COMPETITION
Following the asset sale of our sports drink intellectual property, we will only
be manufacturing and distributing powder versions of ACCELERADE(R) and
ENDUROX(R) R(4)(TM) as well as ACCEL GEL(R). Our primary marketing focus will be
the serious endurance athlete (cyclist, runner, triathlete and swimmer) as well
as team sports. There are a number of companies that currently market products
competitive to ENDUROX(R) R(4)(TM) and ACCELERADE(R). The major companies
include Cytosport, PowerBar, EAS, and Clif Bar. Increased competitive activity
from such companies could make it more difficult for us to establish market
share since such companies have greater financial and other resources available
to them and possess far more extensive manufacturing, distribution and marketing
capabilities than we.
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The weight loss market, in which SATIETRIM(R) will compete, is a very
competitive market place. Weight loss products tend to fall into four categories
including: herbal supplements, meal replacement products (e.g., Slim Fast), food
plans (e.g., Weight Watchers) and prescription products (e.g., Xenical). Today,
weight loss products are manufactured by dietary supplement manufacturers,
pharmaceutical manufacturers, diet food companies, and over-the-counter drug
companies. Intense competitive activity in this market could make it difficult
for us to establish market share, as most of the companies that have products in
this category have greater financial, marketing, sales, manufacturing, and
distribution resources than we have.
We believe that long-term success in the marketplace for any of our products
will be dependent on the proprietary nature of our formulas as well as such
factors as distribution and marketing capabilities.
SUPPLIERS OF RAW MATERIALS
We do not have manufacturing facilities and have no present intention to
manufacture any products ourselves. We fulfill product needs through
relationships with independent manufacturers. We generally do not have long-term
contracts with any of these manufacturers. Competitors that do their own
manufacturing may have an advantage over us with respect to pricing,
availability of product, and in other areas because of their control of the
manufacturing process.
On January 28, 2005, we entered into an Exclusive Custom Manufacturing Agreement
with an affiliate of our investor, Hormel Health Labs. This agreement provides
for the exclusive manufacturing and processing of our powered sports drinks at
fixed prices. The initial term of the agreement is one year, and was extended in
August 2005 to two years.
Generally, our contract manufacturers obtain raw materials necessary for the
manufacture of our products from numerous sources. We generally do not have
contracts with suppliers of materials required for the production of our
products. We obtain ciwujia for our ENDUROX EXCEL(R) caplet line of products
from suppliers in the Peoples Republic of China. At the present time, we obtain
all of our needs from one supplier in the People's Republic of China, but
believe that we could switch to a number of alternative suppliers without
significant effect. We have not entered into any long-term supply agreements
with this supplier. In addition, all other raw materials used in our existing
products are available from multiple sources.
There is no assurance that suppliers will provide the raw materials needed by us
in the quantities requested or at a price we are willing to pay. Because we do
not control the source of these raw materials, we are also subject to delays
caused by interruption in production of materials based on conditions outside of
our control.
DEPENDENCE ON MAJOR CUSTOMERS
GNC and Performance, Inc. accounted for approximately 30% and 20%, respectively,
of net sales in fiscal 2005 and 0% and 0%, respectively, of net accounts
receivable at December 31, 2005. Deferred revenues for consigned inventory at
GNC were $369,068 as of December 31, 2005. The loss of these customers, a
significant reduction in purchase volume by these customers, or the financial
difficulty of such customers, for any reason, could significantly reduce our
revenues. We have no agreement with or commitment from either of these customers
with respect to future purchases.
PATENTS AND TRADEMARKS
The following describes the patents and trademarks we have obtained related to
our sports nutrition products and our weight loss technology. On February 22,
2006, we sold the patents and trademarks related to our ACCELERADE(R) and
ENDUROX(R) line of sports nutrition products to Mott's subject to an exclusive
license back to us to continue to market the powder, gel and pill form of these
products
We received a use patent, United States Patent No. 5,585,101 in December 1996
covering the use of ciwujia, the principal active herb in ENDUROX(R) and ENDUROX
EXCEL(R) caplets, entitled Method to Improve Performance During Exercise Using
the Ciwujia Plant. This patent expires in December 2013.
We received a composition of matter patent, United States Patent No. 6,051,236,
in April 2000 entitled Composition for Optimizing Muscle Performance During
Exercise. This patent expires in April 2017.
We received a composition of matter patent, United States Patent No. 6,207,638,
in March 2001 entitled Nutritional Intervention Composition for Enhancing and
Extending Satiety. This patent expires in March 2018.
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We received a use patent, United States Patent No. 6,429,190, in August 2002
entitled Method For Extending The Satiety Of Food By Adding A Nutritional
Composition Designed To Stimulate Cholecystokinin (CCK). This patent expires in
August 2019.
We received a composition of matter patent, United States Patent No. 6,436,899,
in August 2002 entitled Nutritional Intervention Composition for Enhancing and
Extending Satiety. This patent expires in August 2019.
We received a composition of matter patent, United States Patent No. 6,468,962,
in October 2002 entitled Nutritional Intervention Composition for Enhancing and
Extending Satiety. This patent expires in October 2019.
We received a composition of matter patent, United States Patent No. 6,558,690,
in May 2003 entitled Nutritional Intervention Composition for Improving Efficacy
of a Lipase Inhibitor. This patent expires in May 2020.
We received a composition of matter patent, United States Patent No. 6,716,815,
in April 2004 entitled Nutritional Intervention Composition for Enhancing and
Extending Satiety. This patent expires in April 2021.
We received a composition of matter patent, United States Patent No. 6,838,431,
in January 2005 entitled Nutritional Intervention Composition Containing
Protease Inhibitor Extending Post Meal Satiety. This patent expires in January
2022.
We received a composition of matter patent, United States Patent No. 6,989,171,
in January 2006 entitled Sports Drink Composition For Enhancing Glucose Uptake
and Extending Endurance During Physical Exercise. This patent expires in January
2023.
We also have several patents pending on our technology. To the extent these are
improvements on our existing sports drink patents, Mott's will own these
patents, but we will have an exclusive license to use them in powder, gel and
pill products.
The patent holder for all patents is our CEO and President, Dr. Robert Portman.
Our policy is to have all patents assigned to us upon filing. Patent numbers
6,051,236 and 6,989,171 above have been assigned to Mott's. To the extent we do
not have patents on our products, there can be no assurance that another company
will not replicate one or more of our products, nor is there any assurance that
patents that are obtained will provide meaningful protection or significant
competitive advantages over competing products. For example, our use patent on
ciwujia would not prevent the sale of a product containing that herb with a
claim or for a use that was not covered by our patent.
We have federal trademark registrations for ENDUROX(R), ENDUROX EXCEL(R),
ENDUROX PROHEART(R), ENDUROX(R) R(4)(TM), SATIETROL(R), SATIETROL COMPLETE(R),
ACCELERADE(R), ACCEL GEL(R), COUNTDOWN(R), and MUSCLEADE(R) among others. We
also have filed our trademarks in most Western European countries, Canada,
Mexico and Japan. Our policy is to pursue registrations for all of the
trademarks associated with our key products, and to protect our legal rights
concerning the use of our trademarks. We rely on common law trademark rights to
protect our unregistered trademarks.
GOVERNMENTAL REGULATION
We have determined that all of our existing and proposed products, as described
above, are nutritional or dietary supplements as defined under federal statutes
and regulations of the FDA. Neither nutritional supplements nor dietary
supplements require FDA or other governmental approval prior to their marketing
in the United States. No governmental agency or other third party makes a
determination as to whether our products qualify as nutritional supplements,
dietary supplements, or neither. We make this determination based on the
ingredients contained in the products and the claims made for the products. The
processing, formulation, packaging, labeling and advertising of such products,
however, are subject to regulation by one or more federal agencies including the
FDA, the Federal Trade Commission, the Consumer Products Safety Commission, the
Department of Agriculture and the Environmental Protection Agency. Our
activities also are subject to regulation by various agencies of the states and
localities in which our products are sold.
We market products that are covered under two types of FDA regulations,
Nutritional Supplements and Dietary Supplements. Nutritional Supplements contain
food and GRAS (Generally Regarded as Safe) ingredients and do not require FDA
approval or notification. Such products must follow labeling guidelines outlined
by the FDA.
Dietary Supplements is a classification of products resulting from the enactment
of the Dietary Supplement Health and Education Act of 1994 in October 1994,
which amended and modified the application of certain provisions of the Federal
Food, Drug and Cosmetics Act as they relate to dietary supplements, and required
the FDA to promulgate regulations consistent with this act.
The Dietary Supplement Health and Education Act defines a dietary supplement to
include:
o any product intended to supplement the diet that bears or
contains a vitamin, mineral, herb or other botanical, an amino
acid, a substance to supplement the diet by increasing the total
dietary intake, or any concentrate, constituent, extract, or
combination of any such ingredient, provided that such product is
either intended for ingestion in tablet, capsule, powder,
softgel, gelcap, or liquid droplet form;
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o or, if not intended to be ingested in such form, is not
represented for use as a conventional food or as a sole item of a
meal or the diet; and
o is labeled as a dietary supplement.
The practical effect of such an expansive definition is to ensure that the new
protections and requirements of this act will apply to a wide class of products.
Under the Dietary Supplement Health and Education Act, companies that
manufacture and distribute dietary supplements are allowed to make any of the
following four types of statements with regard to nutritional support on
labeling without FDA approval:
o a statement that claims a benefit related to a classical nutrient
deficiency disease and discloses the prevalence of such disease
in the United States;
o a statement that describes the role of a nutrient or dietary
ingredient intended to affect structure or function in humans;
o a statement that characterizes the documented mechanism by which
a nutrient or dietary ingredient acts to maintain or function; or
o a statement that "describes general well-being" from consumption
of a nutrient or dietary ingredient.
In addition to making sure that a statement meets one of these four criteria, a
manufacturer of the dietary supplement must have substantiation that such
statement is truthful and not misleading, must not claim to diagnose, mitigate,
treat, cure, or prevent a specific disease or class of diseases, and must
contain the following disclaimer, prominently displayed in boldface type: "This
statement has not been evaluated by the Food and Drug Administration. This
product is not intended to diagnose, treat, cure, or prevent any disease."
On February 6, 2000, the FDA issued new guidelines concerning statements made
for dietary supplements. These new regulations have important implications for
the marketing of weight loss products such as SATIETROL(R). Previously the
regulations made it clear that a product that made a claim for obesity must be
treated as a drug. Under the new regulations, the FDA makes a distinction
between obesity and overweight. Overweight is no longer considered a disease but
rather a natural life process. Overweight is considered a condition that affects
the structure and function of the body. As now defined, dietary supplements can
make a claim for ordinary weight loss rather than as a treatment for obesity.
Furthermore, these regulations also permit the use of appetite suppressant as a
structure/function claim under the Dietary Supplement Health and Education Act.
The issuance of these regulations will give us greater latitude in the types of
claims we can make about SATIETROL(R) as long as such claims are substantiated
by the necessary studies.
EXPENDITURES FOR RESEARCH AND DEVELOPMENT
Our research and development expenditures in the past two fiscal years,
exclusive of market research and marketing related expenditures, were as
follows: 2005 - $195,000; 2004 - $145,000. The primary reason for the increase
was due to our aggressive research and development plan put in place as we
continue to seek out additional patents and claims for our products. We
anticipate that research and development expenses will increase as we conduct
additional clinical trials on all of our products.
COMPLIANCE WITH ENVIRONMENTAL LAWS
We are not aware of any administrative or other costs that we incur which are
directly related to compliance with environmental laws, and we have not
experienced any other significant effect from the impact of environmental laws.
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