United-Guardian, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. The interim financial statements are unaudited. United-Guardian develops, manufactures, and markets cosmetic ingredients, pharmaceutical and medical products, and specialty industrial products.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $3.431 million | $3.323 million | Up 3% |
| Income from operations | $1.524 million | $1.311 million | Up 16% |
| Net income | $1.181 million | $790,307 | Up 49% |
| Basic and diluted EPS | $0.26 | $0.17 | Up $0.09 |
| Cash from operations | $990,206 | $1.287 million | Down 23% |
Gross margin was approximately 60% versus 58%; operating margin was approximately 44% versus 39%; net margin was approximately 34% versus 24%. Cost of sales fell to about 40% of revenue from 42%, while operating and R&D expenses also declined. The effective income tax rate was approximately 21% in both periods.
By product line, cosmetic ingredient sales decreased 4% to $1.631 million; pharmaceutical sales rose 10% to $1.143 million; medical product sales rose 14% to $616,026; and industrial and other sales decreased 3% to $40,938.
Liquidity, balance sheet, and cash flows
At March 31, 2021, cash and cash equivalents were $862,049 and marketable securities were $8.211 million. Current assets were $12.653 million, current liabilities were $1.571 million, and working capital was $11.082 million, up $1.250 million from year-end 2020. The current ratio was 8.1, compared with 8.0 at December 31, 2020. Total assets were $13.320 million and stockholders’ equity was $11.536 million. The balance sheet reports no debt.
Operating cash flow was $990,206; investing activities used $719,601, primarily for marketable-security purchases and $28,156 of capital expenditures. Cash increased $270,605 during the quarter. No financing cash flow was reported. The filing states there are no material commitments for future capital expenditures or immediate cash requirements.
Material changes and unusual items
- Revenue increased modestly, led by pharmaceutical and medical products, partly offset by lower cosmetic ingredient sales.
- Pharmaceutical net sales benefited from ending participation in the Medicaid Drug Rebate Program and the 340B Program effective December 31, 2020. Pharmaceutical allowances decreased $70,436, or 23%, year over year; other rebates, fees, chargebacks, and return allowances remain.
- The company recorded approximately $163,000 of Employee Retention Credits in Q1 2021: about $44,000 was applied to payroll taxes and approximately $119,000 was recorded in prepaid expenses and other current assets as due for refund. The credit contributed to lower payroll-related costs.
- The net loss on marketable securities was $72,047, versus $356,595 in Q1 2020; the 2021 loss was unrealized and attributed primarily to normal market fluctuations in fixed-income mutual funds.
- Accounts receivable increased to $1.904 million from $1.388 million at year-end, contributing to lower operating cash flow.
Outlook, commentary, and risks
Management said cosmetic ingredient sales improved from Q3 and Q4 2020 levels, though they were slightly below Q1 2020. It expects pandemic-related effects and competitive pressures may continue; management expressed hope for further improvement during 2021 if global conditions improve, but provided no quantified financial guidance. The company anticipated that excess inventory held by its marketing partner ASI would be reduced by the end of Q2 2021. Management said raw-material availability and production had not been adversely affected and expected adequate supply unless the pandemic worsened. It believes liquidity is sufficient for at least the next 12 months and does not expect the pandemic to impair asset values or liquidity.
Key risks include uncertain COVID-19 effects across international markets, lower-cost cosmetic ingredient competitors, currency movements, customer and distributor concentration, and reliance on trade secrets and proprietary manufacturing processes. Three distributors and one marketing partner accounted for 77% of Q1 2021 sales and 67% of quarter-end receivables. Approximately 22% of reported sales were to customers outside the United States. Management reported effective disclosure controls and no material changes in internal control over financial reporting. No legal proceedings were reported.
Important facts for investors to verify
- Whether cosmetic ingredient demand, especially in China, and ASI’s inventory position developed as management anticipated.
- Whether revenue and margins remain supported by pharmaceutical sales and the end of Medicaid and 340B program participation.
- Collection of the approximately $119,000 ERC refund and the effect of the credit on costs after Q1.
- Customer concentration, receivables growth, and subsequent operating cash-flow conversion.
- Marketable-security portfolio composition, valuation changes, and exposure to market fluctuations.