NOTE A - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

United-Guardian, Inc. (the "Company") is a Delaware corporation that, through its Guardian Laboratories division, manufactures and markets cosmetic ingredients, pharmaceuticals, medical lubricants, and specialty industrial products. It also conducts research and product development, primarily related to the development of new and unique cosmetic ingredients. 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 the Company's products. Two major product lines, Lubrajel

and Renacidin

Irrigation Solution (“Renacidin”) together accounted for approximately

93%

and

94%

of the Company’s sales for the years ended

December 31, 2019

and

December 31, 2018,

respectively. Lubrajel accounted for approximately

67%

and

72%

of the Company’s sales for the years ended

December 31, 2019

and

December 31, 2018,

respectively, and Renacidin accounted for approximately

26%

and

22%

of the Company’s sales for the years ended

December 31, 2019

and

December 31, 2018,

respectively.

Use of Estimates

In preparing financial statements in conformity with a Generally Accepted Accounting Principles in the United States of America (“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 and revenue and expenses during the reporting period. Actual results could differ from those estimates. Such estimated items include the allowance for bad debts, reserve for inventory obsolescence, accrued distribution fees, outdated material returns, possible impairment of marketable securities and the allocation of overhead.

Reclassifications

Certain amounts in the prior-period financial statements have been reclassified to conform to the presentation of the current-period financial statements. These reclassifications had

effect on the previously reported net income.

In accordance with ASC Topic

606

“Revenue from Contracts with Customers”, for the year ended

December 31, 2018,

the Company reclassified certain sales rebates from Cost of Sales to Net Sales, in the amount of

$323,836.

The reclassification had

effect on gross profit, net income, the provision for income taxes or earnings per share for the year ended

December 31, 2018.

See “Revenue Recognition” below for further discussion regarding ASU Topic

606.

Accounts Receivable and Reserves

The carrying amount of accounts receivable is reduced by a valuation allowance that reflects the Company’s best estimate of the amounts that will

not

be collected. The reserve for accounts receivable comprises the allowance for doubtful accounts and sales returns. In addition to reviewing delinquent accounts receivable, the Company considers many factors in estimating this reserve, including historical data, experience, customer types and credit worthiness, and economic trends. At

December 31, 2019

and

2018,

the allowance for doubtful accounts receivable amounted to

$21,178

and

$16,895,

respectively. From time to time, the Company adjusts its assumptions for anticipated changes in any of these or other factors expected to affect collectability.

Revenue Recognition

Effective

January 1, 2018,

the Company adopted ASC Topic

606,

“Revenue from Contracts with Customers”, using the modified retrospective method. Under the new 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 and services. The Company’s principal source of revenue is product sales.

The Company’s sales, as reported, are net of a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration, primarily related to the sale of the Company’s pharmaceutical products, includes chargebacks from the United States Department of Veterans Affairs (“VA”), rebates in connection with participation in Medicare and 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.

The Company recognizes revenue from sales of its cosmetic ingredients, medical products, and industrial products when those products are shipped, as long as a valid purchase order has been received and future collection of the sale amount is reasonably assured. These products are shipped “Ex Works” from the Company’s facility in Hauppauge, NY, and it is at this time that risk of loss and responsibility for the shipment passes to the customer. Sales of these products are deemed final, and there is

obligation on the part of the Company to repurchase or allow the return of those goods unless they are defective.

The Company’s pharmaceutical products are shipped via common carrier upon receipt of a valid purchase order, with, in most cases, the Company paying the shipping costs. Sales of pharmaceutical products are final, and revenue is recognized at the time of shipment, which is the satisfaction of the performance obligation. Pharmaceutical products are returnable only at the discretion of the Company unless (a) they are found to be defective; (b) the product is damaged in shipping; or (c) the product is outdated (but

not

more than

one

year after their expiration date, which is a return policy which conforms to standard pharmaceutical industry practice). The Company estimates an allowance for outdated material returns based on prior year historical returns of their 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.

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

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. The Company’s standard credit terms, which vary depending on the customer, range between

and

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. Prompt-pay discounts are offered to some customers however, due to the uncertainty of the customers actually taking the discounts, the discounts are recorded when they are taken.

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

Disaggregated net sales by product class is as follows:

	Years ended December 31,
	2019		2018
Cosmetic ingredients	$	6,377,323	$	7,529,487
Pharmaceuticals		4,091,817		3,510,720
Medical Products		2,968,806		2,232,141
Industrial and other		161,138		173,217
Total Net Sales	$	13,599,084	$	13,445,565

The Company’s cosmetic ingredients are currently marketed worldwide by

five

marketing partners, of which United States (“U.S.”)-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. During most of

2019

the Company also had a separate marketing partner for Korea, but at the end of

2019

that territory was transferred to ASI. For the years ended

December 31, 2019

and

2018,

approximately

18%

and

19%,

respectively, of the Company’s sales were to (a) its foreign-based marketing partners (which does

not

include ASI), which marketed and distributed the Company’s cosmetic ingredients to customers outside the U.S, and (b) a few foreign customers for the Company’s medical products.

Disaggregated sales by geographic region is as follows:

	Years ended December 31,
	2019		2018

United States*	$	11,118,629	$	10,931,681
Other countries		2,480,455		2,513,884
Net Sales	$	13,599,084	$	13,445,565

* 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 significant percentage of the products are subsequently shipped by ASI to foreign customers. Based on sales information provided to the Company by ASI, for the years ended

December 31, 2019

and

2018,

75%

of ASI’s sales of the Company’s products were to foreign customers, with China representing

49%

of the sales in

2019

and

55%

2018.

Cash and Cash Equivalents

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 high credit quality financial institutions and believes that any amounts in excess of insurance limitations to be at minimal risk. 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.

December 31, 2019,

approximately

$1,174,000

exceeded the FDIC limit.

Dividends

May 15, 2019,

the Company’s Board of Directors declared a semi-annual cash dividend of

$0.55

per share, which was paid on

June 14, 2019

to all stockholders of record as of

May 31, 2019.

November 20, 2019,

the Company’s Board of Directors declared a semi-annual cash dividend of

$0.55

per share which was paid on

December 10, 2019,

to all stockholders of record as of

December 3, 2019.

2019,

the Company declared a total of

$5,053,751

in dividends, of which

$5,049,922

was paid. The balance of

$3,829

is payable to stockholders who could

not

be located at the time the dividend was paid and is being held by the Company for future payment.

May 16, 2018,

the Company’s Board of Directors declared a semi-annual cash dividend of

$0.50

per share, which was paid on

June 13, 2018

to all stockholders of record as of

May 30, 2018.

November 28, 2018,

the Company’s Board of Directors declared a semi-annual cash dividend of

$0.55

per share which was paid on

December 17, 2018,

to all stockholders of record as of

December 10, 2018.

2018

the Company declared a total of

$4,824,035

in dividends, of which

$4,816,239

was paid. The balance of

$7,796

is payable to stockholders who could

not

be located at the time the dividend was paid and is being held by the Company for future payment.

Marketable Securities

The Company’s marketable securities include investments in equity and fixed income mutual funds and U.S. Government securities. The Company’s marketable equity securities are reported at fair value with the related unrealized and realized gains and losses included in net income. U.S Treasury Bills are considered debt securities and any realized gains or losses are reported in other comprehensive 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 would record 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

2019

and

2018,

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.

Inventories

Inventories are valued at the lower of cost and net realizable value. Cost is determined using the average cost method, which approximates cost determined by the

first

-in,

first

-out (“FIFO”) method. Inventory costs include material, labor and factory overhead.

Property, Plant and Equipment

Property, plant and equipment are carried at cost, less accumulated depreciation. Major replacements and betterments are capitalized, while routine maintenance and repairs are expensed as incurred. Assets are depreciated under both accelerated and straight-line methods. Depreciation charged as a result of using accelerated methods was

not

materially different than that which would result from using the straight-line method for all periods presented. Certain factory equipment and fixtures are constructed by the Company using purchased materials and in-house labor. Such assets are capitalized and depreciated on a basis consistent with the Company's purchased fixed assets.

Estimated useful lives are as follows:

Factory equipment and fixtures (years)	5	-	7
Building (years)		40
Building improvements		Lesser of useful life or 20 years

Impairment of Long-Lived Assets

Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

impairments were necessary at

December 31, 2019

and

2018.

Other Assets (net)

Other assets at

December 31, 2019

and

2018

represents an amount expended in connection with the development of the new single-dose form of Renacidin. The Company began amortizing these costs in the

first

quarter of

2016.

December 31, 2019

and

2018,

accumulated amortization for such assets amounted to

$59,296

and

$44,472,

respectively. The final amortization expense of

$14,824

will be taken in

FY2020.

Fair Value of Financial Instruments

Management of the Company believes that the fair value of financial instruments, consisting of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximates their carrying value due to their short payment terms and liquid nature.

Concentration of Credit Risk

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 to determine how much credit to allow or whether any 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 accounts receivable credit risk has been reduced.

For the year ended

December 31, 2019,

two

of the Company’s distributors and marketing partners accounted for approximately

52%

of the Company’s gross sales during the year, and approximately

50%

of its outstanding accounts receivable at

December 31, 2019.

For the year ended

December 31, 2018,

the same

two

distributors and marketing partners accounted for a total of approximately

56%

of the Company’s gross sales during the year, and

47%

of its outstanding accounts receivable at

December 31, 2018.

Vendor Concentration

Most of the principal raw materials used by the Company consist of common industrial organic and inorganic chemicals and 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 long lead times. The Company has

six

major raw material vendors that collectively accounted for approximately

86%

and

80%

of the raw material purchases by the Company in

2019

and

2018,

respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than

not

that some portion or all the deferred tax assets will

not

be realized.

Uncertain tax positions are accounted for utilizing a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As of

December 31, 2019

and

2018,

the Company did

not

have any unrecognized income tax benefits. It is the Company’s policy to recognize interest and penalties related to taxes as interest expense as incurred. During the years ended

December 31, 2019

and

2018,

the Company did

not

record any tax-related interest or penalties. The Company’s tax returns for

2016

and all subsequent years are subject to examination by the United States Internal Revenue Service and by the State of New York.

August 3, 2018,

the IRS issued IRS Rev. Proc

2018

40,

which permits small business taxpayers to obtain automatic IRS consent to implement the small taxpayer provisions under the Tax Cuts and Jobs Act of

2017

(“TCJA”) effective for tax years beginning after

December 31, 2017.

For the year ended

December 31, 2018,

the Company changed its method of tax accounting from an accrual method to the cash method.

December 18, 2019,

the FASB issued ASU

2019

12,

“Simplifying the Accounting for Income Taxes”, which modifies ASC

740

to simplify the accounting for income taxes. The amendments in ASU

2109

are effective for fiscal years beginning after

December 15, 2020.

The Company is currently evaluating whether any of the modifications included in this pronouncement will impact its financial statements.

Research and Development

Research and development expenses are expenditures incurred in connection with in-house research on new and existing products. It includes payroll and payroll related expenses, outside laboratory expenditures, lab supplies, and equipment depreciation.

Shipping and Handling Expenses

Shipping and handling costs are classified in operating expenses in the accompanying statements of income. Shipping and handling costs were approximately

$76,000

and

$81,000

for the years ended

December 31, 2019

and

2018,

respectively.

Advertising Expenses

Advertising costs are expensed as incurred. For the years ended

December 31, 2019

and

2018,

the Company incurred approximately

$28,000

and

$13,000,

respectively, in advertising expense

Earnings Per Share Information

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share would include the dilutive effect of outstanding stock options, if any.

New Accounting Standards

January 2019,

the Company adopted ASU

2016

02,

“Leases”, which was intended to improve financial reporting for lease transactions. This ASU requires organizations that lease assets, such as real estate and manufacturing equipment, to recognize both assets and liabilities on their balance sheet for the rights to use those assets for the lease term and obligations to make the lease payments created by those leases that have terms of greater than

months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU requires disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The adoption of this standard did

not

have a material impact on the Company’s financial statements

December 18, 2019,

the FASB issued ASU

2019

12,

“Simplifying the Accounting for Income Taxes”, which modifies ASU

740

to simplify the accounting for income taxes. The amendments in ASU

2019

are effective for fiscal years beginning after

December 15, 2020.

Early adoption is permitted. The Company is currently evaluating if any of these modifications will have an impact on its financial statements.

August 2018,

the FASB issued ASU

2018

13,

“Fair Value Measurement” (Topic

820

), Changes to the Disclosure Requirements for Fair Value Measurement”. This amendment’s objective is to improve the effectiveness of disclosures about recurring or nonrecurring fair value measurements. This amendment is effective for fiscal years beginning after

December 15, 2019.

The Company does

not

expect the implementation of this standard to have a material impact on its financial statements.

January 2016,

the FASB issued ASU

2016

“Recognition and Measurement of Financial Assets and Financial Liabilities”. This amendment requires companies to measure equity investments at fair value with changes in fair value recognized in net income. The Company adopted this standard effective

January 1, 2018.

In accordance with the implementation of the standard, the Company recognized a cumulative effect adjustment related to unrealized gains on marketable securities, to reduce accumulated other comprehensive income and increase retained earnings on

January 1, 2018

$466,025.

June 2016,

the FASB issued ASU-

2016

“Financial Instruments – Credit Losses”. This guidance affects organizations that hold financial assets and net investments in leases that are

not

accounted for at fair value with changes in fair value reported in net income. The guidance requires organizations to measure all expected credit losses for financial instruments at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. It is effective for fiscal years beginning after

December 15, 2022.

The Company is currently evaluating if this pronouncement will have a potential impact on its financial statements.