UNITED GUARDIAN INC - Quarter Report: 2012 June (Form 10-Q)

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

              For the quarterly period ended  June 30, 2012

¨	TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number:   1-10526

(Exact Name of Registrant as Specified in Its Charter)

(Address of Principal Executive Offices)

 
 

 

 

 

 

	Page No.
Part I.  FINANCIAL INFORMATION
Item 1 -  Condensed Financial Statements (unaudited unless otherwise indicated):
Statements of Income - Three and Six Months ended June 30, 2012 and 2011	2
Statements of Comprehensive Income - Three and Six Months ended June 30, 2012 and 2011	3
Balance Sheets – June 30, 2012 (unaudited)  and December 31, 2011(audited)	4-5
Statements of Cash Flows –  Six months ended June 30, 2012 and 2011	6
Notes to Condensed Financial Statements	7-10
Item 2 -    Management's Discussion and Analysis of Financial Condition and Results of Operations	11-15
Item 3 -    Quantitative and Qualitative Disclosures About Market Risk	16
Item 4 -    Controls and Procedures	16
Part II.  OTHER INFORMATION
Item 1 -    Legal Proceedings	17
Item 1A -  Risk Factors	17
Item 2 -    Unregistered Sales of Equity Securities and Use of Proceeds	17
Item 3 -    Defaults Upon Senior Securities	17
Item 4 -    Mine Safety Disclosures	17
Item 5 -    Other Information	17
Item 6 -    Exhibits	17
Signatures	18

 

 

		THREE MONTHS ENDED JUNE 30,								SIX MONTHS ENDED  JUNE 30,
		2012				2011				2012				2011
Net sales		$	3,735,100			$	4,060,299			$	7,623,792			$	7,702,348
Costs and expenses:
Cost of sales			1,465,119				1,628,293				3,004,959				3,088,883
Operating expenses			548,254				700,783				1,151,117				1,221,929
Total costs and expenses			2,013,373				2,329,076				4,156,076				4,310,812
Income from operations			1,721,727				1,731,223				3,467,716				3,391,536
Other income:
Investment income			41,757				72,580				111,348				143,903
Gain on sale of assets			---				11,237				2,750				5,984
Total other income			41,757				83,817				114,098				149,887
Income before income taxes			1,763,484				1,815,040				3,581,814				3,541,423
Provision for income taxes			570,400				590,400				1,160,100				1,150,600
Net Income		$	1,193,084			$	1,224,640			$	2,421,714			$	2,390,823
Earnings per common share (Basic and Diluted)		$	0.26			$	0.27			$	0.53			$	0.52
Weighted average shares – basic and diluted			4,596,439				4,596,439				4,596,439				4,596,439

 

 

 

ASSETS		JUNE 30,				DECEMBER 31,
		2012				2011
		(UNAUDITED)
Current assets:
Cash and cash equivalents		$	1,836,114			$	1,090,974
Marketable securities			9,473,530				9,295,755
Accounts receivable, net of allowance for doubtful accounts of $18,000 at June 30, 2012 and   December 31, 2011			2,012,659				1,653,440
Inventories (net)			1,127,825				1,467,434
Prepaid expenses and other current assets			167,726				163,034
Prepaid income taxes			---				78,613
Deferred income taxes			223,546				223,546
Total current assets			14,841,400				13,972,796
Property, plant and equipment:
Land			69,000				69,000
Factory equipment and fixtures			3,744,157				3,694,379
Building and improvements			2,716,516				2,714,780
Waste disposal plant			133,532				133,532
Total property, plant and equipment			6,663,205				6,611,691
Less: Accumulated depreciation			5,451,084				5,366,204
Total property, plant and equipment, net			1,212,121				1,245,487
Other assets			18,836				37,672
TOTAL ASSETS		$	16,072,357			$	15,255,955

See Notes to Condensed Financial Statements

		JUNE 30,				DECEMBER 31,
		2012				2011
		(UNAUDITED)
Current liabilities:
Accounts payable		$	126,259			$	400,389
Accrued expenses			1,047,306				676,959
Income taxes payable			64,442				---
Total current liabilities			1,238,007				1,077,348
Deferred income taxes			121,606				64,578
Stockholders’ equity:
Common stock $.10 par value, authorized, 10,000,000 shares; 4,596,439 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively.			459,644				459,644
Accumulated other comprehensive income			142,117				34,612
Retained earnings			14,110,983				13,619,773
Total stockholders’ equity			14,712,744				14,114,029
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	16,072,357			$	15,255,955

 

 

 

 

 

1.	Nature of Business

 

 

2.	Basis of Presentation

 

 

3.	Stock-Based Compensation

 

 

As of June 30, 2012, the Company had no share-based awards outstanding and exercisable and did not grant any options during the first half of 2012.

 

As of June 30, 2012, there were no remaining unrecognized compensation costs related to the non-vested share-based compensation arrangements granted under the Company's plans.

 

The Company did not record any stock-based compensation expense during the first half of 2012 or 2011.

 

The Company did not receive any proceeds from the exercise of options during the first half of 2012 or 2011.

 

4.	Recent Accounting Pronouncements

 

In June 2011, FASB issued an amendment to the disclosure requirements for the presentation of comprehensive income.  The amendment requires that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  This guidance is effective retrospectively for the interim periods and annual periods beginning after December 15, 2011. The Company adopted this amendment effective January 1, 2012.  The adoption of this amendment did not have a material impact on the Company's results of operation.

 

5.	Investments

 

 

										Unrealized
June 30, 2012		Cost				Fair Value				Gain/(Loss)
Corporate bonds
Mature within 1 year		$	93,124			$	85,533			$	(7,591	)
Maturities after 1 year through 5 years			203,920				201,489				(2,431	)
Total corporate bonds			297,044				287,022				(10,022	)
Fixed income mutual funds			8,702,506				8,918,960				216,454
Equity and other mutual funds			256,474				267,548				11,074
		$	9,256,024			$	9,473,530			$	217,506

December 31, 2011		Cost				Fair Value				Unrealized Gain/(Loss)
Available for Sale:
U.S. Treasury and agencies
Mature within 1 year		$	249,137			$	234,388			$	(14,749	)
Corporate bonds
Mature within 1 year			267,251				247,719				(19,532	)
Maturities after 1 year through 5 years			203,920				195,899				(8,021	)
Total corporate bonds			471,171				443,618				(27,553	)
Fixed income mutual funds			8,268,624				8,372,216				103,592
Equity and other mutual funds			253,850				245,533				(8,317	)
		$	9,242,782			$	9,295,755			$	52,973

 

 

 

 

6.	Inventories

 

 

 

7.	Supplemental Financial Statement Information

 

 

 

The Company paid $1,930,504 ($0.42 per share) and $1,654,718 ($0.36 per share) in dividends for the first half of 2012 and 2011, respectively.

 

Research and development expenses amounted to $290,390 and $259,766 for the first half of 2012 and 2011, respectively, and are included in operating expenses.

 

8.	Income Taxes

 

The Company’s tax provision is based on its estimated annual effective rate.  The Company continues to fully recognize its tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. As of June 30, 2012 and December 31, 2011, the Company did not have any unrecognized tax benefits.

 

The Company files consolidated Federal income tax returns in the U.S. with its inactive subsidiary, and separate income tax returns in New York State. The Company is subject to examination by the Internal Revenue Service and by New York State for years 2008 through 2011.

 

 

9.	Comprehensive Income

 

Accumulated other comprehensive income comprises unrealized gains and losses on marketable securities net of the related tax effect.

 

10.	Defined Contribution Plan

11.	Related-Party Transactions

 

 

 

 

12.	Other Information

 

Accrued Expenses

 

 

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

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.

 

 

The Company is a Delaware corporation that conducts research, product development, manufacturing and marketing of cosmetic ingredients, personal and health care products, pharmaceuticals, and specialty industrial products. All of the products that the Company manufactures, with the exception of its RENACIDIN® IRRIGATION (“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 personal care product line is its LUBRAJEL® line of water-based moisturizing and lubricating gels. It also sells two pharmaceutical products for urological uses. Those products are sold primarily 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 Veteran's Administration.

 

 

While the Company does have competition in the marketplace for some of its products, many of its products are either unique in their field or have some unique characteristics, and therefore are not in direct competition with the products of other pharmaceutical, specialty chemical, or health care companies. Many of the Company’s products are manufactured using patented or proprietary processes. 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 and performance 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.

 

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.

 

 

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, 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 U.S. generally accepted accounting principles. 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, inventory, and income taxes. Since December 31, 2011, 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, 2011, and a comparison of the results of operations for the second quarter of 2012 and 2011, and the first half of 2012 and 2011. 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, 2011.

 

 

Sales

 

 

(a)

Pharmaceuticals: The Company’s RENACIDIN product typically accounts for 85% of the Company’s pharmaceutical product sales. Over the past 20 months, RENACIDIN experienced two disruptions in production that led to product shortages. The first disruption began in November 2010 and lasted until May 2011, and was caused by regulatory issues at the third-party facility that manufactures the product for the Company. The issues were unrelated to the Company’s product, but disrupted all production at that facility. When product became available in May 2011, there was a surge in orders, not only due to the need of the Company’s distributors to restock their depleted inventories, but also because of the desire on the part of the distributors to avoid a price increase that was to go into effect on June 1, 2011. The result was unusually strong RENACIDIN sales in the second quarter of 2011.

 

The second disruption began in May 2012 and continues as of the date of this report, and is related to general production problems at the supplier’s manufacturing site.  It affects all of the products manufactured at that facility. The resulting failure to supply product to the Company significantly impacted the Company’s ability to fill orders for product in the second quarter of 2012.

 

Since the Company did not experience the same surge in sales in the second quarter of 2012 as it had in the second quarter of 2011, and because the Company also had to allocate product and reduce shipments as existing inventory was depleted in the second quarter of 2012, sales of RENACIDIN in the second quarter of 2012 were not only lower than they would be in a typical quarter, but also substantially lower than they were in the second quarter of 2011 when the surge in sales took place. As a result, pharmaceutical sales decreased $471,837 (46.6%) for the second quarter of 2012.  However, due to limited product availability from January to May of 2011, compared with full product availability during the same period in 2012, sales for the first half of 2012 decreased by only $76,823 compared with the same period in 2011.

 

The Company has been informed by its supplier that it currently hopes to resume production in September 2012, but that could be delayed further if FDA approval to restart production is delayed or if other events occur that could impact production The supplier is holding three batches that were produced for the Company in May 2012 but have not yet been released, The supplier will not release these batches until it is able to resume regular production. The Company is working with the Food and Drug Administration to get those batches released as soon as possible.

 

As of the date of this report the Company’s inventory of Renacidin has been depleted. The Company will not be able to fill any further orders for Renacidin until production is resumed and/or the lots being held by the supplier are released. The failure of the supplier to deliver additional inventory to the Company before the end of September 2012 will result in a significant impact on its pharmaceutical sales for the third quarter of 2012. The Company has notified the supplier that it will seek reimbursement and compensation for all losses incurred as a result of the disruption in production.

(b)

Personal care products: For the second quarter of 2012 the Company’s sales of personal care products decreased by $65,231 (2.6%) when compared with the second quarter of 2011, and for the first half of 2012 the Company’s sales of personal care products increased by $60,421 (1.2%) when compared with the comparable period in 2011. The decrease in sales in the second quarter of 2012, and the increase in sales for the first six months of 2012, were due to normal fluctuations in sales to ASI, the Company's largest marketing partner. Sales to ASI decreased by $64,878 (3.2%) and increased $76,464 (1.9%) for the three and six months periods, respectively, ended June 30, 2012, compared with the corresponding periods in 2011. The Company believes that these fluctuations in sales were attributable to the timing of orders placed by ASI.

 

(c)

Medical (non-pharmaceutical) products: Sales of the Company’s medical products increased by $176,465 (31.0%) for the second quarter of 2012 , and decreased by $65,666 (4.5%) for the first half of 2012 compared with the comparable periods in 2011. These changes were primarily attributable to the ordering patterns of the Company's customers for these products, and may not reflect an increase or a decrease in sales of these products on an annualized basis.

 

(d)	Industrial and other products:  Sales of the Company's industrial products, as well as other miscellaneous products, increased by $37,897 (126.3%) and $30,667 (52.1%) for the three and six months, respectively, ended June 30, 2012, when compared with the corresponding periods ended June 30, 2011.

 

 

 

 

 

 

 

 

 

 

 

 

Working capital increased by $707,945 to $13,603,393 at June 30, 2012 from $12,895,448 at December 31, 2011. The increase in working capital was primarily due to an increase in accounts receivable and cash. The current ratio decreased to 11.99 to 1 at June 30, 2012 from 12.97 to 1 at December 31, 2011. The decrease in the current ratio was primarily due to the effect of an increase in accrued expenses.

 

During the first half of 2012 the average period of time that an account receivable was outstanding was approximately 44 days. The average period of time that an account receivable was outstanding during the first half of 2011 was 33 days.

 

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 2012.

 

The Company generated cash from operations of $2,787,745 and $2,930,821 for the first half of 2012 and 2011, respectively. The decrease was primarily due to a decrease in accounts payable.

 

Cash used in investing activities for the first half of 2012 and 2011 was $112,101 and $1,346,808, respectively. This decrease was primarily due to a decrease in the purchases of  marketable securities and an increase in proceeds from the sale of marketable securities in the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

 

Cash used in financing activities was $1,930,504 and $1,654,718 for the first half of 2012 and 2011, respectively.  This increase was mainly due to an increase in dividend paid per share, from $0.36 per share in 2011 to $0.42 per share in 2012.

 

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 are in the best interest of the Company and its shareholders, should they arise.

 

 

 

 

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

 

 

 

 

(a)	DISCLOSURE CONTROLS AND PROCEDURES

 

 

(b)	CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

ITEM 1A.

RISK FACTORS

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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