The following discussion and analysis covers material changes in the financial
condition of the Company since the year ended December 31, 2021, and a
comparison of the results of operations for the second quarter of 2022 and 2021
and the first half of 2022 and 2021. This discussion and analysis should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2021. All references in this quarterly report to
"sales" or "Sales" shall mean "net sales" unless specifically identified as
"gross sales".
FORWARD-LOOKING STATEMENTS
Statements made in this Form 10-Q which are not purely historical are
forward-looking statements with respect to the goals, plans, objectives,
intentions, expectations, financial condition, results of operations, future
performance and business of the Company. Forward-looking statements may be
identified by the use of such words as "believes", "may", "will", "should",
"intends", "plans", "estimates", "anticipates", or other similar expressions.
Forward-looking statements involve inherent risks and uncertainties, and
important factors (many of which are beyond the Company's control) could cause
actual results to differ materially from those set forth in the forward-looking
statements. In addition to those specific risks and uncertainties set forth in
the Company's reports currently on file with the SEC, some other factors that
may affect the future results of operations of the Company are: the development
of products that may be superior to those of the Company; changes in the quality
or composition of the Company's products; lack of market acceptance of the
Company's products; the Company's ability to develop new products; general
economic or industry conditions; changes in intellectual property rights;
changes in interest rates; new legislation or regulatory requirements;
conditions of the securities markets; the Company's ability to raise capital;
changes in accounting principles, policies or guidelines; financial or political
instability; acts of war or terrorism; and other economic, competitive,
governmental, regulatory and technical factors that may affect the Company's
operations, products, services and prices. Accordingly, results achieved may
differ materially from those anticipated as a result of such forward-looking
statements, and those statements speak only as of the date they are made.
The Company does not undertake, and specifically disclaims, any obligation to
update any forward-looking statements to reflect events or circumstances
occurring after the date of such statements.
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OVERVIEW
The Company is a Delaware corporation that, through its Guardian Laboratories
division, conducts research, product development, manufacturing, and marketing
of cosmetic ingredients, personal and health care products, pharmaceuticals,
non-pharmaceutical medical products, and proprietary specialty industrial
products. All the products that the Company markets, except for Renacidin, are
produced at its facility in Hauppauge, New York. Renacidin, a urological
product, is manufactured for the Company by an outside contract manufacturer.
The Company's most important product line is its Lubrajel® line of water-based
moisturizing and lubricating gels, which are used primarily as ingredients in
cosmetic products and are also used in medical products, primarily catheter
lubricants. These products are marketed worldwide for cosmetic uses by five
marketing partners, each handling a different geographic area, with the largest
being U.S.-based ASI. The Company's research and development department is
actively working on the development of new products to expand the Company's line
of cosmetic ingredients. Many of the Company's products use proprietary
manufacturing processes, and the company relies primarily on trade secret
protection to protect its intellectual property.
Renacidin and the Company's other pharmaceutical product, Clorpactin®, which is
also used primarily in urology, are distributed through full-line drug
wholesalers and marketed only in the United States. Those wholesalers in turn
sell the products to pharmacies, hospitals, nursing homes, and other long-term
care facilities, and to government agencies, primarily the VA. The Company
promotes Renacidin through internet advertising as well as a dedicated website.
Clorpactin and some of the Company's other products are marketed through
information provided on the Company's corporate website.
The Company's non-pharmaceutical medical products, such as its catheter
lubricants, as well as its specialty industrial products, are sold directly to
end users, or to contract manufacturers utilized by those end users. They are
also available for marketing on a non-exclusive basis by the Company's marketing
partners.
While the Company does have competition in the marketplace for some of its
products, particularly its cosmetic ingredients, some of its pharmaceutical and
medical products have some unique characteristics, and do not have direct
competitors. However, these products may have indirect competition from other
products that are not marketed as direct competitors to the Company's products
but may have functionality or properties that are similar to the Company's
products.
The Company recognizes revenue when all of the following requirements are
satisfied: (a) persuasive evidence of a sales arrangement exists; (b) products
are shipped, which is when the performance obligation is satisfied and title and
risk of loss pass to the customers; and (c) collections are reasonably assured.
An allowance for returns, based on historical experience, is taken as a
reduction of sales within the same period the revenue is recognized.
Over the years the Company has been issued many patents and trademarks, and it
still maintains several registered trademarks, the two most important of which
are "Lubrajel" and "Renacidin." However, regarding the protection of the
Company's proprietary formulations and manufacturing technology, the Company
currently relies primarily on trade secret protection rather than patent
protection due to the current disclosure requirements needed to obtain patents,
the limited protection they afford, and the difficulty and expense of enforcing
them globally. However, the Company may, from time to time, seek patent
protection when it believes it would be in the Company's best interest to do so.
All of the Company's previously issued patents have expired; however, the
Company does not believe that the expiration of those patents has had, or will
have, any material impact on its sales, since in recent years protection for the
Company's most important products has been based on trade secrets and
proprietary manufacturing methods rather than patent protection.
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As discussed in Note 3 above, while the coronavirus pandemic ("pandemic")
continues to impact certain areas of the Company's operations, the current
impact on the Company's financial performance is coming primarily from higher
raw material costs and increased shipping costs, which had an impact on the
Company's gross profit margins in the second quarter of 2022 and may continue to
have a future impact on the Company's gross profit margins in upcoming quarters.
In addition, during the first half of 2022 it was more difficult to ship the
Company's products due to a shortage of truck drivers and limited availability
of shipping vessels. This situation began to gradually improve during the second
quarter of 2022. The shortage of truck drivers and shipping vessels is expected
to continue to improve as the year progresses, but this will be at least
partially contingent upon the extent to which the impact of the pandemic lessens
globally. The Company has been able to minimize the impact on customers by
making them aware of longer lead times that may be necessary as a result of
these issues.
The pandemic has not significantly affected the ability of the Company to obtain
raw materials, but it has created longer lead times for some of them. In
response to the rising raw material prices the Company has instituted price
increases on many of its products, which will help to reduce the impact on the
Company's gross margins in the future.
As a result of the lingering effects of the coronavirus pandemic as described
above, there continues to be uncertainty in regard to the future potential
impact of the pandemic on the Company's operations or financial results. The
Company believes that it is still unable to provide an accurate estimate or
projection as to what the future impact of the pandemic will be on the Company's
future operations or financial results. The Company does not expect the carrying
value of its assets or its liquidity to be impaired by the coronavirus pandemic.
CRITICAL ACCOUNTING POLICIES
As disclosed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2021, the discussion and analysis of the Company's financial
condition and results of operations are based on its financial statements, which
have been prepared in conformity with US GAAP. The preparation of those
financial statements required the Company to make estimates and assumptions that
affect the carrying value of assets, liabilities, revenues and expenses reported
in those financial statements. Those estimates and assumptions can be subjective
and complex, and consequently actual results could differ from those estimates
and assumptions. The Company's most critical accounting policies relate to
revenue recognition, concentration of credit risk, investments, inventory, and
income taxes. Since December 31, 2021, there have been no significant changes to
the assumptions and estimates related to those critical accounting policies.
The following discussion and analysis covers material changes in the financial
condition of the Company since the year ended December 31, 2021, and a
comparison of the results of operations for the six months ended June 30, 2022
and June 30, 2021. This discussion and analysis should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2021. All references in this quarterly report to "sales" or
"Sales" shall mean Net Sales unless specified otherwise.
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The Company recognizes revenue from sales of its cosmetic ingredients, medical
products, and industrial products when all the following requirements are
satisfied: (a) a valid purchase order has been received; (b) products are
shipped, which is when the performance obligation is satisfied and title and
risk of loss pass to the customers; and (c) 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 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. The Company assumes responsibility for the shipment arriving at
its intended destination. Sales of pharmaceutical products are final and revenue
is recognized at the time of shipment, which is when the performance obligation
is satisfied. 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 its 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 gross sales of its pharmaceutical products.
RESULTS OF OPERATIONS
Net Sales
Net sales for the second quarter of 2022 decreased by $31,801 (less than 1%)
when compared with the same period in 2021. Net sales for the first half of 2022
increased by $429,689 (6%) as compared with the corresponding period in 2021.
The decrease and increase in sales for the second quarter of 2022 and the first
half of 2022 were attributable to changes in sales of the following product
lines:
1. Cosmetic ingredients:
a) Second quarter sales: For the second quarter of 2022, the Company's sales
of cosmetic ingredients decreased by $461,813 (25%) when compared with the
second quarter of 2021. The decrease in the second quarter sales was due
primarily to a net decrease of $487,820 (34%) in sales of the Company's cosmetic
ingredients to ASI. The net decrease in sales to ASI was due to two main
factors: 1) in the second quarter of 2021, ASI resumed shipments of the
Company's cosmetic ingredients to China due to improving COVID-19 pandemic
conditions, and sales for that period represented a significant increase in
order to compensate for the lack of sales during the height of the pandemic in
2020; and 2) in the second quarter of 2022 the Company provided pricing rebates
in the amount of $129,600 to ASI for new business it acquired.
Second quarter sales to the Company's four other marketing partners, as well as
to the four direct cosmetic ingredient customers, increased by a net of $26,007
compared with the second quarter of 2021. The increase was attributable to a
sales increase of $168,028 to the Company's marketing partner in the UK and an
increase of $535 in sales to four direct cosmetic ingredient customers. These
increases were offset by a decrease of $126,708 to the Company's marketing
partners in France, a decrease of $770 in Switzerland and a decrease of $15,078
in sales to the Company's marketing partner in Italy.
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b) Six-month sales: For the first half of 2022 the Company's sales of cosmetic
ingredients decreased by $14,494 (less than 1%) when compared with the
corresponding period in 2021. This decrease was due primarily to a net decrease
in sales to ASI of $105,905 (4%), which includes a rebate of $129,600 to ASI in
connection with new business that ASI acquired. That decrease was fully offset
by a net increase in sales of $106,064 to the Company's four other marketing
partners, with sales to the Company's marketing partners in the United Kingdom
and Italy increasing by a combined net of $121,691, and sales to the Company's
marketing partners in France and Switzerland decreasing by a combined net of
$15,622. Sales to the Company's four direct cosmetic ingredient customers
decreased by $14,658.
2. Pharmaceuticals:
Because there are fees, rebates and allowances associated with sales of the
Company's two pharmaceutical products, Renacidin and Clorpactin, discussion of
the Company's pharmaceutical sales includes references to both gross sales
(before fees, rebates and allowances) and net sales (after fees, rebates and
allowances). Gross sales of the Company's pharmaceutical products for the three-
and six-month periods ended June 30, 2022 increased by $112,599 (8%) and
$162,882 (6%), respectively, compared with the corresponding periods in 2021.
These increases were due primarily to increases of $88,962 (7%) and $128,009
(5%) in gross sales of Renacidin for the three- and six-month periods,
respectively, ended June 30, 2022. These increases were accompanied by increases
of $23,637 (14%) and $34,873 (11%) in gross sales of the Company's other
pharmaceutical product, Clorpactin, for the same three- and six-month periods,
respectively, which the Company believes was most likely due to normal
fluctuations in the sales of Clorpactin.
The increase in gross sales for the three- and six-month periods ended June 30,
2022 was partially offset by an increase in pharmaceutical-related fees, rebates
and allowances of $23,393 (11%) and $8,228 (2%), respectively. The increase in
these fees, rebates and allowances is the result of the direct relationship
between the sales of the Company's pharmaceutical products and the rebates and
allowances related to those product sales.
3. Medical (non-pharmaceutical) products:
Sales of the Company's medical products for the three and six-month periods
ended June 30, 2022, increased by $341,332 (55%) and $283,101 (23%),
respectively, compared with the same periods in 2021. The increase in sales for
the three-month period was primarily due to two factors: 1) at March 31, 2022,
the Company had medical product orders of approximately $240,000 that were
waiting to be shipped but were delayed due to a shortage of truck drivers and
limited availability of shipping vessels. These orders were subsequently shipped
in the second quarter of 2022, and 2) The Company has seen a significant
increase in orders from one of its larger customers in China. For the six-month
period ended June 30, 2022, the increase in medical product sales was primarily
due to an increase in orders from the Company's foreign customers, particularly
customers located in China, which began to place larger orders than they had in
2021.
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4. Industrial and other products:
Sales of the Company's industrial products, as well as other miscellaneous
products, for the three-month and six-month periods ended June 30, 2022,
decreased by $525 and $10,028, respectively, when compared with the
corresponding periods in 2021. The decrease in sales for both periods was
primarily due to the loss of one of the Company's larger domestic customers due
to a reformulation of one of that customer's products.
Cost of Sales
Cost of sales as a percentage of net sales increased to 47% in the second
quarter of 2022 from 41% in the second quarter of 2021. For the first six months
of 2022, cost of sales as a percentage of sales increased to 45% compared with
40% for the first six months of 2021. The increases in both periods were the
result of an increase in certain raw material costs, combined with the recording
of $129,600 in rebates payable to one of the Company's marketing partners in the
second quarter of 2022. In addition, the Company recorded a one-time Employee
Retention Credit (ERC) in the first six months of 2021, which decreased the cost
of sales for that period.
Operating Expenses
Operating expenses, consisting of selling and general and administrative
expenses, increased by $107,217 ( 21%) for the second quarter of 2022 compared
with the equivalent period in 2021. Operating expenses increased by $196,839
(20%) for the first six months of 2022, compared with comparable period in 2021.
The increase in operating expenses for the second quarter of 2022 was primarily
due to increases in insurance expense and consulting and legal fees. In
addition, during the second quarter there was an increase in fees to the
independent members of the Company's Board of Directors, which related to the
review process of exploring strategic alternatives for the Company. The increase
in operating expenses for the first 6 months of 2022 was primarily due to the
recording of an ERC in the first 6 months of 2021, which decreased the Company's
operating expenses. After taking into account the effect of the ERC, the
Company's operating expenses increased by (7%) in the first six months of 2022
compared with the same period in 2021, which was due primarily to increases in
the same expenses noted above. Due to the current inflationary environment, the
Company expects to see a minor increase in operating expenses for the remainder
of the year.
Research and Development Expenses
Research and development expenses decreased by $17,759 (14%) for the second
quarter of 2022 compared with the second quarter of 2021, and increased by
$25,621 (12%) for the first six months of 2022 compared with the first six
months of 2021. The decrease in the second quarter of 2022 was due primarily to
a decrease in payroll and payroll related expenses. The increase for the first
six months of 2022 was due to the recording of the ERC in 2021. After taking the
effect of the ERC into account, research and development expenses for the
six-month period ending June 30, 2022 decreased by less than 1%.
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Investment Income
Investment income increased by $13,220 (29%) for the second quarter of 2022
compared with the second quarter of 2021, and increased by $14,010 (16%) for the
first half of 2022 compared with the same period in 2021. The increase in both
periods was due to an increase in dividend income from stock and bond mutual
funds.
Net (loss) gain on Marketable Securities
The net loss on marketable securities increased by $597,852 and $919,465 for the
three and six-month periods ended June 30, 2022 compared with the same periods
in 2021. Approximately 90% of the Company's marketable securities portfolio is
composed of fixed income mutual funds. The Company intentionally weighted its
portfolio as such in an effort to minimize significant stock market
fluctuations. However, given the current inflationary environment and the rise
of interest rates, management believes that the decrease in the market value of
the Company's fixed income mutual funds will be temporary. The Company's
management and Board of Directors are continuing to closely monitor the
Company's investment portfolio and will make any adjustments they believe may be
necessary or appropriate in order to minimize the future impact on the Company's
financial position that the volatility of the global financial markets may have.
Provision for Income Taxes
The Company's effective income tax rate was 21% for the first halves and second
quarters of 2022 and 2021. The Company's tax rate is expected to remain at 21%
for the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased from $9,245,629 at December 31, 2021 to $9,095,419 at
June 30, 2022, a decrease of $150,210. The current ratio increased from 5.0 to 1
at December 31, 2021 to 5.6 to 1 at June 30, 2022. The decrease in working
capital was due to a decrease in marketable securities and cash. The increase in
the current ratio was due primarily to decreases in deferred revenue and income
taxes payable.
The Company believes that its working capital is, and will continue to be,
sufficient to support its operating requirements for at least the next twelve
months. The Company does not expect to incur any significant capital
expenditures for the remainder of 2022. The Company intends to utilize its
available cash and assets primarily for its continued organic growth and
potential future strategic transactions, as well as to mitigate the potential
impact of COVID-19 and inflation on the Company's business.
The Company generated cash from operations of $1,164,601 and $2,617,308 for the
first half of 2022 and 2021, respectively. The decrease from 2021 to 2022 was
primarily due to the decrease in net income.
Cash provided by investing activities was $359,150 in the first half of 2022,
compared with cash used by investing activities of $259,675 for the first half
of 2021. The increase was due to the Company purchasing less marketable
securities in the first half of 2022 compared to 2021.
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Cash used in financing activities was $1,699,392 and $2,204,616 for the first
half of 2022 and 2021, respectively. The decrease was due to a decrease in
dividends paid from $0.48 per share in 2021 to $0.37 per share in 2022.
The Company expects to continue to use its cash to make dividend payments,
purchase marketable securities, and take advantage of other opportunities that
may arise that are in the best interest of the Company and its shareholders.
OFF BALANCE-SHEET ARRANGEMENTS
The Company has no off balance-sheet transactions that have, or are reasonably
likely to have, a current or future impact 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.
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