Item 1.
Business
.
(a)
Introduction
United-Guardian, Inc. ("United", the "Registrant", or the “Company”) is a Delaware corporation that, through its Guardian Laboratories Division ("Guardian"), manufactures and markets cosmetic ingredients, personal care products, pharmaceuticals, medical and health care products, and specialty industrial products. It also conducts research and development, primarily related to the development of new and unique cosmetic and personal care products. United's predecessor, United International Research, Inc. ("UIR"), was founded and incorporated in New York in 1942 by Dr. Alfred R. Globus, United's Chairman and Director of Research until his death on April 9, 2009. On February 10, 1982, a merger took place between UIR and Guardian Chemical Corp. ("GCC"), an affiliate of UIR, whereby GCC was merged into UIR and the name was changed to United-Guardian, Inc., a New York corporation. On September 14, 1987, United-Guardian, Inc. (New York) was merged with and into a newly formed Delaware corporation by the same name, United-Guardian, Inc., for the purpose of changing the domicile of United to Delaware.
The Company conducts research, product development, manufacturing and marketing of cosmetic ingredients, personal and health care products, medical lubricants, pharmaceuticals, and specialty industrial products. The research and development department not only develops new products but also modifies, refines, and expands the uses for existing products, with the goal of further developing the market for the Company's products.
The Company has a broad range of products, some of which are currently marketed, some of which are marketable but are not currently marketed by the Company, and some of which are still in the developmental stage. Of the products being actively marketed, the two largest product lines are the LUBRAJEL
®
line of cosmetic ingredients and medical lubricants, which accounted for approximately 87% of the Company's sales in 2012, and its RENACIDIN
®
IRRIGATION ("RENACIDIN"), a pharmaceutical product that accounted for approximately 8% of the Company's sales in 2012.
(b)
Narrative Description of Business
The Company manufactures and markets cosmetic ingredients, personal and health care products, medical lubricants, pharmaceuticals, and specialty industrial products. It also conducts research and development, primarily related to the development of new and unique cosmetic and personal care products. The Company endeavors to develop products that fill unmet needs in the marketplace, have unique properties, and use proprietary technology that it often protects with patents. Many of the Company's products are marketed through collaborative agreements with larger companies. The personal care products manufactured by the Company, including the cosmetic ingredients, are marketed to end users through the Company's worldwide network of marketing partners and distributors, and are currently used by many of the major global cosmetic and personal care products companies. The Company sells product outright to its marketing partners, FOB the Company’s plant in Hauppauge, New York, and those marketing partners in turn resell those products to their customers, who are typically the end users of the products. The products are not sold on a consignment basis, so unless a product is determined to be defective it is not returnable except at the discretion of the Company.
The Company operates in one business segment. The Company’s products are separated into four distinct product categories: personal care products (including cosmetic ingredients), pharmaceuticals, medical products, and industrial products. Each product category is marketed differently.
The Company’s personal care products, including cosmetic ingredients, are marketed globally by six marketing partners, of which Ashland Specialty Ingredients (“ASI”) is the largest. The products are sold directly to those marketing partners, which in turn resell those products to their customers for use in the manufacture or compounding of the customers’ personal care and cosmetic products. The Company’s non-pharmaceutical medical products (referred to hereinafter as “medical products”) and the specialty industrial products are sold directly by the Company to the end users or to contract manufacturers utilized by the end users. The Company’s pharmaceutical products are marketed by direct advertising, mailings, and trade exhibitions, and are sold to end users primarily through major drug wholesalers, which purchase the Company’s products outright for resale to their customers. The Company also sells a small quantity of pharmaceutical products directly to hospitals and pharmacies. The Company's products are sold under trademarks or trade names owned by the Company. The marks for the most important products, LUBRAJEL
®
and RENACIDIN
®
, as well as some other Company trademarks, are registered as trademarks with the United States Patent and Trademark Office as well as with the appropriate regulatory agencies in some foreign countries.
PRODUCTS
The Company operates in one business segment, and its product lines are separated into four distinct product categories:
LUBRAJEL
is an extensive line of water-based moisturizing and lubricating gel formulations that are used as ingredients in personal care (primarily cosmetic/skincare) products. In the personal care industry, they are used primarily as moisturizers and bases for other cosmetic ingredients, and can be found as an ingredient in skin creams, moisturizers, makeup, and body lotions. The largest selling product in the LUBRAJEL line in 2012 was LUBRAJEL CG, the original form of LUBRAJEL, followed in sales by LUBRAJEL Oil. Some of the other varieties of LUBRAJEL sold for cosmetic use (all using the LUBRAJEL name), in descending order of sales, are MS, DV, PF, NP, II XD, WA, and TW . In addition, many of these products are available in comparable formulations that do not contain parabens as the preservative, and instead use a different preservative system that is preferred by some customers. Those equivalent products are differentiated by adding the word “Free” after the name (for example, LUBRAJEL MS Free, DV Free, etc.), indicating that those formulations do not contain parabens.
LUBRAJEL PF
is different from the other products in the LUBRAJEL line in that it is a completely preservative-free form of LUBRAJEL. It is marketed under the LUBRAJEL PF tradename in all markets other than France, where it is marked under the tradename “Norgel” by Societe D'Etudes Dermatologiques ("Sederma"), a subsidiary of Croda International Plc (“Croda”). Sederma is the Company's exclusive marketing partner and distributor of the Company’s cosmetic ingredients in France and, along with its parent company, Croda, is a major supplier of specialty cosmetic ingredients to the personal care products industry. Tests have shown that this product self-preserves, and that it aids in the preservation of other cosmetic ingredients with which it is formulated.
Each of the following products accounted for less than 2% of the Company’s sales in 2012:
LUBRASIL
™ is a special form of LUBRAJEL in which silicone oil is incorporated into a LUBRAJEL base by microemulsification, thereby maintaining clarity similar to the other LUBRAJEL products. The product has a silky feel, and is water resistant while moisturizing the skin. The newest products in the LUBRASIL line are the LUBRASIL II products, which currently consist of LUBRASIL II DM and LUBRASIL II SB. Both products contain substantially higher levels of silicone than the original LUBRASIL products, and are intended to be additions to the line, not replacements for the original LUBRASIL.
LUBRAJEL II XD
is a version of LUBRAJEL that was developed to be a direct replacement for one of the competitive products to LUBRAJEL.
KLENSOFT
™ is a surfactant (a surface active agent, such as a soap or detergent) that can be used in shampoos, shower gels, makeup removers, and other cosmetic formulations. KLENSOFT sales have been variable due to the ordering patterns of the customers for the product. As a result, in 2012 sales of KLENSOFT increased significantly over 2011. The Company expects the variability in sales of this product to continue.
UNITWIX
®
is a cosmetic additive used as a thickener for oils and oil-based liquids. It is a proprietary, unpatented product. In 2011 the Company developed a new formula for UNITWIX that it now markets under the name UNITWIX II. It was developed as a result of the recent escalation in the cost of UNITWIX and the difficulty in obtaining some of the key raw materials used in the manufacturing of the product, and was intended to be a direct replacement for the original UNITWIX. The new formula is less expensive to manufacture, and therefore can be marketed at a much lower price. Some of the Company's smaller customers for this product have already switched to the new formula, but the Company’s primary customer for UNITWIX has not yet reformulated. The Company is hopeful that this lower-cost formulation will bring in new customers for which the original product was not cost effective. However, even with the new formulation there are still issues regarding cost and availability of the raw materials needed to manufacture this product.
ORCHID COMPLEX
™ is a successor product to the Company's previous OIL OF ORCHIDS product, and is a base for skin creams, lotions, cleansers, and other cosmetics. It is an extract of fresh orchids modified by stabilizers and preservatives, and is characterized by its excellent lubricity, spreadability, light feel, and emolliency. Because of its alcohol solubility, it may also be used in fragrance products such as perfumes and toiletries. Its emolliency makes it an excellent additive to shampoos, bath products and facial cleansers. It is also a superior emollient for sunscreens, vitamin creams, toners and skin serums. It is sold in two forms, water-soluble and oil-soluble.
LUBRASLIDE
™ and a related product,
B-122
™, are powdered lubricants used in the manufacture of cosmetics such as pressed powders, eyeliners, and rouges. They are used as binders for these products, increasing water-repellency and drop strength and lowering the coefficient of friction.
AQUATHIK
™ is a powder that is used as a gelling agent for aqueous solutions or emulsions with a pH below 7.
HYDRAJEL
™
PL
is a personal lubricant originally developed specifically for the feminine personal care market. Sales of this product decreased significantly in 2012 due to the ordering patterns of the primary customer for this product.
The Company believes that its ability to increase sales of its cosmetic and other personal care products will depend on (a) the ability of its marketing partners, especially its largest marketing partner, ASI (formerly International Specialty Products Inc.), to continue to aggressively promote the Company’s products, particularly to new customers, and (b) the Company's success in developing new forms of LUBRAJEL that expand its uses to new applications. The Company is continuing to develop new varieties of LUBRAJEL to extend the line even further, and is working with its marketing partners to find new marketing opportunities.
The Company believes that there is still significant potential to expand the sales of its LUBRAJEL line of products through product modifications, additional claim substantiation, and geographic expansion, especially in such developing markets as mainland China, India, and Eastern Europe.
Any future increases in sales of the LUBRAJEL line of products may be negatively impacted by sales of competitive products, including new products being produced in China. However, the Company believes that because of the proprietary nature of the LUBRAJEL formulations, the strong brand identity, the cost to the end user of reformulation, the Company’s long history of supplying quality products, the extensive line of LUBRAJEL formulations, and the Company’s continuing product development programs, it will continue to be able to compete effectively in the marketplace and expand the market for its LUBRAJEL product line (see “Competition” below).
MEDICAL
LUBRAJEL RR and RC
are both gels used primarily as lubricants for urinary catheters. Both are special grades of LUBRAJEL that can withstand sterilization by gamma radiation, which is one of the methods of terminally sterilizing medical and hospital products. On April 11, 1995, the Company was granted a U.S. patent for these unique forms of LUBRAJEL that expires in December 2013. LUBRAJEL RR was the original radiation-resistant LUBRAJEL product. LUBRAJEL RC was developed specifically for one customer that packages the product in unit doses as a catheter lubricant for many manufacturers. Combined sales of these two products were 11% of the Company’s sales in 2012. Sales of these two products showed a net decrease of approximately 7% compared with sales of these two products in 2011. The net decrease was the result of a decrease of 16.1% in sales of LUBRAJEL RR, which was partially offset by an increase of 6.5% in sales of LUBRAJEL RC. Sales of these products are subject to year-to-year variations based on the ordering patterns of the customers for both products.
LUBRAJEL LC
was developed for a specific customer who required a product suitable for oral use, to be used in a line of mouth moisturizers that it markets. This line of mouth moisturizers was acquired by a major multinational pharmaceutical company in 2009. Since the acquisition, sales of LUBRAJEL LC have increased 9.4% in 2011 compared with 2010, and 3.5% in 2012 compared with 2011. Sales of this product represented approximately 5% of the Company’s sales in 2012.
LUBRAJEL MG
is the original form of LUBRAJEL, developed as a medical lubricant. It is used by many medical device manufacturers for lubricating urinary catheters, prelubricated enema tips, and other medical devices. Sales increased by 8% in 2012 compared with 2011, which the Company believes was the result of fluctuations in the buying patterns of customers for this product. Sales of this product represented 4% of the Company’s sales in 2012.
LUBRAJEL FLUID
is a very low viscosity form of LUBRAJEL that was developed to provide superior lubrication in water-soluble products. It was specifically developed, and is currently being used, as a replacement for silicone oils in pre-lubricated condoms. Sales have decreased in each of the past two years due to a lessening of the concerns about the use of silicone-based products.
Sales of all of the medical grades of LUBRAJEL decreased by 1% in 2012 compared with 2011, and accounted for approximately 21% of the Company’s sales in 2012 compared with 20% in 2011. The Company believes that this was the result of fluctuations in the purchasing patterns of the customers and not the result of a long-term decrease in demand.
PHARMACEUTICAL
RENACIDIN
is a prescription drug product that is used primarily to prevent and to dissolve calcifications in urethral catheters and the urinary bladder. It is marketed as a ready-to-use sterile solution. It is also approved for use in dissolving certain types of kidney stones. It currently has regulatory approval only in the United States. Historically, RENACIDIN has accounted for 16-18% of the Company's annual revenues. This product has been manufactured for the Company under a long-term contract with a major U.S. drug company. In November 2010, that supplier experienced manufacturing issues at the facility that manufactures RENACIDIN that were unrelated to RENACIDIN but nevertheless stopped production until May 2011. As a result, the Company began allocating product, which resulted in approximately a 60% decline in sales of RENACIDIN each month beginning in November 2010 and continuing each month until the Company ran out of product completely in February 2011. In May 2011 regular production resumed, and sales gradually increased through the end of 2012. However, as a result of the shortage, RENACIDIN sales for 2011 were down by 20% compared with 2010. In 2011, the Company received a $385,182 credit from its supplier in resolution of the production curtailment.
In May 2012, the Company’s RENACIDIN supplier once again curtailed production due to manufacturing issues, and the Company’s inventory of RENACIDIN was depleted in July 2012. In the months leading up to that, sales gradually declined as the Company allocated product to stretch out inventory as long as possible. As a result of these production issues, the Company did not receive any shipments of RENACIDIN in 2012. The Company has been informed by the supplier that it is currently projecting a resumption of production in the third quarter of 2013. As a result of this second production curtailment, RENACIDIN sales in 2012 declined another 42% from the already-reduced 2011 levels, and were 60% lower than sales in a typical year before the production curtailments began. To address the May 2012 production curtailment the supplier has paid the Company $518,050, which covers most of the RENACIDIN profit the Company lost in 2012.
The Company’s supply contract with its current RENACIDIN supplier expires in January 2014, and the Company has located a replacement supplier, which will be supplying the product in a new 30 mL single-dose unit. Currently the product is available only in a 500 mL bottle, which is difficult for the patient or care-giver to use. The Company expects that this new single-dose unit will result in wider acceptance and use of the product, and has the potential to significantly increase RENACIDIN sales. The change to the new supplier will require a new submission to, and approval from, the FDA, and the Company is estimating that it will receive that approval sometime in the second half of 2014. The Company is hoping that production by the current supplier will resume in time for the Company to bring in sufficient inventory to enable it to fill orders until the new single-dose unit becomes available, but at the present time there can be no assurance that this will happen, in which case the Company would not have RENACIDIN available for sale until the new product is available, which is not expected until at least mid-2014.
CLORPACTIN
®
WCS-90
is an antimicrobial product used primarily in urology to treat infections in the urinary bladder. It is also used in surgery for treating a wide range of localized infections in the peritoneum (the lining of the abdominal cavity), as well as the eye, ear, nose and throat, and sinuses. The product is a powder that is mixed with water by the end user and used as a solution. It is also a powerful disinfectant, fungicide, and deodorizer. Sales of CLORPACTIN are extremely consistent from year-to-year and represented 3% of the Company’s sales in 2012.
The Company’s pharmaceutical products are returnable only at the discretion of the Company unless (a) they are found to be defective, or (b) they are outdated (but not more than one year after their expiration date, a return policy that conforms to standard pharmaceutical industry practice).
INDUSTRIAL
DESELEX™ Liquid
is a sequestering and chelating agent that is a replacement for phosphates in the manufacture of detergents.
POLYCOMPLEX
M
and
Q
are complexing agents capable of producing clear solutions of specific water-insoluble materials.
DEVELOPMENT ACTIVITIES
The Company's research and development department has developed a large number of products that can be used in many different industries, including the pharmaceutical, medical, personal care (including cosmetic), health care, and specialty chemical industries. These products are in various stages of development, some currently marketable and some in the very early stages of development requiring a substantial amount of development work to bring them to market. Research is also being done on new uses for currently marketed products.
Prior to initiating research and development work on a product, market research is done to determine the marketability of the product, including the potential market size and the most effective method of marketing the product. After that, the research and development department will determine whether the product can be successfully developed, including (a) laboratory refinements and adjustments to suit the intended uses of the product; (b) stability studies to determine the effective shelf life of the product and suitable storage and transportation conditions; and (c) laboratory efficacy tests to determine the effectiveness of the product under different conditions. If development proves feasible, the Company will then determine whether production and sales costs make it feasible to bring the product to market.
If the initial development work is successful and the estimated costs of further development are acceptable to the Company, further development work to bring the product to market will continue, including some or all of the following: (a) clinical studies needed to determine safety and effectiveness of drug or medical device products; (b) preparatory work for the filing of Investigational New Drug Applications or New Drug Applications; and (c) scaling up from laboratory production batches to pilot batches to full-scale production batches.
While there can be no assurance that any particular project will result in a new marketable product or a commercially successful product, the Company believes that a number of its development projects, including those discussed below, may have commercial potential if the Company's development efforts are successful.
The Company's major research focus is on the development of new and unique ingredients for cosmetic and other personal care products. The following are some of the projects that the Company is either working on or intends to work on in the near future:
LUBRAJEL NATURAL
: This is a new “natural” form of LUBRAJEL for cosmetic use. It is based on natural polysaccharides, which contribute moisturization, emulsion stabilization, and emolliency to personal care creams and lotions. LUBRAJEL NATURAL is certified “natural” by Ecocert, a leading industry certification organization for natural and organic products. The Company believes that there is a growing demand, especially in personal care products, for natural products. There are expected to be at least two new formulations of these water-based gels, which will all be marketed under the LUBRAJEL tradename. The Company completed the first of these products at the end of 2012 and has begun its marketing efforts for that product. The Company hopes to begin to see sales sometime in 2013.
LUBRAJEL C NATURAL
: This is expected to be the second product in the LUBRAJEL NATURAL line. It is based on marine polysaccharides. The polysaccharides are noted for boosting the natural immune system and promoting healthier looking skin. LUBRAJEL C NATURAL provides moisturization and emolliency to creams and lotions. Ecocert certification has not yet been applied for; however, the Company believes that this product will be eligible for Ecocert certification.
LUBRAJEL IN
: This is a lower-cost form of LUBRAJEL developed to meet the need for a quality moisturizing ingredient for price sensitive geographic markets, such as India and South America. While not as good a moisturizer as the Company’s traditional grades of LUBRAJEL, LUBRAJEL IN provides a balanced cost/benefit approach for currently untapped markets.
VEGETABLE OIL EMOLLIENT
: This product consists of a blend of olive oil and olive butter in a natural light vegetable oil fraction. This product lends a silky, silicone-like feel to creams and lotions
.
LUBRAJEL TF
: A new medical lubricant specifically developed for a global medical products company. Development work has been completed and initial sales began at the end of 2012.
LUBRAJEL BA
: A new LUBRAJEL formulation intended for oral care uses.
It should be emphasized that some of the projects listed above are in very early stages of research and development, and it is likely that one or more of those projects will not result in marketable products.
The Company expects its research and development costs for 2013 to be comparable to those of 2012, which were $693,000. Any additional increase in development and/or production costs will depend on whether capital investments are required in order to continue development work on, or to manufacture, any of the new products under development.
The Company requires all employees and consultants who may receive confidential and proprietary information to agree in writing to keep such information confidential.
TRADEMARKS AND PATENTS
The Company strongly believes in protecting its intellectual property and intends, whenever reasonably possible and economically practical, to obtain patents in connection with its product development program. The Company currently holds a number of United States patents and trademarks relating to its products, and regularly has patent and trademark applications pending with respect to a number of its research and development products. Some patents previously issued to the Company on certain products have expired. There can be no assurance that any patents held by the Company will be valid or otherwise of value to the Company, or that any patent applied for will be granted. However, the Company believes that its proprietary manufacturing techniques and procedures with respect to certain products offer it some protection from duplication by competitors regardless of the patent status of the products. While in recent years the Company has relied more on trade secrets, proprietary formulations, and manufacturing methods than patents to protect its intellectual property, it intends to continue to file patent applications in situations where it believes that relying on trade secrets would be insufficient protection.
The various trademarks and trade names owned or used by the Company in its business are of varying importance to the Company. The most significant products for which the Company has registered trademarks are LUBRAJEL
®
and RENACIDIN
®
.
Set forth below is a table listing certain information with respect to all unexpired U.S. patents held by the Company.
PATENT NAME
|
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PATENT #
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FILING
DATE
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ISSUE
DATE
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EXPIRATION
DATE
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Radiation-resistant lubricating gel
|
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5,405,622
|
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12/1993
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4/1995
|
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12/2013
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Delivery system for oil-soluble actives in cosmetic and
personal care products
|
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6,117,419
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9/1996
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9/2000
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12/2016
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Microemulsion of silicone in a water-based gel that
forms a clear, transparent, highly stable moisturizer
and lubricant for cosmetic and medical use
|
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6,348,199
|
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1/1994
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2/2002
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2/2019
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There were no Company patents that expired over the past two fiscal years.
DOMESTIC SALES
In the United States the Company's cosmetic ingredient products are marketed and distributed exclusively by ASI in accordance with a marketing agreement entered into in 1996 with ISP and subsequently amended and expanded in 2000, 2002, 2005, and 2010 (see "Marketing Agreements" below). ASI also has certain non-exclusive rights to sell some of the Company's other industrial and medical products. ASI was also granted the exclusive right to market a new oral care product, LUBRAJEL BA, that was specifically developed for it in 2012. See “Marketing Agreements” below.
The Company's domestic sales of pharmaceutical products are handled primarily through the major full-line drug wholesalers and accounted for approximately 11% of the Company's sales in 2012 and 16% in 2011. The Company's other products, such as its medical and specialty industrial products, are sold directly to manufacturers who incorporate these products in their finished products.
FOREIGN SALES
In 2012, approximately 66% of the Company’s sales were to customers in foreign countries, primarily sales of its cosmetic ingredients to customers in Europe and Asia, compared with approximately 60% in 2011. The Company currently has six distributors for its personal care products outside the United States, with ASI being the largest. The Company has a written marketing agreement only with ASI; all other marketing arrangements are subject to cancellation at any time by either the Company or the distributor. The marketing agreement with ASI gives it exclusive foreign marketing rights with the exception of the following territories, where the Company's other marketing partners have exclusive marketing rights: the United Kingdom (by The Azelis Group); France (by Sederma SAS, a subsidiary of Croda International Plc.); Italy (by Luigi & Felice Castelli S.R.L.); Switzerland (by Azelis Cosmetics GmbH.); and South Korea (by C&M International). The Company also has significant direct sales to a company in Ireland for one of the Company’s LUBRAJEL products for a medical use.
MARKETING
The Company markets its products through marketing partners and distributors, advertising in medical and trade journals, mailings to physicians and to the trade, and exhibitions at medical meetings. The pharmaceutical products are sold in the United States primarily to drug wholesalers, which in turn distribute and resell those products to drug stores, hospitals, physicians, long-term care facilities, and the Veteran's Administration and other government agencies. The proprietary cosmetic ingredients and other personal care products are sold outright (not on consignment) to the Company’s marketing partners, which in turn market and resell the products to cosmetic and other personal care manufacturers for use in the manufacture or compounding of their products. The medical and specialty industrial products are sold by the Company directly to the end users. The industrial products are older products that have limited marketability but are still being sold to some long-time customers. They are not actively marketed but are available for sale to any new customers.
MARKETING AGREEMENTS
In 1994, the Company entered into a marketing agreement with ISP, the predecessor of ASI, whereby ISP would market and distribute the Company's personal care products, as well as some medical and specialty industrial products, in certain parts of Europe, Asia, Australia, and Africa. ISP manufactured and marketed globally (and continues to do so as ASI) an extensive line of personal care and pharmaceutical additives and various other industrial products. In 1996, the parties entered into another agreement, extending ISP’s distribution rights to the United States, Canada, Mexico, and Central and South America. In July 2000, the parties entered into an Exclusive Marketing Agreement (the "2000 Agreement"), which modified, extended, and consolidated the 1994 and 1996 agreements. In December 2002, December 2005, and May 2010 the parties entered into letter agreements that further modified and extended the 2000 Agreement until December 31, 2011. The May 2010 agreement also provided for automatic two-year renewals after December 31, 2011 unless either party terminated the arrangement upon 60 days notice. Since neither party provided notice to the other with respect to termination of the contract as of December 31, 2011, the agreement between the Company and ISP (now ASI) was automatically extended until December 31, 2013.
The Company believes that in the event ASI were to cease marketing the Company's products alternative arrangements could be made to continue to supply products to customers currently using the Company's products without any significant interruption of sales.
The Company has other marketing arrangements with marketing partners in the U.K., France, Switzerland, South Korea, and Italy (see “Foreign Sales’” above), but all of these other arrangements are operating under either verbal agreements or expired written agreements, and are subject to termination at any time by either party.
RAW MATERIALS
The principal raw materials used by the Company consist of common industrial organic and inorganic chemicals. Most of these materials are available in ample supply from numerous sources. The Company has five major raw material vendors that together accounted for approximately 77% of the raw material purchases by the Company in 2012. The names of the suppliers and the specific raw materials are considered by the Company to be confidential and proprietary.
INVENTORIES, RETURNS, and ALLOWANCES
The Company's business requires that it maintain moderate inventories of certain of its finished goods. Historically, sufficient inventory levels, returns and allowances have not been a significant factor in the Company's business. However, between November 2010 and May 2011, and again from May 2012 to the present time, the Company was not able to fill all of its orders for RENACIDIN due to vendor supply problems (see Part I, Item 1(b) above). Although the initial 2010-2011 supply problem was resolved, the supply problem that began in May 2012 has not yet been resolved, and the Company is not currently able to fill orders for RENACIDIN, and does not expect to be able to do so until the second half of 2013.
BACKLOG
The Company currently does not have any significant backlog, other than orders for RENACIDN (see above).
SEASONALITY
Due to the nature of the Company's business and the types of products it markets it is not subject to any significant seasonal fluctuations in sales.
CUSTOMERS
Except for medical and specialty industrial products, which are sold directly by the Company to the end users, the Company’s customers are primarily its marketing partners and distributors. The Company sells its products to the marketing partners, which in turn sell those products to hundreds of end users. Although the Company has relatively few marketing partners and distributors, it is not dependent on any one of those companies for the sale of its products. The Company is confident that if any of its marketing partners or distributors were to decide not to sell the Company’s products, the end users of its products would still purchase the Company’s products, either directly from the Company or from a replacement marketing partner or distributor.
COMPETITION
The Company has many products or processes that are either proprietary or have some unique characteristics, and therefore the Company believes it has been able, and will continue to be able, to compete effectively with other pharmaceutical, personal care, specialty chemical, or health care companies as to products deemed competitive with the those of the Company. The pharmaceutical, health care, and cosmetic industries are all highly competitive, and the Company expects competition to intensify as advances in the field are made and become widely known. There are other domestic and foreign companies that are engaged in the same or similar areas of research as those in which the Company is engaged, some of which have substantially greater financial, research, manpower, marketing and distribution resources than the Company. In addition, there are many large, integrated and established pharmaceutical, specialty chemical, personal care and health care companies that have greater capacity than the Company to develop and to commercialize types of products upon which the Company's research and development programs are based. However, the Company believes that the expense of testing and evaluating possible substitutes for the Company's products that are already in customers' formulations, as well as the expense to the customer in relabeling its products, is a significant barrier to displacing the Company's products in current customer formulations. These cost factors make it less likely that a customer would choose a competitive product, unless there was a significant cost savings in doing so. The Company believes that manufacturing, regulatory, distribution and marketing expertise will be increasingly important competitive factors in favor of the Company. In this regard, the Company believes that its marketing arrangements with its global marketing partners will be important in the commercialization of many of the products it is currently developing.
ISO 9001:2008 REGISTRATION
In October 2009 the Company was certified by Underwriters Laboratories, Inc. to be in compliance with the current ISO 9001:2008 standard, indicating that the Company's documented procedures and overall operations had attained the high level of quality needed to comply with this ISO certification level. Prior to that, since December 2003 the Company had been registered under the previous ISO 9001:2000 standard, also by Underwriters Laboratories, Inc. The Company had first earned ISO registration in November 1998, when it earned ISO 9002 registration, and has been in continuous compliance with each of these standards from the time of its approval under each standard.
GOVERNMENT REGULATION
Regulation by governmental authorities in the United States and other countries is a significant factor in the manufacturing and marketing of many of the Company's products. The Company and many of the Company's products are subject to certain government regulations. Products that may be developed and sold by the Company in the United States may require approval from federal regulatory agencies, such as the United States Food and Drug Administration ("FDA") as well as state regulatory agencies. Products that may be developed and sold by the Company outside the United States may require approval from foreign regulatory agencies. Any medical device products developed by the Company will be subject to FDA regulation, and will usually require a 510(k) pre-market notification to the FDA to demonstrate that the device is at least as safe and effective as a legally marketed device. The Company would then need to receive clearance from the FDA prior to marketing the device. Most new pharmaceutical products will require clinical evaluation under an Investigational New Drug application prior to submission of a New Drug Application for approval of a new drug product.
The Company is required to comply with all pertinent current Good Manufacturing Practices of the FDA for medical devices and drugs. Accordingly, the regulations to which the Company and certain of its products may be subject, and any changes with respect thereto, may materially affect the Company's ability to produce and market new products developed by the Company.
The Company's present and future activities are, and will likely continue to be, subject to varying degrees of additional regulation under the Occupational Safety and Health Act, Environmental Protection Act, import, export and customs regulations, and other present and possible future foreign, federal, state and local regulations.
Portions of the Company's operating expenses are directly attributable to complying with federal, state, and local environmental statutes and regulations. In 2012 and 2011 the Company incurred $48,000 and $33,000, respectively, in federal, state, and local environmental law compliance costs. There was no material financial or other impact on the Company as a result of compliance with environmental laws.
EMPLOYEES
The Company presently has 36 employees, 4 of whom serve in an executive capacity, 20 in research, quality control and manufacturing, 7 in maintenance and construction, and 5 in office and administrative support services. Of the total number of employees, 30 are full-time. None of the Company's employees are covered by a collective bargaining agreement. The Company believes that its relations with its employees are very good.