2018 Annual Report

NewNon-Flammable

Anti-FogCoating

C H A I R M A N ’ S M E S S A G EC O M P A N Y P R O F I L E

Founded in 1980, Hydromeris an innovative

biotechnology focused ISO9001:2015 company engagedin the business of inventing,

developing, patenting,licensing, manufacturingand selling hydrophilic

polymer based products forcommercial markets.

Hydromer also provideshighly specialized medical

coating services to industrythrough its FDA registered

and ISO 13485:2016certified Biosearch Medical

Products subsidiary.

The goal of Hydromer is tobe the leading provider of

hydrophilic surfacemodifications and specialty

hydrophilic polymers toindustry. While

maintaining its industryleadership position inpermanent lubricious

coatings for medical devices,Hydromer constantly strivesto create new, value addedtechnologies and to build

upon its currenttechnologies – successfullyexpanding its technology

and product base to includedrug delivery and infectionresistant coatings, anti-fogand condensation control

coatings for optical plasticsand packaging, water

resistant film formers forcosmetic and

pharmaceutical products,unique hydrogels for

medical, bio-surgical andcosmetic applications, and

barrier films for theprotection of skin from

allergens.

Dear Shareholders,

It has been an interesting period. Much has happened since my lastcommunication. Foremost, circumstances beyond our control resulted in amuch delay to our fiscal 2017 annual report, so much so, that we opted toforgo its separate reporting to have it combined with this report. Much ofthe delay revolved on our deferred income tax asset and of the valuationallowance against them. We had to perform additional work to support itscarrying value and despite an extended period to use our deferred incometaxes, the accounting rules required us to still assign a valuation allowanceon a large part of them. Then came the Tax Cuts and Jobs Act of 2017which reduced its value by roughly a third as a result of the lower corporatetax rates that quickly came into effect. At the end, we opted to take a fullvaluation allowance against our deferred income tax assets knowing thatwhen we recover them, that we would have a large income tax benefit torecover against the non-cash charge we were taking for fiscal 2017.Accordingly, you will see a large income tax charge for our fiscal 2017results.

Recovery of that valuation allowance came fairly quickly. Our August2018 sale of the T-HEXX Animal Health business allowed us to recoveressentially all of the deferred tax assets back into income, albeit for thequarter ended September 30, 2018, of our 2019 fiscal year.

For our fiscal year ended June 30, 2018, we are reporting net income.I leave that summary/details for you to read in our Management'sDiscussion & Analysis report. During our annual shareholder's meeting,we will be presenting to our shareholders and stakeholders, segments of ourrejuvenation plan. By now, you have been aware of our $0.25 dividend percommon share and my stepping down from the Chief Executive Officerrole to focus solely on Research & Development. My son, Peter M. vonDyck, who recently returned back to the Company after over twenty yearsbuilding value of two companies that he founded, has assumed the CEOrole effective in September 2018. He is building a rejuvenation plan thatencompasses a focus on sales and marketing, an area that has been lackingfor a company with core competencies of being a R&D and productionoriented organization the past number of years.

In summary, stay tuned for announcement of our complete plans andjoin me for the truly exciting and positive changes to come!

Respectfully,

Manfred F. DyckChairman of the Board and President of R&D

2018 2017Revenues

Sales of Products 2,762,479$ 2,957,318$Service Revenues 1,330,680 1,242,243Royalties and contract revenues 1,538,098 1,245,721

Total Revenues 5,631,257 5,445,282

ExpensesCost of Sales 1,500,512 1,570,906Operating Expenses 4,069,591 3,981,823Settlement (Income) (150,000) -Other (Income) / Expenses 147,496 127,214Provision for Income Taxes 2,750 1,044,260

Total Expenses 5,570,349 6,724,203

Net Income (Loss) 60,908$ (1,278,921)$

Earnings (Loss) Per Common Share 0.01$ (0.27)$Weighted Average Number of

Common Shares Outstanding* 4,772,318 4,772,318See accompanying notes.

Diluted EPS and Basic EPS are the same as the Company does not have any Common Stock Equivalents (e.g. Options).

Accumulated Deficit, Beginning of Year (2,711,282)$ (1,432,361)$Net Income (Loss) 60,908 (1,278,921)

Accumulated Deficit, End of Year (2,650,374)$ (2,711,282)$

The accompanying notes are an integral part of these consolidated financial statements.

June 30,

HYDROMER, INC.CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

Fiscal Year Ended

*

1

June 30, June 30,2018 2017

(unaudited)ASSETS Pro-FormaCurrent Assets:

Cash and cash equivalents 473,162$ 371,735$

Trade Receivables less allowance for doubtful accounts of $89,988 asof June 30, 2018 and $34,840 as of June 30, 2017 1,301,007 992,431Inventory 298,370 452,829Prepaid Assets 158,878 143,896Other 29,774 4,270

Total Current Assets 2,261,191 1,965,161

Property and Equipment, net 2,055,119 2,172,241Intangible assets, net 516,026 610,958Other 8,699 6,557Total Assets 4,841,035$ 4,754,917$

LIABILITIES & STOCKHOLDERS' EQUITYCurrent Liabilities:

Accounts Payable 208,976$ 411,997$Accrued Expenses 234,278 217,532Short-term Borrowings 500,000 200,000Current portion of deferred revenue 17,975 20,101Current portion of mortgage payable 100,742 95,979

Total Current Liabilities 1,061,971 945,609

Long term portion of deferred revenue 12,765 15,677Long term portion of mortgage payable 2,067,848 2,156,088Total Liabilities 3,142,584 3,117,374

Contingencies - -

Stockholders' Equity:Preferred Stock - no par value, authorized 1,000,000 shares; no sharesissued and outstanding - -Common Stock - no par value, authorized 15,000,000 shares;4,783,235 shares issued and 4,772,318 shares outstanding as of June30, 2018 and June 30, 2017 3,721,815 3,721,815Contributed capital 633,150 633,150Accumulated deficit (2,650,374) (2,711,282)Treasury stock, 10,917 common shares at cost (6,140) (6,140)

Total Stockholders' Equity 1,698,451 1,637,543Total Liabilities and Stockholders' Equity 4,841,035$ 4,754,917$

See accompanying notes.

HYDROMER, INC.CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.2

2018 2017Cash Flows from Operating Activities: Pro-Forma

Net Income (Loss) 60,908$ (1,278,921)$

Depreciation and Amortization 335,487 390,509Deferred income taxes - 1,041,760Changes in Assets and Liabilities:

Trade receivables (308,576) (55,912)Inventory 154,459 54,071Prepaid expenses (14,982) 21,477Other assets (39,203) 17,521Accounts payable and accrued expenses (186,275) (16,265)Deferred revenue (5,038) (16,277)

Net Cash (Used in) Provided by Operating Activities (3,220) 157,963

Cash Flows from Investing Activities:Cash purchases of property and equipment (34,766) (62,566)Cash payments on patents and trademarks (77,110) (163,901)

Net Cash Used in Investing Activities (111,876) (226,467)

Cash Flows from Financing Activities:Net borrowings against Line of Credit 300,000 200,000Repayment of long-term borrowings (83,477) (89,926)

Net Cash Provided by Financing Activities 216,523 110,074

Net Increase in Cash and Cash equivalents 101,427 41,570

Cash and Cash equivalents, Beginning of Period 371,735 330,165Cash and Cash equivalents, End of Period 473,162$ 371,735$

See accompanying notes.Cash Paid during the year for:

Interest 144,814$ 121,444$Income taxes 2,750$ 2,750$

Adjustments to reconcile net income (loss) to net cash (used in)provided by operating activities:

HYDROMER, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

June 30,Year Ended

The accompanying notes are an integral part of these consolidated financial statements.3

Hydromer, Inc. & SubsidiaryNotes to the Consolidated Financial Statements

4

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of OperationsHydromer, Inc. & Subsidiary (the “Company”) is a polymer

research and development company based in Branchburg, New Jersey.The Company develops polymer complexes for commercial markets inboth the United States and abroad for the medical, cosmetics, animalhealth and industrial fields. Also in its array of capabilities, theCompany offers R&D services and through its wholly ownedsubsidiary, Biosearch Medical Products, Inc. (“Biosearch”), engineeringservices and contract coating services. The Company has patent rightson certain products from which royalty revenues can be received.

Principles of ConsolidationThe consolidated financial statements include the accounts of

Hydromer, Inc. and its wholly owned subsidiary. All significantintercompany balances and transactions have been eliminated.

Cash and Cash EquivalentsCash and cash equivalents consist of investments with original

maturities of three months or less. As of June 30, 2018 and 2017, therewere no cash equivalents.

Accounts ReceivablesAccounts receivable are uncollateralized, non-interest-bearing

customer obligations due under normal trade terms requiring paymenttypically within 30 days from the invoice date, or in the case of royaltiesor contract payments (see Revenue Recognition), usually 45 days fromthe end of a calendar quarter. Trade accounts receivable are stated atthe amount billed to the customer; royalties and contract revenues areestimated until reported by the licensee / contractual party. Payments ofaccounts receivable are allocated to the specific invoices identified onthe customer's remittance advice or, if unspecified, are applied to theoldest unpaid invoices. The carrying amount of accounts receivable isreduced by a valuation allowance that reflects the Company's bestestimate of the amounts that may not be collected. This estimate isbased on reviews of all balances in excess of 90 days past due from theinvoice date. Based on this assessment, and of current creditworthiness, the Company estimates the portion, if any, of the balancethat will not be collected. Management also considers the need foradditional general reserves and reviews its valuation allowance on aquarterly basis.

Fair Value MeasurementsAccounting Standards Codification (“ASC”) 820-10, Fair Value

Measurements, defines fair value, establishes a framework formeasuring fair value under generally accepted accounting principles andenhances disclosures about fair value measurements. Fair value isdefined under ASC 820-10 as the exchange price that would be receivedfor an asset or paid to transfer a liability (an exit price) in the principalor the most advantageous market for an asset or liability in an orderlytransaction between participants on the measurement date. Valuationtechniques used to measure fair value under ASC 820-10 mustmaximize the use of observable inputs and minimize the use ofunobservable inputs. The standard describes a fair value hierarchybased on the levels of inputs, of which the first two are consideredobservable and the last unobservable, that may be used to measure fairvalue which are the following:

• Level 1 - Quoted prices in active markets for identical assets orliabilities.

• Level 2 - Inputs other than Level 1 that are observable, eitherdirectly or indirectly, such as quoted prices for similar assets orliabilities; quoted prices in markets that are not active; or other inputsthat are observable or corroborated by observable market data orsubstantially the full term of the assets or liabilities.

• Level 3 - Unobservable inputs that are supported by little or nomarket activity and that are significant to the value of the assets orliabilities.

Some of the Company’s financial instruments are not measured atfair value on a recurring basis but are recorded at amounts thatapproximate fair value due to their liquid or short-term nature, such ascash and cash equivalents, receivables and payables. The carryingamount of the mortgage is consistent with the terms available in themarket for instruments with similar risk. There were no financial assetsand liabilities requiring fair value reporting as of June 30, 2018 or 2017.

InventoriesInventories are valued at the lower of cost or net realizable value,

determined by the first-in first-out method and include appropriateamounts of labor and overhead.

DepreciationThe cost of property and equipment, which includes a reasonable

portion of labor costs for equipment built in-house, is depreciated on astraight-line method over the estimated useful lives of the assets: 5-10years for machinery and equipment, 3-5 years for furniture and officeequipment and 40 years for the building. When assets are retired orotherwise disposed of, the cost and related accumulated depreciation areremoved from the accounts, and any resulting gain or loss is reflected inincome for the period. Repairs and maintenance which do not extendthe useful lives of the related assets are expensed as incurred.

PatentsRegistration and maintenance costs associated with the filing and

registration of patents are prepaid and amortized over the remaining lifeof the patent, not to exceed 20 years. Costs associated with patentswhich are not approved or abandoned are expensed in the period inwhich such patents are not approved or abandoned. The annualmaintenance fees associated with existing patents are expensed over 12months and are included in Prepaid Expenses. The Research andDevelopment costs associated with the patented technology areexpensed as incurred and are not capitalized.

Long-Lived AssetsThe Company assesses long-lived assets for impairment as

required under ASC 360-10, Accounting for the Impairment or Disposalof Long-Lived Assets. The Company reviews for impairment wheneverevents or circumstances indicate that the carrying amount of these assetsmay not be recoverable. The Company assesses these assets forimpairment based on estimated future cash flows from these assets.

Revenue RecognitionRevenues from product and services sales are recognized, on an

Ex-Works basis, at the time of shipment or when services are renderedprovided that collection of the resulting receivable is probable.Revenues from royalties are recognized upon the sale of certainproducts by licensees with whom the Company has licensingagreements. Contract Revenues, which includes payments from Stand-still, Supply or Support agreements that are typically based on timeframes, are recognized in the periods to which it pertains. Deferredrevenues are recorded when agreements call for payment ahead of whenthe amounts are earned. In multiple element arrangements, revenue isallocated to each separate unit of accounting and each deliverable in anarrangement is evaluated to determine whether it represents separateunits of accounting. A deliverable constitutes a separate unit ofaccounting when it has standalone value and there is no general right ofreturn for the delivered elements. In instances when the aforementionedcriteria are not met, the deliverable is combined with the undeliveredelements and the allocation of the arrangement consideration andrevenue recognition is determined for the combined unit as a single unitof accounting. Allocation of the consideration is determined atarrangement inception on the basis of each unit’s relative selling price.

Shipping and Handling ChargesThe Company includes costs of shipping and handling billed to

customers in Revenues and the related expense of shipping andhandling costs in Cost of Sales.

Hydromer, Inc. & SubsidiaryNotes to the Consolidated Financial Statements

5

AdvertisingAdvertising costs are expensed as incurred except for tangible

assets, such as printed advertising materials, which are expensed asconsumed. Advertising expense was $23,175 and $17,452 for the yearsended June 30, 2018 and 2017, respectively.

Research and DevelopmentResearch and development costs, primarily employee salaries and

benefits, are charged to operations when incurred and are included inOperating Expenses. The amounts charged to expense for the yearsended June 30, 2018 and 2017 were $636,414 and $644,425,respectively.

Foreign Currency TranslationThe Company’s functional currency is the United States Dollar.

The Company accounts for foreign currency translation pursuant toFinancial Accounting Standards Board (“FASB”) ASC 830-20, ForeignCurrency Transactions. All assets and liabilities are translated intoUnited States dollars using the rates prevailing at the end of the period.Revenues and expenses are translated using the average exchange ratesprevailing throughout the period. Unrealized foreign exchange amountsresulting from translations at different rates according to their nature areincluded in accumulated other comprehensive income or loss.Recognized foreign currency transaction gains and losses arerecognized in the operations.

Comprehensive Income (Loss)The Company applies the provisions of FASB’s ASC 220-10,

Reporting Comprehensive Income, in which unrealized gains and lossesfrom foreign exchange translations are reported in the consolidatedstatements of shareholders’ deficit as comprehensive income (loss).

As of June 30, 2017 and June 30, 2018, the translation adjustmentwas de minimus thus the Company did not report any comprehensiveincome.

Income TaxesIncome taxes are provided for the tax effects of transactions

reported in the financial statements and consist of taxes currently dueplus deferred taxes related primarily to differences between the bases ofassets and liabilities for financial and income tax reporting. Thedeferred tax assets and liabilities represent the future tax returnconsequences of those differences, which will either be taxable ordeductible when the assets and liabilities are recovered or settled.Deferred taxes are also recognized for operating losses that are availableto offset future federal and state income taxes. Any interest charges onunderpayment or other assessments are recorded as interest expense.Any penalties are recorded in Operating Expenses.

Earnings Per ShareEarnings per share, in accordance with the provisions of ASC 260-

10, Earnings Per Share, is computed by dividing net income by theweighted average number of common stock shares outstanding duringthe period.

Use of EstimatesThe preparation of financial statements in conformity with

generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues andexpenses during the reporting period. Actual results could differ fromthose estimates.

2. CONCENTRATION OF CREDIT AND BUSINESS RISK

The Company is exposed to additional sales credit and businessrisks due to its concentration of activity with certain parties. Forexample, at times throughout the year, the Company may maintaincertain bank accounts in excess of FDIC insured limits.

In addition, the Company provides credit in the normal course ofbusiness to customers. Ongoing credit evaluations of its customers areperformed, and allowances for doubtful accounts are based on factorssurrounding the credit risk of specific customers, historical trends andother information.

One customer, in good standing, accounted for 12% of the fiscal2018 sales. There were no significant customers for the year endedJune 30, 2017. The June 30, 2018 accounts receivable balance includedbalances from one customer who represented 12% of the total. Twocustomers represented 10% and 14%, respectively, of the total accountsreceivable balance as of June 30, 2017.

3. INVENTORY

Inventory consists of:June 30,

2018 2017Finished goods $ 30,666 $ 169,022Work in process 53,865 4,220Raw materials 213,839 279,587

$ 298,370 $ 452,829

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:June 30,

2018 2017Land $ 472,410. $ 472,410.Building 2,401,783. 2,400,466.Machinery and equipment 2,618,009. 2,584,940.Furniture and fixtures 212,007. 211,627.

5,704,209. 5,669,443.Less: Accumulated

depreciation and amortization (3,649,090) (3,497,202)Property and Equipment, net $ 2,055,119. $ 2,172,241.

Depreciation expense was $151,888 and $135,899 for the yearsended June 30, 2018 and 2017, respectively.

5. INTANGIBLE ASSETS

Intangible Assets, including prepaid Patent Costs included in PrepaidExpenses of $35,941 and $47,497 as of June 30, 2018 and 2017,respectively, are comprised of the following:

June 30,2018 2017

Patents $ 1,862,246. $ 1,860,430.Trademarks 121,225. 119,933.

Less: Accumulated amortization (1,431,504) (1,321,908)Intangible Assets, net $ 551,967. $ 658,455.

Future amortization of Intangible Assets, as of June 30, 2018, are asfollows:

Year ending June 30,

2019 $ 120,4722020 71,0272021 62,3072022 54,0132023 41,635Thereafter 202,513

$ 551,967

Amortization expense for the years ended June 30, 2018 and 2017were $183,599 and $254,610, respectively.

Hydromer, Inc. & SubsidiaryNotes to the Consolidated Financial Statements

6

6. LONG-TERM DEBT and SHORT-TERM BORROWINGS

As of June 30, 2018, the Company’s facility is financed by atwenty-five year mortgage note bearing an interest rate of 5.00%, fixeduntil October 2018 and then reset every five years at 2.75% over thethen New York Federal Home Loan Bank 5/20 Amortizing AdvanceRate. The mortgage is secured by the real estate and improvements,accounts receivables, inventory and all rents from leases subsequentlyentered into, amortized with monthly payments. As of June 30, 2018,the book value of the real estate and improvements was $1,854,308.

Long-term debt is comprised of the following:June 30,

2018 2017Mortgage note $ 2,236,744. $ 2,324,286.

Less: Loan Modification Fees (68,154) (72,219)Current Maturities (100,742) (95,979)

Long-term Debt,Net of Current Maturities $ 2,067,848. $ 2,156,088.

Maturities of the long-term debt are as follows:

Year ending June 30, As of June 30, 20111

2019 $ 100,7422020 105,7482021 111,0112022 116,543

2023 122,359

Thereafter 1,680,341

$ 2,236,744

On June 30, 2017, the Company opened a $500,000 revolvingworking capital line of credit in the form of a second mortgage with itsmortgage bank at a rate of the Wall St Journal Prime + 1% with interestpayments due monthly. This facility is secured by the real estate andimprovements, accounts, inventory and all rents from leasessubsequently entered into. The balance as of June 30, 2018 was$500,000.

On August 17, 2018, the Long-term debt and Short-termborrowings were paid off early in their entirety (see Footnote #12Subsequent Events)

7. INCOME TAXES

The income tax (benefit) / provision is comprised of the following:Federal State Total

Year Ended June 30, 2018Current $ - $ 2,750. $ 2,750.Deferred - - -

$ -. 2,750. 2,750..Year Ended June 30, 2017

Current $ - $ (13,159). $ (13,159)Deferred 1,001,037 56,382.. 1,057,419.

$ 1,001,037 43,223.. 1,044,260.

The Company’s deferred tax asset and liability as presented in theCompany’s financial statements are comprised of the following:

June 30,2018 2017

Deferred Tax AssetNet Operating Losses $ 542,090. $ 859,726.Adjustment of Goodwill 196,069. 196,069.Research & Development Credits 786,045. 734,325.Valuation Allowance (1.380,668) (1,543,540)

Total Deferred Tax Assets 143,536. 246,580.

Deferred Tax LiabilityDepreciation (143,536) (246,580)

Total Deferred Tax Liability $ (143,536) $ (246,580)

Deferred taxes are recognized for temporary differences betweenthe bases of assets and liabilities for financial statement and income taxpurposes. The differences relate primarily to depreciable assets (usingaccelerated depreciation methods for income tax purposes). TheCompany’s adjustment to Goodwill in 2004 and 2006 created a deferredtax asset, which although has an indefinite life, has been fully reservedfor as realization of its benefit is unlikely.

As of June 30, 2017, the Company has net operating loss carryforwards of $2,108,678 and $2,130,972 for Federal and State taxpurposes, respectively. These net operating loss ("NOL's") carryforwards may be used to reduce federal and state taxable income andtax liabilities in future years and expire in various years through June30, 2036. In addition, the Company has Research and DevelopmentTax Credits ("R&D Tax Credits") of approximately $491,536 and$242,789 for Federal and State tax purposes, respectively, which expirein various years through June 30, 2036 and June 30, 2031, respectively.

While there remains a long remaining life to the Company's NOL'sand R&D Tax Credits, and the Company strongly believes that it will beable to realize a substantial amount of its deferred taxes assets, underthe provisions of FASB’s ASC 740-10-30, Income Taxes, positive andnegative evidence are to be assessed in determining a valuationallowance against the deferred tax assets. A significant piece ofobjective negative evidence evaluated was the pre-tax losses, on a taxbasis, for the fiscal years ended June 31, 2016 and 2017. Such objectivenegative evidence limits the ability to consider subjective positiveevidence, such as the projections for future growth. Accordingly, inlight of the Tax Cuts and Jobs Act passed on December 22, 2017 whichimpacted the carrying value of the gross value of deferred tax assets, theCompany opted to take a full valuation allowance against its deferredtax assets, as of June 30, 2017, except to the extent of the offsettingdeferred tax liabilities as the turn around of any of the deferred taxliability would allow the Company to realize an offseting portion ofdeferred tax asset. Beyond this, the Company can still recover andrealize additional NOL's and R&D Tax Credits [which has been fullyvalued against] in the future when taxable profits return. The Companywill be recognizing a tax benefit from the full recovery against thevaluation reserve during the fiscal year ended June 30, 2019 as a resultof the gain from the sale of the T-HEXX Animal Healthcare business(see Footnote #12).

Hydromer, Inc. & SubsidiaryNotes to the Consolidated Financial Statements

7

For the fiscal year ended June 30, 2018, the Company did realizeprofits and accordingly, was able to recognize a deferred income taxbenefit to the extent of profits.

As of June 30, 2018, the Company's net operating loss carryforwards for Federal and State tax purposes, were $1,973,275 and$1,906,000 respectively, expiring in various years through June 30,2037. The Company's Research and Development Tax Credits ("R&DTax Credits") for Federal and State tax purposes, were approximately$520,769 and $265,276 respectively, which expire in various yearsthrough June 30, 2037 and June 30, 2032, respectively.

The Company’s provision for income taxes differs from applyingthe statutory U.S. federal income tax rate to the income before incometaxes. The primary differences result from providing for state incometaxes, generation of allowable tax credits and from deducting certainexpenses for financial statement purposes but not for federal income taxpurposes.

A reconciliation between taxes computed at the federal statutoryrate and the consolidated effective tax rate follows:

June 30,2018 . . 2017

Federal statutory tax rate 27.5.. % (34.0). %State income tax - net of federal

tax benefit 6.5.. (6.5).R & D credits (84.9). (23.9).Adjustment in

Deferred Tax AssetDeferred Tax LiabilityDeferred Tax Asset for

Rate ChangeValuation allowances

100.3(169.2).

421.2(267.4)

50.4-

-450.6.

Permanent and other differences (29.5). 8.44.9.. % 445.0.. %

FASB’s ASC 740-10-25 also provides recognition criteria and arelated measurement model for uncertain tax positions taken orexpected to be taken in income tax returns. ASC 740-10-25 requires thata position taken or expected to be taken in a tax return be recognized inthe financial statements when it is more likely than not that the positionwould be sustained upon examination by tax authorities. Tax positionsthat meet the more likely than not threshold are then measured using aprobability weighted approach recognizing the largest amount of taxbenefit that is greater than 50% likely of being realized upon ultimatesettlement. The Company had no tax positions relating to open incometax returns that were considered to be uncertain. Accordingly, we havenot recorded a liability for unrecognized tax benefits upon adoption ofASC 740-10-25. There continues to be no liability related tounrecognized tax benefits at June 30, 2018.

The Company’s tax returns for the fiscal years 2015, 2016, 2017and 2018 for Federal and fiscal 2013, 2015, 2016, 2017 and 2018 forNew Jersey, remain subject to examination by the respective taxingauthorities. In addition, net operating losses and research tax creditsarising from prior years are also subject to examination at the time thatthey are utilized in future years. Neither the Company’s federal or statetax returns are currently under examination.

8. RETIREMENT PLAN

The Company sponsors a qualified 401(k) plan coveringsubstantially all full time employees under which eligible employeescan defer a portion of their annual compensation. The Companydetermines annually, the amount of matching contributions. There wereno Company matching contributions made to the plan during the fiscalyears ended June 30, 2018 or June 30, 2017.

9. INDUSTRY SEGMENT INFORMATION

The Company operates two primary business segments: (1)Polymer Research and (2) Medical Products.

Products included in the polymer research segment are Aquamere®,Aquatrix®, BeAqua 6TM, CapricoatTM, CarvanellaTM, Dermaseal®,Dragonhyde®, HerbaDipTM, HerbaSafeTM, Hydromer® Anti-Fog/Condensation Control Coatings, Hydromer® Lubricious Coatings,RhinohydeTM, Sea-Slide®, STAYWETTM and T-HEXX® Barrier Dipsand Sprays. Research and Development services and all of theCompany’s royalties and contract revenues are reported in this segment.

The medical products segment includes the biofeedback medicaldevice, contract coating services and engineering equipment sales andservices.

Due to the multitude of products offered and the product grossmargins, the Company does not track sales contribution by products.

The Company operates globally in its segments with several largecustomers that are important to their operating results. One customeraccounted for 10% of the polymer research segment sales for the 2017fiscal year. For the 2018 fiscal year, two customers accounted for 24%of the polymer research segment sales, at 14% and 10%, respectively.In the medical products segment, three customers accounted for 73% ofthat segment’s 2017 sales, at 18%, 20% and 35%. For the 2018 fiscalyear, three customers accounted for 73% of the sales at 10%, 27% and36%.

The Company evaluates the segments by revenues, total expensesand earnings before income taxes. The Company’s assets are notreviewed by business segment. 83% of the Company's total assets areheld within the polymer research segment; the 17% remainder is in themedical products segment. The accounting policies of these segmentsare described in the summary of significant accounting policies.

Corporate Overhead, primarily the salaries and benefits of seniormanagement, support services (Accounting, Legal, Human Resourcesand Purchasing) and other shared services (building maintenance andwarehousing), is reflected separately from the results of the businesssegments in the following:

PolymerResearch

MedicalProducts

CorporateOverhead Total

Year Ended June 30, 2018Revenue $ 4,402,228. $ 1,229,029. $ 5,631,257.Expenses (2,917,759) (1,043,615) $ (1,606,225) (5.567,599)Earnings (Loss)

beforeIncome Taxes $ 1,484,469. $ 185,414. $ (1,606,225) $ 63,658.

Year Ended June 30, 2017Revenue $ 4,270,110. $ 1,175,172. $ 5,445,282.Expenses (2,823,719) (1,170,336) $ (1,685,888) (5.679,943)Earnings (Loss)

beforeIncome Taxes $ 1,446,391. $ 4,836. $ (1,685,888) $ (234,661)

Geographic revenues were as follows for the years ended June 30,2018 2017

Domestic 64% 64%Foreign 36% 36%

Hydromer, Inc. & SubsidiaryNotes to the Consolidated Financial Statements

8

10. EARNINGS PER SHARE

The following table sets forth the computation of earnings pershare:

2018 2017

Numerator:Net income (loss) $ 60,908 $ (1,278,921)

Denominator:Denominator for earnings per share

- weighted average shares outstanding 4,772,318 4,772,318

Earnings (Loss) per share $ 0.01 $ (0.27)

There were no common stock equivalents (e.g. stock options)outstanding as of June 30, 2018 or 2017.

11. CONTINGENCIES

Royalty revenues and support fees recorded by the Company arebased on the sales of products as reported by the Company’s customers,which has the risk of being under- or over-reported. To minimize suchrisks, the Company’s management utilizes its knowledge andunderstanding of the customer’s business, the market and otherpertinent factors in assessing the validity of reported royalties or supportfees. In addition, the Company may have a right to audit the amountsreported.

The Company has not received any claims by its customers forpossible overpayment of royalties or support fees.

12. SUBSEQUENT EVENTS

On August 17, 2018, the T-HEXX Animal Health business (adivision within the Company), was sold to Huvepharma® for $6.5million cash, for intangibles (formulations, trade secrets, production andprocess know-how, patents, trademarks, customer and client lists),equipment and finished goods inventory. A separate TransitionServices Agreement, in which the Company is to manufacture the T-HEXX products for Huvepharma, for a period of up to one year and aResearch and Development project for the development of a teat plug,was entered into, which will provide for an additional revenue stream tothe Company.

Concurrent with the sale of T-HEXX, both the Long-term debt andShort-term borrowings were paid off and closed.

A pre-tax gain of $5.9 million from the sale of T-HEXX will berecognized for the three months ended September 30, 2018 with acorresponding $1.8 million income tax expense. As all of theCompany's deferred tax assets were assigned a full valuation allowanceduring the fiscal year ended June 20, 2017, a deferred income taxbenefit reflecting the utilization of the maximum deferred tax assets thatcan be applied against this transaction (approximately $1.3 million, thefully reserved for value) will be recorded during the period.Accordingly a net of only $0.5 million of income tax provision wouldbe recorded.

As the sale of the T-HEXX business represents discontinuedoperations for the 2019 fiscal year, the following pro-forma summary ispresented for the periods of this report:

June 30,2018 2017

Continuing OperationsRevenues $ 4,096,918.. $ 3,880,394.Expenses 5,206,034.. 5,098,396.

Pre-tax Loss (1,109,116). (1,218,002)(Benefit) Provision from Income Taxes (395,993) 709,924.

Net Loss from Continuing Operations (713,123) (1,927,926)Net Income from Discontinued Operations 774,031. 649,005.Net Income (Loss) $ 60,908. $ (1,278,921)

On September 19, 2018, the Company's Board of Directorsannounced a $0.25 dividend per Common Share with a Record Date ofSeptember 24, 2018 and a Payment Date of October 8, 2018.

The Company evaluated the events and transactions subsequent toits June 30, 2018 balance sheet date and, in accordance with FASB ASC855-10-50, Subsequent Events, determined there were no othersignificant events to report through November 14, 2018 which is thedate the financial statements were available to be issued.

Hydromer, Inc. & SubsidiaryManagement's Discussion and Analysis of Financial Condition and Results of Operations

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The below discussion analyzes major factors and trendsregarding the results of operations and the financial condition ofthe Company as of June 30, 2018, and its results of operationsfor the prior fiscal period. It should be read in conjunction withthe Financial Statements and Notes thereto.

Revenues for the year ended June 30, 2018 were $5,631,257as compared to $5,445,282 for the same period last year, anincrease of $185,975 (3.4%).

Product sales and services revenues were $4,093,159 for the2018 fiscal year, lower by $106,402 against the prior fiscalyear's $4,199,561 (2.5%).

License, royalties and contract payments were $1,538,098for fiscal 2018 as compared with the $1,245,721 the year before(a 23.5% change).

Management Comment: Product sales for the fiscal yearended June 30, 2018 were $2,762,479 as compared with the2017 fiscal year amount of $2,957,318, or lower by $194,839(6.6%). A significant part of that lower product sales wasattributed to our Cosmetic Intermediaries product line as theCompany migrated towards NMP-free intermediaries for ourcustomers, however they have not yet fully subscribed towardsthat change. NMP is a environmentally unfriendly solvent, andharmful to humans. The elimination of NMP in the Company'sformulations is part of its recent Sustainability approach. Inaddition, on one of the T-HEXX products, for its internationalmarket, the Company began to sell a component instead of aretail ready product at a higher net margin, as final processingand retail packaging, along with marketing, are now borne byour customer. This resulted in a lower product sales value, albeitgross margin on this product would be higher.

Contract Coating Services revenues for fiscal 2018 were$1,330,680 or $88,437 higher (7.1%) than the $1,242,243 thecorresponding period the year before. Despite a generalexpectation of lower contract coating services as our customersconvert to product sales and/or license/contract paymentscustomers, there will be periodic swings as new business /customers come on board, including the current fiscal year.

Classified as Royalty and Contract revenues are royaltiesreceived and the periodic recurring payments from license,stand-still and other agreements other than for product andservices, including revenues from support and supplyagreements which avail our customers continued technicalsupport and/or guaranteed access to our proprietary coatings.Some of the royalties and support fees are based on the net salesof the final item (to which the Hydromer technology is applied)and are subject to the reporting of our customers. The license,royalties and contract payments revenues for fiscal year endedJune 30, 2018 were $1,538,098 or $292,377 higher than fiscal2017's $1,245,721. The increase resulted from a licenseecoming online and reporting higher amounts due.

Total Expenses for the year ended June 30, 2018 were$5,570,349, $1,153,854 (17.2%) lower than the 2017 fiscalyear results of $6,724,203

Cost of Goods Sold was $1,500,512 for fiscal 2018 ascompared to $1,570,906 for fiscal 2017. Operating Expenseswere $4,069,591 and $3,981,823, for the years ended June 30,2018 and 2017, respectively. Other Income is being reported forfiscal 2018 as compared with Other Expenses of $127,214 forfiscal 2017. Income Tax Expense of $2,750 is being recognizedfor fiscal 2018 as compared with $1,044,260 for fiscal 2017.

Management Comment: For the fiscal year ended June 30,2017, a full valuation reserve was placed on the Company'sDeferred Tax Asset despite a long duration (time untilexpiration) due to the accounting provisions, AccountingStandards Codification (“ASC”) 740-10-30 , Income Taxes,resulting in an additional tax charge of $1.1 million. There wasno such valuation allowance charge for the current fiscal year.

Lower product sales resulted in a lower Cost of Goods Sold,the savings of which was reduced by a product mix change. TheCost of Goods Sold of $1,500,512 for the fiscal 2018 year was$70,394 (4.5%) lower than the $1,570,906 the preceding year. Alower Sales of Products level resulted in a decrease to Cost ofGoods Sold. Offsetting a significant part of that decrease was aproduct mix change, of which a larger quantity of lower marginproducts was sold in fiscal 2018, beyond that of the highermargin component sales mentioned earlier.

Operating Expenses were up by $87,768 (2.2%) from fiscal2017, primarily from higher staffing costs, including of a changeto the organizational structure: the hiring of a newly createdChief Strategy and Business Development position, from whicha sweeping company-wide rejuvenation plan is forthcoming.

During fiscal 2018, a termination fee of $150,000 is beingreported from a canceled supply and support agreement. Due tothe terms of the supply and support agreement, entered intoduring fiscal 2017, that agreement was previously not disclosed.Other Expenses includes the mortgage and short-termborrowings interest ($154,200 for fiscal 2018 and $127,735 forfiscal 2017), higher in Fiscal 2018 due to the short-termborrowings.

For the 2018 fiscal year, a Provision for Income Taxes of$2,750 is being reported, which represents the minimumfranchise taxes not offsettable by the Company's NOL and R&Dtax credits. For the fiscal year ended June 30, 2017, the TaxProvision of $1,044,260 includes a valuation allowance againstthe Company's Deferred Tax Assets (NOL and R&D tax credits)of $1,304,060. While this non-cash charge is merely a reservethat can be recaptured in future periods (and already has been),nonetheless the recordance of such has a significant impact tothe overall reported results of fiscal 2017. Most of the amountsreserved for during the 2017 fiscal year is being recovered andrecognized against the August 2018 (a fiscal 2019 transaction)sale of the T-HEXX Animal Healthcare business.

Hydromer, Inc. & SubsidiaryManagement's Discussion and Analysis of Financial Condition and Results of Operations

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Included in the current period's Operating Expenses are“Reinvestment” expenses, costs associated more towards futuregrowth and benefits, from new product creation to the protectionof the development (patents and trademarks). Such expensestotaling $820,013 for fiscal 2018 comprised of Research &Development expenditures (mostly salaries and benefits) and thefunding towards the patent and trademark estate, representing20.1% of the Company’s Operating Expenses. This comparesagainst the $899,035 (22.6% of the Operating Expenses) for theyear ended June 30, 2017.

Net Income of $60,908 ($0.01 per share) is reported for the2018 fiscal year as compared with a Net Loss of $1,278,921($0.27 per share) for the 2017 fiscal year.

Management Comment: An unusual year was reported forthe 2017 fiscal year. Despite having a long duration to utilizethe Deferred Tax Assets of Net Operating Losses and R&D TaxCredits, with expirations of up to 14 to 20 years, the Companyopted to fully reserve for the Deferred Tax Assets, a non-cashcharge with a future opportunity to recover and realize theDeferred Tax Assets ("DTA"). A valuation allowance of$1,304,060, reduced by $246,580 which represents the DeferredTax Liability that could be offset by the DTA, was recorded forthe fiscal year ended June 30, 2017 resulting in a reported netloss of $1,278,921. Most of the DTA's will be recovered /recognized as a tax benefit from the sale of T-HEXX AnimalHealth business in August 2018 (fiscal 2019).

For the 2018 fiscal year, revenues were $185,975 higherthan the prior year, Cost of Sales were down but offset by higherOperating Expenses, as a result of staffing changes, Thetermination fee from a cancelled agreement and the lack of theunusual tax charge of fiscal 2017 rounded out the changesbetween the years.

Liquidity and Capital Resources

Working Capital as of June 30, 2018 was $1,199,220 comparedagainst $1,019,552 the prior year or an improvement of$179,668.

The Cash Used by Operating Activities was $3,220 whichincludes $335,487 provided from the non-cash depreciation andamortization expense. The cash used for Investing Activities(for the purchase of property and equipment and paymentstowards the patent estate and trademarks) totaled $111,876.There was $216,523 of Cash Provided by Financing Activitiesfrom short-term borrowings less principal payments of theCompany's long-term debt.

Management Comment: For the year ended June 30, 2018,the Company has an EBITDA (Earnings before Interest, IncomeTaxes, Depreciation and Amortization) of $553,345 (9.8% ofTotal Revenues). This compares with EBITDA of $283,583 or5.2% of Total Revenues of the prior fiscal year. Theimprovement in EBITDA for the fiscal year ending June 30,2018 is a result of the increase in revenues.

This Annual Report may contain forward-looking statements. Forward-looking statementsinclude, among other things, business strategy and expectations concerning industry conditions,

market position, future operations, margins, profitability, liquidity and capital resources.Forward-looking statements generally can be identified by the use of terminology such as “may,”“will,” “expect,” “intend,” “estimate,” “anticipate” or “believe” or similar expressions or the

negatives thereof. These expectations are based on management’s assumptions and current beliefsbased on currently available information. Although the Company believes that the expectations

reflected in such statements are reasonable, it can give no assurance that such expectations will becorrect. You are cautioned not to place undue reliance on these forward-looking statements,

which speak only as of the date of this Annual Report and the Company does not have anyobligation to update the forward-looking statements. The Company’s operations are subject to a

number of uncertainties, risks and other influences, many of which are outside its control, and anyone of which, or a combination of which, could cause its actual results of operations to differ

materially from the forward-looking statements.

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ABOUT HYDROMER, INC.

Hydromer, Inc. (the “Company”) is an ISO 9001:2015 polymerresearch and development company organized as a New Jerseycorporation in 1980 for the purposes of developing polymericcomplexes for commercial use in the medical, commercial,cosmetics and animal health markets.

Until September 1982, approximately 99% of the outstandingcommon stock, without par value (the “Common Stock”), of theCompany, was owned by Biosearch Medical Products, Inc.(“BMPI”), which in turn was controlled by Manfred Dyck, whois the Company’s current President of R&D, Director and theChairman of the Board. On September 16, 1982, BMPIdistributed its shareholdings in the Company pro rata to theholders of its common stock. In connection with thisdistribution, the Company granted to BMPI an exclusive,worldwide, perpetual, royalty-free license for the use ofHydromer technology in connection with the development,manufacture and marketing of biomedical devices for enteralfeeding applications. On February 4, 2000, the Companyacquired all outstanding stock of BMPI for $0.20 per share, andnow manages BMPI as a subsidiary.

The Company owns several process and applications patents forHydromer® coatings (“Hydromer”). These polymers becomeextremely lubricious (slippery) when wet. Techniques havebeen developed for grafting or applying this substance onto abroad variety of materials, including other polymers likepolyurethane, polyvinyl chloride, silicone elastomers, ceramicsand metals. The Company has been issued patents for permanentanti-fog coatings, hydrophilic polyurethane foams, hydrophilicpolyurethane blends, hydrophilic polyvinylbutyral alloys, severalbiocompatible hydrogels and an anti-bacterial medical material.The Company continues to actively evaluate new marketopportunities for its polymer technology specifically inneurology and cardiology.

The Company owns various registered trademarks, includingAQUAMERE®, a cosmetic intermediate with water resistant filmforming properties; AQUATRIX®, a cosmetic hydrogel;BIOSEARCH®, medical device product lines; DERMASEAL®, adermal barrier film product for the prevention of contactdermatitis; HYDROMER®, hydrophilic coatings; SEA-SLIDE®,a coating for watercraft hulls; and STAYWET®, ultra-hydrophilic coatings.

The Company’s patents are typically broad based, having amultitude of different applications across various industries.Given the breath of its technology and the market specificcapabilities of its employees, the Company currently operates inthe Medical, Industrial/Commercial, Cosmetics and AnimalHealth markets.

MEDICAL MARKETFrom its inception, the Company has been actively engaged inR&D activities and collaborations related to coatings used on orwith medical devices. With the acquisition of BMPI theCompany has been able to offer horizontally integrated servicessuch as contract coating, equipment building and design andR&D services. The company is actively seeking collaborations

with medical device manufacturers in the medical, dental andhealthcare industries.

The Company’s coatings technologies include its hydrophiliclubricious coatings, biostatic/bacterial resistant coatings, cellanti-mitosis and thrombo-resistant coatings and more recently,cell adhesion promoting coatings and a bacterial resistantcoating.

HYDROMER Coatings: Lubricious / Bacterial Resistant /Thrombo-resistant / Cell mitosis / Cell Adhesion

When treated with a Hydromer lubricious polymer, a medicaldevice becomes very slippery when wet, allowing for easyinsertion into any orifice of the body, vascular access or fordevice-in-device (i.e. guidewire-catheter) use. Hydromercoatings are permanently bonded to the device unlike siliconelubricants, which must be re-applied after each use and are oftenleft behind in the bloodstream and body cavities. Hydromercoatings can be coated on complex surfaces and on the insidewalls of devices, unlike the treatments by major competition.The Company believes that the polymer-water interface of itsHydromer coatings provides surface lubricity superior to thequality of other currently marketed lubricants to treat medicaldevices.

Drugs and other substances can be readily incorporated intoHydromer coatings, allowing for controlled release from thedevice for therapeutic purposes or the creation of permanentbiocidal or biostatic surfaces (bacterial resistant coatings).

Certain Hydromer coatings have been shown in numerous studiesto reduce the risk of thrombogenesis or clot formation ondevices. Such thrombo-resistant coatings can be applied tocardiovascular stents, oxygenators, blood warmers, hemodialysiscatheters and equipment, intravenous catheters and much more.

Stand-still Agreements

A portion of the Company's revenues is derived from stand-stillagreements which provide customers the right for a finite periodof time (i) to use the Hydromer process to determine whether thecustomer's products lend themselves to treatment with theprocess and (ii) to test market such products. The stand-stillagreements can also provide the customers the right tosubsequently enter into a license or supply and supportagreement with the Company and to market the product(s)treated with Hydromer, which typically provides the Company aninitial flat fee, followed by periodic royalty payments or supportfees based on sales (see following Supply and SupportAgreemets).

Supply and Support Agreements (License Agreements)In order to avail our customers of a continued material source ortechnical support on our products, a Supply and Supportagreement may be entered into. Depending on the specificrequirements of each agreement, the Company would providecontinued support in terms of product availability or technicalknow-how.

As of June 30, 2018, the Company has supply and supportagreements with over three dozen companies covering the

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application or availability of Hydromer coatings to the followingdevices: angioplasty balloon catheters, biliary and pancreatic stents, cardiovascular microcatheters, central venous catheters, embolization delivery devices, enteral feeding products, female contraceptive devices, foley catheters, guidewires, guiding and umbilical catheters, infusion microcatheters, inter/intra-ocular lenses, intra-occular lense injectors, liposuction devices, neurovascular microcatheters, PTCA catheters, PTA catheters urinary catheters, Nelaton catheters, certain urological devices, and certain vascular devices.

The Company is actively seeking new licensing opportunities.

Hydrogels, Drug Delivery, Wound DressingApplications of the Company’s hydrogels for wound care,implants, drug delivery, burn care, ultrasonic couplants andcosmetic uses are available but not yet commercialized.

The Company’s hydrogel technology offers biocompatibility,flexibility, and ease of use and processing. It also allows for thestabilization of biomolecules, cell cultures, drugs and otheractive substances without potentially damaging external energysources. It is absorbent, inherently self-adhesive but peels awaycleanly and is naturally soothing. Other than our bio-adhesivesand medical coatings, which are one-part systems, to form the gelentails simply to mix the two parts together: no heat, no chemicalcross linkers or expensive high energy processing is required.Many competitive technologies are much more process intensiveand require external energy to crosslink. The Company believesthese products are synergistic to our existing hydrogeltechnologies, and offer further opportunities in internal andtopical actives delivery. The Company has a pilot coatingmachine to facilitate the commercialization of its hydrogeltechnologies. The Company is exploring other medical anddental as well as cosmetic applications for this technology.

The Company has a FDA 510K on its hydrophilic polyurethanefoam technology for medical use applications in the U.S..

Contract Medical Device ManufacturingThe Biosearch Medical Products subsidiary is prepared to acceptmedical start-up incubator type relationships. Our capabilitiesincludes ISO/FDA certified medical manufacturing suites,trained assemblers, machine shop, full regulatory and qualityinfrastructure.

HYDROMER Coating Services

The acquisition of BMPI in 2000 allowed for the Company torealize another source of revenues: Coating Services. Utilizingthe acquired medical device manufacturing know-how and byapplying its coatings technologies, the Company began offeringcoating services, in which the Company coats third-party deviceswith its Hydromer coatings. The Company’s knowledge incoatings technologies allows it to coat various types of material,such as silicone, stainless steel, Pebax and polypropylene costeffectively, whereas some of the competition is unable to.Global customers are using this service in the urology,cardiology, intraocular and neurovascular markets.

The Company continues to expand its activity in coating servicesand is actively seeking new opportunities to provide contractdevelopment, coating and manufacturing services to the medical,commercial and personal care industry, utilizing its Hydromerand Anti-Fog coating technology and expertise. The Companyfurther continues to believe that these services will enable abroader range of customers to use our materials in markets onaccelerated timelines in a more cost effective manner.

R&D and Engineering Services

The medical device market continues to undergo a shift towardconsolidation by very large multi-national players with small,entrepreneurial start-up companies looking to exploit nicheopportunities or unique device designs. The Company’sexperience and knowledge can significantly speed development,assessment and market readiness for our clients, large and small,through its research and development and engineering services.

The Company believes that offering prototyping, processdevelopment and small-medium scale coating/ manufacturingservices is fundamental to the expansion of the Hydromercoatings business, and a strategic imperative. The Company willendeavor to become a “one stop” supplier of high performancecoatings and services.

The Company also has bacterial resistant testing capabilities in-house to perform crucial first developments on the performanceof bacterial colonization control medical coatings and cosmeticintermediates.

INDUSTRIAL/COMMERCIAL

Hydromer Anti-Fog/Condensation Control is an optically clearcoating which prevents the accumulation of vision-obscuringcondensation under high humidity conditions. The Company isselling this material to manufacturers of greenhouse panels,refrigerator freezer doors, industrial and medical safety and swimgoggles, aircraft windows, automotive headlight assemblies(including reflectors) and gauge and meter manufacturers in theU.S. and internationally, including China.

COSMETICS

The Aquamere series of the Company’s cosmetic intermediariesare sold to major cosmetic companies worldwide for use in hairdyes, hair conditioners, mascaras, eye shadows, sunscreens andbody lotions. They are also offered with cationic and siliconegrafted modifications. Formulations have also been developedinternally utilizing this technology and are being offered for sale

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as turnkey products to smaller marketers of personal careproducts.

The Company’s Dermaseal line, a patented film-forminghydrogel technology, is currently being sold to major cosmeticcompanies as a base for foundations and other skin careproducts. It is also being tested for use in broader skin care,cosmetic. Dermaseal is the registered trademark for barrier filmcompositions, patented in fiscal 2000 along with the method forpreventing contact dermatitis. Clinical testing has demonstratedthat these compositions protect the user from the effects ofcontact with poison ivy, oak or sumac plant allergens. Technicaltesting has also demonstrated protection from latex proteins,nickel and other contact allergens. Possible military interests isbeing explored.

Changes in the regulatory environment, including that of theEuropean requirements of REACH (Registration, Evaluation andAuthorisation of Chemicals), can adversely impact themarketability of existing cosmetics and other products. It is theCompany’s intention to address changes to regulatoryrequirements, by among other things reformulating wherenecessary.

ANIMAL HEALTH

The Company’s polymer technology was used to launch theCompany’s entry into the animal health field to combat clinicaland sub-clinical mastitis, a problem that costs U.S. dairy farmersan estimated $2 billion per year, and farmers worldwide anestimated $5 billion. Barrier dips and sprays utilizing T-HEXXtechnology offered dairy farmers exceptional value andunsurpassed protection as the first no-drip and water resistantbarrier products on the market preventing water containingmastitis-causing organisms, including mycoplasma, fromreaching the inner teat surface.

The annual U.S. market for barrier teat dips is estimated to be$100-130 million at the farm level. Barrier products containingT-HEXX technology have protocol-proven active ingredients thatkill mastitis-causing bacteria on contact while continuing toremain active up to 12 hours. They are superior performers inthis niche market, while priced comparably to or less than barrierdip products manufactured by the leading sanitary chemicalcompanies in the world. Our products are compatible withexisting mechanical equipment and milking procedures and mostimportantly, are easily removed using traditional pre-milkingmethods. Based on field tests, our product has beendemonstrated to stay on the cow teat better than the competition,protecting the cow during the complete 8-12 hour milking cycle.

The Company offers a complementary product, T-HEXX DRYExternal Teat Protection Sealant, to protect cows during the non-lactation (“dry cow”) period. T-HEXX DRY is used as a non-irritating low-cost sealant during the dry-off and the critical pre-calving period where it is estimated that over 50% of newmastitis cases are believed to start. T-HEXX DRY is the first drycow dip product with an bacterial resistant barrier that remainson the teat for 3-7 days. Clinical studies show that T-HEXXDRY is impervious to National Mastitis Council (NMC)recognized mastitis-causing organisms for up to seven days, yetis comparably priced to existing dry cow teat sealants that do notoffer such protection. Our product is suggested to be used oncows just prior to their release to the dry cow pen, in conjunction

with existing antibiotic therapy or internal teat sealants. Our T-HEXX DRY product is also sold under private-label, reflectingthe strength of the product.

During fiscal 2010, the Company launched T-HEXX DRYNaturelTM External Teat Sealant, a triclosan-free external teatsealant for dry cows, Sani-SprayTM non-barrier dips and spraysand Dragonhyde® Hoof Bath Concentrate (“Dragonhyde HBC”).Dragonhyde HBC competes against Copper Sulfate andFormalin in hoof baths yet it does not contain such heavy metalsor carcinogenic products. An independent clinical studyconducted by Cornell University and published in the August2010 edition of the Journal of Dairy Science concluded thatDragonhyde HBC outperformed typical Copper Sulfate andFormalin usage. A dissolvable hoof bath powder, DragonhydeDUST was launched in the fall/winter of 2012 to replace theDragonhyde HBC. The successor Dragonhyde DUST, nolonger faced the logistical challenges and costs of shipping theliquid Dragonhyde HBC (a one pound pouch of DragonhydeDUST was equivalent to a gallon (approximately 8 lbs in weight)of Dragonhyde HBC and is readily shippable via commoncarrier unlike its predecessor).

The T-HEXX Animal Health product line was sold in August2018. The Company is not directly involved in the animal healthmarket currently.

CONSUMER PRODUCTS

The Company’s anti-microbial technology was launched into itsConsumer Products line, under the HerbaSafeTM brand. Productsunder this line include an anti-septic, natural, Triclosan freefoaming Hand Soap, and a non-alcohol based Hand Sanitizer.During 2017, two patents covering this technology were granted.

Source of Supply

The Company has no long-term supply contracts with any of itssuppliers and believes that there are adequate alternative sourcesof supply available for all raw materials that it currently uses.

Dependence Upon Customers

The Company derives its revenues from two primary businesssegments: (1) polymer research and the products derived there-from, and (2) medical products. The Company does not haveany significant customer concentration.

Potential Applications

The Company continues to actively explore other applications ofthe complexing capabilities of polymeric substances, such asbacterial resistant agents. The Company is working on andseeks new applications of its patented technologies for use on orwith products of other companies. The anticipated applicationsinclude cosmetics, wound dressings, personal care and a widevariety of medical devices such as vascular stents. Some of theseproducts and applications are in the preliminary developmentstage and are subject to substantial further development beforetheir feasibility can be verified.

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The following demonstrate the potential uses of our innovativeand proprietary technology:

1. Low Coefficient of Friction. Hydromer is a hydrophiliccoating which when contacted by water become extremelylubricious. The Company believes that this unique feature wouldprove beneficial to any medical device that is inserted into thebody. Medical products that would so benefit include:

urinary products - urethral catheters, stents and urinary drainagesystems;

rectal products - enemas, rectal tubes, examination gloves andproctoscopy devices (disposable);

nasal/oral products - suction catheters, oxygen catheters andendotracheal tubes;

cardiovascular and related products - grafts, cardiac assistcatheters heart-lung tubing, stents.

2. Ability to be Complexed with Other Functional Chemicals.The Hydromer hydrophilic polymer coating can be complexedwith other chemicals. For example, Hydromer coatingcomplexed with iodine forms an effective bacterial resistantbarrier. The Company believes that this unique feature wouldlend itself to application on a wide variety of currently marketedmedical products, including vascular stents, foley catheters,wound drains, wart and corn dressings, burn dressings,intravenous catheters, surgical dressings and adhesive bandages.One of the Company’s patents in the coating area, issued in April2000, involves the covalent bonding of infection resistantmaterials into the coating, providing a non-leaching, anti-infective surface.

3. Cross-link Density Can be Controlled. The Hydromerhydrophilic polymer coating, through controlled cross-linking,has been further developed into a special anti-fog coating. Sucha coating is (a) resistant to fogging under a wide range oftemperature/humidity conditions; (b) transparent and hasheat/light stability; (c) long lasting, i.e., will not chip or peel andoffers more scratch resistance than do most commercial plastics;(d) inert to most commercial glass cleaners; (e) less prone tostatic dirt pickup; and (f) applicable by dip, spray or roll coating.This anti-fog product has use on greenhouse panels, refrigeratorfreezer doors, sports goggles, windows, mirrors and otherproducts, either by direct application or by coating of anadhesive backed film.

Research and Development

The Company's research and development activities presentlyare, and during the next year are expected to be devotedprimarily to the development and enhancement of the productsdescribed above and to the design and development of newproducts, either for its own account, jointly with anothercompany or as a sub-contractor to a medical device or otherproduct supplier. The Company sponsors all of such activitieseither as an internally funded or contract based R&D initiative.The major portion of R&D expenses was applied toward salariesand other expenses of personnel employed on a regular basis insuch work.

Competition

The Company considers the most significant competitive factorsin its market to be product capability and performance (including

reliability and ease of use), in addition to price and terms ofpurchase.

The Company currently owns various process and applicationspatents for Hydromer coatings (see "Patents and Trademarks").Although the medical products market is competitive, theCompany does not believe that there is any other productavailable which performs functions significantly better in termsof lubricity, complexing capabilities, durability and cost.

While management believes the Company has a strong positionin the market for medical device coatings, and that itshydrophilic foam, anti-fog coatings and hydrogel products aretechnologically superior to other products in the market, therecan be no assurance that alternatives, with similar properties andapplications, could not be developed by other companies. TheCompany is aware that there are other similar technologiesavailable and/or being developed by others. The industry inwhich the Company competes is characterized by rapidtechnological advances and includes competitors that possesssignificantly greater financial resources and research andmanufacturing capabilities, larger marketing and sales staffs andlonger established relationships with customers than theCompany does, at present or will for the foreseeable future.

Marketing

The Company markets its products and services through fiveprincipal means:

1. Commercialization of its existing technologies: The Companyintends to expand its efforts to market its current technology tothe medical, industrial, personal care and animal health markets.The Company has expanded its capabilities to prototype andmanufacture for customers to demonstrate the value of Hydromertechnology. The Company will also seek opportunities to applyits technology in new applications where the technology willoffer a benefit. Further, the Company will seek customers fortechnologies that have been developed but are not currentlygenerating revenue, capitalize on the technology that has beencreated through its R&D efforts and expand the application ofcurrent technologies.

2. Sale of Development Services: The Company has significantexpertise in polymer development and applications. TheCompany can provide contract product development, contractmanufacturing, supply and support arrangements and coatingservices (see “5. Coating Services”), potentially acting as anoutside product development arm and development supplier forcompanies.

3. Joint Development: The Company will continue to seek jointdevelopment programs, co-marketing programs and otherentrepreneurial business arrangements.

4. Licensing/Support Services: The Company will continue itsendeavors to license or make available its technology to currentmarket leaders in the medical device, pharmaceutical and otherfields, whereby the Company will grant exclusive or non-exclusive rights for the Hydromer coating treatment of existingor new products, and the development of specific productsutilizing its foam and hydrogel technology under its innovativeand proprietary technology. In return, the Company generallywould hope to earn royalties/support fees based on sales of suchtreated or new products.

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5. Coating Services: The Company will serve the customer whoneeds products coated with lubricious or anti-fog coatings.Typically this would be prototypes or runs of low volume, highvalue products. The Company will pursue large volume projectsif they fall within a technical area where the Company hasparticular expertise and focus.

Business opportunities in Coating Services which are ofparticular interest include medical devices (catheters andguidewires) and transparencies (lenses, face shields). Contactswill be pursued in conjunction with marketing of Hydromercoatings, at trade shows, web campaigns and advertisement inappropriate trade publications.

The Company is continually upgrading its on-line and socialmedia presence, advertising copy and promotional literature asneeded to graphically promote the properties and advantages ofits technologies.

The same marketing tools (traditional means of tradeshowcontacts, social media, on-line advertising, advertising,promotional activities, etc.) are used by the Company in its focusof expanding sales globally to the medical, commercial, personalcare and animal health community.

Patents and Trademarks

As of June 30, 2018, the Company has twelve U.S. patents, oneU.S. application and various foreign counterparts. TheCompany’s patents cover hydrophilic coatings and foams,hydrophilic polymer blends, anti-bacterial medical and cosmeticmaterials, non-leaching biostatic coatings, barrier film andbarrier teat dip and hoof bath compositions, Chitosan gels, anti-microbial soaps containing Carvacrol and methods of usingsame, and other potential applications using these patents.

The Company owns the registered trademarks “Aquamere”,“Aquatrix”, “Biosearch”, “Dermaseal”, “Hydromer”, “Sea-Slide”, and "STAYWET" in the United States and othercountries.

Employees

As of June 30, 2018, the Company and its subsidiary had thirty-four active full-time employees. The Chief Executive Officereffective September 14, 2018 is Peter M. von Dyck, replacinghis father, Manfred F. Dyck , who is now President of R&D andremains as Chairman of the Board. The Company does not havea collective bargaining agreement with any of its employees andconsiders its relationship with its employees to be very good.

Government Regulations

The uses of the Company's medical, animal health and cosmeticproducts come under the jurisdiction of the FDA, as well as otherfederal, state and local agencies, and similar agencies in othercountries.

In connection with the Company's support agreements, it isgenerally the obligation of the customer to conform to anyrequired FDA pre-market notification or other regulations. Tothe Company's knowledge, all such customers who are marketingmedical products are in such compliance. The Company expectsto market additional applications of Hydromer’s technologies toclients which may be subject to such FDA review and/or foreign

regulatory agencies’ procedures as proof of safety andeffectiveness of the applications or products, or adherence toprescribed design standards. There can be no assurance thatsuch approvals would be forthcoming or of compliance with suchstandards. Any such failure to obtain approvals or non-compliance might have a significant adverse effect on theCompany's existing products. However, the Company intends tomake every effort to help the client obtain all necessaryapprovals and to comply with such standards, and in the case ofits support agreements, to require the customers to obtain suchapprovals.

The Company contract coats medical products through itsBiosearch Medical Products subsidiary (“Biosearch”), whoseactivities come under the jurisdiction of the FDA and ISO. It isthe policy of the Company to use such regulations as guidelinesduring manufacturing of Hydromer coatings.

The Company is also subject to federal and state regulationsdealing with occupational health and safety and environmentalprotection. It is the policy of the Company to comply with theseregulations and be responsive to its obligations to its employeesand the public.

The Company’s electronically filed reports are available atwww.hydromer.com with historical reports available atwww.sec.gov and www.otcmarkets.com/stock/HYDI/filings.

PROPERTIES

In June 1998, the Company purchased the building and land at35 Industrial Parkway, Branchburg, NJ from Biosearch MedicalProducts, then an affiliated party. The facility, currently its solefacility, is secured by a mortgage through a bank. See thefinancial statements included herein for the terms of theagreement.

In 2002, the Company completed its 10,400 square feetexpansion at its primary location of 35 Industrial Parkway. Thisallowed the Company to consolidate certain manufacturing andquality assurance functions operations formerly located on leasedspace.

The current facility will be adequate for the Company’soperations for the foreseeable future.

MARKET FOR THE COMPANY'S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

Since January 9, 1986, reporting of trading of the Company’sCommon Stock (symbol “HYDI”) has been on the NationalDaily Quotation Service (commonly known as the “PinkSheets”). For the past twenty-nine years, trading in theCompany’s stock has been limited.

The Company’s Common Stock traded at prices ranging $0.40and $1.15 in the fiscal year 2018 and between $0.44 and $0.95 inthe fiscal year 2017. These prices may not include retail mark-ups or mark-downs or any commission to the broker dealer.

The approximate number of holders of record of the CommonStock on October 31, 2018 was 173. There are approximately250 individual shareholders of the Common Stock.

Manfred F. DyckPresident of Research and Development

Martin C. DyckExecutive Vice President, Operations andPresident of Biosearch Medical Productssubsidiary

Gerard M. Brennan, ESQCorporate Secretary

C O R P O R A T E I N F O R M A T I O Nas of October 31, 2018

CORPORATE OFFICERS

BOARD OF DIRECTORS

Peter M. von DyckChief Executive Officer

Robert Y. Lee, CPA, MBAVice President, Finance,Chief Financial Officer andTreasurer

John KonarVice President, Quality Assuranceand Director, Human Resources

Manfred F. Dyck, ChairmanHydromer, IncPresident of Research & Development

Robert H. BeaIntegra LifeSciences, Inc.Vice President/Global Leader,QA Commercialization

James S. PacettiPace Medical Inc,Founder & President

Robert H. BeaIntegra LifeSciences, Inc.Vice President/Global Leader,QA Commercialization

George A. ZietsConsulting / ProductDevelopment

Dieter HeinemannFrankfurt Stock ExchangeSpecialist, retired

Arthur K. DegenPrivate Investor,Adjunct Professor, NJIT,retired

George A. ZietsConsulting / ProductDevelopment

REGISTRAR & TRANSFER AGENTComputershare Shareholder ServicesPO Box 30170College Station, TX 77842-3170(877) 373-6374

INDEPENDENT ACCOUNTANTSRosenberg Rich Baker Berman & Company265 Davidson AvenueSomerset, NJ 08873(908) 231-1000

Michael F. Ryan, Ph.D.e-Clinical MentorPresident

George A. ZietsHK InsightsVice President of R&D /Product Development

35 Industrial Parkway ● Branchburg, NJ 08876 ● U.S.A.Tel: (908) 722-5000

htttp://www.Hydromer.com

• Medical Coatings

Hydromer, Inc ● 35 Industrial Parkway ● Branchburg, NJ 08876-3424Tel: (877) HYDROMER

www.Hydromer.com

HYDROMER® Products & Services:

Drug Delivery Bacterial Resistant Thrombo-Resistant Hydrophilic and Lubricious

Let our legendary technologies enhance yours

• Chemical Analysis & Testing

• Bio-Polymer Production

• Tube Coating:External and Internal

®

• Coating formulation

• Machine design & build

• Technology / process transfer

• Contract manufacturing/coating• Medical Hydrogels• Cosmetic Intermediaries• Anti-fog / Anti-frost condensation

control coatings

• Process development

• Prototype production- GMP/ISO

• Blood Chemistry

• Cell Biology

• OEM Medical DeviceManufacturing

• Polymer Synthesis

• Microbiology

• Web Coating/Film Coating

U.S. Patents

6,054,504 Biostatic Coatings For the Reduction and Prevention of Bacterial Adhesion

6,121,375 Gels Formed By The Interaction Of Polyaldehyde With Various Substances

6,203,812 Hydrophilic Polymer Blends Used To Prevent Cow Skin Infections

6,365,664 Gels Formed By The Interaction Of Poly(aldehyde) With Various Substances Applicatoins of patent use ranges from:6,379,702 Gels Formed By The Interaction Of Polyvinylpyrrolidone With Chitosan Derivatives Animal Health6,395,289 Hydrophilic Polymer Blends Used To Prevent Cow Skin Infections Anti-bacterial / bistatic6,440,442 Hydrophilic Polymer Blends Used For Dry Cow Therapy Anti-fog6,599,448 Radio-Opaque Polymer Coating Consumer Products7,008,979 Coating Compositions For Multiple Hydrophilic Applications Drug Delivery / Complex Systems9,474,701 Antimicrobial Soaps Containing Carvacrol and Methods of Using Same Hydrogels9,474,729 Topical Antimicrobial Compositions And Methods Of Using Same and9,918,991 Topical Antimicrobial Compositions And Methods Of Using Same Lubricious Coatings

The Company also have various foreign counterparts to their U.S. patents