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UNITED-GUARDIAN, INC.

(UG)
  Report
Delayed Nasdaq  -  03:52 2022-10-04 pm EDT
11.06 USD   -3.57%
08/26Transcript : United-Guardian, Inc. - Shareholder/Analyst Call
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08/24United Guardian : FY-2021 Annual Report
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08/19United Guardian : 2nd Quarter 2022 Report to Stockholders
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UNITED GUARDIAN INC Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

08/12/2022 | 10:03am EDT

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.

© Edgar Online, source Glimpses

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