ITEM 1.
|
|
Condensed Financial Statements
|
STATEMENTS
OF INCOME
(UNAUDITED)
|
|
THREE MONTHS ENDED
SEPTEMBER 30,
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
$
|
2,336,360
|
|
|
$
|
3,317,370
|
|
|
$
|
8,613,918
|
|
|
$
|
9,777,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
974,763
|
|
|
|
1,386,948
|
|
|
|
3,634,528
|
|
|
|
4,142,616
|
|
Operating expenses
|
|
|
493,204
|
|
|
|
544,176
|
|
|
|
1,520,114
|
|
|
|
1,593,232
|
|
Research and development
|
|
|
114,836
|
|
|
|
104,800
|
|
|
|
331,134
|
|
|
|
297,304
|
|
Total costs and expenses
|
|
|
1,582,803
|
|
|
|
2,035,924
|
|
|
|
5,485,776
|
|
|
|
6,033,152
|
|
Income from operations
|
|
|
753,557
|
|
|
|
1,281,446
|
|
|
|
3,128,142
|
|
|
|
3,743,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
38,932
|
|
|
|
47,320
|
|
|
|
131,318
|
|
|
|
141,428
|
|
Net gain on marketable securities
|
|
|
113,248
|
|
|
|
25,499
|
|
|
|
143,832
|
|
|
|
369,542
|
|
Total other income
|
|
|
152,180
|
|
|
|
72,819
|
|
|
|
275,150
|
|
|
|
510,970
|
|
Income before provision for income taxes
|
|
|
905,737
|
|
|
|
1,354,265
|
|
|
|
3,403,292
|
|
|
|
4,254,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
188,205
|
|
|
|
284,394
|
|
|
|
708,842
|
|
|
|
883,529
|
|
Net Income
|
|
$
|
717,532
|
|
|
$
|
1,069,871
|
|
|
$
|
2,694,450
|
|
|
$
|
3,371,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share (Basic and Diluted)
|
|
$
|
0.16
|
|
|
$
|
0.23
|
|
|
$
|
0.59
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – basic and diluted
|
|
|
4,594,319
|
|
|
|
4,594,319
|
|
|
|
4,594,319
|
|
|
|
4,594,319
|
|
See Notes to Condensed Financial Statements
UNITED-GUARDIAN,
INC.
BALANCE
SHEETS
ASSETS
|
|
SEPTEMBER 30,
|
|
DECEMBER 31,
|
|
|
2020
|
|
2019
|
|
|
|
(UNAUDITED)
|
|
|
|
(AUDITED)
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
885,060
|
|
|
$
|
1,048,311
|
|
Marketable securities
|
|
|
8,141,897
|
|
|
|
6,867,516
|
|
Accounts receivable, net of allowance for doubtful accounts of $20,186 at September 30, 2020 and $21,178 at December 31, 2019
|
|
|
1,283,595
|
|
|
|
2,098,411
|
|
Inventories, net
|
|
|
1,544,819
|
|
|
|
1,217,277
|
|
Prepaid expenses and other current assets
|
|
|
166,281
|
|
|
|
170,466
|
|
Prepaid income taxes
|
|
|
126,331
|
|
|
|
165,300
|
|
Total current assets
|
|
|
12,147,983
|
|
|
|
11,567,281
|
|
|
|
|
|
|
|
|
|
|
Net property, plant, and equipment:
|
|
|
|
|
|
|
|
|
Land
|
|
|
69,000
|
|
|
|
69,000
|
|
Factory equipment and fixtures
|
|
|
4,504,677
|
|
|
|
4,482,236
|
|
Building and improvements
|
|
|
2,842,285
|
|
|
|
2,839,289
|
|
Total property, plant, and equipment
|
|
|
7,415,962
|
|
|
|
7,390,525
|
|
Less: Accumulated depreciation
|
|
|
6,720,369
|
|
|
|
6,609,818
|
|
Total property, plant, and equipment, net
|
|
|
695,593
|
|
|
|
780,707
|
|
|
|
|
|
|
|
|
|
|
Other assets, net
|
|
|
3,706
|
|
|
|
14,824
|
|
TOTAL ASSETS
|
|
$
|
12,847,282
|
|
|
$
|
12,362,812
|
|
See Notes to Condensed Financial Statements
UNITED-GUARDIAN,
INC.
BALANCE
SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
SEPTEMBER 30,
|
|
DECEMBER 31,
|
|
|
2020
|
|
2019
|
Current liabilities:
|
|
(UNAUDITED)
|
|
(AUDITED)
|
Accounts payable
|
|
$
|
40,925
|
|
|
$
|
71,385
|
|
Accrued expenses
|
|
|
1,158,359
|
|
|
|
1,129,126
|
|
Dividends payable
|
|
|
18,536
|
|
|
|
142,548
|
|
Total current liabilities
|
|
|
1,217,820
|
|
|
|
1,343,059
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
231,728
|
|
|
|
386,855
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock (at $.10 par value) (10,000,000 shares authorized; 4,594,319 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively)
|
|
|
459,432
|
|
|
|
459,432
|
|
Retained earnings
|
|
|
10,938,302
|
|
|
|
10,173,466
|
|
Total stockholders’ equity
|
|
|
11,397,734
|
|
|
|
10,632,898
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
$
|
12,847,282
|
|
|
$
|
12,362,812
|
|
See Notes to Condensed Financial Statements
UNITED-GUARDIAN,
INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS' EQUITY
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2020
|
|
Common stock
|
|
Retained
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Total
|
Balance, January 1, 2020
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,173,466
|
|
|
$
|
10,632,898
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
790,307
|
|
|
|
790,307
|
|
Balance, March 31, 2020
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,963,773
|
|
|
$
|
11,423,505
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
1,186,611
|
|
|
|
1,186,611
|
|
Dividends declared and paid ($0.42 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,928,969
|
)
|
|
|
(1,928,969
|
)
|
Dividends declared, not paid ($0.42 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
(645
|
)
|
|
|
(645
|
)
|
Balance, June 30, 2020
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,220,770
|
|
|
$
|
10,680,202
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
717,532
|
|
|
|
717,532
|
|
Balance, September 30, 2020
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,938,302
|
|
|
$
|
11,397,734
|
|
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
|
|
Common stock
|
|
Retained
|
|
|
|
|
Shares
|
|
Amount
|
|
Earnings
|
|
Total
|
Balance, January 1, 2019
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,465,506
|
|
|
$
|
10,924,938
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
1,222,694
|
|
|
|
1,222,694
|
|
Balance, March 31, 2019
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
11,688,200
|
|
|
$
|
12,147,632
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
1,078,810
|
|
|
|
1,078,810
|
|
Dividends declared and paid ($0.55 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,524,946
|
)
|
|
|
(2,524,946
|
)
|
Dividends declared, not paid ($0.55 per share)
|
|
|
–
|
|
|
|
–
|
|
|
|
(1,930
|
)
|
|
|
(1,930
|
)
|
Balance, June 30, 2019
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
10,240,134
|
|
|
$
|
10,699,566
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
1,069,871
|
|
|
|
1,069,871
|
|
Balance, September 30, 2019
|
|
|
4,594,319
|
|
|
$
|
459,432
|
|
|
$
|
11,310,005
|
|
|
$
|
11,769,437
|
|
See Notes to Condensed Financial Statements
UNITED-GUARDIAN,
INC.
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
|
|
NINE MONTHS ENDED
|
|
|
SEPTEMBER 30,
|
|
|
2020
|
|
2019
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,694,450
|
|
|
$
|
3,371,375
|
|
Adjustments to reconcile net incometo net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
121,669
|
|
|
|
129,625
|
|
Net gain on marketable securities
|
|
|
(143,832
|
)
|
|
|
(369,542
|
)
|
Allowance for doubtful accounts
|
|
|
(992
|
)
|
|
|
–
|
|
Deferred income taxes
|
|
|
(155,127
|
)
|
|
|
(18,847
|
)
|
Decrease (increase) in operating assets:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
815,808
|
|
|
|
53,659
|
|
Inventories
|
|
|
(327,542
|
)
|
|
|
208,159
|
|
Prepaid expenses and other current assets
|
|
|
4,185
|
|
|
|
(11,204
|
)
|
Prepaid income taxes
|
|
|
38,969
|
|
|
|
102,376
|
|
(Decrease) increase in operating liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(30,460
|
)
|
|
|
121,048
|
|
Accrued expenses
|
|
|
29,233
|
|
|
|
40,364
|
|
Dividends payable
|
|
|
(124,657
|
)
|
|
|
–
|
|
Net cash provided by operating activities
|
|
|
2,921,704
|
|
|
|
3,627,013
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(25,437
|
)
|
|
|
(104,662
|
)
|
Proceeds from sale of marketable securities
|
|
|
3,802,205
|
|
|
|
11,359,973
|
|
Purchases of marketable securities
|
|
|
(4,932,754
|
)
|
|
|
(11,112,930
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(1,155,986
|
)
|
|
|
142,381
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(1,928,969
|
)
|
|
|
(2,524,946
|
)
|
Net cash used in financing activities
|
|
|
(1,928,969
|
)
|
|
|
(2,524,946
|
)
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(163,251
|
)
|
|
|
1,244,448
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
1,048,311
|
|
|
|
550,135
|
|
Cash and cash equivalents at end
of period
|
|
$
|
885,060
|
|
|
$
|
1,794,583
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Taxes paid
|
|
$
|
825,000
|
|
|
$
|
800,000
|
|
Supplemental disclosure of non-cash dividends payable
|
|
$
|
645
|
|
|
$
|
1,930
|
|
See Notes to Condensed Financial Statements
UNITED-GUARDIAN,
INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
United-Guardian, Inc. (the “Company”)
is a Delaware corporation that, through its Guardian Laboratories division, conducts research, product development, manufacturing
and marketing of cosmetic ingredients, pharmaceuticals, medical products and proprietary specialty industrial products.
Interim condensed financial statements
of the Company are prepared in accordance with United States Generally Accepted Accounting Principles (“US GAAP”) for
interim financial information, pursuant to the requirements for reporting on Form 10-Q and Regulation S-X. In the opinion of management,
all adjustments, including normal recurring accruals, considered necessary for the fair presentation of financial statements for
the interim periods have been included. The results of operations for the three and nine months ended September 30, 2020 (also
referred to as the "third quarter of 2020" and the "first nine months of 2020", respectively) are not necessarily
indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2020. The
interim unaudited condensed financial statements and notes thereto should be read in conjunction with the audited financial statements
and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2019.
3.
|
Impact of coronavirus (COVID-19)
|
In March 2020, the spread of
the coronavirus (COVID-19) began to cause disruptions among businesses and markets worldwide. On March 20, 2020, the Governor of
New York issued an executive order which closed non-essential businesses. The Company, as a manufacturer of pharmaceutical and
medical products, was considered an essential business, and continued to operate. While the Company’s pharmaceutical customers
have not been impacted by the coronavirus pandemic, sales of the Company’s cosmetic products and medical products have been
impacted, particularly in the third quarter. Third quarter sales of the Company’s cosmetic ingredients decreased by 62%,
and year-to-date sales of those products decreased by 26%, compared with the comparable periods in 2019. These decreases were primarily
the result of a significant decrease in sales of the Company’s cosmetic ingredients to the Company’s marketing partner
in China. Those sales decreased due to a number of factors related to the coronavirus, including (a) lower consumer demand in China
for many of the products in which the Company’s products are used; (b) manufacturing disruptions in China resulting from
the impact of the coronavirus on manufacturing facilities; (c) and excess inventory levels resulting from overstocking on the part
of both the Company’s marketing partner for China as well its distributors in China, due to the uncertainty of being able
to restock product during the coronavirus pandemic. Since the Company’s cosmetic ingredients are marketed globally by its
marketing partners in different countries, it is difficult to project the future impact of the coronavirus pandemic on the Company’s
global cosmetic ingredient sales, since the virus continues to impact countries at different times and to very different extents.
Until the global crisis passes it is likely that there will continue to be a negative impact on the Company’s sales of cosmetic
ingredients in many countries. The Company also believes that the coronavirus has impacted sales to two of the Company’s
medical product customers whose orders decreased in the third quarter of 2020. Since there is uncertainty as to what the duration
of the pandemic will be, the Company is unable to provide any accurate estimate or projection as to what the continuing impact
of the coronavirus will be on the Company’s operations or its financial results in the future.
As of the date of this report,
the Company does not anticipate that the coronavirus pandemic will affect the ability of the Company to obtain raw materials and
maintain production. The Company has price protection on some but not all of its most important raw materials and has multiple
sources for many of its raw materials. The Company also purchased additional quantities of some raw materials at the beginning
of the pandemic, and as a result it does not anticipate that it will have a problem maintaining production. The Company has been
able to maintain sufficient inventory and production levels to enable it to fulfill sales orders on a timely basis. The Company
does not expect the carrying value of its assets or its liquidity to be impaired by the coronavirus pandemic.
In preparing financial statements
in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those estimates. Such estimated items include the allowance
for bad debts, reserve for inventory obsolescence, accrued distribution fees, outdated material returns, possible impairment of
marketable securities, and the allocation of overhead.
The Company
records revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” Under this guidance, revenue
is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected
to be received in exchange for those goods or services. The Company’s principal source of revenue is product sales.
The Company’s
sales, as reported, are subject to 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.
As long as a valid purchase
order has been received and future collection of the sale amount is reasonably assured, the Company recognizes revenue from sales
of its products when those products are shipped, which is when the Company’s performance obligation is satisfied. The Company’s
products are shipped “Ex-Works” from the Company’s facility in Hauppauge, NY, and the risk of loss and responsibility
for the shipment passes to the customer upon shipment. Sales of the Company’s non-pharmaceutical products are deemed final
upon shipment, and there is no obligation on the part of the Company to repurchase or allow the return of these goods unless they
are defective. Sales of the Company’s pharmaceutical products are final upon shipment 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 previous years’ 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 under ASC Topic 606-10-32-8. 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. Due to the Covid-19 pandemic the
Company experienced minor delays in receiving payments from certain customers that were impacted by the pandemic during the third
quarter of 2020, but the negative impact of those delayed payments was 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 September 30, 2020 and December 31, 2019, the allowance for doubtful accounts receivable was $20,186 and $21,178, respectively.
Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the
discounts are recorded when they are taken.
The Company
has distribution agreements with certain distributors of its pharmaceutical products that entitles those distributors to distribution
and services-related fees. The Company records distribution fees, and estimates of distribution fees, as offsets to revenue.
Disaggregated
sales by product class is as follows:
|
|
Three months ended
September 30,
|
|
Three months ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Cosmetic Ingredients
|
|
$
|
550,177
|
|
|
$
|
1,447,624
|
|
|
$
|
3,358,956
|
|
|
$
|
4,535,296
|
|
Pharmaceutical
|
|
|
1,232,586
|
|
|
|
1,132,303
|
|
|
|
3,463,738
|
|
|
|
3,014,656
|
|
Medical
|
|
|
517,036
|
|
|
|
688,301
|
|
|
|
1,683,682
|
|
|
|
2,106,482
|
|
Industrial products
|
|
|
36,561
|
|
|
|
49,142
|
|
|
|
107,542
|
|
|
|
120,652
|
|
Total Sales
|
|
$
|
2,336,360
|
|
|
$
|
3,317,370
|
|
|
$
|
8,613,918
|
|
|
$
|
9,777,086
|
|
The Company’s
cosmetic ingredients are marketed worldwide by five marketing partners, of which U.S.-based Ashland Specialty Ingredients (“ASI”)
purchases the largest volume. Approximately 22% of the Company’s total sales in the third quarter of 2020 were to customers
located outside of the United States, compared with approximately 17% in the third quarter of 2019. For the nine months ended September
30, 2020, approximately 20% of the Company’s total sales were to customers located outside of the United States, compared
with approximately 19% for the nine months ended September 30, 2019.
Disaggregated sales by geographic region
is as follows:
|
|
Three months ended
September 30,
|
|
Three months ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
United States*
|
|
$
|
1,819,084
|
|
|
$
|
2,763,003
|
|
|
$
|
6,887,726
|
|
|
$
|
7,912,571
|
|
Other countries
|
|
|
517,276
|
|
|
|
554,367
|
|
|
|
1,726,192
|
|
|
|
1,864,515
|
|
Total Sales
|
|
$
|
2,336,360
|
|
|
$
|
3,317,370
|
|
|
$
|
8,613,918
|
|
|
$
|
9,777,086
|
|
*Since
all purchases by ASI are shipped to ASI’s warehouses in the U.S. they are reported as U.S. sales for financial reporting
purposes. However, ASI has reported to the Company that approximately 69% of ASI’s sales of the Company’s products
in the third quarter of 2020 were to customers in other countries, with China representing approximately 30% of ASI’s total
sales of the Company’s products, compared with approximately 73% of ASI’s sales of the Company’s products in
the third quarter of 2019 going to customers in other countries, with China representing approximately 46% of ASI’s total
sales of the Company’s products during that period. For the nine months ended September 30, 2020, approximately 69% of ASI’s
sales of the Company’s products were to customers in other countries, with China accounting for approximately 33% of ASI’s
total sales of the Company’s products, as compared with approximately 74% of ASI’s sales going to customers in other
countries for the nine months ended September 30, 2019, with China accounting for approximately 50% of ASI’s total sales
of the Company’s products during that period.
Marketable securities include investments in fixed income and equity mutual funds, and U.S. Government securities with maturities
greater than 3 months, all of which are reported at their fair values.
The Company’s
U.S. Treasury Bills are considered debt securities and any unrealized gains and losses, if any, would be reported in other comprehensive
income. The U.S. Treasury Bills are considered held to maturity securities, as they are purchased direct from the U.S. Government
and are unable to be sold before the maturity date.
The disaggregated
net gains and losses on the marketable securities recognized in the income statements for the three- and nine-month periods ended
September 30, 2020 and 2019, respectively, are as follows:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net gains recognized during the period on marketable securities
|
|
$
|
113,248
|
|
|
$
|
25,499
|
|
|
$
|
143,832
|
|
|
$
|
369,542
|
|
Less: Net gains recognized during the period on marketable securities sold during the period
|
|
|
25,062
|
|
|
|
–
|
|
|
|
29,918
|
|
|
|
247,499
|
|
Unrealized gains recognized during the reporting period on marketable securities still held at the reporting date
|
|
$
|
88,186
|
|
|
$
|
25,499
|
|
|
$
|
113,914
|
|
|
$
|
122,043
|
|
The fair values of the Company’s
marketable securities are determined in accordance with US GAAP, with fair value being defined as the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability. As a basis for considering such assumptions, the Company utilizes the three-tier value hierarchy,
as prescribed by US GAAP, which prioritizes the inputs used in measuring fair value as follows:
|
•
|
Level 1
- inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
|
|
•
|
Level
2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs
that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial
instrument.
|
|
|
|
|
•
|
Level
3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
The Company’s marketable
equity securities, which are considered available for sale securities, are re-measured to fair value on a recurring basis and are
valued using Level 1 inputs using quoted prices (unadjusted) for identical assets in active markets.
The following tables summarize the Company’s
investments:
September 30, 2020 (Unaudited)
Equity Securities
|
|
Cost
|
|
Fair Value
|
|
Unrealized
Gain
|
|
|
|
|
|
|
|
Fixed income mutual funds
|
|
$
|
6,900,333
|
|
|
$
|
7,243,284
|
|
|
$
|
342,951
|
|
Equity and other mutual funds
|
|
|
706,410
|
|
|
|
898,613
|
|
|
|
192,203
|
|
Total equity securities
|
|
|
7,606,743
|
|
|
|
8,141,897
|
|
|
|
535,154
|
|
Total marketable securities
|
|
$
|
7,606,743
|
|
|
$
|
8,141,897
|
|
|
$
|
535,154
|
|
December 31, 2019 (Audited)
Debt Securities
|
|
Cost
|
|
Fair Value
|
|
Unrealized
Gain
|
|
|
|
|
|
|
|
U.S Treasury Bills (maturities of greater than three months up to one year)
|
|
$
|
3,481,625
|
|
|
$
|
3,481,625
|
|
|
$
|
–
|
|
Total debt securities
|
|
$
|
3,481,625
|
|
|
$
|
3,481,625
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income mutual funds
|
|
$
|
1,940,071
|
|
|
$
|
2,122,157
|
|
|
$
|
182,086
|
|
Equity and other mutual funds
|
|
|
1,024,580
|
|
|
|
1,263,734
|
|
|
|
239,154
|
|
Total equity securities
|
|
|
2,964,651
|
|
|
|
3,385,891
|
|
|
|
421,240
|
|
Total marketable securities
|
|
$
|
6,446,276
|
|
|
$
|
6,867,516
|
|
|
$
|
421,240
|
|
Investment income is recognized
when earned and consists principally of interest income from fixed income mutual funds and U.S. Treasury Bills and dividend income
from equity and other mutual funds. Realized gains and losses on sales of investments are determined on a specific identification
basis.
Proceeds from the sale and
redemption of marketable securities amounted to $3,802,205 for the nine months ended September 30, 2020, which included realized
gains of $29,918. Proceeds from the sale and redemption of marketable securities amounted to $11,359,973 for the nine months ended
September 30, 2019, which included realized gains of $247,499.
|
|
September 30,
|
|
December 31,
|
|
|
2020
|
|
2019
|
|
|
(UNAUDITED)
|
|
(AUDITED)
|
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
459,801
|
|
|
$
|
320,507
|
|
Work in process
|
|
|
44,742
|
|
|
|
81,002
|
|
Finished products
|
|
|
1,040,276
|
|
|
|
815,768
|
|
Total inventories
|
|
$
|
1,544,819
|
|
|
$
|
1,217,277
|
|
Inventories are valued at the
lower of cost and net realizable value. Cost is determined using the average cost method, which approximates cost determined by
the first-in, first-out (“FIFO”) method. Finished product inventories at September 30, 2020 and December 31, 2019 are
stated net of a reserve of $35,000 for slow moving and obsolete inventory. At September 30, 2020 and December 31, 2019, the Company
had allowances of $284,185 and $231,392 respectively, for possible outdated material returns, which is included in accrued expenses.
As of the date of this report,
the Covid-19 pandemic has not adversely affected the valuation of the Company’s finished products, work in process, or raw
material inventories.
The Company’s
tax provision is based on its estimated annual effective tax rate. The Company continues to fully recognize its tax benefits, and
as of September 30, 2020 and December 31, 2019, the Company did not have any unrecognized tax benefits. The Company’s provision
for income taxes for the three and nine months ended September 30 comprises the following:
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Provision for federal income taxes - current
|
|
$
|
81,323
|
|
|
$
|
258,169
|
|
|
$
|
863,969
|
|
|
$
|
902,376
|
|
Provision for (benefit from) federal income taxes – deferred
|
|
|
106,882
|
|
|
|
26,225
|
|
|
|
(155,127
|
)
|
|
|
(18,847
|
)
|
Total provision for income taxes
|
|
$
|
188,205
|
|
|
$
|
284,394
|
|
|
$
|
708,842
|
|
|
$
|
883,529
|
|
9.
|
Defined Contribution Plan
|
The Company sponsors a 401(k)
defined contribution plan (“DC Plan”) that provides for a dollar-for-dollar employer matching contribution of the first
4% of each employee’s pay that is deferred by the employee. Employees become fully vested in employer matching contributions
after one year of employment.
The Company also makes discretionary
contributions to each employee's account based on a "pay-to-pay" safe-harbor formula that qualifies the 401(k) Plan under
current IRS regulations. Employees become vested in the discretionary contributions as follows: 20% after two years of employment,
and 20% for each year of employment thereafter until the employee becomes fully vested after six years of employment. In the fourth
quarter of 2018 the Company’s Board of Directors authorized a discretionary contribution in the amount of $150,000, which
was allocated among the accounts of all eligible employees and paid into their accounts in the DC Plan in December 2018. Based
on that 2018 contribution, in the first half of 2019 the Company accrued $75,000 for a possible discretionary contribution at the
end of 2019. However, in May 2019 the Company’s Board of Directors reduced the projected discretionary contribution for 2019
to $145,000, and that is the amount that was allocated among and paid into employees’ accounts in December 2019. Based on
that 2019 contribution, in the first nine months of 2020 the Company accrued $108,750 towards the projected December 2020 discretionary
contribution.
For the first three quarters
of 2020 and 2019, the Company did not make any discretionary payments into the DC Plan.
10.
|
Related-Party Transactions
|
During the three and nine-month
periods ended September 30, 2020, the Company made payments of $9,500, respectively, to the accounting firm Bonamassa, Maietta
and Cartelli, LLP (“Bonamassa”) for accounting and tax services. There were no payments made to Bonamassa during the
three-month period ended September 30, 2019. For the nine-month period ended September 30, 2019, the Company made payments of $6,500
for accounting and tax services to Bonamassa. Lawrence Maietta, a partner in Bonamassa, is a director of the Company.
Accrued Expenses
Accrued expenses consist of the
following:
Accrued Expenses
|
|
September 30,
2020
|
|
December 31,
2019
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
|
|
|
|
|
|
|
Bonuses
|
|
$
|
105,000
|
|
|
$
|
216,000
|
|
Distribution fees
|
|
|
324,849
|
|
|
|
309,190
|
|
Payroll and related expenses
|
|
|
162,799
|
|
|
|
175,433
|
|
Reserve for outdated material
|
|
|
284,185
|
|
|
|
231,392
|
|
Company 401(k) contribution
|
|
|
108,750
|
|
|
|
–
|
|
Audit fee
|
|
|
47,750
|
|
|
|
48,500
|
|
Insurance
|
|
|
35,981
|
|
|
|
–
|
|
Annual report expenses
|
|
|
47,000
|
|
|
|
64,324
|
|
Sales rebates
|
|
|
25,000
|
|
|
|
46,100
|
|
Other
|
|
|
17,045
|
|
|
|
38,187
|
|
Total Accrued Expenses
|
|
$
|
1,158,359
|
|
|
$
|
1,129,126
|
|
12.
|
Recent Accounting Pronouncements
|
In January 2019, the Company adopted
ASU 2016-02, “Leases”, which is intended to improve financial reporting for lease transactions. This ASU required organizations
that lease assets, such as real estate and manufacturing equipment, to recognize both assets and liabilities on their balance sheet
for the rights to use those assets for the lease term and obligations to make the lease payments created by those leases that have
terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease
by a lessee primarily will depend on its classification as finance or operating lease. This ASU required disclosures to help investors
and other financial statement users better understand the amount and timing of cash flows arising from leases. The disclosures
include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial
statements. The adoption of this standard did not have a material impact on the Company’s financial statements.
On December 18, 2019, the FASB
issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which modifies ASU 740, to simplify the accounting
for income taxes. The amendments in ASU 2019-12 are effective for fiscal years beginning after December 15, 2020. Early adoption
is permitted. The Company is currently evaluating if any of the modifications in this pronouncement will have an impact on its
financial statements.
In June 2016, the FASB issued
ASU-2016-13 “Financial Instruments – Credit Losses”. This guidance affects organizations that hold financial
assets and net investments in leases that are not accounted for at fair value with changes in fair value reported in net income.
The guidance requires organizations to measure all expected credit losses for financial instruments at the reporting date based
on historical experience, current conditions and reasonable and supportable forecasts. In November 2019, the FASB amended the effective
date of implementation of this standard for smaller reporting companies. The new effective date is for fiscal years beginning after
December 15, 2022. The Company is evaluating the potential impact on its financial statements.
13.
|
Concentrations of Credit Risk
|
Cash and cash equivalents
- For financial statement purposes, the Company considers as cash equivalents all highly liquid investments with an original maturity
of three months or less when purchased. The Company deposits cash and cash equivalents with high credit quality financial institutions
and believes that any amounts in excess of insurance limitations to be at minimal risk. Cash and cash equivalents held in these
accounts are currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At
September 30, 2020, approximately $637,000 exceeded the FDIC limit.
Customer concentration
- Accounts receivable potentially exposes the Company to concentrations of credit risk. The Company monitors the amount of credit
it allows each of its customers, using the customer’s prior payment history and its overall credit worthiness to determine
how much credit to allow or whether any credit should be given at all. It is the Company’s policy to discontinue shipments
to any customer that is substantially past due on its payments. The Company sometimes requires payment in advance from customers
whose payment record is questionable. As a result of its monitoring of the outstanding credit allowed for each customer, as well
as the fact that the majority of the Company’s sales are to customers whose satisfactory credit and payment record has been
established over a long period of time, the Company believes that its credit risk from accounts receivable is low.
For the three months ended September
30, 2020, one of the Company’s marketing partners, and three of its distributors, together accounted for 79% of the Company’s
sales and 70% of its outstanding accounts receivable at September 30, 2020. During the three-month period ended September 30, 2019,
the same marketing partner and three distributors together were responsible for 74% of the Company’s sales and 70% of its
outstanding accounts receivable at September 30, 2019.
For the nine months ended September
30, 2020, one of the Company’s marketing partners, and three of its distributors, together accounted for 79% of the Company’s
sales and 70% of its outstanding accounts receivable at September 30, 2020. During the nine-month period ended September 30, 2019,
the same marketing partner and three distributors together were responsible for 75% of the Company’s sales and 70% of its
outstanding accounts receivable at September 30, 2019.
Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average
number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock
that would have been outstanding if the potentially dilutive securities had been issued.
Per share basic and diluted earnings
amounted to $0.16 and $0.23 for the three months ended September 30, 2020 and 2019, respectively, and $0.59 and $0.73 for the nine
months ended September 30, 2020 and 2019, respectively.
15.
|
Supplemental Disclosure of Cash Flow Information
|
During the third
quarter of 2020, the Company paid approximately $124,041 to its transfer agent, which represented accrued dividends on unconverted
shares of one of the Company’s previous corporate entities, Guardian Chemical Corporation (“Guardian”). This
payment was made in order to facilitate the conversion of those shares to United-Guardian, Inc. shares, and the subsequent escheatment
of those shares to the appropriate state jurisdictions. The Company is continuing to accrue dividends on the remaining unconverted
shares that are currently pending escheatment.
The Company
has evaluated all subsequent events from the date of the financial statements through the date of this report. As detailed
in Note 3 above, the Covid-19 pandemic is an ongoing event, and as such, the Company is not able to project or quantify the impact
of this event on the Company’s future operations and financial results.
ITEM 2.
|
|
Management's Discussion
and Analysis of Financial Condition and Results of Operations
|
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. (See the
Company’s discussion of the potential impact of the Coronavirus on the Company’s future operations and financial results
in “PART II, ITEM 1A. RISK FACTORS” below).
OVERVIEW
The Company
is a Delaware corporation that, through its Guardian Laboratories division, conducts research, product development, manufacturing
and marketing of cosmetic ingredients, pharmaceuticals, medical products, and proprietary specialty industrial products. All of
the products that the Company manufactures, with the exception of Renacidin®, are produced at its facility in Hauppauge,
New York, and are marketed through marketing partners, distributors, wholesalers, direct advertising, mailings, and trade exhibitions.
Its most important product line is its Lubrajel® line of water-based moisturizing and lubricating gels, which are
used primarily as ingredients in cosmetic products, as well as medical lubricants. 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.
The Company’s cosmetic ingredients are marketed worldwide by five marketing partners, the largest of which is U.S.-based
ASI. The Company also sells two pharmaceutical products for urological uses. Those products are sold primarily in the United States
through the major drug wholesalers, which 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’s
non-pharmaceutical medical products (referred to hereinafter as “medical products”), such as its catheter lubricants,
as well as its specialty industrial products, are sold directly by the Company to the end users or to contract manufacturers utilized
by the end users, although they are available for sale on a non-exclusive basis by its marketing partners as well.
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 a number of registered trademarks, the
two most important of which are “Lubrajel” and “Renacidin”. However, in regard to 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 practical protection they
afford, and the difficulty and expense of enforcing them. 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.
As discussed in Note 3 of the
condensed financial statements above, while the Company remained open due to its status as an “essential business,”
its sales were still negatively impacted by the pandemic. This impact was primarily the result of a decrease in orders for its
cosmetic ingredients, as well as, to a lesser extent, its medical products. The Company’s pharmaceutical products have not
been impacted, and actually increased compared with last year’s third quarter. The decrease in sales of the Company’s
medical products was primarily attributable to a decrease in orders from two of the Company’s larger medical product customers.
The Company believes that these decreases were most likely related to the impact of the coronavirus pandemic.
Sales of the Company’s
cosmetic ingredients will continue to be negatively impacted commensurate with reduced customer demand for, and the consequent
reduced production of, consumer cosmetic products. The Company distributes products to marketing partners globally, and it is difficult
to anticipate what market conditions will be like in other countries where the Company’s products are sold, and how those
conditions might impact future sales of the Company’s products. It is likely that there will be a negative impact on the
Company’s sales of its cosmetic ingredients until the pandemic is contained and normal demand for, and production of, cosmetic
products return to previous levels. Since there is uncertainty as to what the duration of the pandemic will be, the Company is
unable to provide any accurate estimate or projection as to what the full impact of the coronavirus will be on the Company’s
operations and financial results going forward.
As of the date of this report
the Company does not anticipate that the coronavirus pandemic will affect the ability of the Company to obtain raw materials and
maintain production. The Company has price protection on its most important raw material and has multiple sources for many of its
other raw materials. The Company also purchased additional quantities of some raw materials at the beginning of the pandemic, and
as a result does not anticipate that it will have a problem maintaining production. The Company has not had any issues with being
able to maintain sufficient inventory and production levels and it was able to fulfill sales orders on a timely basis.
Critical
Accounting Policies
As
disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, 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, 2019, 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, 2019, and a comparison of the results of operations for the third quarter of 2020 and 2019 and the first nine months of 2020
and 2019. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis or Plan of
Operation" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. All references in this
quarterly report to “sales” or “Sales” shall mean “net sales” unless specifically identified
as “gross sales”.
The Company
recognizes revenue from sales of its cosmetic ingredients, medical products, and industrial products when all of 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. 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 gross sales of its pharmaceutical products.
RESULTS
OF OPERATIONS
Sales
Sales for the third quarter of
2020 decreased by $981,010 (30%) when compared with the same period in 2019. Sales for the first nine months of 2020 decreased
by $1,163,168 (12%) as compared with the corresponding period in 2019. The decrease in sales for both the third quarter of 2020
and the first nine months of 2020 were attributable to changes in sales of the following product lines:
Cosmetic Ingredients:
|
a)
|
Third quarter sales: For the third quarter of 2020, the Company’s sales of cosmetic
ingredients decreased by $897,447 (62%) when compared with the third quarter of 2019. The decrease in third quarter sales was due
primarily to a decrease of $861,153 (73%) in sales of the Company’s personal care products to ASI. This decrease was primarily
the result of a decrease in demand for some of the Company’s products in China in 2020 compared with 2019. Based on information
provided to the Company by ASI, the Company’s marketing partner in China, the reduced sales were the result of both a softening
of the market in China for a particular line of cosmetic products in which the Company’s products were being used, as well
as continuing competition from lower-priced Asian competitors. The Company continues to work closely with ASI to price the Company’s
products as competitively as possible in order to better compete with lower-cost Asian competitors, and it recently provided ASI
with reduced pricing on some of its products, which it hopes will enable it to recover some of the business it has lost to some
of the lower-cost competitors. It is also developing some new products that are directed at increasing sales in both China and
Korea.
|
Third quarter sales to the Company’s
four other marketing partners, as well as to three small direct cosmetic ingredients customers and the Company’s former marketing
partner in Korea, had a net decrease of $36,294 (14%) compared with the third quarter of 2019. Sales to the Company’s marketing
partners in the UK and Switzerland and the Company’s three direct personal care customers increased by a total of $76,662
(123%), while sales to the Company’s marketing partners in France, Italy and Korea decreased by $112,956 (55%). The Company
believes that the decline in sales of the Company’s cosmetic products in Europe has been due to both the impact of the coronavirus
as well as increased competition from Asian competitors selling similar, although not necessarily identical, products at lower
prices.
Nine-month sales: For the
first nine months of 2020, the Company’s sales of cosmetic ingredients decreased by $1,176,340 (26%) when compared with the
same period in 2019. This decrease was due primarily to a decrease of $1,151,292 (31%) in shipments of the Company's extensive
line of cosmetic ingredients to ASI. The primary reason for the decrease in sales to ASI during the first nine months of 2020 was
the same as for the decline in sales in the third quarter, which was both the impact of the coronavirus, which caused a reduction
in demand for the Company’s products in China, as well as the sales of competitive products manufactured in Asia that sell
at lower prices than those of the Company.
Sales for the first nine months of the year of the Company’s cosmetic ingredients to the Company’s four other marketing
partners, as well as to the three direct customers and the Company’s former marketing partner in Korea decreased by $25,048
(3%) compared with the same period in 2019. Nine-month sales to the Company’s marketing partners in France, Switzerland,
Italy and Korea decreased by $113,810 (22%), while combined sales to the Company’s marketing partner in the UK, as well to
the three direct customers, increased by $88,762 (30%).
The Company believes that the
sales fluctuations to the Company’s European marketing partners were the result of a) the impact of the coronavirus; b) continuing
competition from Asian companies selling competitive products at lower prices; and c) the timing of customer orders. As a result
of the competitive situation in both Europe and Asia, from time to time the Company has adjusted its prices in order to retain
or attract customers and be more competitive with some of the lower-priced products. Although there has been some impact on the
Company’s profit margins on those sales, to date this impact has not been significant. The Company intends to continue to
aggressively compete with these products whenever feasible.
In late 2019, the Company began
transitioning its Korean business to ASI and is no longer working with its former Korean marketing partner. The Company believes
that the decline in sales in Korea was due to both increased competition from Asian competitors, as well as an unacceptable marketing
effort on the part of the Company’s previous Korean marketing partner.
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). Net sales of the Company’s pharmaceutical products for the three-
and nine-month periods ended September 30, 2020 increased by $100,283 (9%) and $449,082 (15%), respectively, compared with the
corresponding periods in 2019. These increases were due primarily to increases of $220,531 (19%) and $628,610 (19%) in gross sales
of Renacidin for the three- and nine-month periods, respectively, ended September 30, 2020, combined with increases of $25,348
(16%) and $5,506 (1%) in gross sales of the Company’s other pharmaceutical product, Clorpactin, for the same three-and nine-month
periods, respectively. The increase in gross sales for the three- and nine-month periods ended September 30, 2020 was offset by
an increase in fees, rebates, and allowances of $145,596 and $185,034, respectively.
The Company believes that the
increase in Renacidin sales was the result of the Company’s continuing Google advertising campaign for Renacidin.
As a result of the increase in
the sales of the Company’s pharmaceutical products, there was an increase in allowances for distribution fees, VA chargebacks,
Medicaid and Medicare rebates, sales rebates and outdated material returns, all of which increase proportionally as sales of those
products increase. During the three- and nine-month periods ended September 30, 2020, the allowances for all of the Company’s
products increased by a net of $139,550 (66%) and $184,418 (24%), respectively.
Medical
(non-pharmaceutical) products:
Sales of the Company’s medical
products decreased by $171,265 (25%) for the third quarter of 2020, and by $422,800 (20%) for the nine-month period ended September
30, 2020, compared with the comparable periods in 2019. The decrease in medical product sales for the three-month period ended
September 30, 2020 was primarily attributable to the decrease in orders from two of the Company’s larger direct medical product
customers. The decrease in medical product sales for the nine-month period September 30, 2020 was primarily due to the decrease
in orders from the same two direct medical product customers referred to above as well as one additional customer located in China.
The Company believes that all of these decreases were related to the impact of the coronavirus pandemic, and anticipates that orders
from these customers will gradually increase as normal operations resume.
Industrial
products:
Sales of the Company's industrial
products decreased by $12,581 (26%) and by $13,110 (11%) for the three and nine months, respectively, ended September 30, 2020,
when compared to the corresponding periods in 2019.The decrease in sales for both the three month and nine month periods was primarily
due to a decrease in orders from one of the Company’s industrial product customers located in New York, where non-essential
businesses were temporarily closed earlier in the year due to the coronavirus pandemic.
Cost of Sales
Cost of sales as a percentage
of sales remained the same for both the third quarter of 2020 and 2019, at 42%. For the first nine months of 2020, cost of sales
as a percentage of sales also remained unchanged at 42%, compared to the first nine months of 2019.
Operating Expenses
Operating expenses, consisting
of selling and general and administrative expenses, decreased by $50,972 (9%) for the third quarter of 2020, and by $73,118 (5%)
for the first nine months of 2020, compared with comparable periods in 2019. The decreases in operating expenses for both periods
were primarily attributable to a decrease in payroll and payroll related expenses. Operating expenses are expected to remain relatively
consistent for the remainder of the year.
Research and Development
Expenses
Research and development expenses
increased by $10,036 (10%) for the third quarter of 2020, and by $33,830 (11%) for the first nine months of 2020 compared with
the same periods in 2019. The increases for both periods were mainly due to an increase in payroll and payroll related expenses.
Investment Income
Investment income decreased
by $8,388 (18%) for the third quarter of 2020 compared with the third quarter of 2019 and decreased by $10,110 (7%) for the first
nine months of 2020 compared with the same period in 2019. The decreases in both periods were due to decreased interest income
from U.S. Treasury Bills combined with lower dividend income from stock and bond mutual funds compared to the same periods in 2019.
Net gain on marketable
securities
Net gain on marketable securities
increased by $87,749 (344%) for the third quarter of 2020 compared with the same period in 2019. The reason for the increase was
a combination of an increase in the realized gains on the sales of marketable securities during the period and a continued increase
in market value of the Company’s marketable securities.
For the first nine months of
2020, the net gain on marketable securities decreased by $225,710 (61%) compared with the same period in 2019. The primary reason
for the decrease was that during the first nine months of 2019, the Company recognized a realized gain on the sale of marketable
securities in the amount of $247,499, compared with the corresponding nine-month period in 2020, where the realized gain on securities
sold was $29,918.
Provision for income
taxes
The Company's effective income
tax rate was approximately 21% for the first nine months of 2020 and 2019. The Company’s tax rate is expected to remain at
21% for the current fiscal year.
LIQUIDITY
AND CAPITAL RESOURCES
Working capital increased from
$10,224,222 at December 31, 2019 to $10,930,163 at September 30, 2020, an increase of $705,941. The current ratio increased from
8.6 to 1 at December 31, 2019 to 10.0 to 1 at September 30, 2020. The increase in working capital was primarily due to an increase
in marketable securities. The increase in the current ratio was primarily due to an increase in marketable securities and a decrease
in dividends 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 2020.
The Company generated cash
from operations of $2,921,704 and $3,627,013 for the nine months ended September 30, 2020 and September 30, 2019, respectively.
The decrease in cash from operations was primarily due to a decrease in net income.
Cash used in investing activities
for the nine-month period ended September 30, 2020 was $1,155,986. Cash provided by investing activities for the nine-month period
ended September 30, 2019 was $142,381. The decrease is primarily due to an increase in the purchases of fixed income mutual funds
during the third quarter of 2020.
Cash used in financing activities
was $1,928,969 and $2,524,946 for the nine months ended September 30, 2020 and September 30, 2019, respectively. The decrease was
due to a decrease in the dividends paid per share from $0.55 per share in 2019 to $0.42 per share in 2020.
The Company expects to continue
to use its cash to make dividend payments, to purchase marketable securities, and to take advantage of other opportunities that
may arise that are in the best interest of the Company and its shareholders.
In connection with the coronavirus
pandemic it is possible that certain customer invoices may remain outstanding longer than they have in the past, either due to
slower payments from their customers, or as a result of having to shut down their business from time to time. However, the vast
majority of the Company’s customers are large companies, and the Company does not expect to have to increase its bad debt
reserve and anticipates that its invoices will be paid with minimal delays.
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.