UG United Guardian Inc

The following discussion and analysis covers material changes in the financial condition of the Company since the year ended December 31, 2020, and a comparison of the results of operations for the second quarter of 2021 and 2020 and the first half of 2021 and 2020. 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, 2020. 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.

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 but 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.

As discussed in Note 3 above, the significant negative impact that the coronavirus pandemic (“pandemic”) had on the Company’s sales and net income in 2020 abated somewhat during first half of 2021. Although the Company is still experiencing a decline in demand for its cosmetic ingredients compared with demand prior to the pandemic, sales of these products in the second quarter of 2021 were significantly higher than they were in the same period in 2020. The Company believes that sales of these products continue to be negatively impacted by the pandemic in countries where the pandemic is still not under control. This has resulted in a decrease in consumer demand for cosmetics, and a consequent reduced need for the Company’s cosmetic ingredients that go into those products. Until the pandemic situation improves globally, it is likely that sales of the Company’s cosmetic ingredients will continue to be negatively impacted.

Sales of the Company’s non-pharmaceutical medical products had also been negatively impacted by the pandemic in 2020, with some medical product customers reducing their purchases, but those impacts have lessened as well in the first half of 2021 as both domestic and foreign orders for these products have increased. As a result, the Company experienced an increase in medical product sales of 6% for the six-month period ended June 30, 2021 compared with the same period in 2020, which was due primarily to increases in sales to the Company’s foreign and domestic customers.

Sales of the Company’s pharmaceutical products were not impacted by the pandemic in 2020 or in the first six months of 2021. However, the Company is beginning to see a small decrease in gross pharmaceutical sales due the termination of its participation in the Medicaid Drug Rebate Program. Please refer to the pharmaceutical sales section of the MD&A for further discussion.

The pandemic has not significantly affected the ability of the Company to obtain raw materials, and the Company does not anticipate that it will do so in 2021 unless the global pandemic worsens rather than improves. The Company has been able to maintain production throughout the pandemic.

With the continuing uncertainty as to what the duration and future impact of the pandemic will be, the Company is unable to provide an accurate estimate or projection as to what the impact of the pandemic will be on the Company’s operations or its financial results in the future. 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, 2020, 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, 2020, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

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 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

Net Sales

Net sales for the second quarter of 2021 increased by $703,334 (24%) when compared with the same period in 2020. Net sales for the first half of 2021 increased by $811,288 (13%) as compared with the corresponding period in 2020. The increase in sales for both the second quarter of 2021 and the first half of 2021 were attributable to changes in sales of the following product lines:

a)     Second quarter sales: For the second quarter of 2021, the Company’s sales of cosmetic ingredients increased by $749,857 (68%) when compared with the second quarter of 2020. The increase in the second quarter sales was due primarily to an increase of $597,964 (72%) in sales of the Company’s cosmetic ingredients to ASI. Based on information provided to the Company by ASI, this increase was due primarily to the resumption of shipments of the Company’s products to China by ASI.

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 $151,893 (56%) compared with the second quarter of 2020. The increase was attributable to a sales increase of $153,165 to the Company’s marketing partner in France and an increase of $11,934 in sales to the Company’s marketing partner in Italy. These increases were offset by a decrease of $9,727 to the Company’s marketing partners in the UK and Switzerland and a decrease of $3,479 to four direct cosmetic ingredient customers.

b)     Six-month sales: For the first half of 2021 the Company’s sales of cosmetic ingredients increased by $677,593 (24%) when compared with the equivalent period in 2020. This increase was due primarily to an increase of $503,199 (22%) in shipments of the Company's extensive line of cosmetic ingredients to ASI. The primary reason for the increase in sales for the six-month period was the same as for the sales increase in the second quarter: increased sales to China and other foreign markets by ASI as the economies in various parts of the world begin to emerge from the pandemic.

Sales of the Company’s cosmetic ingredients during the first six months of 2021 to the Company’s four other marketing partners, as well as to the four direct cosmetic ingredient customers, increased by $174,394 (31%) compared with the equivalent period in 2020. The largest increase in sales was to the Company’s marketing partner in the UK, whose sales increased by a total of $74,373; sales to the four direct cosmetic ingredient customers increased by $10,991; and sales to the Company’s marketing partners in Switzerland, Italy and France, increased by a net of $89,030.

The Company believes that the increase in sales of the Company’s cosmetic ingredients in Europe was, at least in part, the result of global pandemic conditions improving.

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, 2021 decreased by $120,215 (8%) and $86,054 (3%), respectively, compared with the corresponding periods in 2020. These decreases were due primarily to decreases of $158,630 (12%) and $145,741 (6%) in gross sales of Renacidin for the three- and six-month periods, respectively, ended June 30, 2021. These decreases were partially offset by increases of $38,415 (28%) and $59,687 (22%) 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 decrease in gross sales for the three- and six-month periods ended June 30, 2021 was partially offset by a decrease in fees, rebates and allowances of $76,954 (26%) and $147,390 (24%), respectively. The decrease in these fees, rebates and allowances was the result of the Company’s termination of its participation in the Medicaid Drug Rebate Program at the end of 2020. Due to the overly burdensome nature of the state Medicaid rebates that the Company had to pay under this program, the Company determined that it was no longer profitable for the Company to continue to participate. Accordingly, on October 30, 2020 the Company informed the Centers for Medicare & Medicaid Services (CMS) of its intention to terminate its Medicaid Drug Rebate Agreement and its participation in the Medicaid Program, effective December 31, 2020. As the Company had anticipated, the discontinuation of its participation in this program resulted in the loss of some Renacidin sales, but that loss was more than offset by the elimination of the rebate payments, which resulted in an increase in net income.

As sales of the Company’s pharmaceutical products fluctuate, there is typically a corresponding direct relationship in the related allowances, such as for distribution fees, VA chargebacks, Medicare rebates, sales rebates and discounts, outdated material returns, and Medicaid rebates. For the three- and six-month periods ended June 30, 2021, these allowances decreased by $76,954 (26%) and $147,390 (24%), respectively, compared with the same periods in 2020. This was primarily a result of the Company’s termination of its participation in the Medicaid Program. Although the Company will no longer be incurring Medicaid-related rebate costs, it will continue to incur costs related to other allowances, including Medicare rebates, distribution fees, chargebacks on VA sales, and outdated material returns.

Sales of the Company’s medical products for the three-month period ended June 30, 2021, decreased by $6,702 (1%) and increased by $70,128 (6%), for the six-month period ended June 30, 2021. The decrease in sales for the three-month period was primarily attributable to the loss of one of the Company’s domestic medical product customers, which had reformulated the product in which the Company’s product had been used. However, due to some of the Company’s other medical customers located outside the United States increasing their orders due to pandemic conditions improving, the impact of the loss of that customer was not as severe for the three-month period. For the six-month period ended June 30, 2021, the increase in medical product sales was primarily due to increased orders from the Company’s foreign and domestic customers, which began to place larger orders than they had in 2020 as a result of improving global conditions related to the coronavirus pandemic.

Sales of the Company's industrial products, as well as other miscellaneous products, for the three- and six-month periods ended June 30, 2021, increased by $3,441 (12%) and $2,232 (3%), respectively, when compared with the corresponding periods in 2020. The increase in sales for both periods was primarily due to an increase in orders from two of the Company’s industrial product customers whose orders had decreased or ceased during the same periods in 2020 due to the coronavirus pandemic. The Company believes that if the pandemic conditions improve, orders of these products should resume their pre-pandemic levels.

Cost of Sales

Cost of sales as a percentage of net sales decreased to 41% in the second quarter of 2021 from 43% in the second quarter of 2020. For the first six months of 2021, cost of sales as a percentage of sales decreased to 40% compared with 42% for the first six months of 2020. The decreases in both periods were the result of a combination of lower overhead costs and the product mix. Both periods in 2021 saw decreased sales of Renacidin, which has a higher production cost compared to the Company’s line of Lubrajel products, the sales of which began to increase in the first quarter of 2021 as the result of the improving global pandemic conditions.

Operating Expenses

Operating expenses, consisting of selling and general and administrative expenses, remained relatively consistent, increasing by only $1,377 (less than 1%) for the second quarter of 2021 compared with the equivalent period in 2020. Operating expenses decreased by $56,771 (6%) for the first six months of 2021, compared with comparable periods in 2020. The decrease in operating expenses for the first six months of 2021 was primarily due to decreases in payroll and payroll related expenses and certain employee fringe benefit costs. Operating expenses are expected to remain relatively consistent for the remainder of the year.

Research and Development Expenses

Research and development expenses increased by $21,459 (20%) for the second quarter of 2021 compared with the second quarter of 2020, and increased by $2,013 (1%) for the first six months of 2021 compared with the first six months of 2020. The increases in both periods were due primarily to an increase in payroll and payroll related expenses.

Investment Income

Investment income decreased by $2,679 (6%) for the second quarter of 2021 compared with the second quarter of 2020, and decreased by $6,986 (8%) for the first half of 2021 compared with the same period in 2020. These decreases were due to a decrease in dividend income from stock and bond mutual funds compared with the same periods in 2020.

Net Gain on Marketable Securities

Net gain on marketable securities decreased by $249,605 (64%) for the second quarter of 2021 compared with the second quarter of 2020. In the second quarter of 2020, the Company had recognized an a unusually large unrealized gain of $383,323, which was the result of the market rebounding after the negative impact the Coronavirus pandemic had on the stock and bond markets in the first quarter of 2020. Those markets took a steep drop in the first few weeks of 2020 after COVID-19 reached the United States. In the second quarter of 2020 the stock market rebounded, which resulted in the significant unrealized gains that the Company experienced in that quarter. There was no comparable significant fluctuation in the stock and bond markets in the first six months of 2021.

For the first half of 2021, the net gain on marketable securities increased by $34,943 (114%), compared with the same period in 2020. The primary reason for the increase was that during the first six months of 2021, the Company recognized a realized gain on the sale of marketable securities in the amount of $112,180 compared with the comparable six-month period in 2020, where the realized gain on securities sold was $4,856.

Provision for Income Taxes

The Company's effective income tax rate was 21% for the first halves and second quarters of 2021 and 2020. The Company’s tax rate is expected to remain at 21% for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital increased from $9,832,326 at December 31, 2020 to $10,333,500 at June 30, 2021, an increase of $501,174. The current ratio increased from 8.0 to 1 at December 31, 2020 to 8.1 to 1 at June 30, 2021. The increase in working capital and the current ratio was primarily due to increases in cash, marketable securities, and accounts receivable, offset by a decrease in inventories.

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 2021. 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 on the Company's business.

The Company generated cash from operations of $2,617,308 and $3,183,479 for the first half of 2021 and 2020, respectively. The decrease from 2020 to 2021 was primarily due to an increase in accounts receivable.

Cash used in investing activities was $259,675 and $95,802 for the first half of 2021 and 2020, respectively. The increase was due primarily to the timing of marketable security sales and reinvestments in 2021 compared with 2020.

Cash used in financing activities was $2,204,616 and $1,928,969 for the first half of 2021 and 2020, respectively. The increase was due to an increase in dividends paid from $0.42 per share in 2020 to $0.48 per share in 2021.

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.