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: March 31, 2000
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
incorporation or organization) Identification No.)
1001 Yamato Road, Suite 403, Boca Raton, Florida 33431
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 994-6191
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. Yes [ ] No [X]
Number of shares of common stock outstanding as of August 15, 2000: 4,975,136
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Index
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-- March 31, 2000 and December 31,
1999
Condensed consolidated statements of operations -- Three months ended
March 31, 2000 and 1999
Condensed consolidated statements of cash flows -- Three months ended
March 31, 2000 and 1999
Notes to condensed consolidated financial statements-- March 31, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 459,516 $ 653,916
Trade accounts receivable 76,338 38,490
Inventories 1,567,932 1,438,292
Prepaid expenses and other
current assets 81,469 118,453
------------ ------------
Total current assets 2,185,255 2,249,151
Property and equipment, less
Accumulated depreciation of
$796,781 and $758,081 at
2000 and 1999, respectively 248,043 286,743
Deferred product costs, less
accumulated amortization of
$4,986,791 and $4,914,191 at
2000 and 1999, respectively 987,638 1,060,238
Investment in joint venture 62,720 62,721
Deposits 124,614 176,450
------------ ------------
$ 3,608,270 $ 3,835,303
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 48,157 $ 127,543
Accrued liabilities 643,295 642,488
------------ ------------
Total current liabilities 691,452 770,031
Commitments and contingencies
Shareholders' equity:
Common stock-- $.01 par value;
30,000,000 shares authorized;
5,035,336 shares issued; and
4,975,136 shares outstanding 50,353 50,353
Additional paid-in capital 19,501,837 19,501,837
Accumulated deficit (16,196,214) (16,047,760)
Treasury Stock, at cost; 60,200 shares (439,158) (439,158)
------------ ------------
Total shareholders' equity 2,916,818 3,065,272
------------ ------------
$ 3,608,270 $ 3,835,303
============ ============
</TABLE>
Note: The balance sheet at December 31, 1999 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.
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales $ 672,390 $ 586,082
Cost of sales 216,316 186,550
--------- ---------
Gross profit 456,074 399,532
Expenses:
Royalty expense 33,953 35,738
Research and development 18,150 104,451
Selling, general & administrative 447,301 618,091
Depreciation & amortization 111,300 122,168
--------- ---------
610,704 880,448
--------- ---------
Operating loss (154,630) (480,916)
Interest and investment income 6,176 23,841
Joint venture equity pick-up -- 2,869
--------- ---------
Loss before income taxes (148,454) (454,206)
Income tax expense -- --
--------- ---------
Net loss $(148,454) $(454,206)
========= =========
Basic and diluted loss per share -
Net loss per common share $ (.03) $ (.09)
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $ (148,454) $ (454,206)
Adjustments to reconcile net loss to
Net cash used by operating activities:
Depreciation and amortization 111,300 122,168
Loss on disposal of property & equipment -- 39,458
Equity in earnings of joint venture -- (2,869)
Write down of inventory 2,475 --
Change in operating assets and liabilities:
Trade accounts receivable (37,848) 207,344
Inventories (132,115) 91,495
Prepaid expenses and other current assets 36,985 (13,919)
Deposits 51,836 47,804
Accounts payable (79,386) 64,786
Accrued liabilities 807 (17,712)
----------- -----------
Net cash provided (used) by operating activities (194,400) 84,349
Investing activities:
Net cash used by investing activities -- --
Financing activities:
Net cash provided (used) by financing
activities -- --
----------- -----------
Net increase (decrease) in cash and
and cash equivalents (194,400) 84,349
Cash and cash equivalents at
beginning of period 653,916 2,127,781
----------- -----------
Cash and cash equivalents at
end of period $ 459,516 $ 2,212,130
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
March 31, 2000
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-month period ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
Note B - Inventories
Inventories consist of the following:
March 31, 2000 December 31, 1999
Finished goods $1,083,594 $ 753,692
Raw materials and components 484,338 684,600
---------- ----------
$1,567,932 $1,438,292
========== ==========
Note C - Distribution Agreement
The Company entered into a license agreement with QVC, Inc. ("QVC") 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 their license agreement (Amended License
Agreement). The Amended License Agreement provided the Company with certain
retail marketing rights, and increased the minimum product purchase requirements
QVC was required to meet on a biannual basis to maintain their exclusive rights
to market Hydron consumer products through direct response television.
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
Note C - Distribution Agreement (continued)
Pursuant to the Amended License Agreement, certain retail marketing rights
formerly held by Direct to Retail (DTR), which rights were granted by QVC to DTR
under a separate agreement, reverted to the Company. Such retail marketing
rights include prestige retail channels of distribution such as traditional
department and specialty stores, boutique stores and beauty salons, as well as
catalog sales. QVC is entitled to receive a commission from the Company on any
such sales.
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, with the next two year term
commencing on June 1, 1997.
Under the terms of the Renegotiated License Agreement, QVC was required to meet
certain minimum product purchase requirements for a two-year period, including
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 renews
automatically. If QVC did not meet the annual or biannual minimum product
purchase requirements, then the Company could elect to continue or terminate the
Renegotiated License Agreement as of the end of each contract year during the
term.
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.
The Company continues to sell certain product to QVC, on a non-exclusive basis,
so that QVC can resell these products to their customers who had previously
purchased and wish to re-order Hydron products.
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with HSN, that grants HSN
an exclusive worldwide license to market and distribute certain of the Company's
proprietary consumer products through various forms of
7
<PAGE>
Note C - Distribution Agreement (continued)
electronic retailing. The Home Shopping Agreement also grants HSN a
non-exclusive license to market Hydron products through all other methods of
distribution in certain countries outside the United States.
Under the terms of the Home Shopping Agreement, HSN will make minimum product
purchases i) during the period ending 12 months following the date on which the
products first aired on HSN's television programs (the "Initial Term"), and ii)
during the second 12 months following the date of the first airing, should HSN
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 HSN's achieving certain escalating
threshold levels in product purchases. However, beginning in the third contract
year, HSN will no longer be required to make minimum product purchases, except
to maintain exclusivity.
The Company launched its products on HSN's television network on September 16,
1999. Hydron products have since been featured in "Hydron Skin Care Solutions"
hours during 7 of the first 11 months of the Home Shopping Agreement and are
expected to air regularly on HSN's television programs. In addition to selling
Hydron products on-air, HSN provides 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 shared equally by HSN and the Company.
Although management believes that there are other avenues for selling its
products, including the Hydron catalog, the loss of HSN as a customer would have
a material adverse effect on the Company's business.
8
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HYDRON TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
March 31, 2000
Note D - Earnings Per Share
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
----------- -----------
<S> <C> <C>
Numerator:
Net loss is both the numerator for basic
loss per share (income available to common
shareholders) and the numerator for diluted
loss per share (income available to common
shareholders after assumed conversions) $ (148,454) $ (454,206)
=========== ===========
Denominator:
Denominator for basic loss per share
(weighted-average shares) 4,975,136 4,910,136
Effect of dilutive securities: Stock options and warrants -- --
----------- -----------
Denominator for dilutive loss per
share (adjusted weighted-average) 4,975,136 4,910,136
=========== ===========
Basic loss per share $ (.03) $ (.09)
=========== ===========
Diluted loss per share $ (.03) $ (.09)
=========== ===========
</TABLE>
Options and warrants to purchase 302,500 shares of common stock were outstanding
at March 31, 2000, but were not included in the computation of diluted earnings
per share because the effect would be anti-dilutive to the net loss per share
for the period.
9
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business
Hydron Technologies, Inc. ("the Company") markets a broad range of consumer and
oral health care products using a moisture-attracting ingredient (the "Hydron(R)
polymers"), and owns a non-prescription drug delivery system for topically
applied pharmaceuticals, which uses such polymer. The Company holds U.S. and
international patents on, what Management believes is the only known
cosmetically acceptable method to suspend the Hydron polymer in a stable
emulsion for use in personal care/cosmetic products. The Company 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 care products for dental
professionals. The Company is developing other personal care/cosmetic products
for consumers using Hydron polymers and can use its patented technology as a
topical drug delivery system.
The Company has entered into a license agreement with National Patent
Development Corp. ("National Patent"), which provides for reciprocal royalty
payments based on the sale of certain of each party's products. The Company
intends to continue to explore the efficacy of using its technology as a topical
drug delivery system and would, when appropriate, either seek licensing
arrangements with third parties, or develop and market proprietary products
through its own efforts.
Hydron products had been marketed on QVC through regularly scheduled hour-long
programs from April 1994 through May 1999 under licensing agreement. The Company
continues to sell certain products to QVC, on a non-exclusive basis, so that QVC
can resell these products to their customers who had previously purchased the
products and wish to re-order Hydron products.
Effective September 1, 1999, the Company entered into a marketing and
distribution agreement (the "Home Shopping Agreement") with HSN that grants HSN
an 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 HSN a non-exclusive license to market Hydron
products through all other methods of distribution in certain countries outside
the United States.
Hydron products have been marketed on HSN through regularly scheduled hour-long
programs since September 1999. The hour-long live broadcasts generally feature
most currently available products, which are sold individually or in collections
(packaging of products in various combinations). Hydron products have since been
featured regularly on HSN's television network and are expected to continue to
air regularly.
Under the terms of the Home Shopping Agreement, HSN is required to make
specified product purchases during the period ending 12 months following the
date on which the products first aired on HSN's television programs (the
"Initial Term"). Should HSN exceed a certain threshold amount in retail sales of
Hydron products to consumers during the Initial Term, it is required to make
specified product purchases during the second 12 months following the date of
the first airing. 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 HSN's achieving certain escalating threshold levels in
product
10
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Business (continued)
purchases. However, beginning in the third contract year, HSN will no longer be
required to meet specified product purchases, except to maintain exclusivity.
In February 2000, HSN management asked the Company to replace Mr. Tauman as
on-air spokesperson for the Hydron line as per the Home Shopping Agreement. The
Company subsequently re-hired Ms. Lauren Anderson as spokesperson. Ms. Anderson
has previously represented the Company as spokesperson at QVC.
In addition to selling Hydron products on-air, HSN provides 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 shared equally by HSN and the
Company.
In November 1996, the Company opened a new channel of distribution for Hydron
products with the launch of its proprietary Catalog. This full color Catalog
offers the Company's personal care products for sale directly to consumers. The
Catalog also provides information on new Hydron products, educates consumers on
proper skin and hair care and facilitates re-ordering. The Company is currently
exploring new ways to enhance Catalog sales and operations.
The majority of Hydron products are sold in connection with on-air marketing.
Although Management believes that there are other avenues for selling the
Company's products, including the Hydron Catalog, the loss of HSN as a customer
would have a material adverse effect on the Company's business. The Company has
not decided what actions, if any, it plans to take under such circumstances.
Results of Operations
Net sales for the three months ended March 31, 2000 increased $86,308 to
$672,390, or 15%, from net sales of $586,082 for the three months ended March
31, 1999. Catalog net sales for the three months ended March 31, 2000 were
$229,581; an increase of $56,744, or 33%, from catalog net sales of $172,837 for
the three months ended March 31, 1999. The increase in catalog net sales was the
result of a managed increase in catalog consumer promotion against the Company's
in-house customer list. Non-catalog net sales, including all sales to HSN and
QVC, for the three months ended March 31, 2000 were $442,809; an increase of
$29,564, or 7%, from $413,245 for the three months ended March 31, 1999. The
increase in 2000 was due to the selling efforts of two television networks
including HSN sales of $276,160 and sales to QVC of $166,649.
Approximately 66% and 71% of the Company's sales during the three months ended
March 31, 2000 and 1999, respectively, were to electronic retailers. HSN
represented 41% of the Company's net sales while QVC represented 25% of net
sales for the quarter. Management anticipates that sales to HSN will grow to be
a larger percentage of the Company's sales and, absent the consummation of
marketing or distribution arrangements with third parties other than HSN, the
Company's dependence upon direct response television as a distribution channel
will remain significant. Any disruption in the Company's
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Results of Operations (continued)
relationship with HSN 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 was 68% for the three months ended
March 31, 2000 and for the three months ended March 31, 1999. The gross profit
margins on non-catalog sales were 61% and 62% for the three months ended March
31, 2000 and 1999, respectively. The increase in non-catalog gross profit margin
was the result of the mix of products sold to HSN. The gross profit margins on
catalog sales were 84% and 82% for the three months ended March 31, 2000 and
1999, respectively. The increase in catalog related gross profit margin relates
primarily to a shift in product mix.
Royalty expenses for the three months ended March 31, 2000 were $33,953,
representing a decrease of $1,785, or 5%, from royalty expenses of $35,738 for
the three months ended March 31, 1999. This decrease is commensurate with a
shift in product mix. These expenses are related primarily to the Patent
Agreement with National Patent and pertain to the use of the Hydron polymers as
a formula ingredient for many of the Company's products.
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 in the first quarter of
Fiscal 2000 were $18,150, a decrease of $86,301, or 83%, from R&D expenses of
$104,451 in the first quarter of Fiscal 1999. The amount of R&D expenses per
year varies, depending on the nature of the development work during each year,
as well as the number and type of products under development at such time.
Selling, general and administrative ("SG&A") expenses for the three months ended
March 31, 2000 were $447,301, a decrease of $170,790, or 28%, from SG&A expenses
of $618,091 for the three months ended March 31, 1999. The decrease in SG&A
expenses was the result primarily of reduction of payroll and related expenses
and reduced legal expenses.
Interest and investment income for the three months ended March 31, 2000 was
$6,176; a decrease of $17,665, or 74%, from interest and investment income of
$23,841 for the three months ended March 31, 1999. This decrease is due
primarily to lower cash balances as a result of the factors discussed above. The
Company maintains a conservative investment strategy, deriving investment income
primarily from U.S. Treasury securities.
The net loss for the three months ended March 31, 2000 was $148,454, as compared
to a loss of $454,206 for the three months ended March 31, 1999. This decrease
in net loss was the result primarily of the factors discussed above.
12
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Liquidity and Financial Resources
The Company's working capital was approximately $1,493,800 at March 31, 2000,
including cash and cash equivalents of approximately $459,500.
There were no investing activities during the three months ended March 31, 2000.
There were no financing activities during the three months ended March 31, 2000.
The Company has incurred significant losses over the past four years. The
ability of the Company to continue, as a going concern is dependent on
increasing sales and reducing operating expenses.
Management's plan to increase sales and reduce operating expenses
includes several specific actions. Catalog sales will be emphasized since they
have higher profit margins and represent markets that are growing more rapidly
than the Company's traditional television market. Direct marketing techniques
will be used to reach new and current consumers such as promotions mailed to
targeted consumers, Web site specials, promotions to other Web site customers,
and direct e-mail promotions to current customers.
Inventory write downs and contract settlements of $1,414,461 and
$1,069,967 were incurred in the years ended December 31, 1999 and 1998,
respectively. Steps have been taken to prevent these types of charges in the
future. In addition, annual operating expenses have been reduced an estimated
$700,000 by reducing payroll cost, warehouse cost, consulting fees, legal fees,
and insurance premiums.
Based on the above plan and 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 payment terms in connection with sales to HSN,
management does not anticipate any difficulty in financing foreseeable inventory
requirements.
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 HSN, QVC and
the Infomercial Partnership) 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.
13
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Cautionary Statement Regarding Forward Looking Statements
The statements contained in this Report on Form 10-Q that are not purely
historical 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, 1999 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.
Part II- Other Information
Item 1. Legal Proceedings
The Company is not a party to, and its property is not the subject of, any
material pending legal proceedings.
Item 6. Exhibits and Reports on Form 8-K
A - Exhibits - 27.1 - Financial Data Schedule
14
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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/ WILLIAM A. FAGOT
--------------------------
William A. Fagot
Chief Financial Officer
Dated: August 22, 2000
15
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
