(a)
Introduction
United-Guardian, Inc. ("United", "Registrant",
or “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 67% of the Company's sales in 2018, and RENACIDIN
®
IRRIGATION SOLUTION ("RENACIDIN"),
a pharmaceutical product that accounted for approximately 27% of the Company's sales in 2018. All references in this Annual Report
to “sales” or “Sales” shall mean Gross Sales.
(b)
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. ASI manufactures and markets globally an extensive line of personal care and
pharmaceutical additives and various other specialty products. The Company’s personal care products are sold directly to
those marketing partners, which in turn resell those products to their customers for use in the formulation of one or more of the
customers’ personal care and cosmetic products. The Company’s non-pharmaceutical medical products (referred to hereinafter
as “medical products”) and its specialty industrial products are sold directly by the Company to marketers of finished
products or to the contract manufacturers utilized by those marketers. The Company’s pharmaceutical products are marketed
primarily through its dedicated RENACIDIN web site and by online promotion, 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 with comparable regulatory agencies in some foreign countries.
PRODUCTS
As stated above, 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 2018 was LUBRAJEL OIL, followed by LUBRAJEL PF (also sold under the trade name “Norgel”). Some
other formulations of LUBRAJEL that are sold for cosmetic use (all using the LUBRAJEL name), in descending order of sales, are
CG, MS, DV, and NP. In addition, many of these products are available in equivalent 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 and DV Free), indicating
that those formulations are free of parabens.
LUBRAJEL PF
is different from the other products
in the LUBRAJEL line in that it is a completely preservative-free form of LUBRAJEL. Tests have shown that this product self-preserves,
and that it aids in the preservation of other cosmetic ingredients with which it is formulated. 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. Purchases of this product
by the company’s largest marketing partner, ASI, for distribution in China, increased significantly in 2018 compared with
2017.
LUBRAJEL NATURAL
was the first product in a 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. Ecocert, one of the global organizations authorized to certify natural and organic products,
has certified that LUBRAJEL NATURAL complies with the Cosmetic Organic and Natural Standard (“COSMOS”), indicating
that the product is suitable for use in natural and organic cosmetic products. This product is now being actively marketed, but
sales in 2018 decreased slightly from 2017.
LUBRASIL
™ is a special formulation of LUBRAJEL
in which silicone oil is incorporated into a LUBRAJEL base by microemulsification, thereby maintaining much of the clarity of regular
LUBRAJEL. The product has a silky feel, and is water resistant while at the same time providing moisturization. The current LUBRASIL
formulation is known as LUBRASIL II SB, which contains substantially higher levels of silicone than the original LUBRASIL formulation.
LUBRAJEL MARINE™
: This is the second product
that the Company developed for its new line of products that use only “natural” ingredients. It was formulated using
naturally-derived polysaccharides, with some of the ingredients sourced from marine vegetation. This product was developed jointly
with ASI, and for that reason is being marketed globally on an exclusive basis by ASI. Like the original LUBRAJEL NATURAL, this
product has received COSMOS certification for use in natural and organic cosmetic products This product is being actively marketed
by ASI, and the Company has begun to receive orders for it as companies begin to bring their formulations to market. The Company
is hopeful that it will see steady growth in sales of this product during the coming years.
Total sales of the Company's personal care products
increased by $661,260 (approximately 10%) for the year ended December 31, 2018 when compared with 2017, primarily due to the increase
in sales of LUBRAJEL PF to ASI for distribution in China and sales of LUBRASIL II SB to ASI for sale to a new customer in Vietnam
that started purchasing the product in 2018. LUBRAJEL personal care products represented 52% of the Company’s sales in 2018.
Each of the following products accounted for
less than 2% of the Company’s sales in 2018, 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. There is also a paraben-free version of this
product known as LUBRAJEL II XD Free. Sales of Lubrajel II XD and Lubrajel II XD Free increased by 69.9% in 2018 primarily due
to ASI sales to new customers.
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.
LUBRASLIDE
™ and a related product, B-122™,
are powdered lubricants used in the manufacture of cosmetics such as pressed powders, eyeliners, and rouges. The products act as
binders, increasing water-repellency and drop strength and lowering the coefficient of friction in the products in which they are
used. There are also some industrial applications for these products.
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 primary customers for the product.
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 manufacturers of some lower-cost competitors to LUBRAJEL that have negatively impacted the sales of
the Company’s personal care ingredients. In particular, the Company has experienced significant pricing pressure from competitive
products being marketed in China by some Asian manufacturers. These lower-cost competitive products are likely to continue to negatively
impact the Company’s profit margins on some of its products in certain geographic areas.
The Company believes that there is still potential
to expand the sales of its LUBRAJEL line of products through new product development, modifications to make some of its current
products more competitive, 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 copies of its products, but that it will still be necessary to be more competitive with its product pricing in certain
geographic areas in order to maintain and grow its market share.
MEDICAL
LUBRAJEL RR
and
RC
are both water-based
gels used primarily as lubricants for urinary catheters. They 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 as a lower-cost alternative to the LUBRAJEL RR for those customers
who are in more cost-sensitive markets. Sales of LUBRAJEL RR were down by approximately 10% in 2018 compared with 2017 due to one
of the customers for that product replacing LUBRAJEL RR with a different LUBRAJEL. Sales of LUBRAJEL RC were down by 21% for the
year due to changes in the purchasing pattern of the primary customer for this product. The combined sales of both products accounted
for approximately 9% of the Company’s sales in 2018.
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 increased by approximately 6% in 2018 compared with 2017, which the Company believes
was the result of fluctuations in the buying patterns of customers for this product. Sales of this product represented approximately
5% of the Company’s sales in 2018.
LUBRAJEL LC, LUBRAJEL FA, and LUBRAJEL BA
are LUBRAJEL
formulations that were developed for use in oral care applications. Combined sales for these products increased by $39,263 (approximately
41%) compared with 2017 due primarily to sales to a new customer for LUBRAJEL BA. The combined sales of LUBRAJEL LC, LUBRAJEL FA
and LUBRAJEL BA accounted for approximately $135,000 (approximately 1%) of Company sales in both 2018 and 2017.
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
in limited use, as a replacement for silicone oils in pre-lubricated condoms. The Company has only one customer for this product,
and sales of this product did not contribute significantly to the Company’s overall sales.
Sales of all of the medical grades of LUBRAJEL
decreased by approximately 6% in 2018 compared with 2017 and accounted for approximately 15% of the Company’s sales in 2018
compared with approximately 18% in 2017. The Company believes that the decrease was due primarily to fluctuations in the purchasing
patterns of its customers. The medical products also became a smaller percentage of total Company sales due to increased sales
of the Company’s personal care and pharmaceutical products relative to the medical products.
PHARMACEUTICAL
RENACIDIN
®
is a prescription drug
product that is used primarily to prevent and to dissolve calcifications in urethral catheters and in the urinary bladder. It is
currently marketed in a plastic 30 mL single-dose bottle. Sales of RENACIDIN increased by approximately 15% in 2018 compared with
2017 and represented approximately 27% of total Company sales.
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 2018, sales increased
by approximately 3% and represented approximately 4% of the Company’s sales. The Company believes that the increase was due
to normal year-to-year fluctuations rather than any significant trend in sales.
The Company’s 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) they are outdated (but not more than one year after their expiration date, which is a return policy that conforms
to standard pharmaceutical industry practice).
INDUSTRIAL
DESELEX™
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. Sales of this product increased by $3,214 (approximately 4%) from
$71,767 in 2017 to $74,981 in 2018.
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 $3,067 (approximately 4%) from $72,807 in 2017 to $69,740 in 2018.
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 OIL NATURAL:
This will be the third product
in the “Natural” line of Lubrajel products. Like LUBRAJEL MARINE, this product is based on naturally derived polysaccharides.
It is being developed to provide lubricating properties and viscosity similar to the Company’s regular LUBRAJEL OIL, but
utilizing only natural ingredients. The polymer network in this product is based solely on vegetable feedstock. The Company is
working with ASI to fine tune this formula and is awaiting the results of some testing ASI is doing to make sure that the Company
has the best possible formulation to take to market. Like the Company’s other “Natural” products, this product
has been certified by Ecocert to comply with the COSMOS standards for use in natural and organic cosmetic products. The Company
is working closely with its marketing partners to determine the primary benefits of this product, and hopes to obtain feedback
soon so that it can begin marketing this product by the third quarter of 2019.
Lubrajel Terra™
:
This is intended to be the fourth product in the LUBRAJEL “Natural” line. It is based on polysaccharides from plant-based
materials. The preliminary formula has been sent to ASI for feedback and testing. The Company plans to submit this product to Ecocert
for certification under COSMOS standards for use in natural and organic cosmetic products. This will enable the Company to have
a broad range of “Natural” products to offer its customers. The Company continues to believe that there is a growing
demand for natural products, especially in personal care products, and expects to add additional products to this line in the future
if these initial products are successful.
LUBRAJEL OIL PF
: This product was developed as
a result of the high demand for the Company’s very popular LUBRAJEL OIL. The benefit of this product would be to enable formulators
to use their own preservative systems without having to account for preservatives that the Company already incorporated. This approach
has been very successful with the Company’s LUBRAJEL PF, and the Company is hopeful that a preservative-free LUBRAJEL OIL
will also be successful. The Company has been fine-tuning this formula to replicate the characteristics of its existing LUBRAJEL
OIL, and is awaiting feedback from the Company’s marketing partners. The Company hopes to launch this product sometime in
2019.
OIL/WAX HYDRATION:
This product concept was developed
at a meeting between United-Guardian and ASI at the end of 2018. The concept for this product is an anhydrous textured gel that
can be added to the oil phase of a cosmetic formula. Like many of the Company’s other “natural” products this
product would be formulated to comply with the COSMOS standard for natural products. This product is in the early stages of development
and the Company hopes to have prototype formulas later this year.
LUBRAJEL 24:
This is another product concept that
came out of a development meeting between the Company and ASI. The idea is to produce a product with 24-hour hydration. While the
Company’s current water-based moisturizing products provide excellent hydration, the goal is to build upon this to produce
a product with superior hydration that will last a full 24 hours. This product is in the early stages of development and the Company
hopes to have prototype formulas later this year.
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 2018 were $399,517 as compared with $646,079 in 2017. The Company expects its research and development expenses in
2019 to be comparable to those of 2018. 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 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. All of the patents that had previously been issued to the Company have expired. 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
®
,
RENACIDIN
®
, and CLORPACTIN
®
.
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 its predecessor company, International Specialty Products (“ISP”), for the marketing of the Company’s cosmetic
ingredients in North, Central, and South America. Since that time this initial agreement has been modified and expanded multiple
times (see “Marketing Agreements” below). ASI also has a non-exclusive right to sell certain of the Company's other
industrial and medical products. It was also granted the exclusive right to market globally an oral care product, LUBRAJEL BA,
which was specifically developed for ASI in 2012 but which, to date, has not had significant sales, and LUBRAJEL MARINE, the second
product in the Company’s LUBRAJEL NATURAL line of products. The current agreement with ASI automatically renewed on January
1, 2018 and will automatically renew again on January 1, 2020 unless either party chooses to terminate, which can be done by giving
60 days’ notice prior to the then expiration date.
Revenue from domestic sales of all Company products
accounted for approximately 83% of the Company’s total sales revenue in 2018, compared with 81% in 2017. Sales to the Company’s
largest marketing partner, ASI, accounted for approximately 42% of total Company sales in 2018 and 40% in 2017. Although a significant
percentage of ASI’s purchases from the Company are ultimately sold to foreign customers, all sales to ASI are included in
domestic sales revenue because all shipments to ASI are delivered to ASI’s warehouses in the U.S.
The Company’s pharmaceutical products
are marketed only in the United States and are sold primarily through full-line drug wholesalers and accounted for approximately
31% of Company sales in 2018, and approximately 30% in 2017. Domestic sales of the Company's medical (non-pharmaceutical) products
accounted for approximately 8% of Company sales in 2018 and 10% in 2017. Although all shipments of medical products to U.S. locations
are considered “ Domestic Sales”, a certain percentage of those shipments are subsequently shipped by some customers
to foreign manufacturing facilities which then produce finished products that are marketed globally.
Domestic sales of the Company’s specialty
industrial products accounted for approximately 1% of Company sales in both 2018 and 2017. The medical and industrial products
are sold directly to customers or their contract manufacturers, who incorporate these products into their finished products.
FOREIGN
SALES
In 2018 and 2017 approximately 17% and 19%,
respectively, of the Company’s sales revenue was from foreign sources and was derived from (a) sales of its personal care
products to the Company’s foreign marketing partners, which accounted for approximately 10% of Company sales in 2018 and
11% in 2017, and (b) sales of some of the Company’s medical products directly to certain customers in foreign countries,
which accounted for approximately 7% of Company sales in 2018 and 8% in 2017.
Because all shipments to the Company’s
largest marketing partner, ASI, are delivered to ASI’s warehouses in the U.S., all sales to ASI are included in “Domestic
Sales”, even though a significant percentage of ASI’s sales of the Company’s products are to customers in foreign
countries. Based on sales information provided to the Company by ASI, in 2018 approximately 75% of ASI’s sales were to customers
in foreign countries, compared with 72% in 2017. ASI’s largest foreign market in both 2018 and 2017 was China, which accounted
for approximately 55% of ASI’s sales of Company products in 2018 and 2017.
Since the Company 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 adjust 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. The Company is also closely monitoring the current trade
negotiations with China and other foreign markets, and when necessary will set aside reserves to account for any possible import
duties that appear likely to be imposed.
SALES
AND MARKETING
The Company markets its products through marketing
partners and distributors, promotion on the Company’s web sites, and by internet advertising. 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 formulation of one or more of their products.
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 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
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.
The marketing agreement with ASI was entered
into in 1994 with ISP, the predecessor company of ASI. That agreement set forth provisions under which ISP/ASI 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. In 1996, the parties entered into another agreement, extending ASI’s distribution rights
to the United States, Canada, Mexico, and Central and South America. In July 2000, December 2002, December 2005, May 2010, November
2012, and November 2013 the parties entered into additional agreements that modified, extended, and consolidated the 1994 and 1996
agreements, and provided for automatic two-year renewals of ASI’s marketing rights unless either party terminated the arrangement
upon 60 days’ notice. The agreement automatically renewed on January 1, 2012, 2014, 2016, and 2018 for additional two-year
terms. The current contract ends on December 31, 2019.
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, 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 six major raw material vendors that together accounted for approximately 80% of the raw material purchases
by the Company in 2018 and 88% in 2017.
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 all 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. Its 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 companies and with suppliers of specialty chemicals used in personal care
and healthcare applications. The pharmaceutical, health care, and cosmetic industries are all highly competitive, and the Company
experienced a high level of competition for its cosmetic ingredients during 2018. During 2018 the U.S. dollar strengthened against
many foreign currencies, which made the Company’s products less competitive in those markets. The Company believes that there
will continue to be increased competition in coming years, especially from Asian competitors, 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.
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 9001:2015
REGISTRATION
On July 23, 2018 the Company was certified by
Underwriters Laboratories, Inc. to be in compliance with the latest ISO standard, ISO 9001:2015, indicating that the Company's
documented procedures and overall operations had attained the high level of quality needed to comply with this current ISO certification
level. From October 2009 to July 2018 the Company had been registered under the ISO 9001:2008 standard; from December 2003 to October
2009 the Company had been registered under the ISO 9001:2000 standard; and between November 1998 and December 2003 the Company
had been registered under the ISO 9002 standard. The Company has been in continuous compliance with ISO standards since November
1998.
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 U.S. Food & 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. Although the Company does not currently market
any medical devices, if it were to do so a 510(k) pre-market notification to the FDA would be required 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. While the Company does not have any current plans to develop any new pharmaceutical products,
any new drug product would require clinical evaluation under an Investigational New Drug Application, and the subsequent submission
to the FDA of a New Drug Application.
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 2018 and 2017
the Company incurred approximately $43,000 and $37,000, 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 29 employees, 4 of
whom serve in an executive capacity, 17 in research, quality control and manufacturing, 5 in maintenance and construction, and
3 in office and administrative support services. Of the total number of employees, 23 work full time.