UNITED GUARDIAN INC - Quarter Report: 2016 March (Form 10-Q)
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
| ¨ | TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number: 1-10526
UNITED-GUARDIAN, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 11-1719724 | |
| (State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
| Incorporation or Organization) |
| 230 Marcus Boulevard, Hauppauge, New York 11788 | ||
| (Address of Principal Executive Offices) | ||
| (631) 273-0900 | ||
| (Registrant’s Telephone Number) | ||
| N/A | ||
| (Former name, former address and former fiscal year, if changed since last report) |
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.
| Large accelerated filer | ☐ | |
| Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | |
| Accelerated filer | ☐ | |
| Smaller reporting company | ☒ |
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 May 1, 2016)
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UNITED-GUARDIAN, INC.
INDEX TO FINANCIAL STATEMENTS
Page No.
Page 1 of 17
Part I. FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements.
UNITED-GUARDIAN, INC.
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, | ||||||||
| 2016 | 2015 | |||||||
| Net sales | $ | 2,262,576 | $ | 4,372,393 | ||||
| Costs and expenses: | ||||||||
| Cost of sales | 897,725 | 1,679,202 | ||||||
| Operating expenses | 467,556 | 460,927 | ||||||
| Research and development | 177,566 | 166,308 | ||||||
| Total costs and expenses | 1,542,847 | 2,306,437 | ||||||
| Income from operations | 719,729 | 2,065,956 | ||||||
| Other income: | ||||||||
| Investment income | 43,312 | 53,454 | ||||||
| Income before provision for income taxes | 763,041 | 2,119,410 | ||||||
| Provision for income taxes | 237,950 | 658,900 | ||||||
| Net income | $ | 525,091 | $ | 1,460,510 | ||||
Earnings per common share (Basic and Diluted) | $ | 0.11 | $ | 0.32 | ||||
| Weighted average shares – basic and diluted | 4,594,319 | 4,596,439 | ||||||
See notes to condensed financial statements
Page 2 of 17
UNITED-GUARDIAN, INC.
STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, | ||||||||
| 2016 | 2015 | |||||||
| Net income | $ | 525,091 | $ | 1,460,510 | ||||
| Other comprehensive income: | ||||||||
| Unrealized gain on marketable securities during period | 151,068 | 98,870 | ||||||
| Income tax expense related to other comprehensive income | 51,363 | 33,616 | ||||||
| Other comprehensive income, net of tax | 99,705 | 65,254 | ||||||
| Comprehensive income | $ | 624,796 | $ | 1,525,764 | ||||
See notes to condensed financial statements
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UNITED-GUARDIAN, INC.
| ASSETS | MARCH 31, 2016 | DECEMBER 31, 2015 | ||||||
| (UNAUDITED) | (AUDITED) | |||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,261,308 | $ | 1,080,489 | ||||
| Marketable securities | 11,417,153 | 10,719,470 | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $8,654 at March 31, 2016 and December 31, 2015 | 1,295,747 | 934,754 | ||||||
| Inventories (net) | 1,528,456 | 1,293,642 | ||||||
| Prepaid expenses and other current assets | 203,766 | 160,533 | ||||||
| Prepaid income taxes | - | 95,767 | ||||||
| Deferred income taxes | 233,305 | 233,305 | ||||||
| Total current assets | 15,939,735 | 14,517,960 | ||||||
| Property, plant and equipment: | ||||||||
| Land | 69,000 | 69,000 | ||||||
| Factory equipment and fixtures | 4,181,810 | 4,175,940 | ||||||
| Building and improvements | 2,776,602 | 2,776,602 | ||||||
| Total property, plant and equipment | 7,027,412 | 7,021,542 | ||||||
| Less: Accumulated depreciation | 5,964,759 | 5,925,429 | ||||||
| Total property, plant and equipment, net | 1,062,653 | 1,096,113 | ||||||
| Other assets (net): | 70,413 | 74,118 | ||||||
| TOTAL ASSETS | $ | 17,072,801 | $ | 15,688,191 | ||||
See notes to condensed financial statements
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UNITED-GUARDIAN, INC.
BALANCE SHEETS (continued)
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| MARCH 31, 2016 | DECEMBER 31, 2015 | |||||||
| Current liabilities: | (UNAUDITED) | (AUDITED) | ||||||
| Accounts payable | $ | 348,223 | $ | 96,815 | ||||
| Accrued expenses | 1,100,783 | 785,623 | ||||||
| Income taxes payable | 141,883 | --- | ||||||
| Dividends payable | 105,929 | 105,929 | ||||||
| Total current liabilities | 1,696,818 | 988,367 | ||||||
| Deferred income taxes | 169,373 | 118,010 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock $.10 par value, authorized, 10,000,000 shares; 4,594,319 shares issued and outstanding at March 31, 2016 and December 31, 2015 | 459,432 | 459,432 | ||||||
| Accumulated other comprehensive income | 172,066 | 72,361 | ||||||
| Retained earnings | 14,575,112 | 14,050,021 | ||||||
| Total stockholders’ equity | 15,206,610 | 14,581,814 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 17,072,801 | $ | 15,688,191 | ||||
See notes to condensed financial statements
Page 5 of 17
UNITED-GUARDIAN, INC.
STATEMENTS
OF CASH FLOWS
(UNAUDITED)
| THREE MONTHS ENDED MARCH 31, | ||||||||
| 2016 | 2015 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 525,091 | $ | 1,460,510 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 43,036 | 42,708 | ||||||
| Realized loss on sale of investments | 10,180 | --- | ||||||
| Recovery of bad debts | --- | (12,326 | ) | |||||
| (Decrease) increase in cash resulting from changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (360,993 | ) | (672,432 | ) | ||||
| Inventories | (234,814 | ) | 244,953 | |||||
| Prepaid expenses and other assets | (43,233 | ) | 2,260 | |||||
| Prepaid income taxes | 95,767 | 6,449 | ||||||
| Accounts payable | 251,407 | 67,150 | ||||||
| Income taxes payable | 141,883 | ---- | ||||||
| Accrued expenses | 315,160 | 670,676 | ||||||
| Net cash provided by operating activities | 743,484 | 1,809,948 | ||||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property, plant and equipment | (5,870 | ) | (2,143 | ) | ||||
| Proceeds from sale of marketable securities | 49,045 | --- | ||||||
| Purchase of marketable securities | (605,840 | ) | (2,853,695 | ) | ||||
| Net cash used in investing activities | (562,665 | ) | (2,855,838 | ) | ||||
| Net increase (decrease) in cash and cash equivalents | 180,819 | (1,045,890 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,080,489 | 2,023,383 | ||||||
| Cash and cash equivalents at end of period | $ | 1,261,308 | $ | 977,493 | ||||
| Supplemental disclosure of cash flow information | ||||||||
| Taxes paid | $ | 450 | $ | 300 | ||||
See notes to condensed financial statements
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UNITED-GUARDIAN, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | Nature of Business |
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, personal and health care products, pharmaceuticals, medical products, and proprietary specialty industrial products.
| 2. | Basis of Presentation |
Interim financial statements of the Company are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“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, consisting solely of 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 current period are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2016. The interim unaudited 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, 2015.
| 3. | Reclassification of Prior Presentation |
Certain prior amounts have been reclassified for consistency with the current period presentation. This reclassification had no effect on the reported income from operations. During the third quarter 2015, the Company concluded that it was appropriate to reclassify research and development costs as a separate item on the statements of income. Previously, such expenses were included with operating expenses.
| 4. | Investments |
The fair values of the Company’s marketable securities are determined in accordance with 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. 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 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 statement. |
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| · | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The following available-for-sale securities, which comprise all the Company’s marketable securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs, which are quoted prices (unadjusted) for identical assets in active markets.
| March 31, 2016 (Unaudited) | ||||||||||||
| Available for sale: | Cost | Fair Value | Unrealized Gain (Loss) | |||||||||
| Fixed income mutual funds | $ | 10,497,924 | $ | 10,564,616 | $ | 66,692 | ||||||
| Equity and other mutual funds | 658,523 | 852,537 | 194,014 | |||||||||
| $ | 11,156,447 | $ | 11,417,153 | $ | 260,706 | |||||||
| December 31, 2015 (Audited) | ||||||||||||
| Available for sale: | ||||||||||||
| Fixed income mutual funds | $ | 9,968,948 | $ | 9,900,587 | $ | (68,361 | ) | |||||
| Equity and other mutual funds | 640,884 | 818,883 | 177,999 | |||||||||
| $ | 10,609,832 | $ | 10,719,470 | $ | 109,638 | |||||||
For the first quarter of 2016 there was $10,180 of net realized losses from the sale and redemption of marketable securities.
Investment income consisted principally of unrealized and realized gains and losses, interest income from bonds, mutual funds, and money market funds.
Marketable securities include investments in fixed income and equity mutual funds and government securities, which are classified as “available-for-sale” securities and are reported at their fair values. Unrealized gains and losses on “available-for-sale” securities are reported as accumulated other comprehensive income (loss) in stockholders’ equity, net of the related tax effects. Investment income is recognized when earned. Realized gains and losses on sales of investments are determined on a specific identification basis.
| 5 | Inventories |
| March 31, 2016 | December 31, 2015 | |||||||
| (Unaudited) | (Audited) | |||||||
| Inventories consist of the following: | ||||||||
| Raw materials | $ | 307,312 | $ | 334,320 | ||||
| Work in process | 66,895 | 44,836 | ||||||
| Finished products | 1,154,249 | 914,486 | ||||||
| $ | 1,528,456 | $ | 1,293,642 | |||||
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Inventories are valued at the lower of cost or current market value. Cost is determined using the average cost method, which approximates cost determined by the first-in, first-out (“FIFO”) method. Finished products inventories at March 31, 2016 and December 31, 2015 are stated net of a reserve of $20,000, for each period, for slow moving and obsolete inventory.
| 6. | Income Taxes |
The Company’s tax provision is based on its estimated annual effective tax 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 December 31, 2015 and March 31, 2016, the Company did not have any unrecognized tax benefits.
| 7. | Comprehensive Income |
Accumulated other comprehensive income comprises unrealized gains and losses on marketable securities net of the related tax effect.
| Changes in Accumulated Other Comprehensive Income | March 31, 2016 | December 31, 2015 | ||||||
| Beginning balance | $ | 72,361 | $ | 259,869 | ||||
| Unrealized gain (loss) on marketable securities before reclassifications - net of tax | 110,515 | (189,903 | ) | |||||
| Realized (loss) gain on sale of securities reclassified from accumulated other comprehensive income | (10,810 | ) | 2,395 | |||||
| Ending balance - net of tax | $ | 172,066 | $ | 72,361 | ||||
| 8. | 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. In addition, the Company has been accruing $175,000 per year toward the payment of a discretionary 401(k) contribution that is apportioned among all employees using a “pay-to-pay” safe harbor formula in accordance with IRS regulations. The Company accrued $43,750 in contributions to the DC Plan for each of the first quarters of 2016 and 2015. For the first quarters of 2016 and 2015 the Company did not make any discretionary contributions to the DC Plan.
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| 9. | Other Information |
| Accrued Expenses | ||||||||
| March 31, 2016 | December 31, 2015 | |||||||
| Bonuses | $ | 375,000 | $ | 250,000 | ||||
| Distribution fees | 207,600 | 206,977 | ||||||
| Payroll and related expenses | 203,191 | 109,451 | ||||||
| Annual report expenses | 40,940 | 66,000 | ||||||
| Audit fee | 68,000 | 82,000 | ||||||
| Insurance | 124,709 | --- | ||||||
| Other | 81,343 | 71,195 | ||||||
| Total Accrued Expenses | $ | 1,100,783 | $ | 785,623 | ||||
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," 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, 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.
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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. 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 five marketing partners, of which Ashland Specialty Ingredients (“ASI”) purchases the largest volume of products from the Company. Approximately 65% 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’ most important products rely on trade secrets and proprietary manufacturing methods rather than patent protection.
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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 three months ended March 31, 2016 and March 31, 2015. 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, 2015.
RESULTS OF OPERATIONS
Net Sales
Net sales for the first quarter of 2016 decreased by $2,109,817 (48.3%) as compared with the first quarter of 2015. The change in net sales for the three-month period ended March 31, 2016 was primarily attributable to a decrease in sales of the Company’s personal care products, which was partially offset by increases in sales of its pharmaceutical, medical, and industrial products, as follows:
| (a) | Personal care products: Sales of personal care products decreased by $2,375,619 (68.7%) when compared with the same period in 2015. Most of the decrease was attributable to a decline in purchases by ASI of one of the Company’s LUBRAJEL products for sale in China. This decline in purchases by ASI was almost entirely the result of (1) overly optimistic order forecasts by some of ASI’s customers in China, which did not materialize, and (2) a regulatory issue in China that was unrelated to the Company’s LUBRAJEL product but which resulted in a curtailment in the production of some cosmetic products that were formulated with LUBRAJEL. In anticipation of the projected orders for LUBRAJEL by ASI’s customers in China, ASI began building inventory of LUBRAJEL starting in the 4th quarter of 2014. As a result of demand not reaching the original projections, and the temporary restriction imposed by the Chinese government on certain cosmetic products, some of which also contained LUBRAJEL, ASI has been working off its inventory of LUBRAJEL to meet the current demand in China. Based upon ASI’s current order forecasts from its customers in China, ASI’s purchases of LUBRAJEL are expected to resume gradually, but will probably not be significant until at least the 3rd quarter of this year. Going forward, the Company will work closely with ASI to rebuild sales of LUBRAJEL to customers in China. In addition, the Company will assess its pricing strategy, where necessary, in order to be as competitive as possible. |
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Sales of the Company’s personal care products to the Company’s other five marketing partners decreased by a net $28,395 (7.3%), with an increase to the Company’s second largest marketing partner offset by a decrease to two of its other marketing partners. The sales fluctuations to these five other marketing partners are primarily the result of the timing of customer orders, but sales of the Company’s products in Western Europe continue to be negatively impacted by both the continuing economic problems in Europe, as well as the strong U.S. dollar relative to the Euro, which made the Company’s products less competitive in Europe. There has been more competition in Europe and Asia in the last 2-3 years than there had been in previous years, due to other 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 customers to these competitive products. From time to time it has been necessary for the Company to lower its prices in order to retain or attract certain customers for some of its products, and this has impacted its profit margins on those sales. To date this impact has not been significant, however the Company expects that it will be necessary to continue to lower its prices in certain cases, at least for the near future, in order to remain competitive in the marketplace.
| (b) | Pharmaceuticals: Pharmaceutical sales increased by $104,681 (24.3%) in the first quarter of 2016 compared with the same period in 2015. This increase was due primarily to a $90,569 (28.9%) increase in sales of RENACIDIN. Because of two prior RENACIDIN production curtailments by the Company’s previous contract manufacturer, sales of RENACIDIN are still well below historical levels. However, during the past year the Company has seen a gradual increase in RENACIDIN sales. More importantly, in December 2015 the Company received approval by the U.S. Food and Drug Administration to market RENACIDIN in a new easy-to-use single-dose plastic 30mL bottle, which replaces the older 500mL glass bottle. The Company has initiated an aggressive marketing campaign to create awareness of the benefits of the new packaging form among urologists, pharmacists and patients. As a result, the Company anticipates that revenue from the sales of RENACIDIN in this new package form will steadily increase as more urologists and end users become aware of its many benefits. Sales of the new product began on March 31, 2016, at the same time as supplies of the older 500mL bottle were depleted. |
| (c) | Medical products: Sales of medical products increased by $151,290 (29.1%) for the first quarter of 2016 when compared with the same period in 2015. The Company believes that the increase was primarily due to the timing of orders, as well as the ordering patterns of many of its customers, which order large quantities of product but may not place the same number of orders in every fiscal quarter. |
| (d) | Industrial and other products: Sales of specialty industrial products, as well as other miscellaneous products, increased by $19,379 (83.5%) for the first quarter of 2016 compared with the same period in 2015. |
In addition to the above changes in sales, net sales allowances increased by $9,547 (16.3%) for the first quarter of 2016 when compared with the same period in 2015. This increase was primarily due to increases in chargebacks paid to the U.S. Department of Veterans Affairs, as well as allowances for distribution fees. These increases were offset by decreases in sales discounts and sales returns and allowances.
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Cost of Sales
Cost of sales as a percentage of sales increased to 39.7% for the first quarter of 2016, up from 38.4% for the first quarter in 2015. The increase was primarily the result of the change in the Company's product mix of sales. The increase in sales of RENACIDIN, which is manufactured for the Company by a third party manufacturer and has a lower margin than many of the Company’s other products, as well as a decrease in sales of the Company's higher-margin LUBRAJEL products, resulted in the higher cost of sales.
Operating Expenses
Operating expenses, consisting of selling, general, and administrative expenses, increased by $6,629 (1.4%) for the first quarter of 2016 compared with the first quarter of 2015. Operating expenses are expected to remain relatively consistent.
Research and Development Expenses
Research and development expenses increased by $11,258 (6.8%) for the first quarter of 2016 compared with the first quarter of 2015. The increase related to increases in payroll and payroll-related expenses due to normal fluctuations in new product development.
Other Income
Other income decreased by $10,142 (19.0%) for the first quarter of 2016 compared with the first quarter of 2015 due to the Company having realized a loss of $10,180 from the sale of marketable securities in the first quarter of 2016. The Company earns dividend income from both stock and bond mutual funds.
Provision for Income Taxes
The Company's effective income tax rate was approximately 31.0% for the first quarter of 2016 and 2015 and is expected to remain consistent for the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by $713,324 to $14,242,917 at March 31, 2016, up from $13,529,593 at December 31, 2015. The increase in working capital is primarily due to increases in marketable securities and accounts receivable. The current ratio decreased to 9.4 to 1 at March 31, 2016, down from 14.7 to 1 at December 31, 2015. The decrease in the current ratio was primarily due to the effect of an increase 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 does not expect to incur any significant capital expenditures for the remainder of 2016. |
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The Company generated cash from operations of $743,484 and $1,809,948 for the three months ended March 31, 2016 and March 31, 2015, respectively. The decrease was primarily due to the reduction in net income.
Cash used in investing activities for the three-month period ended March 31, 2016 was $562,665, while cash used in investing activities for the three-month period ended March 31, 2015 was $2,855,838. The decrease was primarily due to a decrease in the amount of marketable securities purchased in the first quarter of 2016 compared with the first quarter of 2015.
There was no cash used in financing activities for the first quarters of 2016 and 2015.
The Company expects to continue to use its cash to make dividend payments, purchase marketable securities, and take advantage of other market opportunities that are in the best interests of the Company and its shareholders, should they arise.
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. |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information to be reported under this item is not required of smaller reporting companies.
Item 4. CONTROLS AND PROCEDURES
| (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.
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| (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.
PART II - OTHER INFORMATION
None
The information to be reported under this item is not required of smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
None
None
| 31.1 | Certification of Kenneth H. Globus, President and Principal Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2 | Certification of Robert S. Rubinger, Chief Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 32 | Certifications of Principal Executive Officer and Chief Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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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.
| UNITED-GUARDIAN, INC. | ||
| (Registrant) | ||
| By: | /S/ KENNETH H. GLOBUS | |
| Kenneth H. Globus | ||
| President | ||
| By: | /S/ ROBERT S. RUBINGER | |
| Robert S. Rubinger | ||
| Date: May 12, 2016 | Chief Financial Officer | |
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