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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations
The
Company’s revenues for the quarter ended December 31, 2012 were $1,331,628, $61,080 or 4.4% lower than the $1,392,708 for
the same period the previous year. For the six month period ended December 31, revenues were $2,598,118 during the current fiscal
year, as compared with $2,841,305 the year before or $243,187 lower (8.6%). Revenues are comprised of the sale of Products and
Services and Royalty and Contract payments.
Product
sales were $681,321 for the quarter ended December 31, 2012 as compared to $744,189 for the same period the year before, a $62,868
(8.5%) decrease primarily due to the timing of periodic (non-monthly) sales and the drop off in T-HEXX Dragonhyde Hoof Bath Concentrate
sales in Europe due to the high landed cost the end user is facing. Our recently launched Dragonhyde DUST dissolvable hoof bath
powder being released to Europe in 2013 should alleviate that issue. (The recommended usage of Dragonhyde DUST, which can be shipped
by regular mail, is a 1 kg pouch as compared with one gallon of Dragonhyde Hoof Bath Concentrate (which weighs approximately 4
kg) which needs special handling.) The majority of the customers that ordered on a periodic basis during the 2011 period also
ordered in our fiscal quarter ended June 30, 2012 which meant that their new orders are expected in early 2013. Such sales decrease
was offset by an increased demand for our anti-fog condensation control coatings, Cosmetics / Personal Care intermediaries and
medical device coatings. For the six month period, product sales were $1,277,403 for the 2012 period as compared with $1,501,239
for the 2011 period, lower by $223,836 (14.9%), all attributable to the T-HEXX Animal Health line.
Services
revenues, comprised of contract coating services, for the three months ended December 31, 2011 were $335,167 or $36,081 lower
(9.7%) than the $371,248 the corresponding period the year before. For the six month periods ended December 31, 2012 and December
31, 2011, services revenues were $656,938 and $721,647, respectively, or $64,709 lower (9.0%). Customers exiting their respective
business on products utilizing our contract coating services plus those converting to their own coating application while becoming
a medical chemical polymer purchaser lowered the services revenues as compared with the prior period. These “converted”
customers allow for additional revenues from medical device coating [product] sales (as reported above) and Supply and Support
Agreements (see Royalty and Contract revenues following).
Classified
as Royalty and Contract revenues are royalties received and the periodic recurring payments from license, stand still and other
agreements other than for product and services, including revenues from support and supply agreements (which avails our customers
to continued technical support and/or guaranteed access to our proprietary coatings) and may include the transfer of technical
know-how (coatings procedures). Some of the royalties and support fees are based on the net sales of the final item (to which
the Hydromer technology is applied) and are subject to the reporting of our customers. For the six months ended December 31, 2012,
Royalty and Contract revenues were $663,777, compared to $618,419 the same period a year ago, an increase of $45,358 (7.3%), a
result of a new customer converting to Hydromer coatings under a royalty agreement.
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Total
Expenses for the quarter ended December 31, 2012 were $1,298,255 as compared with $1,467,794 the year before, a 11.6% decrease.
For the six months ended December 31, 2012, Total Expenses were $2,642,567 as compared with $3,002,580 the previous year, a 12.0%
decrease.
Reducing
Total Expenses and included in Other Income for the quarter ended December 31, 2012 was $115,344 in income recognized of the proceeds
from the Company’s insurance carrier, a mutual company having no shareholders, making distributions from it being acquired.
There will be additional periodic payments which the Company will include in Other Income.
For the quarter ended December 31, 2012, the Company’s
Cost of Goods Sold was $405,097 as compared with $422,119 the year prior, lower by $17,022 or 4.0%, a result of the lower product
sales. For the six month period ended December 31, 2012, Cost of Goods Sold was $765,246 as compared with $838,131 the same period
a year ago. The $72,885 decrease (8.7%) was due to lower product sales.
Operating
Expenses were $938,745 for the quarter ended December 31, 2012 as compared to $1,037,556 the year before, lower by $98,811 or
9.5%, due to lower staffing levels this year. For the six months ended December 31, 2012, Operating Expenses were $1,900,213 or
$242,668 lower (11.3%) than the previous year’s $2,142,881, primarily due to operating on a lower staffing level.
In
addition to the one time $115,344 distribution recognized as income, Other Income / Expenses includes interest expense, foreign
currency exchange gains/losses and interest income. Interest expense (primarily mortgage interest) for the six months ended December
31, 2012 and December 31, 2011 was $97,201 and $98,743, respectively.
Net
income of $33,373 ($0.01 per share) is reported for the quarter ended December 31, 2012 as compared to a net loss of $75,086 ($0.02
per share) the year before. For the six months ended December 31, 2012, a net loss of $44,449 ($0.01 per share) is reported as
compared to a net loss of $161,275 ($0.03 per share) the year before.
Maintaining
or reducing expenses is part of the Company’s strategy in its return to profitability. Along with revenue increases (due
to new products or the market penetration of current products), the Company expects to achieve profitability. While we did not
see a net growth in revenue during the current period (as compared with the prior year), we expect that to occur soon.
Financial
Condition
Working
capital decreased $40,641 during the six months ended December 31, 2012.
For
the six months ended December 31, 2012, operating activities provided $153,236 in net cash.
The
net loss, as adjusted for non-cash expenses of depreciation and amortization and deferred income taxes, provided $145,970 in cash.
The net change in operating assets and liabilities provided an additional $7,266 in cash. Reductions to accounts receivable and
prepaid expenses were offset by the increase to other assets (the distribution by the insurance carrier, which was received in
mid-January 2013).
Investing
activities used $110,644 and financing activities used $28,628 during the six months ended December 31, 2012.
Investing
activities for the six months ended December 31, 2012 included $28,667 for capital expenditures and $81,977 towards the Company’s
patent estate. Under Financing activities was the repayment of the principal portion of the mortgage.
The
Company is nearing a return to profitability. Cost management and revenue growth are the key factors and while we did not reach
the same revenue levels achieved a year ago, it is certainly within reach. During the past few years, the Company’s R&D
resources were dedicated to its T-HEXX Animal Health product line as that could yield the quickest revenue return (as compared
with the much longer term human medical product line). Some of the recent developments in the T-HEXX product line are being rolled
out into the market.
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