Company is developing other personal care/cosmetic products for consumers
using Hydron polymers and is using its patented technology as a drug delivery
system in at least one of its proprietary products. The Company intends to
continue to explore the efficacy of using its technology for such purposes 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 Hydron
polymers have the potential for wide acceptance in consumer and professional
health care markets.
Most of the Company's net sales for the three months and six months ended June
30, 1999 are derived from sales to QVC, under the Former License Agreement.
Page 10 of 18
<PAGE>
Results of Operations
Net sales for the three months ended June 30, 1999 were $623,092, a decrease of
$401,373, or 39%, from net sales of $1,024,465 for the three months ended June
30, 1998. Net sales for the six months ended June 30, 1999 were $1,209,174, a
decrease of $1,126,509, or 48%, from net sales of $2,335,683 for the six months
ended June 30, 1998.
Non-catalog net sales, primarily to QVC and related entities, for the three
months ended June 30, 1999 were $417,830, a decrease of $444,813, or 52%, from
non-catalog net sales of $862,643 for the three months ended June 30, 1998.
Non-catalog net sales for the six months ended June 30, 1999 were $831,075, a
decrease of $1,092,154, or 57%, from non-catalog net sales of $1,923,229 for the
six months ended June 30, 1998. The decrease in non-catalog sales resulted
primarily from decreased sales to QVC, which in turn, resulted primarily from a
reduction in QVC's retail sales due to the amount and quality of airtime
provided by QVC, as well as the number of new product introductions, the amount
of competitive products offered by QVC, and the effectiveness of the host and
spokesperson. As of September 1, 1999, Hydron products will no longer be sold
on-air by QVC in accordance with the terms of the Former License Agreement.
Catalog net sales for the three months ended June 30, 1999 were $205,262, an
increase of $43,440, or 27%, from catalog net sales of $161,822 for the three
months ended June 30, 1998. Catalog net sales for the six months ended June 30,
1999 were $378,099, a decrease of $34,355, or 8%, from catalog net sales of
$412,454 for the six months ended June 30, 1998. The increase in catalog sales
for the three months ended June 30, 1999 was the result of more successful
promotional activities. The decrease in catalog sales for the six months ended
June 30, 1999 was the result of a one-time vitamin sale of approximately $73,000
during the three months ended March 31, 1998.
Approximately 67% and 84% of the Company's sales for the three months ended June
30, 1999 and 1998, respectively, were to QVC and its related entities.
Approximately 68% and 82% of the Company's sales during the six months ended
June 30, 1999 and 1998, respectively, were to QVC and its related entities.
Management anticipates that sales to QVC as a percentage of the Company's total
sales will decline as a result of the termination of the Former License
Agreement, although the Company may continue to sell certain products to QVC for
re-sale to select customers until June 1, 2001. Management also anticipates
that, under the terms of the Home Shopping Agreement, which is expected to
become effective September 1, 1999, sales to Home Shopping will become a
substantial percentage of the Company's total sales. Assuming the Home Shopping
Agreement becomes effective, absent the consummation of marketing or
distribution arrangements with third parties other than Home Shopping, the
Company's dependence upon Home Shopping as a substantial customer will be
significant. The failure of the Company to enter into the Home Shopping
Agreement, or any disruption in the Company's relationship with Home Shopping,
would have a material adverse effect on the business, financial condition and
results of operations of the Company.
The Company's overall gross profit margin for the three months ended June 30,
1999 was 68%, as compared to 55% for the three months ended June 30, 1998. The
Company's overall gross profit margin for the six months ended June 30, 1999 was
68%, as compared to 57% for the six months ended June 30,
Page 11 of 18
<PAGE>
Results of Operations (continued)
1998. The gross profit margin on non-catalog sales for the three months ended
June 30, 1999 was 61%, as compared to 49% for the three months ended June 30,
1998. The gross profit margin on non-catalog sales for the six months ended June
30, 1999 was 62%, as compared to 53% for the six months ended June 30, 1998. The
increase in non-catalog gross profit margins was the result of the mix of
products sold to QVC, including the sale of approximately $174,000 of sample
size products to QVC for promotional activities at a gross margin of
approximately 15% during the three months ended June 30, 1998. The gross profit
margin on catalog sales for the three months ended June 30, 1999 was 81%, as
compared to 84% for the three months ended June 30, 1998. The gross profit
margin on catalog sales for the six months ended June 30, 1999 was 82%, as
compared to 76% for the six months ended June 30, 1998. The decrease in catalog
gross profit margin for the three months ended June 30, 1999 was the result of
promotional pricing on some of the products offered through the catalog. The
increase in catalog gross profit margin for the six months ended June 30, 1999
resulted primarily from the one-time vitamin sale of approximately $73,000, at a
44% gross profit margin, during the three months ended March 31, 1998.
Research and development ("R&D") expenses reflect the Company'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 for the three months ended
June 30, 1999 were $62,072, a decrease of $66,754, or 52%, from R&D expenses of
$128,826 for the three months ended June 30, 1998. Such expenses for the six
months ended June 30, 1999 were $166,523, a decrease of $80,632, or 33%, from
R&D expenses of $247,155 for the six months ended June 30, 1998. These decreases
resulted primarily from clinical studies performed with respect to various
products with costs of approximately $100,000 incurred during the six month
period ended June 30, 1998. No such clinical studies were performed during the
six months ended June 30, 1999. The amount of R&D expenses per year varies,
depending on the nature of the Company's 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, 1999 were $1,044,040, an increase of $471,508, or 82%, from SG&A
expenses of $572,532 for the three months ended June 30, 1998. Such expenses for
the six months ended June 30, 1999 were $1,662,131, an increase of $483,972, or
41%, from SG&A expenses of $1,178,159 for the six months ended June 30, 1998.
Non-catalog related SG&A expenses for the three months ended June 30, 1999 were
$941,853, an increase of $466,652, or 98%, from SG&A expenses of $475,201 for
the three months ended June 30, 1998. Non-catalog related SG&A expenses for the
six months ended June 30, 1999 were $1,474,657, an increase of $508,989, or 53%,
from SG&A expenses of $965,668 for the six months ended June 30, 1998. These
increases are attributable primarily to the litigation with the Company's former
president, which was settled on June 2, 1999, and with the voluntary early
termination of an executive officer's employment contract on May 31, 1999. The
settlement of the litigation resulted in settlement payments of approximately
$373,000, including the issuance of 75,000 shares of the Company's common stock
Page 12 of 18
<PAGE>
Results of Operations (continued)
valued at approximately $73,000. The termination of an executive officer's
employment contract, that would have otherwise provided for continued employment
through April 30, 2003, resulted in payroll and related costs of approximately
$109,000.
Catalog related SG&A expenses for the three months ended June 30, 1999 were
$102,187, an increase of $4,856, or 5%, from SG&A expenses of $97,331 for the
three months ended June 30, 1998. Catalog related SG&A expenses for the six
months ended June 30, 1999 were $187,474, a decrease of $25,017, or 12%, from
SG&A expenses of $212,491 for the six months ended June 30, 1998. The increase
in catalog related SG&A expenses for the three months ended June 30, 1999 was
attributable to an overall increase in catalog sales. The decrease in catalog
related SG&A expenses for the six months ended June 30, 1999 was attributable
primarily to a decrease in promotional and payroll costs.
Interest and investment income for the three months ended June 30, 1999 was
$24,809, a decrease of $11,946, or 33%, from interest and investment income of
$36,755 for the three months ended June 30, 1998. Interest and investment income
for the six months ended June 30, 1999 was $48,650, a decrease of $19,069, or
28%, from interest and investment income of $67,719 for the six months ended
June 30, 1998. These decreases were due primarily to lower cash balances in the
1999 periods compared to the 1998 periods. 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, 1999 was $812,724, as compared
to a net loss of $281,795 for the three months ended June 30, 1998. The net loss
for the six months ended June 30, 1999 was $1,266,930, as compared to a net loss
of $371,194 for the six months ended June 30, 1998. The increase in the net
losses resulted primarily from the factors discussed above. The non-catalog net
loss for the three months ended June 30, 1999 was $859,546, as compared to a
non-catalog net loss of $308,932 for the three months ended June 30, 1998. The
non-catalog net loss for the six months ended June 30, 1999 was $1,354,999, as
compared to a non-catalog net loss of $448,323 for the six months ended June 30,
1998. The catalog's net income for the three months ended June 30, 1999 was
$46,822, as compared to the catalog's net income of $27,137 for the three months
ended June 30, 1998. The catalog's net income for the six months ended June 30,
1999 was $88,069, as compared to the catalog's net income of $77,129 for the six
months ended June 30, 1998.
Liquidity and Financial Resources
The Company's overall financial condition remains strong as reflected in the
Condensed Consolidated Balance Sheets at June 30, 1999 and December 31, 1998.
Working capital at June 30, 1999 and December 31, 1998 was approximately $2.9
million and $3.7 million, respectively, including cash and cash equivalents of
approximately $1.5 million and $2.1 million, respectively. The Company's
decrease in cash and cash equivalents of approximately $649,000 was the result
primarily of costs associated with the litigation settlement and employment
contract termination, which included cash payments of approximately $300,000 and
$88,000, respectively.
Page 13 of 18
<PAGE>
Liquidity and Financial Resources (continued)
There were no investing activities during the six months ended June 30, 1999.
Investing activities generated approximately $276,000 during the six months
ended June 30, 1998, consisting primarily of a distribution of $275,000 received
from New Hydromercial Partners, the Company's joint venture with QVC.
There were no financing activities during the six months ended June 30, 1999 and
1998.
Based on the Company's present cash position, absence of any short or long term
debt, arrangements with third parties for contractual manufacturing and R&D, and
the Company's present business strategy, management believes that the Company
has adequate resources to meet normal, recurring obligations for at least the
next twelve months, as they become due. Further, in view of the thirty day
payment terms in connection with sales to QVC and anticipated sales to Home
Shopping, management does not anticipate any difficulty in financing foreseeable
inventory requirements. However, since sales to QVC represented approximately
68% of the Company's net sales for the six months ended June 30, 1999, if the
company fails to consummate the Home Shopping Agreement, the termination of the
Former License Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations. Although the Company
and Home Shopping are in the final stages of negotiation of the Home Shopping
Agreement, there can be no assurance that the Home Shopping Agreement will be
concluded.
Under the terms of the Home Shopping Agreement, Home Shopping is expected to
make minimum product purchases from the Company during the period ending 12
months from the date on which Hydron products first air on Home Shopping's
television programs. If Home Shopping exceeds certain retail sales of Hydron
products during that period, the agreement will renew automatically on the same
terms for a second one-year period. Beginning in the third year, Home Shopping
will no longer be required to make minimum product purchases, except to maintain
exclusivity. The agreement may be automatically extended for an indefinite
number of successive one-year periods, subject to Home Shopping's achieving
escalating minimum product purchase levels.
The Company does not have the financial resources to sustain a national
advertising campaign to market its products in a conventional retail mode. In
view of the foregoing, management's strategy has been to enter into marketing,
licensing and distribution agreements with third parties, such as Home Shopping
and QVC, which have greater financial resources than those of the Company and
that can enhance the Company'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 the Company.
The Year 2000 Issues
The Company is dependent upon computer technology to effectively carry out its
day-to-day operations. In addition, the Company is dependent on suppliers and
customers who also use computer technology in the conduct of their business. The
terms "Year 2000 issues" or "Year 2000 problems," or words of a similar
Page 14 of 18
<PAGE>
Liquidity and Financial Resources (continued)
nature, refer to the potential for failure of computer applications as a result
of the failure of programs to properly recognize and handle dates beyond the
year 1999. In the case of the Company, such computer applications may include
customer order processing, inventory management, shipment of products, internal
financial systems and other information systems, among others.
- Readiness
The Company's assessment of the possible consequences of Year 2000 issues on its
business, results of operations, or financial conditions is not complete, but is
continuing in accordance with a Year 2000 compliance plan (the "Year 2000
Plan"). The Year 2000 Plan includes (1) upgrading the Company's information
technology software and embedded technology applications in its systems, where
applicable, to become Year 2000 compliant, (2) assessing the Year 2000 readiness
of suppliers and customers, and (3) developing contingency plans, if practical,
for crucial system and processes. Implementation of the Year 2000 Plan has been
undertaken with respect to various operating and information systems in varying
degrees to date. The Year 2000 Plan is expected to be fully implemented with
respect to crucial information systems in 1999.
Progress to date includes the purchase of upgraded hardware and software
packages and reprogramming of existing systems. All internal systems are
expected to be Year 2000 compliant in 1999. Because the Company is dependent on
its suppliers and customers to successfully operate its business, the Year 2000
Plan includes an assessment process with respect to those vendors and customers
deemed most critical to the operations and business of the Company. To date, the
Company has contacted certain vendors and anticipates completing its vendor
assessment process by the end of 1999. The initial steps of an analysis of the
Company's significant customer to determine the potential effect of the Year
2000 issues on this customer has begun and is expected to be completed in 1999.
The Year 2000 Plan requires continued assessment throughout 1999 in these areas.
- Costs
The costs of the Year 2000 Plan include the purchase price of computer hardware
and software packages, fees for contract programmers and the cost of internal
information technology resources. The costs of achieving Year 2000 compliance
have not been material to date and are not expected to be material.
- Risks
The Company expects no material adverse effect on its results of operations,
liquidity or financial condition as a result of problems encountered in its own
business as a result of Year 2000 issues or as a result of the impact of Year
2000 problems on its vendors or customers. However, the risks to the Company
associated with Year 2000 issues could be significant. While the Company is
undertaking its own evaluation and testing of its information technology and
non-information technology systems, it is dependent to some extent on the
assurances and guidance provided by suppliers of technology and programming
services as to Year 2000 compliance readiness.
Page 15 of 18
<PAGE>
Liquidity and Financial Resources (continued)
Similarly, the Company's Year 2000 Plan calls for ongoing analysis of the
possible effects of Year 2000 problems on its suppliers of materials and
non-information technology goods and services as well as its customers and
demands for its products. The Company has limited ability to independently
verify the possible effects of Year 2000 issues on its customers and suppliers.
Therefore, the Company's assumptions concerning the effect of Year 2000 issues
on its results of operations, liquidity, and financial condition relies on its
ability to analyze the business and operations of each of its critical vendors
or customers. This process, by the nature of the problem, is limited to such
persons' public statements, their responses to the Company's inquiries, and the
information available to the Company from third parties concerning the
industries or particular vendors or customers involved.
Risk also exists that despite the Company's best efforts, critical systems may
malfunction due to year 2000 problems and disrupt its operations. The Company is
unable to determine at this time the nature or length of time for such possible
disruption and therefore the potential materiality thereof to its business or
profitability.
Interruptions of communication services or power supply due to Year 2000
problems can cause affected locations to cease or curtail production or receipt
and shipment of materials and products. The Company is dependent on the
suppliers of power and communication services that no such disruptions occur.
- Contingency Plans
As part of its Year 2000 Plan, the Company will continue to identify and
evaluate risks and possible alternatives should various contingencies arise. The
Company has prioritized remediation of its most crucial information systems and
believes that they will be Year 2000 compliant by the end of 1999. Should
unforeseen circumstances result in substantial delay that may lead to disruption
of business, the Company will develop contingency plans where possible and not
cost prohibitive. To some extent the Company may not be able to develop
contingency plans, such as in the case of communication services or the supply
of power.
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.
Page 16 of 18
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
A - Exhibits - 27.1 - Financial Data Schedule
B - Current report on Form 8-K (Date of Report, June 2, 1999), reporting items 5
and 7.
Page 17 of 18
<PAGE>
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/ Richard Banakus
-----------------------
Richard Banakus
Interim President
Dated: August 23, 1999
Page 18 of 18
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