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, 2002
or
/ / Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the Period from to
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Commission File Number: 0-6333
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HYDRON TECHNOLOGIES, INC.
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(Exact name of Registrant as specified in its charter)
New York 13-1574215
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2201 West Sample Road, Building 9, Suite 7B
Pompano Beach, FL 33073 (954) 861-6400
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(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 March 31, 2002:
4,975,136
HYDRON TECHNOLOGIES, INC.
Index
Part I. Financial Information
-----------------------------
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets -- March 31, 2002 and December 31, 2001
Condensed Statements of Operations -- Three months ended March 31, 2002 and
2001
Condensed Statements of Cash Flows -- Three months ended March 31, 2002 and
2001
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
--------------------------
Exhibits and Reports on Form 8-K.
Signatures
2
HYDRON TECHNOLOGIES, INC.
Condensed Balance Sheets
March 31, 2002 December 31, 2001
(Unaudited) (Note)
------------------- -------------------
ASSETS
------
Current assets
Cash and cash equivalents $ 171,078 $ 167,067
Trade accounts receivable 45,484 61,444
Inventories 1,114,577 1,164,297
Prepaid expenses and other current assets 23,377 43,450
------------------- -------------------
Total current assets 1,354,516 1,436,258
Property and equipment, less accumulated
depreciation of $537,533 and $534,533 at
2002 and 2001, respectively 24,374 27,374
Deposits 28,389 28,203
Deferred product costs, less accumulated
amortization of $5,554,021 and $5,482,021 at
2002 and 2001, respectively 472,347 544,347
------------------- -------------------
Total assets $ 1,879,626 $ 2,036,182
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable $ 178,599 $ 116,559
Deferred revenues 141,111 148,646
Accrued liabilities 371,429 388,033
------------------- -------------------
Total current liabilities 691,139 653,238
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
Preferred stock - $.01 par value
5,000,000 shares authorized; no shares issued
or outstanding - -
Additional paid-in capital 19,501,837 19,501,837
Accumulated deficit (17,924,545) (17,730,088)
Treasury stock, at cost; 60,200 shares (439,158) (439,158)
------------------- -------------------
Total shareholders' equity 1,188,487 1,382,944
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Total liabilities and shareholders' equity $ 1,879,626 $ 2,036,182
=================== ===================
Note: The balance sheet at December 31, 2001 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 financial statements.
3
HYDRON TECHNOLOGIES, INC.
Condensed Statements of Operations
(Unaudited)
Three months ended March 31
2002 2001
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Net Sales $ 380,257 $ 329,693
Cost of sales 85,581 55,607
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Gross profits 294,676 274,086
Expenses:
Royalty expense 19,086 16,485
Research and development 17,877 15,379
Selling, general & administration 377,469 364,599
Depreciation & amortization 75,000 99,600
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Total expenses 489,432 496,063
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Operating loss (194,756) (221,977)
Interest income 297 1,814
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Loss before income taxes (194,459) (220,163)
Income taxes expense - -
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Net loss $ (194,459) $ (220,163)
=================== ===================
Basic and diluted loss per share:
Net loss per common share $ (0.04) $ (0.04)
=================== ===================
Weighted average shares:
Outstanding (basic and diluted) 4,975,136 4,975,136
=================== ===================
See notes to condensed financial statements.
4
HYDRON TECHNOLOGIES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three months ended March 31
2002 2001
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Operating Activities
Net Loss $ (194,459) $ (220,163)
Adjustments to reconcile net loss to
Net Cash provided by operating activities
Depreciation and amortization 75,000 99,600
Change in operating assets and liabilities
Trade accounts receivables 15,960 122,555
Inventories 49,720 45,051
Prepaid expenses and other current assets 20,073 15,383
Deposits (187) 2,998
Accounts payable 62,040 (90,895)
Deferred revenues (7,535) -
Accrued liabilities (16,601) (32,521)
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Net cash provided (used) by operating activities 4,011 (57,992)
Investing activities
Net cash provided (used) by investing activities - -
Financing activities
Net cash provided (used) by financing activities - -
------------------- -------------------
Net increase (decrease) in cash and cash equivalents 4,011 (57,992)
Cash and cash equivalents at beginning of period 167,067 190,946
------------------- -------------------
Cash and cash equivalents at end of period $ 171,078 $ 132,954
=================== ===================
See notes to condensed financial statements.
5
HYDRON TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note A -- Basis of Presentation
The accompanying unaudited 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, 2002 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2002. For further information,
refer to the financial statements and footnotes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Note B - Inventories
Inventories consist of the following:
March 31, December 31,
2002 2001
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Finished goods $ 481,876 $ 543,880
Raw material and components 632,701 620,417
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$ 1,114,577 $ 1,164,297
============ ============
Note C - Distribution
The majority of the Company's products are currently sold in the United States
through Hydron direct marketing channels (proprietary Catalog and the World Wide
Web site). The Company also sells its products to private label customers,
television retailers and, to a lesser extent, internationally through salons and
doctors offices.
While in prior years television retail was the primary focus for the marketing
and distribution of the Company's products, Management believes that the
Company's exclusive agreements with television retailers had limited the
marketing opportunities to build its business through additional sales channels.
Under exclusive contracts with television retailers the Company neither
controlled its airtime nor the selling priorities of those television retailers,
effectively handicapping the Company's ability to influence sales trends.
The Company began diversifying away from television retailers in 2001 with
continued focus on developing the Catalog business and the addition of a private
label customer to provide additional cash flow. Further, the Company has been
pursuing new international distribution and new products that would
significantly augment Hydron's direct marketing efforts. This development
includes filing a patent in February 2002 on new acne formulas that provide
marked performance improvements versus other over-the-counter products currently
on the market.
6
HYDRON TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note C - Distribution (continued)
- Catalog Sales
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 products, educates consumers on proper
skin care and facilitates consumer re-ordering. The Company sells its products
on the World Wide Web and regularly transmits E-mail broadcasts to its customer
base. Catalog sales represented approximately 60% of Hydron's total annual sales
in 2001. The Company is continuing to explore new ways to enhance Catalog sales
and operations.
- Private Label Contracting
Effective March 1, 2001, the Company entered into an agreement with Reliv
International, Inc ("Reliv") to develop and manufacture a line of private label
skin care products under their brand name, ReversAge(R). Five products were
introduced in August 2001 at a national sales meeting to Reliv's multitier
marketing distribution network. The agreement requires minimum product purchases
and advance payments to cover packaging and design costs. Reliv is a public
company traded on NASDAQ (symbol RELV). Private label sales represented
approximately 20% of Hydron's total annual sales in 2001.
- Direct Response Television
Sales of the Company's products to television retailers once were central to the
Company's marketing and distribution strategy. However, such sales have declined
dramatically in recent years. With the termination of the Company's agreement
with HSN in September 2001, sales to television retailers have been reduced to
limited sales made to QVC on a non-exclusive basis. Sales to television
retailers accounted for approximately 18%, 50%, 68%, 79%, and 82% of the
Company's total sales for 2001, 2000, 1999, 1998, and 1997, respectively.
In March, the Company reached a settlement agreement with HSN relative to prior
year's purchase commitments. As a result, Hydron will be able to market directly
to HSN customers who purchased Hydron Products in the past, all of Hydron's
products in HSN's inventory will be returned and callers asking for Hydron
products will be referred to Hydron's call center.
7
HYDRON TECHNOLOGIES, INC.
Notes to Condensed Financial Statements
(Unaudited)
Note C - Distribution (continued)
- International
In 1996, the Company signed an agreement for conventional retail sales with
Doctors Formula Pty. Ltd., an Australia-based health and beauty products
distributor, to market Hydron products in retail salon stores and medical
offices in Australia and New Zealand.
The Company entered into a distribution agreement with a distributor in Taiwan
in April 2001. The first shipment to Taiwan was in May 2001. The Company also
distributes dental products into Spain and, to a lesser extent, other countries.
Although this category is not significant at this time, Management is committed
to the expansion of international sales and believes that international sales
represent one of the foundations for the future growth of the Company.
Note D - Earnings Per Share
Options and warrants to purchase 206,500 shares of common stock were outstanding
at December 31, 2001, 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.
The Board of Directors has approved the issuance of an additional 402,500
options; subject to the approval of a stock option plan amendment at the next
shareholders' meeting. These options have not been reflected; as of December 31,
2001 calculations since there are insufficient options available without the
shareholders actions.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
----------------------------
We have identified the policies outlined below as critical to our business
operations and an understanding of our results of operations. The listing is not
intended to be a comprehensive list of all our accounting policies. In many
cases, the accounting treatment of a particular transaction is specifically
dictated by accounting principles generally accepted in the United States, with
no need for management's judgment in their application. The impact and any
associated risks related to these policies on our business operations is
discussed throughout management's Discussion and Analysis of financial Condition
and results of Operations where such policies affect our reported and expected
financial results. For detailed discussion on the application of these and other
accounting policies, see the Notes to the Financial Statements. Note that our
preparation of the financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of our financial
statements, and the reported amount of assets and liabilities, disclosure of
contingent assets and liabilities at the date of our financial statements, and
the reported amount of revenue and expenses during the reported period. There
can be no assurance that actual results will not differ from those estimates.
Revenue Recognition and Product Warranty
Revenue from product sales is recognized at the time of shipment. Provision is
made in the period of the sale for estimated product returns from the ultimate
end user.
Research and Development
Research and development costs are charged to operations when incurred and are
included in operating expenses.
Advertising
Advertising costs are expensed as incurred and are included in "selling, general
and administrative expenses."
Business
--------
Hydron Technologies, Inc. markets a broad range of consumer and oral health care
products using a moisture-attracting ingredient (the "Hydron(R) polymer"), 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 is developing
other personal care/cosmetic products for consumers using its patented
technology 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 the Hydron polymer have the potential for wide acceptance in
consumer and professional health care markets.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business (continued)
--------------------
The Company has been engaged in the development of various consumer products
using Hydron polymers since 1986. The Company's products are designed to address
concerns about aging, and include Hydron skincare, hair care, bath and body and
sun care. The Company currently has thirty-nine individual products available in
the following product lines: skin care (22 products), hair care (7 products),
bath and body (8 products) and sun care (2 products). These products are also
packaged into collections and sold at a more favorable value than the individual
products sold separately. All of the products are sold directly by the Company
to consumers through the Hydron Catalog and Web site www.hydron.com ("Catalog").
Management believes that the Company's product lines are unique and offer the
following competitive benefits: the moisturizers self-adjust to match the skin's
optimal pH balance soon after they are applied to the skin; they become
water-insoluble on the skin's surface, and unlike all other water-based cremes
and lotions, are not removed by the skin's perspiration or plain water; they are
oxygen-permeable, allowing the skin to breathe; they do not emulsify the skin's
natural moisturizing agents, as do conventional cremes and lotions; and they
attract and hold water, creating a cushion of moisture on the skin's surface
that promotes penetration of other beneficial product ingredients, all while
leaving no greasy after-feel.
The Company's products are dermatologist tested and approved for all skin types.
Products for use around the eye area are also ophthalmologist tested and safe
for contact lens wearers. Most of the Company's moisturizing products are based
on the Company's patented emulsion system, which permits the product ingredients
to deliver their intended benefits over an extended period of time and in a more
efficient manner.
The Company has also developed and currently markets a group of Hydron
polymer-based products for dental professionals under the Hydrocryl(R) brand
name. These include a heat cured material used in the manufacture of dentures,
as well as cold cure kits used in connection with the relining or repairing of
existing Hydrocryl or conventional acrylic dentures that is necessitated by the
continual changes that occur in the tissue structure of the mouth. Management
believes that the hydrophilic, or moisture attracting properties, of these
Hydron polymer-based products give them competitive advantages over conventional
acrylic dentures and denture repair kits, which are not hydrophilic.
Management believes that the Company's patented Hydron emulsion system can
enhance the effectiveness of over-the-counter medications applied to the skin.
The system is designed to deposit a uniform film on the skin's surface and to
have a relatively low affinity for the drug associated with the application.
Management believes that the Hydron system has a number of advantages over
traditional lotions as it promotes hydration of the stratum corneum (the outer
layer of skin), which improves penetration into the skin's pores, and has good
tactility and flexibility. The Company expects to continue to focus research and
development resources on additional Hydron polymer-based products, as well as
other proprietary technology-based products as determined by Management's
assessment of consumer demand.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Business (continued)
--------------------
In 2000, the Company discovered that the Hydron emulsion system also adjusts pH
on the skin to match the pH of the stratum corneum, the skin's surface layer. It
is evident in recent skin research that the pH range of the emulsion system is
essential for contributing to the skin's natural healing process and enzyme
production responsible for rebuilding the skin's lipid barrier.
Hydron filed for patent protection in February 2002 for this revolutionary
delivery system for over-the-counter (OTC) acne drug ingredients. The new system
significantly reduces the harshness and irritation caused by most acne products
currently in the marketplace. The Brand will be developed under the registered
Aclime(R) trademark. The Company is currently finalizing packaging and
evaluating alternative distribution channels for the line, including: direct
marketing, limited retail and infomercials.
The market for acne treatment is growing, particularly among adults who are one
of the primary targets for the Aclime(R) brand. According to current market
research studies, the core acne consumer market is about 25 million consumers.
Up to 47% of adult women experience at least occasional breakouts. Retail sales
of OTC acne treatments account for $380 million in sales and an industry analyst
estimates an additional $300 million is accounted for by direct marketing,
primarily through infomercials. An additional $650 million is spent in the
prescription market in the United States.
The Company is also researching and developing new technology-based and possibly
patentable skin treatment systems that would augment its product line. During
2001, the Company's research and development efforts advanced research into a
skin treatment that may provide anti-aging treatments, wound treatments and
healing enhancement. When appropriate, the Company may license additional
existing technology to fully secure its marketing rights. Research and
development efforts include product formulation, clinical testing, packaging
design and prototypes, extensive product safety and stability testing conducted
by medical professionals, efficacy studies to support product claims, and
consumer research. Charles Fox, a consultant and a former member of the
Company's Board of Directors from September 1997 to October 1998, leads the
Company's research and development efforts. Mr. Fox was formerly director of
product development for Warner Lambert Company's personal products division and
president of the Society of Cosmetic Chemists.
Results of Operations
---------------------
Net sales for the three months ended March 31, 2002 were $380,257; an increase
of $50,564, or 15%, from net sales of $329,693 for the three months ended March
31, 2001. Catalog sales increased by approximately $27,917, or 9%, from $305,684
for the three months ended March 31, 2001 to $333,600 for the three months ended
March 31, 2002. The increase in direct marketing catalog sales resulted
primarily from continuation of promotional offers to existing customers. The
Company has begun testing new direct marketing programs targeted at new
potential customers. Further testing will determine new catalog marketing
programs for future expansion.
Non-catalog net sales, including HSN, QVC, contract sales and international, for
the three months ended March 31, 2002 were $46,656; an increase of $22,647, or
94%, from non-catalog net sales of $24,009 for the three months ended March 31,
2001. The quarterly non-catalog sales increase reflects the shift in
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (continued)
---------------------------------
sales to lower margin private label customers. The Company sold no products to
television retailers during the first quarter 2002 as compared to $24,009 for
the three months ended March 31, 2001.
The Company's overall gross profit margin for the three months ended March 31,
2002 was 78%, as compared to 83% for the three months ended March 31, 2001. The
decrease in gross profit margins for the first quarter reflects a shift in
product mix and the fact that non-catalog sales with lower margins made up a
larger portion of the Company's total sales.
R&D expenses for the three months ended March 31, 2002 were $17,877; an increase
of $2,498, or 16%, from R&D expenses of $15,379 for the three months ended March
31, 2001. 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, 2002 were $377,469; an increase of $12,870, or 4%, from SG&A expenses
of $364,599 for the three months ended March 31, 2001. The increase was
principally due to increased postage, sales commissions and legal expenses.
Interest and investment income for the three months ended March 31, 2002 was
$298, a decrease of $1,516, or 84%, from interest and investment income of
$1,814 for the three months ended March 31, 2001. This decrease is due to lower
cash balances in the 2002 period compared to the 2001 period. 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, 2002 was $194,459, a decrease
of $25,704, or 12%, as compared to a net loss of $220,163 for the three months
ended March 31, 2001. The decrease in the net loss resulted primarily from the
factors discussed above.
Liquidity and Financial Resources
---------------------------------
The Company's working capital was approximately $663,377 at March 31, 2002,
including cash and cash equivalents of approximately $171,078. There were no
investing or financing activities for the three months ended March 31, 2002.
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 continue to 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 new customers.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Liquidity and Financial Resources (continued)
---------------------------------------------
In addition, the Company added a significant Private Label customer of Hydron
based formulas, with a proprietary nutritional complex of additives, that began
ordering in the second quarter, 2001. This customer competes in the multi-Level
Marketing category and has been successful for 13 years.
The Company is also pursuing international distribution agreements that will
expand the company's distribution around the world. Finally, the Company will
continue to develop proprietary technology that it believes will improve its
long-term success in this category.
As noted in the year end Report of Independent Certified Public Accountants,
dated March 18, 2002, the Company experienced losses from operations in 2001,
2000, and 1999. These matters raise substantial doubt about the Company's
ability to continue as a going concern. There can be no assurances that
Management's Plan will be successful and the Company's actual results could
differ materially. No estimate has been made should Management's plan be
unsuccessful.
The effect of inflation has not been significant upon either the operations or
financial condition of the Company.
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.
13
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Current report on Form 8-K
None.
14
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: May 14, 2002
15