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 2018. The Company experienced a decrease in
sales of $78,356 or 6.1% in Fiscal 2018. Sales in Fiscal 2018 were $1,214,213. The Company realized an after income tax profit
of $33,111 for Fiscal 2018 compared to an after income tax profit of $107,225 for Fiscal 2017. 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 2018. 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, 2018 and 2017. 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, 2018 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.
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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.
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|
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
o
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.
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|
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.
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|
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.
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|
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.
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|
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.
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|
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.
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|
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.
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|
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.
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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.
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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.
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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.
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|
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”).
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|
3.
|
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.
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|
4.
|
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.
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Manufacturing
.
The Company manufactures all of its products except for the HemoTemp
R
II Activator. 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-two 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 2018. During Fiscal 2018, Fisher Scientific Company (“Fisher”)
accounted for 28.3% of the Company's sales. Cardinal Health, Inc. (“Cardinal”) accounted for 38.1% of Company sales
during Fiscal 2018 (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
2019, 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, 2016, 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, 2015. 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 0022951050001, 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; Canada, Patent
Number 150496, issued February 8, 2016, expiring February 8, 2026; Canada, Patent Number 156195, issued February 8, 2016, expiring
February 8, 2026; and Turkey, Patent Number 2013/02413, issued March 26, 2013, which expired on March 26, 2018 due to non-payment
of maintenance fee.
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. A Reply to
Office Action was filed on April 12, 2018. 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; Canada, Patent
Number 150495, issued on February 8, 2016, expiring on February 8, 2026; Canada, Patent Number 156173, issued on February 8, 2016,
expiring on February 8, 2026; and Turkey, Patent Number 2013/02394 issued on March 25, 2013, which expired on March 25, 2018 due
to non-payment of maintenance fee.
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-DTek
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, 2018, the Company had $1,568,019 of current assets available. Of this amount, $55,845 represented prepaid expenses, $141,045
was inventory, $230,701 was net trade receivables, and $1,140,428 represented cash.
Management
of the Company believes that it has sufficient working capital to continue operations for the fiscal year ending April 30, 2019
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 28.3% of the Company's net sales during the fiscal year ending April 30, 2018. Cardinal accounted for
38.1% of the Company’s net sales during the fiscal year ending April 30, 2018. At April 30, 2018, Fisher owed the Company
$59,688 and Cardinal owed $138,823. No other customers accounted for 10% or more of the Company’s net sales during Fiscal
2018. 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, 2018 or 2017.
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, nondisposable 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 2018 and 2017, the Company spent $169,892 and $160,878, 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 $42,355 during the last fiscal year and $53,055 during the fiscal year ending in 2017. 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 six full-time employees comprised of the President and three Vice Presidents.
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 88 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, 2018, 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, and Lauane Addis,
Mr. Suzuki’s son-in-law and counsel and Secretary for the Company. 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 28.3% and 38.1% of the Company’s sales, respectively, during Fiscal
2018. 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
2018, 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 $1,155,910 in sales (or approximately 95.2% 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.