United Guardian Inc: Form 10-Q for the period ended Mar 31, 2024

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 using such words as “believes,” “may,” “will,” “should,” “intends,” “plans,” “estimates,” or “anticipates” or other similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our 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, the 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, manufactures and markets cosmetic ingredients, pharmaceuticals, medical lubricants, and sexual wellness products. Prior to July 1, 2023, the Company manufactured and reported sales of a line of specialty industrial products; however, this product line was discontinued after the second quarter of 2023 due to low sales volume with no growth prospects. In October 2023, the Company entered into a distribution agreement with Brenntag Specialties, a global market leader in chemicals and ingredients distribution, for the distribution of the Company’s new line of sexual wellness ingredients, specifically called the “Natrajel™” line of products, in the United States, Canada, Mexico, Central America and South America. Although there were no sales of these products during 2023, the Company anticipates that it will begin manufacturing and reporting sales of this new line of products in 2024.

The Company also conducts research and product development. The Company’s research and development department also modifies, refines, and expands the uses for existing products, with the goal of further developing the market for its products. The Company also develops new products using natural and environmentally friendly raw materials, which is a priority for many of the Company’s cosmetic customers. 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 multifunctional water-based gel formulations, which are designed to provide sensory enhancement, lubrication, and texture to both personal care and medical products.

The Company’s cosmetic ingredients are marketed worldwide for cosmetic uses by five distributors, each handling a different geographic area, with the largest being U.S.-based ASI. In the last few years, to meet the growing demand for “green” and sustainable products, the Company has focused on developing and launching new products which only contain ingredients that are considered “natural”. The Lubrajel products in the new natural line have been certified by the Cosmetic Organic and Natural Standard (“COSMOS”). This standard is recognized globally by the cosmetic industry.

Renacidin and the Company’s other pharmaceutical product, Clorpactin® WCS-90, 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 a dedicated website. Clorpactin WCS-90, as well as the Company’s other products, are marketed through information provided on the Company’s corporate website.

The Company’s medical lubricants, which consist of water-based gel formulations designed mainly to provide sensory enhancement and lubrication to medical device products, are sold directly to medical customers, or to contract manufacturers employed by these medical customers.

The Company does have competition in the marketplace for some of its products, particularly its cosmetic ingredients, some of its pharmaceutical products and its medical lubricants. These competitive products are usually sold at a lower price than the Company’s products; however, they may not compare favorably to the level of performance and quality of our products.

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 cosmetic ingredients 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 medical 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; (c) the product cannot be sold because it is too close to its expiration date; or (d) the product has expired (but it is not more than one year after the expiration date). This return policy 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.

In recent years, the Company has elected to rely on trade secret protection to protect our intellectual property for proprietary product formulations and manufacturing methods. The Company will file for patent protection in situations where the Company believes that relying on trade secret protection alone would not provide sufficient protection. The Company owns the Lubrajel®, Natrajel™, Renacidin®, and Clorpactin® trademarks.

CRITICAL ACCOUNTING POLICIES

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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, 2023, 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, 2023, and a comparison of the results of operations for the three months ended March 31, 2024 and March 31, 2023. 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, 2023. All references in this quarterly report to “sales” or “Sales” shall mean Net Sales unless specified otherwise.

In accordance with ASU-2016-13, the Company recognizes an allowance for credit losses for financial assets carried at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset.

RESULTS OF OPERATIONS

Net Sales

Net sales for the first quarter of 2024 increased by $684,620 (approximately 27%) as compared with the first quarter of 2023. The increase in sales for the first quarter of 2024 was primarily attributable to an increase in sales of the Company’s cosmetic ingredients, which was partially offset by a decrease in sales of the Company’s pharmaceutical products. The changes in the Company’s sales by product line are as follows:

(a) Cosmetic Ingredients: Sales of the Company’s cosmetic ingredients increased by $1,114,581 (approximately 146%) in the first quarter of 2024 compared with the same period in 2023. The increase was primarily attributable to an increase in purchases of the Company’s cosmetic ingredients by ASI, whose purchases increased by $1,217,371 (approximately 227%) compared with the same period in 2023. This increase was offset by a net decrease in sales to the Company’s four other distributors of $104,403 (approximately 47%), while sales to one direct cosmetic ingredient customer in the United States increased by $1,613 (approximately 200%). Based on information received from ASI, the Company believes that the increase in sales to ASI was primarily due to 1) increased demand for the Company’s Lubrajel products, specifically in China; and 2) customers working off excess stock and replenishing their inventories. The Company continues to experience global competition from Asian companies that manufacture and sell products that are competitive with the Company’s products. These competitive products are usually sold at a lower price than our products; however, they may not compare favorably to the level of performance and quality of our products. The Company expects the Asian market to remain very competitive based on the continuing competition from lower-cost competitors, and for that reason, we are concentrating our research and development (“R&D”) efforts on developing new and unique products that other companies do not offer.

(b) Pharmaceutical Products: Because there are fees, rebates, and allowances associated with sales of the Company’s two pharmaceutical products, Renacidin and Clorpactin WCS-90, 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 two pharmaceutical products, Renacidin and Clorpactin WCS-90, together decreased from $1,354,224 in the first quarter of 2023 to $950,323 in the first quarter of 2024, (approximately 30%). Gross sales of both products decreased from $1,459,518 in the first quarter of 2023 to $1,086,669 in the first quarter of 2023 (approximately 26%). The decrease in sales was primarily due to a decrease in gross sales of Renacidin, which decreased from $1,278,350 in the first quarter of 2023 to $891,789 (approximately 30%) in the first quarter of 2024. This decrease was primarily due to the temporary shutdown of production at the Company’s contract manufacturer’s facility during the fourth quarter of 2023. As a result of this shutdown, the Company was forced to allocate its existing stock of Renacidin in order to maintain sufficient supply levels to fill customer orders. Sales of Renacidin remained on allocation until March of 2024, when the Company received product in sufficient quantities to fill customer’s orders in full. The decrease in gross sales of Renacidin were offset by a slight increase in sales of Clorpactin, which increased from $181,167 to $194,880, an increase of approximately 8%. The difference in the net sales decrease compared with the gross sales decrease for these products was due to a combination of a decrease in gross sales of those products, combined with an increase in pharmaceutical sales allowances of $31,051 (approximately 29%), compared with the same period in 2023. The increase in sales allowances was primarily due to an increase in outdated material returns allowances.

(c) Medical Lubricants: Sales of the Company’s medical lubricants increased by $7,108 (approximately 2%) for the first quarter of 2024 when compared with the same period in 2023. The increase was primarily due to an increase in orders from one of the Company’s major medical customers in India.

(d) Industrial Products: Sales of the Company’s industrial products, as well as other miscellaneous products, decreased by $33,168 (100%) for the first quarter of 2024 compared with the same period in 2023. The decrease was due to the discontinuation of this product line after the second quarter of 2023.

Cost of Sales

Cost of sales as a percentage of net sales for the first quarter of 2024 increased to 48%, compared with 43% for the first quarter of 2023. The increase was due primarily to the increased per unit overhead costs associated with the sales in the first quarter of 2024. As a result of the decreased production in 2023, these units carried a higher per unit overhead cost, thereby increasing the Company’s cost of sales when these units were sold in the first quarter of 2024.

Operating Expenses

Operating expenses, consisting of selling, general, and administrative expenses, increased by $50,919 (approximately 10%) for the first quarter of 2024 compared with the first quarter of 2023. The increase was mainly due to increases in Board of Directors fees, legal fees and employee bonuses.

Research and Development Expenses

R&D expenses decreased by $23,977 (approximately 19%) for the first quarter of 2024 compared with the first quarter of 2023. The decrease was primarily due to a decrease in payroll and payroll-related expenses.

Investment Income

Investment income increased by $50,441 (approximately 106%) for the first quarter of 2024 compared with the first quarter of 2023. The increase was primarily due to an increase in interest income from United States Treasury Bills during the first quarter of 2024 compared with the dividend income on the Company’s equity and fixed income mutual funds in the first quarter of 2023.

This change in the makeup of the investment income was attributable to the Company repositioning its marketable securities portfolio in 2023. In the second quarter of 2023, the Company liquidated most of its holdings of equity and fixed income mutual funds. The Company then used the proceeds from these sales to take advantage of higher interest rates by purchasing U.S. Treasury Bills.

Net Gain on Marketable Securities

The net gain on marketable securities decreased from $72,701 for the quarter ended March 31, 2023, to $41,496 for the quarter ended March 31, 2024. The decrease was primarily due to the factors discussed above regarding the Company’s repositioning of its marketable securities portfolio. In the first quarter of 2023, the Company’s marketable securities’ portfolio was primarily invested in equity and fixed income mutual funds, and in the first quarter of 2024 these funds were invested primarily in U.S. Treasury Bills, which are considered cash equivalents and the carrying amount approximates fair value due to the short-term nature of the securities. The Company’s management and Board of Directors are continuing to closely monitor the Company's investment portfolio and have made and will continue to make any changes they believe may be necessary or appropriate 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 approximately 21% for the first quarter of 2024 and 2023 and is expected to remain at 21% for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased by $150,814 to $10,567,643 at March 31, 2024, down from $10,718,457 at December 31, 2023. The current ratio decreased to 6.7 to 1 at March 31, 2024, down from 8.0 to 1 at December 31, 2023. The decreases in working capital and the current ratio were primarily due to increases in accounts payable and accrued expenses.

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’s long-term liquidity position will be dependent on its ability to generate sufficient cash flow from profitable operations.

The Company is in the process of upgrading its building sprinkler system and has incurred costs of $99,000 to date and expects to incur additional costs of $69,000 during 2024. The project is expected to be completed during the second quarter of 2024.

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.

The Company generated cash from operations of $644,120 and $417,589 for the three months ended March 31, 2024 and 2023, respectively. The increase was due primarily to an increase in net income.

Cash used in investing activities for the three months ended March 31, 2024 was $665,478 compared with $46,088 for the three months ended March 31, 2023. The increase was primarily due to an increase in purchases of marketable securities in the first quarter of 2024 compared with the first quarter of 2023.

Net cash used in financing activities was $1,148,468 for the quarter ended March 31, 2024. There were no cash flows from financing for the first quarter of 2023. The increase in cash used in financing activities was due to the Company’s Board of Directors changing the Company’s dividend declaration practice in June of 2023. Under the new practice, the Company expects to consider a semi-annual dividend declaration in January and July of each year. On January 30, 2024, the Company’s Board of Directors declared a cash dividend of $0.25 per share, which was paid on February 20, 2024, to all stockholders of record as of February 12, 2024.

The Company expects to continue to use its cash to make dividend payments, purchase marketable securities, and take advantage of growth opportunities that may arise that are in the best interest of the Company and its shareholders.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The information to be reported under this item is not required of smaller reporting companies.

(a) DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, including its Principal Executive Officer and Principal Financial Officer, has evaluated the design, operation, and effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the evaluation performed by the Company’s management, including its Principal Executive Officer and Principal Financial Officer, it was determined that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosures.

(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company's Principal Executive Officer and Principal Financial Officer have determined that, during the period covered by this quarterly report, there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. They have also concluded that there were no significant changes in the Company’s internal controls after the date of the evaluation.