(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 lubricants,
health care products, and specialty industrial products. It also conducts research and product development, primarily related
to the development of new and unique cosmetic and personal care products. The Company’s research and development department
also modifies, refines, and expands the uses for existing products, with the goal of further developing the market for the Company's
products.
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 the Company to Delaware.
The Company has a broad range of products,
some of which are currently marketed and some of which are still in the research and development 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 85% of the Company's sales in 2015, and RENACIDIN
®
IRRIGATION ("RENACIDIN"),
a pharmaceutical product that accounted for approximately 10% of the Company's sales in 2015.
(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 focuses on the development of products that fill unmet market needs, have unique properties, and use proprietary technology
that it sometimes 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 manufacturers
of cosmetic and personal care products. The Company sells product outright to its marketing partners, Ex Works (EXW) the Company’s
plant in Hauppauge, New York. Those marketing partners in turn resell those products to their customers, who are typically the
manufacturers and marketers of cosmetic and personal care products, and who in turn utilize the Company’s products in their
finished 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”),
a business segment of Ashland, Inc., is the largest. The products are sold directly to those marketing partners, which in turn
resell those products to its 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 hospitals and pharmacies primarily through full-line 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, some of which are registered
with the United States Patent and Trademark Office as well as comparable 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:
PERSONAL CARE
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 as bases for other cosmetic ingredients,
and can be found as an ingredient in skin creams, moisturizers, makeup, and body lotions. The largest product by sales in the
LUBRAJEL personal care line in 2015 was LUBRAJEL OIL, followed by LUBRAJEL CG. Some of the other varieties of LUBRAJEL sold for
cosmetic use (all using the LUBRAJEL name), in descending order of sales, are PF (including Norgel (see LUBRAJEL PF below)), MS,
DV, and NP. 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 geographic markets other than France, where it is marketed 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.
LUBRAJEL NATURAL
is the first product in a new
line of LUBRAJEL products for cosmetic use that are produced using only ingredients that are considered “natural”.
This product, as well as the additional “natural” products under development (see “Development Activities”
below) are based on natural polysaccharides, which contribute moisturization, emulsion stabilization, and emolliency to personal
care products, particularly creams and lotions. LUBRAJEL NATURAL has been certified as natural by Ecocert, a leading industry certification
organization for natural and organic products. This product is now being actively marketed, and there were some initial small sales
in 2015.
Each of the following products accounted for
less than 4% of the Company’s sales in 2015, listed in descending order of sales:
LUBRAJEL II XD
is a version of LUBRAJEL that was
developed to be a direct replacement for one of the competitive products to LUBRAJEL. In 2015 sales increased by over 100% over
2014, from $120,084 to $322,451.
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 highly variable due to the ordering patterns of the customers for the product. In 2015 sales of KLENSOFT
decreased 54% compared with 2014, declining from $237,248 to $109,726. The Company expects the variability in sales of this product
to continue.
LUBRASIL
™ is a special form of LUBRAJEL
in which silicone oil is incorporated into a LUBRAJEL base by micro-emulsification, thereby maintaining clarity similar to the
other LUBRAJEL products. The product has a silky feel, and is water resistant while moisturizing the skin.
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.
ORCHID COMPLEX
™ is an oil-soluble 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.
UNITWIX II
™ is a cosmetic additive used
as a thickener for oils and oil-based liquids. It is a proprietary, unpatented product that the Company developed in 2011 as a
direct replacement for the Company’s original UNITWIX, which is no longer being manufactured due to the raw material cost
issues. The new formula is less expensive to manufacture, and therefore can be marketed at a lower price.
The Company believes that its ability to maintain
and/or increase sales of its cosmetic and other personal care products will depend on (a) the ability and determination of its
marketing partners, especially its largest marketing partner, ASI, to continue to aggressively promote the Company’s products,
particularly to new customers, and to find new marketing opportunities; (b) the Company's success in developing additional new
products, including new varieties of LUBRAJEL, as well as new applications for existing products; and (c) the ability of the Company
to find ways to compete with lower-cost imitations of its LUBRAJEL products that have become significant competitors to the Company’s
products in the past couple of years, and which negatively impacted the Company’s sales of these products in 2015. In particular,
the Company has experienced significant pricing pressure from LUBRAJEL imitations being manufactured in China. The new lower-priced
competitors are likely to adversely affect the Company’s ability to continue marketing certain of its existing LUBRAJEL products
at profit margins comparable to what they have been in the past.
The Company believes that there is still potential
to expand the sales of its LUBRAJEL line of products through product modifications, additional claim substantiation, and geographic
expansion. The Company believes that its strong brand identity and reputation for supplying quality products will be advantageous
in its efforts to compete with the growing number of lower-cost imitations of its products, but that it will still be necessary
to be more competitive with its product pricing in order to maintain and grow its market share.
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. 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 in 2015 decreased by 16.1% compared with 2014, with LUBRAJEL
RR accounting for the largest portion of that decrease. The combined sales of both products accounted for approximately 10.0% of
the Company’s sales in 2015. Sales of both of these products are subject to year-to-year variations based on the ordering
patterns of the customers for these two 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. Sales increased by approximately
29.0% in 2015 compared with 2014.
LUBRAJEL MG
is the original form of LUBRAJEL,
developed as a medical lubricant in the 1970s. It is used by many medical device manufacturers for lubricating urinary catheters,
pre-lubricated enema tips, and other medical devices. Sales decreased by 5.9% in 2015 compared with 2014, which the Company believes
was the result of fluctuations in the buying patterns of customers for this product. Sales of this product represented 4.3% and
4.8% of the Company’s sales in 2015 and 2014, respectively.
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. The Company has only one customer for this product,
and while sales in 2015 increased compared with 2014, these sales did not contribute significantly to the Company’s overall
sales.
LUBRAJEL BA
is a
Lubrajel
formulation that was specifically developed for ASI for an oral care use. ASI is actively promoting this product. Sales
of this product are not yet a significant contributor to the Company’s revenue, and it is too early to project whether or
not it will become a significant product for the Company.
LUBRAJEL TF
is a
medical lubricant specifically
developed for a global medical products company. Initial sales of this product began at the end of 2012. Although the Company is
still hopeful that sales of this product will increase, sales of this product to date have been lower than expected due to the
customer’s uncertain marketing plans for this product.
Sales of all of the medical grades of LUBRAJEL
decreased by 11.7% in 2015 compared with 2014. Sales of these products accounted for 15.7% of the Company’s sales in 2015
compared with approximately 18.5% in 2014. The Company believes that the decrease was primarily due to fluctuations in the purchasing
patterns of its customers.
PHARMACEUTICAL
RENACIDIN
®
is a prescription drug
product that is used primarily to prevent and to dissolve calcifications in urethral catheters and the urinary bladder. Since 1991
it has been marketed as a ready-to-use sterile solution in 500mL glass bottles. It currently has regulatory approval only in the
United States. The product had been manufactured for the Company under a long-term contract with a major U.S. drug company. That
supplier experienced two production curtailments in the past five years, which resulted in a decline in RENACIDIN sales. As a result
of those curtailments, the Company lost sales opportunities due to inventory shortages. In order to compensate the Company for
its lost sales the Company and its supplier entered into a settlement agreement whereby the supplier reimbursed the Company for
the profit it lost during the curtailment periods. The final reimbursement payment under that settlement agreement, in the amount
of $24,402, was received by the Company in the first quarter of 2014.
The Company’s contract with its RENACIDIN supplier
expired in the first quarter of 2015. In 2013, in anticipation of that contract expiration, the Company began working with a new
supplier to produce RENACIDIN in a smaller, more user-friendly container. The new product is a sterile, single dose, 30 mL plastic
bottle that was engineered to dispense the product directly into an indwelling catheter, eliminating the need to use a separate
syringe to extract a small amount of product from the current 500mL bottle. The change to a new supplier and new packaging required
a new submission to, and approval by, the United States Food and Drug Administration (“FDA”). The Company submitted
its application to the FDA in August 2014 in the form of a supplement to its previous New Drug Application (“NDA”)
for RENACIDIN, and received final approval to market the new product in December 2015. Prior to the expiration of its previous
supply agreement for the 500mL bottles the Company had purchased sufficient inventory to last until it received FDA approval for
the new product. The Company expects to begin selling the new single-dose 30mL bottles in April 2016, around the same time that
it expects to sell off its remaining inventory of 500mL glass bottles. The Company is optimistic that this new, more user-friendly
bottle will enable the Company to increase its sales of RENACIDIN over the next few years, and intends to actively market the new
product beginning in April 2016.
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 have been very consistent from year-to-year. In 2015 sales increased
by 2.2% and represented approximately 4.0% of the Company’s sales.
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 used primarily as a replacement for phosphates in the manufacture of detergents. It also has some use in personal
care products as a chelating agent in shampoos and body washes.
THOROCLENS
is a chlorine-based cleanser manufactured
and packaged by the Company for a small company in New England that resells the product to its customers. Sales of this product
decreased by 9.8% in 2015.
DEVELOPMENT ACTIVITIES
In coordination with, and with input from,
its marketing partners, the Company's research and development department has developed products that can be used in many different
industries, including the personal care (including cosmetic), pharmaceutical, medical, 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 scaling up from laboratory production batches to pilot batches to full-scale production batches.
In the case of drug products or medical devices, significant additional work would have to be done, including studies to determine
safety and effectiveness, preparation of an Investigational New Drug (IND) Application, and finally the filing of an NDA. Due to
the size of the Company and the costs involved in bringing new drugs or medical devices to market, the Company does not currently
have plans to develop any new drugs or medical devices, and intends to focus its research and development efforts on the development
of new and innovative products for the personal care and medical (non-drug) markets.
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 MARINE and LUBRAJEL OIL NATURAL:
These will be the next two products in the LUBRAJEL “Natural” line, produced using only ingredients that are considered
“natural”. Like the original LUBRAJEL NATURAL they are based on natural polysaccharides. The LUBRAJEL NATURAL MARINE
uses some components derived from marine vegetation. The LUBRAJEL OIL NATURAL will be a new natural form of the Company’s
original LUBRAJEL OIL, with similar lubricating properties but based on all-natural components. The polymer network in this product
is based solely on vegetable feedstock. Like the original LUBRAJEL NATURAL, both of these products have been certified as natural
by Ecocert. The formulations for both products are still being finalized. The Company hopes to begin marketing both products by
the end of 2016. The Company believes that there is a growing demand, especially in personal care products, for natural products,
and expects to add additional products to this line in the future if these initial products are successful.
Lubrajel Terra
:
This is intended to be the fourth product in the LUBRAJEL “Natural” line. It will be based on polysaccharides from
soil-grown raw materials. This product is in a very early stage of development. If the research proves to be promising our goal
would be to have samples to our marketing partners by the end of 2016.
GLYCERYL GLYCOLATE
:
This material is intended to function as an anti-aging skincare ingredient. The Company has finalized
the product formulation and is in the process of developing recommended applications as well as instructions for potential customers
as to how it can be used in finished formulations.
Guardian
Ester C24P
: This new product is designed to be an alternative to silicone fluid in creams
and lotions. Very preliminary samples have been sent to our distributors for an initial evaluation to determine whether there is
sufficient interest to proceed further
.
Amla Complex
:
This product consists of an extract of the Amla fruit (Indian Gooseberry), which is believed to have certain health benefits, including
improved skin health and healthier hair. It is high in antioxidant content, such as vitamin C. This product is in the R&D phase
and samples are not yet available for evaluation.
It should be emphasized that some of the projects
listed above are in the very early stages of research and development, and there can be no guarantee that any particular development
project will result in a marketable product or in significant sales if it is marketed.
The Company’s research and development
expenses in 2015 were $648,211, as compared with $730,412 in 2014. It expects its research and development expenses in 2016 to
be comparable to those of 2015. 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 two United States patents and several trademarks relating to
its products. In recent years the Company has relied more on trade secrets and proprietary formulations and manufacturing methods
to protect its intellectual property rather than patents, since under current patent law the filing of a patent now provides detailed
proprietary information that can be copied by companies in other countries where enforcement would be difficult and expensive,
such as in China. The Company believes that in many cases it is better to protect its intellectual property in other ways that
do not require the disclosure of proprietary information. Many patents that had previously been issued to the Company 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. The Company will 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 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
|
|
PATENT #
|
|
FILING
DATE
|
|
ISSUE
DATE
|
|
EXPIRATION
DATE
|
|
|
|
|
|
|
|
|
|
Delivery system for oil-soluble actives in cosmetic and personal care products
|
|
|
6,117,419
|
|
|
|
9 /1996
|
|
|
|
9 /2000
|
|
|
|
12 /2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Microemulsion of silicone in a water-based gel that forms a clear, transparent, highly stable moisturizer and lubricant for cosmetic and medical use
|
|
|
6,348,199
|
|
|
|
1 /1994
|
|
|
|
2 /2002
|
|
|
|
2 /2019
|
|
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 International Specialty Products (“ISP”), the predecessor company of ASI. That agreement was amended and expanded
in July 2000, December 2002, December 2005, May 2010, November 2012, and November 2013. ASI also has certain non-exclusive rights
to sell some of the Company's other industrial and medical products. It was also granted the exclusive right to market an oral
care product, LUBRAJEL BA, which was specifically developed for ASI in 2012. The Company received its first order for that product
in February 2014.
The Company's domestic sales of pharmaceutical products are handled primarily through full-line drug wholesalers,
and accounted for approximately 13.3% of the Company's sales in 2015, and 12.5% in 2014. The Company's other products, such as
its medical and specialty industrial products, are sold directly to customers or their contract manufacturers, who incorporate
these products into their finished products.
FOREIGN SALES
In 2015, approximately 53% of the Company’s
products were sold by its marketing partners to customers in foreign countries, compared with approximately 65% in 2014. These
foreign sales consisted primarily of sales of its cosmetic ingredients to customers in Canada, Europe and Asia. In Asia the growth
in sales in the first three quarters of 2015 came almost exclusively from sales into China.
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 sales of one of its medical lubricants
to the manufacturing plant in India of a multi-national medical products customer.
Since the Company’s sells its products
in U.S. Dollars, the Company’s selling prices are not affected by fluctuations in foreign currency exchange rates except
to the extent that a stronger dollar compared with foreign currencies can make the Company’s products less competitive in
foreign markets, sometimes requiring the Company to reduce its prices in order be more competitive. In recent years sales have
been negatively impacted by the strength of the U.S. Dollar relative to other currencies, particularly the Euro, which has resulted
in some of the Company’s products being more price sensitive than they had been in the past. It has also enabled some of
the Company’s competitors to take some market share from the Company in those markets.
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, the U.S. Department of Veterans Affairs,
and other government agencies. The 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 it 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, May 2010, November 2012, and November 2013 the parties entered into letter agreements that further modified and extended
the 2000 Agreement. 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 at no time has either party provided notice to the other with
respect to termination of the contract, the agreement automatically renewed on January 1, 2012, 2014, and 2016 for additional two-year
terms. The current contract ends on December 31, 2017.
The Company believes that in the event ASI
were to cease marketing the Company's products alternative arrangements could be made with one of the other global marketers of
personal care products 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 89% of the raw material purchases
by the Company in 2015, and 84% in 2014. 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.
BACKLOG
The Company currently does not have any significant
backlog of orders.
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
The Company’s personal care/cosmetic
ingredients are marketed and sold globally by six marketing partners. Those marketing partners in turn market and distribute those
products to their customers. Although the Company depends on those marketing partners for the marketing and distribution of its
personal care products, it is confident that if any of its marketing partners were to decide not to sell the Company’s products,
or if the Company chose to replace one or more of those marketing partners, it would be able to put in place new marketing agreements
to service its customers in any of the geographic areas affected. If necessary, the Company would also be able to sell directly
to the end users of its products until such time as a new marketing partner is put in place.
The Company’s pharmaceutical products
are sold to, and distributed by, full-line drug wholesalers throughout the United States. It’s medical and specialty industrial
products are sold directly by the Company to the end users of those products or, in some cases, to contract manufacturers used
by some of those end users.
COMPETITION
The Company has some products or processes
that are either proprietary or have some unique characteristics, and its LUBRAJEL line of products is well known globally and has
an excellent reputation for quality. The Company believes that these characteristics will be advantageous to the Company in its
continuing efforts to compete effectively with other pharmaceutical, personal care, specialty chemical, or health care companies.
The pharmaceutical, health care, and cosmetic industries are all highly competitive, and the Company experienced higher levels
of competition for its cosmetic ingredients during 2015, not only because of additional competition in the marketplace, but also
because of the strengthened U.S. dollar causing the Company’s products to be less competitive than they had been in the past
when the dollar was not as strong. The Company anticipates that this increased competition will continue in the coming years, and
is working with ASI, its primary marketing partner, to address the issue and determine how the Company can make its products more
competitive in the marketplace in light of the changed circumstances. The Company is aware that 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. The Company intends to focus its research efforts on the development of new and innovative products for which
there is not the same competitive situation as there is for some of the Company’s older products, and is optimistic that
the development of unique products, such as its focus on the development of products made exclusively with natural ingredients,
will enable it to continue to compete in a market in which competition has become more of a factor than it had been in the past.
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 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 IND Application
prior to submission of an
NDA 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 2015 and 2014
the Company incurred $38,000 and $42,000, respectively, in federal, state, and local environmental law compliance expenses. There
was no material financial or other impact on the Company as a result of compliance with environmental laws.
EMPLOYEES
The Company presently has 34 employees, 4
of whom serve in an executive capacity, 18 in research, quality control and manufacturing, 6 in maintenance and construction, and
6 in office and administrative support services. Of the total number of employees, 29 work full time.