Item 1.
Business.
General Development of Business
. Biosynergy,
Inc. (the "Company") was incorporated as an Illinois corporation on February 9, 1976. The Company was formed primarily
for the purpose of developing, manufacturing, and marketing products utilizing cholesteric liquid crystals. The Company presently
manufactures and markets disposable medical, laboratory, and industrial thermometric and thermographic cholesteric liquid crystal
devices, and reusable gel packs designed for transporting temperature sensitive materials. The Company also distributes an electronic
heat block used as an activator for its HemoTemp
R
II Core Correlated Blood Monitoring Device manufactured by a third
party to specifications of the Company.
The Company did not enter into any agreements
materially affecting its operations during Fiscal 2017. The Company experienced a decrease in sales of $45,383 or 3.4% in Fiscal
2017. Sales in Fiscal 2017 were $1,292,569. The Company realized an after income tax profit of $107,225 for Fiscal 2017 compared
to an after income tax profit of $106,274 for Fiscal 2016. See “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.”
The Company continued its development and review
of the proposed products described in “Thermographic and Thermometric Devices and Accessories” below.
The Company continued to introduce its products
directly to industrial customers during Fiscal 2017. Management believes there is a need for its products and technology in the
industrial markets.
Except as stated above, there were no other
significant contracts or developments with regard to the Company's business during the past fiscal year.
Financial Information About Industry Segments
.
The Company’s revenues were generated from sales of medical and laboratory products in the medical and laboratory industry
segment during the fiscal years ended April 30, 2017 and 2016. For a description of these products, see “Narrative Description
of Business.”
See "Information About Foreign and Domestic
Operations and Export Sales". See also "Selected Financial Data" and "Financial Statements and Supplementary
Data."
Narrative Description of Business
. The
Company is presently engaged in the business of developing, manufacturing, and marketing disposable thermometric and thermographic
temperature indicators and accessories for the medical, laboratory and industrial markets. The Company has also developed a bacteria
growth retardant agent which is not currently produced or sold by the Company. Further information about the business and proposed
products of the Company are described below.
Thermographic and Thermometric Devices and
Other Products
. During the fiscal year ending April 30, 2017 the Company manufactured and marketed various medical, laboratory,
and consumer thermometric, thermographic, and temperature control devices and accessories. These products (described below) were
sold to hospitals, clinical end-users, laboratories, and product dealers.
1. The HemoTemp
R
Core Correlated
Blood Monitoring Device ("BMD") is designed to be a human blood bag temperature indicator. Human blood must be maintained,
optimally, at 1-3
o
C., and not allowed to exceed 6-10
o
C. Since human blood is always in short supply, it
is critical that blood be maintained within these specifications to avoid loss. HemoTemp
R
BMD monitors the core temperature
of a blood bag from 1-12
o
C., and replaces the impractical mercury thermometer susceptible to breakage. HemoTemp
R
BMD once attached to the blood bag is usable throughout the life of the blood.
2. HemoTemp
R
II Core Correlated
BMD is designed to warn blood bank personnel whenever the internal temperature of the blood bag has exceeded approximately 6-10
o
C. HemoTemp
R
II BMD has an irreversible indicator that is activated when the tag is applied to the blood bag at
approximately 3
o
C. After being activated, the irreversible indicator remains blue colored for at least 48 hours if
the blood is kept at 3
°
C, however, if the blood is warmed to a temperature of 6-10
o
C. or above, the indicator will lose its blue color much more rapidly or the indicator will change color; the nature and degree
of the color change depend on the temperature of the sample and the time at each temperature. The irreversible indicator will not
return to blue even if the blood is subsequently recooled, indicating that the blood has been warmed. The reversible portion of
the indicator reversibly monitors temperatures from 1-9
o
C. HemoTemp
R
II BMD is non-reusable and must be
replaced each time the blood bag is returned to the blood bank and reissued.
3. HemoTemp
R
II Activator is an
electronic, portable block model heater developed to provide a reliable source of heat necessary to activate the Company's HemoTemp
R
II BMD. The HemoTemp
R
II Activator has a thermostatic control to permit precise setting and continuous control of temperatures
in the range for activation of the Company's HemoTemp
R
II BMD. This device is intended by the Company to be used with
HemoTemp
R
II BMD as a system for blood monitoring. This device is manufactured by another company to specifications
set by the Company.
4. TempTrend
R
Temperature Indicator
("TI") is primarily used to monitor the temperature of urine specimens collected for drug testing to detect fraudulent
urine specimens. Most common forms of drug testing require a urine specimen. However, the test is valid only if a legitimate urine
specimen is collected which has not been altered by the subject to mask a drug abuse problem. In order to eliminate altered or
fraudulent urine specimens in tests on federal employees, federal government guidelines require that urine temperature be measured
within four minutes of sample collection, and that the temperature be 90.5-98.9
o
F. Temperature measurements taken with
TempTrend
R
TI are simply a matter of observing the color illuminated number and recording the temperature. TempTrend
R
TI also provides a non-invasive method of monitoring the actual surface temperature trends of any body surface where temperature
measurement is important, such as near joints in rheumatoid arthritis and to assess blood circulation.
5. TempTrend
R
II Temperature Trend
Device ("TTD") is a second generation temperature trend device which is correlated to internal body temperature and provides
a non-invasive, readily visible means of monitoring changes in body temperature. TempTrend
R
II TTD will reflect oral
temperatures such as those taken by glass thermometers. TempTrend
R
II TTD is used intraoperatively to warn of developing
hyper or hypothermic conditions. The indicator can also be used for monitoring a patient's temperature during any type of transfusion
procedure.
6. LabTemp
R
20 and LabTemp
R
40 Surface Temperature Indicators ("STI") are designed to reversibly indicate the temperature of laboratory materials
which require specific storage or use temperatures. LabTemp
R
20 STI indicates temperatures between 0-21
o
C. and LabTemp
R
40 STI monitors temperatures between 19-21 and 24-41
o
C. These thermometers are designed
to monitor the temperature and changes in temperature of hundreds of laboratory chemicals and supplies which require specific temperature
conditions; however, these thermometers are suitable for temperature measurement of any surface.
7. StaFreez
R
Freeze-Thaw Indicator
("FTI") is a freeze-thaw indicator which will irreversibly indicate whether frozen material is warmed to greater than
-20
o
C. Once the frozen product exceeds -20
o
C., the liquid crystal indicator will turn from blue to gray
to black, and refreezing the product at a lower temperature will not bring back the original frozen state color.
8. HemoCool
TM
Gel-Pak is a reusable
gel pack designed for transporting temperature sensitive materials. The HemoCool
TM
Gel-Pak is unique in that it can
be used to assist in maintaining the temperature of temperature sensitive materials both during the processing of the materials
(labeling, testing, etc.) while outside the refrigerator as well as during transport.
9. HemoCool
TM
Gel-Pak for test tubes
is a reusable gel pack designed for transporting up to six test tubes while outside of the refrigerator. For example, this use
can be valuable for new admissions in hospitals who may have 1 – 6 test tubes of samples collected or large collections which
may consist of more than one test tube. These collections can also be isolated using the gel pack.
10. HemoCool
TM
Rollup Gel-Pak for
test tubes is a reusable rollup gel pack designed for transporting up to seven test tubes while outside of the refrigerator. This
device has the same capability as the Gel-Pak described above and additionally can be rolled up and transported through a pneumatic
tube system.
11. The Company also has the capability of
manufacturing on an as needed basis, specialty products including devices manufactured to the specification and design of the customer,
such as time/ temperature shipping labels for food products under the trade name FoodGarde
TM
Time/Temperature Indicators
and liquid crystal thermometers for general purpose thermometry. The Company is not currently selling any such specialty products.
Products Under Development
. The Company
is also developing these other products.
1. The Company previously developed a compound
intended for use as bacteria growth retardant agents for use in various products and processes. Although these antibacterial compounds
are subject to Food and Drug Administration regulation, they are historically designated as Generally Recognized As Safe (GRAS).
The Company is not currently producing or selling these compounds. Since there are several unknown factors regarding efficacy,
supply and regulatory requirements, the outcome of this project cannot be predicted with any certainty at this time.
2. The Company is also investigating production
methods for the bacteria growth retardant compound described in Paragraph 1 above. In this regard, the Company has developed certain
proprietary technology related to the processing of these compounds. On October 14, 2014, the Company was granted a patent “Method
of Producing Eggshell Powder” related to the processing and manufacture of bacteria growth retardant compounds for use in
food and other products (see “Patents and Trademarks”).
3. The Company is developing an improved small
portable refrigerated cooler for transportation of blood and other biologicals.
4. The Company intends to market new irreversible
time/temperature indicators which will be used as shipping labels, and in other forms, for the frozen food packaging industry (under
the tradename FoodGarde
TM
), the pharmaceutical industry, and for other industries requiring careful monitoring of refrigerated
or frozen materials. The devices will have irreversible color changes at various temperatures determined to be critical by the
end-user. Therefore, a purchaser, whether an individual consumer or a merchant, will be able to instantaneously determine the temperature
history of the material. These products will generally be customized to meet the requirements of the customer. There are currently
no contracts for development, manufacture or sale of any such irreversible time/temperature indicators.
5. The Company has recognized a need exists
for a simple, inexpensive indicator to determine if sensitive materials have been subjected to freezing temperatures. The Company
is continuing its investigation of the feasibility of such an indicator.
6. The Company is investigating the feasibility
of additional products to systematize the use of its thermometric and thermographic liquid crystal devices as well as alternative
technologies to supplement its current product line where the Company’s current products are not suitable. The results of
such investigations are not available at this time.
Manufacturing
. The Company manufactures
all of its products except for the HemoTemp
R
II Activator. The Company anticipates that the portable refrigerated cooler
under development will also be manufactured by a third party vendor. This product is manufactured for the Company by an unrelated
company on an as needed basis. Raw materials for the Company's other products are purchased, but all manufacturing of these products
is performed at the Company's production facility. All outside manufacturing is done to specifications set by the Company. There
are no commitments or firm agreements for outside manufacturers to provide products for the Company, and the Company does not anticipate
it will enter into any such agreements in the foreseeable future. Currently, the Company relies exclusively on Fred Suzuki, the
Company’s President and Chief Executive Officer, to manufacture the temperature sensitive liquid crystals used in the Company’s
temperature indicators (See “Material Risk Factors”, below).
The Company has forty-one years of experience
working with various liquid crystal formulations, thermometric and thermographic application methods and the effect of temperature
and other factors on degradable materials. The Company maintains complete records of manufacturing and quality assurance testing
of all of its products in compliance with Food and Drug Administration ("FDA") regulations. All products are manufactured
according to "good manufacturing practices" ("GMP") for medical devices.
Marketing and Distribution
. The Company
has traditionally targeted the medical and laboratory markets. The Company currently uses marketing tools such as direct mailing,
cold calls, public announcements, and its website for introduction of its new products. While novel products, such as the Company's
products, enjoy the advantage of no initial competition, they also initially lack a demonstrated market demand and acceptance.
Furthermore, cost savings programs have slowed down the introduction of new products, particularly in the medical market. As a
result, the time required to achieve acceptance of the Company's medical products has significantly increased, in Management's
opinion.
Although the Company relies on its own sales
and distribution efforts for a portion of its sales, the Company's distributors accounted for a majority of the Company’s
net sales in Fiscal 2017. During Fiscal 2017, Fisher Scientific Company (“Fisher”) accounted for 27.5% of the Company's
sales. Cardinal Health, Inc. (“Cardinal”) accounted for 37.4% of Company sales during Fiscal 2017 (See “Material
Risk Factors”, below). Management believes distributors will continue to be an important part of the Company’s sales
and distribution system in the future.
The Company continues to negotiate with various
medical and laboratory product companies for the distribution of its products under private labels and to introduce its products
in the industrial, pharmaceutical and laboratory markets, the success of which cannot be assured. The Company is attempting to
introduce new products to supplement its current product line. The Company is also researching products outside the traditional
medical and laboratory markets, the results of which cannot be predicted at this time.
During Fiscal 2018, the Company anticipates
employees will work part-time in marketing and one employee will devote substantially all of her time to marketing and selling
the Company’s products. The Company does not have an outside sales force. Since the Company markets its products to approximately
7,000 hospitals in the United States, hundreds of laboratories and industrial end-users in the United States, and thousands of
hospitals and laboratories in foreign countries, it will continue to rely upon the marketing efforts of independent dealers and
sales representatives for the medical and laboratory markets. The Company also directly markets and sells to its industrial customers.
The Company is unaware of its current market
share for its medical and laboratory products.
Sources and Availability of Raw Materials
.
In general, the Company believes its sources and availability of raw materials and finished products to be satisfactory. Presently,
there are a limited number of domestic manufacturers of liquid crystal chemicals. Although it is expected that these domestic manufacturers
will continue to supply the raw liquid crystals needed for the production of the Company's products, continued supply from such
domestic manufacturers cannot be assured. If industrial quantities of raw liquid crystals are unavailable from domestic sources,
the Company will need to import these materials from foreign suppliers, or, as an alternative, manufacture such materials itself.
There can be no assurance that foreign suppliers will have adequate surplus or availability in the event the Company needs to utilize
foreign sources. Other materials and products are currently available from a variety of suppliers (See however “Risk Factors”,
below).
Patents and Trademarks
. The Company
was previously granted or assigned five United States and four foreign patents relating to liquid crystal technology. All of these
patents have expired. Although these patents are no longer in effect, management does not believe this will have an adverse material
impact on the Company's operations, revenues or properties.
The Company currently holds several other patents,
including “Method of Producing Eggshell Powder”, Patent Number US 8,859,010, granted October 14, 2014. This patent
will expire on May 28, 2024.
The Company was also granted a design patent,
“Fold-Over Cooling Pack”, Patent Number US D670816, relating to the Company’s HemoCool
TM
Gel Pak,
on November 13, 2012. This patent will expire on November 13, 2026. In addition, the Company holds several Foreign Design Patents
for the “Fold-Over Cooling Pack”, including Europe, Patent Number 002038745-0001, issued August 7, 2012, expiring on
May 8, 2037; Canada, Patent Number 145628, issued March 21, 2013, expiring March 21, 2023; Turkey, Patent Number 201203234, issued
May 7, 2012, expiring May 7, 2037; and India, Patent Number 245076, issued February 2, 2017, expiring November 8, 2026.
The Company was granted a design patent, “Roll-Up
Gel Pack for Test Tubes,” Patent Number US D712,559 relating to the Company’s HemoCool
TM
Rollup Gel Pak
for test tubes, on September 2, 2014. This patent will expire on September 2, 2028. The Company was also granted another design
patent, “Roll-Up Gel Pack for Test Tubes,” Patent Number US D726,928 relating to the Company’s HemoCool
TM
Rollup Gel Pak for test tubes on April 14, 2016. This patent will expire on April 14, 2029. The Company holds several foreign design
patents for the “Roll-Up Gel Pack for Test Tubes,” including Europe, Patent Number 002295105-0001, issued November
18, 2013, expiring August 22, 2038; Europe, Patent Number 002295105-0002, issued November 18, 2013, expiring August 22, 2038; India,
Patent Number 252643, issued February 5, 2014, expiring March 5, 2028; Turkey, Patent Number 2013/02413, issued March 26, 2013,
expiring March 26, 2038; Canada, Patent Number 150496, issued February 8, 2017, expiring February 8, 2026; and Canada, Patent Number
156195, issued February 8, 2017, expiring February 8, 2026.
The Company also has a Design Patent Pending,
“Gel Pack for Test Tubes,” related to a design for a gel-pack which holds test tubes, HemoCool
TM
Gel-Pak
for test tubes. The Design Patent Application Number 29/447,625 was filed on March 5, 2013 and was initially rejected. Notice of
Appeal was filed on September 18, 2016. An appeal brief was filed on December 18, 2016. Design Patents for the “Gel Pak for
Test Tubes,” have been issued in Europe, Patent Number 002295212-0001 on November 28, 2013, expiring on August 22, 2038,
and Patent Number 002295212-0002 on November 28, 2013, expiring on August 22, 2038; India, Patent Number 252644 issued on January
23, 2014, expiring on March 5, 2028; Turkey, Patent Number 2013/02394 issued on March 25, 2013, expiring on March 25, 2038; Canada,
Patent Number 150495, issued on February 8, 2017, expiring on February 8, 2026; and Canada, Patent Number 156173, issued on February
8, 2017, expiring on February 8, 2026.
The Company may also seek to obtain patents
on other products, as appropriate.
The Company has received registered trademark
protection on all product names to date excepting Temp-D-Tek
TM
, Tempa-Slide
TM
, FoodGarde
TM
, LaproVue
TM
and Hemo-Cool
TM
. The Company has retained, however, all the common law rights to the Thermolyzer
TM
, Temp-D-Tek
TM
,
Tempa-Slide
TM
, FoodGarde
TM
, LaproVue
TM
, and Hemo-Cool
TM
trademarks. Additional trademark
registrations will be applied for as needed.
Patent and trademark protection is important
to the Company, both with respect to its current products, as well as products under development. In circumstances where the Company
is unable to obtain patent trademark protection on its products, as well as any improvements, developments and modifications related
to such products if the Company is able to sell such products without initial significant competition, then the Company believes
no material adverse effects to the Company's operations will result in the event additional patents and/or trademarks are not obtained,
or, if obtained, such patents and/or trademarks are held to be invalid. However, certain processes and chemical formulas will be
maintained only as trade secrets. Management feels that it will be difficult for potential competitors to analyze or reproduce
certain secret processes and formulas without substantial expenditure of capital and resources.
Seasonable Aspect of Business
. The business
of the Company is not seasonal.
Working Capital Items
. The Company has
attempted to conserve working capital whenever possible. To this end, the Company attempts to keep inventory at minimum levels.
The Company believes that it will be able to maintain adequate inventory to supply its customers on a timely basis by careful planning
and forecasting demand for its products. However, the Company is nevertheless required, as is customary in the medical and laboratory
industries, to carry inventory to meet the delivery requirements of customers and thus, inventory represents a substantial portion
of the Company's current assets.
The Company generally grants payment terms
to customers and dealers. The Company will not accept returns of products from its dealers except for change or credit but does
guarantee the quality of its products to the end user for a period of one year. In addition, the Company maintains product liability
insurance at a level which the Company’s management believes is adequate protection for the Company’s product liability
exposure.
As of April 30, 2017, the Company had $1,526,604
of current assets available. Of this amount, $32,165 represented prepaid expenses, $186,312 was inventory, $267,545 was net trade
receivables, and $1,040,582 represented cash.
Management of the Company believes that it
has sufficient working capital to continue operations for the fiscal year ending April 30, 2018 provided the Company's sales and
ability to collect accounts receivable are not adversely affected. In the event the Company's sales materially decrease, the receivables
of the Company are materially impaired for any reason, or the Company needs additional capital for its development projects, it
may be necessary to obtain additional financing to cover working capital items and keep current trade accounts payable, of which
there can be no assurance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Major Customers
. The Company’s
two largest customers are its primary product distributors, Fisher and Cardinal. Fisher was directly responsible for 27.5% of the
Company's net sales during the fiscal year ending April 30, 2017. Cardinal accounted for 37.4% of the Company’s net sales
during the fiscal year ending April 30, 2017. At April 30, 2017, Fisher owed the Company $69,190 and Cardinal owed $152,443. No
other customers accounted for 10% or more of the Company’s net sales during Fiscal 2017. Management believes the loss of
either of these distributors would materially reduce the revenues of the Company until the Company could retain, if available,
the services of other major product distributors or the end users serviced by Fisher and Cardinal began ordering directly from
the Company. Management has no reason to believe that the Company will lose either of these distributors in the foreseeable future.
Backlogs
. The Company had no backorders
at April 30, 2017 or 2016.
Government Contracts
. The Company does
not have a material portion of its business that may be subject to renegotiation of profits or termination of contracts or subcontracts
at the election of any government entity.
Competition
. The Company has no known
commercial competitors of its blood monitoring devices using liquid crystal technology. The Company's HEMOTEMP
R
II BMD
(blood bag temperature monitor) competes in the medical market against several functionally similar products. Management of the
Company has become aware of one such product sold by a competitor with sales substantially equal to the Company’s sales of
HEMOTEMP
R
II BMD. Management of the Company believes that HEMOTEMP
R
II BMD is superior because it provides
an irreversible monitor with a reversible monitor to warn the user that blood is approaching an unsafe temperature. There are no
known commercial competitors of the Company's HemoTemp
R
II Activator.
In the area of laboratory temperature monitoring,
a known competitor supplies reversible and irreversible temperature indicators. In the area of a food or drink safety indicator,
there is no competition known to the Company that utilizes liquid crystal technology. The Company believes that the frozen food
industry presently uses primarily physical and organoleptic evaluation (e.g. evaluation of softness, texture, aroma, taste, and
the like), as well as mercury thermometers and temperature sensitive inks to monitor freshness. Labels containing wax encapsulated
dyes with specific low melting points and capillary action products are produced by several other companies.
The Company’s TempTrend
R
II
competes in the medical market against products produced by several other companies. The Company’s TempTrend
R
competes in the drug testing market, specifically for monitoring the temperature of urine samples, with several other companies
utilizing liquid crystal and non-liquid crystal technology.
A number of other companies are only involved
in the manufacture of liquid crystal raw materials and do not directly compete with the Company for sale of medical, industrial
or consumer products. Mercury and electronic thermometers are used in several competitive applications. They are generally more
costly, non-disposable or not usable in most applications where liquid crystal thermometry and temperature indicators are utilized.
Many of the Company’s competitors may
have greater financial and other resources than the Company. The Company’s ability to compete depends on its ability to design,
manufacture and sell high quality products as well as its ability to develop new products and functionality that meet evolving
customer requirements.
Research and Development
. During Fiscal
2017 and 2016, the Company spent $160,878 and $157,444, respectively, on Company-sponsored research and development activities.
All expenditures for research and development are expensed currently with the exception of significant equipment and set-up charges
which are capitalized and depreciated or amortized over their estimated useful life.
The Company is conducting research and development
of products discussed under "Products Under Development." Although not anticipated, the Company may require financing
to complete the development of these products. The success of the Company in obtaining financing for research and development may
largely determine whether the Company will be able to continue the research and development for such products. Management believes
the Company has sufficient working capital for anticipated research and development for the ensuing year.
Government Regulations
. Company products,
such as the bacteria growth retarding compound, may require pre-clearance by the FDA or other government agencies. Present medical
products of the Company are classified by the FDA as Class I or Class II. These are subject only to general regulations requiring
that manufacturers adhere to certain guidelines to provide reasonable assurance of utility, safety, and effectiveness. These guidelines
include labeling requirements, registration with the FDA as a manufacturer, listing of devices in commercial distribution with
the FDA, notification to FDA of devices proposed to be marketed, conformance to specified current good manufacturing practices
in the manufacture of the devices, conformance to certain record-keeping requirements, and, in the case of Class II devices, conformance
to certain performance standards. At the present time, the Company believes that it is in compliance with regulations set forth
by the FDA.
Information About Foreign and Domestic Operations
and Export Sales
. The Company made export sales to customers located outside of the United States totaling $53,055 during the
last fiscal year and $49,240 during the fiscal year ending in 2016. Export sales were made to customers located in Canada, Puerto
Rico, Philippines, Turkey, Italy, Germany, and Kingdom of Bahrain. The Company also believes that some of its medical devices were
sold to distributors within the United States who resold the devices in foreign markets. However, the Company does not have any
information regarding such sales, and such sales are not considered to be material.
The Company does not rely on any foreign operations
other than its dealers and marketing representatives in their respective marketing areas. See "Marketing and Distribution."
Foreign sales are contingent upon, among other factors, foreign trade regulations, value of the United States Dollar and, where
required, government approval of the Company's products including CE Marketing requirements.
Management of the Company believes that export
sales may continue to increase in future years. However, the Company is exposed to risks generally attendant to foreign operations,
including but not limited to, trade restrictions, tariffs, embargos, foreign war and unrest and competition from foreign and domestic
producers, and therefore there is a risk export sales will not continue to increase in the future. Management believes the partial
or total loss of foreign operations would not have a material impact on the Company’s financial condition or results of operations.
Environmental Protection Expenditures
.
The Company's operations are not subject to any federal, state or local laws regulating the discharge of materials into the environment
which materially affect earnings or the competitive position of the Company, although the Company is subject to such laws. There
were no material capital expenditures made during the last fiscal year to comply with such laws.
Employees
. The Company presently has
five full-time employees comprised of the President and three Vice Presidents. The Company also has a part-time employee in the
production department when needed.
Website
. The Company maintains a Website
at www.biosynergyinc.com. The Company makes available on its Website free of charge its annual report on form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)). The Company will provide electronic or paper copies of its filings free of charge
upon request.
Reports to Shareholders
. The Company
is not required to deliver annual reports to its shareholders. Historically, the Company has not delivered annual reports to its
shareholders and does not intend to do so this year. However, all written material filed with the Securities and Exchange Commission
may be read and copied at the Securities and Exchange Commission’s Public Reference Room at 450 5
th
Street, N.W.,
Washington, D.C. 20549. Such information may also be obtained from the Public Reference Room by calling 1-800-SEC-0330 or by visiting
the Securities and Exchange Commission’s internet site at www.sec.gov. You may obtain copies of this Annual Report and other
reports filed with the Securities and Exchange Commission by contacting the Company at 1940 East Devon Avenue, Elk Grove Village,
Illinois 60007, telephone number 847-956-0471. See also “Website” above.
Item 1A.
Material Risk Factors.
The Company depends on key members of
its management and scientific staff and, if the Company fails to
retain and recruit qualified individuals, its
ability to execute its business
strategy would be harmed.
The Company is highly dependent on the principal
members of its management and scientific staff, in particular Fred K. Suzuki, Jr., the Company’s President, Chief Executive
Officer, Chairman of the Board of Directors, Director of Research and Product Development, and Director of Marketing. Mr. Suzuki
is primarily responsible for developing products and manufacturing the liquid crystals for use in the Company’s primary line
of products. Mr. Suzuki is 87 years old. The loss of Mr. Suzuki may impede the achievement of the Company’s business objectives
or have an adverse effect on the Company’s financial condition or results of operations. The Company may not be able to attract
and retain skilled and experienced personnel on acceptable terms in the future to replace Mr. Suzuki. Further the Company may not
be able to attract and retain skilled and experienced marketing, scientific and sales personnel on acceptable terms in the future
because numerous other high technology companies compete for the services of these qualified individuals. The Company currently
does not maintain key man life insurance on any of its employees, nor has the Company implemented a formal succession plan.
Certain familial groups, in the aggregate,
beneficially own a large percentage of the Company’s common stock and as a result can exert significant influence over the
Company.
As of April 30, 2017, Mr. Suzuki owned 30%
of the outstanding stock of F.K. Suzuki International, Inc. (“FKSI”), and also served on FKSI’s board of directors,
together with Laurence Mead, the Chief Operating Officer of the Company, Lauane Addis, Mr. Suzuki’s son-in-law and counsel
and Secretary for the Company, and Ira Goldstein, an unrelated unaffiliated third party. FKSI in turn owns approximately 30.02%
of the outstanding stock of the Company. As a result of (i) Mr. Suzuki’s ownership and position as director of FKSI, (ii)
shared directorial control over FKSI with Messrs. Mead and Addis with respect to the shares of stock in the Company owned by FKSI,
(iii) other shares of stock in the Company owned by Mr. Suzuki directly, and (iv) stock owned by Mr. Suzuki and his spouse as joint
tenants, Mr. Suzuki is deemed to “beneficially” own an aggregate of 5,513,470 shares, or approximately 36.9%, of the
Company’s outstanding common stock. In addition, Mr. Suzuki’s daughter, Jeanne S. Addis, is the Trustee of the Addis
Family Trust dated September 1, 2009, which owns approximately 28.1% of the outstanding FKSI stock. Accordingly, Mr. Suzuki, together
with other members of his immediate family as a group, may be able to substantially influence all matters requiring approval by
the Company’s shareholders, including the election of directors and the approval of mergers or other business combination
transactions. Circumstances may arise in which the interests of this group could conflict with the interests of the Company’s
other shareholders. Mr. Suzuki, acting in concert with other members of his immediate family, may also delay or prevent a change
in control of the Company even if such a transaction would be beneficial to the Company’s other shareholders.
The Company’s failure to engage
an economically viable manufacturer for the Company’s portable refrigerated cooler for transportation of blood and other
biologicals may cause the Company to lose opportunities to increase the Company’s cash flows and profits.
There can be no assurance that the Company
can engage a manufacturer of the Company’s prototype portable refrigerated cooler for transportation of blood and other biologicals
on economically reasonable terms. The Company’s failure to engage a manufacturer on economically reasonable terms may cause
the Company to lose opportunities to increase the Company’s cash flows and profits.
The Company depends on key distributors
for the marketing and sale of its products and the failure to
retain such distributors may materially affect
the Company and its results of operations.
The Company’s key distributors, Fisher
and Cardinal, accounted for 27.5% and 37.4% of the Company’s sales, respectively, during Fiscal 2017. The Company’s
failure to retain one or both of such distributors may have an adverse effect on the sales of the Company, which may in turn have
an adverse effect on the Company’s results of operations, financial condition and cash flows if such sales cannot be replaced
by another distributor of the Company. The Company has also agreed to payment terms of net 90 days with one dealer. As a result,
the Company’s outstanding accounts receivable have materially increased, increasing the amount of accounts receivable at
risk of collection.
The unavailability of the Company’s
current domestically sourced raw materials may materially affect the Company and its results of operations.
There can be no assurance that the Company
will continue to be able to acquire raw materials, including raw materials for the liquid crystals, which are essential for the
manufacture of the Company’s temperature indicators and other products, from domestic sources, or that the domestic sources
currently used by the Company will continue to supply such raw materials on cost-effective terms. Further, there is no assurance
such raw materials will continue to be available from foreign sources. Although the liquid crystal raw materials are currently
available from foreign sources, acquiring raw materials from such foreign sources may result in an increase in the Company’s
cost for such raw materials, which may in turn have an adverse effect on the Company’s results of operations, financial condition
and cash flows.
The Company receives a substantial percentage
of sales from two products and the failure to increase or maintain sales levels with respect to one or more of such products may
materially affect the Company and its results of operations.
During Fiscal 2017, and for several prior fiscal
periods, two products, HemoTemp
R
Core Correlated BMD and HemoTemp
R
II Core Correlated BMD accounted for a
substantial percentage of the Company’s sales. In the aggregate, these two products accounted for $1,223,705 in sales (or
approximately 94.7% of all Company sales). The Company’s failure to maintain sales levels with respect to one or both of
these products will have an adverse effect on the Company’s results of operations, financial condition and cash flows.
Changes in environmental regulations
may adversely affect the Company and its results of operations.
The Company is not aware of any violations
of environmental regulations by the Company. However, changes in environmental regulations may cause the Company to incur additional
expense for compliance. For instance, the Company may be forced to develop alternative manufacturing methods and processes, or
procure alternative suppliers or raw materials for its products. Increased expense occasioned by changes in environmental regulations
may have an adverse effect on the Company’s results of operations, financial condition and cash flows.
Company’s distributors’ violation
of the Foreign Corrupt Practices Act may adversely affect the Company and its results of operations.
The Company maintains a policy requiring all
of its employees to comply with the Foreign Corrupt Practices Act. However, because the Company engages independent distributors
to distribute and market the Company’s products, there can be no assurance that such distributors will likewise comply. A
violation of the Foreign Corrupt Practice Act by a distributor engaged by the Company may implicate the Company which may in turn
have an adverse effect on the Company’s results of operations, financial condition and cash flows.