The Company recognizes revenue from sales of itsour cosmetic ingredients, medical lubricants, 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 and the Company’sour performance obligation is satisfied. Sales of these products are deemed final, and there is no obligation on the part of the Company to repurchase or allow the return of these goods unless they are defective.

The Company’sOur 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 when the risk of loss and responsibility for the shipment passes to the customer, and the performance obligation of the Company is satisfied. 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of the Company unless (a) they are found to be defective; (b) the product is damaged in shipping; or (c) the product is outdated (but not more than one year after their expiration date, which is a return policy which conforms to standard pharmaceutical industry practice). The Company estimates an allowance for outdated material returns based on prior year historical returns of its pharmaceutical products.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.

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. At March 31, 2023 and 2022, the Company had an allowance of $268,330 and $317,105 respectively, for possible outdated material returns, which is included in accrued expenses.

At March 31, 2023, the Company recorded advance payments from customers of $140,810, which is included in deferred revenue on the balance sheet. The related performance obligations associated with these payments had not been satisfied as of the balance sheet date and are expected to be fulfilled within the second quarter of 2023.

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

Disaggregated revenue by product class is as follows:

Our cosmetic ingredients are marketed worldwide by five distributors, of which U.S.-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. Approximately 24% of the Company’s total sales were to customers located outside of the United States in the first quarter of 2023, compared with approximately 21% in the first quarter of 2022.

Disaggregated revenue by geographic region is as follows:

*Since all purchases by ASI are shipped to ASI’s warehouses in the U.S. they are reported as U.S. sales for financial reporting purposes. However, ASI has reported to the Company that in the first quarter of 2023, approximately 71% of ASI’s sales of the Company’s products were to customers in other countries, with China representing approximately 21% of ASI’s sales of the Company’s products. In the first quarter of 2022, approximately 70% of ASI’s sales of the Company’s products were to customers in other countries, with China representing approximately 39% of ASI’s sales of the Company’s products.

On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses. In accordance with this standard, the Company recognizes an allowance for credit losses for its trade receivables to present the net amount expected to be collected as of the balance sheet date. This allowance is based on the credit losses expected to arise over the life of the asset and are based on Current Expected Credit Losses (CECL). Implementation of this standard did not experienced significant fluctuations between estimated allowances and actual activity.have a material effect on the Company’s financial statements.

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 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.is doubtful in accordance with ASU 2016-13. As of September 30, 2022March 31, 2023 and December 31, 2021,2022, the allowance for doubtful accounts receivable was $18,401$20,054 and $20,252,$20,063, respectively. Prompt-payPrompt pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded whenonly after they arehave been taken.

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

Disaggregated sales by product class are as follows:

Marketable securities include investments in fixed income and equity mutual funds which are reported at their fair values.

The disaggregated net gains and losses on the marketable securities recognized in the statements of income statements for the three and ninemonths ended September 30, 2022March 31, 2023 and 2021,2022 respectively, are as follows:

The fair values of the Company’s marketable securities are determined in accordance with US 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 at the measurement date. 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 US GAAP, which prioritizes the inputs used in measuring fair value as follows:

•    Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•    Level 2 - 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.

•    Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company’s marketable equity securities, which are considered available for saleavailable-for-sale securities, are re-measured to fair value on a recurring basis and are valued using Level 1 inputs using quoted prices (unadjusted) for identical assets in active markets.

The following tables summarize the Company’s investments:

September 30, 2022March 31, 2023(Unaudited) (unaudited)

December 31, 20212022(Audited) (audited)

Investment income is recognized when earned and consists principally of dividend income from equity and fixed income mutual funds.funds and interest income on United States Treasury Bills. Realized gains and losses on sales of investments are determined on a specific identification basis.

ProceedsThere were no proceeds from the sale and redemption of marketable securities amounted to $1,658,293 forin the ninefirst months endedquarter of September 30, 2022, which included realized losses of $207,936. Proceeds from the sale and redemption of marketable securities amounted to $1,832,829 for the nine2023 months endedor September 30, 2021, 2022.which included realized gains of $112,180.

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. Finished product inventories at September 30, 2022March 31, 2023 and December 31, 20212022 are stated net of a reserve of $35,000$80,500 and $64,000, respectively, for slow movingslow-moving and obsolete inventory.

The Company’s tax provision is based on its estimated annual effective tax rate. The Company continues to fully recognize its tax benefits, and as of September 30, 2022March 31, 2023 and December 31, 2021,2022, the Company did not have any unrecognized tax benefits. The Company’s provision for income taxes for the three and ninemonths ended September 30, 2022March 31 and 2021 includescomprises the following:

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 immediately.

The Company also makes discretionary contributions to each employee's account based on a "pay-to-pay" safe-harbor formula that qualifies the 401(k) Plan under current IRS regulations. Employees become vested in the discretionary contributions as follows: 20% after two years of employment, and 20% for each year of employment thereafter until the employee becomes fully vested after six years of employment. The Company accrued $81,750$27,250 in contributions to the DC Plan for the ninethree months ended September 30, 2022,March 31, 2023 and $87,000 for the nine2022, months ended September 30, 2021. respectively. In the first nine monthsquarter of 2022,2023, the Company made discretionary contributions of $109,000$94,326 to the DC Plan. This payment represented the remaining portion of the Company’s 20212022 accrued discretionary contribution. For the firstnine months of 2021, the Company did not make any discretionary contributions to the DC Plan.

For the three-month periods ended September 30, 2022 and 2021, there were no payments made to related parties. For the nine-month periods ended September 30, 2022 and 2021, the Company made paymentsAccrued expenses:

Accrued Expenses

Accrued expenses consist of the following:

OnIn January 1, 2021,2023, the Company adopted Accounting Standards Update (ASU) 2019-12, “Simplifying the Accounting for Income Taxes.” This standard modified ASU 740 and simplifies the accounting for income taxes. The Company has determined that these modifications did not have an impact on its financial statements.

In June 2016, the FASB issued ASU-2016-13 “Financial Instruments – Credit Losses”.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.introduces a new credit loss methodology, Current Expected Credit Losses (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. 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. In November 2019, the FASB amended the effective date of implementationImplementation of this standard for smaller reporting companies. The new effective date is for fiscal years beginning afterdid December 15, 2022. notThe Company is currently evaluating if this pronouncement will have a potential impactmaterial effect on itsthe Company’s financial statements.

Customer concentration -: 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 and its overall credit worthiness 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 credit risk from accounts receivable is low.has been reduced.

For the three months ended September 30, 2022,March 31, 2023, onethree of the Company’s pharmaceutical distributors and one of its cosmetic ingredientingredients marketing partners and three of its pharmaceutical distributors, together accounted for 89%77% of the Company’s net sales, and 86%80% of its outstanding accounts receivable at September 30, 2022.March 31, 2023. During the three months ended September 30, 2021,March 31, 2022, the same three distributors and marketing partner and three distributors together were responsible for 86%a total of approximately 79% of the Company’s sales and 79% of its outstanding accounts receivable at September 30, 2021.

For the nine months ended September 30, 2022, one of the Company’s cosmetic ingredient marketing partners, and three of its pharmaceutical distributors, togethernet sales. They also accounted for 78% of the Company’s sales and 86% of its outstanding accounts receivable at September 30,March 31, 2022.During the nine months ended September 30, 2021, the same marketing partner and three distributors together were responsible for 79% of the Company’s sales and 79% of its outstanding accounts receivable at September 30, 2021.

Basic earnings per share is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued.

Per share basicBasic and diluted earnings were $0.07per share amounted to $0.16 and $0.22$0.20 for the three months ended September 30, 2022March 31, 2023 and 2021, respectively, and $0.41 and $0.77 for the nine months ended September 30, 2022,and 2021, respectively.

On April 20, 2023, the Company was notified by the National Association of Securities Dealers Automated Quotations (“NASDAQ”), that it was not in compliance with the listing standards of the NASDAQ Global Marketplace. This was the result of the Company’s shares of common stock failing to maintain a minimum Market Value of Listed Securities (“MVLS”) standard of $50,000,000 for thirty consecutive days. In the Company’s Form 8-K issued on April 26,^, 2023, the Company addressed the noncompliance by disclosing that it intends to submit a Compliance Plan on or before June 5, 2023. If the Compliance Plan is acceptable to the Listing Notifications Department (“the “Staff”) of the NASDAQ, of which there can be no assurance, the Staff may grant the Company an extension of up to 180 calendar days from the date of the deficiency letter, or until the Compliance Date, to evidence compliance. If the Staff does not accept the Compliance Plan, the Company will have the opportunity to appeal the Staff’s determination.

Item 2. Management's

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plans, objectives, intentions, expectations, financial condition, results of operations, future performance, and business of the Company. Forward-looking statements may be identified by the use ofusing such words as “believes”, “may”, “will”, “should”, “intends”, “plans”, “estimates”,“believes,” “may,” “will,” “should,” “intends,” “plans,” “estimates,” or “anticipates”, or other similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’sour control) could cause actual results to differ materially from those set forth in the forward-looking statements. In addition to those specific risks and uncertainties set forth in the Company'sCompany’s reports currently on file with the SEC, some other factors that may affect the future results of operations of the Company are: the development of products that may be superior to those of the Company; changes in the quality or composition of the Company'sCompany’s products; lack of market acceptance of the Company'sCompany’s products; the Company'sCompany’s ability to develop new products; general economic or industry conditions; changes in intellectual property rights; changes in interest rates; new legislation or regulatory requirements; conditions of the securities markets; the Company'sCompany’s ability to raise capital; changes in accounting principles, policies or guidelines; financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory and technical factors that may affect the Company'sCompany’s operations, products, services, and prices.

Accordingly, results achieved may differ materially from those anticipated as a result of such forward-looking statements, and those statements speak only as of the date they are made.

The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

OVERVIEW

The Company is a Delaware corporation that, through its Guardian Laboratories division, conducts research, product development, manufacturing,manufactures and marketing ofmarkets cosmetic ingredients, personalpharmaceuticals, medical lubricants, and health care products, pharmaceuticals, non-pharmaceutical medical products, and proprietary specialty industrial products. The Company also conducts research and product development. 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 our products. The Company also develops new products using natural and environmentally friendly raw materials, which is a priority for many of the Company’s cosmetic customers. All the products that the Company markets, with the exception ofexcept for Renacidin, are produced at its facility in Hauppauge, New York. Renacidin, a urological product, is manufactured for the Company by an outside contract manufacturer.

The Company’s most important product line is its Lubrajel® line of multifunctional water-based moisturizing and lubricating gels,gel formulations, which are used primarily asdesigned to provide sensory enhancement, lubrication, and texture to both personal care and medical products.

The Company’s cosmetic ingredients in cosmetic products but are also used in medical products, primarily catheter lubricants. These products are marketed worldwide for cosmetic uses by five marketing partners,distributors, each handling a different geographic area, with the largest being U.S.-based ASI. The Company’s researchIn the last few years, to meet the growing demand for “green” and development department is actively workingsustainable products, the Company has focused on the development ofdeveloping and launching new products to expandwhich only contain ingredients that are considered “natural”. The Lubrajel products in the Company’snew natural line ofhave been certified by the Cosmetic Organic and Natural Standard (“COSMOS”). This standard is recognized globally by the cosmetic ingredients. Many of the Company’s products use proprietary manufacturing processes, and the company relies primarily on trade secret protection to protect its intellectual property.industry.

Renacidin and the Company’s other pharmaceutical product, Clorpactin®Clorpactin WCS-90 , which is also used primarily in urology, are distributed through full-line drug wholesalers and marketed only in the United States. Those wholesalers in turn sell the products to pharmacies, hospitals, nursing homes, and other long-term care facilities, and to government agencies, primarily the VA. The Company promotes Renacidin through internet advertising as well as a dedicated website. Clorpactin and some ofWCS-90, as well as the Company’s other products, are marketed through information provided on the Company’s corporate website.

The Company’s non-pharmaceutical medical products, such as its catheter lubricants, as well as its specialty industrialwhich consist of water-based gel formulations designed mainly to provide sensory enhancement and lubrication to medical products, are sold directly to end-users, or to contract manufacturers utilized by those end-users. They are also available for marketing on a non-exclusive basis by the Company’s marketing partners.

While theThe Company does have competition in the marketplace for some of its products, particularly its cosmetic ingredients, some of its pharmaceutical products and its medical lubricants. These competitive products have some unique characteristics, and doare usually sold at a lower price than our products; however, they may not have direct competitors. However, these products may have indirect competition from other products that are not marketed as direct competitorscompare favorably to the Company’s products but may have functionality or properties that are similar to the Company’slevel of performance and quality of our products.

The Company recognizes revenue when all of the following requirements are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) products are shipped, which is when the performance obligation is satisfied and title and risk of loss pass to the customers; and (c) collections are reasonably assured. An allowance for returns, based on historical experience, is taken as a reduction of sales within the same period the revenue is recognized.

Over theIn recent years, the Company has been issued many patents and trademarks, and it still maintains several registered trademarks, the two most important of which are “Lubrajel” and “Renacidin.” However, regarding the protection of the Company’s proprietary formulations and manufacturing technology, the Company currently relies primarilyelected to rely on trade secret protection rather thanto protect our intellectual property for proprietary product formulations and manufacturing methods. The Company will file for patent protection due to the current disclosure requirements needed to obtain patents, the limited protection they afford, and the difficulty and expense of enforcing them globally. However,in situations where the Company may, from time to time, seek patent protection when it believes it would be in the Company’s best interest to do so. All of the Company’s previously issued patents have expired; however, the Company does not believe that the expiration of those patents has had, or will have, any material impact on its sales, since in recent years protection for the Company’s most important products has been basedrelying on trade secrets and proprietary manufacturing methods rather than patentsecret protection alone would not provide sufficient protection.

As discussed in Note 3 above, while the coronavirus pandemic (“pandemic”) continues to impact certain areas of the Company’s operations, the current impact on the Company’s financial performance is coming primarily from higher raw material costs and increased shipping costs, which had an impact on the Company’s gross profit margins in the first nine months of 2022 and may continue to have a future impact on the Company’s gross profit margins in upcoming quarters. In addition, during the first half of 2022 it was more difficult to ship the Company’s products due to a shortage of truck drivers and limited availability of shipping vessels. This situation improved in the third quarter of 2022. The Company had been able to minimizeowns the impact on customers by making them aware of longer lead times that may be necessary as a result of these issues.Lubrajel®, Renacidin®, and Clorpactin® trademarks.

The pandemiccurrent supply chain instability has not significantly affected the ability of the Company to obtain raw materials, but it has made some of those materials more expensive and created longer lead times for some of them. The increased costs of some of these raw materials has continued to impact the Company’s gross profit margins and may continue to impact the gross profit margins in the future on certain products. In response to the rising raw material prices, the Company has instituted price increases on many of its products which will helpwhere possible and hopes to reduceminimize the impact on the Company’s gross margins in the future.

As a result ofWith the lingering effects ofcontinuing uncertainty as to what the coronavirus pandemic as described above, there continues to be uncertainty in regard to theduration and future potential impact of the pandemic, onsupply chain instability and increasing interest rates will be, the Company’s operations or financial results. The Company believes that it is still unable to provide an accurate estimate or projection as to what the futurecontinuing impact of the pandemic will be on the Company’s future operations or its financial results. The Company does not expectresults in the carrying value of its assets or its liquidity to be impaired by the coronavirus pandemic.future.

CRITICAL ACCOUNTING POLICIES

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, the discussion and analysis of the Company’s financial condition and results of operations are based on its financial statements, which have been prepared in conformity with US GAAP. The preparation of those financial statements required the Company to make estimates and assumptions that affect the carrying value of assets, liabilities, revenues, and expenses reported in those financial statements. Those estimates and assumptions can be subjective and complex, and consequently, actual results could differ from those estimates and assumptions. The Company’s most critical accounting policies relate to revenue recognition, concentration of credit risk, investments, inventory, and income taxes. Since December 31, 2021,2022, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

The following discussion and analysis covers material changes in the financial condition of the Company since the year ended December 31, 2021,2022, and a comparison of the results of operations for the third quarter of 2022three months ended March 31, 2023 and 2021 and the first nine months of 2022 and 2021.March 31, 2022. This discussion and analysis should be read in conjunction with "Management's“Management’s Discussion and Analysis or Plan of Operation"Financial Condition and Results of Operations” included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. All references in this quarterly report to “sales” or “Sales” shall mean “net sales”Net Sales unless specifically identified as “gross sales”.specified otherwise.

The Company recognizes revenue from sales of its cosmetic ingredients, medical products,lubricants, and industrial products when all of the following requirements are satisfied: (a) a valid purchase order has been received; (b) products are shipped, which is when the performance obligation is satisfied and title and risk of loss pass to the customers; and (c) 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 no obligation on the part of the Company to repurchase or allow the return of these 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. The Company assumes responsibility for the shipment arriving at its intended destination. Sales of pharmaceutical products are final, and revenue is recognized at the time of shipment. 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 gross sales of itstheir pharmaceutical products.

In accordance with ASU-2016-13, The Company recognizes an allowance for credit losses for financial assets carried at amortized cost to present the net amount expected to be collected as of the balance sheet date. Such allowance is based on the credit losses expected to arise over the life of the asset.

RESULTS OF OPERATIONS

Net Sales

Net sales for the thirdfirst quarter of 20222023 decreased by $762,724 (24%) when compared with the same period in 2021. Net sales for the first nine months of 2022 decreased by $333,035 (3%$1,322,034 (approximately 34%) as compared with the corresponding period in 2021.first quarter of 2022. The decrease in sales for both the thirdfirst quarter of 2022 and the first nine months of 2022 were2023 was primarily attributable to changesa decrease in sales of the followingCompany’s cosmetic ingredients and medical lubricants, which was partially offset by an increase in sales of the Company’s pharmaceutical products and industrial products. The changes in the Company’s sales by product lines:line are as follows:

Based on information received from ASI, the Company believes that the decrease in sales to ASI was primarily due to 1) decreased demand for the Company’s Lubrajel products in China and in other Asian countries resulting from China’s zero-COVID mandate that was in place for much of 2022. 2) customers working off excess stock and changing order patterns to just-in time.

The Company continues to experience global competition from Asian and European companies that manufacture and sell products that are competitive with our products. These competitive products are usually sold at a lower price than our products; however, they may not compare favorably to the level of performance and quality of our products. The Company expects the Asian and European markets to remain very competitive based on the continuing competition from lower-cost competitors, and for that reason, we are concentrating our research and development (“R&D”) efforts on developing new and unique products that other companies do not offer.

Pharmaceuticals:

Because there are fees, rebates and allowances associated with sales ofThe difference in 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 pharmaceutical products for the three-month period ended September 30, 2022 decreased by $71,583 (5%) increase compared with the corresponding period in 2021, while gross sales increase for the nine-month period ended September 30, 2022 increased by $91,299 (2%). The decrease in sales for the three-month period ended September 30, 2022 wasthese products is due primarily to a decreasecombination of $83,746 (6%) in gross sales of Renacidin. For the nine-month period ended September 30,2022, the increase was due to an increase in gross sales of Renacidin of $44,263 (1%)those products, combined with an increasea decrease in grosspharmaceutical sales allowances of the Company’s other pharmaceutical product, Clorpactin, in the amount of $47,036 (9%). The Company believes that the fluctuations in sales for both periods are due to the timing of orders from its distributors of those products.

As sales of the Company’s pharmaceutical products fluctuate there is typically a corresponding direct relationship in the related allowances, such as for distribution fees, VA chargebacks, Medicare rebates, sales rebates and discounts and outdated material returns. For the three-month period ended September 30, 2022, these pharmaceutical related allowances decreased by $14,203 (5%$103,371 (approximately 50%), compared with the same period in 2021. For the nine-month period ended September 30, 2022 these allowances decreased by $22,430 (3%). Despite experiencing an increase in pharmaceutical sales for the first nine months of 2022, the Company believes that the decrease in allowances was a result of having a more favorable pricing structure in place on its VA contract sales during 2022.

Medical (non-pharmaceutical) products:

Sales of the Company’s medical products increased by $40,664 (12%) and $323,767 (20%), respectively, for the three- and nine-month periods ended September 30, 2022, compared with the same periods in 2021. The increase in medical product sales for both periods was primarily attributable to an increase in shipments to one of the Company’s larger direct medical product customers located in China.

Industrial products:

Sales of the Company's industrial products decreased by $8,619 (21%) and by $18,648 (16%), respectively, for the three and nine months ended September 30, 2022, when compared with the corresponding periods in 2021. The decrease in sales for both periodsallowances was primarily due to a decrease in orders from one of the Company’s larger industrial product customers, who was purchasing a product that the Company discontinued duringoutdated material returns allowances.

Cost of Sales

Cost of sales as a percentage of net sales increased to 45% infor the thirdfirst quarter of 2023 remained relatively consistent with that of the first quarter of 2022, up from 42% indecreasing to 43% for the thirdfirst quarter of 2021. For2023, compared to 44% for the first nine months of 2022, cost of sales as a percentage of sales increased to 45%, up from 41%quarter in 2021. The increases in both periods were a result of 1) increased2022.The Company is still experiencing higher overall raw material prices as well as increased shipping costs. These higher costs in 2022 compared with 2021; 2) increased freight costs in 2022 compared with 2021; 3) the increased percentage of sales derived from the Company’s pharmaceutical products, especially in the third quarter of 2022, as these products are sold at a lowermay impact future gross profit margin than the Company’s other product lines; and 4) the recording of $182,371 in rebates payable to one of the Company’s marketing partners during the nine-month period ending September 30, 2022. In addition, the Company had recorded a one-time Employee Retention Credit (“ERC”) of $104,827 in the first nine months of 2021, which reduced the cost of sales for that period.margins.

Operating Expenses

Operating expenses, consisting of selling, and general, and administrative expenses, increaseddecreased by $73,751 (16%) for the third quarter of 2022 compared with the equivalent period in 2021. Operating expenses increased by $270,590 (19%$28,803 (approximately 5%) for the first nine monthsquarter of 2022,2023 compared with the equivalent period in 2021. The increase in operating expenses for the thirdfirst quarter of 20222022. The decrease was due primarily to (a) an increase of $24,000 in fees to the independent members of the Company’s Board of Directors in connection with the effort to recruit a new President & CEO; (b) increases in the Company’s Directors & Officers liability insurance and other insurance-related expenses; and (c) an increase in legal fees to the Company’s outside SEC counsel. The increase in operating expenses for the first nine months of 2022 wasmainly due to (a) an increase of $95,000a decrease in fees to the independent members of the Company’s Board of Directors relating to the Company’s efforts to explore strategic alternatives for the Company, as well as the Board’s effort to recruit a new Presidentemployee bonuses and CEO for the Company; (b) an increase of $35,000 in insurance-related expenses; (c) increases in certain employee fringe benefits; and (d) the recording of an ERC in 2021, which offset some of the Company’s payroll expense in 2021 and which was not available to the Company in 2022. Due to the current inflationary environment, the Company expects to see minor increases in operating expenses for the remainder of the year.depreciation expense.

Research and Development Expenses

Research and developmentR&D expenses decreased by $9,818 (8%) for the third quarter of 2022, and increased by $15,803 (5%$4,707 (approximately 4%) for the first nine monthsquarter of 20222023 compared with the same periods in 2021.first quarter of 2022. The decrease for the third quarter was primarily due to a decrease in certain employee fringe benefit costs. The increase for the nine-month period was primarily due to the recording of the ERC in 2021, which reduced research and development costs. After taking the ERC into account, research and development expenses for the nine-month period ending September 30, 2022 decreased by 3%.bonuses.

Investment Income

Investment income increased by $8,248 (21%$7,082 (approximately 17%) and by $22,258 (18%), respectively, for the three and nine-month periods ending September 30, 2022,first quarter of 2023 compared with the equivalent periods in 2021.first quarter of 2022. The increases in both periods wereincrease was primarily due to increasesan increase in dividendinterest income received from both equity and fixed income mutual funds.United States Treasury Bills during the first quarter of 2023 compared to the first quarter of 2022.

Net (loss) Gain (Loss) on Marketable Securities

The Company recorded a net lossgain on marketable securities increased by $275,418of $72,701 in the first quarter of 2023, compared to a net loss of $393,660 in the first quarter of 2022. Early in 2022, when inflation and $1,194,883 forinterest rates began to rise, the three and nine-month periods ended September 30, 2022 compared withCompany’s investment portfolio, due to its concentration in fixed income mutual funds, began to see a significant market value decline. This pattern of downward market values continued through much of 2022. The market value increase recognized in the same periodsfirst quarter of 2023 is the first increase in 2021. Approximately 90%the market value of the Company’s marketable securitiesinvestment portfolio is composedsince the first quarter of fixed income mutual funds. The Company intentionally weighted its portfolio as such in an effort2022, which was likely due to minimize significant stock market fluctuations. However, given the current inflationary environmentfinancial markets beginning to rebound and the rise of interest rates, managementstabilize. Management believes that the overall decrease in the market value of the Company’s fixed income mutual funds will be temporary but will continue to be volatile.in nature. The Company’s management and Board of Directors are continuing to closely monitor the Company's investment portfolio and have made, and will continue to make any adjustmentschanges they believe may be necessary or appropriate in order to minimize the future impact on the Company’s financial position that the volatility of the global financial markets may have.

Provision for Income Taxes

The Company's effective income tax rate was approximately 21% for the first nine monthsquarter of 2023 and 2022 and 2021. The Company’s tax rate is expected to remain at 21% for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreasedincreased by $727,401 to $9,324,340 at March 31, 2023, up from $9,245,629$8,596,939 at December 31, 2021 to $9,210,314 at September 30, 2022, a decrease of $35,315.2022. The current ratio increaseddecreased to 5.9 to 1 at March 31, 2023, down from 5.07.3 to 1 at December 31, 2021 to 6.5 to 1 at September 30, 2022. The decreaseincrease in working capital was primarily due to decreases in marketable securities and accounts receivable, partially offset by an increase in cash and inventories. The increasedecrease in the current ratio was primarily due to decreasesan increase in accounts payable and deferred revenue and income taxes payable.revenue.

The Company believes that its working capital is, and will continue to be, sufficient to support its operating requirements for at least the next twelve months. The Company’s long-term liquidity position will be dependent on its ability to generate sufficient cash flow from profitable operations.

The Company is in the process of upgrading its building sprinkler system and expects to incur costs of approximately $100,000 in the fourth quarter of 2022 in connection with an upgradethis upgrade. The project is expected to its building sprinkler system.

The Company generated cash from operationscommence during the second quarter of $1,900,456 and $3,648,744 for the nine months ended September 30, 2022 and September 30, 2021, respectively. The decrease in cash from operations was primarily due to a decrease in net income.

Cash used in investing activities for the nine-month period ended September 30, 2022 was $235,751. Cash used in investing activities for the nine-months ended September 30, 2021 was $1,343,651. The decrease was primarily due to a decrease in purchases of marketable securities during 2022. Due to rising raw material and freight costs over the first nine months of 2022, the Company utilized excess cash flow to support these increased production costs, thereby reducing its marketable securities purchases.

Cash used in financing activities was $1,699,392 and $2,204,616 for the nine months ended September 30, 2022 and September 30, 2021, respectively. The decrease was due to a decrease in the dividends paid from $0.48 per share in 2021 to $0.37 per share in 2022.

The Company expects to continue to use its cash to make dividend payments, to purchase marketable securities, and to take advantage of other opportunities that may arise that are in the best interest of the Company and its shareholders.

OFF BALANCE-SHEET ARRANGEMENTS2023.

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.

The Company generated cash from operations of $417,589 and $27,415 for the three months ended March 31, 2023 and 2022, respectively. The increase was due primarily to an increase in accounts payable and deferred revenue.

Cash used in investing activities for the three months ended March 31, 2023 was $46,088 compared with $47,128 for the three months ended March 31, 2022. The decrease was primarily due to a decrease in purchases of property, plant and equipment in the first quarter of 2023.

There was no cash used in financing activities for the first quarters of 2023 and 2022.

The Company expects to continue to use its cash to make dividend payments, purchase marketable securities, and take advantage of other market opportunities which may arise which are in the best interests of the Company and its shareholders.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The information to be reported under this item is not required of smaller reporting companies.

The information to be reported under this item is not required of smaller reporting companies.

The Company’s management, including its Principal Executive Officer and ChiefPrincipal Financial Officer, has evaluated the design, operation, and effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon the evaluation performed by the Company’s management, including its Principal Executive Officer and ChiefPrincipal Financial Officer, it was determined that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed in the reports filed or submitted pursuant to the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to the Company’s management, including its Principal Executive Officer and ChiefPrincipal Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosures.

The Company's Principal Executive Officer and ChiefPrincipal Financial Officer have determined that, during the period covered by this quarterly report, there were no changes in the Company's internal control over financial reporting that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. They have also concluded that there were no significant changes in the Company’s internal controls after the date of the evaluation.

PART II - OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

NONE

ITEM 1A.RISK FACTORS

IMPACT OF COVID-19

The impact of the coronavirus pandemic on the Company’s sales significantly lessened in 2021 compared with 2020, when the pandemic has its most significant impact on the Company’s sales. While the global impact of the pandemic continues to abate, it is likely that there will continue to be some impact on sales of the Company’s cosmetic ingredients, especially in connection with the Company’s sales in China, where the pandemic is still having a significant impact on the economy. The pandemic is still causing increases in Company’s packaging, shipping, and raw material costs. Due to the uncertainty surrounding the duration of the pandemic and its impact in the various countries in which the Company does business, it is difficult for the Company 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 pandemic had not impacted sales of the Company’s pharmaceutical products, and has had only a minor impact on sales of some of the Company’s medical products.

The Company does not anticipate that the pandemic will affect its ability to obtain raw materials and maintain production, and the Company has multiple sources for many of its raw materials. However, some of the Company’s raw materials have experienced price increases, which could impact the manufacturing cost of some of the Company’s products in the future. The Company may or may not be able to pass along and recoup these price increases, depending on the product. The Company expects to be able to maintain production levels sufficient to ship orders on a timely basis, subject to availability of truck drivers.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

NONE

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

NONE

ITEM 4. MINE SAFETY DISCLOSURES

NONE

ITEM 5. PART II - OTHER INFORMATION

NONE

ITEM 6.EXHIBITS

None

None         

None

None

None

* Filed herewith

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNITED-GUARDIAN, INC.

(Registrant)