UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the year ended December 31, 2005 or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ________ to ________.
Commission file Number 0-6333
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
incorporation or organization) Identification No.)
4400 34TH STREET NORTH, SUITE F, ST. PETERSBURG, FL 33714
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (727) 342-5050
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of Class)
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 [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
other amendment to this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company
accelerated filer (as defined in Exchange Act Rule 12b-2). YES [_] NO [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was $3,713,443 based upon the closing price of $0.53 on April 17,
2006.
Number of shares of Common Stock outstanding as of April 17, 2006:
12,201,936.
No documents are incorporated by reference into this Report except those
Exhibits so incorporated as set forth in the Exhibit index.
Transitional Small Business Disclosure Format (Check one): Yes [_]; No [X]
TABLE OF CONTENTS
PART I
Item 1. Business..............................................................3
Item 2. Properties...........................................................11
Item 3. Legal Proceedings....................................................11
Item 4. Submission of Matters to a vote of security holders..................11
PART II
Item 1. Market for common equity and related stockholder matters.............12
Item 2. Management's discussion and analysis or plan or operation............15
Item 3. Other Information....................................................22
Item 4. Consolidated Financial Statements....................................22
PART III
Item 8. Changes & Disagreements with Accountants.............................46
Item 8A. Controls & Procedures................................................46
Item 9. Directors, Executive officers, Promoters and Control persons
Compliance with Section 16(a) of the Exchange Act....................47
Item 10. Executive Compensation...............................................48
Item 11. Security Ownership of certain beneficial owners and Management.......51
Item 12. Certain relationships and related transactions.......................52
Item 13. Exhibits and Reports on Form 8-K.....................................52
Item 14. Principal Accounting Fees and Services ..............................52
Signatures ...................................................................53
2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Hydron Technologies, Inc. ("the Company"), a New York corporation
organized on January 30, 1948, maintains its principal office at 4400 34th
Street North, Suite F, St. Petersburg, FL 33714 and its telephone number is
(727) 342-5050.
During early 2005, the Company returned its focus to the development
and sales of its skin care products. For several years prior, the Company's
research and development efforts were concentrated on products and medical
applications utilizing its patented tissue oxygenation technology, and on
accumulating data for a Food & Drug Administration (FDA) application related to
this technology. On January 10, 2005, the Company attended a Pre-Investigational
Device Exemption meeting with the FDA in the belief that a clear pathway for
safety and clinical research requirements could be determined at that time;
however, a defined methodology could not be agreed upon at that time. As a
result of that meeting, and in consideration of the Company's limited working
capital, management decided to refocus its efforts on non-medical technologies.
The Company continues to believe that its tissue oxygenation technology has
significant potential, and expects to re-institute research and development in
that area when working capital allows.
The Company's current focus is on furthering development and sales of
its other proprietary products, including a newly patented evaporating
emulsifier technology for use in cosmetic treatments and acne products, a number
of patented polymer skin care formulas using a moisture-attracting ingredient
(the "Hydron(R) polymer") that provide superior skin moisturization benefits and
sunscreen delivery, and a patented formula for a wrinkle reduction serum.
Currently, the Company markets a broad range of cosmetic 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. 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.
On July 1, 2005, the Company purchased Clinical Results, Inc. ("CRI"),
for two million (2,000,000) shares of the Company's common stock. Through the
purchase of CRI the Company has entered the business of proprietary formulations
and contract manufacturing for other consumer product companies.
3
LIQUIDITY
The Company anticipates that present working capital balances and
internally generated funds will be sufficient to meet its working capital needs
for the next three months and or longer, based on management decisions and order
flow. Beyond that point, it may be necessary to sell selected assets, or obtain
an infusion of capital. 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.
On July 1, 2005, the Company acquired CRI, a St. Petersburg,
Florida-based company. CRI is a privately held product development laboratory
and contract manufacturer of cosmeceuticals and other personal care products.
CRI's clients range from mass-market retailers to marketers of high-end brands,
and of certain health food store brands.
Management believes that Hydron Technologies will benefit from lower
manufacturing costs, and be better positioned to build its catalog and internet
business, as well as expand the sale of its skin care treatments beyond its
historical direct response TV and catalog operations, by utilizing CRI's broker
network.
Under the terms of the agreement, Hydron Technologies acquired all of
the outstanding shares of capital stock of CRI in consideration of an aggregate
of two million newly issued shares of the Company, in a transaction exempt from
registration under the securities laws. Such shares will be subject to transfer
restrictions unless registered under federal and applicable state securities
laws or sold in a transaction exempt from registration.
Additionally, Hydron restructured both its management and its Board of
Directors. David Pollock, the President of CRI, was appointed Chief Executive
Officer of the Company and joined Hydron's Board, replacing Joshua Rochlin, who
resigned from the Board on March 31, 2005. Douglas Reitz, D.C., CRI's co-owner,
was appointed Executive Vice President of Hydron. As part of the arrangement,
the Company entered into a three-year employment agreement with Mr. Pollock and
Dr. Reitz, each with an annual salary of $106,000.
Effective August 5, 2005, Terrence S. McGrath, the Company's Chief
Operating Officer, resigned in order to pursue other career opportunities. Mr.
McGrath's responsibilities were assumed by Mr. Pollock, Hydron's Chief Executive
Officer.
While CRI will continue providing contract services for its customer
base, Hydron Technologies will benefit from lower manufacturing costs, and be
better positioned to expand the sale of its skincare treatments beyond its
catalog operations by utilizing CRI's broker network.
In an effort to reduce operating expenses, the Company has consolidated
operations by relocating Hydron Technologies' headquarters and certain
warehousing facilities to the CRI manufacturing facility. While CRI will
continue to provide contract manufacturing services, the Company has renamed the
CRI operation as Hydron Technologies. The Company will continue its cost cutting
efforts by reducing research and development costs, and cost of goods by
manufacturing certain products in-house.
Management anticipates that any impact of the acquisition on cash flow
will not be realized for six to nine months. 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.
4
Accordingly, there are no assurances that the Company will be
successful in achieving the above objectives, or that such objectives, if
realized, will enable the Company to obtain profitable operations or continue as
a going concern.
HYDRON(R) BRANDED SKIN CARE PRODUCTS
The Company has been developing various consumer products using Hydron
polymers since 1986. The Company's products are designed to address concerns
about the visible signs of aging, and include Hydron(R) skincare, hair care,
bath and body and sun care lines. The Company currently has forty three
individual branded products available in the following product catagories: skin
care (24 products), hair care (6 products), bath and body (11 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 available through the Hydron catalog and web site at www.hydron.com
("Catalog"). The Company also markets a number of customized formulations under
private label and contract manufacturing for various outside brands.
Management believes that the Company's moisturizers and skin treatments
are unique and offer the following competitive benefits: they 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 independently tested by dermatologist and,
in their opinion, are considered to be safe, non-irritating and applicable to
most skin types. Products for use around the eye area are also ophthalmologist
tested and safe for contact lens wearers. Most of the Company's branded
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.
Management believes that the Hydron(R) emulsion system can enhance the
effectiveness of topical over-the-counter medications. The emulsion system is
designed to deposit a polymer film on the skin's surface which has a number of
advantages over traditional lotions: it promotes hydration of the outer layer of
skin, 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 proprietary technology-based products as determined by management's
assessment of consumer demand.
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.
The pH range of the emulsion system is ideal for promoting the skin's natural
healing process and enzyme production responsible for rebuilding the skin's
lipid barrier. In January 2006, the Company was granted U.S. Patent Number
6,984,391 for its Compositions and Method for Delivery of Skin Cosmeceuticals to
cover this technology, which also applies to a new acne treatment system.
5
PROFESSIONAL PRODUCTS
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(R) polymer-based products give them competitive advantages over
conventional acrylic dentures and denture repair kits, which are not
hydrophilic. Sales of Hydrocryl(R) brand name products were minimal in 2005 and
2004.
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 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. Should
the Company return to television retailers it will not enter into exclusive
agreements.
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 expanded international distribution and new products that would
significantly augment Hydron's direct marketing efforts. This includes its
recently granted emulsion patent which, among other benefits, can generate new
acne formulas that the Company believes provides marked performance improvements
versus other over-the-counter products currently on the market.
Catalog Sales - The Company offers personal care products for sale directly to
consumers. Augmenting direct mail, the Company sells its products on the World
Wide Web and regularly transmits E-mail broadcasts to its customer base. Catalog
sales represented approximately 46% of Hydron's total annual sales in 2005 and
69% in 2004. The Company is continuing to explore new ways to enhance Catalog
sales and operations.
Private Label Contracting - Since March 1, 2001, the Company has been a supplier
to Reliv International, Inc ("Reliv") to develop and manufacture a line of
private label skin care products under their brand name, ReversAge(R). Reliv is
a public company traded on NASDAQ (symbol RELV). Private label sales represented
approximately 16% of Hydron's total annual sales in 2005 and 19% in 2004.
Contract Manufacturing - Through its acquisition of CRI, the Company now
manufactures consumer products for a number of companies. Products include
proprietary formulations for skin and hair care. During the six months of
combined operations ending December 31, 2005, non-Hydron Technologies, Inc.
related contract manufacturing revenue represented 30% of Hydron's total sales.
6
International - The Company sells limited quantities of its products to an
Australia-based health and beauty products distributor for retail sale in salon
stores and medical offices in Australia and New Zealand. The Company also
distributes dental products in Spain and, to a lesser extent, other countries.
Retail - The Company has established minor levels of retail distribution.
Initially, utilizing excess inventory and current packaging configurations, the
Company has sold product on a limited, promotional basis to several retailers.
It is anticipated that any significant retail effort of core Hydron products
would require investment in repackaging.
RESEARCH AND DEVELOPMENT
During the last two years, the Company's research and development
efforts advanced groundbreaking research into oxygenated wound treatments,
healing enhancement, and skin care that may provide anti-aging treatments. Where
possible, the Company may license these technologies to other companies with
expertise in specific applications. 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.
The Company continues to concentrate research and development on
proprietary technology-based products as determined by management's assessment
of consumer demand. The Company's research and development efforts during 2004
focused on accumulating data for Food and Drug Administration (FDA) application
for the Company's oxygenation application.
Management has completed development of an acne ingredient delivery
system. The technology allows for acidic ingredients to be delivered to the
skin's stratum corneum at neutral pH (~6.8 to 7.0), where it then gradually
adjusts to match the pH of the stratum corneum below 5.5. This delivery
technique avoids the irritation and burning associated with traditional acne
treatments that deliver ingredients at pH values as low as 2.0. The Company was
granted U.S. patents on this technology in January 2006.
In the current acne market, medicinal treatments can often be more
irritating and elicit more redness than the skin condition itself. The Company's
new system significantly reduces the harshness and irritation associated with
such products.
Prior to June 2005, Charles Fox, a consultant and a former member of
the Company's Board of Directors from September 1997 to October 1998, led the
Company's research and development efforts. Mr. Fox was formerly director of
product development for Warner Lambert Company's personal products division and
was a former president of the Society of Cosmetic Chemists.
Beginning on July 1, David Pollock and Dr. Richard Douglas Reitz, the
Company's CEO and EVP, respectively, head the Company's R&D effort.
7
PATENTED TECHNOLOGY
The Company strongly believes that technology and patent protection are
essential to providing a sound foundation for a new product. In January 2006,
the Company was granted U.S. Patent Number 6,984,391 for its Compositions and
Method for Delivery of Skin Cosmeceuticals. This patent covers a unique
evaporating emulsifier system that the Company believes is a significant
breakthrough in skin care. It is evident in recent skin research that the pH
range of the emulsion system is essential in contributing to the skin's natural
healing process and the enzyme production responsible for rebuilding the skin's
lipid barrier. The benefits provided by this pH self-adjusting system provides
clinically proven benefits over competitive products
The Company was granted a U.S. patent on its new super-oxygenation
technology in November 2003. This patent covers the process of applying a liquid
containing pure oxygen micro-bubbles to the surface of the skin such that the
oxygen penetrates the skin and oxygenates the underlying tissue. The Company has
applied for international patents on this technology in approximately 29
countries, which are in various stages of review as of December 31, 2005. The
Company expects these patent applications to be approved over the next few
years.
The Company was granted U.S. Patent No. 4,883,659, dated November 28,
1989, and U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a stable
moisturizing emulsion containing an unusual emulsifying agent, as well as the
Hydron polymer and a unique combination of ingredients. These patents have
expiration dates of November 28, 2006 and August 13, 2008, respectively. During
1999 the Company was granted U.S. Patent No. 5,879,684 for its "Line Smoothing
Complex" formula. This product has been clinically shown to reduce fine lines
and wrinkles. The patent has an expiration date of April 11, 2017. In addition,
the Company has registered several trademarks relating to its cosmetic products.
The Company has also received patent protection for its emulsification
process in several countries to facilitate distribution and sale of these
products outside of the United States. The Hydron polymer, utilized in cosmetic
emulsions, creates a thin moisture-attracting film that is non-greasy; is not
dissolved by sebaceous oils or perspiration; does not emulsify the skin's
natural oils and humectants; and allows the skin to breathe. The film is
insoluble in water and resistant to rub-off, but can easily be removed with
cleanser and water.
MANUFACTURING AND RAW MATERIALS
Until July 1, 2005, Hydron polymer-based products were manufactured
exclusively for the Company by independent third parties. The Company had used
principally two manufacturers of cosmetic products because of the quality of
their production and reasonable costs. All raw material and packaging components
for the Company's consumer and professional product lines are readily available
to the Company from a variety of sources.
Since July 1, 2005 the Company is manufacturing the majority of its
products at its own facility.
The Company is not dependent upon any sole manufacturer or supplier for
any of its raw materials or ingredients.
8
AGREEMENT WITH VALERA PHARMACEUTICALS ("VALERA")
Under the terms of an agreement with Valera, which was assigned from GP
Strategies Corporation ("GPS"), the Company has an exclusive worldwide license
to manufacture, market or use non-prescription products that include the Hydron
polymer in the consumer field, including in connection with cosmetic products
and certain personal care products, and in the oral health field, including
dentures. Under the Valera Agreement, Valera retains the exclusive right to
manufacture, sell or distribute any prescription drug or medical device made
with the Hydron polymer, other than in the oral health field. In addition, under
the Valera Agreement, the Company and Valera may each manufacture, sell, and use
non-prescription drug products that include the Hydron polymer as an active
ingredient, that are not included in their respective exclusive fields.
Under the Valera Agreement, Valera also licenses to the Company the
trademark Hydron for use in connection with the manufacture, marketing and use
of products using Hydron polymers as permitted under the Valera Agreement.
Under the terms of the Valera Agreement, the Company and Valera are
each required to pay to the other a royalty of five percent (5%) of their
respective net sales of Hydron polymer products, except for sales of certain
specified non-prescription drug products utilizing the Hydron polymer as an
active ingredient to third parties. Where either party receives an up-front
license fee, royalty or similar payment from non-prescription drug products,
that party shall pay the other party a royalty of twenty-five percent (25%) of
such payments.
An aggregate of $29,512 and $29,132 was accrued and unpaid as of
December 31, 2005 and 2004, respectively. This amount is adequate to cover any
royalties that are payable through that date. The Company has not received any
royalty payments, or been advised of any sales that would entitle it to royalty
payments.
On February 1, 2006 Valera Pharmaceuticals became a publicly traded
company through an Initial Public Offering of its common shares. The Company's
shares are traded on NASDAQ under the symbol VLRX.
LIMITED LIABILITY PARTNERSHIP
In August 2004, The Company established Hydron Royalty Partners, LLLP,
a limited liability limited partnership, to fund the then existing royalty
obligations in consideration for the right to receive future royalty receipts
from Valera Pharmaceuticals, Inc. Hydron Technologies, Inc., the general
partner, assigned its rights in the Valera Agreement to the Partnership. The
Partnership assumed the existing liability for prior period royalties ($127,984)
and will annually pay the first $30,000 of any future royalties due to Valera
through 2008 in return for the right to receive any future royalties that may be
due from Valera on their new products. The Company, as general partner, holds
50.001% of the partnership interests, and the limited partnership interests
represent in the aggregate the remaining 49.999%.
INVENTORY
The Company did not have any backorder of firm booked orders of Hydron
branded product as of December 31, 2005 and generally delivers its orders within
two weeks of the date orders are booked. Although the Company's business in not
seasonal, orders placed by Hydron's private label customers and television
retailers fluctuate on a monthly and quarterly basis. Orders placed by the
Company's Catalog customers are generally shipped within two business days of
the placement of the order.
9
Most items can be produced within a 45-day period. Since the Company
manufacturers products in house and has reduced the lead time for production,
the finished goods inventory can be reduced to an average between 3 - 6 months
of sales. Packaging components must be printed in larger quantities and the
level of those types of items may exceed 12 months of sales. The inventory level
of the Hydron polymer exceeds several years'.
GOVERNMENT REGULATION
The Company's oxygenation process uses pure oxygen, which is a natural
substance and is not controlled. However, the containers, devices used, and the
handling of oxygen require the Food and Drug Administration's approval (FDA).
The Company complies with the Federal Food, Drug and Cosmetic Act ("FDC Act")
and must comply with the labeling requirements of the FDC Act, the Fair
Packaging and Labeling Act ("FPL Act"), and the regulations thereunder. Many
products and applications that are derived from Hydron's oxygenation technology
will be considered medical in nature and FDA approval will be required for this
area. New skin care products and most of the Company's existing products are
"cosmetics" as that term is defined under the FDC Act. Some of the Company's
products (i.e. its topical analgesic and products that contain a sunscreen or
Triclosan) are also classified as over-the-counter drugs.
Additional regulatory requirements for existing products include
certain labeling requirements, registration of the manufacturer and semi-annual
update of the drug list. Management believes that it is in compliance with these
requirements and that it faces no material costs associated with such
compliance.
COMPETITION
The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers' choices among competing products and brands.
Advertising, promotion, merchandising, the pace and timing of new product
introductions, and line extensions also have a significant impact on consumer
buying decisions. The Company competes against a number of marketers of skin
care products, many of which have substantially greater resources than the
Company.
SEASONALITY
The Company's results of operations are not subject to seasonal
fluctuations.
EMPLOYEES
The Company satisfies its human resource needs utilizing an outsourcing
firm that provides all administrative services relating to payroll, personnel
and employee benefits. Management continues to hire, fire, set pay rates and
supervise its staff. This arrangement enables the Company to reduce its
administrative and benefits costs relating to employees. The Company, as of
December 31, 2005, had fifteen full time positions.
10
ITEM 2. PROPERTIES
The Company currently leases office space at 4400 34th St North, Suites
F and H, under two non-cancelable leases in St. Petersburg, Florida, which
expire between April and September 2008. The lease on this office space (21,000
square feet) requires a monthly rent of approximately $4,119, including taxes
and common area expenses.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, and its property is not the subject of,
any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Meeting of the Shareholders of the Company was held on November 15,
2004, in Boca Raton, Florida (the "Meeting"). At the Meeting, the shareholders
of the Company voted on proposals to (i) elect a Board of four directors to
serve until the Company's next meeting of shareholders and until their
successors are elected and qualified and approve the Company's 2003 Stock Plan.
The results of the voting appointed the following Directors:
Richard Banakus
Joshua Rochlin
Karen Gray
Ronald J. Saul
The Shareholders also approved the adoption of the Company's 2003 Stock
Plan and ratified the Audit Committee's selection of DaszkalBolton LLP as the
Company's independent Certified Public Accountants for the year ended December
31, 2004.There was no shareholder meeting held in 2005.
11
PART II
ITEM 1. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's Common Stock is quoted on the OTC Bulletin Board, a
regulated quotation service for over-the-counter securities not listed or traded
on NASDAQ or a national securities exchange, under the symbol HTEC.OB. The
following tables indicate the high and low closing prices for the Company's
Common Stock as reported by the OTC Bulletin Board.
HIGH LOW
CLOSING CLOSING
PRICE PRICE
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2005
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Fourth Quarter $0.45 $0.21
Third Quarter 0.50 0.13
Second Quarter 0.14 0.08
First Quarter 0.30 0.15
2004
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Fourth Quarter $0.45 $0.16
Third Quarter 0.42 0.27
Second Quarter 0.80 0.37
First Quarter 0.82 0.57
As of December 31, 2005, there were approximately 985 shareholders of
record of the Company's Common Stock. The number of shareholders of record will
decline as the Company's transfer agent has notified the Company of its intent
to transfer shares, held in the name of shareholders that it has not been able
to locate, to the proper authorities in compliance with state law requirements
relating to unclaimed property.
DIVIDENDS AND DIVIDEND POLICY
The Company does not contemplate paying dividends in the near-term. The
Board of Directors will determine the payment of dividends in the future in
light of conditions then existing, including the Company's earnings and
financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
On December 10, 2002, the Company completed the sale in a non-broker
transaction to accredited investors of 1,750,000 units, comprised of one share
of Common Stock and one option to purchase one share of Common Stock, at an
exercise price of $.20 per share for a three-year period commencing on the date
of issuance. The purchase price for each unit was $.20, resulting in gross
proceeds to the Company of $350,000.
12
In addition, on November 14, 2003, the Company completed the sale in a
non-brokered transaction to accredited investors of 2,230,000 units, comprised
of one share of its Common Stock and one common stock purchase warrant,
exercisable for one share of Common Stock at an exercise price of $1 per share,
for a five-year period commencing on the date of issuance. The purchase price
for each unit was $.50, resulting in gross proceeds to the Company of
$1,105,000.
In each case, the Company did not register the sale of the units and
the component shares of Common Stock, and options and warrants or the shares of
Common Stock issuable upon exercise of the warrants and options under the
Securities Act in reliance on the exemption from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act.
In connection with the sales of these units, the Company agreed to
register the shares of Common Stock and the shares of Common Stock issuable upon
exercise of the warrants and options included in the units. The Company prepared
the necessary registration statement and received notice from the Security and
Exchange Commission that it was declared effective on July 22, 2004.
The Company has used the proceeds from the sales of these units
primarily for certain R&D and other expenses relating to the development of its
oxygenation technology, and general working capital requirements.
EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes share information about the Company's
equity compensation plans, including the company's Stock Option Plan ("the
Plan") and non-plan equity compensation agreements as of December 31, 2005:
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED WEIGHTED-AVERAGE REMAINING AVAILABLE FOR
UPON EXERCISE OF EXERCISE PRICE OF FUTURE ISSUANCE UNDER
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, EQUITY COMPENSATION
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS PLANS
----------------------------- -------------------- -------------------- -----------------------
Equity compensation plans
approved by security holders 1,357,000 $ 0.37 (1)
Equity Compensation plans not
approved by security holders 44,500 $ 0.25 (1)
---------
Total 1,401,500 $ 0.36
=========
__________
(1) The 2003 Stock Plan was approved at the November 15, 2004 shareholders'
meeting. The aggregate number of shares that may be issued under the Plan
can not exceed 15% of the total outstanding shares. As of December 31, 2004,
the number of Securities for future issuance under the 2003 Stock Plan was
751,525 and 64,600 for all previous plans.
13
EQUITY COMPENSATION PLANS APPROVED BY SHAREHOLDERS
The 1993 Non-Employee Director Stock Option Plan ("1993 Plan") was
adopted by the Board of Directors on December 22, 1993, approved by the
shareholders on July 19, 1994 and approved, as amended, by the shareholders on
December 17, 1997. The purpose of the 1993 Plan is to assist the Company in
attracting and retaining key directors who are responsible for continuing the
growth and success of the Company. No options were granted under the 1993 Plan
during the year ended December 31, 2005
On November 10, 1997, the Board of Directors of the Company adopted the
1997 Non-Employee Director Stock Option Plan ("1997 Plan"). This plan was
approved by the shareholders on December 17, 1997. The purpose of the 1997 Plan
is to assist the Company in attracting and retaining experienced and
knowledgeable non-employee directors who will continue to work for the best
interests of the Company.
The 1997 Plan provides nonqualified stock options for non-employee
directors to purchase an aggregate of 100,000 shares of Common Stock, with
grants of options to purchase 2,000 shares to each non-employee director on
October 1, 1997, grants of options to purchase 2,000 shares on each May 1st
thereafter (starting in 1999), and grants of options to purchase 2,000 shares
upon election or appointment of any new non-employee directors. The options are
not exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option.
The 1997 Plan also provides nonqualified stock options for non-employee
directors who serve on committees of the Board of Directors. The options are not
exercisable for a one-year period and are to be granted at an exercise price
equal to the average fair market value of the Common Stock during the ten
business days preceding the day of the grant of the option. No options were
granted under this provision of the 1997 Plan during the year ended December 31,
2005
During August 1999, the Company agreed to grant an option to purchase
18,000 shares of the Company's Common Stock to each of the five individuals
comprising the Board of Directors, subject to shareholders' approval at the next
annual meeting, at an exercise price of $.64065 per share.
In August 2001, the Company agreed to increase the options granted to
Board members each year. Subject to shareholders' approval, the Company agreed
to grant options to purchase a total of 20,000 shares of the Company's Common
Stock to each of the five individuals comprising the Board of Directors,
beginning with the calendar year 2000. Each Board member will receive options to
purchase 18,000 shares of common stock at an exercise price of $.20157 for their
service in 2000, and options to purchase 20,000 shares of common stock at an
exercise price of $.4275 for their service in 2001, $.3155 for their services in
2002, $.2430 for their services in 2003, $.5945 for their services in 2004 and
$.1105 for their services in 2005. On November 15, 2004, the Shareholders'
approved a new 2003 Stock Plan that ratified these actions by the Board of
Directors.
14
On November 19, 2003, the Board approved, subject to shareholder
approval, the 2003 Stock Plan (the "2003 Plan"). The shareholders approved this
plan on November 15, 2004. The 2003 Plan permits the grant of nonqualified and
incentive stock options, as well as restricted stock purchases. The form of the
equity is left up to the discretion of the committee of the Board (or the Board,
if no committee) at the time of each grant. This 2003 Plan is designed to
consolidate and replace two Stock Option Plans, which have expired; the 1993
Stock Option Plan and the 1997 Non-Employee Director Stock Option Plan. The
purpose of the 2003 Plan is to assist the Company in attracting, retaining, and
motivating key employees, officers, directors, and consultants by offering
selected individuals an opportunity to acquire a proprietary interest in the
success of the Company.
EQUITY COMPENSATION PLANS NOT APPROVED BY SHAREHOLDERS
The Company has agreements with several consultants who provide
financial, business, and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. As part of their compensation, these consultants were granted warrants
and nonqualified stock options to purchase shares of the Company's common stock
at prices representing the fair market value of the shares at the date of grant.
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read with the condensed
consolidated financial statements and related notes contained in this annual
report on Form 10-KSB ("Form 10-KSB"). All statements other than statements of
historical fact included in this Form 10-KSB are, or may be deemed to be,
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. These
statements involve known and unknown risks, uncertainties and other factors that
may cause the Company's actual results, levels of activity, performance or
achievements to be materially different than any expressed or implied by these
forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "continue," or
the negative of these terms or other comparable terminology. Important factors
that could cause actual results to differ materially from those discussed in
such forward-looking statements include: 1. General economic factors including,
but not limited to, changes in interest rates and trends in disposable income;
2. Information and technological advances; 3. Cost of products sold; 4.
Competition; and 5. Success of marketing, advertising and promotional campaigns.
The Company is subject to specific risks and uncertainties related to its
business model, strategies, markets and legal and regulatory environment You
should carefully review the risks described in this Form 10-KSB and in other
documents the Company files from time to time with the SEC. You are cautioned
not to place undue reliance on the forward-looking statements, which speak only
as of the date of this Form 10-KSB. The Company undertakes no obligation to
publicly release any revisions to the forward-looking statements to reflect
events or circumstances after the date of this document.
15
OVERVIEW
In late January 2005, the Company refocused its efforts to skin care
formulations and sales. On July 1, 2005, the Company purchased CRI, Inc. and
BRI, Inc., related companies providing both skin care formulation consulting and
a newly started contract manufacturing business. The Company believes that the
vertical capabilities added by this acquisition will be beneficial to the
Company as it expands beyond its historical base.
In January 2006, the Company was granted U.S. Patent Number 6,984,391
for its Compositions and Method for Delivery of Skin Cosmeceuticals, which also
applies to a new acne treatment system. The Company believes that this unique
emulsion system has significant advantages over the widely used surfactant
emulsions employed by most skin care formulators and manufacturers, and will
seek licensing opportunities whenever possible.
In November 2003, the Company was granted a patent on its new
oxygenation technology that provides a method for delivering oxygen into the
skin and tissue at depths considered medically therapeutic. This unique
technology utilizes topical applications, eliminating reliance on the blood
steam. Preliminary research was conducted at the University of Massachusetts and
Florida Atlantic University and the process to obtain FDA approval was
initiated. Management plans to research additional medical applications if and
when Hydron obtains FDA approval.
The Company raised $1.1 million in December 2003 in a non-brokered
private placement exempt from registration under the Securities Act to fund the
initial research and initiate the lengthy FDA approval process. As research
results begin to quantify the broad applications of this technology and the FDA
hurdles are passed, management anticipates that Hydron will attract key
strategic partners and new investment money will become available. Management
also expects that product development will accelerate in medical areas such as
wound and burn treatment, and skin care applications such as scar reduction,
acne, and diaper rash treatment, oral health, etc.
In 2002 the Company virtually eliminated sales made through television
retailers, having terminated the exclusive relationship with HSN in late 2001,
and as revenues derived from resales by QVC to prior customers declined.
Management expects that in 2005 and beyond, an increasing portion of the
Company's skin care sales will be generated from direct marketing utilizing
direct response mail, the Company's catalog and web site, and licensing
arrangements. Management also expects that the Company will generate an
increasing portion of its revenues from sales made through private label
partners and will look for other opportunities to sell the Company's products
through similar arrangements. Management anticipates introducing new cosmetic
products based on its oxygenation technology, which it believes will open doors
for new distribution. However, the types and timing of the introduction of new
cosmetic products will depend upon the results of further clinical testing.
16
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 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 in Partners.
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.
RESULTS OF OPERATIONS - 2005 VERSUS 2004
Total net sales for 2005 were $1,462,639, an increase of $277,225 or
23% from net sales of $1,185,416 for the year ended December 31, 2004. Catalog
Sales net sales for 2005 were $679,901, a decrease of $139,134 or 17% from sales
of $819,035 for 2004. Private Label and Contract Manufacturing net sales for
2005 were $667,514, an increase of $438,273 or 191% from sales of $229,241 for
2004. Professional sales consist of dental products sold to dental labs for use
in manufacturing dentures. Net sales of dental products for 2005 were $13,868, a
decrease of $4,654 or 25% from sales of $18,522 in 2004. Shipping and handling
revenues for 2005 were $97,815, a decrease of $20,802 or 17% from shipping and
handling revenues of $118,617 in 2004.
Catalog Sales decreased as the Company transferred its customer care
center and upgraded the order taking systems and pick/pack operation in an
effort to reduce operational costs. Additionally, the Company began work on the
new website, which launched at the end of October of this year. During 2005 the
Company went two months without being able to take orders on the Internet, which
management feels may have reduced some of the anticipated sales. Private Label
Manufacturing sales increased due to the acquisition of Clinical Results, Inc.
on July 1, 2005. Clinical Results is in the early stages of its manufacturing
facility and has helped contribute to the overall revenue.
Cost of sales was $731,083 for 2005, an increase of $205,766 or 39%
from cost of sales of $525,317 for 2004. Cost of sales was 50% of total sales in
2005 compared to 44% in 2004. The increase in the cost of sales percentage
reflects the impact of private label sales and an unfavorable inventory
valuation adjustment. Cost of sales for private label sales was in direct
proportion to the sales level. The Company monitors its inventory levels closely
and writes-down any inventory in excess of a one-year supply. Cost of sales
include charges of $100,853 in 2005 to adjust inventories to a one-year supply
valued at the lower of cost or realizable value on a FIFO basis. Similar charges
for 2004 were $59,412. Cost increases are not material to catalog sales and the
private label contracts provide for a pass through of any cost increases
incurred in that segment. Shipping and handling costs for 2005 were $123,823, a
decrease of $6,545 or 5% from shipping and handling costs of $130,368 for the
same period in 2004. This decrease reflects the 17% 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 50% of net sales
for 2005 versus 56% for 2004. This reflects the costs discussed above, less the
relative mix of higher margin catalog sales versus lower margin private label
sales.
17
Royalty expenses in 2005 were $36,211 and $36,331 in 2004. An aggregate
of $29,512 was accrued and unpaid as of December 31, 2005. This amount is
adequate to cover any royalties that are payable through December 2005.
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
were $55,037 in 2005, a decrease of $224,928 or 80% from R&D expenses of
$279,965 in 2004. This decrease was due principally to the Company eliminating
the use of outside FDA consultants in association with its oxygenation
technology during 2005 versus 2004. The amount of annual R&D expenses will vary
year to year depending on the Company's research requirements.
Selling, general and administrative ("SG&A") expenses in 2005 were
$1,358,867, representing an increase of $174,544 or 15% from SG&A expenses of
$1,184,323 in 2004. Advertising and promotional expenses in 2005 were $80,729,
an increase of $19,098 or 31% from advertising and promotional expenses of
$61,631 in 2004. This increase is due to new advertising initiatives taken by
the Company to increase sales. Sales commissions in 2005 were $968, a decrease
of $10,322 or 91% from sales commissions of $11,290 in 2004. The decreased sales
commissions reflect that sales are now handled by non-commissioned sales
representatives. Professional expenses (legal and audit) were $166,032 in 2005,
an increase of $42,581 or 34% from the $123,451 incurred in 2004. The increase
in professional fees involved costs associated with the acquisition of CRI in
2005 offset by increases from a registration statement filed in July and the
proxy statement for the shareholders meeting held November 15, 2004. Payroll
expense was $462,973 in 2005, an increase of $21,164 or 5% from $441,809 in
2004. This increase was due primarily to the acquisition of Clinical Results,
Inc. on July 1, 2005 which includes new management, office support, the moving
of manufacturing and shipping in house, severance expense and operating two
offices for two months. Moving expenses were $26,899 in 2005, an increase of
$26,899 from $0 in 2004.This increase was due to the relocation of the Company's
operations to the Clinical Results, Inc. manufacturing facility. Bad debts in
2005 were $40,560, an increase of $40,560 from $0 in 2004. This increase is due
to the write off of certain receivables deemed uncollectible. All other expenses
were $580,706 for 2005, an increase of $33,596 or 6% from $547,110 in 2004.
Depreciation and amortization expense was $59,090 for 2005, an increase
of $25,173 or 74% from $33,917 in 2004. The increase was due primarily to the
amortization of the intangible of the purchase of CRI.
Net interest (expense) was ($29,730) in 2005 compared to net interest
income of $3,749 in 2004. The increase in interest expense was due primarily to
the interest on the loan payable and related amortization of debt discount.
Minority interest in net loss in 2005 was $35,328 compare to $14,809 in
2004. This minority interest is created from a consolidated limited liability
partnership, Hydron Royalty Partners, LLLP, established by the Company in August
2004 (see Limited Liability Partnership, Item 1. Business).
The Company had a net loss of $772,051, representing a decrease of
$83,828 or 10% from the net loss of $855,879 for 2004, primarily as a result of
the factors discussed above.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that present working capital balances and
internally generated funds will be sufficient to meet our working capital needs
for the next three months and maybe longer based on management decisions and
order flow. Beyond that point, it may be necessary to sell selected assets, or
obtain an infusion of capital. 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
Company's working capital deficit was approximately ($188,416) at December 31,
2005, including cash and cash equivalents of approximately $36,281. Cash used by
operating activities during the twelve months ended December 31, 2005 was
$527,282 and $18,012 was used in investing activities. This was offset by
proceeds from financing activities of $241,896.
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.
On October 24, 2005 the Company received proceeds of $112,500 through
the partial exercise of certain warrants relating to a previous private
placement of its securities in December 2002. These funds were received from
three individuals including two individuals who are (i) the Chairman of the
Board and Interim President, and (ii) a second director of the Company.
On October 24, 2005, the Board of Directors of Hydron Technologies,
Inc., a New York corporation (the "Company"), adopted a resolution authorizing
the extension of options of the exercise period for certain options to purchase
common stock (the "Options") granted in connection with a private placement of
securities by the Company from December 9, 2005 to December 9, 2007 (the "New
Expiration Date") in consideration of the agreement of certain holders to
immediately exercise a portion of the Options and purchase the underlying common
stock. The shares underlying the original Options were registered by the Company
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
of common stock underlying the Options totaled 1,750,000 shares or approximately
13.4% of the total outstanding shares of the Company.
Richard Banakus, the acting Chairman and a director, and Ronald J.
Saul, a director of the Company, together with his spouse, Antonette G. Saul,
are among the holders of the Options. Mr. Banakus assigned for nominal
consideration certain of his Options exercisable for 250,000 shares to Mr. Saul
and effective October 27, 2005 exercised Options representing an aggregate of
250,000 shares of common stock in consideration of the extension of the exercise
period to the New Expiration Date for Options representing an aggregate of
750,000 shares of common stock. Mr. Saul exercised Options effective October 28,
2005, representing an aggregate of 250,000 shares and had Options representing
an aggregate of 125,000 extended to the New Expiration Date. In addition,
certain other holders of Options exercised Options representing an aggregate of
62,500 shares and had the exercise period for Options representing an aggregate
of 62,500 shares extended to the New Expiration Date bringing the total number
of shares represented by the new Options (the "New Options") exercisable at any
time prior to the New Expiration Date to 937,500 or approximately 7.6% of the
total outstanding shares.
19
Each party receiving New Options is an "accredited investor" as defined
in Rule 501(a) under the Securities Act of 1933, as amended (the "Securities
Act"). The Company issued the New Options without registration under the
Securities Act in reliance on the exemptions from registration provided by Rule
506 of Regulation D and Section 4(2) of the Securities Act.
The Company received no proceeds for the issuance of the New Options
other than proceeds from the exercise of Options pursuant to the agreement of
holders of Options to exercise certain Options and proceeds the Company may
receive upon exercise of the New Options. The Company intends to use the
proceeds of the exercise of the Options and the New Options for general working
capital purposes.
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, 2005,
all 2,210,000 warrants are outstanding.
The Company registered these outstanding shares and the 4,481,500
underlying shares of outstanding warrants/options with the Securities and
Exchange Commission effective July 22, 2004. The warrants/options are a future
source of capital for the Company and could generate up to $3,106,270 if they
are exercised.
The Company does not have any material debt other than the loan payable
of $150,000 borrowed from three investors on May 2005 (see Note 11), and two
capital leases for equipment purchases of $73,224. Effective August 5, 2005, the
Company relocated its offices to St Petersburg, Fl. There are no capital
expenditures under construction and no long-term commitments other than royalty
payments under an agreement with Valera Pharmaceuticals, Inc. The Company does
not have any lines of credit. There are no purchase order commitments that
exceed 90 days.
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 implementing one or more of the following
elements:
o Emphasize Catalog sales, including sales made over the Internet, since
these sales have higher profit margins.
o Evaluate the possibilities of increasing direct marketing and direct
response television exposure to build brand awareness and revenues.
o Team with third parties to build the advertising and promotion of the
Hydron(R) brand, as the Company does not have the financial resources
to sustain a national advertising campaign to support distribution of
its production into retail stores.
o Develop and market new product lines based on the Company's proprietary
technologies.
20
o Continue to reduce overhead and operating costs.
o Obtaining an infusion of capital that will sustain the Company's
operation until the newly established licensing arrangements can
produce positive cash flow.
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 to the financial statements to account for the possibility that the plan
may be unsuccessful.
CHANGE IN ACCOUNTING PRINCIPLE AND NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment"
("SFAS 123R"), a revision to SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for
Stock Issued to Employees" and its related implementation guidance. SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, including obtaining
employee services in share-based payment transactions. SFAS 123R applies to all
awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. The Company will adopt the provisions
of SFAS 123R in the first quarter of 2006. The Company believes the adoption of
SFAS 123R will result in increased compensation expense in its consolidated
statement of operations.
SFAS No. 154, "Accounting Changes and Error Corrections," was issued in
May 2005 and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company does not expect that the
adoption of SFAS 154 to have a material impact on the Company's consolidated
financial condition or results of operations.
APPLICATION OF CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
sales and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, management evaluates these estimates, including those
related to bad debts, inventories, investments, intangible assets, income taxes,
restructuring, and contingencies and litigation. Management bases these
estimates on historical experience and on various other assumptions that
management believes to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting estimates are
significant in preparation of our financial statements.
21
ALLOWANCE FOR SALES RETURNS
The Company records product sales when persuasive evidence of an
arrangement exists, shipment has occurred, the price to the buyer is fixed or
determinable, and collectibility is reasonably assured. Catalog sales are sold
on a cash basis with a 30-day guarantee. Returns have been less than $10,000
annually for the last five years. A provision is made at the time sales are
recognized for the estimated cost of product warranties. Private label sales are
sold on account and are collected in 30 to 45 days. If there is a production or
packaging problem, the Company would correct the problem and replace the product
sold. To minimize that possibility, the Company inspects all production batches
before they are packaged to insure quality, efficacy, and consistency.
INVENTORY VALUATION
Shifting sales from one item in our product line to another or minimum
production requirements may create a situation where inventory levels of
specific items may exceed the annual sales of that item. This can create
inventory levels in excess of net realizable value. Management regularly reviews
inventory quantities on hand and, where necessary, records provisions for excess
and obsolete inventory based on either estimated forecast of product demand or
historical usage of the product. If sales do not materialize as planned or
decline below historic levels, management increases the reserve for excess
(quantities in excess of one year's sales) and obsolete inventory. This would
reduce earnings and cash flows.
Packaging changes are planned far in advance in order to limit the
impact of out-dated or obsolete components. Private label customers are required
to prepay the cost of packaging materials in order to take advantage of volume
discounts and protect the Company from any sudden packaging changes.
ITEM 3. OTHER INFORMATION
None.
ITEM 4. CONSOLIDATED FINANCIAL STATEMENTS
Page
--------
Reports of Independent Registered Public Accounting Firm ............... 23
Consolidated Financial Statements:
Balance Sheet as of December 31, 2005 ......................... 24
Statements of Operations for the
Years ended December 31, 2005 and 2004 ........................ 25
Statements of Changes in Shareholders' Equity for the
Years ended December 31, 2005, and 2004 ....................... 26
Statements of Cash Flow for the
Years ended December 31, 2005 and 2004 ........................ 27
Notes to Consolidated Financial Statements .................... 28 - 45
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Hydron Technologies, Inc.
We have audited the accompanying consolidated balance sheet of Hydron
Technologies, Inc. as of December 31, 2005 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hydron
Technologies, Inc. as of December 31, 2005, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
2005 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has a working
capital deficiency at December 31, 2005 and has experienced losses from
operations in 2005 and 2004. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management has implemented
direct marketing techniques to increase the more profitable catalog sales, add
new customers, and take advantage of new distribution channels (see Note 14 to
consolidated Financial Statements). The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ DaszkalBolton LLP
---------------------
Boca Raton, Florida
April 14, 2006
23
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
As of
DECEMBER 31,
2005
------------
ASSETS
Current Assets
Cash and cash equivalents ..................................... $ 36,281
Restricted cash ............................................... 112,334
Trade accounts receivable, net ................................ 147,130
Inventories ................................................... 406,164
Prepaid expenses and other current assets ..................... 31,193
------------
Total current assets ...................................... 733,102
Property and equipment, net ..................................... 136,352
Deferred product costs, net ..................................... 160,955
Intangible assets, net .......................................... 222,634
Deposits ........................................................ 7,579
------------
Total Assets .............................................. $ 1,260,622
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable .............................................. $ 333,398
Loans payable, net ............................................ 146,700
Royalties payable ............................................. 29,512
Deferred revenues ............................................. 134,533
Accrued liabilities ........................................... 254,727
Current portion of capital leases payable ..................... 22,648
------------
Total current liabilities ................................. 921,518
Long term liabilities
Capital leases payable ........................................ 50,576
Minority interest in consolidated partnership ................. 249,863
Commitments and contingencies
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;
11,926,836 shares issued and outstanding ..................... 119,268
Additional paid-in capital .................................... 21,126,925
Accumulated deficit ........................................... (21,199,712)
Treasury stock, at cost; 10,000 ............................... (7,816)
------------
Total Shareholders' equity ................................ 38,665
------------
Total liabilities and shareholders equity ................. $ 1,260,622
============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
24
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
2005 2004
------------ ------------
Net Sales ...................................... $ 1,462,639 $ 1,185,416
Cost of sales .................................. 731,083 525,317
------------ ------------
Gross profit ................................... 731,556 660,099
Expenses
Royalty expense .............................. 36,211 36,331
Research and development ..................... 55,037 279,965
Selling, general & administration ............ 1,358,867 1,184,323
Depreciation & amortization .................. 59,090 33,917
------------ ------------
Total expenses ........................... 1,509,205 1,534,536
------------ ------------
Operating loss ................................. (777,649) (874,437)
Interest income (expense) - net ................ (29,730) 3,749
------------ ------------
Loss before income taxes and minority interest (807,379) (870,688)
Income taxes ................................... - -
Minority interest in net loss of subsidiary .... 35,328 14,809
------------ ------------
Net loss ..................................... $ (772,051) $ (855,879)
============ ============
Basic and diluted loss per share
Net loss per common share .................... $ (0.07) $ (0.09)
============ ============
Weighted average shares
outstanding (basic and diluted) .............. 10,439,817 9,272,789
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25
HYDRON TECHNOLOGIES, INC.
Consolidated Statement of Changes in Shareholders' Equity
Common Stock Preferred Stock Additional Treasury
--------------------- --------------- Paid-in Accumulated Stock Total
Shares Amount Shares Amount Capital Deficit (at cost) Equity
---------- -------- ------ ------ ------------ ------------ --------- -----------
Balance at December 31, 2003 9,320,336 $ 93,203 - $ - $ 21,086,237 $(19,571,782) $(439,158) $ 1,168,500
Sale of Treasury Stock ... - - - - (409,188) - 431,342 22,154
Compensation expense from
stock option awards .... - - - - 59,000 - - 59,000
Net loss ................. - - - - - (855,879) - (855,879)
---------- -------- ------ ------ ------------ ------------ --------- -----------
Balance at December 31, 2004 9,320,336 93,203 - - 20,736,049 (20,427,661) (7,816) 393,775
Exercise of stock options 562,500 5,625 - - 106,875 - - 112,500
Issuance of common shares
in lieu of cash for
interest on loan payable 44,000 440 - - 10,560 - - 11,000
Warrants issued in
connection with loan
payable ................ - - - - 24,000 - - 24,000
Issuance of Common shares
for CRI acquisition .... 2,000,000 20,000 - - 240,000 - - 260,000
Compensation expense from
stock option awards .... - - - - 9,441 - - 9,441
Net loss ................. - - - - - (772,051) - (772,051)
---------- -------- ------ ------ ------------ ------------ --------- -----------
Balance at December 31, 2005 11,926,836 119,268 - - 21,126,925 (21,199,712) (7,816) 38,665
========== ======== ====== ====== ============ ============ ========= ===========
See accompanying notes to consolidated financial statements
26
HYDRON TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEAR ENDED DECEMBER 31,
2005 2004
--------- ---------
OPERATING ACTIVITIES
Net Loss ......................................... $(772,051) $(855,879)
Adjustments to reconcile net loss to
net cash used by operating activities
Minority Interest ............................ (35,328) (14,809)
Depreciation and amortization ................ 59,090 33,917
Compensation expense from stock option awards 9,441 59,000
Deferred financing costs ..................... 7,470 -
Interest expense ............................. 11,000 -
Change in operating assets and liabilities net
of assets acquired
Restricted cash .............................. (112,334) -
Trade accounts receivable .................... (110,526) 577
Inventories .................................. 88,332 38,036
Prepaid expenses and other current assets .... 39,059 (32,768)
Deposits ..................................... 14,224 -
Accounts payable ............................. 197,328 48,211
Royalties payable ............................ 380 (98,305)
Deferred revenues ............................ 43,353 (73,984)
Interest payable ............................. 13,230 -
Accrued liabilities .......................... 20,050 (5,002)
--------- ---------
Net cash used by operating activities .......... (527,282) (901,006)
INVESTING ACTIVITIES
Cash acquired .................................... 6,977 -
Purchases of property and equipment .............. (24,989) -
Deferred product costs ........................... - (42,141)
--------- ---------
Net cash used by investing activities .......... (18,012) (42,141)
FINANCING ACTIVITIES
Loan payable, proceeds, net ...................... 149,249 (4,051)
Payments on capital leases ....................... (19,853) -
Proceed from exercise of stock options ........... 112,500 -
Proceeds from sale of Treasury Stock ............. - 22,154
Increase in minority interest of consolidated
partnership ..................................... - 300,000
--------- ---------
Net cash provided from financing activities .... 241,896 318,103
--------- ---------
Net decrease in cash and cash equivalents ...... (303,398) (625,044)
Cash and cash equivalents at beginning of period ... 339,679 964,723
--------- ---------
Cash and cash equivalents at end of period ......... $ 36,281 $ 339,679
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Warrants issued in connection with loans payable $ 24,000 $ -
Stock issued in acquisition ..................... 260,000 -
Stock issued to pay accrued interest ............ 11,000 -
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization of Business
Hydron(R) Technologies, Inc. (the "Company") manufactures and sells
consumer and professional products, primarily in the personal care/cosmetics
field. The Company holds the exclusive license from Valera Pharmaceuticals
(VLRX), the assignee of GP Strategies Corporation (formerly National Patent
Development Corporation) ("GPS") to a Hydron(R) polymer-based drug delivery
system for topically applied, nonprescription pharmaceutical products, which the
Company uses to develop proprietary products or to license to third parties. The
Company owns U.S. and international patents on a method to suspend the Hydron
polymer in a stable emulsion for use in personal care/cosmetic products.
The Company also owns a patent entitled "Compositions and Methods for
Delivery of Skin Cosmeceuticals." This patent covers the Company's unique
self-adjusting pH emulsion system.
The Company also owns U.S. and international patents on a method to
infuse oxygen into the skin and tissue topically without using the blood stream.
The oxygenation technology was submitted to the Food & Drug Administration to
obtain the necessary approvals for medical applications; however, at this time,
the necessary steps for final approval has not been determined and this project
is currently on hold.
The majority of the Company's products are currently sold in the United
States through the Company's direct marketing channels (proprietary Catalog and
the Web site), and to a lesser extent through salons and doctors' offices, and
internationally. The Company also sells its products to private label customers.
In addition, the Company manufactures products for a number of other companies
on a contract manufacturing basis.
Principles of Consolidation
The consolidated financial statements include the accounts of Hydron
Technologies, Inc. and its wholly-owned subsidiary CRI purchased as of July 1,
2005, and its majority owned limited liability limited partnership, Hydron
Royalty Partners, LLLP. Hydron Royalty Partners, LLLP (the "Partners") which 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 significant
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.
28
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. The credit risk
associated with cash equivalents is considered low due to the credit quality of
the issuers of the financial instruments.
Cash and cash equivalents includes $36,281 which is covered by the
Federal Deposit Insurance Commission.
Restricted cash
At December 31, 2005, the Company had restricted cash of $112,334,
which represents funds from a consolidated entity, that are not available for
use in the Company's normal operations.
Concentration of Credit Risk
Trade accounts receivable are due primarily from contract manufacturing
customers and are usually paid to the Company within 45 days after receipt of
goods. The Company performs ongoing evaluations of its significant customers and
does not require collateral, although in some cases it requires deposits or
advances.
Inventories
Inventories are valued at the lower of cost (first-in, first-out) or
market, and include finished goods, components and raw materials.
Long-Lived Assets
The Company reviews long-lived assets and certain identifiable
intangibles held and used for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In evaluating the fair value and future benefits of its intangible
assets, management performs an analysis of the anticipated undiscounted future
net cash flows of the individual assets over the remaining amortization period.
The Company recognizes an impairment loss if the carrying value of the asset
exceeds the expected future cash flows. During the years ended December 31, 2005
and 2004, there were no deemed impairment of long-lived assets.
Property and Equipment
Property and equipment, consisting primarily of furniture and
equipment, is carried at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, ranging from four to six
years.
Deferred Product Costs
Deferred product costs consist primarily of costs incurred for the
purchase and development of patents and product rights (see Note 6). The
deferred product costs are being amortized over their estimated useful lives of
five to seventeen years using the straight-line method.
29
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Common Stock, Common Stock Options and Net Loss Per Share
When the Company issues shares of common stock in exchange for
services, an expense is recognized over the period in which the services are
rendered. The expense is based upon the fair value of such shares, in accordance
with FASB statement No. 123 "Accounting and Disclosure of Stock-Based
Compensation." using a Black-Scholes pricing model, at the date such
arrangements are consummated or authorized by the Board of Directors, with a
corresponding credit to capital.
The Company has elected to follow Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations in accounting for its stock options and has adopted the
disclosure-only provisions of FASB Statement No. 123. Accordingly, $9,441 in
compensation cost has been recognized in the Company's consolidated financial
statements with respect to issuances in connection with the Company's stock
option plans.
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." The Company has elected to continue to
use the intrinsic value method of accounting for stock compensation in
accordance with APB No. 25 and related interpretations. Had the compensation
expense for the stock option plan been determined based on the fair value of the
options at the grant date consistent with the methodology prescribed under
Statement of Financial Standards No. 123 the Company's net loss and loss per
share would have been increased to the proforma amounts indicated below:
Year ended December 31,
2005 2004
--------- ---------
Net loss, as reported ...................... $(772,051) $(855,879)
Deduct: Total stock-based employee
compensation expense determined
under fair value-based method for all
awards, net of related tax effects ......... (15,384) (134,000)
--------- ---------
Pro Forma net loss ......................... $(787,435) $(989,879)
========= =========
Basic and diluted loss per share
As reported ............. $ (0.07) $ (0.09)
========= =========
Pro forma .............. $ (0.07) $ (0.11)
========= =========
30
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Revenue Recognition
The Company recognizes revenue when
o Persuasive evidence of an arrangement exists,
o Shipment has occurred,
o Price is fixed or determinable, and
o Collectibility is reasonably assured.
Subject to these criteria, the Company recognizes revenue at the time
of shipment of the relevant merchandise. The Company offers its individual
consumer customers a thirty-day warranty and estimates an allowance for sales
returns based on historical experience with product returns. For the Company's
formulation and contract manufacturing business revenue is recognized when the
work is complete and the client approves the formula by written correspondence.
Shipping and Handling Fees
The Company follows the provisions of Emerging Issues Task Force Issue
No. 00-10, "Accounting for Shipping and Handling Fees and Costs." Any amounts
billed to third-party customers for shipping and handling is included as a
component of revenue. Shipping and handling costs incurred are included as a
component of cost of sales.
Cost of Sales
Prior to the acquisition of CRI, products were manufactured through
third parties under contract and cost of sales included the cost of ingredients,
packaging material, assembly and processing costs. Currently, with manufacturing
capability, most products are manufactured in house. Inbound freight, internal
transfers, and component handling costs are charged to cost of sales. Costs
associated with shipping product to customers is included in cost of sales. The
cost of warehousing finished product that is available for sale is included in
selling, general and administrative expenses.
Research and Development Costs
Research and development expenditures, consist of costs incurred in
performing research and development activities, and are expensed as incurred.
For the years ended December 31, 2005 and 2004, expenses charged to Research and
Development were $55,037 and $279,965, respectively.
Advertising
Advertising costs are expensed as incurred and are included in
"Selling, general and administrative expenses." Advertising expenses amounted to
approximately $81,000 and $62,000 for the years ended December 31, 2005 and
2004, respectively.
31
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R "Share-Based Payment"
("SFAS 123R"), a revision to SFAS No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"), and superseding APB Opinion No. 25 "Accounting for
Stock Issued to Employees" and its related implementation guidance. SFAS 123R
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services, including obtaining
employee services in share-based payment transactions. SFAS 123R applies to all
awards granted after the required effective date and to awards modified,
repurchased, or cancelled after that date. The Company will adopt the provisions
of SFAS 123R in the first quarter of 2006. The Company believes the adoption of
SFAS 123R will result in increased compensation expense in its consolidated
Statement of Operations.
SFAS No. 154, "Accounting Changes and Error Corrections," was issued in
May 2005 and replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 requires
retrospective application for voluntary changes in accounting principle in most
instances and is required to be applied to all accounting changes made in fiscal
years beginning after December 15, 2005. The Company does not expect that the
adoption of SFAS 154 to have a material impact on the Company's consolidated
financial condition or results of operations.
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivables, deposits, accounts
payable, and other payables approximates fair value because of their short
maturities
3. INVENTORIES
At December 31, 2005, inventories consist of the following:
2005
---------
Finished goods ..................... $ 76,265
Raw materials and components ....... 620,653
---------
696,918
Less: inventory valuation allowance (290,754)
---------
Inventories, net ................... $ 406,164
=========
The Company's earnings were reduced for surplus inventory in the
amounts of $100,853 and $59,412 for the years ended December 31, 2005 and 2004,
respectively.
32
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
4. ACCOUNTS RECEIVABLES
Accounts receivable consisted of the following at December 31, 2005 and
2004:
2005 2004
--------- ---------
Accounts Receivable ................. $ 172,130 $ 9,614
Less: Allowance for Doubtful accounts (25,000) (0)
--------- ---------
Accounts Receivable, Net ............ $ 147,130 $ 9,614
========= =========
5. PROPERTY AND EQUIPMENT
At December 31, 2005 and 2004, property and equipment consisted of the
following:
2005 2004
--------- ---------
Furniture and equipment .......... $ 357,365 $ 222,002
Less accumulated depreciation .... (221,013) (209,329)
--------- ---------
$ 136,352 $ 12,673
========= =========
Depreciation for the year ended December 31, 2005 and 2004 was $11,684
and $4,968, respectively.
6. DEFERRED PRODUCT COSTS
The Company was granted U.S. Patent No. 4,883,659, dated November 28,
1989, and U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a stable
moisturizing emulsion containing an unusual emulsifying agent, as well as the
Hydron polymer and a unique combination of ingredients. These patents have
expiration dates of November 28, 2006 and August 13, 2008, respectively. During
1999 the Company was granted U.S. Patent No. 5,879,684 for its "Line Smoothing
Complex" formula. This product has been clinically shown to reduce fine lines
and wrinkles. The patent has an expiration date of April 11, 2017.
The Company was granted U.S. Patent No. 6,984,391 dated January 10,
2006, which is titled "Compositions and Methods for Delivery of Skin
Cosmeceuticals." This patent covers the Company's unique self-adjusting pH
emulsion system.
33
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
At December 31, 2005 and 2004 deferred product costs consisted of the
following:
2005 2004
--------- ---------
Deferred product cost ............ $ 351,818 $ 351,818
Less accumulated amortization .... (190,863) (162,135)
--------- ---------
$ 160,955 $ 189,683
========= =========
Amortization for the years ended December 31, 2005 and 2004 was
approximately $27,571 and $27,296, respectively.
Estimated future amortization of intangible assets are as follows:
2006 ................ $31,264
2007 ................ 20,214
2008 ................ 16,667
2009 ................ 11,746
2010 ................ 9,432
thereafter ............. 71,632
7. ACQUISITION
On July 1, 2005, the Company acquired all the outstanding common stock
of Clinical Results, Inc. (CRI). As consideration, the Company issued 2,000,000
shares of common stock (fair value of $260,000). The acquisition was accounted
for using the purchase method of accounting. The results of operations are
included in the consolidated statements of operations since the date of
acquisition. Intangible asset of $241,311 was recorded in this transaction which
is being amortized over 3 to 10 years using the straight line method.
The following summarizes the fair value of the assets of CRI acquired
and the liabilities of CRI assumed:
Cash ......................... $ 6,977
Accounts receivable .......... 26,990
Inventory .................... 12,500
Prepaid assets ............... 3,062
Deposits ..................... 2,216
Property and equipment, net .. 17,297
Identifiable intangible assets 241,311
Accounts payable ............. (45,629)
Other liabilities ............ (4,724)
--------
NET ASSETS ............... $260,000
========
34
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Post-acquisition amortization of the identifiable intangible assets for
the year ended December 31, 2005 was approximately $18,677. Estimated future
amortization of the identifiable intangible assets are as follows:
2006 ................ $35,780
2007 ................ 35,780
2008 ................ 27,446
2009 ................ 19,113
2010 ................ 19,113
thereafter ............. 85,402
8. ROYALTY AGREEMENTS
From 1976 through 1989, the Company and GPS entered into various
agreements, wherein the Company obtained the exclusive worldwide rights to
market products using Hydron polymers in cosmetic and oral health fields, the
two fields in which the Company has concentrated its research and development
efforts, and to utilize the Hydron polymer as a drug release mechanism in
topically applied, nonprescription pharmaceutical products. The Hydron polymer
is one of the underlying technologies in many of the Company's skin care
products. GPS has the exclusive worldwide license to market prescription drugs
and medical devices using Hydron polymers. Further, each has the right to
exploit products with Hydron polymers not in the other's exclusive fields.
Under the terms of the GPS Agreement, the Company and GPS are each
required to pay to the other a royalty of five percent (5%) of their respective
net sales of Hydron polymer products, except for sales of certain specified
non-prescription drug products, utilizing the Hydron polymer as an active
ingredient to third parties. Where the seller receives an up-front license fee,
royalty or similar payment the seller shall pay the other party a royalty of
twenty-five percent (25%) of such payments. GPS has assigned its rights under
the GPS Agreement to Valera Pharmaceuticals (formerly known as Hydro-Med
Sciences, Inc.) (Valera).
The Company and Valera were discussing possible ways to simplify the
GPS Agreement in 2004 but were unable to reach agreement. As a result, the
Company assigned its rights under the GPS Agreement to Hydron Royalty Partners,
LLLP, a newly created limited liability partnership with the Company as the
"General Partner." The partnership assumed the existing liability for prior
period royalties ($127,984) and will annually pay the first $30,000 of any
royalties due to Valera and, in return, will receive future royalties from
Valera.
An aggregate of $29,512 and $ 29,132 was accrued and unpaid as of
December 31, 2005 and 2004. For the years ended December 31, 2005 and 2004, the
Company's Consolidated Statement of Operations has recorded royalty expenses of
approximately $36,000 and $36,000, respectively. The Company has not received
any royalty payments, or been advised of any sales that would entitle the
Company to royalty income.
35
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
9. ACCRUED LIABILITIES
At December 31, 2005, accrued liabilities consisted of the following:
2005
--------
Dividends payable .............. $ 83,163
Director fee payable ........... 101,020
Professional fees .............. 32,398
Other .......................... 38,146
--------
$254,727
========
10. INCOME TAXES
The Company accounts for income taxes under FASB Statement No. 109,
"Accounting for Income Taxes" (FASB 109). Deferred income tax assets and
liabilities are determined based upon differences between financial reporting
and tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. There has been no income tax expense during the two years ended
December 31, 2005.
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows:
2005 2004
----------- -----------
Net operating loss carryforwards $ 7,740,973 $ 8,404,000
Tax credit carry forwards ...... 180,000 180,000
Other .......................... 181,211 202,000
----------- -----------
Deferred tax assets ............ 8,102,184 8,786,000
Less valuation allowance ....... (8,102,184) (8,786,000)
----------- -----------
Total net deferred taxes ....... $ - $ -
=========== ===========
FASB 109 requires a valuation allowance to reduce the deferred tax
assets reported if, based on the weight of the evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
After consideration of all the evidence, both positive and negative, management
has determined that an $8,102,184 valuation allowance at December 31, 2005 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance decreased by $683,816 in 2005 and
increased $376,000 in 2004.
36
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
As of December 31, 2005, the Company had an unused net operating loss
carryforward of approximately $20,571,280 available for use on its future
corporate income tax returns. This net operating loss carryforward begins to
expire in December 2006 through 2025. Pursuant to Sections 382 and 383 of the
Internal Revenue Code, annual use of any of the Company's net operation loss and
credit carry forwards may be limited if cumulative changes in ownership of more
than 50% occur during any three year period.
The reconciliation of income tax rates, computed at the U.S. federal
statutory tax rates, to income tax expense is as follows:
Year ended December 31,
2005 2004
---- ----
Tax at U.S. statutory rates .......... (34%) (34%)
State income taxes, net of federal
tax benefit ......................... (4%) (4%)
Valuation allowance adjustments ...... 38% 38%
---- ----
0% 0%
==== ====
11. LOAN PAYABLE
On June 14, 2005, the Company borrowed an aggregate of One Hundred
Fifty Thousand Dollars ($150,000) (collectively, the "Loans") from three
individual lenders (collectively, the "Lenders"), including individuals who are
(i) the Chairman of the Board and Interim President, and (ii) a second director
of the Company.
In connection with the Loans, the Company issued to each of the Lenders
a promissory note in the principal amount of Fifty Thousand Dollars ($50,000)
(individually, a "Note" and collectively, the "Notes") providing for (a)
quarterly payments of interest at ten percent (10%) per annum and (b) repayment
of principal in a balloon payment on the second anniversary of the date of the
Notes. Under the terms of the Notes, the Company may elect to pay quarterly
interest to the holders of the Notes in shares of common stock, $.01 par value,
of the Company (the "Common Stock"), in an amount calculated by dividing the
amount of interest due and payable by ten cents ($.10). The Notes also provide
that, in the event of a default by the Company under the Notes, the holders may
elect to receive payment of principal and accrued and unpaid interest in shares
of Common Stock, in an amount calculated by dividing the amount of principal and
accrued and unpaid interest payable by the "Average Market Price" for a share of
Common Stock. Under the terms of the Notes, "Average Market Price" means the
average closing sale price for a share of Common Stock measured (x) over the
last ten trading days of the month preceding the interest payment date or, (y)
if no trading in the Common Stock has occurred during such period, the average
closing sale price on the last date on which a share of Common Stock was sold in
over-the-counter trading in the Common Stock. In the event that no shares of
37
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Common Stock have traded in the over-the-counter market for a period of six
months or more, the Average Market Price shall be the fair market price for a
share of Common Stock as determined in good faith by the Board of Directors of
the Company. In October 2005, the Company elected to pay the accrued interest
due on the Notes of $11,040 in stock of the Company and issued 44,000 shares at
$.25 to the Note holders. In January 2006, the Company elected to pay the
accrued interest due on the Notes of $13,230 in stock of the Company and issued
37,800 shares at $.35 to the Note holders.
In addition, in connection with the Loans, each Lender received a
Common Stock Purchase Warrant (collectively, the "Warrants") entitling the
holder to purchase One Hundred Thousand (100,000) shares of Common Stock at an
exercise price of ten cents ($.10) per share for a five-year period. The
warrants were valued using the Black Scholes model at $24,000, which will be
amortized as interest expense over the life of the notes.
The Notes and the Warrants each provide that in the event that the
Company shall grant "piggy back" registration rights to any other party to cause
the Company's Common Stock or any security exercisable or exchangeable for, or
convertible into, shares of Common Stock to be included in a registration
statement filed by the Company for sale by any selling shareholder or by the
Company, the Company will grant the holders of the Notes and Warrants similar
registration rights.
Loans Payable consisted of the following:
2005 2004
--------- ---------
Loan Payable ...................... $ 150,000 $ 751
Accrued interest .................. 13,230 -
Less: Deferred financing costs .... (16,530) -
--------- ---------
$ 146,700 $ 751
========= =========
12. STOCK OPTIONS AND WARRANTS
The number of shares of common stock reserved for issuance was
5,099,000 for December 31, 2005 and 5,575,500 for 2004. This includes 2,210,000
shares for the private placement subscription agreements completed November 14,
2003.
38
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
STOCK OPTION PLANS
THE 1993 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1993 Non-Employee Director Stock Option Plan ("1993 Plan") was
adopted by the Board of Directors on December 22, 1993, approved by the
shareholders on July 19, 1994 and approved, as amended, by the shareholders on
December 17, 1997. The purpose of the 1993 Plan is to assist the Company in
attracting and retaining key directors who are responsible for continuing the
growth and success of the Company. No options were granted under the 1993 Plan
during the year ended December 31, 2005
1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
During 1997, the Company adopted the 1997 Non-Employee Director Stock
Option Plan. Such plan provides grants of stock options to non-employee
directors of the Company to purchase an aggregate of 100,000 shares of the
Company's common stock. Each non-employee director shall be granted an option to
purchase 2,000 shares of the Company's common stock on each May 1st throughout
the term of this plan at exercise prices equal to the average of the fair market
value of the Company's common stock during the ten business days preceding the
date of the grant. In addition, each non-employee director who sits on a
committee of the Board of Directors shall be granted an option to purchase 500
shares of the Company's common stock under the same pricing arrangements as
above. Subject to certain exceptions, no options granted under this plan shall
be exercisable until one year after the date of grant. During August 1999, the
Company agreed to increase the annual May 1st grant to the Board members from
2,000 to 20,000 shares of the Company's common stock and committee members from
500 to 5,000. These options expire five years from the date of grant and all
outstanding options are exercisable at December 31, 2005. There are 24,000
options available for grant under this plan at December 31, 2005.
2003 STOCK PLAN
On November 19, 2003, the Board approved, subject to shareholder
approval, the 2003 Stock Plan (the "2003 Plan"). The shareholders approved this
plan on November 15, 2004. The 2003 Plan permits the grant of nonqualified and
incentive stock options, as well as restricted stock purchases. The form of the
equity is left up to the discretion of the committee of the Board (or the Board,
if no committee) at the time of each grant. This 2003 Plan is designed to
consolidate and replace two Stock Option Plans, which have expired; the 1993
Stock Option Plan and the 1997 Non-Employee Director Stock Option Plan. The
purpose of the 2003 Plan is to assist the Company in attracting, retaining, and
motivating key employees, officers, directors, and consultants by offering
selected individuals an opportunity to acquire a proprietary interest in the
success of the Company.
The Board of Directors had approved the issuance of 943,500 options in
prior periods subject to the adoption of a new stock plan at the November 15,
2004 shareholders' meeting. All of these options have been reflected as being
granted in 2004.
39
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Options to purchase 687,000 shares were granted to employees during the
year ended December 31, 2005, necessitating adjustments to the pro forma
information regarding net income and earnings per share as required by FASB
Statement No. 123.
On January 25, 2005, the Board of Directors, by unanimous consent,
re-authorized the issuance of 743,500 stock options from the 2003 Stock Plan to
Directors and Officers of the Company. Since the original approval date was more
than 12 months before the shareholder adoption of the 2003 Stock Plan, the
options had to be re-authorized to include them under the plan.
Activity with respect to these plans is as follows:
Weighted
Number of Average
Options/ Price Exercise
Warrants Per Share Price
--------- -------------- --------
Outstanding at December 31, 2003 . 221,500 0.20 to 0.92 $0.56
Stock options granted .......... 1,033,500 0.13 to 0.59 0.33
Stock options expired .......... (39,500) 0.64 to 0.92 0.67
---------
Outstanding at December 31, 2004 . 1,215,500 $0.13 to $0.81 $0.37
=========
Stock options granted .......... 687,000 $ 0.28 0.28
Stock options expired .......... (670,500) 0.13 to 0.52 0.30
---------
Outstanding at December 31, 2005 . 1,232,000 $0.13 to $0.81 $0.34
=========
OTHER OPTIONS
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.
On October 24, 2005 the Company received proceeds of $112,500 through
the partial exercise of certain warrants relating to a previous private
placement of its securities in December 2002. These funds were received from
three individuals including two individuals who are (i) the Chairman of the
Board and Interim President, and (ii) a second director of the Company.
40
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
On October 24, 2005, the Board of Directors adopted a resolution
authorizing the extension of the exercise period for certain options to purchase
common stock (the "Options") granted in connection with a private placement of
securities by the Company from December 9, 2005 to December 9, 2007 (the "New
Expiration Date") in consideration of the agreement of certain holders to
immediately exercise a portion of the Options and purchase the underlying common
stock. The shares underlying the original Options were registered by the Company
under the Securities Act of 1933, as amended (the "Securities Act"). The shares
of common stock underlying the Options totaled 1,750,000 shares or approximately
13.4% of the total outstanding shares of the Company.
Richard Banakus, the acting Chairman and a director, and Ronald J.
Saul, a director of the Company, together with his spouse, Antonette G. Saul,
are among the holders of the Options. Mr. Banakus assigned for nominal
consideration certain of his Options exercisable for 250,000 shares to Mr. Saul
and effective October 27, 2005 exercised Options representing an aggregate of
250,000 shares of common stock in consideration of the extension of the exercise
period to the New Expiration Date for Options representing an aggregate of
750,000 shares of common stock. Mr. Saul exercised Options effective October 28,
2005, representing an aggregate of 250,000 shares and had Options representing
an aggregate of 125,000 extended to the New Expiration Date. In addition,
certain other holders of Options exercised Options representing an aggregate of
62,500 shares and had the exercise period for Options representing an aggregate
of 62,500 shares extended to the New Expiration Date bringing the total number
of shares represented by the new Options (the "New Options") exercisable at any
time prior to the New Expiration Date to 937,500 or approximately 7.6% of the
total outstanding shares.
Number of
Options/
Warrants
----------
Outstanding at December 31, 2004 ..................... 1,750,000
Stock options granted (including extended options) ... 937,500
Stock options exercised .............................. (562,500)
Stock options expired ................................ (1,187,500)
----------
Granted and outstanding at December31,2005 ........... 937,500
==========
The Company has agreements with several consultants who provide
financial, business and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. As part of their compensation, these consultants were granted warrants
and nonqualified stock options to purchase shares of the Company's common stock
at prices representing the fair market value of the shares at the date of grant.
Activity with respect to options and warrants granted to these consultants is
summarized below:
41
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Weighted
Number of Average
Options Price Exercise
Warrants Per Share Price
--------- -------------- --------
Outstanding at December 31, 2004 . 150,000 $0.22 to $0.66 $0.56
Stock options granted .......... 19,500 $0.30 to $0.31 0.30
---------
Outstanding at December 31, 2005 . 169,500 0.22 to 0.66 0.53
=========
OTHER WARRANTS
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 $1.00. As of December 31, 2005,
all 2,210,000 warrants are outstanding.
In June 2005, in connection with the loan payable, each Lender received
a Common Stock Purchase Warrant entitling the holder to purchase One Hundred
Thousand (100,000) shares of Common Stock at an exercise price of ten cents
($.10) per share for a five-year period. The warrants were valued using the
Black Scholes model at $24,000, which will be amortized as interest expense over
the life of the notes.
The Company's Statement of Operations for the year ended December 31,
2004 includes $59,000 of research and development cost representing the fair
value of options granted to the Company's FDA consultant. For the year ended
December 31, 2005, interest expense includes $7,470 representing the
amortization of the debt discount.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 2005 and 2004:
2005 2004
------- -------
Risk-free interest rate .............. 4.3% 4.0%
Expected life ........................ 5 years 5 years
Expected volatility .................. 124% 106%
Expected dividend yield .............. 0% 0%
42
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. As the Company's stock options have characteristics significantly
different than those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The weighted average remaining contractual life of all options
outstanding at December 31, 2005 was 2.72 years.
13. COMMITMENTS
Lease
-----
The Company leased office space under a non-cancelable lease agreement,
which expired in August 2005. Net rent expense under this lease was
approximately $30,800 and $66,200 in 2005 and 2004, respectively.
The Company currently leases 21,000 sq feet of office space in under
two non-cancelable leases in St Petersburg, Florida which expire between April
and September 2008. Rent expense for the year ended December 31, 2005 was
approximately $30,000 under these new leases. The Company also leases equipment.
Equipment lease expense for the year ended December 31, 2005 was $4,854.
The leased property under capital leases as of December 31, 2005 had a
cost of $93,078, and accumulated depreciation of $2,438. Amortization of the
leased property is included in depreciation expense.
Future minimum lease payments for these leases at December 31 are as
follows:
YEAR ENDING CAPITAL OPERATING
December 31, LEASES LEASES
------------ ------ ------
2006 .......................... $ 31,951 $ 51,712
2007 .......................... 31,951 78,333
2008 .......................... 26,060 48,185
2009 .......................... - -
--------- ---------
TOTAL MINIMUM LEASE OBLIGATION ..................... 89,962 178,230
LESS: INTEREST .................................. (16,738) -
--------- ---------
PRESENT VALUE OF TOTAL MINIMUM LEASE PAYMENTS ... 73,224 $ 178,230
LESS: CURRENT PORTION ........................... (22,648)
---------
NON-CURRENT PORTION ....................... $ 50,576
=========
43
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
14. MANAGEMENT'S PLAN
The accompanying condensed 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 anticipates that present working capital balances and
internally generated funds will be sufficient to meet our working capital needs
for the next three months or longer based on management decisions and sales. 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.
On July 1, 2005, the Company acquired Clinical Results, Inc. (CRI), a
St. Petersburg, Florida-based company. CRI is a privately held product
development laboratory and contract manufacturer of cosmeceutical and other
personal care products. CRI's clients range from mass market retailers to
marketers of high end brands, and certain health food store brands.
Management believes that Hydron Technologies will benefit from lower
manufacturing costs, and be better positioned to build its catalog and internet
business, as well as expand the sale of its skin care treatments beyond its
historical direct response TV and catalog operations, by utilizing CRI's broker
network.
Under the terms of the agreement, Hydron Technologies acquired all of
the outstanding shares of capital stock of CRI in consideration of an aggregate
of two million newly issued shares of the Company, in a transaction exempt from
registration under the securities laws. Such shares will be subject to transfer
restrictions unless registered under federal and applicable state securities
laws or sold in a transaction exempt from registration.
Additionally, Hydron restructured both its management and its Board of
Directors. David Pollock, the President of CRI, was appointed Chief Executive
Officer of the Company and joined Hydron's Board, replacing Joshua Rochlin, who
resigned from the Board on March 31, 2005. Douglas Reitz, M.D., CRI's co-owner,
was appointed Executive Vice President of Hydron. As part of the arrangement,
the Company entered in to a three-year employment agreement with Mr. Pollock and
Dr. Reitz, each with an annual salary of $106,000.
Effective August 5, 2005, Terrence S. McGrath, the Company's Chief
Operating Officer, resigned in order to pursue other career opportunities. Mr.
McGrath's responsibilities were assumed by Mr. Pollock, Hydron's Chief Executive
Officer.
In an effort to reduce operating expenses, the Company has consolidated
operations by relocating Hydron Technologies' headquarters and certain
warehousing facilities to the CRI manufacturing facility. While CRI will
continue to provide contract manufacturing services, the Company has renamed the
CRI operation as Hydron Technologies. The Company will continue its cost cutting
efforts by reducing research and development costs, and cost of goods by
manufacturing certain products in-house.
44
Hydron Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 2005 and 2004
Management anticipates that any impact of the acquisition on cash flow
will not be realized for six to nine months. 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 objectives, or that such objectives, if
realized, will enable the Company to obtain profitable operations or continue as
a going concern.
15. SUBSEQUENT EVENTS
In January 2006, the Company elected to pay the accrued interest due on
the notes as of December 31, 2005 of $13,230 in stock of the Company and issued
37,800 shares at $.35 to the note holders.
On February 3, 2006 the Company received proceeds of $25,000 through
the partial exercise of certain warrants. These funds were received from a
director of the Company.
On March 29, 2006 the Company received proceeds of $19,535 through the
partial exercise of certain warrants. These funds were received from three
individuals including two individuals who are (i) the Chairman of the Board and
Interim President, and (ii) a second director of the Company.
On March 31, 2006, the Company elected to pay the $21,546 in accrued
interest due on the notes as of that date in stock of the Company and issued
37,800 shares at $.57 to the note holders.
45
PART III
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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 Executive Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive 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.
Disclosure controls and procedures (as defined in the Exchange Act
Rules 13a-14(c) and 15d-14(c)) are controls and other procedures that are
designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act are recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed in our reports filed under the Exchange Act is accumulated and
communicated to management to allow timely decisions regarding required
disclosure.
The Certifying Officer has also indicated that there were no
significant changes in our internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
Our management, including the Certifying Officer, does not expect that
our disclosure controls or our internal controls will prevent all error and
fraud. A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. In addition, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within a company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people or by management
override of the control. The design of any systems of controls also is based in
part upon certain assumptions about the likelihood of future events, and their
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions. Over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
46
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
Listed below are the directors and executive officers of the Company as
of December 31, 2005:
Name Position
---- --------
Richard Banakus Director, Chairman of the Board
Karen Gray Director
Ronald J. Saul Director
David Pollock Director, Chief Executive Officer
Douglas Reitz, D.C Executive Vice President
Business Experience
Richard Banakus, age 59, has served as a director of the Company since
June 1995 and as Interim President of the Company since September 19, 1997. From
April 1991 to the present, Mr. Banakus has been a private investor with
interests in a number of privately and publicly held companies. From July 1988
through March 1991, he was managing partner of Banyan Securities, Larkspur,
California, a securities brokerage firm that he founded.
Karen Gray, age 47, has served as a director of the Company since
December 1997 and was a consultant to the Company on marketing and
communications matters from November 1996 to December 1999. Ms. Gray has over 17
years of management experience in marketing communications in various capacities
with various companies. From 1993 to November 1996, Ms. Gray served as Vice
President, Corporate Communications, of the Company. From June 1992 to November
1993, Ms. Gray served as President of MarCom Associates, Inc., a marketing
communications company that she founded.
Ronald J. Saul, age 58, has served as a director of the company since
January 2003. From September 1992 to the present, Mr. Saul has been a financial
consultant. From October 1985 through August 1992, Mr. Saul was the Treasurer
and Vice President of National Intergroup, a multi company holding company. From
November 1970 to September 1985, Mr. Saul held various accounting and financial
positions with National Intergroup Inc. and its predecessor company, National
Steel Corporation.
David Pollock age 41, has served as a director of the Company and as
CEO of the Company from July 1, 2005 to present. Mr. Pollock is responsible for
developing a number of innovative products, including some of the early glycolic
and alpha hydroxy acid products, the first mass market Vitamin C line, the
number one selling acne system in mass market today, plus products for such
brands as SkinCeuticals, Bliss, Shaklee, Ted Gibson, Vogue International,
DermaFresh, Keri Lotion, CaliforniaBeauty, Desert Essence and more.
Mr. Pollock's experience in formulating is augmented by his product
marketing background as the former Vice President of Product Development for the
Home Shopping Network and his senior management position with the Fuller Brush
company. Mr. Pollock has been a keynote speaker at various national conferences,
written a number of articles for various consumer and trade publications, been a
contributing writer to a text book on delivery systems for chemists, currently
serves on the Scientific Advisory Committee for CTFA(Cosmetic Toiletries &
Fragrance Association) and has served on the board for FCPMA (Florida Cosmetic
Pharmaceutical Manufacturers Association).
47
Dr. Douglas Reitz, Executive Vice President from July 1, 2005 to
present. Dr. Reitz has been involved in researching and clinical testing of a
number of pain relief, anti-inflammatory, acne, anti-aging/collagen building and
breakthrough delivery system technologies. Dr. Reitz brings his knowledge and
expertise to HYDRON Technologies, Inc., overseeing research and clinical trials.
His undergraduate study was in biochemical engineering and then went on to get
his medical degree. He was in private practice for 20 years
DIRECTOR AND OFFICER RESIGNATIONS
Mr. Joshua Rochlin resigned from the Board of Directors of Hydron
Technologies, Inc. effective March 31, 2005 due to his increased commitments at
Marc Ecko Enterprises. In addition, William A. Lauby resigned his position as
Chief Financial Officer effective March 30, 2005 in order to pursue other career
possibilities and to be closer to his family. Effective August 5, 2005, Terrence
S. McGrath, the Company's Chief Operating Officer, resigned in order to pursue
other career opportunities. Mr. McGrath's responsibilities were assumed by Mr.
Pollock, Hydron's Chief Executive Officer.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company's officers, directors and beneficial owners of more than
10% of any class of its equity securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 ("Reporting Persons") are required under the
Act to file reports of ownership and changes in beneficial ownership of the
Company's equity securities with the Securities and Exchange Commission. Copies
of those reports must also be furnished to the Company. Based solely on a review
of the copies of reports furnished to the Company pursuant to the Act, the
Company believes that during the year ended December 31, 2005 all filing
requirements applicable to Reporting Persons were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information for the years ended December
31, 2005, 2004 and 2003 with respect to all compensation awarded to, earned by,
or paid to the Company's Chief Executive Officer, Chief Operating Officer and
Chief Financial Officer. None of the Company's other executive officers received
salary and bonus payments in excess of $100,000 during the year ended December
31, 2005.
48
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -----------------------------------
AWARDS PAYOUTS
OTHER ------------------------- -------
ANNUAL RESTRICTED SECURITIES ALL OTHER
NAME AND PRINCIPAL COMPEN- STOCK UNDERLYING LTIP COMPEN-
POSITION YEAR SALARY BONUS SATION AWARD(S) OPTIONS/SARS PAYOUTS SATION
------------------------- ---- -------- ----- ------- ---------- ------------ ------- ---------
Richard Banakus, Chairman 2005 $ 9,689 - - - - - -
2004 $ 10,530 - - - 198,500 - -
2003 $ 10,530 - - - - - -
Terrence S. McGrath, COO 2005 $ 71,077 - - - - - -
2004 $125,000 - - - 425,000 - -
2003 $125,000 - - - - - -
William A. Lauby, CFO 2005 $ 27,500 - - - - - -
2004 $110,000 - - - 225,000 - -
2003 $110,000 - - - - - -
David Pollock, CEO 2005 $ 53,000 - - - 400,000 - -
2004 $ - - - - - - -
2003 $ - - - - - - -
Dr. Douglas Reitz, 2005 $ 53,000 - - - 200,000 - -
Executive Vice 2004 $ - - - - - - -
President 2003 $ - - - - - - -
During 2005, the members of the Board were granted options to purchase
20,000 shares of the Company's common stock for participation on the Company's
Board of Directors and an additional 5,000 shares if they were on a Board of
Directors committee.
The Board of Directors had approved in prior years the issuance of
198,500 options to Chairman, Richard Banakus, 425,000 options to former COO,
Terrence S. McGrath and 225,000 options to former CFO, William A. Lauby, subject
to the approval of the 2003 Stock Plan. The shareholders at the November 15,
2004 meeting approved the 2003 Stock Plan. Therefore these options were issued
in 2004. The options issued to Mr. McGrath and Mr. Lauby were canceled in 2005
when their employment terminated.
The following table sets forth certain information relating to option
exercises effected during the year ended December 31, 2005, and the value of
options held as of such date by the Company's Chief Executive Officer and all
other persons who were executive officers of the Company and its subsidiaries
for the year ended December 31, 2005. The Company does not have any outstanding
stock appreciation rights.
49
AGGREGATE OPTION EXERCISES FOR THE YEAR ENDED DECEMBER 31, 2005 AND YEAR END OPTION VALUES
Number of
securities underlying Value(1) of unexercised
Shares unexercised options In-the-money options
Acquired at December 31, 2005 at December 31, 2005
On Value ($) Exercisable/ Exercisable/
Name Exercise Realized(2) Unexercisable Unexercisable
---- -------- ----------- --------------------- -----------------------
Richard Banakus -0- -0- 1,493,500(3) $359,975 / $0
David Pollock -0- -0- -0- / 400,000 $0 / $140,000
Douglas Reitz -0- -0- -0- / 200,000 $0 / $70,000
__________
(1) Total value of unexercised options is based upon the closing price ($0.35)
of Common Stock as reported by NASDAQ on December 30, 2005.
(2) Value realized in dollars is the amount that the shareholder is deemed to
have received as the result of the exercise of options, based upon the
difference between the fair market value of the Common Stock as reported by
NASDAQ on the date of exercise and the exercise price of the options.
(3) Includes 750,000 unexercised options purchased in the Company's private
placement completed December 10, 2002; 200,000 unexercised warrants
purchased in the Company's Private Placement completed November 13, 2003;
125,000 options received in a bridge loan agreement with the Company dated
August 4, 2003; 100,000 options received in a bridge loan agreement with the
Company dated June 14, 2005 and 318,500 options received through the
Company's Stock Option Plans.
EMPLOYMENT AGREEMENT
The Company entered in to a three-year employment agreement with David
Pollock, Chief Executive Officer of the Company and Dr. Doug Reitz, Executive
Vice President of the Company each with an annual employment salary of $106,000.
COMPENSATION OF DIRECTORS
Employees of the Company who also serve as directors are not entitled
to any additional compensation for such service, except for Mr. Richard Banakus.
Because of his status as Interim President, Mr. Banakus is treated as a
non-employee director. The Company does not have a written employment agreement
with Mr. Banakus.
Non-Employee directors including Mr. Banakus receive an annual fee of
$5,000, accrued quarterly. During 2005, each of Messrs. Richard Banakus, Karen
Gray and Ronald J. Saul earned $5,000 for their service as a director, Joshua
Rochlin who resigned on March 31, 2005, earned $1,250 as service as a director.
As of December 31, 2005, unpaid directors' fees total approximately $101,021.
50
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of December 31, 2005
regarding (i) the share ownership of the Company by each person who is known to
the Company to be the record or beneficial owner of more than five percent (5%)
of the Common Stock, (ii) the share ownership of each director of the Company,
(iii) the share ownership of the Chief Executive Officer of the Company and each
other most highly paid executive officer of the Company who earned in excess of
$100,000 during the year ended December 31, 2005, and (iv) the share ownership
of all directors and executive officers of the Company, as a group (five
persons).
Name and Address of Amount and Nature of Approximate
Beneficial Owner Beneficial Ownership Percent of Class
------------------------------- -------------------- ----------------
Richard Banakus 3,526,040(1) 26.3%
4400 34th Street North, Suite F
St. Petersburg, FL 33714
Karen Gray 121,000(2) 1.0%
4400 34th Street North, Suite F
St. Petersburg, FL 33714
Ronald J. Saul 1,653,000(3) 13.1%
4400 34th Street North, Suite F
St. Petersburg, FL 33714
David Pollock 1,400,000(4) 11.4%
4400 34th Street North, Suite F
St. Petersburg, FL 33714
Dr. Douglas Reitz 1,200,000(5) 9.9%
4400 34th Street North, Suite F
St. Petersburg, FL 33714
All directors and executive
officers as a group (5 persons) 7,900,040(6) 53.2%
_________
(1) Consists of 2,032,540 shares held directly and 1,493,500 shares issuable
upon exercise of options and warrants.
(2) Consists of 3,000 shares held directly and 118,000 shares issuable upon
exercise of options.
(3) Consists of 928,000 shares held directly and 725,000 shares issuable upon
exercise of options.
(4) Consists of 1,000,000 shares held directly and 400,000 shares issuable upon
exercise of options and warrants.
(5) Consists of 1,000,000 shares held directly and 200,000 shares issuable upon
exercise of options and warrants.
(6) Consists of 4,963,540 shares held directly and 2,936,500 shares issuable
upon exercise of options.
51
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No applicable transactions.
Item 13. Exhibits and reports on Form 8-K
The following documents are filed as a part of this report or are
incorporated by reference to previous filings, if so indicated:
(a) EXHIBITS
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer, Principal Financial
and Accounting 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, Principal Financial
and Accounting Officer Pursuant to 18 U.S.C., Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (filed herewith)
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed by the
Company's principal accountant, DaszkalBolton LLP.
2005 2004
------- -------
Audit fees ............................... $51,200 $29,568
Audit-related fees ....................... - 1,150
Tax fees (Tax compliance and planning) ... 11,181 7,500
All other fees ........................... - -
------- -------
$62,381 $38,218
======= =======
Under the procedures of the Company's audit committee, prior to
engagement of the Company's auditors to provide audit services and non-audit
services, the audit committee considers whether the provisions of such services
would be compatible with maintaining the independence of the Company's principal
accountants, and has determined that the provision of such services is
compatible with such accountants' independence.
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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/ David Pollock
-----------------
David Pollock
Chief Executive Officer
Principal Financial and Accounting Officer
Dated: April 19, 2006
53