Critical Accounting Policies
The Company's financial statements have been prepared in accordance with
Generally Accepted Accounting Principles in the United States of America ("US
GAAP"). Preparation of financial statements requires the Company to make
estimates and assumptions affecting the reported amounts of assets, liabilities,
revenues, and expenses and the disclosure of contingent assets and liabilities.
The Company uses its historical experience and other relevant factors when
developing its estimates and assumptions, which are continually evaluated. Note
A, Nature of Business and Summary of Significant Accounting Policies, of the
Notes to Financial Statements, included in Item 8, Financial Statements and
Supplementary Data, of this Annual Report includes a discussion of the Company's
significant accounting policies. The following accounting policies are those
that the Company considers critical to an understanding of the financial
statements because their application places the most significant demands on the
Company's judgment. The Company's financial results might have been different if
other assumptions had been used or other conditions had prevailed.
Marketable Securities
The Company's marketable securities include investments in equity and fixed
income mutual funds, and U.S. Government securities. The Company's marketable
equity securities are reported at fair value with the related unrealized and
realized gains and losses included in net income. U.S Treasury Bills are
considered debt securities and any realized gains or losses are reported in
other comprehensive income. Realized gains or losses on mutual funds are
determined on a specific identification basis. The Company evaluates its
investments periodically for possible other-than-temporary impairment by
reviewing factors such as the length of time and extent to which fair value had
been below cost basis, the financial condition of the issuer and the Company's
ability and intent to hold the investment for a period of time which may be
sufficient for anticipated recovery of market value. The Company records an
impairment charge to the extent that the cost of the available-for-sale
securities exceeds the estimated fair value of the securities and the decline in
value is determined to be other-than-temporary. During 2019 and 2018, the
Company did not record an impairment charge regarding its investment in
marketable securities because management believes, based on its evaluation of
the circumstances, that the decline in fair value below the cost of certain of
the Company's marketable securities is temporary.
14
UNITED-GUARDIAN, INC.
Revenue Recognition
The Company recognizes revenue from sales of its cosmetic ingredients, medical
products, and industrial products at the time the products are shipped, as long
as a valid purchase order has been received and future collection of the sale
amount is reasonably assured. These products are shipped "Ex-Works" from the
Company's facility in Hauppauge, NY, and it is at this time that risk of loss,
control, and responsibility for the shipment passes to the customer. Sales of
these products are deemed final, and there is no obligation on the part of the
Company to repurchase or allow the return of these goods unless they are
defective.
The Company's pharmaceutical products are shipped via common carrier upon
receipt of a valid purchase order, with, in most cases, the Company paying the
shipping costs. Sales of pharmaceutical products are final, and revenue is
recognized at the time of shipment. Pharmaceutical products are returnable only
at the discretion of the Company unless (a) they are found to be defective; (b)
the product is damaged in shipping; or (c) the product is outdated (but not more
than one year after their expiration date, which is a return policy which
conforms to standard pharmaceutical industry practice). The Company estimates an
allowance for outdated material returns based on prior year historical returns
of its pharmaceutical products.
The Company does not make sales on consignment, and the collection of the
proceeds of the sale of any of the Company's products is not contingent upon the
customer being able to sell the goods to a third party.
Any allowances for returns are taken as a reduction of sales within the same
period the revenue is recognized. Such allowances are determined based on
historical experience. The Company has not experienced significant fluctuations
between estimated allowances and actual activity.
The timing between recognition of revenue for product sales and the receipt of
payment is not significant. The Company's standard credit terms, which vary
depending on the customer, range between 30 and 60 days. The Company uses its
judgment on a case-by-case basis to determine its ability to collect outstanding
receivables and provides allowances for any receivables for which collection has
become doubtful. As of December 31, 2019 and December 31, 2018, the allowance
for doubtful accounts receivable amounted to $21,178 and $16,895, respectively.
Prompt-pay discounts are offered to some customers; however, due to the
uncertainty of the customers actually taking the discounts, the discounts are
recorded when they are taken.
The Company's sales, as reported, are net of a variety of deductions, which
generally are estimated and recorded in the same period that the revenues are
recognized. Such variable consideration, primarily related to the sale of the
Company's pharmaceutical products, includes chargebacks from the United States
Department of Veterans Affairs ("VA"), rebates in connection with participation
in Medicare and Medicaid programs, distribution fees, discounts, and outdated
product returns. These deductions represent estimates of the related obligations
and, as such, knowledge and judgment are required when estimating the impact of
these revenue deductions on sales for a reporting period.
The Company has distribution fee contracts with certain distributors of its
pharmaceutical products that entitles them to receive distribution and
services-related fees. The Company records distribution fees and estimates of
distribution fees as offsets to revenue.
15
UNITED-GUARDIAN, INC.Accounts Receivable Allowance
The Company performs ongoing credit evaluations of the Company's customers and
adjusts credit limits, as determined by a review of current credit information.
The Company continuously monitors collection and payments from customers and
maintains an allowance for doubtful accounts based upon historical experience,
the Company's anticipation of uncollectible accounts receivable and any specific
customer collection issues that have been identified. While the Company's credit
losses have historically been low and within expectations, the Company may not
continue to experience the same credit loss rates that have historically been
attained. The receivables are highly concentrated in a relatively small number
of customers. Therefore, a significant change in the liquidity, financial
position, or willingness to pay timely, or at all, of any one of the Company's
significant customers would have a significant impact on the Company's results
of operations and cash flows.
Inventory Valuation Allowance
In conjunction with the Company's ongoing analysis of inventory valuation,
management constantly monitors projected demand on a product-by-product basis.
Based on these projections, management evaluates the levels of write-downs
required for inventory on hand and inventory on order from contract
manufacturers. Although the Company believes that it has been reasonably
successful in identifying write-downs in a timely manner, sudden changes in
buying patterns from customers, either due to a shift in product interest and/or
a complete pull back from their expected order levels, may result in the
recognition of larger-than-anticipated write-downs.
Results of Operations
Year ended December 31, 2019 compared with the year ended December 31, 2018:
Sales
Sales increased from $13,445,565 in 2018 to $13,599,084 in 2019, an increase of
$153,519 (1%). The increase was due primarily to increases in sales of the
Company's pharmaceutical products, primarily Renacidin, combined with an
increase in sales of many of the Company's medical products. Those increases
were partially offset by decreases in sales of the Company's cosmetic
ingredients.
The net increase in sales was the result of the following specific changes in
sales in the different product categories:
(a) Cosmetic Ingredients:
Sales of the Company's cosmetic ingredients decreased from $7,529,487 in 2018 to
$6,377,323 in 2019, a decrease of $1,152,164 (15%). The decrease was
attributable primarily to decreases in sales of the Company's Lubrajel products
to ASI, the Company's largest marketing partner. Sales to ASI decreased by
$718,440 (12%) from $6,067,821 in 2018 to $5,349,381 in 2019. Aggregate sales to
the Company's other marketing partners decreased by $410,494 (29%) from
$1,419,531 in 2018 to $1,009,037 in 2019. The largest decrease was to the
Company's former marketing partner in Korea, which saw a decrease in sales of
$243,341(73%), from $331,788 in 2018 to $88,447 in 2019. There was also a
decrease of $23,230 in sales of the Company's cosmetic ingredients to three
other direct customers of the Company.
16
UNITED-GUARDIAN, INC.Although a significant percentage of ASI's purchases from the Company are sold
to foreign customers, all sales to ASI are considered U.S. sales for financial
reporting purposes, since all shipments to ASI are shipped to ASI's warehouses
in the U.S. A certain percentage of those products are subsequently shipped by
ASI to its foreign customers. Based on sales information provided to the Company
by ASI, in 2019 and 2018, 75% of ASI's sales were to customers in foreign
countries. ASI's largest foreign market in both 2019 and 2018 was China, which
accounted for approximately 49% of ASI's sales in 2019 and 55% of sales in 2018.
The decrease in sales to ASI was primarily the result of a decrease in ASI's
sales of the Company's cosmetic ingredients in China, which has been a
significant market for the Company's products over the past few years. Based on
information provided to the Company by ASI, there have been two reasons for the
decline in sales. First, there has been a decrease in demand for a cosmetic
product line that had been using significant amounts of one of the Company's
Lubrajel products. While still a significant market, the demand for those
products has declined somewhat over the past year. Second, the Company is
competing with lower-priced manufacturers in Asia that are marketing competitive
products and are able to sell those products at a lower price. The Company is
working closely with ASI to be more competitive with those products, and is
hopeful that it will be able to recover some of the business it has lost to
these lower-cost producers.
Sales of the Company's cosmetic ingredients in Europe decreased slightly in 2019
compared with 2018. There continues to be competition in Europe from Asian and
European competitors selling copies of the Company's products at much lower
prices. The strengthening of the U.S. dollar relative to the Euro also
contributed to the increasingly competitive situation in Europe. The Company
continues to work closely with its marketing partners to be as competitive as
possible and, when appropriate, to offer additional volume discounts and more
aggressive pricing in order to maintain and increase sales and bring in new
customers. However, the Company expects the European market to remain very
competitive based on the increasing sales of these lower-cost products, and for
that reason is concentrating its R&D efforts on developing new and unique
products that these other companies do not have. The Company expects to
introduce several such products during 2020.
The Company has been informed by ASI, its current marketing partner in Korea,
that sales of the Company's products in Korea may be negatively impacted as a
result of the spread of the coronavirus, since in Korea there has always been
significant sales of cosmetic products to Chinese tourists. With the drastic
reduction in travel by Chinese tourists there is an expectation on the part of
cosmetic manufacturers that the demand for cosmetic products will decrease,
especially if the virus continues to spread, which will mean that cosmetic
manufacturers' purchases of the raw materials used to make their cosmetic
products, including those produced by the Company, will be reduced. The Company
also believes that there is a strong possibility that sales in China, Korea,
Europe, the U.S., and other parts of the world may be impacted as a result of
temporary business closures and the suspension of normal activities due to the
spread of the virus. It is too early to determine what the impact will be on the
Company's sales in the coming year, since that will depend to a large extent on
the spread of the virus over the coming months.
Although the Company does source some of its raw materials from areas being
impacted by the coronavirus, it has multiple sources for many, but not all, of
its raw materials. For those it doesn't it is increasing its inventory in case
there is a temporary delay in obtaining some of those materials. While at the
present time the Company's production of cosmetic ingredients, as well as its
other products, has not yet been impacted by the spread of the coronavirus, the
situation is changing rapidly, both in the U.S. and overseas, and there is a
possibility that businesses, including the Company's business, might have to
temporarily shut down, which could have a significant impact on sales until
production can be resumed.
17
UNITED-GUARDIAN, INC.
Pharmaceuticals:
Sales of the Company's two pharmaceutical products, Renacidin and Clorpactin,
together increased by $581,099 (17%), from $3,510,720 in 2018 to $4,091,819 in
2019, with Renacidin accounting for most of the increase. Sales of Renacidin
increased by $555,748 (19%) from $2,932,862 in 2018 to $3,488,610 in 2019, and
accounted for approximately 26% of the Company's sales in 2019, as compared with
22% in 2018. The Company believes that much of this increase has been the result
of the increased awareness of the product by both patients, caregivers, and
physicians as a result of the launch of the Company's web site dedicated to
Renacidin, the continuing efforts to promote the product on the internet, and
the work being done by the Company's internet marketing consultant to make sure
that the product comes up in as many relevant internet searches as possible. The
Company intends to continue these successful internet marketing efforts during
2020.
As a result of the increase in sales of the Company's pharmaceutical products,
there was an increase in allowances for distribution fees, VA chargebacks,
Medicaid and Medicare rebates, and outdated material returns. Those fees,
rebates, and allowances increase proportionally as sales of the Company's
pharmaceutical products increase, and in 2019 those expenses increased by
$142,257 (14%) over 2018, primarily due to the increase in Renacidin sales.
(b) Medical (non-pharmaceutical) products:
Sales of the Company's medical products increased by $736,665 (33%) from
$2,232,141 in 2018 to $2,968,806 in 2019. The increase was primarily the result
of a 58% increase in sales of Lubrajel MG, along with increases in sales of some
of the Company's other medical lubricants, including Lubrajel RC and Lubrajel
RR. While some of the increases were due to fluctuations in purchasing patterns
of the customers for these products, there was also an increase in demand from
some of the customers, particularly for the Lubrajel MG, where one of the major
customers for that product, a contract manufacturer and packager, had a 125%
increase in purchases as a result of securing new customers for the product. .
(c) Industrial and other products:
Sales of the Company's industrial products, as well as other miscellaneous
products, decreased by $12,079 (7%) from $173,217 in 2018 to $161,138 in 2019.
The decrease was primarily due to the decrease in sales of one of the Company's
industrial products to one customer.
Gross Profit on Sales
Gross profit on sales was 58% in 2019 compared with 60% in 2018. The decrease in
gross profit in 2019 compared to 2018 was due to the increased sales of
Renacidin in 2019 compared to 2018. This product carries a lower gross profit
margin than the Company's other products. In 2019, Renacidin represented 26% of
the Company's total sales compared to 22% in 2018.
Operating Expenses
Operating expenses increased by $25,629 (1%) in 2019 compared with 2018,
increasing from $2,122,746 in 2018 to $2,148,375 in 2019. The increase was
mainly attributable to increases in insurance expenses and employee fringe
benefit expenses.
18
UNITED-GUARDIAN, INC.Research and Development Expenses
Research and development expenses amounted to $397,391 and $399,517 in 2019 and
2018, respectively. The decrease of $2,126 (less than 1%) was primarily related
to a decrease in outside laboratory expenses. The Company has been working more
closely than it has in the past with ASI's R&D department to jointly develop and
test new products, which has lowered the internal costs involved with the
development of new products.
Investment Income
Investment income decreased by $28,657 (12%) from $231,986 in 2018 to $203,329
in 2019. The decrease was due to a decrease in investment income from both stock
and bond mutual funds. During 2019, the Company's investment portfolio was more
heavily weighted in U.S. Treasury Bills which yielded interest income that was
less than the dividend income recognized in 2018 from the Company's investment
in stock and bond mutual funds.
Net Gain (Loss) on Marketable Securities
The net gain (loss) on marketable securities changed to a gain of $431,076 in
2019 from a loss of $333,138 in 2018, a positive change of $764,214.The increase
was primarily due to the Company recognizing higher gains (both realized and
unrealized) on its stock and bond mutual funds compared to the same period in
2018.
Provision for Income Taxes
The provision for income taxes increased by $155,136 (14%) from $1,113,523 in
2018 to $1,268,659 in 2019. This increase was due to an increase in net income.
The Company's effective income tax rate was approximately 21% in 2019 and
approximately 20% in 2018. The Company's effective income tax rate in 2018 was
lower than in 2019 due to higher research and development tax credits in 2018
compared with 2019.
Liquidity and Capital Resources
Working capital decreased from $10,320,949 at December 31, 2018 to $10,224,222
at December 31, 2019, a decrease of $96,727 (less than 1%). The current ratio
remained the same at 8.6 to 1 at December 31, 2019 and December 31, 2018. The
decrease in working capital was mainly due to decreases in marketable securities
and inventories, partially offset by increases in accounts receivable and cash.
Accounts receivable (net of allowance for doubtful accounts) as of December 31,
2019 increased by $425,844 (25%) from $1,672,567 in 2018 to $2,098,411 in 2019.
The receivables turnover, or Days Sales Outstanding, for 2019 was 51 days,
compared with 49 days in 2018. The increase was mainly the result of some of the
Company's larger customers implementing electronic payments and, as a result,
the payment terms increased to allow for additional processing time. The
Company's allowance for doubtful accounts receivable increased from $16,895 in
2018 to $21,178 for 2019, and the Company believes that the net balance of its
accounts receivable is fully collectible as of December 31, 2019.
The Company generated cash from operations of $4,476,111 in 2019 compared with
$4,950,412 in 2018. The decrease in 2019 was primarily due to an increase in
accounts receivable and the recognition of a gain on marketable securities in
2019 compared with a loss in 2018.
Net cash used in investing activities was $308,759 for the year ended December
31, 2018 compared with net cash provided by investing activities of $1,071,987
for the year ended December 31, 2019. This increase in net cash was mainly due
to an increase in sales of marketable securities in 2019 compared with 2018.
19
UNITED-GUARDIAN, INC.Cash used in financing activities was $5,049,922 and $4,816,239 during the years
ended December 31, 2019 and 2018, respectively. The increase was due to the
payment of higher dividends in 2019 compared with 2018.
The Company believes that its working capital is sufficient to support its
operating requirements for the next fiscal year. The Company's long-term
liquidity position will be dependent upon its ability to generate sufficient
cash flow from profitable operations. The Company has no material commitments
for future capital expenditures.
Off Balance-Sheet Arrangements
The Company has no off balance-sheet transactions that have, or are reasonably
likely to have, a current or future effect on the Company's financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
The information to be reported under this item is not required of smaller
reporting companies.
New Accounting Pronouncements
See Note "A" to the financial statements regarding new accounting
pronouncements, which note is incorporated herein by reference.
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UNITED-GUARDIAN, INC. 
