PART I
Item 1. Business
Overview
Misonix, Inc. is a New York corporation which, through its
predecessors, was first organized in 1959. We design, manufacture, develop and market minimally invasive therapeutic
ultrasonic medical devices. Our products enhance clinical outcomes and provide value to the overall healthcare system. Since we commercialized our ultrasonic vessel sealing system with US Surgical in 1996, we have helped create
a multi-billion dollar segment within the overall general surgical and gynecological arena. We believe that our current
focus products have the ability to become standard of care and provide the Company with a steady recurring revenue
stream.
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BoneScalpel ® surgical system (“BoneScalpel”), which is used mainly for surgical procedures involving the precise cutting and sculpting of bone while sparing soft tissue. BoneScapel is now recognized by surgeons globally as one of the most important surgical devices enabling improved patient outcomes in the spinal arena.
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SonaStar ® Surgical Aspirator (“SonaStar”), which is used to emulsify and remove soft and hard tumors, primarily in the neuro and general surgery field.
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SonicOne® Wound Cleansing and Debridement System (“SonicOne”), which offers tissue specific debridement and cleansing of wounds and burns for effective removal of devitalized tissue and fibrin deposits while sparing viable cells.
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These devices primarily serve the following clinical specialties:
neurosurgery, orthopedic surgery, plastic surgery, wounds and maxillo-facial.
In the United States, our products are marketed primarily through
a hybrid sales approach. This includes direct sales representatives, managed by regional sales managers and supported by company
application specialists, along with independent distributors.
Outside the United States, we sell BoneScalpel and SonaStar
to specialty distributors who purchase products from us to resell to their clinical customer bases. We sell to all major markets
in the Americas, Europe, Middle East, Asia Pacific and Africa and we plan to sell SonicOne into select international markets.
Products
All Misonix disposables function with proprietary consoles which
essentially convert electrical current into ultrasonic energy via piezo electric crystals in order for the relevant device to produce
a therapeutic effect.
BoneScalpel
The BoneScalpel is a state of the art, ultrasonic bone cutting
and sculpting system capable of making precise cuts with minimal necrosis, minimal burn artifact, minimal inflammation and minimal
bone loss. The device is also capable of preserving surrounding soft tissue structures because of its unique ability to differentiate
soft tissue from rigid bone. This device can make precise linear or curved cuts, on any plane, with precision not normally associated
with powered instrumentation. The BoneScalpel offers the speed and convenience of a powered instrument without the dangers associated
with conventional rotary devices. The effect on surrounding soft tissue is minimal due to the elastic and flexible structure of
healthy tissue. This is a significant advantage in anatomical regions like the spine where patient safety is of primary concern.
In addition, the linear motion of the blunt, tissue-impacting tips avoids accidental ‘trapping’ of soft tissue while
largely eliminating the high speed spinning and tearing associated with rotary power instruments. The BoneScalpel allows surgeons
to improve on existing surgical techniques by creating new approaches to bone cutting and sculpting, leading to substantial
time savings and increased operation efficiencies.
The expanded BoneScalpel product platform will allow entry into
dynamic market segments like MIS spine surgery. In the future, additional market niche opportunities may exist in small bone surgery
of the hand, foot or ankle.
SonaStar
The SonaStar system provides powerful precise aspiration following
the ultrasonic ablation of hard or soft tissue. The SonaStar has been used for a wide variety of surgical procedures applying both
open and minimally invasive approaches, including neurosurgery and liver surgery. The SonaStar may also be used with OsteoSculpt
® probe tips, which enable the precise shaping or shaving of bony structures that prevent open access to partially or completely
hidden soft tissue masses.
SonicOne
The SonicOne Ultrasonic Cleansing and Debridement System is
a highly innovative, tissue specific approach for the effective removal of devitalized or necrotic tissue and fibrin deposits while
sparing viable, surrounding cellular structures. The tissue specific capability is, in part, due to the fact that healthy and viable
tissue structures have a higher elasticity and flexibility than necrotic tissue and are more resistant to destruction from the
impact effects of ultrasound. The ultrasonic debridement process separates devitalized tissue from viable tissue layers, allowing
for a more defined treatment and, usually, a reduced pain sensation. We believe SonicOne establishes a new standard in wound and
burn bed preparation, the essential first step in the healing process, while contributing to a faster patient healing.
Other Business and Medical Devices
In October 1996, we entered into a license agreement with Medtronic
Minimally Invasive Therapies (“MMIT”). The MMIT license covers the further development of our medical technology relating
to vessel sealing products, which uses high frequency sound waves to coagulate and divide tissue for both open and laparoscopic
surgery. We developed the AutoSonix product with MMIT under the agreement. As a result of this joint development, we co-own certain
patents with MMIT and MMIT paid us a 5% royalty on end user sales. The MMIT license gives MMIT exclusive worldwide marketing and
sales rights for this technology and device. Total royalties from sales of this device worldwide were approximately $3,764,000,
$3,903,000 and $4,162,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. The royalty is recorded as “other
income” in our financial statements. Our license agreement with MMIT expired in August 2017 and no further payments are due
thereafter.
High Intensity Focused Ultrasound Technology
We sold our rights to the high intensity focused ultrasound
technology to SonaCare Medical, LLC (“SonaCare”) in May 2010. We may receive up to approximately $5.8 million in payment
for the sale. SonaCare will pay us 7% of the gross revenues received from its sales of the (i) prostate product in Europe and (ii)
kidney and liver products worldwide, until we have 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 June
30, 2017 were $1,504,788.
Other
The Company’s distribution agreement with Mentor Corporation,
a subsidiary of Johnson & Johnson, for the sale, marketing and distribution of the Lysonix soft tissue aspirator used for cosmetic
surgery has terminated. Sales continue on a limited non-contractual purchase order basis. Total sales of this device, which includes
parts and service, were approximately $48,000, $45,000 and $264,000 for the fiscal years ended June 30, 2017, 2016 and 2015,
respectively.
Customers
For the fiscal years ended June 30, 2017, 2016 and 2015, Cicel
(Beijing) Science and Tech Co. Ltd. (“Cicel”), the Company’s former Chinese distributor, accounted for 0.2%,
6.4%, and 13.4% of the Company’s net sales, respectively. We did not have any other customer that accounted for 10% or more
of our net sales during such periods.
Research & Development
As of June 30, 2017, our Research and Development (“R&D”)
organization consisted of a staff of ten employees including engineers, technical and support personnel. The in-house technical
expertise includes mechanical engineering, acoustics, electrical engineering, software development and product design. The R&D
group focuses principally on developing new products and supporting existing products.
During the three years ended June 30, 2017, the Company incurred
R&D expenses of $1,837,497, $1,839,479, and $1,592,923 and or 6.7%, 8.0% and 7.2% of sales, respectively.
Revenue by Region
The Company’s revenues are generated from various regions
throughout the world. Sales by the Company outside the United States are made through distributors. Sales made in the United States
are made primarily through representative agents. The following is an analysis of net sales from continuing operations by geographic
region:
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For the years ended June 30,
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Net Change
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2017
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2016
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2015
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2017
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2016
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Domestic
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$
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16,460,771
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$
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13,086,806
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$
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10,797,920
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25.8
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%
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21.2
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%
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International
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10,809,192
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10,026,388
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11,406,658
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7.8
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%
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(12.1
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)%
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Total
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$
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27,269,963
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$
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23,113,194
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$
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22,204,578
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18.0
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%
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4.1
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%
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Our international sales include a concentration in China, aggregating
$1,335,667, $1,557,132, and $2,974,086 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Manufacturing and Supply
The Company manufactures and assembles its medical device products
at its production facility located in Farmingdale, New York. The Company’s products include components manufactured by other companies
in the United States. The Company is not dependent upon any single source of supply and has no long-term supply agreements. The
Company believes that it will not encounter difficulty in obtaining materials, supplies and components adequate for its anticipated
short-term needs.
Competition
Competition in the medical device products industry is rigorous
with many companies having significant capital resources, large research laboratories and extensive distribution systems greater
than the Company’s. Some of the Company’s major competitors are Medtronic, Anspach, Johnson & Johnson, Integra Life Sciences,
Inc., Söering, Stryker Corporation and Smith and Nephew.
Regulatory Requirements
The Company’s medical device products are subject to the regulatory
requirements of the U.S. Food and Drug Administration (“FDA”) and other international regulatory authorities. In the
United States and other markets where the Company’s products are sold, the Company has the appropriate marketing authorizations
and complies with all applicable regulations including, without limitation, 21 USC Chapter 6, 21 CFR Part 807, 93/42 EEC and Health
Canada SOR/98-282. In the US, Misonix products have 510(k) clearances.
The Company also operates and maintains a Quality Management
System which complies with the requirements of International Standards ISO 13485: 2012 + AC:2012, Health Canada CAN/CSA ISO 13485:2003,
and US 21CFR Part 820 Quality System Regulation. This system encompasses the principle of enhancing customer satisfaction
through the effective application of the system, including processes for control, monitoring, and continual improvement in order
to assure the Company consistently meets or exceeds customer expectations and applicable statutory/regulatory requirements.
The Company is not aware of any regulatory situations, other
than those disclosed in Item 3 herein, that would materially impact the Company, nor is the Company aware of any pending legal
action or new material breaches of the regulations to which it is subject.
Trademarks, Patents, and Copyrights
The Company holds 55 U.S. patents along with 12 in Europe, 9
in Japan and 14 in Canada and has multiple pending patent applications for its core product lines including ultrasonic and wound
technologies, among other things. The Company believes that these patents provide it with a competitive market advantage.
The Company also holds 13 trademarks protecting its Company and product names.
The Company will continue to seek patent, trademark, and copyright
protections as it deems advisable to protect the markets for its products and its R&D efforts.
Backlog
As of June 30, 2017, the Company’s backlog (firm orders
that have not yet been shipped) was $397,660 as compared to $45,256 as of June 30, 2016. The Company does not typically have
large recurring orders, but instead ships most of its products on a just in time basis, which results in low levels of backlog.
Employees
As of June 30, 2017, the Company employed a total of 92
full-time employees, including 32 in management and supervisory positions. The Company considers its relationship with its employees
to be good.
Website Access Disclosure
The Company’s Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q and Current Reports on Form 8-K are available free of charge on the Company’s website at
www.misonix.com
as
soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Copies of the Company’s
Annual Report will be made available to shareholders, free of charge, upon written request.
Item 1A.
Risk Factors.
In addition to the other information contained in this Annual
Report on Form 10-K (the “10-K”) and the exhibits hereto, the following risk factors should be considered carefully
in evaluating our business. Our business, financial condition and/or results of operations could be materially adversely affected
by any of these risks. This section contains forward-looking statements. You should refer to the explanation of the qualifications
and limitations on forward-looking statements set forth immediately prior to the beginning of Item 1 of the 10-K. Additional
risks not presently known to us or that we currently deem immaterial may also adversely affect our business, financial condition
and/or results of operations. The following list sets forth many, but not all, of the factors that could impact the Company’s
ability to achieve results discussed in any forward-looking statement. Investors should understand that it is not possible to predict
or identify all such factors and should not consider this list to be a complete statement of all potential risks and uncertainties.
Risks Related to Our Business
The termination of our former
Chinese distributor will have an adverse effect on our sales revenue.
For the fiscal years ended June 30, 2017, 2016 and 2015, our
former Chinese distributor accounted for 0.2%, 6.4%, and 13.4% of our net sales, respectively. This distributor was our largest
single customer during fiscal 2016 and fiscal 2015. We have ended our commercial relationship during the first quarter of fiscal
2017 due to allegations of potential violation of laws (See Item 3 “Legal Proceedings”). The Company then engaged a
replacement distributor during the third quarter of fiscal 2017. The termination of our prior distributor could continue to have
an adverse effect on our net sales if sales from the new Chinese distributor are less than the prior distributor.
We are subject to extensive medical device regulation
which may impede or hinder the approval process for our products and, in some cases, may not ultimately result in approval or may
result in the recall or seizure of previously approved products.
Our products, development activities and manufacturing processes
are subject to extensive and rigorous regulation in the United States by the FDA pursuant to the Federal Food, Drug, and Cosmetic
Act (the “FDC Act”), by comparable agencies in foreign countries, and by other regulatory agencies and governing bodies.
Under the FDC Act, medical devices must receive FDA clearance or approval before they can be commercially marketed in the U.S.
In addition, most major markets for medical devices outside the U.S. require clearance, approval or compliance with certain standards
before a product can be commercially marketed. The process of obtaining marketing approval or clearance from the FDA for new products,
or with respect to enhancements or modifications to existing products, could:
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take a significant amount of time;
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require the expenditure of substantial resources;
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involve rigorous pre-clinical and clinical testing;
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require changes to the products; and
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result in limitations on the proposed uses of the products.
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Marketing approvals or clearances are not the only risk. The
FDA, and other regulatory bodies, also can require the withdrawal of an approved or cleared product from commercial distribution
due to failure to comply with regulatory standards or the occurrence of unforeseen problems.
As a medical device manufacturer, we are required to register
with the FDA and are subject to periodic inspection by the FDA for compliance with the FDA’s Quality System Regulation requirements,
which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation
procedures. In addition, FDA regulations require us to provide information to the FDA whenever there is evidence that reasonably
suggests that a medical device may have caused or contributed to a death or serious injury or, if a malfunction were to occur,
could cause or contribute to a death or serious injury. Compliance with applicable regulatory requirements is subject to continual
review and is rigorously monitored through periodic inspections by the FDA. In the European Union and China, we are required to
maintain certain ISO certifications in order to sell our products and must undergo periodic inspections by notified bodies to obtain
and maintain these certifications. Failure to meet regulatory quality standards could have a material adverse effect on our business,
financial condition or results of operations.
Consequently, there can be no assurance that we will receive
the required clearances from the FDA or other regulatory bodies for new products or modifications to existing products on a timely
basis or that any FDA approval will not be subsequently withdrawn. Later discovery of previously unknown problems with a product
or manufacturer could result in fines, delays or suspensions of regulatory clearances, seizures or recalls of products, operating
restrictions and/or criminal prosecution. The failure to receive product approval clearance on a timely basis, suspensions of regulatory
clearances, seizures or recalls of products or the withdrawal of product approval by the FDA or other regulatory bodies could have
a material adverse effect on our business, financial condition or results of operations.
We may not be able to effectively protect our intellectual
property rights.
Patents and other proprietary rights are and will be essential
to our business and our ability to compete effectively with other companies. We also rely upon trade secrets, know-how, continuing
technological innovations, strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive
position. We pursue a policy of generally obtaining patent protection in both the U.S. and abroad for patentable subject matter
in our proprietary devices and also attempt to review third-party patents and patent applications to the extent publicly available
to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor
the patent claims of others. We currently own numerous U.S. and foreign patents. We also are party to various license agreements
pursuant to which patent rights have been obtained or granted in consideration for cash or royalty payments. No assurance can be
made that any pending or future patent applications will result in issued patents, that any current or future patents issued to,
or licensed by, us will not be challenged or circumvented by our competitors, or that our patents will not be found invalid.
We also operate in an industry that is susceptible to significant
intellectual property litigation and, in recent years, it has been common for companies in the medical device field to aggressively
challenge the patent rights of other companies in order to prevent the marketing of new devices. Intellectual property litigation
is expensive, complex and lengthy and its outcome is difficult to predict. Future patent litigation may result in significant royalty
or other payments or injunctions that can prevent the sale of products and may significantly divert the attention of our technical
and management personnel.
In addition, we may have to take legal action in the future
to protect our patents, trade secrets or know-how or to assert our intellectual property rights against claimed infringement by
others. Any legal action of that type could be costly and time consuming to us and no assurances can be made that any lawsuit will
be successful.
The invalidation of key patents or proprietary rights that we
own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business,
financial condition or results of operations. In the event that our right to market any of our products is successfully challenged,
or if we fail to obtain a required license or are unable to design around a patent, our business, financial condition or results
of operations could be materially adversely affected.
Future product liability claims and other litigation may
adversely affect our business, reputation and ability to attract and retain customers.
The design, manufacture and marketing of medical device products
of the types that we produce entail an inherent risk of product liability claims. A number of factors could result in an unsafe
condition or injury to, or death of, a patient with respect to these or other products that we manufacture or sell, including component
failures, manufacturing flaws, design defects or inadequate disclosure of product-related risks or product-related information.
These factors could result in product liability claims, a recall of one or more of our products or a safety alert relating to one
or more of our products. Product liability claims may be brought by individuals or by groups seeking to represent a class.
Anyone or any company can bring an action against Misonix,
including private securities litigation and shareholder derivative suits, and adverse litigation results could affect our business.
Our judicial system allows anyone, including
shareholders, to bring a claim against the Company and force the Company to defend itself even if the claim is baseless. The defense
may or may not be covered by the Company’s insurance, the result of which could ultimately create a burden on the Company
dependent upon the outcome.
Litigation can be lengthy, expensive and
disruptive to our operations, and results cannot be predicted with certainty. An adverse decision could result in monetary damages
or injunctive relief that could affect our financial condition or results of operations.
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 March 24, 2017, the Court appointed Scalfani and another individual Misonix
shareholder, Tracey Angiuoli, as lead plaintiffs for purposes of pursuing the action on behalf of the putative class. The lead
plaintiffs, on behalf of the putative class, and the Company have reached a settlement in principle under which the Company would
pay $500,000 to resolve the matter. That settlement is subject to approval by the district court. The Company believes it has various
legal and factual defenses to the allegations in the complaint, and intends to vigorously defend the action if the settlement is
not approved and finalized.
On April 5, 2017, the Company’s former distributor in
China, Cicel, filed a lawsuit against the Company and certain officers and directors of the Company in the United States District
Court for the Eastern District of New York, alleging that the Company improperly terminated its contract with the former distributor.
The complaint, which seeks various remedies, including compensatory and punitive damages, specific performance and preliminary
and post judgment injunctive relief, asserts various causes of action, including breach of contract, unfair competition, tortious
interference with contract, fraudulent inducement, and conversion. 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.
On June 6, 2017, Irving Feldbaum, an individual shareholder
of Misonix, filed a lawsuit in the U.S. District Court for the Eastern District of New York. The complaint alleges claims against
the Company’s board of directors, its former CEO and CFO, certain of its former directors, and the Company as a nominal defendant
for alleged violations of Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and state law claims
for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that the Company incurred
damages 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. The complaint also alleges
that the Company’s February 4, 2016 Proxy Statement contained false and misleading statements regarding executive compensation.
The complaint seeks the recovery of damages on behalf of the Company and the implementation of changes to corporate governance
procedures. On June 16, 2017, Michael Rubin, another individual shareholder of Misonix, filed a case alleging similar claims in
the same district court. The cases are at their earliest stages; there has been no discovery and there is no trial date. While
the Company believes that these matters will be covered by its directors and officers liability insurance contract, the Company
is not able either to estimate the amount of potential loss or potential recovery it may recognize, if any, from these claims or
to identify any changes in corporate governance procedures it may undertake, if any, as a result of these claims.
Violation of anti-corruption laws could subject the Company
to significant penalties which would materially affect our business and liquidity.
We are required to comply with the Foreign Corrupt Practices
Act (“FCPA”) and similar anti-corruption laws in other jurisdictions around the world where we do business. Compliance
with these laws has been subject to increasing focus and activity by regulatory authorities in recent years. Actions by our employees,
or third-party intermediaries acting on our behalf, in violation of such laws, whether carried out in the United States or elsewhere
in connection with the conduct of our business may expose us to liability for violations of the FCPA or other anti-corruption laws
and accordingly may have a material adverse effect on our reputation and our business, financial condition or results of operations.
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 (the “Investigation”).
On September 27, 2016 and September 28, 2016, the Company voluntarily
contacted the Securities Exchange Commission (“SEC”) and the U.S. Department of Justice (“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 ongoing investigations of these matters.
Although our Investigation is complete, additional issues or
facts could arise which may expand the scope or severity of the potential violations. The Company could also receive additional
requests from the DOJ or SEC, which may require further investigation. 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. During its
distributorship relationship with the prior Chinese distributor from 2010 through 2016, the Company generated sales of approximately
$8 million from the relationship. We cannot assure you that the DOJ and the SEC will not impose penalties based on the profit derived
from these sales.
Further, the Company may suffer other civil penalties or adverse
impacts, including lawsuits by private litigants in addition to the lawsuits that already have been filed, or investigations and
fines imposed by local authorities. The investigative costs to date are approximately $2.5 million, of which approximately
$2.4 million was charged to general and administrative expenses during the fiscal year ended June 30, 2017.
As a result of the delayed filings of our Quarterly Reports
on Form 10-Q for the fiscal period ended September 30, 2016 and December 31, 2016, respectively, and the Annual Report on Form
10-K for the fiscal year ended June 30, 2016 with the SEC, we are not currently eligible to use a registration statement on Form
S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.
We are not currently eligible to register the offer and sale
of our securities using a registration statement on Form S-3 and we will not become eligible until we have timely filed certain
periodic reports required under the Exchange Act for 12 consecutive calendar months. There can be no assurance when we will meet
this requirement, which depends in part upon our ability to file our periodic reports on a timely basis in the future. Should we
wish to register the offer and sale of our securities to the public before we are eligible to do so, on Form S-3, our transaction
costs and the amount of time required to complete the transaction could increase, making it more difficult to execute any such
transaction successfully and potentially having an adverse effect on our financial condition.
Our future growth is dependent upon the development of
new products and line extensions, which requires significant research and development, clinical trials and regulatory approvals,
all of which are very expensive and time-consuming and may not result in a commercially viable product.
In order to develop new products and improve current product
offerings, we focus our research and development programs largely on the development of next-generation and novel technology offerings
across multiple programs and opportunities.
As a part of the regulatory process of obtaining marketing clearance
from the FDA for new products, we conduct and participate in numerous clinical trials with a variety of study designs, patient
populations and trial endpoints. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by
us, by our competitors or by third parties, or the market’s perception of this clinical data, may adversely impact our ability
to obtain product approvals from the FDA, our position in, and share of, the markets in which we participate and our business,
financial condition, results of operations or future prospects.
New products may not be accepted by customers in the marketplace.
We are now, and will continue to be, developing new products
and introducing them into the market. There can be no assurance that any new product will be accepted by the market. New products
are sometimes introduced into the market in a prototype format and may need later revisions or design changes before they operate
in a manner to be accepted in the market. As a result of the introduction of new products, there is some risk that revenue expectations
may not be met and in some cases the product may not achieve market acceptance.
We face intense competition and may not be able to keep
pace with the rapid technological changes in the medical device industry.
The medical device product market is highly competitive. We
encounter significant competition across our product lines and in each market in which our products are sold from various medical
device companies, most of which have greater financial and marketing resources than we do.
Additionally, the medical device product market is characterized
by extensive research and development and rapid technological change. Developments by other companies of new or improved products,
processes or technology may make our products or proposed products obsolete or less competitive and may negatively impact our revenues.
In some cases foreign companies may attempt to copy our designs illegally. We are required to devote continued efforts and financial
resources to develop or acquire scientifically advanced technologies and products, apply our technologies cost-effectively across
product lines and markets, attract and retain skilled development personnel, obtain patent and other protection for our technology
and products, obtain required regulatory and reimbursement approvals and successfully manufacture and market our products. Failure
to develop new products or enhance existing products could have a material adverse effect on our business, financial condition
or results of operations.
Consolidation in the healthcare industry could lead to
demands for price concessions or the exclusion of some suppliers from certain of our significant market segments.
The cost of healthcare has risen significantly over the past
decade and numerous initiatives and reforms initiated by legislators, regulators and third-party payers to curb these costs have
resulted in a consolidation trend in the healthcare industry, including hospitals. This in turn has resulted in greater pricing
pressures and the exclusion of certain suppliers from important market segments as group purchasing organizations, independent
delivery networks and large single accounts continue to consolidate purchasing decisions for some of our hospital customers. We
expect that market demand, government regulation, third-party reimbursement policies and societal pressures will continue to change
the worldwide healthcare industry, resulting in further business consolidations and alliances among our customers and competitors,
which may reduce competition, exert further downward pressure on the prices of our products and may adversely impact our business,
financial condition or results of operations.
We may experience disruption in supply due to our dependence
on our suppliers to continue to ship product requirements and our inability to obtain suppliers of certain components for our products.
Our suppliers may encounter problems during manufacturing due
to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations,
equipment malfunctions, labor shortages or environmental factors. In addition, we purchase both raw materials used in our products
and finished goods from various suppliers and may have to rely on a single source supplier for certain components of our products
where there are no alternatives are available. Although we anticipate that we have adequate sources of supply and/or inventory
of these components to handle our production needs for the foreseeable future, if we are unable to secure on a timely basis sufficient
quantities of the materials we depend on to manufacture our products, if we encounter delays or contractual or other difficulties
in our relationships with these suppliers, or if we cannot find suppliers at an acceptable cost, then the manufacture of our products
may be disrupted, which could increase our costs and have a material adverse effect on our business.
If we fail to manage any expansion or acquisition, our
business could be impaired.
We may in the future acquire one or more technologies, products
or companies that complement our business. We may not be able to effectively integrate these into our business and any such acquisition
could bring additional risks, exposures and challenges to the Company. In addition, acquisitions may dilute our earnings per share,
disrupt our ongoing business, distract our management and employees, increase our expenses, subject us to liabilities and increase
our risk of litigation, all of which could harm our business. If we use cash to acquire technologies, products, or companies, such
use may divert resources otherwise available for other purposes. If we use our common stock to acquire technologies, products,
or companies, our shareholders may experience substantial dilution. If we fail to manage any expansions or acquisition, our business
could be impaired.
Our agreements and contracts entered into with partners
and other third parties may not be successful.
We signed in the past and may pursue in the future agreements
and contracts with third parties to assist in our marketing, manufacturing, selling and distribution efforts. We cannot assure
you that any agreements or contracts entered into will be successful.
The fluctuation of our quarterly results may adversely
affect the trading price of our common stock.
Our revenues and results of operations have in the past and
will likely vary in the future from quarter to quarter due to a number of factors, many of which are outside of our control and
any of which may cause our stock price to fluctuate. You should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of our future performance. It is likely that in some future quarters, our results of operations may be below the
expectations of public market analysts and investors. In this event, the price of our common stock may fall.
We may not be able to attract and retain additional key
management, sales and marketing and technical personnel, or we may lose existing key management, sales and marketing or technical
personnel, which may delay our development and marketing efforts.
We depend on a number of key management, sales and marketing
and technical personnel. The loss of the services of one or more key employees could delay the achievement of our development and
marketing objectives. Our success will also depend on our ability to attract and retain additional highly qualified management,
sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many
of whom are often subject to competing employment offers, and we do not know whether we will be able to attract and retain such
personnel.
Future changes in financial accounting standards or practices
or existing taxation rules or practices may cause adverse or unexpected revenue fluctuations and affect our reported results of
operations.
A change in accounting standards or practices or a change in
existing taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of
transactions completed before the change is effective. New accounting pronouncements and taxation rules and varying interpretations
of accounting pronouncements and taxation practice have occurred and may occur in the future. Changes to existing rules or the
questioning of current practices may adversely affect our reported financial results or the way we conduct our business.
The Affordable Healthcare for America Act includes provisions
that may adversely affect our business and results of operations, including an excise tax on the sales of most medical devices.
On March 21, 2010, the House of Representatives passed the Affordable
Health Care for America Act, which President Obama signed into law on March 23, 2010. With a new administration in place beginning
in 2017, changes may be made to the Affordable Health Care Act, or it may be repealed and replaced. The potential impact of these
events may adversely affect our business and results of operations. The medical device tax has been established, but in the future
the government may decide to increase the tax rate. The impact of the recent change in Presidential administration has yet to be
determined.
We are experiencing greater scrutiny and regulation by
governmental authorities, which may lead to greater regulation in the future.
Our medical devices and our business activities are subject
to rigorous regulation, including by the FDA, the DOJ and numerous other federal, state and foreign governmental authorities. These
authorities and members of Congress have been increasing their scrutiny of our industry. Certain state governments and the federal
government have enacted legislation aimed at increasing transparency of our interactions with health care providers. As a result,
we are required by law to disclose payments and other transfers of value to health care providers licensed by certain states and,
starting with payments or other transfers of value made on or after August 1, 2013, to all U.S. physicians and U.S. teaching hospitals
at the federal level. Any failure to comply with these legal and regulatory requirements could impact our business. In addition,
we may continue to devote substantial additional time and financial resources to further develop and implement policies, systems,
and processes to comply with enhanced legal and regulatory requirements, which may also impact our business. We anticipate that
governmental authorities will continue to scrutinize our industry closely, and that additional regulation may increase compliance
and legal costs, exposure to litigation, and other adverse effects on our operations.
Risk of reprocessing disposables.
In some jurisdictions around the world, culture and practice
encourages reuse of disposable products when the product is clearly labeled for single use. Such reuse may expose us to liability
in these jurisdictions.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The Company occupies approximately 34,400 square feet at 1938
New Highway, Farmingdale, New York pursuant to a lease expiring on June 30, 2018. The Company pays rent of approximately $26,000
a month, which includes a pro rata share of real estate taxes, water, sewer and other charges which are assessed on the leased
premises or the land upon which the leased premises are situated. The Company believes that the leased facilities are adequate
for its present needs.
Item 3.
Legal Proceedings.
Former Chinese Distributor
For several months, with the assistance of outside counsel,
the Company has been conducting the 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, the Company 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 ongoing investigations of these matters.
Although our 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. During its distributorship
relationship with the prior Chinese distributor from 2010 through 2016, the Company 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 lawsuits that already have been filed, or investigations and
fines imposed by local authorities. The investigative costs to date are approximately $2.5 million, of which approximately $2.4
million was charged to general and administrative expenses during the fiscal year ended June 30, 2017.
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 March 24, 2017, the Court appointed Scalfani and another
individual Misonix shareholder, Tracey Angiuoli, as lead plaintiffs for purposes of pursuing the action on behalf of the putative
class. The lead plaintiffs, on behalf of the putative class, and the Company have reached a settlement in principle under which
the Company would pay $500,000 to resolve the matter. That settlement is subject to approval by the district court. The Company
believes it has various legal and factual defenses to the allegations in the complaint, and intends to vigorously defend the action
if the settlement is not approved and finalized.
Stockholder Derivative Litigation
On June 6, 2017, Irving Feldbaum, an individual shareholder of Misonix, filed a lawsuit in the U.S. District Court for the Eastern
District of New York. The complaint alleges claims against the Company’s board of directors, its former CEO and CFO, certain
of its former directors, and the Company as a nominal defendant for alleged violations of Section 14(a) of the Securities Exchange
Act of 1934 and state law claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint
alleges that the Company incurred damages 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. The complaint also alleges that the Company’s February 4, 2016 Proxy Statement contained false and misleading
statements regarding executive compensation. The complaint seeks the recovery of damages on behalf of the Company and the implementation
of changes to corporate governance procedures. On June 16, 2017, Michael Rubin, another individual shareholder of Misonix, filed
a case alleging similar claims in the same district court. The cases are at their earliest stages; there has been no discovery
and there is no trial date. The Company is not able either to estimate the amount of potential loss or potential recovery it may
recognize, if any, from these claims or to identify any changes in corporate governance procedures it may undertake, if any, as
a result of these claims.
Former Chinese Distributor - Litigation
On April 5, 2017, the Company’s former distributor in
China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against the Company and certain officers and directors
of the Company in the United States District Court for the Eastern District of New York, alleging that the Company improperly terminated
its contract with the former distributor. The complaint, which seeks various remedies, including compensatory and punitive damages,
specific performance and preliminary and post judgment injunctive relief, asserts various causes of action, including breach of
contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. 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.
Item 4.
Mine Safety Disclosures.
Not applicable.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
Company currently has five Directors (the “Board”). Their term expires at the next Annual Meeting of Shareholders.
The following table contains information regarding all Directors and executive officers of the Company as of June 30, 2017:
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Director
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Name
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Age
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Principal Occupation
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Since
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John W. Gildea
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73
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Director
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2004
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Dr. Charles Miner III
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65
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Director
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2005
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Stavros G. Vizirgianakis
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46
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President, Chief Executive Officer and Director
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2013
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Patrick A. McBrayer
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65
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Director
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2014
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Thomas M. Patton
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53
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Director
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2015
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Joseph P. Dwyer
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61
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Chief Financial Officer
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—
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Richard A. Zaremba
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61
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Senior Vice President, Secretary and Treasurer
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—
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Robert S. Ludecker
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49
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Senior Vice President, Global Sales and Marketing
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—
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Dan Voic
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55
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Vice President of Research and Development and
Engineering
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—
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Joseph J. Brennan
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54
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Vice President of Operations
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—
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John J. Salerno
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62
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Vice President of Quality and Regulatory Affairs
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—
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Christopher H. Wright
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43
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Vice President of Domestic Sales
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—
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Principal
Occupations and Business Experience of Directors and Executive Officers
The
following is a brief account of the business experience of the Company’s Directors and executive officers:
Directors
John
W. Gildea
, now retired, was the founding principal of Gildea Management Co., a management company of special situations with
middle market companies in the United States and Central Europe. From 2000 to 2003, Gildea Management formed a joint venture with
J.O. Hambro Capital Management Co. to manage accounts targeting high yield debt and small capitalization equities. From 1996 to
2000, Gildea Management formed and founded Latona Europe, a joint venture between Latona U.S., Lazard Co. and Gildea Management
to restructure several Czech Republic companies. Before forming Gildea Management in 1990, Mr. Gildea managed the Corporate Services
Group at Donaldson, Lufkin and Jenrette, an investment banking firm. Mr. Gildea is a graduate of the University of Pittsburgh.
Mr. Gildea has extensive experience as an international investment banker and sits on the board of several companies. The Board
believes this experience in addition to his experience as a Director of Misonix and knowledge of the Company qualifies him to
serve as a Director.
Dr.
Charles Miner III
currently practices internal medicine in Darien, Connecticut. Dr. Miner is on staff at Stamford and Norwalk
Hospitals and since 1982 has held a teaching position at Columbia Presbyterian Hospital. Dr. Miner received his M.D. from the
University of Cincinnati College of Medicine in 1979 and received a Bachelor of Science from Lehigh University in 1974. Dr. Miner
is an experienced physician and teacher in the medical field. He serves on the board of The Stamford Hospital Foundation Board.
The Board believes his experience as a medical doctor and his corporate experience qualifies him to serve as a Director.
Stavros
G. Vizirgianakis
became the Company’s Interim Chief Executive Officer in September 2016 and its full-time President
and Chief Executive Officer in December 2016. Mr. Vizirgianakis has a distinguished career in the medical devices field having
worked for United States Surgical Corporation as director of sales for sub-Saharan Africa and later Tyco Healthcare in the capacity
of General Manager South Africa. In 2006, Mr. Vizirgianakis co-founded Surgical Innovations, which has become one of the largest
privately owned medical device distributors in the African region, and now part of the Johannesburg Stock Exchange listed entity
Ascendis Health. In that capacity, Mr. Vizirgianakis acted as a distributor of the Company’s products. Mr. Vizirgianakis
was Managing Director of Ascendis Medical from January 2014 through July 2016. Mr. Vizirgianakis also served on the board of Tenaxis
Medical and is a strategic investor and advisor to numerous medical device startups and established companies in this field. Mr.
Vizirgianakis has a degree in commerce from the University of South Africa. The Board believes Mr. Vizirgianakis’ industry
knowledge, sales and marketing experience and his vast international business relationships qualify him to serve as a Director.
Patrick
A. McBrayer
has served since January 2016 as President and Chief Executive Officer of ACell Corporation, a surgery and wound
care company. Mr. McBrayer previously served as President and Chief Executive Officer and as a director of privately-held AxioMed
Spine Corporation from February 2006 to January 2015. AxioMed is a medical device company focused on restoring the natural function
of the spine. Prior to joining AxioMed, he held positions with Xylos Corporation (medical biomaterials); Exogen, Inc. (treatment
of musculoskeletal injury and disease); Osteotech, Inc. (tissue technology); and Johnson and Johnson Products, Inc. (healthcare
products). Mr. McBrayer holds a B. S. in General Engineering from the United States Military Academy. The Board believes Mr. McBrayer’s
industry knowledge and experience as a CEO qualifies him to serve as a Director.
Thomas
M. Patton
has served as President and Chief Executive Officer of CAS Medical Systems, Inc. and as a member of its Board of
Directors since August 2010. He previously served as the CEO of Wright Medical Group, an orthopedic device company, located in
Memphis, Tennessee, and as President of Novametrix Medical Systems, a patient-monitoring company, located in Wallingford, Connecticut.
From 2003 to 2010, Mr. Patton acted as an advisor to the healthcare-focused private equity group of Ferrer Freeman & Company
and, in that capacity, served as the interim CEO of Informed Medical Communications on a part-time basis in 2006 and 2007. Mr.
Patton is a co-founder and CEO of QDx, Inc., a start-up company that developed a platform for hematology diagnostics beginning
in 2003. Mr. Patton attended The College of the Holy Cross, where he majored in Economics and Accounting. After graduating magna
cum laude from Georgetown University Law Center, Mr. Patton worked at the law firm of Williams & Connolly in Washington, D.C.
Thereafter, he joined Wright Medical Group as its General Counsel where he served in various executive roles until being appointed
CEO. The Board believes Mr. Patton’s industry knowledge and experience qualify him to serve as a director.
Executive
Officers who are not Directors
Joseph
P. Dwyer
has served as the Company’s Chief Financial Officer since August 2017 and previously served as Interim
Chief Financial Officer from September 2016. From June 2015 to the present, Mr. Dwyer has provided financial consulting
and advisory services to various companies, through the firms Dwyer Holdings and TechCXO. Prior thereto, from November 2012
until June 2015, he was Chief Financial Officer of Virtual Piggy, Inc., a publicly-traded technology company. Prior to
joining Virtual Piggy, Mr. Dwyer served as chief financial officer of OpenLink Financial, Inc., a privately held company,
which provides software solutions for trading and risk management in the energy, commodity, and capital markets. During 2011
and 2012, Mr. Dwyer was a member of the board of directors and chairman of the audit committee and served as interim
chief administrative officer of Energy Solutions International, Inc., a privately-held company providing pipeline
management software to energy companies and pipeline operators. From 2010 through 2011, Mr. Dwyer served as chief
administrative officer of Capstone Advisory Group, LLC, a privately- held financial advisory firm providing corporate
restructuring, litigation support, forensic accounting, expert testimony and valuation services. Mr. Dwyer served as a
consultant to Verint Systems, Inc., a software company listed on the NASDAQ Global Market, from 2009 through 2010, assisting
with SEC reporting and compliance. From 2005 through 2009, Mr. Dwyer served as chief financial officer and executive vice
president of AXS-One Inc., a publicly traded software company. During 2004, Mr. Dwyer served as chief financial officer of
Synergen, Inc., a privately held software company providing energy technology to utilities. Prior to 2004, Mr. Dwyer also
served as chief financial officer and executive vice president of Caminus Corporation, an enterprise application software
company that was formerly listed on the NASDAQ National Market, chief financial officer of ACTV, Inc., a digital media
company that was formerly listed on the NASDAQ National Market, and chief financial officer of Winstar Global Products, Inc.,
a manufacturer and distributor of hair care, bath and beauty products until its acquisition by Winstar Communications, Inc.
in 1995 when Mr. Dwyer went on to serve as senior vice president, finance of Winstar Communications. Mr. Dwyer received his
BBA in Accounting from the University of Notre Dame in 1978 and is licensed as a Certified Public Accountant in the State of
New York.
Richard
A. Zaremba
became Senior Vice President and Chief Financial Officer in 2004. He became Vice President and Chief Financial
Officer in February 1999 and in September 2016, he became Senior Vice President, Finance. From March 1995 to February 1999, he
was the Vice President and Chief Financial Officer of Converse Information Systems, Inc., a manufacturer of digital voice recording
systems. Previously, Mr. Zaremba was Vice President and Chief Financial Officer of Miltope Group, Inc., a manufacturer of electronic
equipment. Mr. Zaremba is a licensed certified public accountant in the State of New York and holds BBA and MBA degrees in Accounting
from Hofstra University.
Robert
S. Ludecker
became Senior Vice President of Global Sales and Marketing in May 2015. Prior to joining the Company as Global
Vice President of Sales and Marketing in May 2013, Mr. Ludecker served from February 2011 to May 2013 as Vice President of Global
Sales and Marketing for BioMimetic Therapeutics, a NASDAQ-listed biotechnology company, specializing in the development and commercialization
of products which promote the healing of musculoskeletal injury and diseases, including orthopedic, spine, and sports medicine
applications. Prior to BioMimetic, Mr. Ludecker served from February 2008 to February 2011 in a variety of senior sales and marketing
leadership positions with Small Bone Innovations, a private New York City-based orthopedic company specializing in small bones,
and Smith and Nephew, a leading U.K.-based global provider of orthopedic reconstruction implants and a broad portfolio of medical
instruments and supplies. Mr. Ludecker holds a B. A. degree from Kenyon College.
Dan
Voic
became Vice President of Research and Development and Engineering in January 2002. Prior thereto, he served as Engineering
Manager and Director of Engineering with the Company. Mr. Voic has in excess of 15 years’ experience in both medical and
laboratory and scientific products development. Mr. Voic holds an M.S. degree in mechanical engineering from Polytechnic University
“Traian Vuia” of Timisoara, Romania and an MS degree in applied mechanics from Polytechnic University of New York.
Joseph
J. Brennan
became Vice President of Operations in November 2014. Prior to joining the Company, Mr. Brennan served from October
2008 to August 2014 as Director of Operations for Air Techniques, Inc., a global medical device company. Mr. Brennan holds a B.
T. degree from the State University of New York at Farmingdale.
John
J. Salerno
became Vice President of Quality and Regulatory Affairs in March 2015. Prior to joining the Company, Mr. Salerno
served from December 2012 to March 2015 as Senior Director of Quality Assurance for US Nonwovens Corp., a privately-held over
the counter drug products, cosmetics, personal care and EPA surface disinfectant company. From May 2010 to December 2012, Mr.
Salerno was a consultant for US Nonwovens. From 2006 to 2010, Mr. Salerno held the position of Vice President of Quality Assurance
and Regulatory Affairs for International Technidyne Corporation. Prior to 2006, Mr. Salerno held the position of Vice President
of Regulator Compliance and Reliability Engineering for Pall Life Sciences. Mr. Salerno holds a Master’s degree in Microbiology
from Long Island University and a Bachelor’s degree in biology from Fordham University.
Christopher
H. Wright
became Vice President of Domestic Sales in July 2015. Prior to that, he was National Sales Director of Surgical
Sales for the Company since 2013. Prior to joining the Company, Mr. Wright served from 2011 to 2013 in the position of Senior
Business Director with Wright Medical/BioMimetics, LLC. From 2007 – 2011 Mr. Wright held the position for Regional Manager
with Small Bone Innovations. From 2005 – 2007 he held the position of Territory business manager with Baxter Healthcare.
Prior to 2005, Mr. Wright was an independent sales representative. Mr. Wright holds a Bachelor of Arts degree in Business Administration
from Xavier University of New Orleans in Louisiana.
Executive
officers are elected annually by, and serve at the discretion of, the Board.
Section
16 (a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires the Company’s executive officers, directors and persons who own more than 10% of a registered
class of the Company’s equity securities (“Reporting Persons”) to file reports of ownership and changes in ownership
on Forms 3, 4, and 5 with the SEC. These Reporting Persons are required by SEC regulation to furnish the Company with copies of
all Forms 3, 4 and 5 they file with the SEC. Based solely on the Company’s review of the copies of the forms it has received,
the Company believes that all Reporting Persons, complied on a timely basis with all filing requirements applicable to them with
respect to transactions during fiscal year 2017, with the exception of one transaction by Robert Ludecker during fiscal 2015 which
was omitted from the original Form 4 and was filed late, via amendment, in fiscal 2017.
Code
of Ethics
The
Company has adopted a code of ethics that applies to all of its directors, officers (including its Chief Executive Officer, Chief
Financial Officer, Controller and any person performing similar functions) and employees. The Company has made the Code of Ethics
available on its website at
www.MISONIX.com
.
Director
Nomination Process
The
process followed by the Nominating and Governance Committee to identify and evaluate director candidates includes requests to
the members of our board of directors and others for recommendations, meetings from time to time to evaluate biographical information
and background material relating to potential candidates and interviews of selected candidates by members of the Nominating and
Governance Committee and our board of directors.
While
we do not have a formal diversity policy for board membership, we look for potential candidates that help ensure that the board
of directors has the benefit of a wide range of attributes, including cultural, gender, ethnic and age diversity and experience
in industries beyond healthcare. We also look for financial oversight experience, financial community experience and a good reputation
within the financial community; business management experience and the potential to succeed top management in the event board
intervention is necessary on an unexpected basis; business contacts, business knowledge and influence that may be useful to our
businesses; and knowledge about our industry and technologies.
Our
board of directors does not currently prescribe any minimum qualifications for director candidates; however, the Nominating and
Governance Committee will take into account a potential candidate’s experience, areas of expertise and other factors relevant
to the overall composition of our board of directors.
Shareholders
may recommend individuals to the Nominating and Governance Committee for consideration as potential director candidates by submitting
the names of the candidate(s), together with appropriate biographical information and background materials and a statement as
to whether the shareholder or group of shareholders making the recommendation has beneficially owned more than 5% of our common
stock for at least a year as of the date such recommendation is made, to the Nominating and Governance Committee, Attn: Corporate
Secretary, Misonix, Inc., 1938 New Highway, Farmingdale, New York 11735. Assuming that appropriate biographical and background
material has been provided on a timely basis, the Nominating and Governance Committee will evaluate shareholder-recommended candidates
by following substantially the same process, and applying substantially the same criteria, as it follows for candidates submitted
by others.
Audit
Committee
The
Company has a separately-designated standing Audit Committee. The members of the Audit Committee are Messrs. Patton, Gildea and
McBrayer. The Board of Directors has determined that each member of the Audit Committee is “independent” not only
under the Corporate Governance Requirements applicable to Nasdaq-listed companies but also within the definition contained in
a final rule of the SEC. Furthermore, the Board of Directors has determined that Mr. Gildea and Mr. Patton are “audit committee
financial experts” within the definition contained in a final rule adopted by the SEC.
Item
11.
Executive Compensation.
Compensation
Discussion and Analysis
Overview
of Compensation Program and Philosophy
Our
compensation program is intended to:
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Attract, motivate, retain and reward employees
of outstanding ability;
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●
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Link changes in employee compensation to individual
and corporate performance;
|
|
●
|
Align employees’ interests with those
of the Company’s shareholders.
|
The
ultimate objective of our compensation program is to increase shareholder value. We seek to achieve these objectives with a total
compensation approach which takes into account a competitive base salary, bonus pay based on the annual performance of the Company
and individual goals and stock option and restricted stock awards.
The
Board’s Compensation Committee, which is comprised solely of independent directors and is responsible for making decisions
regarding the amount and form of compensation paid to the Company’s executive officers, has carefully considered the results
of prior say-on-pay shareholder votes. Based upon the vote results at the most recent annual shareholders meeting, shareholders
appear to be supportive of the Compensation Committee’s approach to the executive compensation program.
Base
Salaries
Base
salaries paid to executives are intended to attract and retain highly talented individuals. In setting base salaries, individual
experience, individual performance, the Company’s performance and job responsibilities during the year are considered. Executive
salaries are reconciled by Human Resources and evaluated against local companies of similar size and nature. During the fiscal
year ended June 30, 2017, Messrs. Ludecker, Voic and Zaremba each received base salary increases of 3% based on performance.
Annual
Bonus Plan Compensation
The
Compensation Committee of the Board approves annual performance-based compensation. The purpose of the annual bonus-based compensation
is to motivate executive officers and key employees. Target bonuses, based upon recommendations from the Chief Executive Officer,
are evaluated and approved by the Compensation Committee for all management employees other than the Chief Executive Officer.
The bonus recommendations are derived from individual and Company performance but not based on a specific formula and are discretionary.
The Chief Executive Officer’s bonus compensation is derived from the recommendation of the Compensation Committee based
upon the Chief Executive Officer’s performance and Company performance but is not based on a specific formula and is discretionary.
Bonuses earned in fiscal 2017 based on performance were as follows: $0 to Mr. Vizirgianakis, $0 to Mr. Dwyer, $0 to Mr. McManus,
$0 to Mr. Zaremba, $82,500 to Mr. Ludecker , $22,000 to Mr. Voic, and $0 to Mr. Wright.
Equity
Incentive Awards
Company
executives are eligible to receive restricted stock and stock options (which give them the right to purchase shares of common
stock at a specified price in the future). These grants will vest based upon the passage of time, the achievement of performance
metrics, or both. We believe that the use of restricted stock and stock options as the basis for long-term incentive compensation
meets our defined compensation strategy and business needs by achieving increased value for shareholders and retaining key employees.
Stock
option awards are intended to attract and retain highly talented executives, to provide an opportunity for significant compensation
when overall Company performance is reflected in the stock price and to help align executives’ and shareholders’ interests.
Stock options are typically granted at the time of hire to key new employees and annually to a broad group of existing key employees,
including executive officers. We have adopted a number of equity compensation plans governing the grant of such stock options.
All of our equity compensation plans have been approved by our shareholders.
Annual
option grants to executive officers are made at the discretion of the Board or the Compensation Committee and may be in the form
of incentive stock options (“ISOs”) up to the fullest extent permitted under tax laws, with the balance granted in
the form of nonqualified stock options. The option grants are subject to the terms of the relevant plan. ISOs have potential income
tax advantage for executives if the executive disposes of the acquired shares after satisfying certain holding periods. Tax laws
provide that at the date of grant, the aggregate fair market value of ISOs that become exercisable for any employee in any year
may not exceed $100,000.
Our
current standard option vesting schedule for all employees is 25% on the first anniversary of the date of grant, 25% on the second
anniversary of the date of grant, 25% on the third anniversary of the date of grant and 25% on the fourth anniversary of the date
of grant. We have on occasion issued options that have two year vesting to employees.
The
number of stock options granted in fiscal 2017 to the named executive officers, and their estimated fair value, were as follows:
Named Executive Officer
|
|
Grant Date
|
|
Number of
Options
Granted
|
|
|
Estimated
Fair Value of
Awards at
Grant Date
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
12/6/2016
|
|
|
30,000
|
|
|
$
|
153,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
11/3/2016
|
|
|
31,000
|
|
|
$
|
110,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
12/6/2016
|
|
|
30,000
|
|
|
$
|
153,561
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
12/6/2016
|
|
|
15,000
|
|
|
$
|
76,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
11/3/2016
|
|
|
15,000
|
|
|
$
|
53,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
12/6/2016
|
|
|
35,000
|
|
|
$
|
179,155
|
|
The
stock options awarded on November 3, 2016 had an exercise price of $6.76 (which was equal to the average of the opening and closing
market price per share of our stock on the date of grant). The stock options awarded on December 6, 2016 had an exercise price
of $9.525 (which was equal to the average of the opening and closing market price per share of our stock on the date of grant).
All stock options in the above table provide for vesting at 25% per year on the first four year anniversary dates of the grant
date, with a stated expiration date of ten years after grant.
In
conjunction with the execution of his employment agreement, on December 15, 2016 Mr. Vizirgianakis received grants of an aggregate
of 400,000 shares of restricted stock pursuant to the Company’s 2014 Employee 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 Company’s 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 Company’s 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.
Other
Annual Compensation and Benefits
Although
direct compensation, in the form of salary, non-equity incentive awards and long-term equity incentive awards provide most of
the compensation to each Executive Officer, we also provide for the following items of additional compensation:
|
●
|
Retirement
savings are provided by a 401(k) plan, in the same manner to all U.S. employees. This plan includes an employer matching contribution
of 10% which is intended to encourage employees (including the chief executive officer) to save for retirement.
|
|
●
|
Health,
life and disability benefits are offered to our executive officers in the same manner to all of our U.S. employees. We provided
additional life insurance, long term care policies and certain transportation expenses for our chief executive officer and
each of our executive officers.
|
Transportation
expenses are provided to executive officers, primarily in the form of an automobile allowance. Our former chief executive officer
had the use of a Company provided automobile with driver.
Compensation
Committee Report
Our
Compensation Committee has furnished the following report. The information contained in the “
Compensation Committee Report”
is not deemed to be “soliciting material” or to be “filed” with the SEC, nor is such information to
be incorporated by reference into any future filing under the Securities Act of 1933, as amended (the “Securities Act”),
or the Exchange Act, as amended, except to the extent that we specifically incorporate it by reference in to such filings.
Our
Compensation Committee has reviewed and discussed the “Compensation Discussion and Analysis” required by Item 402(b)
of Regulation S-K of the Securities Act with management. Based on such review and discussion, our Compensation Committee recommended
to our Board of Directors that the
“Compensation Discussion and Analysis”
be included in our Annual Report
on Form 10-K for the fiscal year ended June 30, 2017 for filing with the SEC.
|
Compensation
Committee
|
|
|
|
Patrick A. McBrayer
|
|
Dr. Charles Miner III
|
|
Thomas M. Patton
|
Compensation
Committee Interlocks and Insider Participation
During
fiscal 2017, Messrs. Gildea, McBrayer, Patton and Miner and our former director, T. Guy Minetti served as members of our Compensation
Committee. No Member of our Compensation Committee is or was during fiscal year 2017 an employee or an officer of Misonix or its
Subsidiaries.
Grants
of Plan Based Awards
The
following table presents non-equity and equity awards granted to the named executive officers in fiscal year 2017.
GRANTS
OF PLAN-BASED AWARDS IN FISCAL 2017
Name
|
|
Grant
Date
|
|
(1)
All Other
Stock
Awards:
Number of
Shares of
Stock
|
|
|
All
Other
Option
Awards:
Number of
Securities
Underlying
Options
|
|
|
(2)
Exercise or
Base price
of Option
Awards
($/Share)
|
|
|
(3)
Grant Date
Fair Value
of Stock
and Option
Awards
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros
G. Vizirgianakis
|
|
12/15/2016
|
|
|
133,334
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,286,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
12/15/2016
|
|
|
133,333
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,180,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
12/15/2016
|
|
|
133,333
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
1,170,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
12/6/2016
|
|
|
|
|
|
|
30,000
|
|
|
$
|
9.525
|
|
|
$
|
153,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
11/3/2016
|
|
|
|
|
|
|
31,000
|
|
|
$
|
6.760
|
|
|
$
|
110,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
12/6/2016
|
|
|
|
|
|
|
30,000
|
|
|
$
|
9.525
|
|
|
$
|
153,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
12/6/2016
|
|
|
|
|
|
|
15,000
|
|
|
$
|
9.525
|
|
|
$
|
76,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
11/3/2016
|
|
|
|
|
|
|
15,000
|
|
|
$
|
6.760
|
|
|
$
|
53,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
12/6/2016
|
|
|
|
|
|
|
35,000
|
|
|
$
|
9.525
|
|
|
$
|
179,155
|
|
|
(1)
|
Mr. Vizirgianakis received restricted stock
awards pursuant to our 2014 Equity Incentive Plan.
|
|
|
|
|
(2)
|
Stock option awards were issued on November
3, 2016 pursuant to our 2009 Equity Incentive Plan except for Mr. Wright who was awarded from the 2012 Employee Equity Incentive
Plan. Stock option awards were issued on December 6, 2016 pursuant to our 2014 Equity Incentive Plan except for Mr. Ludecker
who was awarded from the 2012 Employee Equity Plan. All stock options in the above table provide for vesting at 25% per year
on the first four year anniversary dates of the grant date, with a stated expiration date of ten years after grant.
|
|
(3)
|
This amount represents the Black-Scholes computation
as of that date of award, except for Mr. Vizirgianakis, whose awards were valued using a Monte Carlo computation as of the
grant date of the award.
|
Stock
Option Exercises
The
following table shows all stock option exercises during fiscal 2017 by the named executive officers.
OPTION
EXERCISES IN FISCAL 2017
|
|
|
|
Name
of Executive Officer
|
|
Exercise
Date
|
|
|
Number
of
Shares
Acquired
On Exercise
|
|
|
(1)
Value
Realized On
Exercise
|
|
|
|
|
|
|
|
|
Michael A. McManus, Jr.
|
|
|
5/22/2017
|
|
|
|
369,025
|
|
|
$
|
2,899,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. McManus, Jr.
|
|
|
6/14/2017
|
|
|
|
98,475
|
|
|
$
|
391,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
|
6/5/2017
|
|
|
|
3,000
|
|
|
$
|
21,240
|
|
|
(1)
|
Amounts reflect the difference between the exercise
price of the options and the market value of the shares acquired upon exercise. Market values are based on the closing price
per share of our Common Stock on the NASDAQ Global Market on the date of exercise.
|
Employment
and Severance Agreements
Vizirgianakis
Employment Agreement
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 Employee 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 Company’s
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 Company’s 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.
McManus
Employment Agreement
On
May 22, 2015, the Employment Agreement, dated July 1, 2014, by and between Michael A. McManus, Jr. and the Company was mutually
terminated and replaced by a new Employment Agreement whereby Mr. McManus continued to serve as the Company’s President
and Chief Executive Officer (the “McManus Agreement”). The McManus Agreement, effective as of May 22, 2015, had an
initial term expiring June 30, 2017 and would renew for successive one-year periods thereafter unless terminated by either party
not less than ninety (90) days prior to the end of the then-current term. The McManus Agreement provided for an annual base salary
of (i) $299,000 through June 30, 2015 and (ii) $325,000 commencing July 1, 2015, and an annual bonus based on Mr. McManus’
achievement of annual goals and objectives as determined by the Compensation Committee of the Company’s Board of Directors.
Mr. McManus also received a one-time grant of options to purchase 100,000 shares of Common Stock at an exercise price of $11.88
per share (the “McManus Options”).
Mr.
McManus was entitled under the McManus Agreement to participate in any plans and programs made available to the executive employees
of the Company generally.
The
Company could terminate the McManus Agreement for cause (as defined in the McManus Agreement). Mr. McManus could terminate the
McManus Agreement for good reason (as defined in the McManus Agreement). If Mr. McManus terminated the McManus Agreement for good
reason, the Company was required to (i) pay him an amount equal to two times his total compensation (annual base salary plus bonus)
at the highest rate paid him at any time during the aggregate time he has been employed by the Company, payable in a lump sum
within sixty days of termination of employment, and (ii) pay premiums for medical, dental, vision, hospitalization and long term
care coverage under Company plans for a period of twenty-four (24) months.
Mr.
McManus was entitled to severance pay and benefits if he terminated his employment with the Company following a Change in Control
(as defined in the McManus Agreement), to provide him with an incentive to remain with the Company and consummate a strategic
corporate sale or transaction that maximizes shareholder value. Severance pay and benefits were triggered upon (i) his Involuntary
Termination without Cause (as defined in the McManus Agreement) for a reason other than death or Disability (as defined in the
McManus Agreement) or (ii) as a result of a Constructive Termination (as defined in the McManus Agreement) which in either case
occurs: (x) during the period not to exceed twenty-four (24) months after the effective date of a Change in Control, or (y) before
the effective date of a Change in Control, but after the first date on which the Board of Directors and/or senior management of
the Company has entered into formal negotiations with a potential acquirer that results in the consummation of a Change in Control.
In
the event that pay and benefits are so triggered, Mr. McManus (A) was entitled to receive severance pay in an amount equal to
two (2) times the sum of (a) his annual base pay and (b) bonus at the highest rate paid him for any fiscal year during the aggregate
period of his employment by the Company, payable in cash in a lump sum; the payment of premiums for medical, dental, vision, hospitalization
and long term care coverage under Company plans for a period of twenty-four (24) months; (B) had the right, for a period of (i)
ninety (90) days for stock options granted under any of the Company’s Employee Stock Option Plans adopted prior to 2005
and (ii) two (2) years for stock options granted under the Company’s 2005 Employee Equity Incentive Plan, 2009 Employee
Equity Incentive Plan, 2014 Employee Equity Incentive Plan and any plan adopted after the effective date of the McManus Agreement,
following his Termination Date (as defined in the McManus Agreement) to exercise the options to the extent such options were otherwise
vested and exercisable as of the Termination Date under the terms of the applicable stock option McManus Agreement(s) and plan(s);
and (C) would vest in all unvested stock option grants with respect to options granted after July 1, 2012.
Mr.
McManus also agreed in the McManus Agreement to an eighteen month post-termination covenant not-to-compete, as well as other customary
covenants concerning non-solicitation and non-disclosure of confidential information of the Company.
The
Company and Mr. McManus had previously entered into two letter agreements (the “Letter Agreements”) providing for
the exercise of vested options by Mr. McManus (i) for a ninety (90) day period after his retirement with respect to stock options
granted under certain of the Company’s stock option plans and (ii) for two (2) years after Mr. McManus terminated his employment
with the Company in the event of a Change-in-Control (as defined in the applicable stock option plans) and he was eligible for
the severance benefits provided for by the McManus Agreement. The Company and Mr. McManus entered into a letter agreement to confirm
that the terms and conditions of the Letter Agreements continued to be in full force and effect and apply to the McManus Agreement.
McManus
Retirement Agreement
On
August 26, 2016, the Company and Mr. 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,
which supersedes the McManus Agreement and letter agreements dated May 22, 2015, July 1, 2012 and July 1, 2012, respectively,
the Company agreed to (i) pay Mr. McManus’ salary through June 30, 2017 at the 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 current levels upon timely election by Mr. McManus under
the law informally known as COBRA; and (iii) extend the exercisability of previously granted and currently vested options to purchase
shares of the Company’s Common Stock through June 30, 2017. In addition, Mr. McManus had continued use of the vehicle provided
him pursuant to the McManus Agreement through December 31, 2016.
The
Retirement Agreement provides for customary releases by the Company and Mr. McManus as well as customary provisions concerning
confidentiality, non-disparagement and cooperation.
The
Retirement Agreement also provided that through June 30, 2017, upon request of the Company’s (i) Board of Directors or (ii)
President and Chief Executive Officer, Mr. McManus would consult with the Company for up to ten (10) hours per month without compensation
therefor except for reimbursement of reasonable travel expenses.
Mr.
McManus shall continue to be entitled to indemnification to the extent permitted to him by the Company’s By-Laws and Certificate
of Incorporation. The Company has also agreed to maintain directors’ and officers’ liability insurance for Mr. McManus’
benefit, if any, that shall be no less favorable to him than such insurance made available to or for the benefit of former directors
or officers of the Company.
Dwyer Employment Agreement
On August 21, 2017, the Company entered into an Employment Agreement
(the “Dwyer Agreement”) with Joseph P. Dwyer pursuant to which Mr. Dwyer serves as the Company’s full time Chief
Financial Officer. Mr. Dwyer had been serving as Interim Chief Financial Officer of the Company since September 13, 2016.
Pursuant to the Dwyer Agreement, Mr. Dwyer’s initial term
of employment runs through August 21, 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. Dwyer will receive an annual base salary of not less
than two hundred seventy-five thousand dollars ($275,000) per annum, subject to review by the Board at least annually for increase
but not for decrease. Mr. Dwyer is also eligible to receive annual bonuses in the discretion of the Board. If the Company terminates
Mr. Dwyer’ employment without cause (as defined in the Dwyer Agreement), the Company provides a notice of non-renewal, or
Mr. Dwyer terminates his employment for good reason (as defined in the Dwyer Agreement), Mr. Dwyer shall be entitled to receive
(i) a lump-sum cash payment from the Company in an amount equal to fifty percent of the annual base salary if the applicable termination
of employment takes place prior to the first anniversary of the effective date of the Dwyer Agreement or one hundred percent of
the annual base salary if the applicable termination of employment takes place on or at any time after the first anniversary of
the effective date of the Dwyer Agreement and (ii) continuation of all employee benefits and fringe benefits to which he was entitled
under the Dwyer Agreement immediately prior to such termination of employment for a period of six or twelve months (as the case
may be based upon the same time criteria as the cash severance) following the termination of employment. The Dwyer Agreement also
contains non-competition and non-solicitation covenants from Mr. Dwyer during the term of employment and for a period of 12 months
thereafter.
In conjunction with the execution of the Dwyer Agreement, Mr.
Dwyer received a grant of a ten-year stock option to purchase one hundred thousand (100,000) shares (the “Dwyer Stock Option
Award”) of Company common stock, under the Misonix, Inc. 2017 Equity Incentive Plan or another equity plan adopted by the
Board and approved by the Company’s shareholders. The Dwyer Stock Option Award has an exercise price of $10.20 per share,
which equals the fair market value as defined in the plan and vests and becomes exercisable in four equal annual installments from
the date of grant.
Dwyer
Consulting Agreement
On
September 13, 2016, the Company appointed Joseph Dwyer as the Company’s interim Chief Financial Officer, reporting
to the Company’s Chief Executive Officer and Audit Committee. The Company entered into a Consulting Agreement,
dated September 13, 2016, with Dwyer Holdings LLC (“Dwyer Co.”) to provide Mr. Dwyer’s services to the
Company (the “Dwyer Consulting Agreement”). The Dwyer Consulting Agreement was in effect for a one (1) year
period, cancellable by either party upon five (5) days’ notice any time after the initial two (2) months of the term.
Dwyer Co. was paid $30,000 per month for Mr. Dwyer’s services. On October 25, 2016, the Company entered into Amendment
No. 1 to Consulting Agreement (the “Amendment”) with Dwyer Holdings LLC. The Amendment amends the Dwyer
Consulting Agreement solely to: (i) require that the Company provide Mr. Dwyer with coverage under its directors’
and officers’ liability policy that is no less favorable than the coverage then provided to any other present or
former executive, officer or director of the Company during the term of the Dwyer Consulting Agreement and for a period of at
least five years thereafter and (ii) provide that should Mr. Dwyer be required or requested by the Company to provide
documentary evidence or testimony in connection with any claim or legal matter arising from or connected with the services
provided under the Dwyer Consulting Agreement, the Company shall pay all reasonable expenses (including fees of legal
counsel) in complying therewith and, following the term of the Dwyer Consulting Agreement, $400 per hour for sworn testimony
or preparation therefor payable in advance. The Dwyer Consulting Agreement was superseded by the Dwyer Agreement described
above.
Executive
Severance Agreements
On
September 15, 2016, the Company and Richard A. Zaremba, Senior Vice President – Finance, entered into a letter agreement
(the “Zaremba Agreement”) which provides that in the event (i) Mr. Zaremba’s employment with the Company is
terminated by the Company on or before September 15, 2018 for any reason other than for Cause (as defined in the Zaremba Agreement),
the Company will pay him a one-time additional compensation equal to twelve (12) months annual base salary and (ii) of a Change
in Control of Misonix (as defined in the Zaremba Agreement) and his employment by the Company or the acquiring company ceases
(x) involuntarily or (y) voluntarily in accordance with the terms of the Zaremba Agreement, Mr. Zaremba will be entitled to a
one-time additional compensation equal to twelve (12) months annual base salary. The Zaremba Agreement contains standard provisions
regarding (i) execution of a release and covenant not to sue; (ii) cooperation; (iii) confidentiality; (iv) non-competition; (v)
non-solicitation; and (vi) non-disparagement.
On
September 15, 2016, the Company and Robert S. Ludecker, Senior Vice President, Global Sales and Marketing, entered into a letter
agreement (the “Ludecker Agreement”) which provides that in the event (i) Mr. Ludecker’s employment with the
Company is terminated by the Company on or before September 15, 2018 for any reason other than for Cause (as defined in the Ludecker
Agreement), the Company will pay him a one-time additional compensation equal to twelve (12) months annual base salary and (ii)
of a Change in Control of Misonix (as defined in the Ludecker Agreement) and his employment by the Company or the acquiring company
ceases (x) involuntarily or (y) voluntarily in accordance with the terms of the Ludecker Agreement, Mr. Ludecker will be entitled
to a one-time additional compensation equal to twelve (12) months annual base salary. The Ludecker Agreement contains standard
provisions regarding (i) execution of a release and covenant not to sue; (ii) cooperation; (iii) confidentiality; (iv) non-competition;
(v) non-solicitation; and (vi) non-disparagement.
Summary
of Potential Payments Upon Termination or Following a Change-In-Control
Severance
Agreement and Severance Payments
Except
as described above, we did not have severance agreements with any of our Executive Officers during fiscal 2017. As described above
under “- Employment and Severance Agreements,” we subsequently entered into a Retirement Agreement and General Release
with our former Chief Executive Officer Michael A. McManus, Jr., governing the terms of his retirement from the Company and entered
into severance letter agreements with Mr. Zaremba and Mr. Ludecker that provide for payment of twelve (12) months annual base
salary upon certain employment termination events.
Change-in-Control
and Change-in-Control Payments
In
the event of a change-in-control, we are required to make certain change-in-control payments to Mr. Zaremba, Mr. Ludecker, and
Mr. Voic under the terms of the change-in-control agreements. The agreements provide for twelve (12) months base salary upon change
in control of the Company.
The following table shows the benefits which would be received
by each of our named executive officers for severance and change-in-control events:
|
|
Severance Payments
|
|
|
Change-in-Control Payments
|
|
|
|
|
|
|
Employee
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Equity
|
|
|
|
|
|
|
Salary
|
|
|
Benefits
|
|
|
Total
|
|
|
Salary
|
|
|
Benefits
|
|
|
Awards
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
$
|
540,000
|
|
|
$
|
32,040
|
|
|
$
|
572,040
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,820,000
|
|
|
$
|
3,820,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
$
|
137,500
|
|
|
$
|
10,000
|
|
|
$
|
147,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
$
|
243,347
|
|
|
$
|
—
|
|
|
$
|
243,347
|
|
|
$
|
243,347
|
|
|
$
|
—
|
|
|
$
|
89,725
|
|
|
$
|
333,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
$
|
275,843
|
|
|
$
|
—
|
|
|
$
|
275,843
|
|
|
$
|
275,843
|
|
|
$
|
—
|
|
|
$
|
136,290
|
|
|
$
|
912,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
188,264
|
|
|
$
|
—
|
|
|
$
|
80,425
|
|
|
$
|
268,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
54,213
|
|
|
$
|
54,213
|
|
Tax deductibility of Executive Compensation
Section 162 (m) of the Code limits to $1,000,000 per person
the amount that we may deduct for compensation paid to any of our most highly compensated officers in any year. In fiscal 2017,
there was no executive officer’s compensation that exceeded $1,000,000 except for Stavros Vizirgianakis, our Chief Executive
Officer, based on the valuation of his equity compensation.
Summary of Compensation
The table and footnotes below describe the total compensation
paid for fiscal years ended June 30, 2017, June 30, 2016, and June 30, 2015 to the “named executive officers,” who
are each of the persons who served as our principal executive officer and principal financial officer during fiscal 2017, and the
three other most highly compensated individuals who were serving as executive officers of the Company on June 30, 2017, the last
day of the fiscal year.
SUMMARY COMPENSATION
TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
Name
|
|
Fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
and Principal
|
|
Ended
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Compen-
|
|
|
|
|
Position
|
|
June 30,
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Awards ($)
|
|
|
Awards ($)
|
|
|
sation ($)
|
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros Vizirgianakis
|
|
|
2017
|
|
|
$
|
180,000
|
|
|
|
|
|
|
$
|
3,637,388
|
|
|
|
|
|
|
$
|
124,020
|
(1)
|
|
$
|
3,941,408
|
|
President and Chief Executive
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Officer
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
|
2017
|
|
|
$
|
285,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
285,000
|
|
Chief Financial Officer
|
|
|
2016
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael A. McManus, Jr.
|
|
|
2017
|
|
|
$
|
54,167
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
348,263
|
(3)
|
|
$
|
402,430
|
|
Former President and Chief
|
|
|
2016
|
|
|
$
|
325,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
259,715
|
|
|
$
|
99,730
|
|
|
$
|
684,445
|
|
Executive Officer (2)
|
|
|
2015
|
|
|
$
|
290,008
|
|
|
$
|
100,000
|
|
|
|
—
|
|
|
$
|
1,314,695
|
|
|
$
|
96,291
|
|
|
$
|
1,800,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
|
2017
|
|
|
$
|
239,804
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
153,561
|
|
|
$
|
15,093
|
(5)
|
|
$
|
408,458
|
|
Senior Vice President of Finance,
|
|
|
2016
|
|
|
$
|
232,819
|
|
|
$
|
45,000
|
|
|
|
—
|
|
|
$
|
110,379
|
|
|
$
|
10,081
|
|
|
$
|
398,279
|
|
Secretary and Treasurer (4)
|
|
|
2015
|
|
|
$
|
226,038
|
|
|
$
|
25,000
|
|
|
|
—
|
|
|
$
|
178,374
|
|
|
$
|
10,731
|
|
|
$
|
440,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
|
2017
|
|
|
$
|
271,817
|
|
|
$
|
82,500
|
|
|
|
—
|
|
|
$
|
264,250
|
|
|
$
|
31,300
|
(6)
|
|
$
|
649,867
|
|
Senior Vice President-Medical
|
|
|
2016
|
|
|
$
|
263,900
|
|
|
$
|
65,000
|
|
|
|
—
|
|
|
$
|
110,379
|
|
|
$
|
8,194
|
|
|
$
|
447,473
|
|
Global Sales and Marketing
|
|
|
2015
|
|
|
$
|
215,098
|
|
|
$
|
45,000
|
|
|
|
—
|
|
|
$
|
748,751
|
|
|
$
|
8,376
|
|
|
$
|
1,017,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
|
2017
|
|
|
$
|
185,523
|
|
|
$
|
22,000
|
|
|
|
—
|
|
|
$
|
76,781
|
|
|
$
|
15,615
|
(7)
|
|
$
|
299,919
|
|
Vice President of
|
|
|
2016
|
|
|
$
|
180,119
|
|
|
$
|
25,000
|
|
|
|
—
|
|
|
$
|
128,776
|
|
|
$
|
11,885
|
|
|
$
|
345,780
|
|
Research and Development
|
|
|
2015
|
|
|
$
|
174,873
|
|
|
$
|
20,000
|
|
|
|
—
|
|
|
$
|
208,103
|
|
|
$
|
12,147
|
|
|
$
|
415,123
|
|
and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
|
2017
|
|
|
$
|
383,250
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
232,714
|
|
|
$
|
10,870
|
(8)
|
|
$
|
626,834
|
|
Vice President - U. S. Sales
|
|
|
2016
|
|
|
$
|
296,300
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
55,190
|
|
|
$
|
7,646
|
|
|
$
|
359,136
|
|
|
|
|
2015
|
|
|
$
|
248,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
59,458
|
|
|
$
|
8,246
|
|
|
$
|
315,704
|
|
|
(1)
|
Includes $65,020 of legal fees related to his employment contract with the Company and his visa application process, $10,000 for relocation costs, $3,900 for a car allowance and $10,000 for director fees prior to being appointed as Chief Executive Officer. Stock awards assume that all performance conditions are met. Refer to footnote 6 of the Consolidated Financial Statements for a description of the valuation method and inputs relating to the stock awards.
|
|
(2)
|
Mr. McManus retired from the Company effective September 2, 2016.
|
|
(3)
|
Includes $270,833 of severance payments, $58,617 of expenses for a Company-owned automobile and a driver, $26,229 of life insurance benefits and long term care insurance coverage.
|
|
(4)
|
On September 13, 2016, Mr. Zaremba (i) ceased serving as the Company’s Senior Vice President and Chief Financial Officer and (ii) was appointed Senior Vice President, Finance of the Company. He remains the Company’s Secretary and Treasurer.
|
|
(5)
|
Includes a car allowance, life and long term care insurance coverage.
|
|
(6)
|
Includes a $10,220 for a car allowance, life and long term care insurance coverage and $13,076 for a home security system.
|
|
(7)
|
Includes a car allowance, toll reimbursements and life and long term care insurance coverage.
|
|
(8)
|
Includes a car allowance, life and long term care insurance coverage.
|
Outstanding Equity Awards at Fiscal
Year-End
The following table sets forth information
regarding outstanding equity awards held as of June 30, 2017 by our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2017 FISCAL
YEAR END
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
|
(1)
Number of
Shares of
Stock That
Have Not
Not Vested
|
|
|
Market
Value of
Shares of
Stock That
Have Not
Vested
|
|
Stavros G. Vizirgianakis
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
134,000
|
(11)
|
|
$
|
1,279,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,000
|
(11)
|
|
$
|
1,270,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,000
|
(11)
|
|
$
|
1,270,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard A. Zaremba
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
—
|
(1)
|
|
|
2.96
|
|
|
|
9/13/2022
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
10,000
|
(3)
|
|
|
4.68
|
|
|
|
9/10/2023
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
15,000
|
(4)
|
|
|
7.67
|
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
22,500
|
(7)
|
|
|
9.38
|
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
30,000
|
(10)
|
|
|
9.25
|
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
2,500
|
(3)
|
|
|
4.68
|
|
|
|
9/10/2023
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
17,500
|
(4)
|
|
|
7.67
|
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
40,000
|
(8)
|
|
|
12.77
|
|
|
|
5/14/2025
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
22,500
|
(7)
|
|
|
9.38
|
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
31,000
|
(9)
|
|
|
6.76
|
|
|
|
11/3/2026
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
30,000
|
(10)
|
|
|
9.52
|
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
—
|
|
|
|
2.19
|
|
|
|
9/13/2021
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
—
|
(1)
|
|
|
2.96
|
|
|
|
9/13/2022
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
8,750
|
(3)
|
|
|
4.68
|
|
|
|
9/10/2023
|
|
|
|
|
|
|
|
|
|
|
|
17,500
|
|
|
|
17,500
|
(4)
|
|
|
7.67
|
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
|
|
|
|
8,750
|
|
|
|
26,250
|
(7)
|
|
|
9.38
|
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
(10)
|
|
|
9.52
|
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000
|
|
|
|
5,000
|
(4)
|
|
|
7.67
|
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
|
|
|
|
3,750
|
|
|
|
11,250
|
(7)
|
|
|
9.38
|
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
15,000
|
(9)
|
|
|
6.76
|
|
|
|
11/3/2026
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
35,000
|
(10)
|
|
|
9.52
|
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Options issued 09/13/12
and vest equally over 4 years.
|
|
(2)
|
Options issued 12/05/12
and vest equally over 4 years.
|
|
(3)
|
Options issued 09/10/13
and vest equally over 4 years.
|
|
(4)
|
Options issued 09/09/14
and vest equally over 4 years.
|
|
(5)
|
Options issued 05/22/15
and vest on June 30, 2017.
|
|
(6)
|
Options issued 08/19/2015
and vest equally over 4 years.
|
|
(7)
|
Options issued 08/18/2015
and vest equally over 4 years.
|
|
(8)
|
Options issued 05/14/2015
and vest equally on 11/14/2016, 5/14/2017, 5/14/2018 and 5/14/2019.
|
|
(9)
|
Options issued on 11/3/16
and vested equally over 4 years.
|
|
(10)
|
Options issued on 12/6/16
and vested equally over 4 years.
|
|
(11)
|
134,000 shares vesting in
five equal installments on September 1, 2017, 2018, 2019, 2020 and 2021; 133,000 shares vest 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 Company’s 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 133,000 shares vest 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 Company’s 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.
|
Equity Plans
As of June 30, 2017, the Company had the following stock plans
with options or other grants outstanding or available for issuance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
Expired /
|
|
|
|
|
|
For
|
|
Plan
|
|
Shares
|
|
|
Granted
|
|
|
Exercised
|
|
|
Forfeited
|
|
|
Outstanding
|
|
|
Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Employee Stock Option Plan
|
|
|
1,000,000
|
|
|
|
1,251,261
|
|
|
|
376,368
|
|
|
|
868,955
|
|
|
|
5,938
|
|
|
|
—
|
|
2005 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
547,125
|
|
|
|
484,250
|
|
|
|
48,925
|
|
|
|
13,950
|
|
|
|
—
|
|
2005 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
97,500
|
|
|
|
7,500
|
|
|
|
90,000
|
|
|
|
—
|
|
2009 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
619,925
|
|
|
|
357,227
|
|
|
|
123,100
|
|
|
|
139,598
|
|
|
|
3,175
|
|
2009 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
48,750
|
|
|
|
33,750
|
|
|
|
112,500
|
|
|
|
38,750
|
|
2012 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
664,000
|
|
|
|
111,250
|
|
|
|
188,250
|
|
|
|
364,500
|
|
|
|
24,250
|
|
2012 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
41,250
|
|
|
|
138,750
|
|
|
|
61,250
|
|
2014 Employee Equity Incentive Plan
|
|
|
750,000
|
|
|
|
480,000
|
|
|
|
—
|
|
|
|
154,000
|
|
|
|
326,000
|
|
|
|
24,000
|
|
2017 Equity Incentive Plan
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,191,236
|
|
|
|
901,425
|
|
Director Compensation
Directors are compensated through payment of a cash fee and
annual stock option grants. Commencing on January 1, 2017 and effective on May 9, 2017, each non-employee director received an
annual fee of $35,000 and the Chairman of the Audit Committee received $45,000. Commencing February 3, 2015, each non-employee
director received an annual fee of $20,000 and the Chairman of the Audit Committee received $25,000. Each non-employee director
was also reimbursed for reasonable expenses incurred while traveling to attend a meeting of the Board of Directors or while traveling
in furtherance of the business of the Company. In May 2017, the Chairman of the Audit Committee received a one time additional
payment of $25,000 in recognition of his services during the prior year.
The following table sets forth information for the fiscal year
ended June 30, 2017 with respect to the compensation of our directors.
|
|
DIRECTOR COMPENSATION FOR THE
|
|
|
|
2017
FISCAL YEAR
|
|
Name
|
|
Fees Earned
or Paid in Cash ($)
|
|
|
Option
Awards ($)
|
|
|
Total
($)
|
|
John
W. Gildea
|
|
$
|
23,750
|
|
|
|
|
|
$
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Charles
Miner III
|
|
$
|
23,750
|
|
|
|
|
|
$
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
T.
Guy Minetti
|
|
$
|
11,250
|
|
|
|
|
|
$
|
11,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros
G. Vizirgianakis
|
|
$
|
10,000
|
|
|
|
|
|
$
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
M. Patton
|
|
$
|
53,700
|
|
|
|
|
|
$
|
53,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
A. McBrayer
|
|
$
|
23,750
|
|
|
|
|
|
$
|
23,750
|
|
Outstanding options at June 30, 2017 for Messrs. Gildea and
Miner were 90,000 shares each, Mr. Vizirgianakis was 37,500 shares, Mr. McBrayer was 30,000 shares, Mr. Patton was 15,000 shares
and Mr. Minetti was 75,000.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters
.
The following table sets forth as of June 30, 2017, certain
information with regard to the ownership of the Company’s Common Stock by (i) each beneficial owner of 5% or more of the
Company’s Common Stock; (ii) each director; (iii) each executive officer named in the “Summary Compensation Table”
above; and (iv) all executive officers and directors of the Company as a group. Unless otherwise stated, the persons named in the
table have sole voting and investment power with respect to all Common Stock shown as beneficially owned by them.
Name and Address (1)
|
|
Common Stock
Beneficially
Owned
|
|
|
Percent
Of
Class
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
|
1,648,578
|
(2)
|
|
|
17.6
|
|
Michael A. McManus, Jr.
|
|
|
636,868
|
|
|
|
6.8
|
|
John W. Gildea
|
|
|
97,500
|
(3)
|
|
|
1.0
|
|
Patrick A. McBrayer
|
|
|
11,350
|
(4)
|
|
|
*
|
|
Charles Miner
|
|
|
85,000
|
(5)
|
|
|
*
|
|
Thomas M. Patton
|
|
|
3,750
|
(6)
|
|
|
*
|
|
Richard A. Zaremba
|
|
|
171,023
|
(7)
|
|
|
1.8
|
|
Robert S. Ludecker
|
|
|
84,943
|
(8)
|
|
|
*
|
|
Dan Voic
|
|
|
216,395
|
(9)
|
|
|
2.3
|
|
Christopher H. Wright
|
|
|
14,500
|
(10)
|
|
|
*
|
|
Joseph P. Dwyer
|
|
|
500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All executive officers and Directors as a group (Twelve people)
|
|
|
2,338,039
|
(11)
|
|
|
24.0
|
|
* Less than 1%
(1)
|
Except as otherwise noted, the business address of each of the named individuals in this table is c/o MISONIX, INC., 1938 New Highway, Farmingdale, New York 11735. Michael A. McManus has an address at 100 White Plains Road, Bronxville, New York 10708.
|
|
|
(2)
|
Includes 15,000 shares which Mr. Vizirgianakis has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
(3)
|
Includes 67,500 shares which Mr. Gildea has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(4)
|
Includes 11,250 shares which Mr. McBrayer has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(5)
|
Includes 67,500 shares which Dr. Miner has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(6)
|
Consists of shares which Mr. Patton has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(7)
|
Includes 39,500 shares which Mr. Zaremba has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(8)
|
Includes 80,000 shares which Mr. Ludecker has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(9)
|
Includes 77,500 shares which Mr. Voic has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(10)
|
Includes 12,500 shares which Mr. Wright has the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
|
|
(11)
|
Includes 378,000 shares which such persons have the right to acquire upon exercise of stock options which are exercisable within 60 days.
|
Equity Compensation Plan Information:
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
|
|
|
|
|
|
|
available for
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
future
|
|
|
|
securities to
|
|
|
-average
|
|
|
issuance
|
|
|
|
be
|
|
|
exercise
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
price of
|
|
|
compensation
|
|
|
|
exercise of
|
|
|
outstanding
|
|
|
plans
|
|
|
|
outstanding
|
|
|
options,
|
|
|
(excluding
|
|
|
|
options,
|
|
|
warrants
|
|
|
securities
|
|
|
|
warrants
|
|
|
and
|
|
|
reflected in
|
|
Plan category
|
|
and rights
|
|
|
rights
|
|
|
column (a))
|
|
|
|
|
(a)
|
|
|
|
(b)
|
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
|
|
|
|
|
|
|
|
|
|
I.2001 Plan
|
|
|
5,938
|
|
|
$
|
1.82
|
|
|
|
—
|
|
II. 2005 Plan
|
|
|
13,950
|
|
|
$
|
2.84
|
|
|
|
—
|
|
III. 2005 Directors Plan
|
|
|
90,000
|
|
|
$
|
3.04
|
|
|
|
—
|
|
IV. 2009 Plan
|
|
|
139,598
|
|
|
$
|
4.60
|
|
|
|
3,175
|
|
V. 2009 Directors Plan
|
|
|
112,500
|
|
|
$
|
5.56
|
|
|
|
38,750
|
|
VI. 2012 Plan
|
|
|
364,500
|
|
|
$
|
7.70
|
|
|
|
24,250
|
|
VII. 2012 Directors Plan
|
|
|
138,750
|
|
|
$
|
9.96
|
|
|
|
61,250
|
|
VIII. 2014 Plan
|
|
|
326,000
|
|
|
$
|
10.26
|
|
|
|
24,000
|
|
IX. 2017 Plan
|
|
|
|
|
|
$
|
—
|
|
|
|
750,000
|
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
1,191,236
|
|
|
$
|
7.66
|
|
|
|
901,425
|
|
Item 13. Certain Relationships and
Related Transactions, and Director Independence.
Director Compensation
Please see Item 11 - “Executive Compensation - Director
Compensation” for a discussion of options granted and other compensation to our non-employee directors.
Executive Compensation
Please see Item 11 - “Executive
Compensation” for additional information on compensation of our present and former executive officers. Information
regarding (1) an Employment Agreement, and a Retirement Agreement and General Release with Michael A. McManus, Jr., our
former President and Chief Executive Officer, (2) letter agreements with Richard A. Zaremba, our Senior Vice President
– Finance, and Robert S. Ludecker, our Senior Vice President, Global Sales and Marketing (3) an Employment Agreement
with Stavros G. Vizirgianakis, our current President and Chief Executive Officer and (4) an Employment Agreement and a
prior Consulting Agreement with Joseph Dwyer, our Chief Financial Officer.
Director Independence
The Company is required to have a Board of Directors a majority
of whom are “independent” as defined by the Corporate Governance Rules applicable to Nasdaq-listed companies and to
disclose those Directors that the Board has determined to be independent. Based on such definition, the Board has determined that
all directors other than Stavros G. Vizirgianakis, who is an officer of the Company, are independent. See “Item 10. Directors,
Executive Officers of the Registrant and Corporate Governance”.
Item 14. Principal Accountant Fees
and Services.
Audit Fees
Grant Thornton LLP (“Grant Thornton”) billed the
Company $509,482 and $960,351 in the aggregate for services rendered for the audit of the Company’s 2017 and 2016 fiscal
years, respectively, and the review of the Company’s interim financial statements included in the Company’s Quarterly
Reports on Form 10-Q for the Company’s 2017 and 2016 fiscal years, respectively.
Audit-Related Fees
Grant Thornton billed the Company $15,600 and $15,600 for audit-related
services as defined by the SEC for the fiscal years ended June 30, 2017 and 2016 respectively. The audit-related services were
for the audits of the Company’s pension plan.
Tax Fees
Grant Thornton billed the company $0 and $31,200 for tax related
services for the fiscal years ended June 30, 2017 and 2016 respectively.
Policy on Pre-approval of Independent Registered Public Accounting
Firm Services
The charter of the Audit Committee provides for the pre-approval
of all audit services and all permitted non-audit services to be performed for Misonix by the independent registered public accounting
firm, subject to the requirements of applicable law. The procedures for pre-approving all audit and non-audit services provided
by the independent registered public accounting firm include the Audit Committee reviewing audit-related services, tax services
and other services. The Audit Committee periodically monitors the services rendered by and actual fees paid to the independent
registered public accounting firm to ensure that such services are within the parameters approved by the Audit Committee.
Notes
to Consolidated Financial Statements
For
the Years Ended June 30, 2017, 2016, and 2015
1.
Basis of Presentation, Organization and Business and Summary of Significant Accounting Policies
Basis
of Presentation
These
consolidated financial statements of Misonix, Inc. (“Misonix” or the “Company”) include the accounts of
Misonix and its 100% owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain
historical 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 amounts 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 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 June 30, 2017 were $1,504,788.
Cash
and Cash Equivalents
The
Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
All of the Company’s cash is maintained in bank accounts and accordingly it does not have cash equivalents at June 30, 2017.
The Company’s cash balance at June 30, 2017 was $11,557,071.
The
Company maintains cash balances at various financial institutions. At June 30, 2017, these financial institutions held cash
that was approximately $11,325,285in excess of amounts insured by the Federal Deposit Insurance Corporation and other government
agencies.
Major
Customers and Concentration of Credit Risk
Included
in sales from continuing operations are sales to Cicel of $46,722, $1,557,132 and $2,974,086, for the fiscal years ended June
30, 2017, 2016 and 2015, respectively. There were no accounts receivable from Cicel at June 30, 2017 and 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 and sculpting products, which use high frequency sound waves to coagulate and divide tissue for both open and laparoscopic
surgery, were $3,764,000 , $3,903,000 and $4,162,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Accounts
receivable from MMIT royalties were approximately $925,000 and $973,000 at June 30, 2017 and 2016, respectively. The license agreement
with MMIT expired in August 2017.
At
June 30, 2017 and 2016, the Company’s accounts receivable with customers outside the United States were approximately $860,000
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.
Accounts
Receivable
Accounts
receivable, principally trade, are generally due within 30 to 90 days and are stated at amounts due from customers, net of
an allowance for doubtful accounts. The Company performs ongoing credit evaluations and adjusts credit limits based upon payment
history and the customer‘s current credit worthiness, as determined by a review of their current credit information. The Company
continuously monitors aging reports, collections and payments from customers and maintains a provision for estimated credit losses
based upon historical experience and any specific customer collection issues that have been identified. While such credit losses
have historically been within expectations and the provisions established, the Company cannot guarantee that the same credit loss
rates will be experienced in the future. The Company writes off accounts receivable when they become uncollectible.
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market and consist of raw materials, work-in process and finished goods
and include purchased materials, direct labor and manufacturing overhead. Management evaluates the need to record adjustments
to write down inventory to the lower of cost or market on a quarterly basis. The Company’s policy is to assess the valuation
of all inventories, including raw materials, work-in-process and finished goods and it writes down its inventory for estimated
obsolescence based upon the age of inventory and assumptions about future demand and usage. Inventory items used for demonstration
purposes, rentals or on consignment are classified as property, plant and equipment.
Property,
Plant and Equipment
Property,
plant and equipment are recorded at cost. Minor replacements and maintenance and repair expenses are charged to expense as incurred.
Depreciation of property and equipment is provided using the straight-line method over estimated useful lives ranging from 3 to
5 years. Leasehold improvements are amortized over the life of the lease or the useful life of the related asset, whichever
is shorter. The Company‘s policy is to periodically evaluate the appropriateness of the lives assigned to property, plant and
equipment and make adjustments if necessary. 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 BoneScapel and Sonic OneOR generators which
are consigned to customers are depreciated over a 5 year period, and depreciation is charged to selling expenses. See Note 4.
Revenue
Recognition
The
Company records revenue upon shipment for products shipped F.O.B. shipping point. Products shipped F.O.B. destination points are
recorded as revenue when received at the point of destination. Shipments under agreements with distributors are not subject to
return, and payment for these shipments is not contingent on sales by the distributor. Accordingly, the Company recognizes revenue
on shipments to distributors in the same manner as with other customers. Service contracts and royalty income are recognized when
earned. The Company generally warrantees its product for a 12 month period, and accordingly records a related warranty reserve.
Historical warranty costs have not been significant.
The
Company presents taxes collected from customers and remitted to governmental authorities in the consolidated statements of operations
on a net basis.
Long-Lived
Assets
The
carrying values of intangible and other long-lived assets, excluding goodwill, are periodically reviewed to determine if any impairment
indicators are present. If it is determined that such indicators are present and the review indicates that the assets will not
be fully recoverable, based on undiscounted estimated cash flows over the remaining amortization and depreciation period, their
carrying values are reduced to estimated fair value. Impairment indicators include, among other conditions, cash flow deficits,
an historic or anticipated decline in revenue or operating profit, adverse legal or regulatory developments, accumulation of costs
significantly in excess of amounts originally expected to acquire the asset and a material decrease in the fair value of some
or all of the assets. Assets are grouped at the lowest levels for which there are identifiable cash flows that are largely independent
of the cash flows generated by other asset groups. No such impairment was deemed to exist in fiscal 2017 and 2016.
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 this impairment test 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 in acquisition or during subsequent periods when tested for impairment. The Company completed
its annual goodwill impairment tests for fiscal 2017 and 2016 as of June 30th each year. No impairment of goodwill was deemed
to exist in fiscal 2017, 2016 and 2015.
Patents
The
cost of acquiring or processing patents is capitalized at cost. This amount is being amortized using the straight-line method
over the estimated useful lives of the underlying assets, which is approximately 17 years. Patents totaled $719,136 and $604,916
at June 30, 2017 and 2016, respectively. Amortization expense for the years ended June 30, 2017, 2016 and 2015 was approximately
$110,000, $94,000 and $150,000, respectively.
The
following is a schedule of estimated future patent amortization expense as of June 30, 2017 during the following fiscal years:
2018
|
|
$
|
116,375
|
2019
|
|
|
105,211
|
2020
|
|
|
81,782
|
2021
|
|
|
75,611
|
2022
|
|
|
49,642
|
Thereafter
|
|
|
290,515
|
|
|
$
|
719,136
|
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income in those periods in which temporary differences become deductible. Should
management determine that it is more likely than not that some portion of the deferred tax asset will not be realized, a valuation
allowance against the deferred tax asset would be established in the period such determination was made.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized
in the financial statements from such position are measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. The Company classifies income tax related interest and penalties as a component
of income tax expense.
Income
(Loss) Per Share
Basic
income (loss) per common share (“Basic EPS”) is computed by dividing income (loss) by the weighted average
number of common shares outstanding using the treasury stock method. Diluted income (loss) per common share (“Diluted
EPS”) is computed by dividing income (loss) by the weighted average number of common shares and the dilutive common
share equivalents and convertible securities then outstanding.
The
number of weighted average common shares used in the calculation of Basic EPS and Diluted EPS were as follows:
|
|
For the years ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Basic shares
|
|
|
8,398,778
|
|
|
|
7,776,949
|
|
|
|
7,580,450
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
513,669
|
|
Diluted shares
|
|
|
8,398,778
|
|
|
|
7,776,949
|
|
|
|
8,094,119
|
|
Excluded
from the calculation of Diluted EPS are options to purchase 257,000 shares of common stock for the twelve months ended
June 30, 2015. The excluded shares are any shares in which the average stock price for the year ended June 30 is less than
the exercise price of the outstanding options in the period in which the Company has net income. Diluted EPS for the
twelve months ended June 30, 2017 and 2016 presented is the same as Basic EPS, as the inclusion of the effect of common
share equivalents then outstanding would be anti-dilutive. For this reason, excluded from the calculations of diluted EPS for
the twelve months ended June 30, 2017 and 2016 are outstanding options to purchase 1,191,236 and 1,790,224
shares, respectively. Also excluded from the calculation of earnings per share are the 400,000 restricted stock awards which
we issued in December 2016 as none of the shares were vested as of June 30, 2017.
Research
and Development
All
research and development expenses are expensed as incurred and are included in operating expenses.
Advertising
Expense
The
cost of advertising is expensed in the period the advertising first takes place. The Company incurred approximately $76,000, $386,000
and $155,000 in advertising costs during the fiscal years ended June 30, 2017, 2016 and 2015, respectively. Advertising costs
are reported in selling expenses on the statement of operations.
Depreciation
Expense for Consigned Inventory
The
Company typically provides to its United States customers, on a consignment basis, the generators used to power its BoneScapel
and SonicOne products. Title to these generators remains at all times with the Company. When these generators are deployed in
the field at customer locations, the Company depreciates these units over a five year period and charges the depreciation to selling
expenses. Depreciation expense relating to consigned generators for the three years ended June 30, 2017 was $425,000, $416,000
and $232,000, respectively. Prior to fiscal 2017, consigned units were depreciated over a three year period. The impact of this
change in accounting estimate was a reduction in expense of approximately $283,000 for the year ended June 30, 2017, compared
to what the expense would have been without this change.
Shipping
and Handling
Shipping
and handling fees for the fiscal years ended June 30, 2017, 2016 and 2015 were approximately $119,000, $109,000 and $62,000
respectively, and are reported as a component of net sales. Shipping and handling costs for the fiscal years ended June 30,
2017, 2016 and 2015 were approximately $337,000, $142,000 and $87,000, respectively, and are reported as a component of selling
expenses.
Stock-Based
Compensation
The
Company measures compensation cost for all share based payments at fair value and recognizes the cost over the vesting period. The
Company uses the Black-Scholes method to value awards and utilizes the straight line amortization method to recognize the expense
associated with the awards with graded vesting terms.
Restricted
Stock Awards
The
Company measures compensation cost for all restricted stock awards at fair value and recognizes the cost over the vesting period. For
awards that have market conditions, the Company uses the Monte Carlo valuation method to value awards and utilizes the straight
line amortization method to recognize the expense associated with the awards with graded vesting terms. Where awards have
performance conditions, the Company will determine the probability of achieving those conditions and will record compensation
expense when it is probable that the conditions will be met.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (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. We have not yet selected a transition method and are 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.
In
August 2014, the FASB issued guidance on management‘s responsibility in evaluating whether there is substantial doubt about a
company‘s ability to continue as a going concern and related footnote disclosures. Management will be required to evaluate, at
each reporting period, whether there are conditions or events that raise substantial doubt about a company‘s ability to continue
as a going concern within one year from the date the financial statements are issued. This guidance is effective prospectively
for annual and interim reporting periods beginning in 2017; implementation of this guidance did not have a material effect on
the Company’s financial condition or results of operations.
In
November 2015, the FASB issued ASU 2015-17 “Balance Sheet Classification of Deferred Taxes (Topic 740)”. The amendments
in this ASU require deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
The amendments eliminate the guidance in Topic 740 that requires an entity to separate deferred tax liabilities and assets into
a current amount and a noncurrent amount in a classified statement of financial position. The Company adopted ASU 2015-17 as of
March 31, 2016 on a prospective basis in order to simplify the balance sheet classification of deferred taxes.
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
March 2016, the FASB issued guidance on simplifying several aspects of accounting for share-based payment award
transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. This guidance requires a mix of prospective, modified retrospective, and retrospective
transition to all annual and interim periods presented and is effective for the Company beginning in fiscal 2018. The Company
adopted this guidance on July 1, 2017. This guidance will be adopted by the Company on July 1, 2017 and management expects this to result in an increase in the Company’s deferred tax asset of approximately $2.5 million.
In
August 2016, the FASB issued guidance on the Statement of Cash Flows Classification of certain cash receipts and cash payments
(a consensus of the Emerging Issues Task Force). This guidance addresses the following eight specific cash flow issues: Debt prepayment
or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after
a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial
interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle.
This guidance will be 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
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 January 1, 2017.
In January 2017, the FASB issued ASU No.
2017-01,
Business Combinations: Clarifying the Definition of a Business
(“ASU 2017-01"). ASU 2017-01
clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 is effective for annual periods and interim periods within those annual periods beginning
after December 15, 2017, and early adoption is permitted. The Company is in the process of evaluating the impact of the adoption
of ASU 2017-01 on its consolidated 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 June 30, 2017 and 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:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Raw material
|
|
$
|
2,409,148
|
|
|
$
|
3,102,175
|
|
Work-in-process
|
|
|
741,994
|
|
|
|
854,631
|
|
Finished goods
|
|
|
3,267,232
|
|
|
|
3,101,234
|
|
|
|
|
6,418,374
|
|
|
|
7,058,040
|
|
Less valuation reserve
|
|
|
1,425,940
|
|
|
|
1,235,105
|
|
|
|
$
|
4,992,434
|
|
|
$
|
5,822,935
|
|
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery and equipment
|
|
$
|
2,452,363
|
|
|
$
|
2,128,349
|
|
Furniture and fixtures
|
|
|
1,406,758
|
|
|
|
1,387,883
|
|
Automobiles
|
|
|
22,328
|
|
|
|
22,328
|
|
Leasehold improvements
|
|
|
691,751
|
|
|
|
682,591
|
|
Demonstration and consignment inventory
|
|
|
6,951,583
|
|
|
|
5,247,946
|
|
|
|
|
11,524,783
|
|
|
|
9,469,097
|
|
Less: accumulated depreciation and amortization
|
|
|
(7,794,580
|
)
|
|
|
(6,976,282
|
)
|
|
|
$
|
3,730,203
|
|
|
$
|
2,492,815
|
|
Depreciation and amortization of property, plant and equipment
totaled approximately $957,000, $1,339,000 and $981,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
5. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current
liabilities:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and vacation
|
|
|
715,245
|
|
|
|
648,705
|
|
Accrued bonus
|
|
|
343,400
|
|
|
|
300,000
|
|
Accrued commissions
|
|
|
751,000
|
|
|
|
433,000
|
|
Professional fees
|
|
|
662,537
|
|
|
|
256,130
|
|
Litigation settlement
|
|
|
500,000
|
|
|
|
|
|
Deferred income
|
|
|
27,901
|
|
|
|
20,655
|
|
Severance
|
|
|
10,029
|
|
|
|
—
|
|
Other
|
|
|
336,026
|
|
|
|
228,847
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,346,138
|
|
|
$
|
1,887,337
|
|
6. Stock-Based Compensation Plans
At June 30, 2017, the Company had outstanding equity-linked
grants under eight stock-based compensation plans (the “Plans”), as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
Expired /
|
|
|
|
|
|
For
|
|
Plan
|
|
Shares
|
|
|
Granted
|
|
|
Exercised
|
|
|
Forfeited
|
|
|
Outstanding
|
|
|
Issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 Employee Stock Option Plan
|
|
|
1,000,000
|
|
|
|
1,251,261
|
|
|
|
376,368
|
|
|
|
868,955
|
|
|
|
5,938
|
|
|
|
—
|
|
2005 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
547,125
|
|
|
|
484,250
|
|
|
|
48,925
|
|
|
|
13,950
|
|
|
|
—
|
|
2005 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
97,500
|
|
|
|
7,500
|
|
|
|
90,000
|
|
|
|
—
|
|
2009 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
619,925
|
|
|
|
357,227
|
|
|
|
123,100
|
|
|
|
139,598
|
|
|
|
3,175
|
|
2009 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
48,750
|
|
|
|
33,750
|
|
|
|
112,500
|
|
|
|
38,750
|
|
2012 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
664,000
|
|
|
|
111,250
|
|
|
|
188,250
|
|
|
|
364,500
|
|
|
|
24,250
|
|
2012 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
41,250
|
|
|
|
138,750
|
|
|
|
61,250
|
|
2014 Employee Equity Incentive Plan
|
|
|
750,000
|
|
|
|
480,000
|
|
|
|
—
|
|
|
|
154,000
|
|
|
|
326,000
|
|
|
|
24,000
|
|
2017 Equity Incentive Plan
|
|
|
750,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
750,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,191,236
|
|
|
|
901,425
|
|
The compensation cost that has been charged against income for
these plans was $1,086,139, $1,629,644 and $1,107,250 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively, and
is recorded in the department associated with the employee to which the grants are issued. The expense for fiscal 2017 included
a charge to modify certain stock options of $81,765 and a reversal of stock compensation from prior periods due to forfeitures
of unvested options of $625,202. As of June 30, 2017, there was approximately $5,612,949 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements to be recognized over a weighted-average period of 3.2 years,
which includes $3,148,986 of unrecognized compensation expense on restricted stock awards.
Shares from option exercises
may be acquired by various methods. They may be acquired by (a) cash or certified check, (b) with previously acquired shares
of common stock having an aggregate fair market value, on the date of exercise, equal to the aggregate exercise price of
all options being exercised (provided that such shares were not acquired less than six (6) months prior to such
exercise date)
, (c) in certain circumstances by
surrendering options to acquire shares of common stock in exchange for the number of shares of common stock. Cash in the
amount of $332,592 was received from the exercise of stock options for the year ended June 30, 2017. The Company received
141,351 shares of common stock as payment for options exercised during the year ended June 30, 2017. During the year ended
June 30, 2017, the Company issued 280,200 treasury shares in connection with stock option exercises.
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 the price of the Common Stock on the
NASDAQ Stock Market on the date of grant as set forth in the 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 fiscal years ended June 30, 2017, 2016 and 2015 was $4.46, $4.68 and $5.70 per share, respectively. The fair
value was estimated based on the weighted average assumptions of:
|
|
For twelve months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rates
|
|
|
1.80
|
%
|
|
|
1.71
|
%
|
|
|
1.60
|
%
|
Expected option life in years
|
|
|
6.25
|
|
|
|
6.25
|
|
|
|
6.50
|
|
Expected stock price volatility
|
|
|
54.68
|
%
|
|
|
55.41
|
%
|
|
|
61.13
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of option activity under the Plans as of June 30,
2017, 2016 and 2015, and changes during the years ending on those dates is presented below:
|
|
Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Outstanding
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
Outstanding as of June 30, 2014
|
|
|
1,663,329
|
|
|
|
3.88
|
|
|
$
|
4,879,106
|
|
Vested and exercisable at June 30, 2014
|
|
|
967,056
|
|
|
|
3.81
|
|
|
$
|
2,937,802
|
|
Granted
|
|
|
549,000
|
|
|
|
10.11
|
|
|
|
|
|
Exercised
|
|
|
(579,463
|
)
|
|
|
4.11
|
|
|
|
|
|
Forfeited
|
|
|
(47,250
|
)
|
|
|
7.70
|
|
|
|
|
|
Expired
|
|
|
(28,000
|
)
|
|
|
8.00
|
|
|
|
|
|
Outstanding as of June 30, 2015
|
|
|
1,557,616
|
|
|
|
5.80
|
|
|
$
|
6,553,821
|
|
Vested and exercisable at June 30, 2015
|
|
|
620,256
|
|
|
|
3.19
|
|
|
$
|
3,911,604
|
|
Granted
|
|
|
320,000
|
|
|
|
8.80
|
|
|
|
|
|
Exercised
|
|
|
(82,737
|
)
|
|
|
4.60
|
|
|
|
|
|
Forfeited
|
|
|
(4,375
|
)
|
|
|
9.23
|
|
|
|
|
|
Expired
|
|
|
(280
|
)
|
|
|
5.82
|
|
|
|
|
|
Outstanding as of June 30, 2016
|
|
|
1,790,224
|
|
|
$
|
6.38
|
|
|
$
|
1,675,072
|
|
Vested and exercisable at June 30, 2016
|
|
|
813,349
|
|
|
$
|
3.82
|
|
|
$
|
1,501,208
|
|
Granted
|
|
|
327,500
|
|
|
|
8.34
|
|
|
|
|
|
Exercised
|
|
|
(527,663
|
)
|
|
|
3.30
|
|
|
|
|
|
Forfeited
|
|
|
(383,625
|
)
|
|
|
8.23
|
|
|
|
|
|
Expired
|
|
|
(15,200
|
)
|
|
|
8.51
|
|
|
|
|
|
Outstanding as of June 30, 2017
|
|
|
1,191,236
|
|
|
$
|
7.66
|
|
|
$
|
2,748,956
|
|
Vested and exercisable at June 30, 2017
|
|
|
517,361
|
|
|
$
|
6.33
|
|
|
$
|
1,923,794
|
|
The total fair value of shares vested during the year ended
June 30, 2017 was $1,213,325. The number and weighted-average grant-date fair value of non-vested stock options at the beginning
of fiscal 2017 was 977,000 and $4.96, respectively. The number and weighted-average grant-date fair value of stock options which
vested during fiscal 2017 was 248,625 and $4.88, respectively.
The following table summarizes information
about stock options outstanding and exercisable at June 30, 2017:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
Range of
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
|
|
|
|
Life
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
Prices
|
|
|
Number
|
|
|
(Yrs.)
|
|
|
Price
|
|
|
Number
|
|
|
Price
|
|
$0.85-$6.74
|
|
|
352,236
|
|
|
4.1
|
|
|
$
|
4.09
|
|
|
313,861
|
|
|
$
|
3.98
|
|
$6.75-$8.53
|
|
|
341,750
|
|
|
8.3
|
|
|
$
|
7.23
|
|
|
85,000
|
|
|
$
|
7.57
|
|
$8.54-13.89
|
|
|
497,250
|
|
|
8.4
|
|
|
$
|
10.49
|
|
|
118,500
|
|
|
$
|
11.65
|
|
|
|
|
1,191,236
|
|
|
7.1
|
|
|
$
|
7.66
|
|
|
517,361
|
|
|
$
|
6.33
|
|
Stock options are granted with exercise prices not less than
the fair market value of the Company’s Common Stock, at the time of the grant, with an exercise term as determined by the
compensation committee of the Company’s board of directors (the “Committee”) not to exceed 10 years. The Committee
determines the vesting period for the Company’s stock options. Generally, such stock options have vesting periods of immediate
to four years. Certain option awards provide for accelerated vesting upon meeting specific retirement, death or disability criteria,
and upon change of control.
Restricted Stock Awards
On December 15, 2016, the Company issued 400,000 shares of restricted
stock to its Chief Executive Officer. These awards vest over a period of up to five years, subject to meeting certain service,
performance and market conditions. These awards were valued at approximately $3.4 million and compensation expense recorded for
the year ended June 30, 2017 was $488,402. The awards contain a combination of vesting terms which include time vesting, performance
vesting relating to revenue achievement, and market vesting related to obtaining certain levels of Company stock prices. At June
30, 2017, the Company has estimated that it is probable that the performance conditions will be met. The awards were valued using
a Monte Carlo valuation model using a stock price at the date of grant of $9.60, a term of 3 to 5 years, a risk free interest rate
of 1.6% to 2.1% and a volatility factor of 66.5%.
7. 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.
The following is a schedule of future minimum lease payments,
by year and in the aggregate, under operating leases with initial or remaining terms of one year or more at June 30, 2017:
|
|
|
Operating
|
|
|
|
|
Leases
|
|
2018
|
|
|
|
353,659
|
|
2019
|
|
|
|
21,812
|
|
2020
|
|
|
|
21,812
|
|
2021
|
|
|
|
9,225
|
|
Total minimum lease payments
|
|
|
$
|
406,508
|
|
Certain of the leases provide for escalation clauses, renewal
options and the payment of real estate taxes and other occupancy costs. Rent expense for all operating leases was approximately
$428,000, $411,000 and $375,000 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
Purchase Commitments
As of June 30, 2017, 2016, and 2015, the Company had purchase
and inventory commitments totaling $2,859,718, $2,507,125 and $2,982,198, respectively.
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 March 24, 2017, the Court appointed Scalfani and another individual Misonix shareholder,
Tracey Angiuoli, as lead plaintiffs for purposes of pursuing the action on behalf of the putative class. The lead plaintiffs, on
behalf of the putative class, and the Company have reached a settlement in principle under which the Company would pay $500,000
to resolve the matter. That settlement is subject to approval by the district court. The Company believes it has various legal
and factual defenses to the allegations in the complaint, and intends to vigorously defend the action if the settlement is not
approved and finalized. The Company has accrued a liability of $500,000 as of June 30, 2017. The Company believes that its exposure
will be limited to its insurance company retention of $250,000.
Former Chinese Distributor - FCPA
For several months, with the assistance of outside counsel,
the Company conducted 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, the Company 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 ongoing 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. During its
distributorship relationship with the prior Chinese distributor from 2010 through 2016, the Company 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 lawsuits that already have been filed,
or investigations and fines imposed by local authorities. The investigative costs to date are approximately $2.5 million,
of which approximately $2.4 million was charged to general and administrative expenses during the fiscal year ended June 30, 2017.
Former Chinese Distributor – Litigation
On April 5, 2017, the Company’s former distributor in
China, Cicel (Beijing) Science & Technology Co., Ltd., filed a lawsuit against the Company and certain officers and directors
of the Company in the United States District Court for the Eastern District of New York, alleging that the Company improperly terminated
its contract with the former distributor. The complaint, which seeks various remedies, including compensatory and punitive damages,
specific performance and preliminary and post judgment injunctive relief, asserts various causes of action, including breach of
contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. 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.
Stockholder Derivative Litigation
On June 6, 2017, Irving Feldbaum, an individual shareholder
of Misonix, filed a lawsuit in the U.S. District Court for the Eastern District of New York. The complaint alleges claims against
the Company’s board of directors, its former CEO and CFO, certain of its former directors, and the Company as a nominal defendant
for alleged violations of Section 14(a) of the Securities Exchange Act of 1934 and state law claims for breach of fiduciary duty,
waste of corporate assets, and unjust enrichment. The complaint alleges that the Company incurred damages 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. The complaint also alleges that the Company’s
February 4, 2016 Proxy Statement contained false and misleading statements regarding executive compensation. The complaint seeks
the recovery of damages on behalf of the Company and the implementation of changes to corporate governance procedures. On June
16, 2017, Michael Rubin, another individual shareholder of Misonix, filed a case alleging similar claims in the same district court.
The cases are at their earliest stages; there has been no discovery and there is no trial date. The Company is not able either
to estimate the amount of potential loss it may recognize, if any, from these claims or to identify any changes in corporate governance
procedures it may undertake, if any, as a result of these claims.
8. Related Party Transactions
Stavros G. Vizirgianakis was appointed
to Misonix’s Board of Directors on May 7, 2013 and became the Company’s CEO in December 2016. Applied BioSurgical,
a company formerly owned by Mr. Vizirgianakis’ father and now owned by his brother, 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 each of the past three fiscal years and accounts receivable at June 30 for the indicated time periods below with Applied BioSurgical:
|
|
For the years ended June 30:
|
|
Applied BioSurgical
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
580,888
|
|
|
$
|
559,787
|
|
|
$
|
540,185
|
|
Accounts receivable
|
|
$
|
192,984
|
|
|
$
|
272,421
|
|
|
$
|
294,683
|
|
On October 25, 2016, the Company sold 761,469 shares of Common
Stock in a private placement to Stavros G. Vizirgianakis, the Company’s current Chief Executive Officer, at a price per share
of $5.253, representing total cash proceeds to the Company of approximately $4.0 million.
9. Income Taxes
Open tax years related to federal and state income tax filings
are for the years ended June 30, 2014, 2015, 2016 and 2017. The Company’s net operating loss carryforwards from closed
years can be adjusted by the tax authorities when they are utilized in an open year. The Company files state tax returns in California,
Florida, New Jersey, New York, Pennsylvania, Texas and various other states. During the current year, the Company received notification
from the Internal Revenue Service of an examination for the year ended June 30, 2015. As of June 30, 2017, no significant preliminary
audit findings were received by the Company and no reserves have been recorded. The Company’s foreign subsidiary, Misonix Ltd. filed tax returns in the United Kingdom. Open years related to
the United Kingdom for filing are June 30, 2015, 2016 and 2017. As of June 30, 2017 and 2016, the Company has no material unrecognized
tax benefits and no accrued interest and penalties.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets / (liabilities)
|
|
|
|
|
|
|
|
|
Bad debt reserves
|
|
$
|
34,243
|
|
|
$
|
34,151
|
|
Inventory reserves
|
|
|
676,733
|
|
|
|
624,808
|
|
Accruals and allowances
|
|
|
269,539
|
|
|
|
148,479
|
|
License fee and other income
|
|
|
—
|
|
|
|
2,139
|
|
Net operating loss carryforwards
|
|
|
3,500,826
|
|
|
|
2,204,637
|
|
Tax credits
|
|
|
455,916
|
|
|
|
406,070
|
|
Stock based compensation
|
|
|
451,892
|
|
|
|
839,611
|
|
Deferred gain - HIFU and Labcaire
|
|
|
149,222
|
|
|
|
156,275
|
|
Amortization
|
|
|
(594,306
|
)
|
|
|
(599,802
|
)
|
Depreciation
|
|
|
16,030
|
|
|
|
195,048
|
|
Other
|
|
|
3,182
|
|
|
|
12,004
|
|
|
|
|
4,963,277
|
|
|
|
4,023,420
|
|
Valuation Allowance
|
|
|
(628,730
|
)
|
|
|
(628,730
|
)
|
Total net deferred tax assets
|
|
$
|
4,334,547
|
|
|
$
|
3,394,690
|
|
Prior to June 30, 2014 and through March 31, 2015, the Company
had a full valuation allowance recorded against deferred tax assets. As of the year ended June 30, 2015, the Company reduced the
valuation allowance by $5,503,417. The change in the valuation allowance includes a $1,499,297 write-off of deferred tax assets
against its corresponding valuation allowance. The write-off primarily pertains to the loss in tax benefit for net operating losses
subject to limitations under federal tax law that precludes its utilization. In addition, during the fourth quarter of fiscal 2015,
based on the Company’s consideration of all available positive and negative evidence including achieving cumulative profitable
operating performance over the prior three years and the Company’s positive outlook for taxable income in the future, the
Company reevaluated its deferred tax asset. Based upon the guidance under ASC 740, the Company concluded that it was more likely
than not that the Company would realize the benefit of such deferred tax assets. The portion of the valuation allowance release
attributable to income in future years resulted in the recognition of a tax benefit of $2,892,000 in continuing operations in the
fourth quarter of fiscal 2015. The deferred tax asset will be realized against future income tax expense that would be payable
in the absence of the net operating loss carryforward. The Company still maintains a full valuation allowance on all foreign net
operating losses in the amount of $628,730.
At June 30, 2017, the Company has a gross deferred tax asset
of $4,963,277. Based upon the guidance under ASC 740, after consideration of all available positive and negative evidence, the
Company concluded that it was more likely than not that the Company would realize the benefit of its deferred tax assets. Accordingly,
the Company concluded that no valuation allowance was required at June 30, 2017. This determination was primarily based on the
Company’s forecasted taxable income for future periods. The forecast of future taxable income is based on judgments which
the Company has made regarding its ability to grow revenue both domestically and internationally, its ability to control costs,
its ability to introduce new products into the marketplace and its ability to achieve and maintain profitability.
As of June 30, 2017, the Company had approximately $10,781,000
of U.S. federal net operating loss carryforwards which expire in tax years between 2031 and 2037. Included in this amount are windfall
tax benefits related to exercised stock options of approximately $2,571,000, the benefit of which will be recorded in equity when
realized when the Company adopts ASU 2016-09 beginning in fiscal 2018. The Company has approximately $281,000 of research and development
tax credit carryforwards which expire in the tax years between 2026 and 2037. In addition, the Company has approximately
$175,000 of alternative minimum tax credit which has an indefinite carryforward period.
Significant components of the income tax expense (benefit) attributable
to continuing operations are as follows:
|
|
Year Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
4,962
|
|
|
$
|
59,686
|
|
State
|
|
|
5,424
|
|
|
|
17,012
|
|
|
|
44,361
|
|
Total current
|
|
|
5,424
|
|
|
|
21,974
|
|
|
|
104,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(990,016
|
)
|
|
|
(558,133
|
)
|
|
|
(2,845,039
|
)
|
State
|
|
|
(38,216
|
)
|
|
|
(37,192
|
)
|
|
|
(43,640
|
)
|
Total deferred
|
|
|
(1,028,232
|
)
|
|
|
(595,325
|
)
|
|
|
(2,888,679
|
)
|
|
|
$
|
(1,022,808
|
)
|
|
$
|
(573,351
|
)
|
|
$
|
(2,784,632
|
)
|
The reconciliation of income tax expense (benefit) computed
at the Federal statutory tax rates to income tax expense (benefit) is as follows:
|
|
Year ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Tax at federal statutory rates
|
|
$
|
(974,308
|
)
|
|
$
|
(646,828
|
)
|
|
$
|
856,604
|
|
State income taxes, net of federal benefit
|
|
|
(34,636
|
)
|
|
|
(13,319
|
)
|
|
|
29,278
|
|
Research credit
|
|
|
(50,000
|
)
|
|
|
(49,593
|
)
|
|
|
(70,401
|
)
|
Stock-based compensation
|
|
|
6,692
|
|
|
|
191,827
|
|
|
|
303,398
|
|
Deferred tax asset adjustments (1)
|
|
|
—
|
|
|
|
(100,939
|
)
|
|
|
—
|
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,914,045
|
)
|
Travel and entertainment
|
|
|
34,743
|
|
|
|
35,010
|
|
|
|
21,508
|
|
Other
|
|
|
(5,299
|
)
|
|
|
10,491
|
|
|
|
(10,974
|
)
|
|
|
$
|
(1,022,808
|
)
|
|
$
|
(573,351
|
)
|
|
$
|
(2,784,632
|
)
|
|
(1)
|
Relates to the correction
of two errors from the fiscal 2015 tax provision in fiscal 2016 as the net impact was not material.
|
10. Employee Profit Sharing Plan
The Company sponsors a retirement plan pursuant to Section 401(k)
of the Internal Revenue Code of 1986, as amended (the “Code”) for all full-time employees. Participants may contribute
a percentage of compensation not to exceed the maximum allowed under the Code, which was $24,000 if the employee was over 50 years
of age for the year ended June 30, 2017. The plan provides for a matching contribution by the Company of 10% of annual eligible
compensation contributed by the participants based on years of service, which amounted to $57,465, $52,145 and $46,636 for the
fiscal years ended June 30, 2017, 2016 and 2015, respectively.
11. 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 Years Ended June 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
|
$
|
20,328,676
|
|
|
$
|
16,091,651
|
|
|
$
|
12,833,377
|
|
Equipment
|
|
|
|
6,941,287
|
|
|
|
7,021,543
|
|
|
|
9,371,201
|
|
Total
|
|
|
$
|
27,269,963
|
|
|
$
|
23,113,194
|
|
|
$
|
22,204,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
|
$
|
14,866,772
|
|
|
$
|
11,277,449
|
|
|
$
|
8,449,215
|
|
Equipment
|
|
|
|
1,593,999
|
|
|
|
1,809,357
|
|
|
|
2,348,705
|
|
Total
|
|
|
$
|
16,460,771
|
|
|
$
|
13,086,806
|
|
|
$
|
10,797,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
|
$
|
5,461,904
|
|
|
$
|
4,814,202
|
|
|
$
|
4,384,162
|
|
Equipment
|
|
|
|
5,347,288
|
|
|
|
5,212,186
|
|
|
|
7,022,496
|
|
Total
|
|
|
$
|
10,809,192
|
|
|
$
|
10,026,388
|
|
|
$
|
11,406,658
|
|
Substantially all of the Company’s long-lived assets are
located in the United States.
12. Quarterly Results (unaudited)
|
|
Fiscal 2017
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
Net sales
|
|
$
|
6,171,625
|
|
|
$
|
6,030,380
|
|
|
$
|
7,177,763
|
|
|
$
|
7,890,195
|
|
|
$
|
27,269,963
|
|
Cost of goods sold
|
|
|
1,912,007
|
|
|
|
1,818,672
|
|
|
|
2,112,099
|
|
|
|
2,374,661
|
|
|
|
8,217,439
|
|
Gross profit
|
|
|
4,259,618
|
|
|
|
4,211,708
|
|
|
|
5,065,664
|
|
|
|
5,515,534
|
|
|
|
19,052,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
3,325,687
|
|
|
|
3,271,134
|
|
|
|
3,587,859
|
|
|
|
4,036,227
|
|
|
|
14,220,907
|
|
General and administrative expenses
|
|
|
1,931,821
|
|
|
|
2,087,419
|
|
|
|
2,484,962
|
|
|
|
3,091,004
|
|
|
|
9,595,206
|
|
Research and development expenses
|
|
|
492,084
|
|
|
|
440,364
|
|
|
|
465,863
|
|
|
|
439,186
|
|
|
|
1,837,497
|
|
Total operating expenses
|
|
|
5,749,592
|
|
|
|
5,798,917
|
|
|
|
6,538,684
|
|
|
|
7,566,417
|
|
|
|
25,653,610
|
|
Loss from operations
|
|
|
(1,489,974
|
)
|
|
|
(1,587,209
|
)
|
|
|
(1,473,020
|
)
|
|
|
(2,050,883
|
)
|
|
|
(6,601,086
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
19
|
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
|
|
75
|
|
Royalty income and license fees
|
|
|
944,068
|
|
|
|
949,048
|
|
|
|
953,235
|
|
|
|
925,259
|
|
|
|
3,771,610
|
|
Other
|
|
|
(1,996
|
)
|
|
|
(6,640
|
)
|
|
|
(6,940
|
)
|
|
|
(20,635
|
)
|
|
|
(36,211
|
)
|
Total other income
|
|
|
942,091
|
|
|
|
942,427
|
|
|
|
946,313
|
|
|
|
904,643
|
|
|
|
3,735,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from continuing operations before income taxes
|
|
|
(547,883
|
)
|
|
|
(644,782
|
)
|
|
|
(526,707
|
)
|
|
|
(1,146,240
|
)
|
|
|
(2,865,612
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
|
|
|
(26,000
|
)
|
|
|
(30,000
|
)
|
|
|
(219,000
|
)
|
|
|
(747,808
|
)
|
|
|
(1,022,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from continuing operations
|
|
$
|
(521,883
|
)
|
|
$
|
(614,782
|
)
|
|
$
|
(307,707
|
)
|
|
$
|
(398,432
|
)
|
|
$
|
(1,842,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations net of income tax expense of $0,$0, $0 and $88,375, respectively
|
|
|
|
|
|
|
|
|
|
|
161,861
|
|
|
|
(236
|
)
|
|
|
161,625
|
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
161,861
|
|
|
|
(236
|
)
|
|
|
161,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(521,883
|
)
|
|
$
|
(614,782
|
)
|
|
$
|
(145,846
|
)
|
|
$
|
(398,668
|
)
|
|
$
|
(1,681,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share from continuing operations - Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share from discontinued operations - Basic
|
|
|
—
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - Basic
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share from continuing operations - Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share from discontinued operations - Diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - Diluted
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.20
|
)
|
|
|
Fiscal 2016
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
Net sales
|
|
$
|
5,250,985
|
|
|
$
|
6,039,355
|
|
|
$
|
5,426,147
|
|
|
$
|
6,396,707
|
|
|
$
|
23,113,194
|
|
Cost of goods sold
|
|
|
1,760,699
|
|
|
|
1,957,900
|
|
|
|
1,859,749
|
|
|
|
2,062,278
|
|
|
|
7,640,626
|
|
Gross profit
|
|
|
3,490,286
|
|
|
|
4,081,455
|
|
|
|
3,566,398
|
|
|
|
4,334,429
|
|
|
|
15,472,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expenses
|
|
|
2,656,280
|
|
|
|
2,991,687
|
|
|
|
3,319,385
|
|
|
|
3,665,609
|
|
|
|
12,632,961
|
|
General and administrative expenses
|
|
|
1,803,920
|
|
|
|
1,675,090
|
|
|
|
1,515,559
|
|
|
|
1,834,947
|
|
|
|
6,829,516
|
|
Research and development expenses
|
|
|
399,994
|
|
|
|
392,068
|
|
|
|
548,278
|
|
|
|
499,139
|
|
|
|
1,839,479
|
|
Total operating expenses
|
|
|
4,860,194
|
|
|
|
5,058,845
|
|
|
|
5,383,222
|
|
|
|
5,999,695
|
|
|
|
21,301,956
|
|
Loss from operations
|
|
|
(1,369,908
|
)
|
|
|
(977,390
|
)
|
|
|
(1,816,824
|
)
|
|
|
(1,665,266
|
)
|
|
|
(5,829,388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
19
|
|
|
|
25
|
|
|
|
19
|
|
|
|
18
|
|
|
|
81
|
|
Royalty income and license fees
|
|
|
988,170
|
|
|
|
1,018,362
|
|
|
|
963,025
|
|
|
|
979,200
|
|
|
|
3,948,757
|
|
Other
|
|
|
(6,021
|
)
|
|
|
(5,413
|
)
|
|
|
(5,464
|
)
|
|
|
(4,980
|
)
|
|
|
(21,878
|
)
|
Total other income
|
|
|
982,168
|
|
|
|
1,012,974
|
|
|
|
957,580
|
|
|
|
974,238
|
|
|
|
3,926,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) from continuing operations before income taxes
|
|
|
(387,740
|
)
|
|
|
35,584
|
|
|
|
(859,244
|
)
|
|
|
(691,028
|
)
|
|
|
(1,902,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit)
|
|
|
(168,000
|
)
|
|
|
(139,000
|
)
|
|
|
(15,000
|
)
|
|
|
(251,351
|
)
|
|
|
(573,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) from continuing operations
|
|
$
|
(219,740
|
)
|
|
$
|
174,584
|
|
|
$
|
(844,244
|
)
|
|
$
|
(439,677
|
)
|
|
$
|
(1,329,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations net of income tax expense of $0,$0, $0 and $88,375, respectively
|
|
|
—
|
|
|
|
—
|
|
|
|
165,000
|
|
|
|
(8,069
|
)
|
|
|
156,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
165,000
|
|
|
|
(8,069
|
)
|
|
|
156,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(219,740
|
)
|
|
$
|
174,584
|
|
|
$
|
(679,244
|
)
|
|
$
|
(447,746
|
)
|
|
$
|
(1,172,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share from continuing operations - Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share from discontinued operations - Basic
|
|
|
—
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - Basic
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share from continuing operations - Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.11
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share from discontinued operations - Diluted
|
|
|
—
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
—
|
|
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.15
|
)
|
Schedule II
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
charged
|
|
|
|
|
|
Balance at
|
|
|
|
|
beginning
|
|
|
to cost and
|
|
|
|
|
|
end of
|
|
Description
|
|
|
of period
|
|
|
expenses
|
|
|
(Deductions)
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts Years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
96,868
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
96,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
126,868
|
|
|
$
|
(30,000
|
)(A)
|
|
$
|
—
|
|
|
$
|
96,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
$
|
136,868
|
|
|
$
|
(10,000
|
)(A)
|
|
$
|
—
|
|
|
$
|
126,868
|
|
|
(A)
|
Reduction in allowance for doubtful accounts due to
adjustment in reserve balance.
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
charged (credited)
|
|
|
|
|
|
Balance at
|
|
|
|
|
beginning
|
|
|
to cost and
|
|
|
|
|
|
end of
|
|
Description
|
|
|
of period
|
|
|
expenses
|
|
(Deductions)
|
|
|
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation allowance Year ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
628,730
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
628,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
628,730
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
628,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
$
|
6,132,147
|
|
|
$
|
(1,111,693
|
)
|
|
$
|
(4,391,724
|
)(A)
|
|
$
|
628,730
|
|
|
(A)
|
Reduction in deferred tax valuation allowance due
to reevaluation of deferred tax assets.
|