UG 10-Q Quarter ended June 30, 2016

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2016

For the transition period from _________ to _________

Commission File Number: 1-10526

UNITED-GUARDIAN, INC.

(Exact Name of Registrant as Specified in Its Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒  No ☐

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

4,594,319 shares of common stock, par value $.10 per share

(as of August 1, 2016)

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UNITED-GUARDIAN, INC.

INDEX TO FINANCIAL STATEMENTS

UNITED-GUARDIAN, INC.

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

BALANCE SHEETS
(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC .

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

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 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, results actually 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, 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 personal care products. Some of the Company’s products have patent protection, and others are produced using proprietary manufacturing processes.

The Company’s personal care products are marketed worldwide by six marketing partners, of which Ashland Specialty Ingredients (“ASI”) purchases the largest volume of products from the Company. Approximately 37% of the Company’s products are sold, either directly or through the Company’s marketing partners, to end users located outside of the United States.

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 United States Department of Veterans Affairs.

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 similar functions or properties to the Company’s products.

The Company recognizes revenue when products are shipped, title and risk of loss pass to the customers, persuasive evidence of a sales arrangement exists, and 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 intends, whenever possible, to make efforts to obtain patents in connection with its product development program. Most of the patents that the Company has been issued have expired; however, the Company does not believe that the expiration of those patents will have any material effect on its sales, since the Company’s most important products rely on trade secrets and proprietary manufacturing methods rather than patent protection.

Critical Accounting Policies

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, 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 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, 2015, 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, 2015, and a comparison of the results of operations for the second quarter of 2016 and 2015, and the first half of 2016 and 2015. 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, 2015.

RESULTS OF OPERATIONS

Net sales for the second quarter of 2016 decreased by $1,984,926 (48.1%) when compared with the same period in 2015. Net sales for the first half of 2016 decreased by $4,094,743 (48.2%) as compared with the corresponding period in 2015. The changes in net sales for both the second quarter of 2016 and the first half of 2016 were attributable to changes in sales of the following product lines:

Sales of the Company’s personal care products to the Company’s five other marketing partners for the second quarter of 2016 decreased by a net of $106,731 (24.1%) compared with the second quarter of 2015, and decreased by a net $85,056 (10.5%) for the first six months of 2016 compared with the same period in 2015. In each of those periods, increases in sales to two of the distributors were offset by decreases to three others, with the largest change being attributable to the Company’s Korean marketing partner, whose sales decreased by $97,075 (34.9%) for the second quarter of 2016 compared with the second quarter of 2015, and by $211,884 (48.2%) for the first half of 2016 compared with the same period in 2015. That marketing partner had experienced unusually strong sales in the first half of 2015 that were not repeated in the first half of 2016, with some of that reduction being attributable to the timing of orders.

In the second quarter of 2016 sales to the Company’s marketing partners in the United Kingdom and Italy increased, while sales to its marketing partners in France and Switzerland decreased, resulting in a net decrease in sales of $9,656 (5.9%) compared with the second quarter of 2015. For the six months ended June 30, 2016 sales to the Company’s marketing partners in the United Kingdom and France increased, while sales to its marketing partners in Italy and Switzerland decreased, resulting in a net increase in sales of $126,828 (34%) compared with the same period in 2015.

The Company’s sales in Western Europe continue to be negatively impacted by (a) the continuing economic problems in Europe; (b) the strong U.S. dollar relative to the Euro, which has made the Company’s products less competitive in Europe, and (c) increased competition. For the past few years the Company has been experiencing additional competition from Asian companies selling imitations of the Company’s products at much lower prices, particularly a Korean company that is manufacturing imitations of the Company’s products in China. This has resulted in a loss of some business to these competitive products. As a result, from time to time it has been necessary, and will continue to be necessary, for the Company to lower its prices in specific cases in order to retain or attract customers, and this has impacted its profit margins on those sales. The Company intends to continue to work with its marketing partners to take whatever steps are necessary to try to recover the business it has lost to these lower-priced products, including continuing to reduce prices on a case by case basis, as needed, in order to remain as competitive as possible.

In addition to the above changes in sales, net sales allowances increased by $20,826 for the three months and increased by $30,073 for the six months, respectively, ended June 30, 2016, when compared with the corresponding periods in 2015. The increase for the three-month period and decrease for the six-month period were both due primarily to increases or decreases in chargebacks paid to the U.S. Department of Veterans Affairs and allowances for distribution fees.

Cost of Sales

For the second quarter of 2016, cost of sales as a percentage of sales increased to 47.1%, from 34.0% in the second quarter of 2015. Cost of sales as a percentage of sales increased to 43.3% for the first half of 2016, from 36.3% for the comparable period in 2015. The increases for the second quarter of 2016 and for the first half of 2016 were primarily the result of a higher percentage of the Company’s sales for those periods coming from its pharmaceutical products, primarily RENACIDIN, which is manufactured for the Company by a third party manufacturer and, for that reason, has a lower margin than many of the Company’s other products.

Operating Expenses

Operating expenses, consisting of selling, general and administrative expenses, increased by $21,338 (4.8%) for the second quarter of 2016 compared with the comparable quarter in 2015, and increased by $27,967 (3.1%) for the first half of 2016 compared with the first half of 2015. The increases in operating expenses were primarily attributable to some additional expenses for advertising and sales promotions for its new single-dose form of RENACIDIN. Operating expenses are expected to remain relatively consistent.

Research and Development Expenses

Research and development expenses increased by $1,354 (0.9%) for the second quarter of 2016 compared with the second quarter of 2015, and by $12,612 (3.9%) for the first half of 2016 compared with the same period in 2015. The increases relate to increases in payroll and payroll-related expenses.

Investment Income

Investment income increased by $10,012 for the second quarter of 2016 compared with the comparable quarter of 2015, and decreased by $130 for the first half of 2016 compared with the first half of 2015. These increases were mainly due to fluctuations in dividend income from both stock and bond mutual funds.

Provision for Income Taxes

The Company's effective income tax rate remained approximately 31.0% for all periods presented, and is expected to remain consistent for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreased from $ 13,529,593 at December 31, 2015 to $13,101,036 at June 30, 2016, a decrease of $428,557. The current ratio decreased from 14.7 to 1 at December 31, 2015 to 11.6 to 1 at June 30, 2016. The decrease in working capital was primarily due to a decrease in marketable securities and an increase in accrued expenses. The decrease in the current ratio was primarily due to the increase in accrued expenses. The increase in accrued expenses was due to an increase in accruals for payroll and payroll-related 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 does not expect to incur any significant capital expenditures for the remainder of 2016.

The Company generated cash from operations of $524,379 and $3,061,313 for the first half of 2016 and 2015, respectively. The decrease was primarily due to the decrease in net income.

Cash provided by investing activities for the first half of 2016 was $251,960, and cash used in investing activities in the first half of 2015 was $927,431. This increase was primarily due to a decrease in the purchases of marketable securities in the first half of 2016 compared with the comparable period in 2015.

Cash used in financing activities was $1,603,871 and $2,298,219 for the first half of 2016 and 2015, respectively. This decrease was mainly due to a decrease in dividends paid per share from $0.50 per share in 2015 to $0.35 per share in 2016.

OFF BALANCE SHEET ARRANGEMENTS

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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

The Company’s management, including its Principal Executive Officer and Chief 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 Chief 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 Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosures.

The Company's Principal Executive Officer and Chief 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.

NONE

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

NONE

NONE

NONE

NONE

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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