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UG > SEC Filings for UG > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for UNITED GUARDIAN INC


10-May-2013

Quarterly Report


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; 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 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 United States Department of Veterans Affairs.

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The Company's pharmaceutical products are distributed primarily in the United States. Its 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 one-half 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'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, 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.

CRITICAL ACCOUNTING POLICIES

As disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, 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, patents, and income taxes. Since December 31, 2012, 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, 2012, and a comparison of the results of operations for the three months ended March 31, 2013 and March 31, 2012. 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, 2012.

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RESULTS OF OPERATIONS

Sales

Net sales for the first quarter of 2013 increased by $63,469 (1.6%) as compared with the first quarter of 2012. The change in net sales for the three-month period ended March 31, 2013 was primarily attributable to sales of the Company's products, as discussed below.

(a) Personal care products: For the first quarter of 2013 the Company's gross sales of personal care products increased by $367,765 (14.1%) when compared with the same period in 2012. This increase was mainly due to an increase of $299,866 (13.4%) in sales to the Company's largest marketing partner for the first quarter of 2013 when compared with the same period in 2012. The Company believes that the overall increase in personal care product sales was due to a number of factors, including an increase in demand for the Company's products, the replenishment of low inventory levels of certain products by the Company's largest marketing partner, and the timing of customer orders.

(b) Pharmaceuticals: Gross sales of pharmaceuticals decreased by $570,698 (84.0%) in the first quarter of 2013 compared with the same period in 2012. The decrease was due to the absence of any sales of RENACIDIN in the first quarter of 2013, as compared with normal sales of that product in the first quarter of 2012. The Company has been unable to replenish its RENACIDIN inventory due to production issues encountered by the Company's sole supplier. The Company's inventory of RENACIDIN was depleted in July 2012, and there have been no sales of that product since that time. The Company's supplier is paying the Company approximately $98,000 for each month that the product is not available, which the Company believes covers most of its lost profits each month. This will continue until either production resumes or the contract with the supplier ends on January 20, 2014, whichever comes first.

The Company is currently working with a new supplier that will manufacture the product in a new single-dose unit, which may increase the Company's revenue from this product in future years. The Company is hopeful that production with the current supplier will resume before the contract ends, and that it will be able to bring in sufficient additional inventory to last until the new supplier is approved by the U.S. Food and Drug Administration, which the Company hopes will happen by the end of 2014.

(c) Medical products: Gross sales of the Company's medical products increased by $211,016 (32.1%) for the first quarter of 2013 when compared with the same period in 2012. The Company believes the increase was primarily due to the timing of customer orders.

(d) Industrial and other products: Sales of the Company's specialty industrial products, as well as other miscellaneous products, increased by $21,255 (98.3%) for the first quarter of 2013 compared with the same period in 2012.

In addition to the above changes in sales, net sales allowances decreased by $34,132 (40.7%) for the first quarter of 2013 when compared with the same period in 2012. This decrease was primarily due to a decrease in chargebacks paid to the U.S. Department of Veterans Affairs, a reduction in pharmaceutical sales rebates to state Medicaid agencies, and lower distribution fees due to the lack of RENACIDIN sales.

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Cost of Sales

Cost of sales as a percentage of sales decreased to 35.7% for the first quarter of 2013 from 39.6% for the first quarter in 2012. The decrease was primarily the result of the change in the Company's product mix due to the absence of RENACIDIN sales in 2013 and a proportionate increase in sales of the Company's higher-margin LUBRAJEL products.

Operating Expenses

Operating expenses consist of selling, general, and administrative expenses. Operating expenses decreased $41,295 (6.8%) for the first quarter of 2013 compared with the first quarter of 2012. This decrease was mainly due to a decrease in insurance costs.

Other Income

Other income increased by $274,671 (380%) for the first quarter 2013 compared with the first quarter of 2012. The increase was mainly attributable to $292,830 that was paid to the Company in the first quarter of 2013 by its RENACIDIN supplier in connection with the supplier's curtailment of RENACIDIN production (see "Pharmaceuticals" above). The Company entered into an agreement with its RENACIDIN supplier whereby the supplier agreed to pay the Company $97,610 per month until either production resumes or the supply agreement ends on January 20, 2014, whichever comes first. Production is not expected to resume until the third quarter of 2013. For more information see the Company's Annual Report on Form 10-K for 2012.

The Company earns interest income from money market funds and bonds, and dividend income from both stock and bond mutual funds. The increase in Other income attributable to the RENACIDIN settlement in the first quarter of 2013 was partially offset by a decrease of $15,409 (22.1%) in investment income. This decrease was primarily due to the Company selling some of its marketable securities to pay for the December 2012 dividend paid by the Company. Other income was also lower by $2,750 in the first quarter of 2013 compared with the first quarter of 2012 due to a gain on sale of assets that took place in the first quarter of 2012 that did not recur in the first quarter of 2013.

Provision for Income Taxes

The provision for income taxes increased by $172,100 (29.2%) for the first quarter of 2013 when compared with the same period in 2012. This increase is mainly due to an increase in net income from operations before taxes of $508,119 (27.9%) in 2013 when compared with 2012.

The Company's effective income tax rate was approximately 33.0% for the first quarter of 2013 and 2012, and is expected to remain consistent for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital increased by $1,613,330 to $13,409,225 at March 31, 2013 from $11,795,895 at December 31, 2012. The increase in working capital is primarily due to an increase in marketable securities and accounts receivable, partially offset by an increase in taxes payable. The current ratio decreased to 9 to 1 at March 31, 2013 from 15 to 1 at December 31, 2012. The decrease in the current ratio was primarily due to the effect of an increase in income taxes payable.

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During the three-month period ended March 31, 2013, the average period of time that an account receivable was outstanding was approximately 34 days. The average period of time that an account receivable was outstanding during the three-month period ended March 31, 2012 was 37 days. The decrease was mainly due to customers paying on a more timely basis.

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 2013.

The Company generated cash from operations of $2,063,888 and $2,054,436 for the three months ended March 31, 2013 and March 31, 2012, respectively. The increase in cash was primarily due to decreases in the receivable from the RENACIDIN damage settlement and in inventory.

Cash used in investing activities for the three-month period ended March 31, 2013 was $1,783,158, while cash used in investing activities for the three-month period ending March 31, 2012 was $1,563,222. This increase was primarily due to an increase in the amount of marketable securities purchased in the first quarter of 2013 compared with the first quarter of 2012.

There was no cash used in financing activities for the first quarters of 2013 and 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 interests of the Company, should they arise.

RECENT ACCOUNTING PRONOUNCEMENTS

Please see Note 4 to the Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the financial statements.

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.

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