(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 Corporation ("Guardian"), an affiliate of UIR, whereby Guardian 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 57% of the Company's sales in 2020, and Renacidin® Irrigation Solution
(“Renacidin"), a pharmaceutical product that accounted for 36% of the Company's sales in 2020.
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. 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 the Company’s
“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 website and by internet advertising, 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 website at www.u-g.com, and
a specific website for Renacidin at www.renacidin.com.
IMPACT OF THE CORONAVIRUS PANDEMIC
In March 2020, the
spread of the coronavirus (COVID-19) began to cause disruptions among businesses and markets worldwide. On March 20, 2020, the
Governor of New York issued an executive order which closed non-essential businesses. The Company, as a manufacturer of pharmaceutical
and medical products, was considered an essential business, and continued to operate throughout the pandemic. When the spread of
the coronavirus was at its worst in New York the Company modified its staffing schedule in order to decrease employee density as
much as possible, with employees working 7 days a week on altered hours, and later on an every-other-week work schedule with limited
hours. Despite the reduced schedule the Company was able to maintain adequate production and shipping schedules, and was able to
fill all orders on a timely basis. As things improved, the Company gradually increased its working hours and employee density until
it resumed its regular working schedule in June 2020. Throughout the pandemic the Company was able to maintain its full payroll,
all employees received their full pay, and no employees were furloughed or dismissed.
While the Company’s
pharmaceutical sales have not been impacted by the coronavirus pandemic, sales of the Company’s cosmetic ingredients and
medical products have been significantly impacted, particularly in the second half of 2020. Sales of the Company’s cosmetic
ingredients in 2020 decreased by 33% compared with 2019. The decrease was primarily the result of lower sales to ASI, the Company’s
marketing partner in China, and was caused primarily by factors related to the coronavirus, including (a) lower consumer demand
in China for many of the products in which the Company’s products are used; (b) manufacturing disruptions in China resulting
from the impact of the coronavirus on manufacturing facilities; and (c) excess inventory levels due to overstocking on the part
of both the Company’s marketing partner for China as well as its sub-distributors in China. The overstocking was due to the
uncertainty on the part of the marketing partner about being able to continue to get product from the Company during the pandemic.
Because the Company’s
cosmetic ingredients are marketed in many different countries, it is difficult to project the future impact of the coronavirus
pandemic on the Company’s global cosmetic ingredient sales, since the virus continues to impact different countries at different
times and to very different extents. The Company is hopeful that as vaccinations increase, the global economic situation will gradually
improve. However, based on the current situation, as well as future projections by different analysts, the Company anticipates
that the pandemic will continue to negatively impact sales of the Company’s cosmetic ingredients throughout most or all of
2021.
The Company also believes
that the coronavirus impacted sales to two of the Company’s four major medical product customers whose orders decreased in
2020, and may have been a factor in the loss of a third (although the Company has not yet been able to confirm that as the reason
for that lost business). Overall sales of the Company’s medical products decreased by 31% compared with the corresponding
periods in 2019.
With the continuing
uncertainty as to what the duration and future impact of the pandemic will be, the Company is unable to provide an accurate estimate
or projection as to what the continuing impact of the coronavirus will be on the Company’s operations or its financial results
in the future. However, as of the date of this report, the Company does not anticipate that the coronavirus pandemic will affect
the ability of the Company to obtain raw materials and maintain production. The Company has price protection on some but not all
of its most important raw materials, has multiple sources for many of its raw materials, and has been able to maintain sufficient
inventory and production levels to enable it to fulfill sales orders on a timely basis. The Company does not expect the carrying
value of its assets or its liquidity to be impaired by the coronavirus pandemic.
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. Included
in the many different formulations of Lubrajel are variations that use different types of preservatives, as well as some, like
Lubrajel PF, Lubrajel Oil PF, and Lubrajel II XD PF, which are all preservative-free.
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.
LUBRAJEL MARINE™
was the second product that the Company developed for its new line of “natural” cosmetic 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. It is being actively marketed
by ASI, and while sales have not attained the levels that the Company had originally hoped for, the Company is still optimistic
that sales will increase as the interest in natural products in the marketplace continues.
Total sales of the
Company's cosmetic ingredients decreased by $2,102,737 (33%) for the year ended December 31, 2020 when compared with 2019, and
accounted for approximately 39% of total Company sales in 2020 compared with 47% in 2019. The decrease was due primarily to a decrease
in sales of Lubrajel cosmetic ingredients to ASI for distribution in China, which the Company believes was due mainly to issues
related to the coronavirus pandemic.
Each of the following
cosmetic ingredients accounted for less than 2% of the Company’s sales in 2020, 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 a paraben-free
version of this product known as Lubrajel II XD Free, and the Company is currently developing a preservative-free version of the
product.
B-122™ is a powdered
lubricant used in the manufacture of certain cosmetics, such as pressed powders, eyeliners, and rouges, as well as some industrial
products. The product acts as a binder, increases water-repellency and drop strength, and lowers the coefficient of friction in
the products in which they are used. Until 2021 the Company also had small sales of another powdered lubricant, Lubraslide,
but that product has now been discontinued due to the negative environmental impact of the PTFE that was one of its ingredients.
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.
LUBRASIL™ II SB
is a special formulation of Lubrajel in which silicone oil is incorporated into a Lubrajel base using proprietary technology that
enables the product to maintain much of the clarity of regular Lubrajel. The product has a silky feel and is water resistant while
at the same time providing moisturization.
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 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 for those products; (b) the Company's success
in developing new and innovative cosmetic ingredients, including new types of water-based moisturizers and lubricants; developing
new applications for existing products; and (c) the ability of the Company to compete with manufacturers of lower-cost competitors
to Lubrajel that have negatively impacted the sales of the Company’s cosmetic ingredients over the past few years. In particular,
the Company has experienced significant pricing pressure from competitive products being marketed by some Asian manufacturers.
These lower-cost competitive products are likely to continue to negatively impact the Company’s sales and 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 cosmetic ingredients 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, reliability, and reputation for supplying quality products will be advantageous in its efforts
to compete with the growing number of lower-cost competitors, 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 Lubrajel RR
for those customers who are in more cost-sensitive markets. Sales of Lubrajel RR increased in 2020 compared with 2019, and sales
of Lubrajel RC. The Company believes that the decrease in sales of Lubrajel RC was primarily the result of a decrease in orders
from one of the Company’s customers that has been impacted by the coronavirus pandemic. The combined sales of both products
accounted for 10% of the Company’s sales in 2020.
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 for this product decreased in 2020 compared with
2019 due to a decrease in sales to two of the Company’s larger customers for this product that are located in areas, such
as China, that were significantly impacted by the coronavirus.
LUBRAJEL LC and LUBRAJEL FA
are Lubrajel formulations that were developed for use in oral care applications. Sales of these products decreased in 2020 compared
with 2019 primarily as the result of a decrease in orders from the Company’s primary customer, which the Company believes
was related to the coronavirus pandemic.
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 31% in 2020 compared with 2019 and accounted for approximately 19% of the Company’s
sales in 2020 compared with approximately 22% in 2019.
PHARMACEUTICALS
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
12% in 2020 compared with 2019, and represented approximately 36% of total Company sales. The Company believes that the increase
was due to the Company’s increased marketing efforts for this product, including a dedicated website and expanded 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,
and in 2020 sales of Clorpactin represented approximately 6% 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; (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 PRODUCTS
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 slightly in 2020 and
represented less than 1% of Company sales. The decrease in sales was primarily due to a decrease in orders from the Company’s
primary customer for this product, which the Company believes was due to the impact of the coronavirus pandemic.
THOROCLENS is a chlorine-based
industrial cleanser manufactured and packaged by the Company for a small company in New England. Sales of this product increased
in 2020, but, as with Deselex, represented 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 develops products that are 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 the Company consults with its global marketing partners 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, as well as 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 is 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 Lubrajel
PF, its first preservative-free product, and the Company is hopeful that a preservative-free formulation of Lubrajel Oil will also
be successful. The Company has launched this product exclusively with Ashland. Ashland initially launched the product in Asia
in June 2020, and followed with a global launch in November. Based on the amount of customer interest, as well as the qualification
of the product for use by existing and new customers, Ashland has indicated that it considers this launch to be a success.
LUBRAJEL II XD PF:
Like 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. This product is ready for marketing,
and it is anticipated that Ashland will have formally launched this product in early February 2021. The product has already been
qualified by some customers in the EMEA market.
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 for cosmetic use 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 discussed and considered by the Company for a number of years, and the Company believes that the time is right to focus on
these development efforts. The goal is to develop a lower-cost product with similar benefits to some of the Company’s other
Lubrajel cosmetic products, but which would not take away sales from those other products. The Company’s current development
efforts for this product have focused on evaluating competitive products and comparing their attributes to those of the product
we are developing. This initial research will enable the Company to determine the best path forward in developing a product that
will be competitive in price sensitive markets. The Company anticipates that this initial research will be completed in early 2021,
and that product development will begin shortly thereafter.
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. A prototype
formula has been tested for sensory benefits. Before additional development work is conducted on this prototype we will be discussing
the marketability of the product with our distributors to determine appropriate product pricing and anticipated customer interest.
A clear understanding of what pricing the market will support is necessary before determining the next steps in this project.
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 hydration testing is scheduled for March 2021. The results of this testing
will determine the next steps in this project.
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 Company has initially launched this product with its
UK marketing partner due to a specific interest they had in this product. The product has already been qualified for use by some
customers in the UK, and the first commercial order was placed in January 2021. We will continue to work with our marketing partners
to gain feedback on this product, and pursue additional markets where we believe that this product could be successful.
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 2020 were $451,208 compared with $397,391 in 2019. The Company expects its research and development
expenses in 2021 to be comparable to those of 2020. 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
COSMETIC INGREDIENTS:
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”). That agreement was 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), most recently in 2019 when Korea
was added to ASI’s marketing territory. ASI also has the exclusive right to market two of the Company’s products: Lubrajel
Marine, which was the second product in the Company’s Lubrajel Natural line of products; and Lubrajel BA, an oral
care product which was specifically developed for ASI in 2012 but which, to date, has not had significant sales. ASI also has a
non-exclusive right to sell certain of the Company's other industrial and medical 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 80% of the Company’s total sales in 2020, compared with 82% in
2019. Domestic sales of cosmetic ingredients accounted for approximately 30% of total Company sales in 2020, compared with 40%
in 2019. Sales to the Company’s largest marketing partner, ASI, accounted for approximately 29% of total Company sales in
2020 and 39% of sales in 2019. It should be noted, however, that while all sales to ASI are considered domestic sales because all
shipments to ASI are delivered to ASI in the U.S., a significant percentage of ASI’s purchases from the Company are ultimately
sold to foreign customers. Based on sales information provided to the Company by ASI, 68% of ASI’s sales in 2020 were to
customers in foreign countries, compared with 75% in 2019.
PHARMACEUTICALS:
The Company’s
pharmaceutical products are marketed only in the United States, and are sold primarily through full-line drug wholesalers. Sales
of those products accounted for approximately 41% of Company sales in 2020, compared with approximately 30% in 2019.
During 2020 and 2019,
the Company participated in various government drug rebate programs related to the sale of Renacidin, its most important pharmaceutical
product. These programs include the Medicaid Drug Rebate Program (MDRP), Section 340B Drug Pricing Program (340B), Veterans Affairs
Federal Supply Schedule (FSS), and the Medicare Part D Coverage Gap Discount Program (CGDP). These programs required the Company
to either sell its product at a discounted price, or, in the case of Medicaid, to pay a significant rebate to the various states
where Renacidin was being provided to Medicaid patients. The Company’s sales, as reported, are net of these rebates, some
of which are estimated and are recorded in the same period that the revenue is recognized.
As a result of
the overly burdensome nature of the Medicaid rebates it became clear to the Company in October 2020 that it was no longer
profitable for the Company to continue participating in the Medicaid or the 340B programs. As a result, on October 30, 2020,
the Company informed the Centers for Medicare & Medicaid Services (CMS) and the Health Resources and Services
Administration (HRSA) of its intention to terminate its Medicaid Drug Rebate Agreement and its 340B Drug Pricing Agreement,
effective December 31, 2020. The Company will, however, continue to participate in the other government discount and rebate
programs, specifically the Veterans Affairs FSS Program and the Medicare Part D Coverage Gap Program (CGDP).
MEDICAL PRODUCTS:
The Company’s
non-pharmaceutical medical products, such as its catheter lubricants and oral care products, are sold directly by the Company to
the end users or to contract manufacturers utilized by the end users. These products are also are available for sale on a non-exclusive
basis by its marketing partners as well. Domestic sales of the Company’s medical products accounted for approximately 8%
of the Company’s total sales in 2020, compared with 11% in 2019. Although all shipments of medical products to U.S. locations
are considered domestic sales, a percentage of those shipments are subsequently shipped by some customers to foreign manufacturing
facilities, which then produce finished products that are marketed globally.
INDUSTRIAL PRODUCTS:
Domestic sales of the
Company’s specialty industrial products accounted for less than 2% of Company sales in both 2020 and 2019. These products
are sold directly to end-user customers or their contract manufacturers, who incorporate these products into their finished products.
FOREIGN
SALES
In 2020 and 2019, approximately
20% and 18%, 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 9% of Company sales in
2020 and 7% in 2019, 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 both 2020 and 2019.
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, 68% of ASI’s sales of the
Company’s products in 2020 were to customers in foreign countries, compared with 75% in 2019. ASI’s largest foreign
market in both 2020 and 2019 was China, which accounted for approximately 33% of ASI’s sales of Company products in 2020
and 49% in 2019.
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. As a result of the
weakening dollar in 2020, the Company’s products became a little more competitive than they have been over the past few years.
SALES AND MARKETING
The Company markets
its products through marketing partners and distributors, promotion on the Company’s websites, 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.).
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, which extended 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 88% of the
raw material purchases by the Company in 2020 and 84% in 2019.
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. 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 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 2020 the Company experienced a high level of competition
for its cosmetic ingredients both in the U.S. and in foreign markets. Unlike in 2019, in 2020 the value of the U.S. dollar declined
relative to some other foreign currencies, in particular the Euro, which made the Company’s products a little more competitive
in those markets than it had been in recent years. Despite the more favorable currency situation, the Company believes that there
will continue to be significant competition for its products, especially from Asian competitors, and the Company intends to continue
to work closely with its marketing partners to remain as competitive as possible. 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 companies that have greater capacity than the Company to develop and to commercialize
the types of products upon which the Company's research and development programs are based. The Company intends to continue 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 it is optimistic that the development of unique products, including
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. Some products
developed and sold by the Company in the United States may require approval from federal regulatory agencies, such as the U.S.
Food & Administration (“FDA”), as well as state regulatory agencies. Some products 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 2020 and 2019, the Company incurred approximately $13,000 and $39,000, 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 25 employees, 4 of whom serve in an executive capacity, 16 in research, quality control and manufacturing, 3 in maintenance
and construction, and 2 in office and administrative support services. Of the total number of employees, 22 are full time.