UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 2004
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Period from __________ to __________
Commission File Number: 0-6333
HYDRON TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
New York 13-1574215
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2201 West Sample Road, Building 9, Suite 7B
Pompano Beach, FL 33073 (954) 861-6400
(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 10, 2004: 9,260,136
EXPLANATORY NOTE
This Form 10-Q/A (Amendment No. 1) amends Part I, Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004,
originally filed by Hydron Technologies, Inc. on November 10, 2004. The effect
of the amendment is to include a discussion of start up costs for Hydron Royalty
Partners, LLLP and minority interest in net loss that were inadvertently omitted
in Management's Discussion in the original filing. The financial statements are
properly reported but Management's Discussion had not been updated.
TABLE OF CONTENTS PAGE
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 3
Condensed Consolidated Statement of Operations
Three months and nine months ended
September 30, 2004 and 2003 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 4. Control and Procedures 16
Part II. Other Information
Exhibits and Reports on Form 8-K. 17
Signatures 18
Certification of Chief Officers Pursuant to Section 19
302 of the Sarbanes-Oxley Act of 2002 and Item 307
of Regulation S-K
Certification Pursuant to 18 U.S.C, Section 1350, as 22
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
2
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2004 December 31, 2003
(Unaudited) (Note)
------------------ -------------------
ASSETS
Current Assets
Cash and cash equivalents $ 559,704 $ 964,723
Trade accounts receivable 937 10,191
Inventories 525,855 520,032
Prepaid expenses and other current assets 44,447 34,422
------------------ -------------------
Total current assets 1,130,943 1,529,368
Property and equipment, less accumulated
depreciation of $207,511 and $204,361 at
2004 and 2003, respectively 14,491 17,641
Deposits 19,588 19,587
Deferred product costs, less accumulated
amortization of $155,686 and $133,186 at
2004 and 2003, respectively 158,730 176,491
------------------ -------------------
Total Assets $1,323,752 $ 1,743,087
================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 72,693 $ 42,229
Loans payable 1,837 4,803
Royalties payable 26,837 127,437
Deferred revenues 93,813 165,164
Accrued liabilities 261,145 234,954
------------------ -------------------
Total current liabilities 456,325 574,587
Commitments and contingencies - -
Minority interest in consolidated partnership 284,552 -
Shareholders' equity
Preferred stock - $.01 par value; 5,000,000 shares
authorized; no shares issued or outstanding - -
Common stock - $.01 par value
30,000,000 shares authorized; 9,320,336 shares
issued; and 9,260,136 shares outstanding
at 2004 and 2003, respectively 93,203 93,203
Additional paid-in capital 21,086,237 21,086,237
Accumulated deficit (20,157,407) (19,571,782)
Treasury stock, at cost; 60,200 shares (439,158) (439,158)
------------------ -------------------
Total shareholders' equity 582,875 1,168,500
------------------ -------------------
Total liabilities and shareholders' equity $1,323,752 $ 1,743,087
================== ===================
Note: The balance sheet at December 31, 2003 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 ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30, Nine months ended September
2004 2003 2004 2003
---------------- ---------------- ----------------- -----------------
(Note) (Note)
Net Sales $ 200,975 $ 324,705 $ 923,204 $ 959,922
Cost of sales 75,324 113,597 378,776 350,550
---------------- ---------------- ----------------- -----------------
Gross profits 125,651 211,108 544,428 609,372
Expenses
Royalty expense 4,565 - 27,384 -
Research and development 46,946 26,940 168,389 71,886
Selling, general & administration 318,666 297,377 926,681 917,153
Depreciation & amortization 8,550 49,770 25,650 149,310
---------------- ---------------- ----------------- -----------------
Total expenses 378,727 374,087 1,148,104 1,138,349
---------------- ---------------- ----------------- -----------------
Operating loss (253,076) (162,979) (603,676) (528,977)
Interest income - net of interest expense 942 (593) 2,604 18
---------------- ---------------- ----------------- -----------------
Loss before income taxes
and minority interest (252,134) (163,572) (601,072) (528,959)
Minority interest in net loss 15,448 - 15,448 -
Income taxes expense - - - -
---------------- ---------------- ----------------- -----------------
Net loss $ (236,686) $ (163,572) $ (585,624) $ (528,959)
================ ================ ================= =================
Basic and diluted loss per share $ (0.03) $ (0.02) $ (0.06) $ (0.08)
================ ================ ================= =================
Weighted average shares
outstanding (basic and diluted) 9,260,136 7,050,136 9,260,136 7,050,136
================ ================ ================= =================
Note: Shipping and handling billings and costs have been reclassified from
Selling, general, & administrative to Net sales and Cost of sales,
respectively. These reclassifications have no effect on reported Net
income.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4
HYDRON TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30,
2004 2003
--------------- ---------------
Operating Activities
Net Loss $ (585,624) $ (528,959)
Adjustments to reconcile net loss to
net cash used by operating activities
Depreciation and amortization 25,650 149,310
Change in operating assets and liabilities
Trade accounts receivables 9,254 1,690
Inventories (5,822) 88,571
Prepaid expenses and other current assets (10,025) 5,215
Deposits - 1,228
Accounts payable 30,464 (45,604)
Royalties payable (100,600) -
Deferred revenues (71,351) 58,903
Accrued liabilities 26,189 48,892
--------------- ---------------
Net cash used in operating activities (681,867) (220,754)
Investing activities
Capital Expenditures, net - (13,480)
Deferred product costs (4,739) (36,507)
--------------- ---------------
Net cash used in investing activities (4,739) (49,987)
Financing activities
Net cash used for repayment of loans payable (2,966) 205,702
Change in amount due minority interest 284,552 -
Additional Paid in capital - -
--------------- ---------------
Net cash provided from financing activities 281,586 205,702
--------------- ---------------
Net decrease in cash and cash equivalents (405,019) (65,039)
Cash and cash equivalents at beginning of period 964,723 291,136
--------------- ---------------
Cash and cash equivalents at end of period $ 559,704 $ 226,097
=============== ===============
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5
HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED 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 adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. 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, 2003.
The consolidated financial statements include the accounts of Hydron
Technologies, Inc. and a majority owned limited liability limited partnership,
Hydron Royalty Partners, LLLP. Hydron Royalty Partners, LLLP (the "Partners")
was established in August 2004 by Hydron, the general partner, and ten limited
partners for the purpose of paying outstanding and up to $30,000 annually of
future royalties and licensing obligations in return for royalty and licensing
payments due from Valera Pharmaceuticals, Inc. The establishment of Partners
allowed Hydron to meet its current and future royalty obligations and retain the
possibility of a significant royalty income stream opportunity. All appropriate
inter-company transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires Management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE B - INVENTORIES
Inventories consist of the following:
September 30, December 31,
2004 2003
------------- ------------
Finished goods $ 106,435 $ 90,443
Raw materials and components 419,420 429,589
------------- ------------
$ 525,855 $ 520,032
============= ============
6
HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE C - DISTRIBUTION
The majority of the Company's products are currently sold in the United
States through Hydron's direct marketing channels (proprietary Catalog and the
World Wide Web site). The Company also sells its products to private label
customers and, to a lesser extent, television retailers and internationally
through salons and doctors' offices.
NOTE D - EARNINGS PER SHARE
Effective January 1, 2004, the Company granted options to purchase
100,000 shares of common stock for $.659 to consultants. These options vest over
12 months.
Options and warrants to purchase 5,577,500 shares of common stock were
outstanding at September 30, 2004, but were not included in the computation of
diluted earnings per share because the effect would be anti-dilutive. The
outstanding options and warrants include 1,015,000 options the Board of
Directors has approved, subject to the approval of a stock option plan amendment
at the next shareholders' meeting on November 15, 2004.
There were no options granted to employees during the three months
ended September 30, 2004 that would require adjustments to the pro forma
information regarding net income and earnings per share required by FASB
Statement No. 123, and it is unchanged from that reflected in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities represent expenses that apply to the reported period and
have not been billed by the provider or paid by the Company. Accrued liabilities
consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------- ------------
Dividends payable $ 83,163 $ 83,163
Director fees payable 76,015 65,012
Professional fees 35,356 24,712
Other 66,611 62,067
------------- ------------
$ 261,145 $ 234,954
============= ============
7
HYDRON TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE F - GOING CONCERN
The accompanying condensed consolidated financial statements were
prepared assuming that the Company will continue as a going concern. This basis
of accounting contemplates the recovery of the Company's assets and the
satisfaction of its liabilities in the normal course of operations. The
Company's ultimate ability to attain profitable operations is dependent upon
obtaining additional financing or achieving a level of sales adequate to support
its cost structure.
Accordingly, there are no assurances that the Company will be
successful in achieving the above plans, or that such plans, if consummated,
will enable the Company to obtain profitable operations or continue as a going
concern.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BUSINESS
Hydron Technologies, Inc. continues to shift its primary focus to
conducting research and development into products and medical applications
utilizing its patented tissue oxygenation technology. In November 2003, Hydron
received a US patent for its method of oxygenating skin and tissue topically,
using microbubbles of pure oxygen averaging one micron in diameter, suspended in
fluid. The super-oxygenation technology delivers pure oxygen through the skin to
tissue depths considered therapeutic for wound healing and the maintenance of
tissue viability. A topically applied oxygenated skin treatment could have
numerous applications in wound healing and anti-aging skincare treatments.
Research and development efforts to date have included clinical
testing, in-vitro bacteriological testing, micro-bubble size analysis, packaging
prototypes, and stability testing. Following its successful pre-clinical test at
the University of Massachusetts Medical School, Department of Thoracic Surgery,
the Company commissioned a clinical test on healthy human subjects. This
clinical test produced an average increase in subcutaneous tissue oxygenation of
54%. Management believes that these tests provided the first-ever evidence that
subcutaneous tissue could be oxygenated from the outside in.
On November 14, 2003, Hydron completed a non-brokered private placement
to accredited investors, raising $1.1 million, to accelerate its research and
development program surrounding this oxygenation technology. The Company has
also added expert clinical and regulatory consultants and is pursuing approval
from the FDA to allow the use of its oxygenation technology for a number of
medical applications.
In October 2004, the Company received notice from the FDA that Hydron's
MicrO2 Oxygenation Apparatus is a device that will be reviewed and regulated by
the Center for Devices and Radiological Health under the medical device
provisions of the Federal Food, Drug, and Cosmetic Act. Hydron's MicrO2
Oxygenation Apparatus is a device intended to produce oxygenated water infused
with micro-bubbles to use in topical oxygen therapy. The device would be used at
the patient bedside or doctor's office to enhance wound healing. Further, the
device is intended for adjunctive therapy (rather than sole treatment) for
wounds such as skin ulcerations due to diabetes, venous stumps, post surgical
infections and gangrenous lesions, decubitus ulcers, infected amputation stumps,
skin grafts, burns, and frostbite.
The Company also markets a broad range of consumer and oral health care
products using a moisture-attracting ingredient (the "Hydron(R) polymer"), and a
topical delivery system for active ingredients including pharmaceuticals. 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. Additional patents
have been applied for relating to a self-adjusting pH formulation for skincare
and acne. The Company is developing other personal care/cosmetic products for
consumers using its patented technology and would, when appropriate, seek
licensing arrangements with third parties, or develop and market proprietary
products through its own efforts.
In August 2004, Hydron Technologies, Inc. (Hydron), as general partner,
formed Hydron Royalty Partners, LLLP (Partners) a Limited Liability Limited
Partnership for the purpose of funding
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
existing royalty obligations and a portion of future royalty obligations in
consideration of sharing future royalty income that may arise from Hydron's
agreement with Valera Pharmaceuticals, Inc. (Valera). Partners has completed a
non-brokered private placement of Limited Partnership Interest to ten accredited
investors including Hydron's Chairman, Richard Banakus and a Hydron Director,
Ronald J. Saul. Each limited partner invested $30,000 or an aggregate of
$300,000 for a 49.999% interest of Partners. The establishment of the Partners
allowed Hydron to meet its current and future royalty obligations and retain the
possibility of a significant royalty income stream opportunity.
RESULTS OF OPERATIONS
Total net sales for the three months ended September 30, 2004 were
$200,975, a decrease of $123,730 or 38.1% from net sales of $324,705 for the
three months ended September 30, 2003. Skin care products net sales for the
three months ended September 30, 2004 were $172,954, a decrease of $116,885 or
40.3% from sales of $289,839 for the three months ended September 30, 2003.
Professional products net sales for the three months ended September 30, 2004
were $3,194, a decrease of $186 or 5.5% from sales of $3,380 for the three
months ended September 30, 2003. Shipping and handling revenues for the three
months ended September 30, 2004 were $24,826, a decrease of $4,456 or 15.2% from
shipping and handling revenues of $29,282 in the three months ended September
30, 2003.
For the nine months ended September 30, 2004, total net sales were
$923,204, a decrease of $36,718 or 3.8% from net sales of $959,922 for the nine
months ended September 30, 2003. Skin care products net sales for the nine
months ended September 30, 2004 were $828,169, a decrease of $18,178 or 2.1%
from sales of $846,347 for the nine months ended September 30 2003. Professional
products net sales for the nine months ended September 30, 2004 were $5,368, a
decrease of $2,500 or 31.8% from sales of $7,868 for the nine months ended
September 30, 2003. Shipping and handling revenues for the nine months ended
September 30, 2004 were $87,842, a decrease of $11,439 or 11.5% from shipping
and handling revenues of $99,281 in the nine months ended September 30, 2003.
Skin care products sales consist primarily of catalog sales and private
label sales. During the three months ended September 30, 2004, direct marketing
catalog sales decreased by $70,176 or 29.1% from $241,255 for the three months
ended September 30, 2003 to $171,079. Private label sales for the three months
ended September 30, 2004 were $1,875, a decrease of $19,493 or 91.2% from
private label sales of $21,368 for the same period last year. These sales tend
to fluctuate from quarter to quarter as purchase orders for individual items
cover more than one year's supply. Purchase orders are received only
approximately four to six times a year for the seven items in the line.
For the nine months ended September 30, 2004, direct marketing catalog
sales decreased by $164,876 or 21.1% from $781,638 last year to $616,762 this
year. Private label sales for the nine months were $211,407, an increase of
$173,914 or 463.9% from private label sales of $37,493 for the same period last
year. As stated above, these private label sales tend to fluctuate significantly
from quarter to quarter.
Historically, over 98% of the Company's products are sold in the United
States. The Company sells skin care products in Australia and dental products in
Spain and Canada. These sales are not material at this time and represented 0.6%
and 1.1% of total net sales for the three months ended September 30, 2004 and
2003, respectively. For the nine months ended September 30, sales outside the
United States represented 0.5% and 0.6% of total sales for 2004 and 2003,
respectively.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Cost of sales was $75,324 for the three months ended September 30,
2004, a decrease of $38,273 or 33.7% from cost of sales of $113,597 for the
three months ended September 30, 2003. Cost of sales was 37.5% of total sales
the three months ended September 30, 2004 compared to 35.0% for the three months
ended September 30, 2003. The cost of sales percentage increased as the
quarterly non-variable costs had to be absorbed by the lower sales level.
Shipping and handling costs for the third quarter of 2004 were $29,806, a
decrease of $6,419 or 17.7% from shipping and handling costs of $36,225 for the
same period in 2003. This decrease reflects the decline in catalog sales.
For the nine months ended September 30, 2004, cost of sales was
$378,776, an increase of $28,226 or 8.1% from cost of sales of $350,550 for the
nine months ended September 30, 2003. Cost of sales was 41.0% of total sales for
the nine months ended September 30, 2004 compared to 36.5% for the nine months
ended September 30, 2003. The increase in cost of sales percentage reflects the
impact of this period's significantly higher private label sales that include
higher product cost (68.4% of sales) versus the product cost of catalog sales
(18.1% of sales). Shipping and handling costs for the nine months were $97,744,
a decrease of $28,200 or 22.4% from shipping and handling costs of $125,944 for
the same period in 2003. This decrease reflects the 21.1% decline in catalog
sales plus savings realized by performing more of the shipping and handling
tasks in house.
The Company's overall gross profit margin decreased to 62.5% of net
sales for the three months ended September 30, 2004 versus 65.0% for the three
months ended September 30, 2003. This is due primarily to the impact of fixed
costs on lower sales levels. For the nine months ended September 30, 2004 the
overall gross profit margin decreased to 59.0% of net sales versus 63.5% for the
same period in 2003. The decrease for the nine months reflects the impact of
significant private label sales that have a lower margin than catalog sales.
Royalty expenses for the three months ended September 30, 2004 were
$4,565. There were no royalty expenses for the first quarter of 2003. For the
nine months ended September 30, 2004, royalty expenses were $27,384. No accrued
royalty expenses were required in 2003 as the definition of applicable products
was changed, creating a surplus accrual during 2003. That surplus has now been
exhausted and the expense reflects the royalties due on sales for the period.
Research and development ("R&D") expenses reflect the Company's efforts
to identify new product opportunities, obtain regulatory approval, 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, 2004 were $46,946, an increase of
$20,006 or 74.3% over R&D expenses of $26,940 for the three months ended
September 30, 2003. This increase is due principally to the Company's R&D work
on its new oxygenation technology. For the nine months ended September 30, 2004,
R&D expenses were $168,389, an increase of $96,503 or 134.2% over R&D expenses
of $71,886 for the same period last year. The amount of R&D expenses per year
will continue to increase as the oxygenation technology moves through the FDA
approval process and the Company expands its research behind this technology.
Selling, general, and administrative ("SG&A") expenses for the three
months ended September 30, 2004 were $318,666, representing an increase of
$21,289 or 7.2% from SG&A expenses of $297,377 for the three months ended
September 30, 2003. Set up costs for Hydron Royalty Partners, LLLP was $19,834,
and printing costs increased $10,226 for the production of annual reports and
proxy statements for the shareholders' meeting in November. These were offset by
lower credit card processing fees and postage. For the nine months ended
September 30, 2004, selling, general, and administrative expenses were $926,681,
an increase of $9,528 or 1.0% from $917,153 for the same period last year.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Depreciation and amortization expense was $8,550 for the three months
ended September 30, 2004, a decrease of $41,220 or 82.8% from $49,770 for the
three months ended September 30, 2003. For the nine months ended September 30,
2004 depreciation and amortization was $25,650, a decrease of $123,660 or 82.8%
from $149,310 for the same period last year. The decrease was due primarily to
intangible assets becoming fully amortized by mid-2003. Fully amortized
intangible assets of $5,370,000 were written off in 2003.
Net interest income was $942 for the three months ended September 30,
2004 compared to net interest expense of $593 for the three months ended
September 30, 2003. The Company maintains a conservative investment strategy
with respect to its cash balances, deriving investment income primarily from
U.S. Treasury securities.
Minority interest in net loss was $15,448 for the three and nine months
ended September 30, 2004 and represents the minority partners' share of the
operating loss of Hydron Royalty Partners, LLLP, which has been consolidated
with Hydron Technologies, Inc. The partnership was established in August 2004,
so there is no similar item included in last year's results.
The Company had a net loss of $236,686, representing an increase of
$73,114 or 45.7% for the three months ended September 30, 2004 from the net loss
of $163,572 for the three months ended September 30, 2003, a result primarily of
the factors discussed above.
For the nine months ended September 30, 2004, the Company had a net
loss of $585,624, an increase of $56,665 or 10.7% from net loss of $528,959 for
the nine months ended September 30, 2003. The increase in the net loss is a
result primarily of the factors discussed above.
LIQUIDITY AND FINANCIAL RESOURCES
The Company anticipates that present working capital balances and
internally generated funds will not be sufficient to meet its working capital
needs for the next twelve months. The development of the Company's oxygenation
technology will depend on its ability to raise capital on commercially
reasonable terms. The Company's working capital was approximately $674,618 as of
September 30, 2004, including cash and cash equivalents of approximately
$559,704. Cash used by operating activities for the nine months ended September
30, 2004 was $677,479. Net funds used for investing activities were $24,574 and
financing activities provided $297,034 for the nine months ended September 30,
2004.
The Company does not have any material debt, long-term capital leases,
or long-term operating leases. The lease on the current office facility expires
August 31, 2005. There are no long-term capital expenditures under construction
and no long-term commitments other than royalty payments under an agreement with
GP Strategies Corporation (See note 5 to the Financial Statements included in
the Company's Form 10-K dated December 31, 2003). The Company does not have any
lines of credit. There are no purchase order commitments that exceed 90 days.
The Company completed a non-brokered private placement of 1,750,000
Units at $.20 per Unit ($350,000), on December 10, 2002 to several accredited
investors. Each Unit is comprised of one share of common stock and one
three-year option to buy one additional common share at $.20. As of December 31,
2003 all 1,750,000 options are outstanding.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
On November 14, 2003, the Company completed a non-brokered private
placement of 2,210,000 Units at $.50 per Unit ($1,105,000) to accredited
investors. Each Unit is comprised of one share of Common Stock and one five-year
warrant to buy one additional common share at $1.00. As of December 31, 2003,
all 2,210,000 warrants are outstanding.
The Company has registered these outstanding shares and the 4,581,500
underlying shares of outstanding warrants and options with the Securities and
Exchange Commission as required by the November 14, 2003 private placement
agreement. The warrants/options are a future source of capital for the Company
and could generate up to $2,560,000 if they are exercised.
Hydron Royalty Partners, LLLP (the "Partners") was established in
August, 2004 by Hydron, the general partner, and ten limited partners for the
purpose of paying outstanding and up to $30,000 annually of future royalty and
licensing obligations in return for royalty and licensing payments revenues
possibly due from Valera Pharmaceuticals, Inc. The establishment of Partners
allowed Hydron to meet its current and future royalty obligations and retain the
possibility of a significant royalty income stream opportunity.
The Company's independent accountants issued a "going concern" opinion
since the Company has incurred significant losses over the past five years and
generates a negative cash flow on a monthly basis. The ability of the Company to
continue as a going concern is dependent upon increasing sales, managing
operating expenses, and obtaining additional equity financing.
Management's plan includes the following elements:
o Obtaining FDA approval of the Company's oxygenation technology in
marketing segments which are attractive to today's investor;
o Expanding the product line of existing private label customers, thus
leveraging the Hydron polymer technology across multiple product lines;
o Effectively applying the Company's existing resources to achieve
objectives that will attract the interest of new investors and
strategic partners;
o Advancing the oxygenation technology in the medical segment so as to
stimulate the interest of investors and strategic partners;
o Entering into joint ventures with strategic partners that can provide
complimentary products, distribution, and manufacturing capabilities;
o Developing new skin care products for new private label customers
utilizing Hydron's proprietary expertise to expand our product base;
o Licensing proprietary and possibly patentable technologies, including
skin and tissue oxygenation, and the self-adjusting pH system for skin
care and acne ingredient delivery, where appropriate to third party
companies;
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
o Continuing emphasis on catalog sales, including sales made over the
internet, since these sales have higher profit margins;
o Increasing use of direct marketing techniques to reach new and current
consumers, such as print promotions mailed to targeted consumers, Web
site specials, promotions to other Web site customers, and direct
E-mail promotions to new customers;
o Adding new international distribution revenue streams through expanded
use of distribution agreements with foreign and international
distributors;
o Developing, acquiring, and marketing new product lines based on
proprietary technologies that appeal to aging baby boomers as well as
to a younger generation;
o Continuing to develop proprietary technology that the Company believes
will improve its long-term success in the skin care business, such as
the acne ingredient delivery system. The Company's super-oxygenated
fluid and composition technology should facilitate significant advances
in skin care products and open application and licensing opportunities
beyond the skin care category;
o Entering into marketing, licensing, and distribution agreements with
third parties, which have greater financial and distribution resources
than those of the Company and that can enhance the Company's product
introductions with appropriate national marketing support programs.
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.
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, including, without
limitation, its plans regarding distribution and marketing of its products and
the development, acquisition, and marketing of new products. 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."
Each forward-looking statement reflects the Company's current view of
future events and is subject to risks, uncertainties, and other factors that
could cause actual results to differ materially from any results expressed or
implied by its forward-looking statements. Important factors that could cause
actual results to differ materially from the results expressed or implied by any
forward-looking statements include:
o The volatility of the price of the Company's common stock;
o The Company's ability to fund future growth;
o The Company's ability to be profitable;
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
o The Company's ability to attract and retain qualified personnel;
o General economic conditions in the medical and cosmetic markets;
o Market demand for and acceptance of the Company's products;
o Legal claims against the Company, including, but not limited to claims
of patent infringement;
o The Company's ability to protect its intellectual property;
o Defects in the Company's products;
o The Company's obligation to indemnify certain customers;
o The Company's dependence on contract manufacturers and suppliers;
o The Company's dependence on a small number of customers for private
label revenue;
o The Company's ability to develop and maintain relationships with key
vendors;
o New regulations and legislation;
o General economic and business conditions;
o Other risks and uncertainties disclosed in the Company's Annual Report
on Form 10-K for the year ended December 31, 2003 and in the Company's
other filings with the SEC.
All subsequent forward-looking statements relating to the matters
described in this document and attributable to the Company or to persons acting
on its behalf are expressly qualified in their entirety by such factors. The
Company has no obligation to publicly update or revise these forward-looking
statements to reflect new information, future events, or otherwise, except as
required by applicable federal securities laws, and the Company cautions you not
to place undue reliance on these forward-looking statements.
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ITEM 4. CONTROLS AND PROCEDURES
As of the end of this period, the Company carried out an evaluation,
under the supervision and with the participation of Management, including its
Chief Operating Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Operating
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective to timely alert them to material
information required to be included in the Company's Securities Exchange Act of
1934 filings.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal controls
subsequent to the date that the Company carried out its evaluation.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Item 307 of Regulation S-K
(filed herewith).
31.2 Certification of Chief Operating Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Item 307 of Regulation S-K
(filed herewith).
31.3 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 and Item 307 of Regulation S-K
(filed herewith).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C., Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32.2 Certification of Chief Operating Officer Pursuant to 18 U.S.C., Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32.3 Certification of Chief Financial Officer Pursuant to 18 U.S.C., Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
(b) Reports on Form 8-K:
On October 1, 2004 the Company filed a report on Form 8-K in connection
with the establishment of Hydron Royalty Partners, LLLP, a limited
liability limited partnership, for the purpose of funding existing
royalty obligations.
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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.
/s/: William A. Lauby
---------------------
William A. Lauby
Chief Financial Officer and
Principal Accounting Officer
Dated: November 10, 2004
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