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: September 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
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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 November 5, 1999: 4,975,136.
Page 1 of 20
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets -- September 30, 1999 and December 31,
1998
Condensed consolidated statements of operations -- Three months ended
September 30, 1999 and 1998; nine months ended September 30, 1999 and 1998
Condensed consolidated statements of cash flows -- Nine months ended
September 30, 1999 and 1998
Notes to condensed consolidated financial statements -- September 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 20
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<TABLE>
<CAPTION>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
September 30, 1999 December 31, 1998
----------------------------------------------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,561,810 $ 2,127,781
Trade accounts receivable 79,323 428,817
Inventories 1,754,703 1,751,353
Prepaid expenses and other
current assets 156,566 72,610
-----------------------------------------------
Total current assets 3,552,402 4,380,561
Property and equipment, net 352,491 550,773
Investment in joint venture 61,525 53,534
Deferred product costs, less
accumulated amortization of
$4,481,504 and $4,623,451 at
1999 and 1998, respectively 1,132,924 1,350,978
-----------------------------------------------
Deposits 326,450 305,587
$ 5,425,792 $ 6,641,433
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 356,371 $ 261,581
Accrued liabilities 412,339 405,281
-----------------------------------------------
Total current liabilities 768,710 666,862
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 (14,463,763) (13,073,618)
Treasury stock, at cost; 50,200 shares (431,345) (431,345)
-----------------------------------------------
Total shareholders' equity 4,657,082 5,974,571
-----------------------------------------------
$ 5,425,792 $ 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 20
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<TABLE>
<CAPTION>
HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
Three Months and Nine Months Ended September 30, 1999 and 1998
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 902,679 $ 964,539 $ 2,111,853 $ 3,300,222
Cost of sales 311,238 377,827 697,637 1,384,599
--------- ---------- ---------- ----------
Gross profit 591,441 586,712 1,414,216 1,915,623
--------- ---------- ---------- ----------
Expenses:
Royalty expense 41,591 53,112 116,150 172,520
Research and
development 25,042 80,647 191,565 327,802
Selling, general
& administrative 543,646 670,991 2,205,777 1,849,150
Depreciation &
amortization 123,330 128,429 364,468 385,010
--------- ---------- ---------- ----------
733,609 933,179 2,877,960 2,734,482
--------- ---------- ---------- ----------
Operating loss (142,168) (346,467) (1,463,744) (818,859)
Interest income 16,958 38,350 65,608 106,069
Joint venture equity pick-up 1,995 2,829 7,991 36,308
--------- ---------- ---------- ----------
Loss before income taxes (123,215) (305,288) (1,390,145) (676,482)
Income tax expense -- -- -- --
--------- ---------- ---------- ----------
Net loss $(123,215) $ (305,288) $(1,390,145) $ (676,482)
========= ========== =========== ==========
Basic and diluted loss
per share - Net loss
per common share $ (.02) $ (.06) $ (.28) $ (.14)
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 20
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, 1999 and 1998
Nine Months Ended
September 30,
1999 1998
------------------------------
Operating activities:
Net cash provided by (used in)
operating activities $ (554,271) $ 515,205
-----------------------------
Investing activities:
Capital expenditures, net (11,700) (234)
Distribution from joint venture -- 275,000
------------------------------
Net cash provided by
(used in) investing activities (11,700) 274,766
-----------------------------
Financing activities:
Proceeds from issuance
of common stock, net -- --
-----------------------------
Net cash used in
financing activities -- --
-----------------------------
Net increase (decrease) in cash
and cash equivalents (565,971) 789,971
Cash and cash equivalents at
beginning of period 2,127,781 2,133,722
-----------------------------
Cash and cash equivalents at
end of period $ 1,561,810 $ 2,923,693
=============================
See notes to condensed consolidated financial statements.
Page 5 of 20
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
September 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 nine month periods ended September 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:
September 30, December 31,
1999 1998
-----------------------------
Finished goods $1,078,265 $ 909,928
Work in progress 160,275 199,374
Raw materials and components 516,163 642,051
--------------------------
$1,754,703 $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 through the
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 20
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
SEPTEMBER 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 were 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 purchase 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 could not 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 has the right
to continue to sell certain of the Company's products on a non-exclusive basis
to existing customers who had previously purchased and wish to re-order Hydron
products, for a period of two years commencing June 1, 1999.
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with Home Shopping Club
LP ("Home Shopping"), that grants Home Shopping exclusive worldwide license to
market and distribute certain of the Company's proprietary consumer products
through various forms of electronic retailing. The Home Shopping Agreement also
grants Home Shopping a non-exclusive license to market Hydron products through
all other methods of distribution in certain countries outside the United
States.
Page 7 of 20
<PAGE>
Note C - Marketing And Distribution Agreements (continued)
Under the terms of the Home Shopping Agreement, Home Shopping will make minimum
product purchases (i) during the period ending 12 months following the date on
which the products first aired 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 launched its products on Home Shopping's television programs on
September 16, 1999. Hydron products have since been featured in hour long
"Hydron Skin Care Solutions" programs which were televised by Home Shopping on
October 24 and 25, 1999, and are expected to continue to air regularly on Home
Shopping's television programs. 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 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 September 16, 2001 (the second anniversary 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 20
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
September 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 Nine Months Ended
September 30, September 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) $ (123,215) $ (305,288) $(1,390,145) $ (676,482)
=====================================================
Denominator:
Denominator for basic earnings per share
(weighted-average shares) 4,945,576 4,910,136 5,015,299 4,910,136
Effect of dilutive securities: Stock options
and warrants -- -- -- --
-----------------------------------------------------
Denominator for dilutive earnings per share
(adjusted weighted-average) 4,945,576 4,910,136 5,015,299 4,910,136
=====================================================
Basic earnings per share $ (.02) $ (.06) $ (.28) $ (.14)
=====================================================
Diluted earnings per share $ (.02) $ (.06) $ (.28) $ (.14)
=====================================================
</TABLE>
Options and warrants to purchase 256,500 shares of common stock were outstanding
at September 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 20
<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 and cosmetic products. The Company has concentrated its sales and
development activities primarily on the application of these biocompatible,
hydrophilic polymers in various personal care and cosmetic products for
consumers and, to a lesser extent, oral health care products for dental
professionals.
The Company entered into a Marketing and Distribution Agreement with Home
Shopping Club LP ("Home Shopping") 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 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 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 nine months ended
September 30, 1999 are derived from sales to QVC under the Former License
Agreement, and sales to Home Shopping under the Home Shopping Agreement.
Page 10 of 20
<PAGE>
Results of Operations
- ---------------------
Net sales for the three months ended September 30, 1999 were $902,679,
representing a decrease of $61,860, or 6%, from net sales of $964,539 for the
three months ended September 30, 1998. Net sales for the nine months ended
September 30, 1999 were $2,111,853, representing a decrease of $1,188,369, or
36%, from net sales of $3,300,222 for the nine months ended September 30, 1998.
Non-catalog net sales, primarily to Home Shopping and QVC, for the three months
ended September 30, 1999 were $616,248, representing a decrease of $180,641, or
23%, from non-catalog net sales of $796,889 for the three months ended September
30, 1998. Non-catalog net sales for the nine months ended September 30, 1999
were $1,447,323, representing a decrease of $1,272,795, or 47%, from non-catalog
net sales of $2,720,118 for the nine months ended September 30, 1998. The
decrease in non-catalog net sales resulted primarily from decreased sales to
QVC, which were partially offset by an initial sale to Home Shopping prior to
the launch of the Company's products on Home Shopping's television programs on
September 16, 1999.The decrease in net sales to QVC resulted primarily from the
termination of the Former License Agreement effective May 31, 1999. As of
September 1, 1999, Hydron products ceased to be sold on-air by QVC in accordance
with the terms of the Former License Agreement.
Catalog net sales for the three months ended September 30, 1999 were $286,431,
representing an increase of $118,781, or 71%, from catalog net sales of $167,650
for the three months ended September 30, 1998. Catalog net sales for the nine
months ended September 30, 1999 were $664,530, representing an increase of
$84,426, or 15%, from catalog net sales of $580,104 for the nine months ended
September 30, 1998. The increase in catalog sales for the three and nine months
ended September 30, 1999 was the result of promotional activities.
Approximately 68% and 83% of the Company's sales for the three months ended
September 30, 1999 and 1998, respectively, were to Home Shopping and QVC.
Approximately 69% and 82% of the Company's sales during the nine months ended
September 30, 1999 and 1998, respectively, were to Home Shopping and QVC.
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 prior purchasers until June 1, 2001. Management also anticipates
that, under the terms of the Home Shopping Agreement, which became effective
September 1, 1999, sales to Home Shopping will become a substantial percentage
of the Company's total sales. 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. 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 September
30, 1999 was 66%, as compared to 61% for the three months ended September 30,
1998. The Company's overall gross profit
Page 11 of 20
<PAGE>
Results of Operations (continued)
- ---------------------------------
margin for the nine months ended September 30, 1999 was 67%, as compared to 58%
for the nine months ended September 30, 1998. The gross profit margin on
non-catalog sales for the three months ended September 30, 1999 was 57%, as
compared to 56% for the three months ended September 30, 1998. The gross profit
margin on non-catalog sales for the nine months ended September 30, 1999 was
60%, as compared to 54% for the nine months ended September 30, 1998. The
increase in non-catalog gross profit margins was the result of the mix of
products sold to QVC and Home Shopping. The gross profit margin on catalog sales
for the three months ended September 30, 1999 was 83%, as compared to 84% for
the three months ended September 30, 1998. The gross profit margin on catalog
sales for the nine months ended September 30, 1999 was 82%, as compared to 78%
for the nine months ended September 30, 1998. The decrease in catalog gross
profit margin for the three months ended September 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 nine months ended September 30,
1999 resulted primarily from a one-time vitamin sale of approximately $73,000,
which had 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
September 30, 1999 were $25,402, representing a decrease of $55,605, or 69%,
from R&D expenses of $80,647 for the three months ended September 30, 1998. Such
expenses for the nine months ended September 30, 1999 were $191,565,
representing a decrease of $136,237, or 42%, from R&D expenses of $327,802 for
the nine months ended September 30, 1998. These decreases resulted primarily
from clinical studies performed with respect to various products with costs of
approximately $100,000 incurred during the nine month period ended September 30,
1998. No such clinical studies were performed during the nine months ended
September 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
September 30, 1999 were $543,646, representing a decrease of $127,345, or 19%,
from SG&A expenses of $670,991 for the three months ended September 30, 1998.
Such expenses for the nine months ended September 30, 1999 were $2,205,777,
representing an increase of $356,627, or 19%, from SG&A expenses of $1,849,150
for the nine months ended September 30, 1998.
Non-catalog related SG&A expenses for the three months ended September 30, 1999
were $371,961, representing a decrease of $171,202, or 32%, from SG&A expenses
of $542,981 for the three months ended September 30,1998.Non-catalog related
SG&A expenses for the nine months ended September 30, 1999 were $1,846,618,
representing an increase of $337,969, or 22%, from SG&A expenses of $1,508,649
for the nine months ended September 30, 1998. The decrease in non-catalog
related SG&A expenses for the three months ended September 30, 1999 was
primarily the result of reduced payroll and legal expenses and also lower
selling expenses as a result of the limited air time on QVC and Home Shopping.
The increase in non-catalog related SG&A expenses for the nine months ended
September 30,
Page 12 of 20
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Results of Operations (continued)
- ---------------------------------
1999 is 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 the payment to the former president of
approximately $300,000 in cash and the issuance of 75,000 shares of the
Company's common stock 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 September 30, 1999 were
$171,685, representing an increase of $43,675, or 34%, from SG&A expenses of
$128,010 for the three months ended September 30, 1998. Catalog related SG&A
expenses for the nine months ended September 30, 1999 were $359,159,
representing an increase of $18,658, or 5%, from SG&A expenses of $340,501 for
the nine months ended September 30, 1998. These increases in catalog related
SG&A expenses for the three and nine months ended September 30, 1999 are
attributable to an overall increase in promotional costs.
The Company anticipates that SG&A expenses will increase substantially during
the quarter ending December 31, 1999 as a result of costs associated with the
continued reconfiguration of the Company's existing product inventory to meet
the requirements of its new exclusive electronic retailer, increased
co-operative advertising, and the production of new product components and
additional finished goods inventory.
Interest and investment income for the three months ended September 30, 1999 was
$16,958, representing a decrease of $21,392, or 56%, from interest and
investment income of $38,350 for the three months ended September 30, 1998.
Interest and investment income for the nine months ended September 30, 1999 was
$65,608, representing a decrease of $40,461, or 38%, from interest and
investment income of $106,069 for the nine months ended September 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 September 30, 1999 was $123,215, as
compared to a net loss of $305,288 for the three months ended September 30,
1998. The net loss for the nine months ended September 30, 1999 was $1,390,145,
as compared to a net loss of $676,482 for the nine months ended September 30,
1998. The net losses resulted primarily from the factors discussed above. The
non-catalog net loss for the three months ended September 30, 1999 was $178,404,
as compared to a non-catalog net loss of $304,663 for the three months ended
September 30, 1998. The non-catalog net loss for the nine months ended September
30, 1999 was $1,533,403, as compared to a non-catalog net loss of $752,985 for
the nine months ended September 30, 1998. The catalog's net income for the three
months ended September 30, 1999 was $55,189, as compared to the catalog's net
loss of $625 for the three months ended September 30, 1998. The catalog's net
income for the nine months ended September 30, 1999 was $143,258, as compared to
the catalog's net income of $76,503 for the nine months ended September 30,
1998.
Page 13 of 20
<PAGE>
Liquidity and Financial Resources
- ---------------------------------
Working capital at September 30, 1999 and December 31, 1998 was approximately
$2.8 million and $3.7 million, respectively, including cash and cash equivalents
of approximately $1.6 million and $2.1 million, respectively. The Company's
decrease in cash and cash equivalents of approximately $566,000 was the result
primarily of costs associated with the litigation settlement litigation
settlement and employment contract termination, which included cash payments of
approximately $300,000 and $88,000, respectively.
There were minimal investing activities during the nine months ended September
30, 1999, consisting primarily of the purchase of property and equipment.
Investing activities generated approximately $276,000 during the nine months
ended September 30, 1998, consisting primarily of a distribution of $275,000
received from New Hydromercial Partners, the Company's joint venture with QVC.
This joint venture is no longer active and is expected to be dissolved.
There were no financing activities during the nine months ended September 30,
1999 or 1998.
Based on the Company's present cash position, the 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 first
year's guaranteed revenues under the Home Shopping Agreement and the thirty day
payment terms in connection with sales to QVC, management does not anticipate
any difficulty in financing foreseeable inventory requirements.
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 September 16, 1999, the date on which Hydron products first aired 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.
Page 14 of 20
<PAGE>
Liquidity and Financial Resources (continued)
- ---------------------------------------------
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 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
Page 15 of 20
<PAGE>
as a result of problems encountered in its own business due to Year 2000 issues
or as a result of the impact.
Liquidity and Financial Resources (continued)
- ---------------------------------------------
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.
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.
Page 16 of 20
<PAGE>
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 17 of 20
<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, August 10, 1999)
C - Current report on Form 8-K (Date of Report, September 1, 1999)
Page 18 of 20
<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: November 15, 1999
Page 19 of 20
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