UNITED GUARDIAN INC

During 2020 the coronavirus pandemic (“pandemic”) negatively impacted the Company’s sales and net income, primarily due to reduced demand for the Company’s cosmetic ingredients. The Company believes that this decline in demand was caused by both the closure of manufacturing facilities that used the Company’s products, as well as the drop in consumer purchases of many products in which the Company’s cosmetic ingredients are incorporated. The Company maintained production throughout the pandemic, but orders for its cosmetic ingredients declined significantly throughout 2020. Although sales of these products decreased slightly in the first quarter of 2021 compared with the first quarter of 2020, they increased significantly compared with the sales levels of the third and fourth quarters of 2020. It is too early to predict what the continuing impact of the pandemic will be on sales of these products, but until the global pandemic situation improves, it is likely that sales of the Company’s cosmetic ingredients will continue to be negatively impacted. Because the Company has significant sales of its cosmetic ingredients outside the United States, sales will be impacted not only by the impact of the pandemic on the United States but also the course and impact of the pandemic in the many countries in which the Company’s products are sold.

As discussed in Note 3 above, throughout 2020 the pandemic continued to negatively impact the Company’s sales and net income, primarily as a result of the decline in demand for the Company’s cosmetic ingredients. The Company believes that this decline in demand was caused by both the Covid-related closures of manufacturing facilities that used the Company’s products, as well as the drop in consumer purchases of many products in which the Company’s cosmetic ingredients are incorporated. The Company maintained production throughout the pandemic, but orders for its cosmetic ingredients declined significantly throughout 2020. Although sales of these products decreased slightly in the first quarter of 2021 compared with the first quarter of 2020, they increased significantly compared with the sales levels of the third and fourth quarters of 2020. It is too early to predict what the continuing impact of the pandemic will be on sales of these products, but until the global pandemic situation improves, it is likely that sales of the Company’s cosmetic ingredients will continue to be negatively impacted. Because the Company has significant sales outside the United States, sales of its cosmetic ingredients are going to be impacted not only by how the pandemic affects the United States, but also what the course of the pandemic is in the many countries in which the products that incorporate the Company’s cosmetic ingredients are sold.

Sales of the Company’s medical products were also negatively impacted by the pandemic in 2020, with the Company losing one of its domestic medical customers, and some other customers reducing their purchases. Although sales in the first quarter of 2021 were negatively impacted by the loss of that customer, those losses were offset by an increase in sales to one of the Company’s other medical customers, resulting in a net increase in sales of the Company’s medical products in the first quarter of 2021.

In addition to the impact of the pandemic on sales of the Company’s cosmetic ingredients there also continues to be significant global competition from Asian and European competitors selling products that are chemically similar to, and competitive with, those sold by the Company, and which are marketed at lower prices than the products manufactured by the Company. The weakening of the U.S. dollar relative to the Euro in 2020 helped to offset the lower pricing of some of the Company’s competitors, but in the first quarter of 2021, the dollar has strengthened, which makes the Company’s products less competitive, since the Company sells its products in dollars. Whether or not this continues during 2021 may determine whether the Company’s products become more or less competitive, and the Company is not in a position to predict what impact, if any, this will have on the Company’s sales. 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 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 research and development (“R&D”) efforts on developing new and unique products that other companies do not have.

As sales of the Company’s pharmaceutical products increase there is typically a corresponding and proportional increase in allowances, such as for distribution fees, VA chargebacks, Medicare rebates, sales rebates and discounts, outdated material returns, and Medicaid rebates. As a result of the Company’s termination of the Medicaid Drug Rebate Agreement and its participation in the Medicaid Program, in the first quarter of 2021 allowances related to sales of the Company’s pharmaceutical products decreased by $70,436 (23%), and total allowances related to the sale of all of the Company’s products, including pharmaceuticals, decreased by a net of $69,438 (approximately 22%), compared with the same period in 2020. While 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.

As a result of the coronavirus pandemic, global consumer purchases of cosmetic products in 2020 declined, which resulted in a decline in sales of cosmetic ingredients sold by the Company. Although sales of these products decreased slightly in the first quarter of 2021 compared with the first quarter of 2020, they increased significantly compared with the sales levels of the third and fourth quarters of 2020. It is too early to predict what the continuing impact of the pandemic will be on sales of these products, but until the global pandemic situation improves, it is likely that sales of the Company’s cosmetic ingredients will continue to be negatively impacted. The sales of these products were particularly impacted in China, since prior to the pandemic the Company had significant sales in China, and the decrease in demand for these products in China resulted in excess inventory being held by ASI, which is gradually being reduced. Until that excess inventory situation is completely resolved, which the Company anticipates happening by the end of the second quarter of 2021, the Company’s sales in China may still be impacted.