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Saturday, October 14, 2006

Hydromer Inc (HYDI)

Hydromer Inc (HYDI, sec, website) Bio-polymer (polymers for medical, commercial, cosmetics, and veterinary) research and development. Until 1982 controlled by current Chairman and CEO (71). From the newly released 10-K:
These polymers become extremely lubricious (slippery) when wet. Techniques have been developed for grafting or applying this substance onto a broad variety of materials, including other polymers like polyurethane, polyvinyl chloride, and silicone elastomers, ceramics and metals. The Company has also been issued patents for permanent anti-fog materials, hydrophilic polyurethane foams, hydrophilic polyurethane blends, hydrophilic polyvinylbutyral alloys, several biocompatible hydrogels and an anti-bacterial medical material.
They have products from boat hull coatings to cow teat coatings.

10-K: (Why did they just issue a 10-K for the same period, neither is an amended version)
period ending June 30, 2006.
4.6 million shares on Sept 1, 2006. 402K options.
Customer concentration: 32% and 29% of revenues for J&J's Cordis Division and Cook Endoscopy (formerly Wilson Cook Medical).
85 employees.
Bought a building at 35 Industrial Parkway, Branchburg, NJ in 1998.

Product revenues down 3.4%.
License royalties down 18.4%.
Medical device orders were down. Contract coating services, medical coating sales were up. Lost two significant customers: one went in-house, the other "lost focus on the product line during the transition" [sounds like pure hogwash]
The Company expects a turn around from these particular customers, as in the former, the Company will replace lost medical device revenues with the sales of lubricious coatings (along with a cost reduction to staffing from the elimination of a product line). With regards to the second customer, the Company has brought to their attention of the business reduction and we are currently working on re-establishing volume. In addition, there was an one-time $250,000 in technology transfer revenues in fiscal 2005.
Gross margins went down. Looking ahead at the numbers, this doesn't seem like a particularly profitable business. More of a mousetrap company.

CEO has been around just about forever. Executive VP of operations was picked up in an acquisition in 2000 (he changed the focus to contract medical coatings). A lot of the top people are new, from 2000.

Two product liability lawsuits, covered by the liability insurance. No mention of the amount, which I would assume could affect liability costs in the future.

They claim that a lot of the increased costs now will help with operational leverage in the future. Also, 2005 costs were lowered by a $94K grant and low inventory overhead. Also patent infringement claim costs of $83K in 2006. ALso a $75K debt writeoff in 2006. $509K in legal fees since 2004, the case has now been settled (apparently in their favor since they claim it substantiated the validity of their patents). $238K impairment of goodwill recorded for 2006 (with no help in taxes), no charge in 2005. This was partially offset by $284K discounted value on $300K settlement showing up in 2006 as other income.

Auditors: Rosenberg Rich Baker Berman & Company, 40 years in business.

The assets of the company are mainly PP&E, AR, and inventory. The current ratio is 1.5. A bit less than half equity.

Revenues are down somewhat. Gross margins are about 55%. Operating expenses eat up the rest. Net loss, although they seem to hover around breakeven.

Not much dilution in the past 2 years.

Cash flow from operations is ugly and capex is about the same or greater than depreciation for the last two years. Not to mention the extra cash paid for patents and trademarks. Net borrowing for two years.
Very low cash paid for income taxes.

Big R&D costs (over 12% of revenues).

Big 10-year mortgage, 6.52% fixed. The land has appreciated somewhat, but not enough to jump and and down about. Last year they got a 2nd mortgage on the property (raised $2 million), 6.38% fixed.

Financial ratios failed a covenant, got a waiver.
Revolver: ($750K, secured by AR and inventories, LIBOR + 2.25).

Some NOLs.

With shares selling right now at 70 cents, the fully diluted market cap is around $3.5 million, which is about 1/2 revenues.

Looking at prior financial statements, here are their earnings over time:
2006: ($779K)
2005: $269K
2004: $231K
2003: $134K
2002: $186K
2001: $397K
2000: $130K
1999: $317K
1998: $376K

Roughly guessing, I'd say it looks like around $200K per year to me, and maybe it doesn't stand up well over time to inflation? I'd say a market cap of about $3 million is all that it's worth. But you never know if they strike pay dirt in the future, which would make it worth the $3.5 million market cap it currently has.

Too much of a mousetrap. Stop following

You are soooooooooooo right! as a former employee.... Resigned by the way. It is the biggest mousetrap co. I have EVER been associated with
Well, it's always good to hear from someone in-the-know about decisions that I've made. Thanks for the info!

I believe two of my investments are good examples of what a non-mousetrap company looks like: EPLN and BKBO. Both are heavily involved in the unglamorous nuts-and-bolts of their respective industries. Both are focused on pragmatic issues. And both are systematically pursuing their target market customers. Sometimes they do seem to chase technology rather than customer problems, but that seems to be the exception.

As an engineer myself, I've seen a lot of "technology for its own sake" activity.
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