UNITED GUARDIAN INC [UG] Filings

United-Guardian, Inc. (“Registrant” or “Company”) is a Delaware corporation that, through its Guardian Laboratories division, manufactures and markets cosmetic ingredients, pharmaceutical products, medical lubricants, and sexual wellness ingredients. Prior to July 1, 2023, the Company manufactured and reported sales of a line of specialty industrial products; however, this product line was discontinued after the second quarter of 2023 due to low sales volume with no growth prospects. The Company conducts research and product development leading to the commercialization of new premium ingredients for the cosmetic and healthcare markets. The Company’s research and development department also modifies, refines, and expands the uses for existing products, with the goal of further developing the market for its products. The Company is developing new products using natural and environmentally friendly raw materials, which is a priority for many of the Company’s cosmetic customers.

Interim condensed financial statements of the Company are prepared in accordance with generally accepted accounting principles in the United States of America (“US 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 considered necessary for the fair presentation of financial statements for the interim periods have been included. The results of operations for the three and nine months ended September 30, 2024 (also referred to as the "third quarter of 2024" and the "first nine months of 2024," respectively) are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2024. The interim unaudited condensed financial statements and notes thereto should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

The continued supply chain instability, primarily caused by military conflicts in the Middle East, has impacted vessels’ access to the Red Sea and Suez Canal. The Company is working closely with its suppliers regarding lead times and continues to closely monitor this situation. Although the Company has not experienced any delays in receiving raw materials or a substantial increase in shipping costs, the Company is aware that the situation is fluid and could impact the Company at any time. If that occurs, we may experience longer lead times and increased shipping costs for some of the Company’s raw materials, which may impact the Company’s future gross margins. The Company is also continuing to monitor any potential supply chain disruptions caused by the severe weather events that have impacted the southern United States.

As a result of the global supply chain instability and higher interest rates, there continues to be uncertainty regarding the potential impact on the Company’s operations and financial results and we are unable to provide an accurate estimate or projection as to what the future impact will be.

In preparing financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. Actual results could differ from those estimates. Such estimated items include the reserve for credit losses, reserve for inventory obsolescence, accrued distribution fees, outdated material returns, possible impairment of marketable securities, and the allocation of overhead.

For financial statement purposes, the Company considers as cash equivalents all highly liquid investments with an original maturity of three months or less at the time of purchase. The Company deposits cash and cash equivalents with financially strong, FDIC-insured financial institutions, and it believes that any amounts above FDIC insurance limitations are at minimal risk. The amounts held in excess of FDIC limits at any point in time are considered temporary and are primarily due to the timing of maturities of United States (“U.S.”) Treasury Bills. Cash and cash equivalents held in these accounts are currently insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At September 30, 2024 and December 31, 2023, $880,000 and $315,000, respectively, exceeded the FDIC limit.

Cash and cash equivalents include currency on hand, demand deposits with banks or financial institutions, and short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. The following table summarizes the Company's cash and cash equivalents:

As of January 1, 2023, the Company adopted FASB Accounting Standards Update (“ASU”) No. 2016-13, Measurement of Credit Losses on Financial Instruments, and all subsequently issued related amendments, which changed the methodology used to recognize impairment of the Company’s contract receivables. Under this ASU, financial assets are presented at the net amount expected to be collected, requiring immediate recognition of estimated credit losses expected to occur over the asset’s remaining life. This is in contrast to previous US GAAP, under which credit losses were not recognized until it was probable that a loss had been incurred. The Company performed its expected credit loss calculation based on historical accounts receivable write-offs, including consideration of then-existing economic conditions and expected future conditions. The adoption of this ASU did not have a significant impact on the financial statements. Prior to the implementation of ASU No. 2016-13, the Company calculated its reserve for accounts receivable by considering many factors including historical data, experience, customer types, credit worthiness and economic trends.

The carrying amount of accounts receivable is reduced by an allowance for credit losses that reflects the Company’s best estimate of the amounts that will not be collected as of the balance sheet date. This allowance is based on the credit losses expected to arise over the life of the asset and is based on the Current Expected Credit Losses (“CECL”). At September 30, 2024, and December 31, 2023, the allowance for credit losses related to accounts receivable amounted to $19,174 and $16,672, respectively.

The Company records revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” Under this guidance, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration expected to be received in exchange for those goods or services. The Company’s principal source of revenue is product sales.

As long as a valid purchase order has been received and future collection of the sale amount is reasonably assured, the Company recognizes revenue from sales of its products when those products are shipped, which is when the Company’s performance obligation is satisfied. The Company’s cosmetic ingredients are shipped “Ex-Works” from the Company’s facility in Hauppauge, NY, and the risk of loss and responsibility for the shipment passes to the customer upon shipment. Sales of the Company’s non-pharmaceutical medical products are deemed final upon shipment, and there is no obligation on the part of the Company to repurchase or allow the return of these goods unless they are defective. Sales of the Company’s pharmaceutical products are final upon shipment unless (a) they are found to be defective; (b) the product is damaged in shipping; (c) the product cannot be sold because it is too close to its expiration date; or (d) the product has expired (but it is not more than one year after the expiration date). This return policy conforms to standard pharmaceutical industry practice. The Company estimates an allowance for outdated material returns based on previous years’ historical returns of its pharmaceutical products.

The Company’s sales, as reported, are subject to a variety of deductions, some of which are estimated. These deductions are recorded in the same period in which the revenue is recognized. Such deductions, primarily related to the sale of the Company’s pharmaceutical products, include chargebacks from the United States Department of Veterans Affairs (‘VA”), rebates in connection with the Company’s participation in Medicare programs, distribution fees, discounts, and outdated product returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on sales for a reporting period.

During 2024 and 2023, the Company participated in various government drug rebate programs related to the sale of Renacidin^®, its most important pharmaceutical product. These programs include the Veterans Affairs Federal Supply Schedule (FSS), and the Medicare Part D Coverage Gap Discount Program (CGDP). These programs require the Company to sell its product at a discounted price. The Company’s sales, as reported, are net of these product rebates and discounts, some of which are estimated, and are recorded in the same period that the revenue is recognized.

In August of 2022, the Inflation Reduction Act (“IRA”) was signed into law. The IRA made significant changes to the current Medicare Part D benefit design as it relates to discounts available to enrollees from pharmaceutical manufacturers of brand name drugs. Beginning on January 1, 2025, the Centers for Medicare & Medicaid Services (“CMS”) will implement a new Medicare Part D Manufacturer Discount Program (“discount program”), which will replace the current CGDP. The new discount program eliminates the coverage gap benefit phase, introduces pharmaceutical manufacturer discounts in the initial and catastrophic coverage phases and lowers the cap on enrollee out-of-pocket costs. Under the new discount program, additional rebates are expected to be owed by pharmaceutical manufacturers due to the restructuring of the benefit periods. The overall financial impact of this new program will vary depending on the products being reimbursed but does have the potential to increase Medicare Part D rebates for drug manufacturers. At this time, the Company is unable to predict what future impact this new program will have on its financial condition; however, on January 31, 2024, the Company was notified by CMS that it qualified as a “specified small manufacturer” and will be entitled to a multi-year phase-in period during which it will pay a lower percentage discount on drugs dispensed to beneficiaries.

The Company does not make sales on consignment, and the collection of the proceeds of the sale of any of the Company’s products is not contingent upon the customer being able to sell the goods to a third party.

Any allowances for returns are taken as a reduction of sales within the same period the revenue is recognized. Such allowances are determined based on historical experience under ASC Topic 606-10-32-8. The Company has not experienced significant fluctuations between estimated allowances and actual activity. At September 30, 2024 and December 31, 2023, the Company had an allowance of $271,916 and $247,847, respectively, for possible outdated material returns, which is included in accrued expenses. There is no value associated with these outdated material returns, as these products are destroyed.

The Company has distribution fee contracts with certain distributors of its pharmaceutical products that entitle them to distribution and service-related fees. The Company estimates distribution fees and records distribution fees as offsets to revenue.

Disaggregated sales by product class are as follows:

^{(1) This product line was discontinued as of July 1, 2023.}

The Company’s cosmetic ingredients are marketed worldwide by five distributors, of which U.S.-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. Approximately 20% of the Company’s total sales in the third quarter of 2024 were to customers located outside of the United States, compared with approximately 26% in the third quarter of 2023. For the nine months ended September 30, 2024, approximately 17% of the Company’s total sales were to customers located outside of the United States, compared with approximately 24% for the nine months ended September 30, 2023.

Disaggregated sales by geographic region are as follows:

* Substantially all purchases by ASI are shipped to ASI’s warehouses in the U.S. As a result, all sales to ASI are reported as U.S. sales for financial reporting purposes, even though a significant quantity of those purchases will be shipped by ASI to foreign customers. ASI has reported to the Company that approximately 74% of its sales of the Company’s products in the third quarter of 2024 were to foreign customers compared with 71% for the same period in 2023, with China representing approximately 35% of those foreign sales in the third quarter of 2024, compared with approximately 23% in the third quarter of 2023.

For the nine months ended September 30, 2024 approximately 81% of ASI’s sales of the Company’s products were to foreign customers, with China accounting for approximately 46% of ASI’s sales of the Company’s products, as compared with approximately 69% of ASI’s sales going to customers in other countries for the nine months ended September 30, 2023, with China accounting for approximately 27% of ASI’s sales of the Company’s products during that period.

The Company recognizes an allowance for credit losses for its trade receivables to present the net amount expected to be collected as of the balance sheet date. This allowance is based on the credit losses expected to arise over the life of the asset and are based on Current Expected Credit Losses (CECL).

The timing between recognition of revenue for product sales and the receipt of payment is not significant. The Company’s standard credit terms, which vary depending on the customer, range between 30 and 60 days. The Company provides allowances for any receivables for which collection is doubtful in accordance with ASU 2016-13. As of September 30, 2024 and December 31, 2023, the allowance for credit losses on accounts receivable was $19,174 and $16,672, respectively. Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded only after they have been taken.

The Company’s marketable securities include investments in equity mutual funds and Certificates of Deposit with maturities longer than three months. The Company’s marketable equity securities are reported at fair value with the related unrealized and realized gains and losses included in net income. Certificates of Deposit and U.S. Treasury Bills are recorded at amortized cost. Realized gains or losses on mutual funds are determined on a specific identification basis. The Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and extent to which fair value had been below cost basis, the financial condition of the issuer and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery of market value.

The disaggregated net gains and losses on the marketable securities recognized in the income statements for the three and nine months ended September 30, 2024 and 2023, respectively, are as follows:

The fair values of the Company’s marketable securities are determined in accordance with US 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 at the measurement date. 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 US 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 instrument.

•    Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s marketable equity securities, which are considered available for sale securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs using quoted prices (unadjusted) for identical assets in active markets. The Company’s fixed income Certificates of Deposit and U.S. Treasury Bills are considered held-to-maturity securities and are valued at amortized cost.

The following tables summarize the Company’s investments:

September 30, 2024(Unaudited)   

December 31, 2023(Audited)

Investment income is recognized when earned and consists principally of dividend income from equity mutual funds and interest income from U.S. Treasury Bills, Certificates of Deposit and money market funds. Realized gains and losses on sales of investments are determined on a specific identification basis.

Proceeds from the sale and redemption of marketable securities amounted to $1,065,000 for the nine months ended September 30, 2024 and there were no realized gains or losses. Proceeds from the sale and redemption of marketable securities amounted to $5,255,145 for the nine months ended September 30, 2023, which included realized losses of $433,769.

Inventories are valued at the lower of cost and net realizable value. Net realizable value is equal to the selling price less the estimated costs of selling and/or disposing of the product. Cost is determined using the average cost method, which approximates cost determined by the first-in, first-out (“FIFO”) method. Finished product inventories at September 30, 2024 and December 31, 2023 are stated net of a reserve of $25,000 and $47,000, respectively, for slow moving and obsolete inventory.

The Company’s tax provision is based on its estimated annual effective tax rate. The Company continues to fully recognize its tax benefits, and as of September 30, 2024 and December 31, 2023, the Company did not have any unrecognized tax benefits. The Company’s provision for income taxes for the three and nine months ended September 30, 2024 and 2023 includes the following:

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 immediately.

The Company also makes discretionary contributions to each employee's account based on a "pay-to-pay" safe-harbor formula that qualifies the 401(k) Plan under current IRS regulations. Employees become vested in the discretionary contributions as follows: 20% after two years of employment, and 20% for each year of employment thereafter until the employee becomes fully vested after six years of employment.

The Company accrued $81,750 and $109,000 in contributions to the DC Plan at September 30, 2024 and December 31, 2023, respectively. In the first nine months of 2024 and 2023, the Company made discretionary contributions of $109,000 and $ 94,326, respectively, to the DC Plan. These payments represented the Company’s 2023 and 2022 accrued discretionary contributions.

For the nine-month period ended September 30, 2024, the Company made payments of $20,000 to Ken Globus, the Company’s former President, for consulting services provided to the Company. There were no payments made to Mr. Globus during the three-month period ended September 30, 2024. For the three- and nine-month periods ended September 30, 2023, the Company made payments of $30,000 and $90,000, respectively, to Mr. Globus for consulting services provided to the Company.

For the three- and nine-month periods ended September 30, 2024, the Company made payments of $4,000 and $14,750, respectively, to the accounting firm PKF O’Connor Davies (“PKF”) for accounting and tax services. For the three- and nine-month periods ended September 30, 2023, the Company made payments of $9,000 and $12,000, respectively, to PKF. Lawrence Maietta, a partner at PKF, is a director of the Company.

Accrued Expenses

Accrued expenses consist of the following:

In December 2023, the FASB issued ASU 2023-09 “Income Taxes- Improvements to Income Tax Disclosures”. This guidance enhances the transparency and decision usefulness of income tax disclosures. More specifically, the amendments relate to the income tax rate reconciliation and income taxes paid disclosures and require 1) consistent categories and greater disaggregation of information in the rate reconciliation and 2) income taxes paid disaggregated by jurisdiction. This guidance is effective for fiscal years beginning after December 31, 2024.

Customer concentration - Accounts receivable potentially exposes the Company to concentrations of credit risk. The Company monitors the amount of credit it allows each of its customers, using the customer’s prior payment history and its overall credit worthiness to determine how much credit to allow or whether credit should be given at all. It is the Company’s policy to discontinue shipments to any customer that is substantially past due on its payments. The Company sometimes requires payment in advance from customers whose payment record is questionable. As a result of its monitoring of the outstanding credit allowed for each customer, as well as the fact that the majority of the Company’s sales are to customers whose satisfactory credit and payment record has been established over a long period of time, the Company believes that its credit risk from accounts receivable is low.

For the three months ended September 30, 2024, one of the Company’s cosmetic ingredient distributors, and three of its pharmaceutical distributors, together accounted for 77% of the Company’s gross sales and 79% of its outstanding accounts receivable at September 30, 2024. During the three months ended September 30, 2023, the same cosmetic ingredient distributor and three pharmaceutical distributors together were responsible for 73% of the Company’s gross sales and 82% of its outstanding accounts receivable at September 30, 2023.

For the nine months ended September 30, 2024, one of the Company’s cosmetic ingredient distributors, and three of its pharmaceutical distributors, together accounted for 81% of the Company’s gross sales and 79% of its outstanding accounts receivable at September 30, 2024. During the nine months ended September 30, 2023, the same cosmetic ingredient distributor and three pharmaceutical distributors together were responsible for 73% of the Company’s gross sales and 82% of its outstanding accounts receivable at September 30, 2023.

Most of the principal raw materials used by the Company consist of common industrial organic and inorganic chemicals that are available in ample supply from numerous sources. However, there are some raw materials used by the Company that are not readily available or require longer lead times.

For the three months ended September 30, 2024, the Company had three major raw material suppliers that collectively accounted for approximately 88% of the raw material purchases made by the Company. For the three months ended September 30, 2023, the Company had four major raw material suppliers that collectively accounted for approximately 89% of the raw material purchases made by the Company.

For the nine months ended September 30, 2024 the Company had three major raw material suppliers that collectively accounted for approximately 82% of the raw material purchases made by the Company. During the first nine months of 2023, the Company had five major raw material suppliers that collectively accounted for approximately 92% of the raw material purchases made by the Company. In addition to the Company’s raw materials concentration, the Company utilizes one contract manufacturer for the production of its pharmaceutical product, Renacidin. Any disruption in this manufacturer’s operations could have a material impact on the Company’s revenue stream.

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.

Per share basic and diluted earnings were $0.19 and $0.14 for the three months ended September 30, 2024 and 2023, respectively, and $0.60 and $0.40 for the nine months ended September 30, 2024 and 2023, respectively.

On January 30, 2024, the Company’s Board of Directors declared a cash dividend of $0.25 per share, which was paid on February 20, 2024, to all holders of record as of February 12, 2024. Dividends totaling $1,148,468 were paid. The balance of $112 is payable to stockholders whose old Guardian Chemical shares have not yet been exchanged to United-Guardian, Inc. shares and are pending escheatment.

On July 10, 2024, the Company’s Board of Directors declared a cash dividend of $0.35 per share, which was paid on July 31, 2024, to all holders of record as of July 23, 2024. Dividends totaling $1,607,855 were paid and the balance of $156 is payable to stockholders whose old Guardian Chemical shares have not yet been exchanged to United-Guardian, Inc. shares and are pending escheatment.

On July 12, 2023, the Company’s Board of Directors declared a cash dividend of $0.10 per share, which was paid on August 2, 2023, to all holders of record as of July 26, 2023. Dividends totaling $459,387 were paid and the balance of $45 is payable to stockholders whose old Guardian Chemical shares have not yet been exchanged to United-Guardian, Inc. shares and are pending escheatment.

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