UNITED GUARDIAN INC 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.   Impact of the Coronavirus Pandemic   While the coronavirus pandemic (“pandemic”) continues to impact certain areas of the Company’s operations, the substantial impact the pandemic had on Company sales in 2020 significantly lessened in 2021. While the Company believes that sales of its cosmetic ingredients are still being negatively impacted, the sales situation has improved substantially, and the current impact is coming more from increased shipping costs and higher raw material costs, which may have some future impact on the Company’s profit margins in upcoming quarters. It has also experienced delays in shipping orders due to a shortage of truck drivers and trucks, and limited availability of shipping vessels. The shortage of truck drivers and shipping vessels is expected to continue in 2022 but improve as the year progresses. The Company has been able to minimize the impact on customers by making them aware of longer lead times that may be necessary as a result of these issues.   16   UNITED-GUARDIAN, INC.   Sales of the Company’s non-pharmaceutical medical products (“medical products”) had also been negatively impacted by the pandemic in 2020, but those impacts have lessened as well in 2021. Sales of the Company’s pharmaceutical products were not impacted by the pandemic in 2020 or in 2021.   The pandemic has not significantly affected the ability of the Company to obtain raw materials, but it has made some of those materials more expensive, which could impact the Company’s gross profit margins in the future. The Company has been able to maintain production throughout the pandemic.   There continues to be uncertainty regarding the future impact of the pandemic on the Company’s operations or financial results. While the impact on the Company’s’ sales lessened considerably in 2021, the Company is still unable to provide an accurate estimate or projection as to what the future impact of the pandemic will be on the Company’s future operations or financial results. The Company does not expect the carrying value of its assets or its liquidity to be impaired by the pandemic.   Another result of the pandemic has been a significant increase in inflation during 2021. While it is unknown whether inflation will continue to increase or will begin to decrease during 2022, continued inflation is likely to result in further increases in raw material costs, shipping costs, and internal labor costs, which could impact the Company’s future profit margins.   Critical Accounting Policies   The Company’s financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“US GAAP”). Preparation of financial statements requires the Company to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. The Company uses its historical experience and other relevant factors when developing its estimates and assumptions, which are continually evaluated. Note A, Nature of Business and Summary of Significant Accounting Policies, of the Notes to Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report includes a discussion of the Company’s significant accounting policies. The following accounting policies are those that the Company considers critical to an understanding of the financial statements because their application places the most significant demands on the Company’s judgment. The Company’s financial results might have been different if other assumptions had been used or other conditions had prevailed.   Marketable Securities   The Company’s marketable securities include investments in equity and fixed income mutual funds. The Company’s marketable equity securities are reported at fair value with the related unrealized and realized gains and losses included in net income. 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 Company records an impairment charge to the extent that the cost of the available-for-sale securities exceeds the estimated fair value of the securities and the decline in value is determined to be other-than-temporary. During 2021 and 2020, the Company did not record an impairment charge regarding its investment in marketable securities because management believes, based on its evaluation of the circumstances, that the decline in fair value below the cost of certain of the Company’s marketable securities is temporary.   17   UNITED-GUARDIAN, INC.   Revenue Recognition   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.   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 current participation in Medicare programs and its past participation in Medicaid 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. All references to “sales” or “Sales” shall mean “net sales” unless specifically identified as “gross sales.”   During 2021 and 2020, 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. In addition, during 2020, the Company also participated in the Medicaid Drug Rebate Program (MDRP), which required the Company to pay a significant rebate to the various states where Renacidin was provided to Medicaid patients, as well as the Section 340B Drug Pricing Program (340B), which required the Company to sell their product at a deeply discounted price. Due to the overly burdensome nature of these Medicaid rebates on the Company, and the deeply discounted pricing associated with the 340B Program, the Company terminated its participation in the MDRP and the 340B Programs, effective December 31, 2020. The Company has continued to participate in the other government discount and rebate programs, specifically the Veterans Affairs FSS Program and the Medicare Part D Coverage Gap Program (CGDP). The Company’s sales, as reported, are net of these rebates, some of which are estimated and are recorded in the same period that the revenue is recognized.   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 products 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 is too close to its expiration date for the customer to sell; or (d) the product is expired but is not more than one year after its expiration date. These return policies are in conformance with 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 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.   18   UNITED-GUARDIAN, INC.   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.   The timing between recognition of revenue for product sales and the receipt of payment is not significant. During 2020, the Company experienced minor delays in receiving payments from certain customers that were impacted by the pandemic; however, the negative impact of those delayed payments was not significant. The Company’s standard credit terms, which vary depending on the customer, range between 30 and 60 days. The Company uses its judgment on a case-by-case basis to determine its ability to collect outstanding receivables and provides allowances for any receivables for which collection has become doubtful. As of December 31, 2021 and December 31, 2020, the allowance for doubtful accounts receivable was $20,252 and $14,017, respectively. Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded when they are taken.   The Company has distribution agreements with certain distributors of its pharmaceutical products that entitle those distributors to distribution and services-related fees. The Company records distribution fees, and estimates of distribution fees, as offsets to revenue.   Accounts Receivable Allowance   The Company performs ongoing credit evaluations of the Company’s customers and adjusts credit limits, as determined by a review of current credit information. The Company continuously monitors collection and payments from customers and maintains an allowance for doubtful accounts based upon historical experience, the Company’s anticipation of uncollectible accounts receivable and any specific customer collection issues that have been identified. While the Company’s credit losses have historically been low and within expectations, the Company may not continue to experience the same credit loss rates that have historically been attained. The receivables are highly concentrated in a relatively small number of customers. Therefore, a significant change in the liquidity, financial position, or willingness to pay timely, or at all, of any one of the Company’s significant customers would have a significant impact on the Company’s results of operations and cash flows. As mentioned above, the Company has not experienced significant issues with the collection of its accounts receivable balances due to the COVID-19 pandemic.   Inventory Valuation Allowance   In conjunction with the Company’s ongoing analysis of inventory valuation, management constantly monitors projected demand on a product-by-product basis. Based on these projections, management evaluates the levels of write-downs required for inventory on hand and inventory on order from contract manufacturers. Although the Company believes that it has been reasonably successful in identifying write-downs in a timely manner, sudden changes in buying patterns from customers, either due to a shift in product interest and/or a complete pull back from their expected order levels, may result in the recognition of larger-than-anticipated write-downs. The Company has performed an evaluation of its inventory on hand as of the date of this report and believes the reserve is adequate to cover any slow-moving or obsolete inventory. The Company does not believe the value of its finished products, work in process or raw material inventories have been adversely affected by the coronavirus pandemic.           19   UNITED-GUARDIAN, INC.   Results of Operations   Year ended December 31, 2021 compared with the year ended December 31, 2020:   Sales   Sales increased 27% from $10,986,081 in 2020 to $13,929,629 in 2021. The increase was due primarily to increases in sales of the Company’s cosmetic products and non-pharmaceutical medical products as global economies began recovering from the coronavirus pandemic during 2021.   The increase in sales was the result of the following specific changes in sales in the different product categories:     (a) Cosmetic Ingredients :   Sales of the Company's cosmetic ingredients increased by 61% from $4,274,586 in 2020 to $6,872,714 in 2021. The increase was attributable primarily to an increase in sales of the Company’s Lubrajel line of products to ASI, the Company’s largest marketing partner, whose purchases increased by 74% in 2021. Aggregate sales to the Company’s four other marketing partners increased by 22% from $992,951 in 2020 to $1,210,046 in 2021. That increase was primarily attributable to Company’s marketing partner in the United Kingdom (“UK”), whose sales increased by 42%, from $445,402 in 2020 to $631,589 in 2021. These increases were offset by a small decrease in sales of the Company’s cosmetic ingredients to four other direct customers of the Company.   The Company believes that the increase in sales of the Company’s cosmetic ingredients to ASI was the result of global pandemic conditions improving. However, until the global crisis passes it is likely that there will continue to be a negative impact on the Company’s sales of its cosmetic ingredients, as well as, to a lesser extent, its non-pharmaceutical medical products.   Although a significant percentage of ASI’s purchases from the Company are sold to foreign customers, all sales to ASI are considered U.S. sales for financial reporting purposes, since all shipments to ASI are shipped to ASI’s warehouses in the U.S. A certain percentage of those products are subsequently shipped by ASI to its foreign customers. Based on sales information provided to the Company by ASI, 74% of ASI’s sales in 2021 were to customers in foreign countries, compared to 68% in 2020. ASI’s largest foreign market in both 2021 and 2020 was China, which accounted for approximately 41% of ASI’s sales in 2021 and 34% of sales in 2020.   There continues to be global competition from Asian and European competitors selling products that are competitive with those sold by the Company and which are marketed at lower prices than those produced by the Company. The strengthening of the U.S. dollar relative to the Euro in the second half of 2021 made the Company’s products a little less competitive than they had been in the first half of 2021, when the dollar had been weaker relative to the Euro. The Company continues to work closely with its marketing partners to price its products as competitively as possible and, when appropriate, to offer additional volume discounts and more aggressive pricing in order to maintain and increase sales and bring in new customers. However, the Company expects the European market to remain very competitive based on the continuing competition from lower-cost competitors, and for that reason it is concentrating its R&D efforts on developing new and unique products that these other companies do not have. The Company expects to introduce several such products during 2022.     (b) Pharmaceuticals :   Because there are fees, rebates, and allowances associated with sales of the Company’s two pharmaceutical products, Renacidin and Clorpactin, discussion of the Company’s pharmaceutical sales includes references to both gross sales (before fees, rebates and allowances) and net sales (after fees, rebates and allowances). Gross sales of the Company’s two pharmaceutical products, Renacidin and Clorpactin, together decreased by 4%, from $5,959,705 in 2020 to $5,748,244 in 2021. Gross sales of Renacidin decreased by 6%, from $5,347,827 in 2020 to $5,041,460 in 2021, while gross sales of Clorpactin increased by 16% from $611,878 in 2020 to $706,784 in 2021. The decrease in Renacidin sales was primarily due the Company terminating its participation in the Medicaid Drug Rebate Program on December 31, 2020.   20   UNITED-GUARDIAN, INC.   The decrease in gross sales was partially offset by a decrease in pharmaceutical related fees, rebates and allowances of $427,733 (30%). The decreases in these fees, rebates and allowances were primarily the result of the Company’s termination of its participation in the Medicaid Drug Rebate Program at the end of 2020. Due to the overly burdensome nature of the Medicaid rebates that the Company had to pay under this program, the Company determined that it was no longer profitable for the Company to continue to participate. Accordingly, on October 30, 2020 the Company informed the Centers for Medicare & Medicaid Services (CMS) of its intention to terminate its Medicaid Drug Rebate Agreement and its participation in the Medicaid Program, effective December 31, 2020. As the Company had anticipated, the discontinuation of its participation in this program resulted in the loss of some Renacidin sales, but that loss was more than offset by the elimination of the rebate payments, which resulted in an increase in gross profit from Renacidin sales. Although the Company will no longer be incurring Medicaid-related rebate costs, it will continue to incur costs related to other allowances, including Medicare rebates, distribution fees, chargebacks on VA sales, and outdated material returns.     (c) Medical (non-pharmaceutical) products :   Sales of the Company’s medical products increased by 6%, from $2,052,961 in 2020 to $2,171,204 in 2021. Despite losing one of its major medical product customers in 2020, medical product sales rebounded in 2021 with increases in orders from two of the Company’s larger medical customers located in China and India. The Company believes that the increases in those orders were due to improving economic conditions in those countries.     (d) Industrial and other products:   Sales of the Company's industrial products, as well as other miscellaneous products, increased by 8%, from $139,482 in 2020 to $150,387 in 2021. The increase was primarily due to an increase in sales to two of the Company’s industrial product customers, which are located in areas whose operations had been negatively impacted by the Coronavirus pandemic, resulting in a decrease in their orders in 2020.             Gross Profit on Sales   Gross profit on sales was 59% in 2021 compared with 56% in 2020. The increase in gross profit was due to two main factors: 1) increased sales of the Company’s Lubrajel line of products in 2021, which carry a higher profit margin than the Company’s pharmaceutical products, and 2) the significant reduction in sales allowances related to the Company’s pharmaceutical products in 2021 helped to increase the gross profit on those products in 2021 compared with 2020.   Operating Expenses   Operating expenses increased from $2,026,368 in 2020 to $2,035,970 in 2021. The increase was mainly attributable to an increase in consulting and professional fees. The Company anticipates that operating expenses will remain relatively consistent for 2022.   21   UNITED-GUARDIAN, INC.   Research and Development Expenses   Research and development expenses increased from $451,208 in 2020 to $478,642 in 2021. The increase was primarily related to an increase in payroll and payroll related expenses.   Investment Income   Investment income increased from $226,245 in 2020 to $233,857 in 2021. The increase was due to an increase in dividend income from both stock and bond mutual funds. In early 2020, the Company began to shift its investment strategy from lower-yielding U.S. Treasury Bills towards short and intermediate-term bond funds that were yielding higher returns.   Net (loss) gain on Marketable Securities   The net (loss) gain on marketable securities decreased from a net gain of $298,585 in 2020 to a net loss of $23,018 in 2021. The decrease was primarily due to the Company recognizing higher realized gains on sales of mutual funds in 2020, which totaled $415,595, compared to the realized gains on sales of mutual funds in 2021 of $111,917.   Provision for Income Taxes   The provision for income taxes increased from $856,022 in 2020 to $1,219,383 in 2021. This increase was due to an increase in income before taxes. The Company’s effective income tax rate was 20.7% in 2021 and 20.6% in 2020.   Liquidity and Capital Resources   Working capital decreased from $9,832,326 at December 31, 2020 to $9,245,629 at December 31, 2021. The current ratio decreased from 8.0 to 1 at December 31, 2020 to 5.0 to 1 at December 31, 2021. The decrease in working capital was mainly due to an increase in dividends paid during 2021, combined with increases in accounts payable, accrued expenses and deferred revenue.   Accounts receivable (net of allowance for doubtful accounts) as of December 31, 2021 increased from $1,387,698 in 2020 to $1,813,346 in 2021. The increase in accounts receivable was due to the increase in sales the Company experienced during 2021 due to global economies recovering from the coronavirus pandemic, especially in the fourth quarter of 2021. The receivables turnover, or “Days Sales Outstanding”, for 2021, was 42 days, compared with 58 days in 2020. The decrease was indicative of the improvement in customers’ ability to more efficiently process payments as economies recovered from the pandemic during 2021. During 2020, the Company experienced minor delays in receiving payments from some customers. The Company’s allowance for doubtful accounts receivable increased from $14,017 in 2020 to $20,252 in 2021, and the Company believes that the net balance of its accounts receivable as of December 31, 2021 was, and continues to be, fully collectible.   The Company generated cash from operations of $5,313,277 in 2021 compared with $3,594,240 in 2020. The increase in 2021 was primarily due to an increase in net income in 2021 compared with 2020, combined with an increase in accounts payable, accrued expenses and deferred revenue.   Net cash used in investing activities was $468,676 for the year ended December 31, 2020 compared with $183,475 for the year ended December 31, 2021. This decrease in net cash used in investing activities was mainly due to decreased purchases of marketable securities during 2021.   22   UNITED-GUARDIAN, INC.   Net cash used in financing activities was $5,190,033 and $3,582,481 during the years ended December 31, 2021 and 2020, respectively. The increase was due to the payment of higher dividends in 2021 compared with 2020.   The Company believes that its working capital is sufficient to support its operating requirements for the next fiscal year. The Company's long-term liquidity position will be dependent upon its ability to generate sufficient cash flow from profitable operations.   The Company has no material commitments for future capital expenditures and no material cash requirements of immediate concern.   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.   New Accounting Pronouncements   See Note "A" to the financial statements regarding new accounting pronouncements, which note is incorporated herein by reference.   Item   7A. Quantitative and Qualitative Disclosures about Market Risk.   The information to be reported under this item is not required of smaller reporting companies.   Item 8. Financial Statements and Supplementary Data.   Annexed hereto starting on page F-1.   Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.   None.