(UNAUDITED)
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 and other personal care products, pharmaceuticals, medical and health care products and proprietary specialty industrial products.
2. Basis of Presentation
Interim financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Regulation SX. 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 three- and six-month periods ended June 30, 2014 (also referred to as the "second quarter of 2014" and the "first half of 2014", respectively) are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2014. 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, 2013.
3.
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Stock-Based Compensation
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The Company maintains a stock-based compensation plan for its employees and directors, which is more fully described in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. The Company recognizes the fair value of all share-based payments to employees, including grants of employee stock options, as a compensation expense in the financial statement. As of June 30, 2014, the Company had no share-based awards outstanding and exercisable and did not grant any options during the second quarter of 2014 or for the first half of 2014.
4.
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Recent Accounting Pronouncements
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In December 2013, FASB issued ASU 2013-11, “Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This amendment requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward with exceptions. This amendment only applies to entities that have an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date. This update became effective for interim and annual reporting periods beginning after December 15, 2013. The update does not have a material impact on the Company’s results of operation and at the present time it does not apply to the Company.
In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” This standard effects any entity that uses the guidance of GAAP for entering into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. It requires that an entity should recognize revenue to depict the transfer or promised goods or services to customers in an amount that reflects the consideration the entity expects to receive for the exchange of goods or services. This amendment is effective for interim and annual reporting periods beginning after December 15, 2016.
In June 2014, FASB issued ASU 2014-11, “Transfers and Servicing: Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This standard aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with accounting for other typical repurchase agreements. These types of transactions will now be accounted for as secured borrowings. It eliminates sales accounting for repurchase-to-maturity and supersedes guidance for accounting transactions involving transfers of financial assets with contemporaneous repurchase financing agreements that leads to off balance sheet accounting. This update becomes effective for interim and annual reporting periods beginning after December 15, 2014. The update does not have a material impact on the Company’s results of operation and at the present time it does not apply to the Company.
5. 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:
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Level 1 -
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inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
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Level 2 -
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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.
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Level 3 -
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inputs to the valuation methodology are unobservable and significant to the fair value measurement.
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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:
June 30, 2014
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Cost
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Fair Value
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Available for sale
:
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Fixed income mutual funds
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$
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8,031,630
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$
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8,303,928
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$
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272,298
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Equity and other mutual funds
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614,618
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776,392
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161,774
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$
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8,646,248
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$
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9,080,320
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$
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434,072
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December 31, 2013
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Cost
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Fair Value
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Unrealized
Gain/(Loss)
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Available for Sale
:
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Corporate bonds (matures within 1 year)
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$
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203,920
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$
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200,053
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$
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(3,867
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)
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Fixed income mutual funds
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7,325,930
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7,425,687
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99,757
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Equity and other mutual funds
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1,131,147
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1,237,465
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106,318
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$
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8,660,997
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$
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8,863,205
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$
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202,208
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Proceeds from the sale and redemption of marketable securities amounted to $2,074,729 for the first half of 2014, which included realized losses of $15,603. Proceeds from the sale and redemption of marketable securities amounted to $1,719,983 for the first half of 2013, which included realized gains of $13,439.
Investment income consisted principally of unrealized and realized gains and losses, interest income from bonds and money market funds, and dividend income from bond funds and mutual funds.
Marketable securities include investments in equity mutual funds, government securities and corporate bonds which are classified as “available-for-sale” securities and are reported at their fair values. Unrealized gains and losses on “available-for-sale” securities are reported as accumulated other comprehensive income (loss) in stockholders’ equity, net of the related tax effects. Investment income is recognized when earned. Realized gains and losses on sales of investments are determined on a specific identification
basis.
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June 30,
2014
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December 31,
2013
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Inventories consist of the following:
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Raw materials and work in process
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$
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485,593
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$
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488,757
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Finished products
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1,243,362
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1,121,990
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$
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1,728,955
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$
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1,610,747
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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 product inventories at June 30, 2014 and December 31, 2013 are stated net of a reserve of $20,000 for slow-moving or obsolete inventory.
7.
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Supplemental Financial Statement Information
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For purposes of the Statements of Cash Flows, the Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents.
Cash payments for taxes were $1,367,089 and $1,305,474 for the first half of 2014 and 2013, respectively. No payments were made for interest during these periods.
The Company paid $2,206,291 ($0.48 per share) and $2,160,326 ($0.47 per share) in dividends for the first half of 2014 and 2013, respectively.
Research and development expenses amounted to $275,324 and $298,923 for the first half of 2014 and 2013, respectively, and $128,356 and $150,624 for the second quarters of 2014 and 2013, respectively. These costs are included in operating expenses.
The Company’s tax provision is based on its estimated annual effective rate. The Company continues to fully recognize its tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. As of June 30, 2014 and December 31, 2013, the Company did not have any unrecognized tax benefits.
The Company files consolidated Federal income tax returns in the U.S. with its inactive subsidiary, and separate income tax returns in New York State. The Company is subject to examination by the Internal Revenue Service and by the State of New York for years 2010 through 2013. In March 2014 the New York State Department of Taxation and Finance (“DTF”) commenced a routine examination of the Company’s income tax returns for years 2010 through 2012. The Company is in the early stages of the audit, and has provided the DTF with some preliminary information.
The Company's policy is to recognize interest and penalties in interest expense.
Accumulated other comprehensive income comprises unrealized gains and losses on marketable securities net of the related tax effect.
Changes in Accumulated Other
Comprehensive Income
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June 30, 2014
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June 30, 2013
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Beginning balance – net of tax
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$
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132,123
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$
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178,979
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Unrealized gain/(loss) on marketable securities
before reclassifications - net of tax
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166,929
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(134,619
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)
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Realized (loss)/gain on sale of securities
reclassified from accumulated other
comprehensive income
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(15,603
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)
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13,439
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Ending balance - net of tax
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$
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283,449
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$
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57,799
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10.
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Income from Damage Settlement
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In May 2012 the Company’s supplier of one its pharmaceutical products, RENACIDIN
®
IRRIGATION (“RENACIDIN”) curtailed production due to manufacturing issues. In January 2013 the Company and its supplier entered into a settlement agreement whereby the supplier agreed to pay the Company $518,050 for profit the Company lost during 2012 as a result of the curtailment, and an additional $97,610 a month beginning January 1, 2013 for each month that the curtailment continues. It also agreed to pay an additional $48,805 for the first two months after shipments resumed, and another $24,402 for the third month after production resumed, as ramp-up payments. The payments were to continue until either the supply contract ended in January 2014 or product delivery resumed, whichever occurred first. Because deliveries resumed at the end of October of 2013, the obligation to pay $97,610 per month ceased as of that time, and the supplier’s remaining obligation was to pay the ramp-up payments for the following three months. As of the end of the first quarter of 2014, all damage settlement payments had been made. As a result, the Company did not receive any damage settlement payments in the second quarter of 2014, as compared with the $292,830 it received in damage settlement payments in the second quarter of 2013. For the first half of 2014 the Company received $24,402 in damage settlement payments, as compared with $585,660 in the first half of 2013.
11.
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Defined Contribution Plan
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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. For the three and six months ended June 30, 2014 and 2013, the Company had accrued for contributions of $43,750 and $87,500, respectively, to the DC Plan. For the first half of 2014 and 2013, the Company did not make any discretionary contributions to the DC Plan.
12.
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Related-Party Transactions
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During the first half of 2014 and 2013, the Company paid to Bonamassa, Maietta and Cartelli, LLP $6,500 and $2,000, respectively, for accounting and tax services. Lawrence Maietta, a partner in Bonamassa, Maietta and Cartelli, LLP, is a director of the Company.
Accrued Expenses
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Bonuses
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$
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586,344
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$
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250,000
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401K plan contributions
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87,500
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---
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Distribution fees
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199,351
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196,558
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Payroll and related expenses
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83,782
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104,394
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Annual report expenses
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42,378
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66,000
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Audit fee
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47,776
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73,269
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Other
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30,173
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37,794
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Total Accrued Expenses
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$
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1,077,304
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$
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728,015
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