(a) Introduction
United-Guardian, Inc. ("United", "Registrant",
or “Company”) is a Delaware corporation that, through its Guardian Laboratories division, manufactures and markets
cosmetic ingredients, pharmaceuticals, medical lubricants, and specialty industrial products. It also conducts research and product
development, primarily related to the development of new and unique cosmetic ingredients. 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 67% of the Company's sales in 2019, and Renacidin® Irrigation Solution (“Renacidin"), a
pharmaceutical product that accounted for 26% of the Company's sales in 2019.
Unless indicated otherwise, all references in
this Annual Report to “sales” or “Sales” shall mean net sales. When changes are shown as percentages, the
number is approximate and has been rounded from one decimal place to the nearest whole number.
(b) Description of Business
The Company manufactures and markets cosmetic
ingredients, pharmaceuticals, medical lubricants, and specialty industrial products. It also conducts research and development,
primarily related to the development of new and unique cosmetic ingredients. 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 cosmetic ingredients manufactured
by the Company 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 products. The Company sells products 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: cosmetic ingredients, pharmaceuticals, medical
products, and industrial products. Each product category is marketed differently.
The Company’s cosmetic ingredients are
currently marketed globally by five marketing partners, of which Ashland Specialty Ingredients (“ASI”), a business
segment of Ashland, Inc., is the largest. During most of 2019 the Company also had a separate marketing partner for Korea, but
at the end of 2019 that territory was transferred to ASI. ASI manufactures and markets globally an extensive line of personal care
and pharmaceutical additives and various other specialty products. The Company’s cosmetic ingredients 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. The Company has a corporate web site at www.u-g.com, and a specific
web site for one of its pharmaceutical products at www.renacidin.com.
PRODUCTS
As stated above, the Company operates in one
business segment, and its product lines are separated into four distinct product categories:
COSMETIC INGREDIENTS
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 personal care products,
and can be found as an ingredient in skin creams, moisturizers, makeup, and body lotions. The largest product by sales in the Lubrajel
cosmetic ingredient line in 2019 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 MS, CG ,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 and NORGEL are different from
the other products in the Lubrajel line in that they are completely preservative-free forms of Lubrajel. Tests have shown that
these products self-preserve, and aid in the preservation of other personal care products with which they are formulated. The products
are marketed under the Lubrajel PF tradename in all geographic markets other than France, where they are 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.
Sales of these two products decreased by 5% in 2019 compared with 2018.
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 2019 decreased by 33% from 2018.
LUBRAJEL MARINE™ 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 while
sales have not attained the levels that the Company had originally hoped for, there has been a recent increase in orders, and the
Company is still hopeful that sales of this product will increase in the next year or two as the interest in natural products in
the marketplace continues to grow.
Total sales of the Company's cosmetic ingredients
decreased by $1,152,164 (15%) for the year ended December 31, 2019 when compared with 2018, and accounted for approximately 47%
of total Company sales in 2019 compared with 56% in 2018. The Company’s Lubrajel line of cosmetic ingredients represented
46% of total Company sales in 2019, compared with 55% in 2018.The decrease was primarily due to a decrease in sales of Lubrajel
products to ASI for distribution in China, and a decrease in sales to ASI of a different Lubrajel product for distribution in North
America.
Each of the following cosmetic ingredients accounted
for less than 2% of the Company’s sales in 2019, listed in descending order of sales.
LUBRASIL™ is a special formulation of Lubrajel
in which silicone oil is incorporated into a Lubrajel base using proprietary technology, 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. Sales of this product decreased by 7% from 2019.
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 decreased by 5% in 2019.
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.
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.
The Company believes that its ability to maintain
and/or increase sales of its cosmetic ingredients 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 cosmetic
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 LUBRICANTS
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 increased by 4% in 2019 compared with 2018, and sales of Lubrajel
RC increased by 18%. The Company believes that both increases were primarily the result of normal fluctuations in the buying patterns
of the customers for this product. The combined sales of both products accounted for 10% of the Company’s sales in 2019.
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 58% in 2019 compared with 2018. Most of this increase was due to increased
sales to several of the customers for this product. Two of those customers are contract manufacturers that manufacture and package
products for other companies, and both acquired new customers for this product in 2019.
LUBRAJEL LC and LUBRAJEL FA are Lubrajel formulations
that were developed for use in oral care applications. Combined sales for these products decreased by 1% compared with 2018, due
primarily to fluctuations in the buying patterns of its customers for those products.
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
increased by 38% in 2019 compared with 2018 and accounted for approximately 22% of the Company’s sales in 2019 compared with
approximately 15% in 2018.
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 19% in 2019 compared with
2018, and represented approximately 26% of total Company sales. The Company believes that the increase was due to increased marketing
efforts for this product, including a new dedicated web site, as well as an increase in the Company’s internet advertising.
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 2019, sales increased
by approximately 4% 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 decreased by 8% but represent less than 1%
of Company sales.
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
increased by 7% in 2019, but, as with Deselex, represent less than 1% of Company sales.
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. Because
of the high cost of bringing new drugs or medical devices to market, and the Company’s limited resources, 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 cosmetic ingredients. The following are some of the projects on which the Company is currently working:
LUBRAJEL OIL PF: This product was developed
as a result of the high demand for the Company’s very popular Lubrajel Oil. Unlike that product, this formulation will be
preservative-free, which enables formulators to use their own preservative systems without having to account for preservatives
already incorporated into the product. This approach has been very successful with the Company’s regular Lubrajel PF, and
the Company is hopeful that a preservative-free formulation of Lubrajel Oil will also be successful. The Company has completed
the testing on this product, and plans to launch it at the In-Cosmetics conference in Barcelona in April 2020.
LUBRAJEL II XD PF: Like the Lubrajel
Oil PF, this product was developed to meet the continuing market demand for preservative-free products. Current formulators are
moving from conventional preservative systems to more natural methods of preservation. Eliminating the preservatives enables a
formulator to choose the preservative system that is best for their final application. Prototypes of this product have been developed
and are currently undergoing sensory testing.
LOWER-COST LUBRAJEL: Based on feedback
from its marketing partners, the Company believes that there could be significant market potential for a version of Lubrajel that
can be produced and marketed at a lower cost than the current line of Lubrajel products. There are certain global markets that
are not suitable for the current price points for Lubrajel, and the Company believes that the development of a lower-priced Lubrajel
could open these new markets for the Company. The idea for a lower-cost Lubrajel has been reviewed and evaluated by the Company
for a number of years, but until now the Company did not have a clear path for the development of this product. It now believes
that the time is right to focus on these development efforts. The Company’s goal is to understand the competitive market
and develop a lower-cost product with comparable benefits to some of the Company’s other Lubrajel products but which will
not take away sales from those other products. Prototypes are being developed and will undergo a series of tests to determine which
formulation would be the most competitive. Once a prototype has been selected, samples will be sent to the Company’s marketing
partners for evaluation.
OIL/WAX HYDRATION: 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 has a high natural origin content based on ISO 16128, and, like the Company’s
other natural products, is intended to be certified as a “natural” ingredient. Prototypes have been created and will
undergo further testing and evaluation.
LUBRAJEL 24: The purpose
of this project is to develop a product with 24-hour hydration. While the Company’s current water-based moisturizing products
provide excellent hydration, the goal is to build upon that to produce a product with superior hydration that will last a full
24 hours. Prototypes have been developed and testing will be conducted to determine hydration benefits.
LUBRAJEL OIL NATURAL: This product
was developed to be an addition to the Company’s “natural” line of products. It uses vegetable feedstock, and
is based on polysaccharide chemistry. Modifications have been made over the past year to increase hydration and stabilize the emulsion.
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 newest prototype has been sent to our marketing partners for their
feedback.
LUBRAJEL TERRA™: The Company’s
goal with this product was to further extend the Company’s line of products based on natural ingredients. In this case, the
product uses plant-based materials. As with the Lubrajel Oil Natural, this product is based on polysaccharide chemistry. The Company
is confident that the product will be certified by Ecocert to comply with the COSOMOS standard, and the necessary documentation
for that certification will be submitted once the Company arrives at a final formulation.
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 2019 were $397,391 compared with $399,517 in 2018. The Company expects its research and development expenses in 2020
to be comparable to those of 2019. 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, 2020 and will automatically renew again on January 1, 2022 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 82% of the Company’s total sales in 2019, compared with 81% in 2018. Domestic sales of cosmetic
ingredients accounted for approximately 40% of total Company sales in 2019, compared with 45% in 2018. Sales to the Company’s
largest marketing partner, ASI, accounted for approximately 36% of total Company gross sales in 2019 and 42% of gross sales in
2018. 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
30% of Company sales in 2019, and approximately 26% in 2018. Domestic sales of the Company's medical (non-pharmaceutical) products
accounted for approximately 11% of Company sales in 2019 and 8% in 2018. 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 2019 and 2018. 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 2019 and 2018, approximately 18% and 19%,
respectively, of the Company’s sales revenue was from foreign sources and was derived from (a) sales of its cosmetic ingredients
to the Company’s foreign marketing partners, which accounted for approximately 7% of Company sales in 2019 and 11% in 2018,
and (b) sales of some of the Company’s medical products directly to certain customers in foreign countries, which accounted
for approximately 11% of Company sales in 2019 and 8% in 2018.
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 both 2019 and 2018, 75% of ASI’s sales were to customers
in foreign countries. ASI’s largest foreign market in both 2019 and 2018 was China, which accounted for approximately 49%
of ASI’s sales of Company products in 2019 and 55% in 2018.
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 to 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.
SALES AND MARKETING
The Company markets its products through marketing
partners and distributors, promotion on the Company’s web sites, and by internet advertising, and has some direct sales to
customers as well. The cosmetic ingredients 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 product 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 marketing
partner. 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 Safic-Alcan); and Switzerland (by Azelis Cosmetics GmbH.).
The Company previously had a separate marketing partner in Korea, but at the end of 2019 the marketing rights for Korea were transferred
to ASI.
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 cosmetic ingredients, 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, and in December 2019 the marketing rights in Korea were transferred
to ASI from the Company’s previous distributor for Korea. 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, 2018, and 2020 for additional two-year
terms. The current contract ends on December 31, 2021.
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 cosmetic
ingredients to continue to supply products to customers currently using the Company's products, without any significant interruption
of sales.
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 86% of the raw material purchases
by the Company in 2019 and 80% in 2018.
INVENTORIES, RETURNS, and ALLOWANCES
It is important for the Company to maintain
moderate inventory levels of certain of its finished goods in order to fulfill purchase orders in a timely manner. 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 cosmetic ingredients are
currently marketed and sold globally by five marketing partners. During most of 2019, the Company also had a separate marketing
partner for Korea, but at the end of 2019 that territory was transferred to ASI. 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 cosmetic ingredients, 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. Its Lubrajel line of products is well known globally and has a long-standing
reputation for high quality. The Company believes that these characteristics will be advantageous to the Company in its continuing
efforts to compete effectively with other companies marketing similar products. The pharmaceutical, health care, and cosmetic industries
are all highly competitive, and during 2019 the Company experienced a high level of competition for its cosmetic ingredients both
in the U.S. and in foreign markets. In 2019 the U.S. dollar continued to strengthen 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 plans to develop new pharmaceutical products, if it decided
to do so 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 2019 and 2018,
the Company incurred approximately $39,000 and $43,000, 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 28 employees, 4 of
whom serve in an executive capacity, 16 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 are full time.
POTENTIAL IMPACT OF CORONAVIRUS
The Company’s marketing partners sell
the Company’s cosmetic ingredients and medical lubricants to customers in geographic areas that are currently being impacted
by an outbreak of coronavirus, in particular China, Korea, and certain parts of Europe. It is likely that this outbreak will have
some impact on the Company’s sales in these geographic areas, particularly in Asia. However, at the time of the Company’s
filing of this Form 10-K it is not possible to determine the extent of that potential impact. With some businesses in the affected
areas temporarily closing as a result of the spread of this virus, it is possible that payments from some customers may be delayed.
The Company has also been informed by its marketing partners in Asia that there is an expectation on the part of cosmetic manufacturers
doing business there that consumer sales of cosmetic products in some areas may decrease due to the temporary closing of stores
and the reduction in tourism. As a result, it is believed that some manufacturers may temporarily reduce their purchases of raw
materials used in the production of their cosmetics, including those materials sold by the Company. The Company is monitoring this
situation closely to determine what impact, if any, this outbreak will have on its sales in the coming year.
Although the Company does source some of its
raw materials from areas being impacted by the coronavirus, it has multiple sources for many, but not all, of its raw materials.
For those it doesn’t it is increasing its inventory in case there is a temporary delay in obtaining some of those materials.
While at the present time the Company’s production of cosmetic ingredients, as well as its other products, has not yet been
impacted by the coronavirus, the situation is changing rapidly, both in the U.S. and overseas, and there is a possibility that
businesses, including the Company’s business, might have to temporarily shut down, which could have a significant impact
on sales until production can be resumed.