UNITED-GUARDIAN, INC.

Part I. FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

STATEMENTS OF INCOME
(unaudited)

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

BALANCE SHEETS

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

BALANCE SHEETS

(continued)

LIABILITIES AND STOCKHOLDERS’ EQUITY

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(unaudited)

THREE AND SIX MONTHS ENDED JUNE 30, 2023

THREE AND SIX MONTHS ENDED JUNE 30, 2022

THREE AND SIX MONTHS ENDED JUNE 30, 2021

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

STATEMENTS OF CASH FLOWS
(unaudited)

See Notes to Condensed Financial Statements

UNITED-GUARDIAN, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

United-Guardian, Inc. (the(“Registrant” or “Company”) is a Delaware corporation that, through its Guardian Laboratories division, conducts research, product development, manufacturingmanufactures and marketing ofmarkets cosmetic ingredients, pharmaceuticals, and medical products, and proprietary specialty industrial products.lubricants. The Company’sCompany conducts research and product development departmentand modifies, refines, and expands the uses for existing products, with the goal of further developing the market for additional uses and markets. Itits products. The Company also develops new products using natural and environmentally-friendlyenvironmentally friendly raw materials, which is important toa priority for many of the Company'sCompany’s cosmetic customers.

2.        Basis of Presentation

Interim condensed financial statements of the Company are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information, pursuant to the requirements for reporting on Form 10-Q10-Q and Regulation S-X.S-X. In the opinion of management, all adjustments 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 months ended June 30, 2022 (also2023 (also referred to as the "second quarter of 2022"2023" and the "first half of 2022"2023", respectively) are not necessarily indicative of results that ultimately may be achieved for any other interim period or for the year ending December 31, 2022. 2023. The interim unaudited condensed 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-K10-K for the year ended December 31, 2021.2022.

3.        Impact of Coronavirus (COVID-19)

While the coronavirus pandemic (“pandemic”)There continues to impact certain areas of the Company’s operations, the currentbe residual impact on the Company’s business and financial performance is coming primarily from the coronavirus pandemic. In particular, there has been decreased demand for the Company’s Lubrajel® products in China as a result of (a) slower than expected post-COVID economic recovery in China; (b) increased competition from lower-priced competitors, especially those from Asian producers; (c) overstocking on the part of certain customers while the zero-COVID mandate was in effect in China for much of 2022.

As a result of the ongoing supply chain instability, the Company has experienced longer lead times and higher prices for many of its raw materials. The increases in raw material costs and increased shipping costs, which had an impact onprices have negatively impacted the Company’s gross profit margins in the second quarterfirst half of 20222023 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 began to gradually improve during the second quarter of 2022. The shortage of truck drivers and shipping vessels is expected to continue to improve as the year progresses, but this will be at least partially contingent upon the extent to which the impact of the pandemic lessens globally. The Company has been able to minimize the impact on customers by making them aware of longer lead times that may be necessary as a result of these issues.

The pandemic has not significantly affected the ability of the Company to obtain raw materials, but has created longer lead times for some of them. In response to theTo help offset rising raw material prices and shipping costs and their impact on the Company’s gross margins, the Company has instituted price increases on many of its products, which will help to reduce the impact onproducts.

While inflation has lessened somewhat during 2023, it is uncertain if this downward trend in the Company’s gross margins will continue. If the inflation rate begins to rise in the future.second half of the year, there will likely be further increases in raw material costs, shipping costs, and internal labor costs, which could negatively impact the Company’s future gross margins.

As a result of the lingeringresidual effects of the coronavirus pandemic, as described above,combined with global supply chain instability and inflation, there continues to be uncertainty in regard toregarding the future potential impact of the pandemic on the Company’s operations orand its financial results. The Company believes that it is still unable to provide an accurate estimate or projection as to what the future impact of the pandemic will be on the Company’s future operations orand its financial results. The Company does not expect the carrying value of its assets or its liquidity to be impaired by the coronavirus pandemic.performance going forward.

4.        Use of Estimates

In preparing financial statements in conformity with 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, as well as revenues 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.

5.        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 inception.the time of purchase. The Company deposits cash and cash equivalents with high credit qualityfinancially strong, FDIC-insured financial institutions, and believes that any amounts above FDIC insurance limitations are at minimal risk. The amounts held in excess of insurance limitationsFDIC limits at any point in time are considered temporary and are primarily due to be at minimal risk.the timing of the maturities of United States Treasury Bills. 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.$250,000. At June 30, 2022 2023 and December 31, 2021, $395,0002022, $1,221,000 and $410,000,$105,000, respectively, exceeded the FDIC limit.

Cash and cash equivalents include currency on hand, demand deposits with banks or financial institutions, and short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present minimal risk of changes in value because of changes in interest rates. The following table summarizes the Company's cash and cash equivalents:

6.        Revenue Recognition

The Company records revenue in accordance with ASC Topic 606 “Revenue from Contracts with Customers.” Under this 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 or services. The Company’s principal source of revenue is product sales.

The Company’s sales, as reported, are subject to a variety of deductions, some of which are estimated. These deductions are recorded in the same period that the revenues are recognized. Such deductions, primarily related to the sale of the Company’s pharmaceutical products, include chargebacks from the United States Department of Veterans Affairs (‘VA”), rebates in connection with the Company’s participation in Medicare 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.

During 20222023 and 2021,2022, the Company participated in various government drug rebate programs related to the sale of Renacidin®, its most importantour best-selling pharmaceutical product. These programs include the Veterans Affairs Federal Supply Schedule (FSS), and the Medicare Part D Coverage Gap Discount Program (CGDP). These programs require the Company to sell its product at a discounted price. The Company’s sales, as reported, are net of these product rebates and discounts, some of which are estimated and are recorded in the same period that the revenue is recognized.

The Company recognizes revenue from sales of its cosmetic ingredients, medical, 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’s 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’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 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 its 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 offrom 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 606-10-32-8.606-10-32-8. 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 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. As of At June 30, 2023 and 2022, the Company had an allowance of $277,274 and December 31, 2021, the allowance$331,943, respectively, for doubtful accounts receivable was $28,398 and $20,252, respectively. Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded when they are taken.possible outdated material returns, which is included in accrued expenses.

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

Disaggregated sales by product class are as follows:

The Company’s cosmetic ingredients are marketed worldwide by five marketing partners, distributors, of which U.S.-based Ashland Specialty Ingredients (“ASI”) purchases the largest volume. Approximately 35%22% of the Company’s total sales in the second quarter of 20222023 were to customers located outside of the United States, compared with approximately 24%35% in the second quarter of 2021.2022. For the six months ended June 30, 2022, 2023, approximately 28%23% of the Company’s total sales were to customers located outside of the United States, compared with approximately 23%28% for the six months ended June 30, 2021.2022.

Disaggregated sales by geographic region are as follows:

* Since substantially all purchases by ASI are shipped to ASI’s warehouses in the U.S., all sales to ASI are reported as U.S. sales for financial reporting purposes, even though a significant quantity of those purchases will be shipped by ASI to foreign customers. ASI has reported to the Company that approximately 75%70% of its sales of the Company’s products in the second quarter of 20222023 were to foreign customers, with China representing approximately 46%40%. For the same time period in 2021,2022, approximately 72%75% of ASI’s sales of the Company’s products were to foreign customers, with China representing approximately 43%46%.

For the six months ended June 30, 2022 2023 approximately 73%70% of ASI’s sales of the Company’s products were to customers in other countries, with China accounting for approximately 43%29% of ASI’s sales of the Company’s products, as compared with approximately 69%73% of ASI’s sales going to customers in other countries for the six months ended June 30, 2021, 2022, with China accounting for approximately 40%43% of ASI’s sales of the Company’s products during that period.

7.        Marketable Securities

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 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 provides allowances for any receivables for which collection is doubtful in accordance with ASU 2016-13. As of June 30, 2023 and December 31, 2022, the allowance for doubtful accounts receivable was $34,823 and $20,063, respectively. Prompt-pay discounts are offered to some customers; however, due to the uncertainty of the customers taking the discounts, the discounts are recorded only after they have been taken.

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

The disaggregated net gains and losses on marketable securities that were recognized on the income statements for the threethree- and six monthssix-months ended June 30, 2023 and June 30, 2022 and June 30, 2021 were 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-tierthree-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.

•    

The Company’s marketable equity securities, which are considered available 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:

June 30, 20222023 (unaudited)

December 31, 20212022 (audited)

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

Proceeds from the sale and redemption of marketable securities amounted to $1,658,292$5,255,145 for the first half of 2022,2023, which includes realized losses of $207,936.$433,769. Proceeds from the sale and redemption of marketable securities amounted to $1,832,827$1,658,292 for the first half of 2021,2022, which included realized gainslosses on sales of $112,180.$207,936.

8.        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-outfirst-in, first-out (“FIFO”) method. Finished product inventories at June 30, 2022 2023 and December 31, 2021 2022 are stated net of a reserve of $35,000$72,000 and $64,000, respectively, for slow moving and obsolete inventory.

9.        Income Taxes

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 June 30, 2022 2023 and December 31, 2021, 2022, the Company did not have any unrecognized tax benefits. The Company’s provision for income taxes for the threethree- and six monthssix-months ended June 30, 2022 2023 and 2021,2022, included the following:

10.      Defined Contribution Plan

The Company sponsors a 401(k)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)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 $54,500 and $65,000 in contributions to the DC Plan for the six monthssix-months ended June 30, 2022 2023 and 2021,2022, respectively. In the firstsix months of 2023, the Company made discretionary contributions of $94,326 to the DC Plan. This payment represented the remaining portion of the Company’s 2022 discretionary contribution. For the first half of 2022, the Company made discretionary contributions of $109,000 to the DC Plan. This payment represented the Company’s 2021 discretionary contribution. For the first half of 2021, the Company did not make any discretionary contributions to the DC Plan.

11.      Other Information

12.      Recent Accounting Pronouncements

On In 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-2016-13ASU-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 after December 15, 2022. The Company is currently evaluating if this pronouncement willdid not have a potential impactmaterial effect on itsthe Company’s financial statements.

13.      Concentrations of Credit Risk

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 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.

During the three months ended June 30, 2022, 12023, one of the Company’s cosmetic ingredient marketing partners,distributors, along with 3three of its pharmaceutical distributors, together were responsible for 69%81% of the Company’s sales, and accounted for 84% of its outstanding accounts receivable at June 30, 2023. During the three months ended June 30, 2022, the same cosmetic ingredient distributor and three pharmaceutical distributors together were responsible for 65% of the Company’s sales, and accounted for 68% of its outstanding accounts receivable at June 30, 2022.During the three months ended June 30, 2021, the same marketing partner and 3 distributors together were responsible for 75%

During the six months ended June 30, 2022, 12023, one of the Company’s cosmetic ingredient marketing partners,distributors, along with three of its pharmaceutical distributors, together were responsible for 74%78% of the Company’s sales, and accounted for 84% of its outstanding accounts receivable at June 30, 2023. During the six-month period ended June 30, 2022, the same cosmetic ingredient distributor and three pharmaceutical distributors together were responsible for 72% of the Company’s sales, and accounted for 68% of its outstanding accounts receivable at June 30, 2022.During the six-month period ended June 30, 2021, the same marketing partner and 3 distributors together were responsible for 76% of the Company’s sales, and accounted for 73% of its outstanding accounts receivable at June 30, 2021.

14.      Earnings Per Share

For the three- and six-month periods ended June 30, 2023, the Company made payments of $30,000 and $60,000 respectively, to Ken Globus, the Company’s former President, for consulting services provided to the Company. There were no payments made to Mr. Globus for consulting services in the corresponding periods in 2022.

For the three- and six-month periods ended June 30, 2023, the Company made payments of $3,000, to the accounting firm PKF O’Connor Davies (“PKF”) for accounting and tax services. Lawrence Maietta, a partner at PKF, is a director of the Company. For the three- and six-month periods ended June 30, 2022, the Company made payments of $5,000 to the accounting firm PKF, for accounting and tax services.

Basic 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. 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 basic and diluted earnings amounted to $0.14$0.10 and $0.29$0.14 for the three months ended June 30, 2022 2023 and 2021,2022, respectively, and $0.34$0.26 and $0.55$0.34 for the six months ended June 30, 2023 and 2022, and 2021,respectively.

15.      Other Items

On January 25, 2022, the Company announced that its Board of Directors had launched a formal review process to explore strategic alternatives. The purpose of the review was to ensure that value was being maximized for shareholders, and that the Company has sufficient scale and financial resources to take advantage of potential growth opportunities available. These alternatives could include, among others, an outright sale of the Company, possible joint ventures, strategic partnerships or alliances, or other possible transactions.

On June 14, 2022, the Company announced that it had completed the formal review process of exploring strategic alternatives and concluded that there were no opportunities presented to the Company that the Board of Directors believed would be in the best interests of the Company or its stockholders. While the active efforts will be suspended, the Company will continue to explore opportunities to grow the Company’s core businesses and will consider any opportunities that would be in the best interests of the Company and its stockholders.

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 second quarter of 20222023 and 20212022 and the first half of 20222023 and 2021.2022. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company'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” unless specifically identified as “gross sales”.

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 of such words as “believes”, “may”, “will”, “should”, “intends”, “plans”, “estimates”, “anticipates”, or other similar expressions. Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond the Company’s 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'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's products; lack of market acceptance of the Company's products; the Company'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'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'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, and health caremedical lubricants. The Company conducts various research and development activities. The Company’s research and development department modifies, refines, and expands the uses for existing products, pharmaceuticals, non-pharmaceutical medicalwith the goal of further developing the markets that its products are used in. The Company also develops new products with a focus on using natural and proprietary specialty industrial products.environmentally friendly raw materials, which is a priority for many of the Company’s cosmetic customers. All the products that the Company markets, except 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.

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

The Company’s cosmetic ingredients in cosmetic products and 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 have been certified by the Cosmetic Organic and Natural Standard (“COSMOS”). This standard is recognized globally by the cosmetic industry.

Renacidin and the Company’s other pharmaceutical product, Clorpactin®, which is also used primarily in urology, WCS-90, are distributed through full-line drug wholesalers and are currently 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 industrial products,which consist of water-based gel formulations designed to provide sensory enhancement and lubrication mainly for medical device applications. Products are sold directly to end users,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.end-users.

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 the Company’s 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 tolevel of performance and quality of the Company’s products.

The Company recognizes revenue when all of the following requirements are satisfied: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 its 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 second quarter 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 began to gradually improve during the second quarter of 2022. The shortage of truck drivers and shipping vessels is expected to continue to improve as the year progresses, but this will be at least partially contingent upon the extent to which the impact of the pandemic lessens globally. The Company has 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 valuefuture.

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 six months ended June 30, 20222023 and June 30, 2021.2022. This discussion and analysis should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’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 unless 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: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 a 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, which is when the performance obligation 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 its 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 its 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 second quarter of 20222023 decreased by $31,801 (less than 1%$975,878 (27%) when compared with the same period in 2021.2022. Net sales for the first half of 2022 increased2023 decreased by $429,689 (6%$2,297,912 (31%) as compared with the corresponding period in 2021.2022. The decrease and increase in sales for the second quarter of 20222023 and the first half of 20222023 were attributable to changes in sales of the following product lines:

1.Cosmetic ingredients:

a)(a) Second quarter sales: For the second quarter of 2022,2023, the Company’s sales of cosmetic ingredients decreased by $461,813 (25%$621,076 (45%) when compared with the second quarter of 2021.2022. The decrease in the second quarter sales was due primarily to a net decrease of $487,820 (34%$402,586 (43%) in sales of the Company’s cosmetic ingredients to ASI. The net decrease in sales to ASI was due to two main factors: 1) inwhen compared with the second quarter of 2021,2022. Based on information provided by ASI, resumed shipments ofthe decrease in sales was due to three main factors 1) decreased demand for the Company’s cosmetic ingredients toLubrajel products in China due to improving COVID-19 pandemic conditions,slow post-COVID economic growth; 2) increased competition from lower-priced competitors, especially those from Asian producers; and sales for that period represented a significant increase3) customers working off excess stock, maintaining lower inventory levels, and changing ordering patterns to just in order to compensate for the lack of sales during the height of the pandemic in 2020; and 2) in the second quarter of 2022 the Company provided pricing rebates in the amount of $129,600 to ASI for new business it acquired.time.

Second quarter sales to the Company’s four other marketing partners,distributors, as well as to the fourone direct cosmetic ingredient customers, increasedcustomer, decreased by a net of $26,007$218,490 (50%) compared with the second quarter of 2021.2022. The increasedecrease was attributable to a sales increasedecreases of $168,028$225,182 to the Company’s marketing partnerdistributors in the UK and an increase of $535 in sales to four direct cosmetic ingredient customers.Italy. These increasesdecreases were offset by a decreasean increase in sales of $126,708$6,692 to the Company’s marketing partners in France, a decrease of $770distributors in Switzerland and a decrease of $15,078 in sales to the Company’s marketing partner in Italy.France as well as one direct customer.

b)(b) Six-month sales: For the first half of 20222023 the Company’s sales of cosmetic ingredients decreased by $14,494 (less than 1%$1,937,090 (56%) when compared with the corresponding period in 2021.2022. This decrease was due primarily to a net decrease in sales to ASI of $105,905 (4%$1,564,484 (59%), which includes a rebate when compared with the second quarter of $129,600 to ASI in connection with new business that ASI acquired. That2022. This decrease was fully offset bycombined with a net increasedecrease in sales of $106,064$372,606 to the Company’s four other marketing partners, with salesdistributors and one direct customer. Sales to the Company’s marketing partnersdistributors in the United Kingdom, France, and Italy increasingand one direct customer decreased by a combined net of $121,691,$374,965 and sales to the Company’s marketing partnersdistributor in France and Switzerland decreasingincreased by a combined net of $15,622. Sales to the Company’s four direct cosmetic ingredient customers decreased by $14,658.$2,359.

2.Pharmaceuticals:

Because thereThere are fees, rebates and allowances associated with sales of the Company’s two pharmaceutical products, Renacidin and Clorpactin,Clorpactin. As a result, 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- and six-month periods ended June 30, 20222023 increased by $112,599 (8%$154,369 (10%) and $162,882$180,009 (6%), respectively, compared with the corresponding periods in 2021.2022. These increases were due primarily to increases of $88,962 (7%$170,351 (13%) and $128,009 (5%$183,490 (7%) in gross sales of Renacidin for the three- and six-month periods, respectively, ended June 30, 2022.2023. These increases were accompaniedoffset by increasesdecreases of $23,637 (14%$15,982 (8%) and $34,873 (11%$3,481 (1%) in gross sales of the Company’s other pharmaceutical product, Clorpactin, for the same three- and six-month periods, respectively, whichrespectively. The Company attributes the Company believes was most likely dueincrease in sales of Renacidin to a price increase that went into effect during the quarter combined with normal fluctuations in thecustomer ordering patterns. The decrease in sales of Clorpactin.

The increase in gross sales for the three- and six-month periods ended June 30, 2022Clorpactin was partially offset by an increase in pharmaceutical-related fees, rebates and allowances of $23,393 (11%) and $8,228 (2%), respectively. The increase in these fees, rebates and allowances is the result of the direct relationship between the sales of the Company’s pharmaceutical products and the rebates and allowances related to those product sales.

3.Medical (non-pharmaceutical) products:

Sales of the Company’s medical products for the three and six-month periods ended June 30, 2022, increased by $341,332 (55%) and $283,101 (23%), respectively, compared with the same periods in 2021. The increase in sales for the three-month period was primarily due to two factors: 1) at March 31, 2022, the Company had medical product orders of approximately $240,000 that were waitingalso believed to be shipped but were delayed due to a shortage of truck drivers and limited availability of shipping vessels. These orders were subsequently shippedcaused by normal fluctuation in the second quarter of 2022, and 2) The Company has seen a significant increase in orders from one of its larger customers in China. For the six-month period ended June 30, 2022, the increase in medical product sales was primarily due to an increase in orders from the Company’s foreign customers, particularly customers located in China, which began to place larger orders than they had in 2021.customer ordering patterns.

The difference between the net sales increase compared with the gross sales increase for these products is due to a combination of 1) the net increase in gross sales of those products, combined with; 2) an increase in pharmaceutical sales allowances of $16,152 (5%) for the three-month period ended June 30, 2023, and a decrease in pharmaceutical sales allowances of $87,218 (21%) for the six-month period ended June 30, 2023. These allowances typically have a direct relationship with the sales of the Company’s pharmaceutical products, however, for the six-month period ended June 30, 2023, the decrease in sales allowances was primarily due to a decrease in outdated material returns allowances.

4.Medical lubricants:

Sales of the Company’s medical lubricants for the three- and six-month periods ended June 30, 2023, decreased by $479,568 (50%) and $616,332 (41%), respectively, compared with the same periods in 2022. The decrease in sales for the three- and six-month periods was primarily due to one of the Company’s larger customers in China changing their ordering patterns in 2023 due to the overstocking of product while China’s Zero-COVID Mandate was in place.

Industrial and other products:

Sales of the Company's industrial products, as well as other miscellaneous products, for the three-monththree- and six-month periods ended June 30, 2022,2023, decreased by $525$13,451 and $10,028,$11,718, respectively, when compared with the corresponding periods in 2021.2022. The decrease in sales for both periods was primarily due to the lossCompany’s phase out of one of the Company’s larger domestic customersits industrial product line due to a reformulationlow sales. The second quarter of one2023 is the last period for which the Company will be reporting sales of that customer’s products.this product line.

Cost of Sales

Cost of sales as a percentage of net sales increased to 54% in the second quarter of 2023 from 47% in the second quarter of 2022 from 41% in the second quarter of 2021.2022. For the first six months of 2022,2023, cost of sales as a percentage of sales increased to 45%48% compared with 40%45% for the first six months of 2021.2022. The increases in both periods were the result of an increase1) the product sales mix in certain raw material costs, combined2023 compared with the recording of $129,600same periods in rebates payable to one2022. The Company’s pharmaceutical products represented a larger percentage of the Company’s marketing partners in the second quarter of 2022. In addition, the Company recorded a one-time Employee Retention Credit (ERC) in the first six months of 2021, which decreased the cost of sales for that period.both the three- and six-month periods ended June 30, 2023 compared with the same periods in 2022. These products carry a lower gross margin than the Company’s cosmetic products and medical lubricants, and 2) higher per unit overhead costs due to reduced production caused by lower demand for some of the Company’s products.

Operating Expenses

Operating expenses, consisting of selling and general and administrative expenses, increaseddecreased by $107,217 ( 21%$46,136 (7%) and $74,939 (6%) respectively, for the second quarter of 2022three- and six-month periods ended June 30, 2023 compared with the equivalent periodperiods in 2021. Operating expenses increased by $196,839 (20%) for the first six months of 2022, compared with comparable period in 2021. The increase in operating expenses for the second quarter of 2022 was primarily due to increases in insurance expense and consulting and legal fees. In addition, during the second quarter there was an increase in fees to the independent members of the Company’s Board of Directors, which related to the review process of exploring strategic alternatives for the Company. The increase in operating expenses for the first 6 months of 2022 was primarily due to the recording of an ERC in the first 6 months of 2021, which decreased the Company’s operating expenses. After taking into account the effect of the ERC, the Company’s operating expenses increased by (7%) in the first six months of 2022 compared with the same period in 2021, which was due primarily to increases in the same expenses noted above. Due to the current inflationary environment, the Company expects to see a minor increase in operating expenses for the remainder of the year.

Research and Development Expenses

Research and development expenses decreased by $17,759 (14%) for the second quarter of 2022 compared with the second quarter of 2021, and increased by $25,621 (12%) for the first six months of 2022 compared with the first six months of 2021.2022. The decrease in the second quarter of 2022both periods was due primarily to a decrease in payroll and payroll related expenses. The increase for the first six months of 2022 wasmainly due to the recording of the ERCdecreases in 2021. After taking the effect of the ERC into account, researchemployee bonuses and development expenses for the six-month period ending June 30, 2022 decreased by less than 1%.depreciation expenses.

Research and Development Expenses

Research and development expenses increased by $16,463 (15%) and $11,756 (5%), respectively, for the three- and six-month periods ended June 30, 2023, compared with the equivalent periods in 2022. The increase was primarily due to increases in payroll and payroll-related expenses.

Investment Income

Investment income increaseddecreased by $13,220 (29%$3,910 (7%) for the second quarter of 20222023 compared with the second quarter of 2021,2022 and increased by $14,010 (16%$3,172 (3%) for the first half of 20222023 compared with the same period in 2021.2022. The decrease in the second quarter was primarily due to a shift in the investment portfolio from equity and fixed income mutual funds to U.S. Treasury Bills and Certificates of Deposit, which yielded slightly less income during the second quarter of 2023 compared to the same period in 2022. The increase in both periodsfor the six-month period was primarily due to an increase in dividend income from stock and bond mutual funds.the overall investment portfolio.

Net Gain (loss) gain on Marketable Securities

The net loss on marketable securities increased by $597,852 and $919,465 forFor the three and six-monththree- and-six-month periods ended June 30, 2022 compared with2023, the same periods in 2021. Approximately 90% of the Company’sCompany recorded net gains on its marketable securities portfolio is composed of fixed income mutual funds. The Company intentionally weighted its portfolio as such in an effort to minimize significant stock market fluctuations. However, given the current inflationary environment and the rise of interest rates, management believes that the decrease in the market valueamount of $7,479 and $80,180, respectively. For the corresponding periods in 2022, the Company recorded net losses of $460,278 and $853,938, respectively. The reason for the fluctuation was due to 1) during 2022, the Company’s fixed income mutual funds will be temporary.(which made up approximately 90% of the investment portfolio) lost a significant amount of value due to increases in interest rates and those unrealized losses were recorded during 2022; and 2) a majority of those mutual funds were sold during the second quarter of 2023, and while most of the losses had already been recorded in 2022, there were some increases in market value at the time of these sales, which created unrealized gains in the current period. The Company’s management and Board of Directors are continuing to closely monitor the Company's investment portfolio and will make any adjustments 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 21% for the first halveshalf and second quartersquarter of 2022both 2023 and 2021.2022. The Company’s tax rate is expected to remain at 21% for the current fiscal year.

LIQUIDITY AND CAPITAL RESOURCES

Working capital decreasedincreased from $9,245,629$8,596,939 at December 31, 20212022 to $9,095,419$10,009,566 at June 30, 2022, a decrease2023, an increase of $150,210.$1,412,627. The current ratio increased from 5.07.3 to 1 at December 31, 20212022 to 5.68.4 to 1 at June 30, 2022.2023. The decreaseincrease in working capital was due to a decrease in marketable securities and cash. The increase in the current ratio was primarily due to an increase in cash and prepaid income taxes. The increase in cash was primarily due to decreases in deferred revenue and income taxes payable.the Company changing the date of its semiannual dividend payment from June to August.

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 does not expect to incur any significant capital expenditures for the remainder of 2022. The Company intends to utilize its available cash and assets primarily for its continued organic growth and potential future strategic transactions, as well as to mitigate the potential impact of COVID-19 and inflation on the Company's business.

The Company is in the process of upgrading its building sprinkler system and expects to incur costs of approximately $100,000 in connection with this upgrade. The project is currently in process and the Company will be making progress payments throughout the remainder of 2023.

The Company generated cash from operations of $1,164,601$852,247 and $2,617,308$1,164,601 for the first half of 20222023 and 2021,2022, respectively. The decrease from 20212022 to 20222023 was primarily due to the decrease in net income.

Cash provided by investing activities was $359,150$4,800,208 in the first half of 2022,2023, compared with cash used by investing activities of $259,675$359,150 for the first half of 2021.2022. The increase was due to an increase in the Company purchasing lesssales of the Company’s marketable securities in the first half of 20222023 compared to 2021.with 2022. The proceeds from these sales were primarily reinvested in short-term U.S. Treasury Bills, which are included in cash and cash equivalents.

Cash used in financing activities was $1,699,392 and $2,204,616 for the first half of 2022 and 2021, respectively. The decrease wasrepresented the payment of dividends. There were no financing activities during the first half of 2023 due to a decrease inthe Company shifting the declaration and payment of dividends paid from $0.48 per share in 2021 to $0.37 per share in 2022.the third quarter of 2023.

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

OFF BALANCE-SHEET ARRANGEMENTS

The Company has no off balance-sheet transactions that have, or are reasonably likely to have, a current or future impact on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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

Item 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

Item 4.   CONTROLS AND PROCEDURES.

The Company’s management, including its Principal Executive Officer and Chief 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 Chief 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 Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosures.

The Company's Principal Executive Officer and Chief 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.

NONE

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. OTHER INFORMATION.

NONE

ITEM 6. EXHIBITS.

* 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.