Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant
is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). ☑
Yes ☐ No
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. ☑
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller
reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate
by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of the voting
stock held by non-affiliates of the registrant on December 31, 2017 (computed by reference to the closing price of such stock on
such date) was approximately $71,441,583.
There were 9,442,095 shares of Common Stock
outstanding at August 29, 2018.
In this document, we refer to Misonix,
Inc. and its subsidiaries (unless the context otherwise requires) as “we,” the “Company” or “Misonix.”
With the exception of historical information contained in this Form 10-K, content herein may contain “forward looking statements”
that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements
are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot guarantee
that any forward looking statements will be accurate, although we believe that we have been reasonable in our expectations and
assumptions. Investors should realize that if underlying assumptions prove inaccurate or unknown risks or uncertainties materialize,
actual results could vary materially from our expectations and projections. These factors include general economic conditions,
delays and risks associated with the performance of contracts, risks associated with international sales and currency fluctuations,
uncertainties as a result of research and development, acceptable results from clinical studies, including publication of results
and patient/procedure data with varying levels of statistical relevance, risks involved in introducing and marketing new products,
regulatory compliance, potential acquisitions, consumer and industry acceptance, litigation and/or contemplated 510(k) filings,
the ability to achieve and maintain profitability in our business lines, and other factors discussed in this Annual Report on Form
10-K, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. We disclaim any obligation to update any forward-looking
statements.
PART I
Item 1. Business
Overview
Misonix, Inc. is a New York corporation
based in Farmingdale, New York. We design, manufacture and market minimally invasive therapeutic ultrasonic medical devices. Our
products enhance clinical outcomes and provide value to customers and patients. We believe that our current focus products have
the ability to become standard of care and provide the Company with a growing revenue stream.
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BoneScalpel® Surgical System (“BoneScalpel”),
which is used for surgical procedures involving the precise cutting and sculpting of bone while sparing soft tissue. BoneScapel
is now recognized by many surgeons globally as a critical surgical tool 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, wound care and maxillo-facial surgery.
In the United States, our products are
marketed primarily through a hybrid sales approach. This includes direct sales representatives, managed by regional sales managers,
along with independent distributors.
Outside the United States, we sell
our products 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.
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 and removal,
leading to substantial time savings and increased operation efficiencies.
The expanded BoneScalpel product platform
will allow entry into dynamic market segments like minimally invasive spine surgery and other bone cutting and sculpting needs.
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.
License and Other Agreements
On October 19, 2017, the Company entered
into a License and Exclusive Manufacturing Agreement (the “Agreement”) with Hunan Xing Hang Rui Kang Bio-technologies
Co., Ltd., a Chinese corporation (the “Licensee”) under which Misonix has licensed certain manufacturing and distribution
rights to its SonaStar product line in China, Hong Kong and Macau (the “Territory”) in exchange for payments totaling
at least $11,000,000.
Pursuant to the Agreement, Licensee is
obligated to pay the Company: (i) initial amounts consisting of upfront fees and stocking orders totaling $5,000,000, payable in
five (5) equal monthly installments of $1,000,000 each; (ii) royalty payments from the sale of SonaStar products in the Territory,
including minimum royalty payments of $2,000,000 per calendar year in each of 2019, 2020, and 2021; and (iii) reimbursement of
technology transfer costs in an amount up to $1,000,000. The Agreement also provides that Misonix will supply SonaStar products
to Licensee at agreed prices during the transition period prior to Licensee’s commencement of manufacturing.
During the year ended June 30, 2018, the
Company delivered the licensed SonaStar technology to the Licensee, and recorded license revenue of $4,010,000. In addition, during
the year ended June 30, 2018, the Company had delivered the contractually agreed number of SonaStar units to the Licensee and had
recorded product revenue of $990,000. All of the $5 million of initial payments were collected as of March 31, 2018.
In October 1996, we entered into a license
agreement with Medtronic Minimally Invasive Therapies (“MMIT”). The MMIT license covered 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
$525,000, $3,764,000 and $3,903,000 for the fiscal years ended June 30, 2018, 2017 and 2016, 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.
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. Fiscal
2018 payments were $250,000 bringing cumulative payments through June 30, 2018 to $2,542,579.
Customers
For the fiscal year ended June 30, 2018,
one customer, Hunan Xing Hang Rui Kang Bio-technologies Co., Ltd., accounted for 15.8% of our revenue. During the fiscal years
ended June 30, 2017 and 2016, we did not have any customer that accounted for 10% or more of our net sales during such periods.
Research & Development
As of June 30, 2018, our Research
and Development (“R&D”) organization consisted of a staff of 10 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. The Company is currently developing its Nexus next generation surgical platform, resulting in higher
research and development expenditures in the current fiscal year.
During the three years ended June 30, 2018,
the Company incurred R&D expenses of $4,394,149, $1,837,497, and $1,839,479, or 12.0%, 6.7% and 8.0% of sales, respectively.
Revenue by Region
The Company’s revenues are generated
from various regions throughout the world. Sales by the Company outside the United States are made through distributors. Sales
made in the United States are made primarily through its direct sales force and some distributors. The following is an analysis
of net sales from continuing operations by geographic region:
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For the years ended June 30,
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Net Change
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2018
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2017
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2016
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2018
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2017
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Domestic
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$
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20,044,363
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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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21.8
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%
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25.8
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%
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International
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16,635,463
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10,809,192
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10,026,388
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53.9
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%
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7.8
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%
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Total
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$
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36,679,826
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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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34.5
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%
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18.0
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%
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Our international sales include a concentration
in China, aggregating $6,969,258, $1,335,667, and $1,557,132 for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Fiscal 2018 international sales include $4,010,000 of license revenue.
Manufacturing and Supply
The Company largely 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 21 CFR 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 14 in Europe, 9 in Japan and 15 in Canada, 2 in China 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, 2018, the Company’s
backlog (firm orders that have not yet been shipped) was $209,648 as compared to $397,660 as of June 30, 2017. 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, 2018, the Company employed
a total of 118 full-time employees. 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
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 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.
We have a recent history of net losses.
We have experienced losses from continuing
operations during the last three fiscal years. The loss from continuing operations before income taxes was approximately $2.4 million
for the 2018 fiscal year, and the accumulated deficit was approximately $15.5 million as of June 30, 2018. There can be no assurance
that we will be able to return to operating profitability in the near-term or at all. As of June 30, 2018, we had a cash balance
of approximately $11.0 million. Although we believe this amount is sufficient to finance our operations for at least the next 12
months, there can be no assurance that this will provide sufficient liquidity for longer-term operations or initiatives. Our cash
flows may be impacted by a number of factors, including changing market conditions, market acceptance of our new and existing products,
and the loss of one or more key customers. There can be no assurance that we will be successful in raising additional capital if
the need arises. The failure to raise any necessary additional capital on acceptable terms, or at all, may have a material adverse
effect on our future business and results of operations.
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 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 sought various remedies, including compensatory and
punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action,
including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On
October 7, 2017, the court granted the Company’s motion to dismiss all of the tort claims asserted against it, and also granted
the individual defendants’ motion to dismiss all claims asserted against them. The only claim remaining in the case is for
breach of contract against the Company. 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; discovery is just beginning 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 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. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 16, 2018,
the Company and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in
principle. There are aspects of the settlement that remain to be negotiated and documented, and the settlement is subject to approval
by the District Court after notice to the Company’s shareholders.
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.
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 revenues
of approximately $8 million.
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 $3.0 million, of which
approximately $0.5 million, $2.4 million and $0.1 million was charged to general and administrative expenses during the years ended
June 30, 2018, 2017 and 2016 respectively.
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 the Company as supplier 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 poor business practices, 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 the Company’s 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, 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, however through
an act of Congress, the excise tax was suspended from January 1, 2016 to December 31, 2017. On January 22, 2018, Congress passed
another suspension of the tax from January 1, 2018 through December 31, 2020.
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
including the imposition of international trade sanctions and tariffs. Certain state governments and the federal government have
enacted legislation aimed at increasing transparency of our interactions with health care providers. Any failure to comply with
these legal and regulatory requirements could impact our business.
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 September 30, 2019. The Company pays rent
of approximately $28,000 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 - FCPA
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 (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 revenues
of approximately $8 million.
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 $3.0 million, of which
approximately $0.5 million, $2.4 million and $0.1 million was charged to general and administrative expenses during the years ended
June 30, 2018, 2017 and 2016 respectively.
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 sought various remedies, including compensatory and
punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action,
including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On
October 7, 2017, the court granted the Company’s motion to dismiss all of the tort claims asserted against it, and also granted
the individual defendants’ motion to dismiss all claims asserted against them. The only claim remaining in the case is for
breach of contract against the Company. 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; discovery is just beginning 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. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 16, 2018,
the Company and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in
principle. There are aspects of the settlement that remain to be negotiated and documented, and the settlement is subject to approval
by the District Court after notice to the Company’s shareholders.
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 August 15, 2018:
Name
|
|
Age
|
|
Principal Occupation
|
|
Director
Since
|
|
|
|
|
|
|
|
|
|
Patrick A. McBrayer
|
|
66
|
|
Director
|
|
2014
|
|
|
|
|
|
|
|
|
|
Dr. Charles Miner III
|
|
66
|
|
Director
|
|
2005
|
|
|
|
|
|
|
|
|
|
Thomas M. Patton
|
|
54
|
|
Director
|
|
2015
|
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
47
|
|
President, Chief Executive Officer and Director
|
|
2013
|
|
|
|
|
|
|
|
|
|
Gwendolyn A. Watanabe
|
|
47
|
|
Director
|
|
2018
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
62
|
|
Chief Financial Officer
|
|
—
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
50
|
|
Senior Vice President, Global Sales and Marketing
|
|
—
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
56
|
|
Vice President of Research and Development and Engineering
|
|
—
|
|
|
|
|
|
|
|
|
|
Joseph J. Brennan
|
|
55
|
|
Vice President of Operations
|
|
—
|
|
|
|
|
|
|
|
|
|
John J. Salerno
|
|
63
|
|
Vice President of Quality and Regulatory Affairs and Chief Compliance Officer
|
|
—
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
44
|
|
Vice President of Domestic Sales
|
|
—
|
|
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
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.
Dr. Charles Miner III
currently
practices internal medicine in Darien, Connecticut and is employed by Stamford Health Medical Group. He is also a director of Castle
Connolly Private Health Partners, LLC and CEO of Castle Connolly Lifestream MD, LLC. 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.
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 was a co-founder and CEO of QDx, Inc., a start-up
company that developed a platform for hematology diagnostics beginning in 2003 which was sold to Abbott Laboratories. 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. Mr. Patton has served
on the board of directors of various public and private healthcare companies. The Board believes Mr. Patton’s industry knowledge
and experience qualify 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 became one of the largest privately owned medical device distributors
in the African region, and 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 and his vast international business relationships
qualify him to serve as a Director.
Gwendolyn A. Watanabe
, who joined
the Company’s board of directors in July 2018, served since 2013 as Global Vice President Corporate Development & Strategy
for Teleflex Incorporated, a NYSE-listed global provider of medical technology products. From 2012-2013, she served as Vice
President of the Cardiac Care Business Unit of Teleflex Incorporated, and from 2009-2012 she was President and Chief Executive
Officer of Hotspur Technology, Inc. prior to its acquisition by Teleflex Incorporated. From 2004-2009 Ms. Watanabe served as Chief Financial Officer and
Chief Business Officer of Nellix, Inc. Prior thereto, she served in executive capacities at Bacchus Vascular, Inc. and AneuRx,
Inc. She has also been a General Partner of the medical device venture funds Saratoga Ventures V, L.P. and Saratoga Ventures VI,
L.P. Ms. Watanabe is a graduate of the Massachusetts Institute of Technology, and holds an M.S. in Mechanical Engineering from
Stanford University and an M.B.A. from Harvard University Graduate School of Business. The Board believes Ms. Watanabee’s
industry knowledge and experience qualifies her 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 as the Company’s Treasurer and Secretary since September 2017,
and previously served as Interim Chief Financial Officer from September 2016 to August 2017. 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.
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 and also assumed the position of Chief Compliance Officer in April 2018. 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 2018.
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
.
Nomination
of Directors
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 committee are Messrs. Patton, McBrayer and Ms. Watanabe. Mr. Patton chairs the committee.
John W. Gildea, a former member of the Board, served on the Audit Committee until July 2018. Each current member of the committee,
and each member who served during the 2018 fiscal year, is independent as defined in Rule 10A-3 of the Securities and Exchange
Commission and the listing standards of Nasdaq. The Board of Directors has determined that Messrs. Patton and McBrayer each qualifies
as an “audit committee financial expert,” as that term is defined in Regulation S-K of the Securities and Exchange
Commission.
Item 11.
Executive
Compensation.
Compensation Discussion and Analysis
Overview of Compensation Program
and Philosophy
Our compensation program is intended to:
|
●
|
Attract, motivate, retain and reward employees of outstanding ability;
|
|
●
|
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 evaluated against local companies of similar size and nature. During the fiscal year ended June 30, 2018, Messrs.
Vizirgianakis, Dwyer, Ludecker and Voic each received base salary increases of 3.0% based on performance.
Annual Bonus Plan Compensation
The Compensation Committee of the Board
approves annual performance-based compensation. The purpose of the annual bonus 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 2018
based on performance were as follows: $167,000 to Mr. Vizirgianakis, $85,000 to Mr. Dwyer, $170,500 to Mr. Ludecker, and $39,000
to Mr. Voic. Mr. Wright’s performance-based compensation is commission based and he therefore did not participate in the
bonus plan.
Equity Incentive Awards
Company executives are eligible to receive
restricted stock and stock options (which gives 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 2018 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
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
8/21/2017
|
|
|
100,000
|
|
$
|
582,770
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
11/2/2017
|
|
|
12,000
|
|
$
|
66,238
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
11/2/2017
|
|
|
24,000
|
|
$
|
132,476
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
11/2/2017
|
|
|
12,000
|
|
$
|
66,238
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
11/2/2017
|
|
|
12,000
|
|
$
|
66,238
|
|
The stock options awarded on August 21,
2017 had an exercise price of $10.20 (which was equal to the closing market price per share of our stock on the date of grant).
The stock options awarded on November 2, 2017 had an exercise price of $10.25 (which was equal to the 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.
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, 2018 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 2018, Messrs. McBrayer, Miner
and Patton served as members of our Compensation Committee. No Member of our Compensation Committee is or was during fiscal year
2018 an employee or an officer of Misonix or its subsidiaries.
Summary of Compensation
The table and footnotes below describe
the total compensation for fiscal years ended June 30, 2018, June 30, 2017, and June 30, 2016 earned by the “named executive
officers,” who are each of the persons who served as our principal executive officer and principal financial officer during
fiscal 2018, and the three other most highly compensated individuals who were serving as executive officers of the Company on June
30, 2018, the last day of the fiscal year.
SUMMARY COMPENSATION
TABLE
Name and Principal Position
|
|
Fiscal year
Ended
June 30,
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock
Awards ($)
|
|
|
Option
Awards ($)
|
|
|
All Other
Compensation ($)
|
|
Total ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros Vizirgianakis
|
|
2018
|
|
|
$
|
365,400
|
|
|
$
|
167,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,907
|
(1)
|
$
|
541,307
|
|
President and Chief Executive
|
|
2017
|
|
|
$
|
180,000
|
|
|
$
|
103,125
|
|
|
$
|
3,637,388
|
|
|
$
|
—
|
|
|
$
|
124,020
|
|
$
|
4,044,533
|
|
Officer
|
|
2016
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
2018
|
|
|
$
|
309,385
|
|
|
$
|
85,000
|
|
|
$
|
—
|
|
|
$
|
649,008
|
|
|
$
|
7,327
|
(1)
|
$
|
1,050,720
|
|
Chief Financial Officer
|
|
2017
|
|
|
$
|
285,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
285,000
|
|
|
|
2016
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
2018
|
|
|
$
|
279,972
|
|
|
$
|
170,500
|
|
|
$
|
—
|
|
|
$
|
132,476
|
|
|
$
|
9,409
|
(1)
|
$
|
592,356
|
|
Senior Vice President-Medical
|
|
2017
|
|
|
$
|
271,817
|
|
|
$
|
82,500
|
|
|
$
|
—
|
|
|
$
|
264,250
|
|
|
$
|
31,300
|
|
$
|
649,867
|
|
Global Sales and Marketing
|
|
2016
|
|
|
$
|
263,900
|
|
|
$
|
65,000
|
|
|
$
|
—
|
|
|
$
|
110,379
|
|
|
$
|
8,194
|
|
$
|
447,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
2018
|
|
|
$
|
191,088
|
|
|
$
|
39,000
|
|
|
$
|
—
|
|
|
$
|
66,238
|
|
|
$
|
11,843
|
(2)
|
$
|
308,170
|
|
Vice President of
|
|
2017
|
|
|
$
|
185,523
|
|
|
$
|
22,000
|
|
|
$
|
—
|
|
|
$
|
76,781
|
|
|
$
|
15,615
|
|
$
|
299,919
|
|
Research and Development
|
|
2016
|
|
|
$
|
180,119
|
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
$
|
128,776
|
|
|
$
|
11,885
|
|
$
|
345,780
|
|
and Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
2018
|
|
|
$
|
321,775
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
66,238
|
|
|
$
|
7,850
|
(1)
|
$
|
395,863
|
|
Vice President - U. S. Sales
|
|
2017
|
|
|
$
|
383,250
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
232,714
|
|
|
$
|
10,870
|
|
$
|
626,834
|
|
|
|
2016
|
|
|
$
|
296,300
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,190
|
|
|
$
|
7,646
|
|
$
|
359,136
|
|
|
(1)
|
Consists of a car allowance, life and long term care
insurance coverage.
|
|
(2)
|
Consists of a car allowance, toll reimbursements and
life and long term care insurance coverage.
|
Grants of Plan Based Awards
The following table
presents non-equity and equity awards granted to the named executive officers in fiscal year 2018.
GRANTS OF PLAN
BASED AWARDS IN FISCAL 2018
Name
|
|
Grant Date
|
|
All Other Stock Awards: Number of Shares of Stock
|
|
All Other Option Awards: Number of Securities Underlying Options
|
|
(1) Exercise or Base price of Option Awards ($/Share)
|
|
(2) Grant Date Fair Value of Stock and Option Awards ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
8/21/2017
|
|
|
—
|
|
|
100,000
|
|
$
|
10.20
|
|
$
|
582,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
11/2/2017
|
|
|
—
|
|
|
12,000
|
|
$
|
10.25
|
|
$
|
66,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
11/2/2017
|
|
|
—
|
|
|
24,000
|
|
$
|
10.25
|
|
$
|
132,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
11/2/2017
|
|
|
—
|
|
|
12,000
|
|
$
|
10.25
|
|
$
|
66,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
11/2/2017
|
|
|
—
|
|
|
12,000
|
|
$
|
10.25
|
|
$
|
66,238
|
|
|
(1)
|
Stock option awards were issued on August 21, 2017 to Mr. Dwyer pursuant to our 2017 Employee Equity
Incentive Plan. Stock option awards were issued on November 2, 2017 pursuant to our 2017 Employee Equity Incentive Plan, except
Mr. Wright, who received his grant from the 2012 Employee Equity Incentive 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.
|
|
(2)
|
This amount represents the Black-Scholes computation as of that date of award.
|
Outstanding Equity Awards at Fiscal
Year-End
The following table
sets forth information regarding outstanding equity awards held as of June 30, 2018 by our named executive officers.
OUTSTANDING EQUITY
AWARDS AT 2018 FISCAL YEAR END
Name
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price ($)
|
|
|
Option
Expiration
Date
|
|
Number of
Shares of
Stock That
Have Not
Not Vested
|
|
Stavros G. Vizirgianakis
|
|
|
|
|
|
|
|
(1)
|
|
$
|
—
|
|
|
|
|
|
107,200
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
133,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
100,000
|
(2)
|
|
|
10.20
|
|
|
8/21/2027
|
|
|
|
|
|
|
|
—
|
|
|
|
12,000
|
(3)
|
|
|
10.25
|
|
|
11/2/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
—
|
(3)
|
|
|
4.68
|
|
|
9/10/2023
|
|
|
|
|
|
|
|
26,250
|
|
|
|
8,750
|
(4)
|
|
|
7.67
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
60,000
|
|
|
|
20,000
|
(5)
|
|
|
12.77
|
|
|
5/14/2025
|
|
|
|
|
|
|
|
15,000
|
|
|
|
15,000
|
(6)
|
|
|
9.38
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
7,750
|
|
|
|
23,250
|
(7)
|
|
|
6.76
|
|
|
11/3/2026
|
|
|
|
|
|
|
|
7,500
|
|
|
|
22,500
|
(8)
|
|
|
9.53
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
—
|
|
|
|
24,000
|
(2)
|
|
|
10.25
|
|
|
11/2/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
—
|
|
|
|
2.19
|
|
|
9/13/2021
|
|
|
|
|
|
|
|
17,500
|
|
|
|
—
|
|
|
|
2.96
|
|
|
9/13/2022
|
|
|
|
|
|
|
|
26,250
|
|
|
|
—
|
|
|
|
4.68
|
|
|
9/10/2023
|
|
|
|
|
|
|
|
26,249
|
|
|
|
8,751
|
(4)
|
|
|
7.67
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
17,500
|
|
|
|
17,500
|
(7)
|
|
|
9.38
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
3,750
|
|
|
|
11,250
|
(8)
|
|
|
9.53
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
—
|
|
|
|
12,000
|
(3)
|
|
|
10.25
|
|
|
11/2/2027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
2,500
|
(4)
|
|
|
7.67
|
|
|
9/9/2024
|
|
|
|
|
|
|
|
7,500
|
|
|
|
7,500
|
(6)
|
|
|
9.38
|
|
|
8/18/2025
|
|
|
|
|
|
|
|
3,750
|
|
|
|
11,250
|
(7)
|
|
|
6.76
|
|
|
11/3/2026
|
|
|
|
|
|
|
|
8,750
|
|
|
|
26,250
|
(5)
|
|
|
9.53
|
|
|
12/6/2026
|
|
|
|
|
|
|
|
—
|
|
|
|
12,000
|
(3)
|
|
|
10.25
|
|
|
11/2/2027
|
|
|
|
|
|
(1)
|
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.
|
|
(2)
|
Options issued 8/21/17 and vest equally over 4 years.
|
|
(3)
|
Options issued 11/2/17 and vest equally over 4 years.
|
|
(4)
|
Options issued 9/09/14 and vest equally over 4 years.
|
|
(5)
|
Options issued 5/14/2015 and vest equally on 11/14/2016, 5/14/2017, 5/14/2018 and 5/14/2019.
|
|
(6)
|
Options issued 8/18/2015 and vest equally over 4 years.
|
|
(7)
|
Options issued on 11/3/16 and vested equally over 4 years.
|
|
(8)
|
Options issued on 12/6/16 and vested equally over 4 years.
|
Stock Option Exercises
The following table shows all stock option
exercises during fiscal 2018 by the named executive officers.
OPTION EXERCISES IN FISCAL 2018
|
|
Name of Executive Officer
|
|
Exercise Date
|
|
|
Number of
Shares
Acquired
On Exercise
|
|
|
(1) Value
Realized On
Exercise
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros Vizirgianakis
|
|
|
9/21/2017
|
|
|
|
7,500
|
|
|
$
|
18,713
|
|
|
(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.
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’s 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
amended 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 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
Robert S. Ludecker 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 2018.
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. 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 (data with respect to
equity awards assumes at change of control at June 30, 2018):
|
|
Severance Payments
|
|
|
Change-in-Control Payments
|
|
|
|
Salary
|
|
|
Employee Benefits
|
|
|
Total
|
|
|
Salary
|
|
|
Employee Benefits
|
|
|
Equity Awards
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stavros G. Vizirgianakis
|
|
$
|
556,200
|
|
|
$
|
32,040
|
|
|
$
|
588,240
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,627,680
|
|
|
$
|
4,627,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph P. Dwyer
|
|
$
|
141,625
|
|
|
$
|
10,000
|
|
|
$
|
151,625
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
245,800
|
|
|
$
|
245,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert S. Ludecker
|
|
$
|
284,109
|
|
|
$
|
—
|
|
|
$
|
284,109
|
|
|
$
|
284,109
|
|
|
$
|
—
|
|
|
$
|
646,040
|
|
|
$
|
930,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dan Voic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
193,912
|
|
|
$
|
—
|
|
|
$
|
784,600
|
|
|
$
|
978,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher H. Wright
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
303,625
|
|
|
$
|
303,625
|
|
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
2018, there was no executive officer’s compensation that exceeded $1,000,000 other than Mr. Dwyer, who’s compensation
was $1,050,720 for fiscal 2018.
Equity Plans
As of June 30, 2018, the Company had the
following stock plans with options or other grants outstanding or available for issuance:
Plan
|
|
Initial Shares
|
|
|
Granted
|
|
|
Exercised
|
|
|
Expired / Forfeited
|
|
|
Outstanding
|
|
|
Available For 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
|
|
|
|
490,550
|
|
|
|
48,925
|
|
|
|
7,650
|
|
|
|
—
|
|
2005 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
112,500
|
|
|
|
37,500
|
|
|
|
45,000
|
|
|
|
—
|
|
2009 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
624,925
|
|
|
|
386,350
|
|
|
|
125,600
|
|
|
|
112,975
|
|
|
|
675
|
|
2009 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
225,000
|
|
|
|
56,250
|
|
|
|
75,000
|
|
|
|
93,750
|
|
|
|
50,000
|
|
2012 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
695,000
|
|
|
|
122,370
|
|
|
|
196,000
|
|
|
|
376,630
|
|
|
|
1,000
|
|
2012 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
222,500
|
|
|
|
3,750
|
|
|
|
45,000
|
|
|
|
173,750
|
|
|
|
22,500
|
|
2014 Employee Equity Incentive Plan
|
|
|
750,000
|
|
|
|
505,000
|
|
|
|
3,625
|
|
|
|
158,875
|
|
|
|
342,500
|
|
|
|
3,875
|
|
2017 Equity Incentive Plan
|
|
|
750,000
|
|
|
|
172,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,000
|
|
|
|
578,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,330,193
|
|
|
|
656,050
|
|
Director Compensation For Fiscal 2018
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 $45,000. Each non-employee
director was also reimbursed for reasonable expenses incurred while traveling to attend a meeting of the Board of Directors or
while traveling in furtherance of the business of the Company.
The following table
sets forth information for the fiscal year ended June 30, 2018 with respect to the compensation of our directors.
DIRECTOR COMPENSATION
FOR THE 2018 FISCAL YEAR
|
|
DIRECTOR COMPENSATION FOR THE
2018 FISCAL YEAR
|
|
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Option
Awards ($)
|
|
|
Total ($)
|
|
John W. Gildea
|
|
$
|
35,000
|
|
|
|
74,905
|
|
|
$
|
109,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Charles Miner III
|
|
$
|
35,000
|
|
|
|
74,905
|
|
|
$
|
109,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas M. Patton
|
|
$
|
45,000
|
|
|
|
112,357
|
|
|
$
|
157,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patrick A. McBrayer
|
|
$
|
35,000
|
|
|
|
99,873
|
|
|
$
|
134,873
|
|
Outstanding options at June 30, 2018 were
as follows: Mr. Gildea - 105,000 shares, Dr. Miner - 90,000 shares, Mr. McBrayer - 50,000 shares, and Mr. Patton - 37,500 shares.
Item 12.
Security Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth as of August
15, 2018, 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
|
|
|
1,659,828
|
(2)
|
|
|
17.5
|
%
|
South Africa Alpha Capital Management Ltd. and Praesidium Capital Management (Pty) Ltd.
|
|
|
502,270
|
(3)
|
|
|
5.3
|
%
|
Patrick A. McBrayer
|
|
|
39,850
|
(4)
|
|
|
|
*
|
Charles Miner
|
|
|
108,132
|
(5)
|
|
|
1.1
|
%
|
Thomas M. Patton
|
|
|
35,000
|
(6)
|
|
|
|
*
|
Gwendolyn A. Watanabe
|
|
|
—
|
|
|
|
|
*
|
Joseph P. Dwyer
|
|
|
26,300
|
(7)
|
|
|
|
*
|
Robert S. Ludecker
|
|
|
147,693
|
(8)
|
|
|
1.5
|
%
|
Dan Voic
|
|
|
255,144
|
(9)
|
|
|
2.7
|
%
|
Christopher H. Wright
|
|
|
35,750
|
(10)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
All executive officers and Directors as a group (Eleven people)
|
|
|
2,320,697
|
(11)
|
|
|
23.4
|
%
|
* 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.
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(2)
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Includes 18,750 shares which Mr. Vizirgianakis has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(3)
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Based upon information set forth in a Schedule 13G Amendment No. 1 filed with the SEC on February 14, 2018, by South Africa Alpha Capital Management Ltd. (“SAACM”) and Praesidium Capital Management (Pty) Ltd. (“PCM”). SAACM and PCM each hold shared voting and dispositive power over all of the indicated shares. SAACM’s business address is 69 Front Street, Hamilton, Bermuda, HM12; PCM’s business address is The Terraces, Block G, Steenberg Office Park, Silverwood Close, Tokai, Cape Town, South Africa.
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(4)
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Includes 38,750 shares which Mr. McBrayer has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(5)
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Includes 78,750 shares which Dr. Miner has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(6)
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Includes 30,000 shares which Mr. Patton has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(7)
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Includes 25,000 shares which Mr. Dwyer has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(8)
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Includes 138,250 shares which Mr. Ludecker has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(9)
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Includes 116,249 shares which Mr. Voic has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(10)
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Includes 33,750 shares which Mr. Wright has the right to acquire upon exercise of stock options which are exercisable within 60 days.
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(11)
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Includes 491,499 shares which such persons have the right to acquire upon exercise of stock options which are exercisable within 60 days.
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Equity Compensation Plan Information:
Plan category
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Number of securities to be issued upon exercise of outstanding options, warrants and rights
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Weighted -average exercise price of outstanding options, warrants and rights
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Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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I.2001 Plan
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5,938
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$
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1.82
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—
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II. 2005 Plan
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7,650
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$
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2.55
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—
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III. 2005 Directors Plan
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45,000
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$
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2.49
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—
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IV. 2009 Plan
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112,975
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$
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4.91
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675
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V. 2009 Directors Plan
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93,750
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$
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7.18
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50,000
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VI. 2012 Plan
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376,630
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$
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7.92
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1,000
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VII. 2012 Directors Plan
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173,750
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$
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9.88
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22,500
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VIII. 2014 Plan
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342,500
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$
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10.28
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3,875
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IX. 2017 Plan
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172,000
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$
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10.22
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578,000
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Equity compensation plans not approved by security holders
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—
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—
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—
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Total
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1,330,193
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$
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8.53
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656,050
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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 named executive officers.
Director Independence
The Company is required to have a Board
of Directors a majority of whom are “independent” as defined by the Nasdaq listing standards and to disclose those
Directors that the Board of Directors has determined to be independent. Based on such definition, the Board of Directors 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
BDO USA, LLP (“BDO”) billed
the Company $210,131 and $0 in the aggregate for services rendered for the audit of the Company’s 2018 and 2017 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
2018 and 2017 fiscal years, respectively.
Audit-Related Fees
None.
Tax Fees and All Other Fees
BDO did not provide any tax services or
other services to the Company during the fiscal years ended June 30, 2018 and 2017 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.
MISONIX, INC. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended June 30, 2018, 2017,
and 2016
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.
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,
our products are marketed primarily through a hybrid sales approach. This includes direct sales representatives, managed by regional
sales managers, 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. 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, 2018 were $2,542,579.
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, 2018. The Company’s cash balance
at June 30, 2018 was $10,979,455.
The Company maintains cash balances at
various financial institutions. At June 30, 2018, these financial institutions held cash that was approximately $10,729,455
in 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 the Company distributor of SonaStar in China of $6,969,258, $0 and $0, for the fiscal years ended June 30, 2018, 2017
and 2016, respectively, inclusive of product licensing fees of $4,010,000. Accounts receivable from this customer were $293,915
at June 30, 2018.
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 $525,000, $3,764,000
and $3,903,000 for the fiscal years ended June 30, 2018, 2017 and 2016, respectively. Accounts receivable from MMIT royalties were
$0 and $925,000 at June 30, 2018 and 2017, respectively. The license agreement with MMIT expired in August 2017.
At June 30, 2018 and 2017, the Company’s
accounts receivable with customers outside the United States were approximately $1,630,000 and $860,000, 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 net realizable value 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 net realizable value 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.
License
revenue is recorded when 1) a contract has been executed, 2) the underlying intellectual property has been transferred, 3) the
payment terms are identified and 4) the risk of a reversal of revenue from lack of receipt of consideration or other factors has
passed. License revenue for the years ended June 30, 2018, 2017 and 2016 was $4,010,000, $0 and $0, respectively.
On
October 19, 2017, the Company entered into a License and Exclusive Manufacturing Agreement (the “Agreement”) with
Hunan Xing Hang Rui Kang Bio-technologies Co., Ltd., a Chinese corporation (the “Licensee”or “Hunan” )
under which Misonix has licensed certain manufacturing and distribution rights to its SonaStar product line in China, Hong Kong
and Macau (the “Territory”) in exchange for payments totaling at least $11,000,000.
The
Agreement with Hunan provides for the following three primary revenue streams:
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a)
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Sales
of Misonix SonaStar products, totaling $990,000, which have been recognized as product revenue when the products were shipped.
For the quarters ended September 30, 2017, December 31, 2017 and March 31, 2018, revenue of $270,000, $570,000 and $150,000,
respectively, was recognized from these product shipments, which completed the initial product shipment requirement under
the Agreement.
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b)
|
A
technology license fee of $4,010,000, relating to the granting of a technology license to Hunan, allowing Hunan to manufacture
and sell SonaStar products in China. The applicable technology was delivered to Hunan in the quarter ended March 31, 2018,
and the license fee was recorded in full in that quarter. This technology license fee will be accounted for as “Revenue
- License” in our statement of operations in the quarter ended March 31, 2018.
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c)
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A
royalty fee based on the number of generators manufactured and sold by Hunan in China during the initial 10 year term of the
Agreement. For the calendar years 2019, 2020 and 2021, Hunan will pay a minimum royalty fee of $2 million per year. After
2021, there are no minimum royalties. These royalty payments will be recorded as “Revenue – Royalty” when
the royalties are earned.
|
In
addition, the Agreement contains a provision allowing for Misonix to be reimbursed by Hunan for it’s out of pocket costs
to assist Hunan with training to build the product, to the extent Hunan requests any training. We consider this option to be a
substantive option which should be accounted for as a separate event as the event occurs rather than as a deliverable in the original
arrangement. We also believe that this will be an immaterial portion of this contract.
During
the year ended June 30, 2018, the Company delivered the licensed SonaStar technology to the Licensee, and recorded license revenue
of $4,010,000.
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, 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 2018 and 2017.
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 also compares its market capitalization to the value of its goodwill to view for evidence
of impairment. The Company completed its annual goodwill impairment tests for fiscal 2018 and 2017 as of June 30th each year. No
impairment of goodwill was deemed to exist in fiscal 2018 and 2017.
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 $757,447 and $719,136 at June 30, 2018 and 2017, respectively. Amortization
expense for the years ended June 30, 2018, 2017 and 2016 was approximately $127,000, $110,000 and $94,000, respectively.
The following is a schedule of estimated
future patent amortization expense as of June 30, 2018 during the following fiscal years:
2019
|
|
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$
|
125,961
|
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2020
|
|
|
|
101,483
|
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2021
|
|
|
|
95,312
|
|
2022
|
|
|
|
62,765
|
|
2023
|
|
|
|
61,695
|
|
Thereafter
|
|
|
|
310,231
|
|
|
|
|
$
|
757,447
|
|
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.
Earnings Per Share
Earnings per share (“EPS”)
is calculated using the two class method, which allocates earnings among common stock and participating securities to calculate
EPS when an entity’s capital structure includes either two or more classes of common stock or common stock and participating
securities. Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether
paid or unpaid) are participating securities. As such, unvested restricted stock of the Company are considered participating securities.
The dilutive effect of options and their equivalents (including non-vested stock issued under stock based compensation plans),
is computed using the “treasury” method.
Basic income per common share is based
on the weighted average number of common shares outstanding during the period. Diluted income per common share includes the dilutive
effect of potential common shares outstanding. The following table sets forth the reconciliation of weighted average shares outstanding
and diluted weighted average shares outstanding:
|
|
For the twelve months ended
|
|
|
|
June 30,
|
|
|
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2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
9,009,189
|
|
|
|
8,398,778
|
|
|
|
7,776,949
|
|
Dilutive effect of resticted stock awards (participating securities)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share
|
|
|
9,009,189
|
|
|
|
8,398,778
|
|
|
|
7,776,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
9,009,189
|
|
|
|
8,398,778
|
|
|
|
7,776,949
|
|
Diluted EPS for the three years ended
June 30, 2018 as presented is the same as basic EPS as the inclusion of the effect of common share equivalents then outstanding
would be anti-dilutive. Accordingly, excluded from the calculation of diluted EPS are the dilutive effect of options to purchase
211,801, 473,848, and 467,733 shares of common stock for the years ended June 30, 2018, 2017 and 2016, respectively. Also excluded
from the calculation of both basic and diluted earnings per share for the years ended June 30, 2018 and 2017 are the 400,000 shares
of restricted common stock which were issued in December 2016.
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 $0, $76,000 and $386,000 in advertising costs
during the fiscal years ended June 30, 2018, 2017 and 2016, 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, 2018 was $487,000, $425,000 and $416,000, 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, 2018, 2017 and 2016 were approximately $99,000, $119,000 and $109,000 respectively, and are reported
as a component of net sales. Shipping and handling costs for the fiscal years ended June 30, 2018, 2017 and 2016 were approximately
$289,000, $337,000 and $142,000, 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 ASC Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), which
was subsequently updated. This purpose of the updated standard is to provide enhancements to the quality and consistency of revenue
recognition between companies using U.S. GAAP and International Financial Reporting Standards. The new five-step recognition model
introduces the core principle of recognizing revenue in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for the promised goods or services.
When effective, as amended, ASU 2014-09
will require us to use either of the following transition methods: (i) a full retrospective approach reflecting the application
of the standard in each prior reporting period with the option to elect certain practical expedients; or (ii) a modified retrospective
approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional
footnote disclosures to describe the nature, amount, timing and uncertainty of revenue, certain costs and cash flows arising
from our contracts with customers). This standard became effective for the Company on July 1, 2018 and we will adopt
the new pronouncement under the modified retrospective approach.
We have reviewed our various revenue
streams within our reporting segment and have gathered data regarding the segregation of those revenue streams into the following
types for analysis (i) sale of medical device products under standard ship and bill practices, (ii) consignment and leasing of
medical device products, and (iii) licensing agreements related to medical technology. We have gathered data and quantified the
amount of sales by type of revenue stream and categorized the types of sales for the purpose of comparing how we currently recognize
revenue to the new standard in order to quantify the impact of this ASU. We have finalized our review on our medical device
product sales and the consignment and leasing of medical devices. We generally anticipate having substantially similar performance
obligations under the new guidance as compared with deliverables and units of account currently being recognized. We expect
to recognize an immaterial adjustment to retained earnings reflecting the cumulative impact for the above described revenue streams.
Due to the nature of the licensing agreements that the Company enters into, the
revenue recognition treatment required under the new standard will depend on contract-specific terms. The Company is in the process
of concluding on the impact that the standard will have on this revenue stream and will need to consistently evaluate the nature
of any implicit price concession granted on a major license and IP agreement with the Company’s Chinese partner which will
impact the timing of royalty revenue to be recorded under the contract. This may result in revenue being recognized on this license
earlier than current practice although such revenue has not yet been recorded and the Company has not yet concluded on any necessary
adjustment to retained earnings upon adoption.
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 consolidated financial statements.
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. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not
expected to have a material impact on the Company’s consolidated financial statements.
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.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting
Standards Update No. 2016-09 “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting” intended to simplify several aspects of accounting for share-based payment transactions. The Company adopted
these amendments beginning in the first quarter of fiscal 2018. The guidance requires that all excess tax benefits and tax deficiencies
previously recorded as additional paid-in capital be prospectively recorded in income tax expense. The guidance allows for an increase
in the threshold for net share settlement up to the maximum statutory rate in employees’ applicable jurisdictions without
triggering liability classification. The adoption of this guidance had an immaterial impact on income taxes on the Company’s
Consolidated Statement of Operations for the year ended June 30, 2018. The Company elected to apply the presentation requirement
for cash flows related to excess tax benefits prospectively, which had an immaterial impact on both net cash from operating activities
and net cash used in financing activities for the year ended June 30, 2018. The presentation requirements for cash flows related
to employee taxes paid for withheld shares had no impact on any of the periods presented on the Company’s Consolidated Statements
of Cash Flows since such cash flows have historically been presented as a financing activity. Finally, the Company has elected
to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result, the Company recorded the cumulative
impact of $908,875 as an increase to Deferred Income Taxes with a corresponding decrease to Accumulated Deficit.
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, 2018 and 2017, 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,
2018
|
|
|
June 30,
2017
|
|
Raw material
|
|
$
|
3,540,205
|
|
|
$
|
2,409,148
|
|
Work-in-process
|
|
|
180,442
|
|
|
|
741,994
|
|
Finished goods
|
|
|
1,743,497
|
|
|
|
3,267,232
|
|
|
|
|
5,464,144
|
|
|
|
6,418,374
|
|
Less valuation reserve
|
|
|
444,258
|
|
|
|
1,425,940
|
|
|
|
$
|
5,019,886
|
|
|
$
|
4,992,434
|
|
4. Property, Plant and Equipment
Property, plant and equipment consist of the following:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
Demonstration and consignment inventory
|
|
$
|
8,227,878
|
|
|
$
|
6,951,583
|
|
Machinery and equipment
|
|
|
2,582,244
|
|
|
|
2,452,363
|
|
Furniture and fixtures
|
|
|
1,464,325
|
|
|
|
1,406,758
|
|
Leasehold improvements
|
|
|
691,751
|
|
|
|
691,751
|
|
Software systems
|
|
|
223,087
|
|
|
|
—
|
|
Automobiles
|
|
|
22,328
|
|
|
|
22,328
|
|
|
|
|
13,211,613
|
|
|
|
11,524,783
|
|
Less: accumulated depreciation and amortization
|
|
|
(9,023,235
|
)
|
|
|
(7,794,580
|
)
|
|
|
$
|
4,188,378
|
|
|
$
|
3,730,203
|
|
Depreciation and amortization of property,
plant and equipment totaled approximately $1,300,000, $957,000 and $1,339,000 for the fiscal years ended June 30, 2018, 2017
and 2016, respectively.
5. Accrued Expenses and Other Current Liabilities
The following summarizes accrued expenses and other current
liabilities:
|
|
June 30,
2018
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Accrued payroll, payroll taxes and vacation
|
|
$
|
351,435
|
|
|
$
|
715,245
|
|
Accrued bonus
|
|
|
552,988
|
|
|
|
343,400
|
|
Accrued commissions
|
|
|
742,807
|
|
|
|
751,000
|
|
Professional fees
|
|
|
102,065
|
|
|
|
662,537
|
|
Litigation settlement
|
|
|
—
|
|
|
|
500,000
|
|
Deferred income
|
|
|
13,303
|
|
|
|
27,901
|
|
Deferred foreign taxes
|
|
|
401,000
|
|
|
|
—
|
|
Vendor and sales tax accruals
|
|
|
648,574
|
|
|
|
346,055
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,812,172
|
|
|
$
|
3,346,138
|
|
6. Stock-Based Compensation Plans
At June 30, 2018, the Company had outstanding
equity-linked grants under eight stock-based compensation plans (the “Plans”), as follows:
Plan
|
|
Initial
Shares
|
|
|
Granted
|
|
|
Exercised
|
|
|
Expired /
Forfeited
|
|
|
Outstanding
|
|
|
Available
For
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
|
|
|
|
490,550
|
|
|
|
48,925
|
|
|
|
7,650
|
|
|
|
—
|
|
2005 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
195,000
|
|
|
|
112,500
|
|
|
|
37,500
|
|
|
|
45,000
|
|
|
|
—
|
|
2009 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
624,925
|
|
|
|
386,350
|
|
|
|
125,600
|
|
|
|
112,975
|
|
|
|
675
|
|
2009 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
225,000
|
|
|
|
56,250
|
|
|
|
75,000
|
|
|
|
93,750
|
|
|
|
50,000
|
|
2012 Employee Equity Incentive Plan
|
|
|
500,000
|
|
|
|
695,000
|
|
|
|
122,370
|
|
|
|
196,000
|
|
|
|
376,630
|
|
|
|
1,000
|
|
2012 Non Employee Director Stock Option Plan
|
|
|
200,000
|
|
|
|
222,500
|
|
|
|
3,750
|
|
|
|
45,000
|
|
|
|
173,750
|
|
|
|
22,500
|
|
2014 Employee Equity Incentive Plan
|
|
|
750,000
|
|
|
|
505,000
|
|
|
|
3,625
|
|
|
|
158,875
|
|
|
|
342,500
|
|
|
|
3,875
|
|
2017 Equity Incentive Plan
|
|
|
750,000
|
|
|
|
172,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,000
|
|
|
|
578,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,330,193
|
|
|
|
656,050
|
|
The compensation cost that has been charged
against income for these plans was $1,728,491, $1,086,139 and $1,629,644 for the fiscal years ended June 30, 2018, 2017 and 2016,
respectively, and is recorded in the department associated with the employee to which the grants are issued. The expense for fiscal
2018 included a reversal of stock compensation from prior periods due to forfeitures of unvested options of $625,202. As of June 30,
2018, there was $4,617,767 of total unrecognized compensation cost related to non-vested share-based compensation arrangements
to be recognized over a weighted-average period of 2.4 years, which includes $2,248,649 of unrecognized compensation expense
on restricted stock awards.
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, 2018, 2017 and 2016 was $5.50, $4.46 and $4.68 per share, respectively.
The fair value was estimated based on the weighted average assumptions of:
|
|
For the three years ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rates
|
|
|
1.98
|
%
|
|
|
1.80
|
%
|
|
|
1.71
|
%
|
Expected option life in years
|
|
|
5.95
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Expected stock price volatility
|
|
|
57.42
|
%
|
|
|
54.68
|
%
|
|
|
55.41
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of option activity under the
Plans as of June 30, 2018, 2017 and 2016, and changes during the years ended on those dates is presented below:
|
|
|
|
|
Options
|
|
|
|
|
|
|
Outstanding
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Aggregate
Intrinsic
Value
|
|
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
|
|
Granted
|
|
|
305,500
|
|
|
|
10.10
|
|
|
|
|
|
Exercised
|
|
|
(76,418
|
)
|
|
|
5.47
|
|
|
|
|
|
Forfeited
|
|
|
(15,125
|
)
|
|
|
7.89
|
|
|
|
|
|
Expired
|
|
|
(75,000
|
)
|
|
|
4.87
|
|
|
|
|
|
Outstanding as of June 30, 2018
|
|
|
1,330,193
|
|
|
$
|
8.47
|
|
|
$
|
5,369,557
|
|
Vested and exercisable at June 30, 2018
|
|
|
681,316
|
|
|
$
|
7.67
|
|
|
$
|
3,355,240
|
|
The total fair value of shares vested during
the year ended June 30, 2018 was $1,553,905. The number and weighted-average grant-date fair value of non-vested stock options
at the beginning of fiscal 2018 was 673,875 and $4.77, respectively. The number and weighted-average grant-date fair value of stock
options which vested during fiscal 2018 was 648,777 and $5.08, respectively.
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, 2018 was $900,337. At June 30, 2018, there was $2,248,649 of unrecognized compensation
cost to non-vested restricted stock awards to be recognized over a weighted-average period of 2.8 years. 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, 2018, 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 $28,000.
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,
2018:
|
|
|
Operating
Leases
|
|
2019
|
|
|
$
|
359,353
|
|
2020
|
|
|
|
115,324
|
|
2021
|
|
|
|
12,488
|
|
2022
|
|
|
|
—
|
|
Total mimimun lease payments
|
|
|
$
|
487,165
|
|
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 $435,000, $428,000 and $411,000 for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Purchase Commitments
As of June 30, 2018, 2017, and
2016, the Company had purchase and inventory commitments totaling $3,841,641, $2,859,718 and $2,507,125, 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 was seeking 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 reached a settlement in principle under which the Company would
pay $500,000 to resolve the matter. The district court approved the settlement and dismissed the lawsuit with prejudice in an order
dated December 16, 2017. The Company has paid its $250,000, representing its insurance retention. The balance was paid by the Company’s
insurance carrier.
Former Chinese Distributor - FCPA
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 revenues
of approximately $8 million.
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 $3.0 million, of which
approximately $0.5 million, $2.4 million and $0.1 million was charged to general and administrative expenses during the years ended
June 30, 2018, 2017 and 2016 respectively.
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 sought various remedies, including compensatory and
punitive damages, specific performance and preliminary and post judgment injunctive relief, and asserted various causes of action,
including breach of contract, unfair competition, tortious interference with contract, fraudulent inducement, and conversion. On
October 7, 2017, the court granted the Company’s motion to dismiss all of the tort claims asserted against it, and also granted
the individual defendants’ motion to dismiss all claims asserted against them. The only claim remaining in the case is for
breach of contract against the Company. 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; discovery is just beginning 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. On July 21, 2017, the district court consolidated the two actions for all purposes. On July 16, 2018,
the Company and counsel for Mr. Feldbaum and Mr. Rubin informed the District Court that the parties had reached a settlement in
principle. There are aspects of the settlement that remain to be negotiated and documented, and the settlement is subject to approval
by the District Court after notice to the Company’s shareholders.
8. Related Party Transactions
OrthoXact Proprietary Limited (“OrthoXact”)
(formerly Applied BioSurgical) is an independent distributor for the Company in South Africa. The chief executive officer of OrthoXact
is also the brother of Stavros G. Vizirgianakis, the CEO of Misonix, Inc.
Set forth below is a table showing the
Company’s net revenues for the years ended June 30 and accounts receivable at June 30 for the indicated time periods below
with OrthoXact:
|
|
For the years ended June 30:
|
|
Applied BioSurgical
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
999,719
|
|
|
$
|
580,888
|
|
|
$
|
559,787
|
|
Accounts receivable
|
|
$
|
239,062
|
|
|
$
|
192,984
|
|
|
$
|
272,421
|
|
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, 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. The Company was examined by the Internal
Revenue Service for the year ended June 30, 2015 and such examination had been closed with no change in taxes. The Company’s former
foreign subsidiary, Misonix Ltd. filed tax return in the United Kingdom and it was dissolved in June 2018.
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets / (liabilities)
|
|
|
|
|
|
|
|
|
Bad debt reserves
|
|
$
|
45,817
|
|
|
$
|
34,243
|
|
Inventory reserves
|
|
|
194,363
|
|
|
|
676,733
|
|
Accruals and allowances
|
|
|
18,938
|
|
|
|
269,539
|
|
Net operating loss carryforwards
|
|
|
2,738,775
|
|
|
|
3,500,826
|
|
Tax credits
|
|
|
496,898
|
|
|
|
455,916
|
|
Foreign tax credits
|
|
|
401,000
|
|
|
|
—
|
|
Stock based compensation
|
|
|
516,733
|
|
|
|
451,892
|
|
Deferred gain - HIFU and Labcaire
|
|
|
91,862
|
|
|
|
149,222
|
|
Amortization
|
|
|
(378,818
|
)
|
|
|
(594,306
|
)
|
Depreciation
|
|
|
(36,088
|
)
|
|
|
16,030
|
|
Other
|
|
|
6,873
|
|
|
|
3,182
|
|
|
|
|
4,096,353
|
|
|
|
4,963,277
|
|
Valuation Allowance
|
|
|
(4,096,353
|
)
|
|
|
(628,730
|
)
|
Total net deferred tax assets
|
|
$
|
—
|
|
|
$
|
4,334,547
|
|
Tax
Cuts and Jobs Act of 2017
The
Tax Cuts and Jobs Act of 2017 (the “Tax Legislation”), enacted on December 22, 2017, contains significant changes
to U.S. tax law, including lowering the U.S. corporate income tax rate to 21%, implementing a territorial tax system, and imposing
a one-time tax on deemed repatriated earnings of foreign subsidiaries.
The
Tax Legislation reduces the U.S. statutory tax rate from 35% to 21%, effective January 1, 2018. U.S. tax law requires that taxpayers
with a fiscal year that begins before and ends after the effective date of a rate change calculate a blended tax rate based on
the pro rata number of days in the fiscal year before and after the effective date. As a result, for the fiscal year ended June
30, 2018, the Company’s U.S. statutory income tax rate is 27.55%.
On
December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on
accounting for the tax effects of the Tax Legislation. SAB 118 provides a measurement period that should not extend beyond one
year from the Tax Legislation enactment date for companies to complete the accounting under ASC 740, Income Taxes. In accordance
with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Legislation for which the accounting under
ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Legislation is
incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
The Company recorded $1,755,823 discrete tax expense representing the expense of remeasuring its U.S. deferred tax assets at the
lower 21% U.S. statutory tax rate. In addition, the Company had approximately $169,000 of alternative minimum tax credit which
was reclassed to tax receivable.
Valuation
Allowance on Deferred Tax Assets
Deferred
tax assets refer to assets that are attributable to differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets in essence represent future savings of taxes that would otherwise
be paid in cash. The realization of the deferred tax assets is dependent upon the generation of sufficient future taxable income,
including capital gains. If it is determined that the deferred tax assets cannot be realized, a valuation allowance must be established,
with a corresponding charge to net income.
In
accordance with ASC Topic 740, the Company establishes valuation allowances for deferred tax assets that, in its judgment are
not more likely-than-not realizable. The guidance requires entities to evaluate all available positive and negative evidence,
including cumulative results in recent periods, weighted based on its objectivity, in determining whether its deferred tax assets
are more likely than not realizable.
The
Company regularly assesses its ability to realize its deferred tax assets. While the Company had positive cumulative pretax income
as of June 30, 2017, based on actual results for fiscal 2018 and the Company’s current forecast for fiscal 2019 the Company
is in a three year cumulative loss position at June 30, 2018, and it expects to be in a cumulative pretax loss position as of
June 30, 2019. Management evaluated available positive evidence, including the continued growth of the Company’s revenues
and gross profit margins, its recent SonaStar technology license to its Chinese partner and the reduction in investigative and
professional fees recognized in fiscal 2017, along with available negative evidence, including the Company’s continuing
investment in building its next generation Nexus platform and its continuing investment in building a direct sales force, while
at the same time paying commissions to its domestic sales distributors. After weighing both the positive and negative evidence,
management concluded that the Company’s deferred tax assets are not more likely-than-not realizable. Accordingly, the Company
recorded a full valuation allowance of $4,096,353 against its remaining deferred tax assets at June 30, 2018. The Company will
continue to assess its ability to utilize its net operating loss carryforwards, and will reverse this valuation allowance when
sufficient evidence is achieved to allow the realizability of such deferred tax assets.
As
of June 30, 2018, the Company had approximately $12,175,000 of U.S. federal net operating loss carryforwards of which $10,504,000
will expire in tax years between 2031 and 2037 and $1,671,000 will not expire. Included in U.S. Federal net operating loss carryforward
amount are windfall tax benefits related to exercised stock options of approximately $2,571,000, the benefit of which was recorded
in equity when the Company adopted ASU 2016-09 beginning in fiscal 2018. The Company has approximately $497,000 of research and
development tax credit carryforwards which expire in the tax years between 2026 and 2038.
Significant
components of the income tax expense (benefit) attributable to continuing operations are as follows:
|
|
Year
Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,962
|
|
Foreign
|
|
|
401,000
|
|
|
|
5,424
|
|
|
|
17,012
|
|
Total current
|
|
|
401,000
|
|
|
|
5,424
|
|
|
|
21,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
5,116,778
|
|
|
|
(990,016
|
)
|
|
|
(558,133
|
)
|
State
|
|
|
(101,132
|
)
|
|
|
(38,216
|
)
|
|
|
(37,192
|
)
|
Total deferred
|
|
|
5,015,646
|
|
|
|
(1,028,232
|
)
|
|
|
(595,325
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,416,646
|
|
|
$
|
(1,022,808
|
)
|
|
$
|
(573,351
|
)
|
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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Tax at
federal statutory rates
|
|
$
|
(483,207
|
)
|
|
$
|
(974,308
|
)
|
|
$
|
(646,828
|
)
|
State income taxes,
net of federal benefit
|
|
|
(102,812
|
)
|
|
|
(34,636
|
)
|
|
|
(13,319
|
)
|
Research credit
|
|
|
(216,099
|
)
|
|
|
(50,000
|
)
|
|
|
(49,593
|
)
|
Stock-based compensation
|
|
|
306,678
|
|
|
|
6,692
|
|
|
|
191,827
|
|
Deferred tax asset
adjustments (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,939
|
)
|
Valuation allowance
|
|
|
4,096,353
|
|
|
|
—
|
|
|
|
—
|
|
Reduction of deferred
tax asset related to Tax Legislation
|
|
|
1,755,823
|
|
|
|
—
|
|
|
|
—
|
|
Travel and entertainment
|
|
|
12,458
|
|
|
|
34,743
|
|
|
|
35,010
|
|
Other
|
|
|
47,452
|
|
|
|
(5,299
|
)
|
|
|
10,491
|
|
|
|
$
|
5,416,646
|
|
|
$
|
(1,022,808
|
)
|
|
$
|
(573,351
|
)
|
(1)
|
Relates
to the correction of error from the fiscal 2016 tax provision 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, 2018. 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 $58,162, $57,465 and $52,145 for the fiscal years ended June 30, 2018, 2017 and 2016, 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 Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Total
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
23,596,476
|
|
|
$
|
20,328,676
|
|
|
$
|
16,091,651
|
|
Equipment
|
|
|
9,073,350
|
|
|
|
6,941,287
|
|
|
|
7,021,543
|
|
License
|
|
|
4,010,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
36,679,826
|
|
|
$
|
27,269,963
|
|
|
$
|
23,113,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
17,735,749
|
|
|
$
|
14,866,772
|
|
|
$
|
11,277,449
|
|
Equipment
|
|
|
2,308,614
|
|
|
|
1,593,999
|
|
|
|
1,809,357
|
|
License
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
20,044,363
|
|
|
$
|
16,460,771
|
|
|
$
|
13,086,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumables
|
|
$
|
5,860,727
|
|
|
$
|
5,461,904
|
|
|
$
|
4,814,202
|
|
Equipment
|
|
|
6,764,736
|
|
|
|
5,347,288
|
|
|
|
5,212,186
|
|
License
|
|
|
4,010,000
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
16,635,463
|
|
|
$
|
10,809,192
|
|
|
$
|
10,026,388
|
|
Substantially
all of the Company’s long-lived assets are located in the United States.
12. Quarterly
Results (unaudited)
|
|
Fiscal
2018
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
7,280,723
|
|
|
$
|
8,323,845
|
|
|
$
|
8,429,132
|
|
|
$
|
8,636,126
|
|
|
$
|
32,669,826
|
|
License
|
|
|
—
|
|
|
|
—
|
|
|
|
4,010,000
|
|
|
|
—
|
|
|
|
4,010,000
|
|
Total
revenue
|
|
|
7,280,723
|
|
|
|
8,323,845
|
|
|
|
12,439,132
|
|
|
|
8,636,126
|
|
|
|
36,679,826
|
|
Cost
of goods sold
|
|
|
2,177,355
|
|
|
|
2,465,826
|
|
|
|
2,631,893
|
|
|
|
2,519,824
|
|
|
|
9,794,898
|
|
Gross
profit
|
|
|
5,103,368
|
|
|
|
5,858,019
|
|
|
|
9,807,239
|
|
|
|
6,116,302
|
|
|
|
26,884,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
3,570,713
|
|
|
|
3,919,515
|
|
|
|
4,447,421
|
|
|
|
4,430,732
|
|
|
|
16,368,381
|
|
General
and administrative expenses
|
|
|
2,573,131
|
|
|
|
2,380,860
|
|
|
|
1,925,086
|
|
|
|
2,184,062
|
|
|
|
9,063,139
|
|
Research
and development expenses
|
|
|
901,274
|
|
|
|
957,204
|
|
|
|
1,199,895
|
|
|
|
1,335,776
|
|
|
|
4,394,149
|
|
Total
operating expenses
|
|
|
7,045,118
|
|
|
|
7,257,579
|
|
|
|
7,572,402
|
|
|
|
7,950,570
|
|
|
|
29,825,669
|
|
Income
(loss) from operations
|
|
|
(1,941,750
|
)
|
|
|
(1,399,560
|
)
|
|
|
2,234,837
|
|
|
|
(1,834,268
|
)
|
|
|
(2,940,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
13
|
|
|
|
45
|
|
|
|
9,074
|
|
|
|
16,991
|
|
|
|
26,123
|
|
Royalty
income and license fees
|
|
|
452,971
|
|
|
|
71,550
|
|
|
|
916
|
|
|
|
1
|
|
|
|
525,438
|
|
Other
|
|
|
(4,458
|
)
|
|
|
(4,387
|
)
|
|
|
(5,712
|
)
|
|
|
16,831
|
|
|
|
2,274
|
|
Total
other income
|
|
|
448,526
|
|
|
|
67,208
|
|
|
|
4,278
|
|
|
|
33,823
|
|
|
|
553,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(1,493,224
|
)
|
|
|
(1,332,352
|
)
|
|
|
2,239,115
|
|
|
|
(1,800,445
|
)
|
|
|
(2,386,906
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Income
tax expense (benefit)
|
|
|
(281,000
|
)
|
|
|
5,524,422
|
|
|
|
—
|
|
|
|
173,224
|
|
|
|
5,416,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
Net
income from continuing operations
|
|
|
(1,212,224
|
)
|
|
|
(6,856,774
|
)
|
|
|
2,239,115
|
|
|
|
(1,973,669
|
)
|
|
|
(7,803,552
|
)
|
Income
from discontinued operations net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
191,117
|
|
|
|
191,117
|
|
Net
loss
|
|
$
|
(1,212,224
|
)
|
|
$
|
(6,856,774
|
)
|
|
$
|
2,239,115
|
|
|
$
|
(1,782,552
|
)
|
|
$
|
(7,612,435
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.87
|
)
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
Diluted
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.24
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.85
|
)
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
0.23
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - Basic
|
|
|
8,958,405
|
|
|
|
8,977,984
|
|
|
|
9,028,506
|
|
|
|
9,037,046
|
|
|
|
9,009,189
|
|
Weighted
average shares - Diluted
|
|
|
8,958,405
|
|
|
|
8,977,984
|
|
|
|
9,549,144
|
|
|
|
9,037,046
|
|
|
|
9,009,189
|
|
|
|
Fiscal
2017
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Year
|
|
Revenue
|
|
$
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from discontinued operations, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Basic
|
|
|
7,809,385
|
|
|
|
8,374,900
|
|
|
|
8,613,354
|
|
|
|
8,806,570
|
|
|
|
8,398,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - Diluted
|
|
|
7,809,385
|
|
|
|
8,374,900
|
|
|
|
8,613,354
|
|
|
|
8,806,570
|
|
|
|
8,398,778
|
|
Schedule
II
Description
|
|
|
Balance
at
beginning
of period
|
|
|
Additions
charged
to cost and
expenses
|
|
(Deductions)
|
|
|
Balance
at
end of
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts-years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$
|
96,868
|
|
|
$
|
103,132
|
|
$
|
—
|
|
|
$
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
96,868
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
96,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
126,868
|
|
|
$
|
(30,000
|
) (A)
|
$
|
—
|
|
|
$
|
96,868
|
|
|
(A)
|
Reduction
in allowance for doubtful accounts due to adjustment in reserve balance.
|
Description
|
|
|
Balance
at
beginning
of period
|
|
|
Additions
charged (credited)
to cost and
expenses
|
|
(Deductions)
|
|
|
Balance
at
end of
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax valuation
allowance-years ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
$
|
628,730
|
|
|
$
|
3,467,623
|
|
|
|
|
|
$
|
4,096,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
$
|
628,730
|
|
|
|
—
|
|
|
—
|
|
|
$
|
628,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
$
|
628,730
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
628,730
|
|