Notes to Consolidated Financial Statements
For the Three Months Ended September 30,
2016 and 2015
1. Basis of Presentation, Organization and Business and Summary
of Significant Accounting Policies
Explanatory Note
Misonix, Inc. (“Misonix” or the “Company”)
was not able to file its Quarterly Report on Form 10-Q (the “10-Q”) for the three months ended September 30, 2016 by
its due date. For several months, with the assistance of outside counsel, Misonix has been conducting a voluntary investigation
into the business practices of its independent Chinese entity that previously distributed its products in China and the Company’s
knowledge of those business practices, which may have implications under the Foreign Corrupt Practices Act (“FCPA”),
as well as into various internal controls issues identified during the investigation. On September 27, 2016 and September 28, 2016,
Misonix voluntarily contacted the Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”),
respectively, to advise both agencies of these potential issues. Misonix has provided and will continue to provide documents
and other information to the SEC and the DOJ, and is cooperating fully with these agencies in their investigations of these matters.
Although the internal investigation is now complete, additional
issues or facts could arise which may expand the scope or severity of the potential violations. Misonix could also receive
additional requests from the DOJ or SEC, which may require further investigation. Misonix has no current information derived from
the internal investigation or otherwise to suggest that its previously reported financial statements and results are incorrect.
Refer to footnote 9, Commitments and Contingencies, for additional
information regarding these matters.
Basis of Presentation
These consolidated financial statements include the accounts of
Misonix and its 100% owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial
statements do not include all the information and footnotes required by U.S. GAAP for complete financial statements. As such, they
should be read with reference to the Company’s Annual Report on Form 10-K for the year ended June 30, 2016, which provides
a more complete explanation of the Company’s accounting policies, financial position, operating results, business properties
and other matters. In the opinion of management, these financial statements reflect all adjustments considered necessary for a
fair statement of interim results.
Reclassifications
Certain expenses on the Statement of Operations have been reclassified
to be consistent with the current year presentation. Historically, the Company had recorded stock compensation expense and bonus
expense predominantly within general and administrative expenses. The Company has reclassified the prior years’ presentation
to allocate certain of these costs to cost of goods sold, selling expenses and research and development expenses, which is consistent
with the classification being used in fiscal 2017. This reclassification had no impact on the Company’s presentation of operating
income (loss) and the gross profit impact was not material.
Organization and Business
Misonix designs, manufactures, develops and markets therapeutic
ultrasonic devices. These products are used for precise bone sculpting, removal of soft tumors, and tissue debridement in the fields
of orthopedic surgery, plastic surgery, neurosurgery, podiatry and vascular surgery. In the United States, the Company sells its
products through a network of commissioned agents assisted by Company personnel. Outside of the United States, the Company sells
to distributors who then resell the product to hospitals. The Company operates as one business segment.
High Intensity Focused Ultrasound Technology
The Company sold its rights to the high intensity focused ultrasound
technology to SonaCare Medical, LLC (“SonaCare”) in May 2010. The Company may receive up to approximately $5.8 million
in payment for the sale. SonaCare will pay the Company 7% of the gross revenues received from its sales of the (i) prostate product
in Europe and (ii) kidney and liver products worldwide, until the Company has received payments of $3 million, and thereafter 5%
of the gross revenues, up to an aggregate payment of $5.8 million, all subject to a minimum annual royalty of $250,000. Cumulative
payments through September 30, 2016 were $1,254,788. No payments were received during the quarter ended September 30, 2016. Payments
are generally received once per year, in the Company’s third fiscal quarter.
Major Customers and Concentration of Credit Risk
Included in sales from continuing operations are sales to Cicel
(Beijing) Science and Tech Co. Ltd. (“Cicel”) of $0 and $243,052, for the three months ended September 30, 2016 and
2015, respectively. Accounts receivable from Cicel were $0 at September 30, 2016 and June 30, 2016. The Company terminated
its agreement with Cicel in the first quarter of fiscal 2017.
Total royalties from Medtronic Minimally Invasive Therapies (“MMIT”)
related to their sales of the Company’s ultrasonic cutting products, which use high frequency sound waves to coagulate and
divide tissue for both open and laparoscopic surgery, were $938,000 and $969,437, for the three months ended September 30, 2016
and 2015, respectively. Accounts receivable from MMIT royalties were approximately $938,000 and $973,000 at September 30, 2016
and June 30, 2016, respectively. The license agreement with MMIT expires in August 2017.
At September 30, 2016 and June 30, 2016, the Company’s accounts
receivable with customers outside the United States were approximately $732,000 and $768,000, respectively, none of which is over
90 days.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and judgments that affect the reported
amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions are used for but
not limited to establishing the allowance for doubtful accounts, valuation of inventory, depreciation, asset impairment evaluations
and establishing deferred tax assets and related valuation allowances, and stock-based compensation. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In January 2017, the Financial Accounting Standards Board (the “FASB”)
issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment
. Under the new standard, goodwill impairment would
be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying value
of goodwill. This ASU eliminates existing guidance that requires an entity to determine goodwill impairment by calculating the
implied fair value of goodwill by hypothetically assigning the fair value of a reporting unit to all of its assets and liabilities
as if that reporting unit had been acquired in a business combination. This update is effective for annual periods beginning after
December 15, 2019, and interim periods within those periods. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. The Company will apply this guidance to applicable impairment tests after
the adoption date.
In February 2016, the FASB issued guidance on lease accounting requiring
lessees to recognize a right-of-use asset and a lease liability for long-term leases. The liability will be equal to the present
value of lease payments. This guidance must be applied using a modified retrospective transition approach to all annual and interim
periods presented and is effective for the Company beginning in fiscal 2019. The Company is currently in the early stages of evaluating
this guidance to determine the impact it will have on its financial statements.
In May 2014, the FASB issued guidance on revenue from contracts
with customers. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to
customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides
a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization
of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration
to be recognized before contingencies are resolved, in certain circumstances. The guidance also requires enhanced disclosures regarding
the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity's contracts with customers. This guidance
permits the use of either the retrospective or cumulative effect transition method and is effective for the Company beginning in
2019; early adoption is permitted beginning in 2018. The Company has not yet selected a transition method and is currently evaluating
the impact of the guidance on the Company's financial condition, results of operations and related disclosures. The FASB has also
issued the following additional guidance clarifying certain issues on revenue from contracts with customers: Revenue from Contracts
with Customers - Narrow-Scope Improvements and Practical Expedients and Revenue from Contracts with Customers - Identifying Performance
Obligations and Licensing. The Company is currently in the early stages of evaluating this guidance to determine the impact it
will have on its financial statements.
There are no other recently issued accounting pronouncements that
are expected to have a material effect on the Company's financial position, results of operations or cash flows.
2. Fair Value of Financial Instruments
We follow a three-level fair value hierarchy that prioritizes the
inputs to measure fair value. This hierarchy requires entities to maximize the use of "observable inputs" and minimize
the use of "unobservable inputs." The three levels of inputs used to measure fair value are as follows:
Level 1: Quoted prices (unadjusted) for identical assets or
liabilities in active markets as of the measurement date.
Level 2: Significant other observable inputs other than Level 1
prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect assumptions
that market participants would use in pricing an asset or liability.
At September 30, 2016 and June 30, 2016, all of our cash, trade
accounts receivable and trade accounts payable were short term in nature, and their carrying amounts approximate fair value.
3. Inventories
Inventories are summarized as follows:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
Raw material
|
|
$
|
2,859,877
|
|
|
$
|
3,102,175
|
|
Work-in-process
|
|
|
761,582
|
|
|
|
854,631
|
|
Finished goods
|
|
|
2,821,807
|
|
|
|
3,101,234
|
|
|
|
|
6,443,266
|
|
|
|
7,058,040
|
|
Less valuation reserve
|
|
|
1,265,705
|
|
|
|
1,235,105
|
|
|
|
$
|
5,177,561
|
|
|
$
|
5,822,935
|
|
4. Property, Plant and Equipment
Depreciation and amortization of property, plant and equipment totaled
approximately $200,000 and $312,000, for the three months ended September 30, 2016 and 2015, respectively. Inventory items included
in property, plant and equipment are depreciated using the straight line method over estimated useful lives of 3 to 5 years.
Depreciation of generators which are consigned to customers is expensed over a 5 year period during the three months ended September
30, 2016 and is expensed over a 3 year period for the three months ended September 30, 2015, and depreciation is charged to selling
expenses. The impact of this change in accounting estimate was a reduction in expense of approximately $180,000 for the three months
ended September 30, 2016, compared to what the expense would have been without this change.
5. Goodwill
Goodwill is not amortized. We review goodwill for impairment annually
and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances
could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale
or disposition of significant assets or products. Application of these impairment tests requires significant judgments, including
estimation of cash flows, which is dependent on internal forecasts, estimation of the long term rate of growth for the Company’s
business, the useful lives over which cash flows will occur and determination of the Company’s weighted average cost of capital.
The Company primarily utilizes the Company’s market capitalization and a discontinued cash flow model in determining the
fair value which consists of Level 3 inputs. Changes in the projected cash flows and discount rate estimates and assumptions underlying
the valuation of goodwill could materially affect the determination of fair value at acquisition or during subsequent periods when
tested for impairment. The Company completed its annual goodwill impairment tests for fiscal 2016 and 2015 as of June 30 of each
year. No impairment of goodwill was deemed to exist in fiscal 2016 and 2015.
6. Patents
The costs of acquiring or processing patents are capitalized at
cost. These amounts are being amortized using the straight-line method over the estimated useful lives of the underlying assets,
which is approximately 17 years. Patents totaled $662,794 and $604,916 at September 30, 2016 and June 30, 2016, respectively.
Amortization expense for the three months ended September 30, 2016 and 2015 was $26,000 and $23,000, respectively.
The following is a schedule of estimated future patent amortization
expense as of September 30, 2016:
2017
|
|
$
|
75,532
|
|
2018
|
|
|
97,994
|
|
2019
|
|
|
89,687
|
|
2020
|
|
|
66,258
|
|
2021
|
|
|
62,111
|
|
Thereafter
|
|
|
271,212
|
|
|
|
$
|
662,794
|
|
7. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current liabilities:
|
|
September 30,
|
|
|
June 30,
|
|
|
|
2016
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and vacation
|
|
|
621,790
|
|
|
|
648,705
|
|
Accrued bonus
|
|
|
100,000
|
|
|
|
300,000
|
|
Accrued commissions
|
|
|
452,000
|
|
|
|
433,000
|
|
Professional fees
|
|
|
447,038
|
|
|
|
256,130
|
|
Deferred income
|
|
|
13,596
|
|
|
|
20,655
|
|
Severance
|
|
|
320,001
|
|
|
|
-
|
|
Other
|
|
|
206,445
|
|
|
|
228,847
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,160,870
|
|
|
$
|
1,887,337
|
|
8. Stock-Based Compensation Plans
The compensation cost that has been charged against income
for the Company’s stock option plans was ($226,119) of income, which included a reversal of stock compensation
from prior periods due to forfeitures of unvested options of $597,196, and $301,743 of expense for the three months ended
September 30, 2016 and 2015, respectively. As of September 30, 2016, there was approximately $2,074,029 of total
unrecognized compensation cost related to non-vested share-based compensation arrangements to be recognized over a
weighted-average period of 2.5 years. Certain share based costs for the quarter ended September 30, 2015 included in
general and administrative expenses were reclassified to cost of revenue, selling and research and development expenses to
be consistent with the current year’s classification.
During the quarter ended September 30, 2016, the Company modified
the terms of certain stock options, which resulted in a charge to operations of $60,747.
Stock options typically expire 10 years from the date of grant
and vest over service periods, which typically are 4 years. All options are granted at fair market value, as defined in the applicable
plans.
The fair value of each option award was estimated on the date of
grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. The expected volatility
represents the historical price changes of the Company’s stock over a period equal to that of the expected term of the option.
The Company uses the simplified method for determining the option term. The risk-free rate was based on the U.S. Treasury
yield curve in effect at the time of grant. The expected dividend yield is based upon historical and projected dividends. The Company
has historically not paid dividends, and is not expected to do so in the near term.
The weighted average fair value at date of grant for options granted
during the three months ended September 30, 2015 was $4.73. There were no options granted during the three months ended September
30, 2016. The fair value was estimated based on the weighted average assumptions of:
|
|
For three months ended
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
-
|
|
|
|
1.80
|
%
|
Expected option life in years
|
|
|
-
|
|
|
|
6.25
|
|
Expected stock price volatility
|
|
|
-
|
|
|
|
55.35
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
0
|
%
|
A summary of option activity under the Company’s equity plans
as of September 30, 2016, and changes during the three months ended September 30, 2016 is presented below:
|
|
Outstanding
Shares
|
|
|
Average
Exercise
Price
|
|
|
Aggregate
Instrinsic Value
|
|
Vested and exercisable at June 30, 2016
|
|
|
1,790,224
|
|
|
$
|
6.38
|
|
|
$
|
1,675,072
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
(325,875
|
)
|
|
|
8.17
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
|
|
1,464,349
|
|
|
$
|
5.98
|
|
|
$
|
1,701,312
|
|
Vested and exercisable at September 30, 2016
|
|
|
957,474
|
|
|
$
|
4.30
|
|
|
$
|
1,683,139
|
|
The total fair value of shares vested during the quarter ended September
30, 2016 was $606,000. The number and weighted-average grant-date fair value of non-vested stock options at the beginning of fiscal
2017 was 976,875 and $4.81, respectively. The number and weighted-average grant-date fair value of stock options which vested during
the quarter ended September 30, 2016 was 144,250 and $4.20, respectively.
9. Commitments and Contingencies
Leases
The Company has entered into several non-cancellable operating leases
for the rental of certain manufacturing and office space, equipment and automobiles expiring in various years through 2021. The
principal building lease provides for a monthly rental of approximately $26,000. The Company also leases certain office equipment
and automobiles under operating leases expiring through fiscal 2018.
Class Action Securities Litigation
On September 19, 2016, Richard Scalfani, an individual shareholder
of Misonix, filed a lawsuit against the Company and its former CEO and CFO in the U.S. District Court for the Eastern District
of New York, alleging violations of the federal securities laws. The complaint alleges that the Company’s stock price was
artificially inflated between November 5, 2015 and September 14, 2016 as a result of alleged false and misleading statements in
the Company’s securities filings concerning the Company’s business, operations, and prospects and the Company’s
internal control over financial reporting. Scalfani filed the action seeking to represent a putative class of all persons (other
than defendants, officers and directors of the Company, and their affiliates) who purchased publicly traded Misonix securities
between November 5, 2015 and September 14, 2016. Scalfani seeks an unspecified amount of damages for himself and for the putative
class under the federal securities laws.
On November 18, 2016, Scalfani and another individual Misonix shareholder,
Tracey Angiuoli, petitioned the Court to be appointed lead plaintiffs for purposes of pursuing the action on behalf of the putative
class.
The Company believes it has various legal and factual defenses to
the allegations in the complaint, and intends to vigorously defend the action. The case is at its earliest stages; there has been
no discovery and there is no trial date. The Company is not able to estimate the amount of potential loss it may recognize, if
any, from this claim. The Company believes that its insurance coverage is sufficient to cover a potential loss, after payment of
the policy retention of $250,000.
Chinese Distributor
For several months, with the assistance of outside counsel, the
Company has been conducting a voluntary investigation into the business practices of the independent Chinese entity that previously
distributed its products in China and the Company’s knowledge of those business practices, which may have implications under
the FCPA, as well as into various internal controls issues identified during the investigation.
On September 27, 2016 and September 28, 2016, we voluntarily contacted
the SEC and the DOJ, respectively, to advise both agencies of these potential issues. The Company has provided and will continue
to provide documents and other information to the SEC and the DOJ, and is cooperating fully with these agencies in their investigations
of these matters.
Although the Company’s investigation is complete, additional
issues or facts could arise which may expand the scope or severity of the potential violations. The Company has no current
information derived from the investigation or otherwise to suggest that its previously reported financial statements and results
are incorrect.
At this stage, the Company is unable to predict what, if any, action
the DOJ or the SEC may take or what, if any, penalties or remedial measures these agencies may seek. Nor can the Company
predict the impact on the Company as a result of these matters, which may include the imposition of fines, civil and criminal penalties,
which are not currently estimable, as well as equitable remedies, including disgorgement of any profits earned from improper conduct
and injunctive relief, limitations on the Company’s conduct, and the imposition of a compliance monitor. The DOJ and
the SEC periodically have based the amount of a penalty or disgorgement in connection with an FCPA action, at least in part, on
the amount of profits that a company obtained from the business in which the violations of the FCPA occurred. Since the inception
of its distributorship relationship with the prior Chinese distributor in 2012, the Company has generated sales of approximately
$8 million from the relationship.
Further, the Company may suffer other civil
penalties or adverse impacts, including lawsuits by private litigants in addition to the lawsuit that has already been filed, or
investigations and fines imposed by local authorities. The investigative costs to date are approximately $1.9 million, of
which approximately $0.6 million was charged to general and administrative expenses during the quarter ended September 30, 2016.
10. Related Party Transactions
Applied BioSurgical, a company owned by the
brother of the Company’s Chief Executive Officer, Stavros G. Vizirgianakis, is an independent distributor for the Company
outside of the United States.
Set forth below is a table showing the Company’s net sales
for the three months ended September 30 and accounts receivable at September 30 for the indicated time periods below with Applied
BioSurgical:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
52,196
|
|
|
$
|
79,985
|
|
Accounts receivable
|
|
$
|
253,699
|
|
|
$
|
223,029
|
|
11. Income Taxes
For the three months ended September 30,
2016 and 2015, the Company recorded an income tax benefit from continuing operations of $26,000 and $168,000, respectively.
For the three months ended September 30, 2016
and 2015, the effective rate of (4.7%) and (43.3)%, respectively, on continuing operations varied from the U.S. federal statutory
rate primarily due to permanent book tax differences, state taxes and tax credits.
As of September 30, 2016 and June 30, 2016,
the Company has no material unrecognized tax benefits or accrued interest and penalties.
12. Licensing Agreements for Medical Technology
In October 1996, the Company entered into a License Agreement
with MMIT expiring August 2017, covering the further development and commercial exploitation of the Company's medical technology
relating to laparoscopic products, which uses high frequency sound waves to coagulate and divide tissue for both open and laparoscopic
surgery. The MMIT license provides for exclusive worldwide marketing and sales rights for this technology. The Company receives
a 5% royalty on sales of these products by MMIT. Royalties from this license agreement were $938,000 and $969,437 for the three
months ended September 30, 2016 and 2015, respectively.
13. Segment Reporting
Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated on a regular basis by the chief operating decision-maker
(“CODM") in deciding how to allocate resources to an individual segment and in assessing performance of the segment.
The Company has concluded that its Chief Executive Officer is the CODM as he is the ultimate decision maker for key operating decisions,
determining the allocation of resources and assessing the financial performance of the Company. These decisions, allocations and
assessments are performed by the CODM using consolidated financial information. Consolidated financial information is utilized
by the CODM as the Company's current product offering primarily consists of minimally invasive therapeutic ultrasonic medical devices.
The Company's products are relatively consistent and manufacturing is centralized and consistent across product offerings. Based
on these factors, key operating decisions and resource allocations are made by the CODM using consolidated financial data and as
such the Company has concluded that it operates as one segment.
Worldwide revenue for the Company's products is categorized as follows:
|
|
For the Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
4,544,195
|
|
|
$
|
3,490,686
|
|
Equipment
|
|
|
1,627,430
|
|
|
|
1,760,299
|
|
Total
|
|
$
|
6,171,625
|
|
|
$
|
5,250,985
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
3,317,929
|
|
|
$
|
2,584,111
|
|
Equipment
|
|
|
568,628
|
|
|
|
483,960
|
|
Total
|
|
$
|
3,886,557
|
|
|
$
|
3,068,071
|
|
|
|
|
|
|
|
|
|
|
International
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
1,226,266
|
|
|
$
|
906,575
|
|
Equipment
|
|
|
1,058,802
|
|
|
|
1,276,339
|
|
Total
|
|
$
|
2,285,068
|
|
|
$
|
2,182,914
|
|
Substantially all of the Company’s long-lived assets are located
in the United States.
14. Severance
On August 26, 2016, the Company and the Company’s former Chief
Executive Officer, Michael McManus (“McManus”) entered into a retirement agreement and general release (the “Retirement
Agreement”). Pursuant to the Retirement Agreement, on September 2, 2016 Mr. McManus resigned as a Director and the Chairman
of the Board of Directors of the Company and retired as President and Chief Executive Officer of the Company. Pursuant to the Retirement
Agreement, the Company agreed to (i) pay Mr. McManus’ salary through June 30, 2017 at the then current level; (ii) continue
to pay premiums for Mr. McManus’ and his dependents’ coverage under the Company’s medical, dental, vision, hospitalization,
long term care and life insurance coverage through June 30, 2017 at the then current levels upon timely election by Mr. McManus
under the law informally known as COBRA; and (iii) extend the exercisability of previously granted and then currently vested options
to purchase shares of Common Stock through June 30, 2017. In addition, Mr. McManus had continued use of the vehicle pursuant to
his prior employment agreement through December 31, 2016. In connection with this Retirement Agreement, the Company recorded a
charge of $330,000 during the quarter ended September 30, 2016 to accrue for the cash portion of these benefits, which will be
paid during the period ending June 30, 2017. In addition, the Company recorded a non-cash compensation expense of $61,000 in connection
with the modification of the terms of his vested stock options, and recorded a reduction in non-cash compensation expense of $596,000
relating to the forfeiture of his unvested stock options.
15. Subsequent Events
NASDAQ Deficiency Letters
On September 15, 2016, Misonix received a deficiency letter from
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company, as a result of not filing the 10-K on September
13, 2016 and disclosing that the Company likely would not be able to file the 10-K within the 15-day extension period provided
in Rule 12b-25(b) under the Securities Exchange Act of 1934, as amended, was not in compliance with Listing Rule 5250(c)(1) of
the Nasdaq Listing Rules (the “Rules”) for continued listing. In addition, on November 10, 2016, Misonix received a
second deficiency letter from Nasdaq indicating that the Company, as a result of not filing its Quarterly Report on Form 10-Q for
the period ended September 30, 2016 (the “Q1 10-Q”) by November 9, 2016, together with its prior failure to timely
file the 10-K, was not in compliance with Listing Rule 5250(c)(1) for continued listing. In the letters, Nasdaq requested that
Misonix submit a plan to regain compliance with the Rules by November 14, 2016. On November 14, 2016, Misonix submitted to Nasdaq
a plan to regain compliance with the Rules. After reviewing Misonix's plan to regain compliance, Nasdaq granted an exception to
enable the Company to regain compliance with the Rules. Under the terms of the exception, Misonix must file its 10-K and Q1 10-Q
on or before March 13, 2017. In the event that Misonix does not satisfy the terms set forth in the extension, Nasdaq will provide
written notification that Misonix's common stock will be delisted. At that time, Misonix may appeal Nasdaq's determination for
a panel review. The Company filed the 10-K with the SEC on February 9, 2017.
On February 10, 2017, Misonix received a third
deficiency letter from Nasdaq indicating that the Company, as a result of not filing its Quarterly Report on Form 10-Q for the
fiscal quarter ended December 31, 2016 (the “Q2 10-Q”) by February 9, 2017 and disclosing that the Company will not
be able to file the Q2 10-Q within the five-day extension period provided in Rule 12b-25(b) under the Exchange Act, together with
its prior and ongoing failure to timely file the Q1 10-Q, was not in compliance with Listing Rule 5250(c)(1) for continued listing.
The Company previously submitted a plan to Nasdaq to regain compliance with the Rules and Nasdaq has granted the Company an exception
until March 13, 2017 to regain compliance. The Company submitted its amended compliance plan to the Nasdaq on February 23, 2017
indicating that the Company expected to file its Q1 10-Q and Q2 10-Q by March 13, 2017.
Employment Agreement - Stavros G. Vizirgianakis
On December 15, 2016, the Company entered into an Employment Agreement
(the “Vizirgianakis Agreement”) with Stavros G. Vizirgianakis pursuant to which Mr. Vizirgianakis serves as the Company’s
full time President and Chief Executive Officer. Mr. Vizirgianakis had been serving on an unpaid basis as interim Chief Executive
Officer of the Company since September 2, 2016. Mr. Vizirgianakis continues to serve as a member of the Company’s Board of
Directors.
Pursuant to the Vizirgianakis Agreement, Mr. Vizirgianakis’
initial term of employment runs through September 13, 2019, provided that the term shall be automatically renewed and extended
for consecutive one (1) year renewal terms, unless either party sends to the other party a notice of non-renewal at least ninety
(90) days prior to the expiration of the initial term or any then-current renewal term. Mr. Vizirgianakis will receive an annual
base salary of not less than three hundred sixty thousand dollars ($360,000) per annum, subject to review by the Board at least
annually for increase but not for decrease. Mr. Vizirgianakis is also eligible to receive annual bonuses in the discretion of the
Board. The Vizirgianakis Agreement also provides for a one-time $10,000 moving allowance and reimbursement of counsel fees relating
to visa matters and the negotiation of the Vizirgianakis Agreement. If the Company terminates Mr. Vizirgianakis’ employment
without cause (as defined in the Vizirgianakis Agreement), the Company provides a notice of non-renewal, or Mr. Vizirgianakis terminates
his employment for good reason (as defined in the Vizirgianakis Agreement), Mr. Vizirgianakis shall be entitled to receive (i)
a lump-sum cash payment from the Company in an amount equal to one and one-half (1.5) times the annual base salary as is in effect
immediately prior to the date of such termination, and (ii) continuation of all employee benefits and fringe benefits to which
he was entitled under the Vizirgianakis Agreement immediately prior to such termination of employment for a period of eighteen
(18) months following the termination of employment. The Vizirgianakis Agreement also contains non-competition and non-solicitation
covenants from Mr. Vizirgianakis during the term of employment and for a period of 18 months thereafter.
In conjunction with the execution of the Vizirgianakis Agreement,
Mr. Vizirgianakis received grants of an aggregate of 400,000 shares of restricted stock pursuant to the Company’s 2014 Equity
Incentive Plan (the “Plan”) as follows: (i) a grant of 134,000 shares vesting in five equal installments on September
1, 2017, 2018, 2019, 2020 and 2021; (ii) a performance grant of 133,000 shares which vests if both of the following conditions
are satisfied simultaneously: (A) at any time prior to the third anniversary of the grant date, the most recent publicly reported
trailing four (4) fiscal quarter revenue of the Company (exclusive of the impact of any acquisitions after the grant date) is at
least $35,000,000 and (B) the closing price of the Common Stock is at least $10.50 per share (subject to adjustment for stock splits,
stock dividends and the like) for ten (10) consecutive trading days; and (iii) a performance grant of 133,000 shares which vests
if both of the following conditions are satisfied simultaneously: (A) at any time prior to the fifth anniversary of the grant date,
the most recent publicly reported trailing four (4) fiscal quarter revenue of the Company (exclusive of the impact of any acquisitions
after the grant date) is at least $48,000,000 and (B) the closing price of the Common Stock is at least $13.00 per share (subject
to adjustment for stock splits, stock dividends and the like) for ten (10) consecutive trading days. The aforementioned performance
grants will vest on a change of control in accordance with the Plan only if the applicable share price threshold is met in such
transaction.
Director Resignation
On December 15, 2016, T. Guy Minetti, a member of the Company’s
Board of Directors, resigned from the Board. In connection with his resignation, the Board agreed to extend the exercisability
of previously granted and then currently vested options to purchase shares of the Company’s common stock through December
15, 2017.
Equity Investment
On October 25, 2016, the Company sold 761,469 shares of Common Stock
in a private placement to Stavros G. Vizirgianakis, a director of the Company and its current Chief Executive Officer, at a price
per share of $5.253, representing total cash proceeds to the Company of approximately $4.0 million.
Investigative Fees
Subsequent to September 30, 2016, the Company has incurred approximately
$1.1 million in fees relating to its FCPA investigation and related activities.