Washington, D.C. 20549
The Compensation Committee is empowered to advise management and make recommendations to the Board of Directors with respect to the compensation and other employment benefits of executive officers and key employees of the Company. In exercising its responsibilities, the Compensation Committee establishes and monitors policies governing the compensation of executive officers, reviews the performance of and determines salaries and incentive compensation for executive officers, and makes option or other equity-based awards to those individuals. Additionally, the Compensation Committee administers our stock plans. The Compensation Committee has a written charter, a copy of which is available on our corporate Web site, www.dynatronics.com, under "Investors, Corporate Governance, Governance Documents." A copy of this charter is included with this Proxy Statement as Attachment A.
The Compensation Committee meets as often as it deems necessary, without the presence of any executive officer whose compensation it is then approving. Neither the Compensation Committee nor the Company engaged or received advice from any compensation consultant during fiscal year 2017.2018. As of the date of this Proxy Statement, the following independent directors are members of the Compensation Committee: Scott A. Klosterman, (Chair), Erin S. Enright, Brian M. Larkin and R. Scott Ward. Mr. Larkin was appointed to the Committee in March 2017. The Compensation Committee held three meetings during fiscal year 2017.2018. All committee members attended at least 75% of these meetings.
Nominees for the Board of Directors should be committed to enhancing long-term shareholder value and must possess a high level of personal and professional ethics, sound business judgment and integrity. The Board of Directors is composed of a diverse group of leaders in their respective fields. The Board of Directors encourages selection of directors who will contribute to Dynatronics'our corporate governance, including: responsibility to its shareholders, technology leadership, effective execution, high customer satisfaction and superior employee working environment. The Nominating and Governance Committee from time to time reviews the appropriate skills and characteristics required of Board members, including factors that it seeks in Board members such as diversity of business experience, viewpoints and personal background, and diversity of skills in technology, finance, marketing, international business, financial reporting and other areas that are expected to contribute to an effective Board of Directors. In evaluating potential candidates for the Board of Directors, the Nominating and Governance Committee considers these factors in light of the specific needs of the Board of Directors at that time. The brief biographical description of each nominee set forth in the "Business“Business Experience and Qualifications of Nominees"Nominees” above includes the primary individual experience, qualifications, attributes and skills of each of our directors nominated for election at this Annual Meeting that led to the conclusion that each director should serve as a member of the Board of Directors at this time.Directors.
Shareholders may communicate directly with our Board of Directors by writing to them at "Board“Board of Directors, c/o Jim Ogilvie, Vice President of BusinessCorporate Development, Dynatronics Corporation, 7030 Park Centre Drive, Cottonwood Heights, Utah 84121."” All communications received in this manner will be opened for the sole purpose of determining whether the contents represent a message to our directors, after which they will be forwarded to the director or directors to whom addressed, except for communications that are (1) advertisements, promotions of a product or service, patently offensive material or matters deemed inappropriate for the Board of Directors, (2) solely related to complaints with respect to ordinary course of business, customer service and satisfaction issues, or (3) clearly unrelated to our business, industry, management, Board of Directors, or related committee matters.
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completion of “360” performance evaluations of each Board member by the Company as executive officers for their service as directors. The following table summarizes the total compensation paid by us during the fiscal year ended June 30, 2017, to our non-employee directors.
Director Compensation Fiscal Year 2017 (1)
| | Stock awards | | Total | |
| Name | ($) | | ($) | |
(a) | (c) | | (h) | |
| | | | | |
| Erin S. Enright | | $ | 20,000 | | | $ | 20,000 | |
| David B. Holtz | | $ | 19,000 | | | $ | 19,000 | |
| Scott A. Klosterman | | $ | 19,000 | | | $ | 19,000 | |
| Brian M. Larkin | | $ | 17,000 | | | $ | 17,000 | |
| R. Scott Ward, PhD | | $ | 17,000 | | | $ | 17,000 | |
(1) | Columns (b) and (d) through (g) are omitted from this table as no items of compensation referenced in those columns were paid to the directors during the period covered by the table. Total compensation paid to Mr. Cullimore, our Chief Executive Officers and Chairman, who also served as a director during fiscal year 2017, is detailed in the Summary Compensation Table under "Executive Compensation" on page 13 of this Proxy Statement. Executive officers serving as directors received no additional compensation for service as directors during fiscal year 2017. |
Fiscal Year 2018 Director Compensation
In fiscal year 2018, each non-employee director will be paid an annual cash retainer of $15,000 and equity compensation under our 2015 Equity Incentive Award Plan consisting of 10,000 shares of Common Stock. Committee chairs will receive an additional cash payment of $10,000 for service as the chairsother members of the respective Board committees.of Directors.
Family Relationships
None of the directors or executive officers is related to any other director or executive officer of the Company by blood, marriage or adoption.
EXECUTIVE OFFICERS
The following table sets forth information concerning our executive officers as of the date of this Proxy Statement. Similar information regarding Mr. Cullimore, who is also a member of ourOur Board of Directors may be found on page 5, above.
| | | Officer | Position |
Name | Age | Since | with Company |
| Kelvyn H. Cullimore, Jr. | 61 | 1983 | President and CEO |
| David A. Wirthlin | 56 | 2016 | Chief Financial Officer and Secretary |
| James N. Ogilvie | 31 | 2016 | Vice President of Business Development |
| Cynthia L. McHenry | 58 | 2017 | Vice President of Operations |
| Bryan D. Alsop | 55 | 2011 | Vice President of Information Systems |
| T. Jeff Gephart | 56 | 2016 | Senior Vice President of Sales |
| Douglas G. Sampson | 63 | 2009 | Vice President of R&D, Quality and Regulatory |
Kelvyn H. Cullimore, Jr., is our President and Chief Executive Officer. Information regarding Mr. Cullimore's business and education background and experience is included under the heading "Business Experience and Qualifications of Nominees" on page 5 of this Proxy Statement.
David A. Wirthlin joined Dynatronics and was appointed Chief Financial Officer in October 2016 and our Corporate Secretary in March 2017. He previously was with ArmorWorks Enterprises, LLC, a privately-held military armor technology company located in Arizona, where he served in several capacities. He served as Chief Financial Officer of ArmorWorks from June 2004 until January 2016, and was a consultant on a contract basis to ArmorWorks from January 2016 until his employment by Dynatronics. Mr. Wirthlin had previously served as Chief Financial Officer for Integrated Information Systems, Inc. and SkyMall, Inc., where he led the initial public offering process for each company and subsequently was directly responsible for all Commission related functions. He is a CPA (inactive status) and worked in public accounting and consulting for seven years at Arthur Andersen LLP. Mr. Wirthlin holds an MBA from the University of Chicago and a BS in Accounting from the University of Utah. He is a CPAactively involved in the State of Utah (inactive status).
James N. Ogilvie was appointed Vice President of Business Development in December of 2016; he joined us in August 2015, initially as Director of Business Development. Mr. Ogilvie had previously been with Evolent Health, Inc. (NYSE:EVH), a start-up where he developed strategic business cases for hospital systems. He started his career in the investment banking division of Robert W. Baird where he provided analytical support on equity offerings, mergersoversight and acquisitions and other financial advisory services. Mr. Ogilvie graduated from Brigham Young University, School of Accountancy, receiving an MS and BS in Accounting. His is also a CPA.
Cynthia L. McHenry was appointed Vice President of Operations in March 2017. For nearly 20 years Ms. McHenry worked for St Jude Medical (now Abbott). She was their Sr. Director of Global Operations, Integration and Site Optimization from 2013 – 2015. Prior to that, she was Director of Product Development and Director of Engineering Operations and Services. Ms. McHenry earned her Master of Business Administration (MBA) degree from Claremont Graduate University, The Peter F. Drucker & Masatoshi Ito Graduate School of Management with additional certificates in Strategy and Leadership. Ms. McHenry received her BS in Business Management from the University of Redlands.
Bryan D. Alsop was named Vice President of Information Systems in 2016. From July 2011, he served as Vice President of Information Technology. He was a consultant to Dynatronics in early 2009 and joined the Company later that year as the Director of Information Technology. From 2000 to 2008, Mr. Alsop was director of information technology at Bear River Mutual Insurance, where he was responsible for all aspectsmanagement of the IT department as a membermaterial risks that could affect the Company. The Board of the executive management team. Previously, he worked for such companies as Aetna Healthcare, McKesson, ITT Defense, Evans & Sutherland, and Sony Pictures Entertainment. He received his Bachelor of Science degree in Computer Science in 1991 from California State University - Northridge.
T. Jeff Gephart was appointed Senior Vice President of Sales in March 2016. Mr. Gephart spent almost a decade as Vice President of Sales for Chattanooga Group, the Company's largest competitor, managing their extensive sales network. Subsequently, he worked as Director of Sales and Marketing in the US market for Zimmer MedizinSystems, a German manufacturer of rehabilitation products and, most recently, as Director of Sales and Marketing for Gebauer Corporation, where he supervised sales, marketing and customer service for their worldwide operations.
Douglas G. Sampson was appointed Vice President of Research & Development, Quality and Regulatory in March 2017, and was Vice President of Production and Research and Development from September 2009 to 2017. Prior to joining Dynatronics, Mr. Sampson worked for Philips for 29 years. His positions included executiveDirectors carries out its risk oversight and management responsibilities in various Philips subsidiaries in Asia and the United States. From 2002 to 2007, he was Country Manager and Managing Director of NXP Semiconductor, Philips Semiconductor Thailand, where he was primarily responsible for all aspects of the manufacturing and sales operations of that subsidiary. Most recently, from 2007 to 2008, he served as Vice President of Outsourced Manufacturing for Fairchild Semiconductors in Singapore. Mr. Sampson earned a Master of Business Administration degree from the University of New Mexico, Anderson School of Management. He also holds a Bachelor of Science degree in electronics engineering technology from Brigham Young University, and an Associate's Degree in electronics engineering technology from Brigham Young University Idaho (formerly Ricks College).
EXECUTIVE COMPENSATION
Employment Agreement and Potential Payments upon Termination or Change in Control
Effective May 1, 2015, we entered into an employment agreement with Kelvyn H. Cullimore, Jr., our Chairman, President and Chief Executive Officer. The agreement was approved by the Compensation Committee of the Board. The compensation package underlying this agreement includes: (1) a base salary of $200,000 per year; (2) an automobile allowance; (3) a discretionary annual bonus (as determined by the Compensation Committee); (4) restricted stock awards and/or stock options granted under our equity compensation plan, as amended and restated; and (5) other employee benefits that are standard in such agreements, including, by way of example, life and disability insurance, health insurance, and paid vacation. The agreement also contains a provision granting Mr. Cullimore a single lump-sum cash payment of $500,000 within 30 days following a change of control event occurring after May 1, 2015. The agreement defines a "change of control" as an event in which:
(a) | any person or group of persons together with its affiliates, but excluding (i) the Company or any of its subsidiaries, (ii) any employee benefit plans of the Company or (iii) a corporation owned,monitoring risk directly or indirectly, by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes, directly or indirectly, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities (not including in the securities beneficially owned by such person any securities acquired directly from the Company); |
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(b) | the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on May 1, 2015, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's shareholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the effective date of the agreement or whose appointment, election or nomination for election was previously so approved or recommended;
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(c) | the consummation of a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with any other corporation or entity regardless of which entity is the survivor, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company, such surviving entity or any parent thereof outstanding immediately after such merger or consolidation; or |
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(d) | the shareholders of the Company approve a plan of complete liquidation or winding-up of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. |
Notwithstanding the foregoing, a change of control shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the holders of the Common Stock of the Company immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of the Company immediately following such transaction or series of transactions, and a change of control shall not occur for purposes of the agreement as a resultfull board and, where appropriate, through its committees. Effective risk oversight is a priority of any primary or secondary offering of Company Common Stock to the general public through a registration statement filed with the Commission.
In addition, notwithstanding the foregoing, to the extent that any payment under the agreement is payable solely upon or following the occurrence of a change of control and such payment is treated as "deferred compensation" for purposes of §409A of the Internal Revenue Code, no event that would not qualify as a "change in the ownership of the Company," a "change in the effective control of the Company," or a "change in the ownership of a substantial portion of the assets of the Company" as such terms are defined in §1.409A-3(i)(5) of the Treasury Regulations, shall be treated as a change of control under the agreement.
If a change of control occurs, Mr. Cullimore's stock options, stock awards, warrants and other similar rights granted to him prior to termination will immediately and entirely vest and will be immediately delivered to him without restriction or limitation of any kind (except for normal transfer restrictions required by law). In the event of termination prior to the expiration of the term of the agreement, we are also obligated to pay Mr. Cullimore a separation payment equal to 12 months' salary.
The agreement also provides that upon termination of employment we will transfer to Mr. Cullimore title, free and clear of all encumbrances, to either the Company-owned vehicle used by him at the time of termination, or a vehicle of substantially similar market value. The agreement terminates upon Mr. Cullimore's death or disability or upon termination of his employment for cause. The agreement also contains covenants against competition during the term of his employment and for eighteen months after the termination.
SUMMARY COMPENSATION TABLE
The following table summarizes information concerning the compensation awarded to, earned by or paid to, our Chief Executive Officer and the two most highly paid executive officers of the Company other than our Chief Executive Officer who were serving as executive officers as of June 30, 2017, and one former executive officer of the Company who was not serving as of such date (collectively, our "Named Executive Officers") for the periods indicated:
Name and Principal Position | Year ended June 30, | | Salary ($) | | | Bonus / Severance ($) | | | All Other Compensation ($) (Note 1) | | | Total ($) | |
| (a) | (b) | | (c) | | | (d) | | | (i) | | | (j) | |
| Kelvyn H. Cullimore, Jr. | 2017 | | $ | 200,000 | | | $ | 0 | | | $ | 31,202 | | | $ | 231,202 | |
| Chairman, President/CEO | 2016 | | $ | 200,000 | | | $ | 0 | | | $ | 28,106 | | | $ | 228,106 | |
| | | | | | | | | | | | | | | | | | |
| T. Jeff Gehpart | 2017 | | $ | 175,512 | | | $ | 19,732 | | | $ | 3,678 | | | $ | 198,922 | |
| Sr. VP Sales | 2016 | | $ | 50,769 | | | $ | 10,511 | | | $ | 1,221 | | | $ | 62,501 | |
| | | | | | | | | | | | | | | | | | |
| Bryan D. Alsop | 2017 | | $ | 135,000 | | | $ | 0 | | | $ | 13,883 | | | $ | 148,883 | |
| VP Information Systems | 2016 | | $ | 133,115 | | | $ | 0 | | | $ | 13,314 | | | $ | 146,429 | |
(1) | For each of the individuals listed in the table above, amounts indicated under "All Other Compensation" (column (i)) include but are not limited to perquisites including the dollar value of insurance premiums paid with respect to health and dental insurance, use of Company paid automobile, and cellular phone. No single item included in this column exceeds $25,000 or 10% of the total in the category. Columns (e) through (h) are omitted from this table, as no compensation of the types referred to in those columns was paid to the Named Executive Officers during the periods indicated. |
401(k) Plans
We maintain three 401(k) plans for our employees at Dynatronics Corporation (the "Dynatronics Plan") and our subsidiaries, Hausmann Enterprises, LLC (the "Hausmann Plan") and Bird & Cronin, LLC (the "Bird & Cronin Plan).
Dynatronics Plan. Under the Dynatronics plan, employees who are 20 years of age or older and have completed at least one month of service with Dynatronics are eligible to participate. Eligible employees may contribute to the Dynatronics Plan in the form of salary deferrals of up to $18,000, the maximum allowable for calendar year 2017. Eligible employees who are over 50 years old may contribute an additional $6,000 in catchup contributions during calendar year 2017. We match annual employee contributions at 25% of employee contributions, up to a maximum of $500 per employee per year. Participants in the Dynatronics Plan are fully vested in their salary deferral contributions, and employer matching contributions vest at 20% per year after two years of service (100% vested after 6 years). Amounts deferred by Named Executive Officers in the Dynatronics Plan, along with the 25% matching contributions, are included under "All Other Compensation" in the "Summary Compensation Table".
Hausmann Plan. Under the Hausmann Plan, employees who are 21 years of age or older and have completed a year of service with more than 1,000 hours of service with Hausmann are eligible to participate. Eligible employees may contribute to the Hausmann Plan in the form of salary deferrals of up to $18,000, the maximum allowable for calendar year 2017. Eligible employees who are over 50 years old may contribute an additional $6,000 in catchup contributions during calendar year 2017. We match employee contributions at 50% of up to the first 6% of employee compensation. Participants in the Hausmann Plan are fully vested in their salary deferral contributions, and employer matching contributions vest 10% after one year with more than 1,000 hours of service and 20% each year thereafter (100% vested after 6 years with more than 1,000 hours of service).
Bird & Cronin Plan. Under the Bird & Cronin plan, employees who are 21 years of age or older and have completed six months of service with more than 500 hours of service with Bird & Cronin are eligible to participate. Eligible employees may contribute to the Bird & Cronin Plan in the form of salary deferrals of up to $18,000, the maximum allowable for calendar year 2017. Eligible employees who are over 50 years old may contribute an additional $6,000 in catchup contributions during calendar year 2017. We match employee contributions at 100% of up to the first 5% of employee compensation. Participants in the Bird & Cronin Plan are fully vested in their salary deferral contributions, and employer matching contributions vest 20% per year after two years of service with more than 1,000 hours of service (100% vested after 6 years with more than 1,000 hours of service).
Section 162(m) Treatment Regarding Performance-Based Equity Awards
Under Section 162(m) of the Internal Revenue Code, a public company is generally denied deductions for compensation paid to its chief executive officer and the next four most highly compensated executive officers to the extent the compensation for any such individual exceeds $1,000,000 for the taxable year. Our executive compensation programs are designed to preserve the deductibility of compensation payable to executive officers, although deductibility is just one among a number of factors considered in determining appropriate levels or types of compensation.
OUTSTANDING EQUITY AWARDS AS OF FISCAL YEAR-END 2017
The following table summarizes the outstanding equity awards held by our Named Executive Officers as of June 30, 2017:
| | | | | | Stock Awards | | | | | | | |
Name (a) | | Number of securities underlying unexercised options (#) exercisable (b) | | | Option exercise price ($) (e) | | | Option expiration date (f) | | | Number of shares or units of stock that have not vested (#) (g) | | | Market value of shares or units of stock that have not vested ($) (h) | |
Kelvyn H. Cullimore, Jr. | | | 10,000 | | | $ | 3.34 | | | 11/20/2025 | | | | 102,000 | | | $ | 275,400 | |
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| Larry K. Beardall | | | 0 | | | $ | 0.00 | | | N/A | | | | 0 | | | $ | 0 | |
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| T. Jeff Gephart | | | 3,750 | | | $ | 2.87 | | | 3/1/2026 | | | | 11,250 | | | $ | 30,375 | |
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| Bryan D. Alsop | | | 5,000 | | | $ | 4.15 | | | 7/28/2019 | | | | 0 | | | $ | 0 | |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 16, 2017 (the "Table Date"), except as indicated in the footnotes below, for the following: (1) each person whom we know beneficially owns more than 5% of our Common Stock; (2) each of our directors and director nominees; (3) each of our Named Executive Officers; and (4) all of our executive officers and directors as a group. As of the Table Date, 4,823,694 shares of Common Stock were issued and outstanding. Unless otherwise indicated, the address of each beneficial owner listed in the table is c/o Dynatronics Corporation, 7030 Park Centre Drive, Cottonwood Heights, Utah 84121.
We have determined beneficial ownership in accordance with the rules of the Commission. Except as indicated in the footnotes below, we believe, based on the information furnished to us, that the persons named in the table below have sole voting and investment power with respect to all shares of Common Stock that they beneficially own, subject to applicable community property laws. In computing the number of shares beneficially owned by each person or group as of the Table Date, we included shares of Common Stock that such person or group had the right to acquire on or within 60 days after the Table Date, including, but not limited to, shares issuable upon the exercise of options or warrants, conversion of preferred stock, or the vesting of restricted share awards that would vest or could settle on or within 60 days after the Table Date. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than one percent is denoted with an asterisk (*).
Principal Shareholders, Security Ownership of Holders of More than 5% of Voting Securities
Name of Beneficial Owner | | Number of Shares | | | Percent of Class | | | Percent of Voting | |
| Stuart M. Essig | | | 3,285,294 | (1) | | | 42.8% | | | | 17.3% | |
| 174 Nassau Street #320 | | | | | | | | | | | | |
| Princeton, NJ 08542 | | | | | | | | | | | | |
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| Stuart M. Essig 2007 Family Trust | | | 637,474 | (2) | | | 11.8% | | | | 3.5% | |
| 174 Nassau Street #320 | | | | | | | | | | | | |
| Princeton, NJ 08542 | | | | | | | | | | | | |
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| Provco Ventures I LP | | | 1,996,944 | (3) | | | 30.6% | | | | 11.0% | |
| 795 E. Lancaster Ave. Suite 200 | | | | | | | | | | | | |
| Villanova, PA 19085 | | | | | | | | | | | | |
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| Brian Baker | | | 255,607 | (4) | | | 5.0% | | | | 1.2% | |
| 25251 Nueva Vista | | | | | | | | | | | | |
| Laguna Niguel, CA 92677 | | | | | | | | | | | | |
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| John Henneman and Keryl Rowden | | | 255,607 | (5) | | | 5.0% | | | | 1.2% | |
| c/o NewLink Genetics | | | | | | | | | | | | |
| 2700 Via Fortuna Drive | | | | | | | | | | | | |
| Terrace II Suite 100 | | | | | | | | | | | | |
| Austin, TX 78746 | | | | | | | | | | | | |
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| David H. Hausmann | | | 318,941 | (6) | | | 6.3% | | | | 2.3% | |
| 71 Briarwood Avenue | | | | | | | | | | | | |
| Norwood, NJ 07648 | | | | | | | | | | | | |
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| Armistice Capital, LLC | | | 1,771,891 | (7) | | | 29.2% | | | | 12.5% | |
| c/o Steven Boyd | | | | | | | | | | | | |
| 510 Madison Ave, 22nd Floor | | | | | | | | | | | | |
| New York, NY 10022 | | | | | | | | | | | | |
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| First Light Focus Fund LP | | | 354,379 | (8) | | | 7.0% | | | | 2.5% | |
| 3300 Edinborough Way, Suite 201 | | | | | | | | | | | | |
| Edina, MN 55435 | | | | | | | | | | | | |
(1) | Mr. Essig is an observer to our Board of Directors and the husband of Erin Enright, a Preferred Director and member of our Board of Directors. The amount indicated includes 880,000 shares of Common Stock issuable upon conversion of Series A Preferred Stock, 260,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 1,710,000 shares of Common Stock issuable upon the exercise of warrants beneficially owned by Mr. Essig. Amount indicated does not include 398,010 shares of Common Stock issuable upon conversion of Series C Preferred Stock following shareholder approval. Mr. Essig has sole voting and dispositive power over all shares of stock indicated; neither Ms. Enright nor the Essig Trust (see Note 2 to this table, below) has shared voting or dispositive power over the shares owned of record by Mr. Essig. |
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(2) | Mr. Essig is the Settlor/Grantor of The Stuart M. Essig 2007 Family Trust ("Essig Trust"). Mr. Essig's wife, Erin S. Enright, is Trustee of the Essig Trust and is a Preferred Director and member of our Board of Directors. Shares include 188,800 shares of Common Stock issuable upon conversion of Series A Preferred Stock, 40,000 shares issuable upon conversion of Series B Preferred Stock, and 343,200 shares issuable upon exercise of warrants owned of record by the Essig Trust. Ms. Enright and the Essig Trust have shared voting and dispositive power over all shares of stock held by the Essig Trust; Mr. Essig has no voting or dispositive power over such shares. Amount indicated also includes 15,456 shares of Common Stock held of record by Ms. Enright; however, Ms. Enright has sole voting and dispositive power over those shares of Common Stock owned of record by Ms. Enright and neither the Essig Trust nor Mr. Essig has shared voting or dispositive power over such shares. (See Note 2 to "Security Ownership of Management and Directors" table, below.)
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(3) | The General Partner of Provco Ventures I, LP is Provco, LLC. The sole member of Provco, LLC is Richard E. Caruso, Ph.D. The amount indicated includes 484,000 shares of Common Stock issuable upon conversion of Series A Preferred Stock, 200,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 1,026,000 shares of Common Stock issuable upon the exercise of warrants held by Provco. Amount indicated does not include 300,000 shares of Common Stock issuable upon conversion of Series C Preferred Stock owned by Provco once shareholder approval is obtained at the Annual Meeting. |
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(4) | The amount indicated includes 96,000 shares of Common Stock issuable upon conversion of Series A Preferred Stock, and 144,000 shares of Common Stock issuable upon the exercise of warrants held by Mr. Baker. |
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(5) | The amount indicated includes 96,000 shares of Common Stock issuable upon conversion of Series A Preferred Stock, and 144,000 shares of Common Stock issuable upon the exercise of warrants held by John Henneman and Keryl Rowden. |
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(6) | The amount indicated includes 90,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 135,000 shares of Common Stock issuable upon the exercise of warrants held by Mr. Hausmann. |
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(7)
| Amount indicated includes 500,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 750,000 shares of Common Stock issuable upon the exercise of warrants held by Armistice. Amount indicated does not include 760,000 shares of Common Stock issuable upon conversion of Series C Preferred Stock owned by Armistice once shareholder approval is obtained at the Annual Meeting. |
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(8) | Amount indicated includes 100,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 150,000 shares of Common Stock issuable upon the exercise of warrants held by First Light. Amount indicated does not include 680,000 shares of Common Stock issuable upon conversion of Series C Preferred Stock owned by First Light once shareholder approval is obtained at the Annual Meeting. |
Security Ownership of Management and Directors
| Name of Beneficial Owner | | Number of Shares | | | | | Percent of Class | |
| Directors | | | | | | | | |
| Kelvyn H. Cullimore, Jr. (CEO/Director) | | | 207,258 | | | (1) | | | 4.1 | % |
| Erin S. Enright (Director) | | | 3,922,768 | | | (2) | | | 47.6 | % |
| David B. Holtz (Director) | | | 14,684 | | | (3) | | | * | |
| Scott A. Klosterman (Director) | | | 14,684 | | | | | | * | |
| Brian M. Larkin (Director) | | | 210,276 | | | (4) | | | 4.2 | % |
| R. Scott Ward (Director) | | | 14,991 | | | | | | * | |
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| Named Executive Officers | | | | | | | | | | |
| T. Jeff Gephart | | | 22,956 | | | (5) | | | * | |
| Bryan D. Alsop | | | 5,000 | | | (6) | | | * | |
| All executive officers and directors as a group (8 persons) | | | 4,412,617 | | | | | | 51.8 | % |
(1) | Includes 72,000 shares of restricted Common Stock that vest upon retirement, change of control or death, 10,000 shares of Common Stock owned of record by Mr. Cullimore's wife, and options held by Mr. Cullimore for the purchase of 10,000 shares of Common Stock. |
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(2) | Ms. Enright is a Preferred Director and member of our Board of Directors; she is also a Managing Member of Prettybrook. The amount indicated includes 15,456 shares of Common Stock held of record by Ms. Enright. Neither Ms. Enright nor Prettybrook has shared voting or dispositive power over any other shares indicated, including: 880,000 shares of Common Stock issuable upon conversion of Series A Preferred Stock, 260,000 shares of Common Stock issuable upon conversion of Series B Preferred Stock, and 1,710,000 shares of Common Stock issuable upon the exercise of warrants beneficially owned by Mr. Essig as indicated in the table on page 17, above, for which Mr. Essig has sole voting and dispositive power. Amount indicated also includes 188,800 shares of Common Stock issuable upon conversion of Series A Preferred Stock, 40,000 shares issuable upon conversion of Series B Preferred Stock, and 343,200 shares issuable upon exercise of warrants beneficially owned by the Essig Trust, of which Ms. Enright is the Trustee. |
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(3) | Mr. Holtz is a Preferred Director and a member of our Board of Directors. Mr. Holtz is an executive officer of Provco, LLC, the general partner of Provco Ventures I LP. |
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(4) | Mr. Larkin is a Preferred Director and a member of our Board of Directors. The amount indicated includes 48,000 shares issuable upon conversion of shares of Series A Preferred Stock, 20,000 shares issuable upon conversion of Series B Preferred Stock, and 102,000 shares issuable upon the exercise of warrants beneficially owned by Mr. Larkin. Amount indicated excludes 40,000 shares of Common Stock issuable upon conversion of Series C Preferred Stock once shareholder approval of Proposal No. 3 is obtained. |
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(5) | Mr. Gephart is our Senior Vice President of Sales. The amount indicated includes 5,600 shares of Common Stock issuable upon conversion of Series A Preferred Stock and 8,400 shares underlying the warrants held by Mr. Gephart. |
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(6) | Mr. Alsop is our Vice President of Information Systems. The amount indicated includes 5,000 shares of Common Stock issuable upon exercise of options held by Mr. Alsop. |
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of securities ownership and changes in such ownership with the Commission. Officers, directors and greater than ten percent shareholders also are required by Commission rules to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on review of the copies of the Forms 3, 4 and 5 (and amendments thereto) furnished to us during and with respect to the fiscal year ended June 30, 2017, we believe that during the fiscal year ended June 30, 2017, all Section 16(a) filings required to be made by these persons were filed and that such filings were timely except we understand that Provco Ventures I LP filed four late reports disclosing four transactions, Stuart M. Essig filed four late reports disclosing four transactions, and our director Brian M. Larkin filed on late report disclosing one transaction.Equity Compensation Plans
As of June 30, 2017, we had equity awards outstanding under two plans: the 2005 Dynatronics Equity Incentive Award Plan ("2005 Plan") and the 2015 Dynatronics Equity Incentive Award Plan ("2015 Plan"). The 2015 Plan was approved by our shareholders on June 29, 2015. Outstanding awards under these plans expire (if not exercised) on the expiration date indicated in the respective awards, or, if no expiration date is indicated in such award, on the tenth anniversary of the grant date of the award. Nonqualified and incentive stock options and other awards have been granted to our employees, officers, directors and consultants under these plans. The Compensation Committee administers these plans.
As of June 30, 2017, options for the purchase of 74,473 shares of Common Stock were exercisable and a total of 166,990 shares are subject to options outstanding under the 2005 Plan and 2015 Plan. As of June 30, 2017, a total of 299,549 shares were available for issuance through options or awards yet to be granted under the 2015 Plan. The following table sets forth information as of June 30, 2017 about our stock option plans and our non-plan options under which our equity securities are authorized for issuance.
Equity Compensation Plan Information
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | | Weighted- average exercise price of outstanding options, warrants and rights (b) | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) | |
| Equity compensation plans approved by security holders | | | 166,990 | | | $ | 3.14 | | | | 299,549 | |
| Equity compensation plans not approved by security holders | | | 72,000 | | | $ | 0.00 | | | | 0 | |
| Total | | | 238,990 | | | $ | 2.20 | | | | 299,549 | |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Review, Approval or Ratification of Transactions with Related Persons
We have adopted a policy that any transactions with directors, executive officers or entities of which they are also officers or directors or in which they have a financial interest, will only be on terms consistent with industry standards and approved by a majority of the disinterested directors of our Board of Directors. Our bylaws provideThese duties are carried out through the effective use of Board committees that no such transactionsfunction under written charters adopted by us shall be either void or voidable solely because of such relationship or interest of directors or officers or solely because such directors are present at the meeting of our Board of Directors or a committee thereof which approves such transactions, or solely because their votes are counted for such purpose if:Board.
· | The fact of such common directorship or financial interest is disclosed or known by our Board of Directors or committee and noted in the minutes, and our Board of Directors or committee authorizes, approves or ratifies the contract or transaction in good faith by a vote for that purpose without counting the vote or votes of such interested directors; or |
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· | The fact of such common directorship or financial interest is disclosed to or known by the shareholders entitled to vote, and they approve or ratify the contract or transaction in good faith by a majority vote or written consent of shareholders holding a majority of the shares of Common Stock entitled to vote (the votes of the interested directors or officers shall be counted in any such vote of shareholders); or |
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· | The contract or transaction is fair and reasonable to us at the time it is authorized or approved. |
In addition, interested directors may be counted in determining the presence of a quorum at a meeting of our Board of Directors or a committee thereof that approves such transactions. If there are no disinterested directors, we shall obtain a majority vote of the shareholders approving the transaction.
PROPOSAL NO. 2
RATIFICATION OF SELECTION OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
General
The BoardWhat am I voting on?
Ratification of Directors is asking the shareholders to ratify the Audit Committee's appointmentselection of Tanner LLC ("Tanner") as Dynatronics'our independent registered public accounting firm for the fiscal year ending June 30, 2018. While2019.
Vote required: A majority of the shares present or represented by proxy.
Effect of abstentions: Same as a vote “AGAINST”.
Effect of broker non-votes: None (because this is a routine proposal, there are no broker non-votes).
The Audit Committee of the Board of Directors has selected Tanner LLC as our independent registered public accounting firm for the fiscal year ending June 30, 2019 and has further directed that management submit the selection of our independent registered public accounting firm for ratification by the shareholders at the Annual Meeting. Our lead audit partner at Tanner LLC serves no more than five consecutive years in that role. Representatives of Tanner LLC are expected to be present at the Annual Meeting. They will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions.
Neither our Bylaws nor other governing documents or law require shareholder ratification of the selection of auditors by the shareholders is not required and is not binding uponTanner LLC as our independent registered public accounting firm. However, the Audit Committee oris submitting the Company, inselection of Tanner LLC to the eventshareholders for ratification as a matter of a negative vote on such ratification,good corporate practice. If the shareholders fail to ratify the selection, the Audit Committee might choosewill reconsider whether or not to reconsider its selection.retain that firm. Even if the appointmentselection is ratified, the Audit Committee in its discretion may direct the appointment of a different independent registered public accounting firmauditors at any time during the year if the Audit Committee determinesthey determine that such a change would be in Dynatronics'our best interests and its shareholders'in the best interests.interests of our shareholders.
The Audit Committee is directly responsible for the appointment, determinationaffirmative vote of the compensation for, and retention and oversightholders of a majority of the work ofshares present in person or represented by proxy and entitled to vote on the independent registered public accounting firm retainedmatter at the Annual Meeting will be required to audit Dynatronics' consolidated financial statements. The Audit Committee has appointed Tanner as our independent registered public accounting firm for fiscal 2018 and is responsible for pre-approving all audit and permissible non-audit services to be provided by Tanner.
THE BOARD, UPON THE RECOMMENDATION OF THE AUDIT COMMITTEE, RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL AND RATIFICATION OF TANNER LLC AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR ENDING JUNE 30, 2018.
CHANGES IN CERTIFYING ACCOUNTANT
On October 24, 2016,ratify the
Audit Committee approved the engagementselection of Tanner
as the Company's independent registered public accounting firm for the Company's fiscal year ending June 30, 2017. Also, the Audit Committee informed BDO USA, LLP ("BDO") that it had been dismissed, effective October 24, 2016, as the Company's independent registered public accounting firm. BDO had been engaged as our independent registered public accounting firm in July 2016, for the fiscal year ended June 30, 2016, when we dismissed Mantyla McReynolds LLC, which had been our independent registered public accounting firm for the two years ended June 30, 2015. Mantyla McReynolds LLC combined with BDO effective July 1, 2016.LLC.During the fiscal year ended June 30, 2016, and the subsequent interim period through October 24, 2016, the Company had (i) no disagreements within the meaning of Item 304(a)(1)(iv) of Regulation S-K and the instructions thereto with BDO on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, any of which that, if not resolved to BDO's satisfaction, would have caused it to make reference to the subject matter of any such disagreement in connection with its reports for such years and interim period and (ii) no reportable events within the meaning of Item 304(a)(1)(v) of Regulation S-K.
BDO's report on the Company's consolidated financial statements for the fiscal year ended June 30, 2016, did not contain any adverse opinion or disclaimer of opinion, nor was the report qualified or modified as to uncertainty, audit scope, or accounting principles.
During the fiscal year ended June 30, 2016, and the subsequent interim period through October 24, 2016, neither the Company nor anyone on its behalf has consulted with Tanner regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, (ii) the type of audit opinion that might be rendered on the Company's financial statements, (iii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K and the instructions thereto, or (iv) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
In accordance with Item 304(a)(3) of Regulation S-K, the Company provided BDO a copy of the disclosures made above, which were also made in the Company's Current Report on Form 8-K prior to filing such report with the Commission, and requested that BDO furnish the Company with a letter addressed to the Commission stating whether or not BDO agrees with the above statements. A copy of the letter was filed with the Current Report.
Independence
Tanner LLC has advised us that it has no direct or indirect financial interest in the Companyus or in any of itsour subsidiaries and that during 20172018, it had no connection with the Companyus or any of itsour subsidiaries, other than as itsour independent registered public accounting firm or in connection with certain other activities,services, as described below.
Representatives of Tanner are expected to be present at the Annual Meeting
Principal Accountant Fees and will have the opportunity to make a statement if they desire to do so. It is also expected that those representatives will be available to respond to appropriate questions.Services
PRINCIPAL ACCOUNTANT FEES AND SERVICES
During fiscal year 2016, BDO provided2018, we entered into an engagement agreement with Tanner LLC, which set forth the terms by which Tanner LLC agreed to perform audit services consistingfor us. Those services consisted of the audit of theour annual consolidated financial statements, and the effectiveness of our internal control over financial reporting, review of the Company for the fiscal year 2016. BDOquarterly financial statements, stand-alone audits of subsidiaries, and accounting consultations, consents, and other services related to our SEC filings. Tanner LLC did not perform any financial information systems design and implementation services for the Company forus in our fiscal year 2016.2018.
During fiscal year 2017, Tanner providedLLC performed services consisting of the audit of theour annual consolidated financial statements, and the effectiveness of our internal control over financial reporting, review of the Company for the fiscal year ended June 30, 2017.quarterly financial statements, and accounting consultations, consents, and other services related to our SEC filings. Tanner LLC did not perform any financial information systems design and implementation services for the Company forus in fiscal year 2017.
Audit Fees
The aggregatefollowing table summarizes the fees billedpaid by BDO for professional services rendered for the fiscal year ended June 30, 2016, in connection with (i) the audit of our annual financial statements set forth in our Annual Report on Form 10-K for the fiscal year then ended, and (ii) the reviews of our quarterly financial statements set forth in our Quarterly Reports on Form 10-Q for each of our fiscal quartersus to Tanner LLC during the period then ended, totaled approximately $96,000.
The fees billed by Tanner for professional services rendered for the fiscal year ended June 30, 2017 in connection with (i) the audit of our annual financial statements set forth in our Annual Report on Form 10-K for the fiscal year then ended, and (ii) the reviews of our quarterly financial statements set forth in our Quarterly Reports on Form 10-Q for each of our fiscal quarters during the period then ended, totaled approximately $160,000.
Audit-Related Fees
No fees were billed by Tanner or BDO in each of the last two fiscal years for other assurance2017 and related services.2018.
Audit-related fees paid to BDO in fiscal year 2016 totaled approximately $31,000
| Type of Service and Fee | | |
| Audit Fees | $160,000 | $202,000 |
| Audit Related Fees | 5,000 | 7,000 |
| Tax Fees | - | - |
| All Other Fees | 120,000
| 20,000 |
| Total Fees | $285,000 | $229,000 |
Pre-approval Policies and were in connection with our private placement of Series A Preferred Stock in 2015, and our selling shareholder registration statements related to the 2015 offering of Series A Preferred Stock and warrants and underlying Common Stock. Audit-related fees paid to BDO in fiscal year 2017 totaled approximately $33,000 and were in connection with our selling shareholder registration statements related to our 2016 private placement of Series A Preferred Stock, and our 2017 private placement of units of Common Stock, Series B Preferred Stock and warrants ("Units"), and underlying Common Stock.Procedures
Audit-related fees paid to Tanner in fiscal year 2017 totaled approximately $5,000 and were in connection with the private placement of the Units, and our selling shareholder registration statements related to the 2016 private placements of our Series A Preferred Stock and the Units, as well as review of our Current Reports on Form 8-K associated with our acquisition of Hausmann.
Other fees paid to Tanner for professional services rendered during the fiscal year ended June 30, 2017 in connection with our acquisition of Hausmann in April 2017, totaled approximately $120,000.
All fees described above were approved by the Company's Audit Committee.
Audit Committee Policy Regarding Pre-Approval of Audit and Permissible Non-Audit Services of the Company's Independent Registered Public Accounting Firm
The Audit Committee has established a policy that all audit and permissible non-audit services provided by the independent registered public accounting firm will be pre-approved by the Audit Committee. These services may include audit services, audit-related services, tax services and other services. The Audit Committee considers whether the provision of each non-audit service is compatible with maintaining the independence of the independent registered public accounting firm. Pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent registered public accounting firm and our management are required to periodically report to the Audit Committee regarding the extent of services provided in accordance with this pre-approval, and the fees for the services performed to date.
REPORT OF THE AUDIT COMMITTEE
The following is the report of the Audit Committee with respect to the Company's audited financial statements for the year ended June 30, 2017. The information contained in this report shall not be deemed "soliciting material" or otherwise considered "filed" with the Commission, and such information shall not be incorporated by reference into any future filing under the Securities Act or the Exchange Act except to the extent that the Company specifically incorporates such information by reference in such filing.
The Audit Committee has reviewed and discussed with Dynatronics' management anddetermined that the rendering of services other than audit services by Tanner LLC is compatible with maintaining the audited consolidated financial statements of Dynatronics contained in Dynatronics' Annual Report on Form 10-K for the 2017 fiscal year. The Audit Committee has also discussed with Tanner LLC the matters required to be discussed by Auditing Standard No. 16, Communications with Audit Committees.principal accountant’s independence.
The Audit Committee has received and reviewed the written disclosures and the letter from Tanner LLC required by applicable requirements
Recommendation of the Public Company Accounting Oversight Board regarding the independent accountant's communications with the Audit Committee concerning independence, and has discussed with Tanner LLC its independence from Dynatronics.
Based on the review and discussions referred to above, the Audit Committee recommended to the
The Board of Directors recommends a vote FOR Proposal No. 2 ratifying the selection of Tanner LLC as our independent registered public accounting firm for the year ending June 30, 2019.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to our executive officers as of October 4, 2018.
| Name | | Age | | Position |
| Christopher R. von Jako, Ph.D. | | 49 | | Chief Executive Officer and Director |
| David A. Wirthlin | | 57 | | Chief Financial Officer and Secretary |
| James N. Ogilvie | | 32 | | Vice President Corporate Development |
| Daryl Connell | | 46 | | Chief Information Officer |
| Skyler Black | | 35 | | Corporate Controller |
Dr. von Jako’sbiographical information and work experience and other credentials are summarized in the section of this Proxy Statement that discusses Proposal No. 1, Election of Directors. Information regarding the other executive officers in the table above is provided below.
David A. Wirthlin joined us and was appointed Chief Financial Officer in October 2016 and Corporate Secretary in March 2017. He previously worked with ArmorWorks Enterprises, LLC, a privately-held military armor technology company located in Arizona, where he served in several capacities: Chief Financial Officer from June 2004 until January 2016, and consultant on a contract basis to ArmorWorks from January 2016 until October 2016. Mr. Wirthlin served as Chief Financial Officer for Integrated Information Systems, Inc. and SkyMall, Inc., where he led the initial public offering process for each company and subsequently was directly responsible for all SEC-related functions. He is a CPA in the State of Utah (inactive status) and worked in public accounting and consulting for seven years at Arthur Andersen LLP. Mr. Wirthlin holds an MBA degree from the University of Chicago and a B.S. degree in Accounting from the University of Utah.
James N. Ogilvie was appointed Vice President of Corporate Development in December of 2016; he joined us in August 2015, initially as Director of Business Development. Mr. Ogilvie worked previously at Evolent Health, Inc. (NYSE:EVH) where he developed strategic business cases for hospital systems. He started his career in the investment banking division of Robert W. Baird, where he provided analytical support on equity offerings, mergers and acquisitions, and other financial advisory services. Mr. Ogilvie graduated from Brigham Young University, School of Accountancy, receiving an M.S. degree and B.S. degree in Accounting. He is also a CPA, licensed in Wisconsin.
Daryl Connelljoined us in February 2018 as Chief Information Officer. He previously was with Conklin Company Inc., a privately-held chemical manufacturer located in Minnesota, where he served as Director of Information Technology from October 2015 until February 2018. Mr. Connell also previously served as Director of Information Technology for Ablenet, Inc., Llewellyn Worldwide Ltd, and Wirth Companies Inc. Mr. Connell received his education in M.I.S. at Brown College in Minnesota and the University of Minnesota.
Skyler Blackjoined us as Corporate Controller in January 2018. He was previously with PricewaterhouseCoopers, LLP where he spent 12 years in their assurance practice. He is a CPA in the state of Nevada and holds a B.S. degree in Accounting from Brigham Young University – Idaho.
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the ownership of our common stock and voting securities as of October 4, 2018, by (1) each person known by us to be the beneficial owner of more than 5% of the issued and outstanding common stock, based upon their most recent filings or correspondence with the SEC, (2) our Named Executive Officers and the directors individually, and (3) the Named Executive Officers and directors as a group. Except as indicated in the notes below the table, each of the persons listed below is believed to exercise sole voting and investment power over the shares of stock that are listed for such individual or entity in the table. Under SEC rules, “Named Executive Officers” include (i) all individuals serving as our principal executive officer or acting in a similar capacity during the last completed fiscal year, regardless of compensation level; (ii) our two most highly compensated executive officers other than the principal executive officer who were serving as executive officers at the end of the last completed fiscal year; and (iii) up to two additional individuals for whom disclosure would have been provided pursuant to the rule but for the fact that the audited consolidated financial statements be included in Dynatronics' Annual Report on Form 10-Kindividual was not serving as an executive officer of the Company at the end of the last completed fiscal year. We have identified Kelvyn H. Cullimore, Jr., who served as our Chief Executive Officer until June 2018, and Dr. Christopher von Jako, Ph.D., as our principal executive officers and therefore as Named Executive Officers for its 2017these purposes. In addition, we have identified Jeff Gephart and David Wirthlin who were our two most highly compensated executive officers other than our principal executive officer during the fiscal year for filing withended June 30, 2018, although Mr. Gephart was no longer employed by us at the Securities and Exchange Commission.
| Respectfully submitted: |
| |
| |
| THE AUDIT COMMITTEE
David Holtz, Chairman
Erin S. Enright
Scott A. Klosterman
|
22end of the fiscal year. Unless otherwise indicated in the notes below the table, the address of each beneficial owner listed in the table below is c/o Dynatronics Corporation, 7030 Park Centre Dr., Cottonwood Heights, Utah 84121.
PROPOSAL NO. 3
APPROVAL OF THE ISSUANCE OF COMMON STOCK (OR SECURITIES CONVERTIBLE
INTO OR EXERCISABLE FOR COMMON STOCK) REPRESENTING MORE THAN 19.99% OF THE OUTSTANDING COMMON STOCK OR VOTING POWER OF THE COMPANY IN CONNECTION WITH THE ACQUISITION OF THE ASSETS OF BIRD & CRONIN
The "NASDAQ Acquisition Rule" (NASDAQ Listing Rule 5635(a)) requires shareholder approval prior to the issuancetable assumes 8,226,523 shares of securities in connection with an acquisitioncommon stock issued and outstanding as of October 4, 2018. For purposes of the stock or assets of another company wheretable, we determined the total number of shares of common stock beneficially owned by each person under Rule 13d-3(d)(1) of the Exchange Act. Under this rule, shares of common stock not outstanding that are subject to issuance pursuant to options, warrants, rights or conversion privileges exercisable by a person within 60 days of the date indicated (October 4, 2018) are deemed outstanding for the purpose of calculating the number and percentage beneficially owned by such person but are not deemed outstanding for the purpose of calculating the number or percentage beneficially owned by each any other person listed in the table. Except where otherwise noted, we believe that each individual or entity named has sole investment and voting power with respect to the shares of indicated as beneficially owned by such person, subject to community property laws, where applicable. Beneficial ownership representing less than one percent is denoted with an asterisk (*).
| | | |
Name/Address of Beneficial Owner | | | |
| Greater than 5% Shareholders: | | | |
Stuart M. Essig (1) | 3,970,361 | 35.2% | 16.4% |
| | | | |
Stuart M. Essig 2007 Family Trust (2) | 668,837 | 7.3% | 2.7% |
| | | | |
Provco Ventures I, LP (3) | 2,499,779 | 24.8% | 10.9% |
| | | | |
David H. Hausmann(4) | 442,379 | 5.2% | 2.3% |
| | | | |
Armistice Capital, LLC (5) | 1,790,985 | 16.9% | 8.9% |
| | | | |
Nancy K. Cronin (6) | 978,161 | 12.0% | 8.8% |
| Named Executive Officers and Directors | | | |
Kelvyn H. Cullimore, Jr. (CEO/Director)(7) | 169,685 | 2.1% | 1.2% |
| | | | |
Christopher R. von Jako, Ph.D. (CEO/Director)(8) | 275,824 | 3.3% | * |
| | | | |
T. Jeff Gephart(9) | 19,534 | * | * |
| | | | |
David A. Wirthlin(10) | 16,487 | * | * |
| | | | |
Erin S. Enright (Director)(11) | 4,639,198 | 39.2% | 19.2% |
| | | | |
David B. Holtz (Director)(12) | 14,684 | * | * |
| | | | |
Scott A. Klosterman (Director)(13) | 14,684 | * | * |
| | | | |
Brian M. Larkin (Director)(14) | 285,535 | 3.4% | 1.4% |
| | | | |
R. Scott Ward (Director)(15) | 14,991 | * | * |
| | | | |
| All Named Executive Officers and directors as a group (nine persons) | 5,434,211 | 44.0% | 23.0% |
__________________
(1) | Mr. Essig is an observer to our Board of Directors and the husband of Erin Enright, a Preferred Director and the Chairperson of the Board. The amount indicated includes: (a) 921,356 shares of common stock owned of record; (b) 880,000 shares of common stock issuable upon conversion of Series A Preferred; (c) 260,000 shares of common stock issuable upon conversion of Series B Preferred; and (d) 1,909,005 shares of common stock issuable upon the exercise of warrants. Mr. Essig has sole voting and dispositive power over the shares of stock indicated. He has no voting or dispositive power over securities that are beneficially owned of record by the Essig Trust (see Note (2), below) or by Ms. Enright (see Note (14), below). The address for this beneficial owner is 512 West MLK Jr. Blvd #320, Austin, Texas 78701. |
(2) | Mr. Essig is the Settlor/Grantor of The Stuart M. Essig 2007 Family Trust (“Essig Trust”). His wife, Ms. Enright, is Trustee of the Essig Trust. Shares include: (a) 71,381 shares of common stock owned of record; (b) 188,800 shares of common stock issuable upon conversion of Series A Preferred; (c) 40,000 shares of common stock issuable upon conversion of Series B Preferred; and (d) 343,200 shares of common stock issuable upon exercise of warrants. Ms. Enright and the Essig Trust have shared voting and dispositive power over the shares of stock owned of record by the Essig Trust. Amount indicated also includes 25,456 shares of common stock owned of record by Ms. Enright personally, over which Ms. Enright has sole voting and dispositive power. (See Note 14, below.) The address for this beneficial owner is 512 West MLK Jr. Blvd #320, Austin, Texas 78701. |
(3) | The address of this beneficial owner is 795 E. Lancaster Ave. Suite 200, Villanova, PA 19085. The general partner of this shareholder is Provco, LLC. The sole member of Provco, LLC is Richard E. Caruso, Ph.D. The amount indicated includes: (a) 639,779 shares of common stock owned of record; (b) 484,000 shares of common stock issuable upon conversion of Series A Preferred; (c) 200,000 shares of common stock issuable upon conversion of Series B Preferred; and (d) 1,176,000 shares of common stock issuable upon the exercise of warrants. |
(4) | Amount indicated includes 177,379 shares of common stock owned of record, 90,000 shares of common stock issuable upon conversion of Series B Preferred, and 175,000 shares of common stock issuable upon the exercise of warrants. Mr. Hausmann is the President of our Hausmann Enterprises Division. The address for this beneficial owner is 71 Briarwood Avenue, Norwood, NJ 07648. |
(5) | Amount indicated includes: (a) 540,985 shares of common stock owned of record; (b) 500,000 shares of common stock issuable upon conversion of Series B Preferred; (c) 760,000 shares of common stock issuable upon conversion of Series C Preferred; and (d) 1,130,000 shares of common stock issuable upon the exercise of warrants. The preferred stock and the warrants include provisions that limit the exercise or conversion thereof, as applicable, to the extent such exercise would cause the holder, together with its affiliates and any other person acting together with it and its affiliates, to beneficially own a number of shares of common stock which would exceed 9.99% of our then outstanding common stock following such exercise or conversion, excluding for purposes of such determination shares of common stock issuable upon the exercise of the warrant or conversion of the preferred stock which have not been exercised or converted. The shareholder may increase or decrease its beneficial ownership limitation upon giving notice to us, which such increase or decrease will not be effective until the 61st day after the notice is delivered to us. The address for this beneficial owner is c/o Steven Boyd, 510 Madison Ave, 22nd Floor, New York, New York 10022. |
(6) | Ms. Cronin received these shares upon conversion of shares of Series D Preferred issued in connection with our acquisition of B&C, of which she was a majority beneficial owner. The address for this beneficial owner is 6101 Mt. Normandale Dr., Bloomington, Minnesota 55438. |
(7) | Amount indicated includes 159,685 shares of common stock owned of record by Mr. Cullimore and 10,000 shares of common stock owned of record by Mr. Cullimore’s wife. |
(8) | Amount indicated includes: (a) 40,824 shares of common stock owned of record; (b) 48,000 shares of common stock issuable upon conversion of shares of Series A Preferred; (c) 111,000 shares of common stock issuable upon exercise of warrants; and (d) 26,000 shares of common stock issuable upon conversion of shares of Series B Preferred owned of record. |
(9) | Mr. Gephart is included as a Named Executive Officer due to his compensation paid to him as Senior Vice President of Sales from July 1, 2017 until April 26, 2018. The amount indicated includes: (a) 5,534 shares of common stock owned of record; (b) 5,600 shares of common stock issuable upon conversion of Series A Preferred; and (c) 8,400 shares underlying warrants. |
(10) | Mr. Wirthlin is included as a Named Executive Officer due to his compensation paid to him as Chief Financial Officer. The amount indicated includes: (a) 487 shares of common stock owned of record; (b) 4,000 shares of common stock issuable upon conversion of shares of Series A Preferred; (c) 6,000 shares of common stock issuable upon exercise of warrants; and (d) 6,000 shares of common stock issuable upon exercise of options held by Mr. Wirthlin. |
(11) | The amount indicated includes: (a) 25,456 shares of common stock owned of record; (b) 3,970,361 shares of common stock beneficially owned by her husband, Stuart Essig (see Note (1), above); and (c) 643,381 shares of common stock beneficially owned by the Essig Trust (see Note (2), above). Ms. Enright has no voting and dispositive power over the shares beneficially owned by her husband and she has shared voting and dispositive power as Trustee over the shares beneficially owned by the Essig Trust. |
(12) | Mr. Holtz is an executive officer of Provco, LLC, the general partner of Provco Ventures I LP. |
(13) | All amounts indicated are shares of common stock owned of record by Mr. Klosterman. |
(14) | The amount indicated includes: (a) 95,535 shares of common stock owned of record; 48,000 shares issuable upon conversion of shares of Series A Preferred; (b) 20,000 shares issuable upon conversion of Series B Preferred; and (c) 122,000 shares issuable upon the exercise of warrants. |
| (15) | All amounts indicated are shares of common stock owned of record by Dr. Ward. |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended June 30, 2018, our officers, directors and greater than ten percent beneficial owners filed all applicable reports under Section 16(a).
EXECUTIVE COMPENSATION
The following table summarizes information concerning the compensation awarded to, earned by or paid to, the Named Executive Officers for the periods indicated (columns (g) and (h) have been intentionally omitted):
Summary Compensation Table
Name and principal position (a) | | | | | | | All other compensation($) (i) | |
| Kelvyn H. Cullimore, Jr. | | 2017 | $200,000 | - | - | - | $31,202 | $231,202 |
Chief Executive Officer(1) | | 2018 | $200,000 | - | $192,931 | - | $764,412 | $1,157,343 |
| Christopher R. von Jako | | 2017 | - | - | - | - | - | - |
Chief Executive Officer(2) | | 2018 | $4,230 | - | $147,500 | $56,881 | - | $208,611 |
T. Jeff Gephart(3) | | 2017 | $175,512 | $19,732 | - | - | $3,678 | $198,922 |
| Sr. VP Sales | | 2018 | $142,789 | - | $12,400 | - | $43,596 | $198,785 |
| David A. Wirthlin | | 2017 | $117,308 | - | - | - | 10,146 | $127,454 |
Chief Financial Officer | | 2018 | $175,000 | -
| -
| -
| $15,136 | $190,136 |
__________________
(1)
Mr. Cullimore’s service as Chief Executive Officer was terminated in June 2018. Amounts in column (e) for fiscal year 2018 include the value of restricted stock awards, the vesting of which was accelerated upon termination of Mr. Cullimore’s employment pursuant to the terms of his employment agreement. Amount in column (i) for fiscal year 2018 includes amounts paid or accrued for payment as severance to Mr. Cullimore pursuant to the terms of his employment agreement, including (i) $0 as salary continuation, (ii) $0 in the form of continued medical benefits, (iii) $700,000 as future severance payments in cash following termination, (iv) $31,512 as the fair market value of a vehicle transferred to Mr. Cullimore, and (v) $87,283 fair market value of shares withheld to reimburse us for payment of the withholding tax in connection with the restricted shares delivered as reported in column (e). Amounts in column (i) also include amounts paid for Mr. Cullimore’s medical benefits.
(2)
Dr. von Jako became Chief Executive Officer in June 2018.
(3)
Mr. Gephart’s employment was terminated in April of 2018. Amount in column (i) for fiscal year 2018 includes $41,250 paid as severance.
Outstanding Equity Awards at June 30, 2018
The following table presents, for each of the Named Executive Officers, information regarding outstanding equity awards held as of June 30, 2018.
| | |
| Name | Number of securities underlying unexercised options (#) exercisable | Number of securities underlying unexercised options (#) unexercis-able | Option exercise price ($) | Option expiration date | Number of shares or units of stock that have not vested (#) | Market value of shares of units of stock that have not vested ($) |
| (a) | | | | (f) | | |
| Kelvyn H. Cullimore. | 20,000 | 20,000 | $3.34 | 11/20/2023 | - | $- |
| Christopher von Jako | - | 50,000 | $2.95 | 6/26/2024 | 50,000 | $142,500 |
| Jeff Gephart | 7,500 | 7,500 | $2.87 | 3/1/2024 | - | $- |
| David Wirthlin | 6,000 | 18,000 | $2.65 | 10/31/2024 | - | $- |
Employment Agreements
We entered into an employment agreement with our Chief Executive Officer, Dr. von Jako on May 24, 2018, which became effective upon its approval by the Board on June 26, 2018. The employment agreement provides for the following: (1) an annual base salary of $275,000; (2) a target annual cash bonus up to a maximum of 30% of base salary (provided that quantitative and qualitative objectives established by the Compensation Committee of the Board have been met); (3) a grant of a stock option for the purchase of 50,000 shares of common stock at a purchase price of $2.95 per share, which was the market price of the common stock on the date of grant; (4) a grant of 50,000 shares of restricted stock, with the stock option and the restricted stock each vesting in four annual installments at a rate of 25% per annum, commencing on the first anniversary date of the date of grant; and (5) annual grants of stock options and restricted stock awards having an aggregate fair market value on date of grant of between $150,000 and $200,000 at the discretion of the Compensation Committee, with such fair market values determined with reference to a Black-Scholes model as to the options and the trading prices of our common stock as of the grant date as to the restricted stock awards. Fifty percent of the new hire stock option grant and restricted stock award will vest in the event we terminate Dr. von Jako’s employment without cause during the first twelve months of his employment. In the event of a termination of his employment upon a change of control, 100% of previously issued equity grants held by Dr. von Jako at the time of termination will vest in full, notwithstanding the terms of any equity incentive plan or applicable award agreements. Acceleration of vesting in any event will be subject to the execution of a general release of known and unknown claims in a form satisfactory to us.
Dr. von Jako also executed our standard form of indemnification agreement for executives and directors and an agreement titled “Agreement Regarding Confidential Information, Ownership of Inventions, Non-Competition, Customer Non-Solicitation and Employee Non-Solicitation Covenants, and Acknowledgment of At-Will Employment,” which are part of his employment agreement. Among other things, these agreements impose certain restrictions on Dr. von Jako, including compliance with post-employment covenants to (i) protect our confidential information; (ii) not accept employment with or provide services to a competitor for one year after termination; (iii) not solicit our employees or customers for two years after termination; and (iv) not disparage or otherwise impair our reputation or goodwill.
Payments upon Termination
Under his employment agreement dated May 1, 2015, Kelvyn H. Cullimore, Jr., who was employed as our Chief Executive Officer, Mr. Cullimore was entitled to severance payments in the event of termination of his employment under certain circumstances. In June 2018, we terminated Mr. Cullimore’s service as Chief Executive Officer to facilitate a change in management, triggering his rights to the severance payments under his employment agreement. Mr. Cullimore executed a Separation and Release Agreement, or Separation Agreement, that includes a customary release of claims against us in consideration for which we paid Mr. Cullimore the following: (1) a severance payment equal to $200,000, which represents 12 months of base salary in effect as of the Separation Date, paid 50% on the 30th day following the Separation Date and 50% in equal installments over the following six months; (2) additional severance consideration in the total amount of $500,000, to be issuedpaid in quarterly installments over a two-year period following the Separation Date, (iii) full acceleration of vesting of previously granted and unvested restricted stock awards totaling 72,000 shares, (iv) earned but unpaid bonuses, if any, with respect to fiscal year 2018, (v) the transfer of a vehicle, and (vi) accrued and unpaid salary through the last day of employment. (See the “Summary Compensation Table” above.)
Retirement Benefits
We do not provide pension arrangements or post-retirement health coverage for executive officers or employees. Our executive officers and other eligible employees may participate in one of our 401(k) defined contribution plans. In fiscal year 2018, we maintained three separate 401(k) plans for our employees: (1) the Dynatronics Corporation Plan (the “Dynatronics Plan”); (2) the Hausmann Enterprises, LLC Plan (the “Hausmann Plan”); and (3) the Bird & Cronin, LLC Plan (the “Bird & Cronin Plan”). Additional information on these three plans is or will be equal to orprovided in excess of 20%this part of the Proxy Statement, below.
Dynatronics Plan. Under the Dynatronics Plan, employees who are 20 years of age or older and have completed at least one month of service with Dynatronics Corporation are eligible to participate. Eligible employees may contribute to the Dynatronics Plan in the form of salary deferrals of up to $18,500, the maximum allowable for calendar year 2018. Eligible employees who are over 50 years old may contribute an additional $6,000 in catchup contributions during calendar year 2018. We match annual employee contributions at 25% of employee contributions, up to a maximum of $500 per employee per year. Participants in the Dynatronics Plan are fully vested in their salary deferral contributions, and employer matching contributions vest at 20% per year after two years of service (100% vested after six years).
Hausmann Plan. We acquired the Hausmann Plan as part of our acquisition of HII. Under the Hausmann Plan, employees who are 21 years of age or older and have completed a year of service with 1,000 hours worked with Hausmann are eligible to participate. Eligible employees may contribute to the Hausmann Plan in the form of salary deferrals of up to 60% of their salary or $18,500 (whichever is less) if under 50 years of age, the maximum allowable for calendar year 2018. Eligible employees who are over 50 years old may contribute up to 100% of their salary or $24,500 which includes $6,000 in catchup contributions during calendar year 2018. We match employee contributions at 50%, up to the first 6% of employee compensation. Participants in the Hausmann Plan are fully vested in their salary deferral contributions, and employer matching contributions vest 10% after year one, 10% after year two, and 20% each year thereafter (100% vested after six years).
Bird & Cronin Plan. We acquired this plan with the acquisition of B&C. Under the Bird & Cronin Plan, employees who are 21 years of age or older and have completed six months of service with more than 500 hours of service with Bird & Cronin are eligible to participate. Eligible employees may contribute to the Bird & Cronin Plan in the form of salary deferrals of up to $18,500, the maximum allowable for calendar year 2018. Eligible employees who are over 50 years old may contribute an additional $6,000 in catchup contributions during calendar year 2018. We match employee contributions at 100% of up to the first 5% of employee compensation. Participants in the Bird & Cronin Plan are fully vested in their salary deferral contributions, and employer matching contributions vest 20% per year after two years of service with more than 1,000 hours of service (100% vested after six years with more than 1,000 hours of service).
DIRECTOR COMPENSATION
In fiscal year 2018, we paid our non-employee directors an annual cash retainer of $15,000 and an equity retainer of 10,000 shares of restricted stock. Committee chairs received an additional retainer of $10,000 for the year. Retainers were pro-rated for the portion of the year served if service began after the start of the fiscal year. Directors who are also employees are not paid additional compensation for their service as members of the Board of Directors.
The following table summarizes the total compensation paid to the non-employee directors during the fiscal year ended June 30, 2018.
Director Compensation Table(1)
| Fees earned or paid in cash ($) (b) | | |
Kelvyn H. Cullimore, Jr.(2) | - | - | - |
| Erin S. Enright | 25,000 | 26,500 | 51,500 |
| David B. Holtz | 25,000 | 26,500 | 51,500 |
| Scott A. Klosterman | 25,000 | 26,500 | 51,500 |
| Brian M. Larkin | 15,000 | 26,500 | 41,500 |
| R. Scott Ward, Ph.D. | 15,000 | 26,500 | 41,500 |
_________________
(1)
Columns (d) through (g) are omitted from this table as no items of compensation referenced in those columns were paid to the directors during the period covered by the table. Total compensation paid to Dr. von Jako, our Chief Executive Officer, who also became a director on June 26, 2018, is detailed in the Summary Compensation Table under "Executive Compensation" on page 22 of this Proxy Statement. Executive officers serving as directors received no additional compensation for service as directors during fiscal year 2018.
(2)
Mr. Cullimore was also Chief Executive Officer until June 26, 2018. After that date and to the present, he has been serving as a non-employee director.
PROPOSAL NO. 3
APPROVAL OF THE DYNATRONICS CORPORATION 2018 EQUITY INCENTIVE PLAN
On September 10, 2018, the Board adopted, subject to approval of our shareholders, the Dynatronics Corporation 2018 Equity Incentive Plan, or the 2018 Plan, which would allow us to grant awards for the issuance of up to 600,000 shares of our common stock. The Board believes that adopting a new plan, rather than amending our plan adopted by the Board and approved by our shareholders in June 2015 (the “2015 Plan”) will provide for a new framework that is aligned with the current tax law and current status and outlook of our management and Board. Although we are adopting the new 2018 Plan, the Board has also determined to keep our 2015 Plan in operation and to grant awards under that plan as prescribed by its terms until the remaining shares allocated under the 2015 Plan have been used. Under the 2015 Plan we were authorized to grant awards in the form of options, restricted stock, restricted stock units and other stock-based awards for the issuance of up to 500,000 shares of common stock. The 2015 Plan has approximately 220,000 shares of common stock available for issuance.
Under our current forecasts, based on current stock prices and the number of shares available for grant under the 2015 Plan, in order to provide for sufficient equity components for executive and director compensation over the next three or more years, and to provide equity compensation flexibility for employees and consultants, the Board of Directors determined it was advisable to adopt the 2018 Plan. This assumes that we continue to grant awards consistent with current practices, as reflected in our burn rate discussed below, and noting that future circumstances may require us to change our current equity grant practices.
In an effort to attract, retain and motivate individuals who make important contributions to our business, we desire to have the ability to issue securities to our officers, directors, employees and consultants, as well as officers of our subsidiaries under the new 2018 Plan. The principal reason for the 2018 Plan is to increase the number of shares of common stock outstanding beforeapproved for issuance to provide our Board of Directors, the issuanceCompensation Committee, and our management with greater flexibility to provide grants of stock-based awards. If the 2018 Plan is not approved by the shareholders, we could continue to grant awards under the 2015 Plan until the allocated shares are exhausted, which we estimate would at current rates take approximately one year. Furthermore, if the 2018 Plan is not approved, we would have fewer shares to use for awards to employees and directors. Accordingly, the Board recommends that the shareholders approve the 2018 Plan.
Purpose
The Board of Directors believes that the 2018 Plan is necessary for us to attract, retain, reward and motivate our employees, directors, and consultants through the grant of stock or securities.options, stock appreciation rights, restricted stock and restricted stock units. We are seeking shareholder approvalbelieve the 2018 Plan is best designed to allow conversionprovide the proper incentives for our employees, directors and consultants, ensures our ability to make performance-based awards, and meets the requirements of the Series C Preferred Stock and the Series D Preferred Stock and for the exerciseapplicable law.
The Board of the Warrants, in excess of 19.99% of our issued and outstanding Common Stock and the voting power of the Company, because the proceeds of the sale of the Series C Preferred Stock and the Warrants were used to finance the acquisition of the assets of Bird & Cronin as described in this Proxy Statement (the "Acquisition") and because the Series D Preferred Stock was issued as part of the consideration paid for the assets of Bird & Cronin.
We are not seeking shareholderDirectors believes that approval of the Acquisition or the use of proceeds from the sale of the Series C Preferred Stock or the Warrants. Shareholder approval of Dynatronics shareholders2018 Plan will enable us to continue to grant equity-based awards in a manner that is not required under Utah law. For additional information aboutconsistent with market practices, which is important to allow us to competitively attract, retain, reward and motivate our acquisition of Bird & Cronin, including a detailed summary of the terms of the Asset Purchase Agreement entered into in connection with the Acquisition (the "Asset Purchase Agreement"), see the sections entitled "Background of the Acquisition"employees, directors and "The Asset Purchase Agreement."consultants, who are critical to achieving our business goals.
Proposal No. 3 is not seeking authorization or approval of our shareholders to enter into the Securities Purchase Agreement among the Company and the purchasers of the Series C Preferred Stock and the related Warrants (the "Securities Purchase Agreement") described below, to enter into the Asset Purchase Agreement, to consummate the sale of the Series C Preferred Stock or to complete the Acquisition of Bird & Cronin. Securities Purchase Agreements for the sale of $7,000,000 of Series C Preferred Stock have already been executed and 2,800,000 shares of Series C Preferred Stock have been issued by the Company. In addition, in connection with the offer and sale of the Series C Preferred Stock, we have issued Warrants to purchase 1,400,000 shares of Common Stock. Upon approval of Proposal No. 3 at the Annual Meeting, the Series C Preferred Stock becomes convertible in an amount representing in excess of 19.99% of our Common Stock outstanding and the Warrants become exercisable. Immediately upon approval of Proposal No. 3, the Series C Preferred Stock will automatically convert to Common Stock, except to the extent, if any, that a shareholder of the Series C Preferred Stock has previously elected to be subject to the Beneficial Ownership Limitation (as defined below), in which case such shareholder's conversion
The 2018 Plan will be restricted to the amount of the applicable Beneficial Ownership Limitation. Remaining, i.e., unconverted shares of Series C Preferred Stock will no longer have any preferences as to liquidation, redemption, or payment of dividends.
If the Company does not receive approval of this Proposal No. 3, the Series C Preferred Stock will continue to be non-voting stock, entitled to payment of dividends quarterly at an annual rate of 6%, but will not be convertible until shareholder approval can be obtained at a future meeting of the shareholders. Similarly, the Warrants will not be exercisable until we have obtained shareholder approval.
Background and Reasons for the Series C Financing
On September 26, 2017, we entered into Securities Purchase Agreements with certain accredited investors (the "Preferred Investors"), pursuant to which we agreed to (i) issue and sell an aggregate of 2,800,000 shares of Series C Preferred Stock and Warrants to purchase an aggregate of 1,400,000 shares of Common Stock. The price per share of Series C Preferred Stock, with attached Warrant, was $2.50. Each Warrant, when exercisable, will entitle the holder to purchase one share of Common Stock for $2.75 per share. Gross proceeds from the sale of these securities was $7.0 million. Closing of the offering and issuance of the shares of Series C Preferred Stock and Warrants took place on October 2, 2017.
In connection with the offer and sale of the Series C Preferred Stock and the Warrants, we entered into a registration rights agreement (the "Registration Rights Agreement") with the Preferred Investors, obligating us to file a registration statement with the Commission to register all shares of Common Stock issuable upon conversion of the Series C Preferred Stock and the exercise of the Warrants, within 45 days of the closing of the sale of the Series C Preferred Stock and Warrants. Proceeds of the offering were used for the purchase of the assets of Bird & Cronin, as described elsewhere in this Proxy Statement.
Our Board of Directors determined that the issuance of the Series C Preferred Stock and related Warrants was advisable and in our best interest and in the best interest of our shareholders. We entered into the financing transaction in order to raise funds necessary for the Acquisition and for general working capital purposes.
Description of the Series C Preferred Stock
The following is a summary of the terms of the Certificate of Designations, Preferences and Rights of Series C Non-Voting Convertible Preferred Stock (the "Series C Designation of Rights") filed with the Utah Division of Corporations and Commercial Code (the "Utah Division") on September 29, 2017. We encourage you to read the Series C Designation of Rights thoroughly; the following summary is qualified by the terms contained in the Series C Designation of Rights.
Each share of Series C Preferred Stock has no par value per share and a stated value equal to $2.50, with the aggregate stated value of all shares of Series D Preferred Stock being $7.0 million. The Series C Preferred Stock is non-voting. Prior to shareholder approval, Preferred Investors (excluding officers, directors, employees or consultants of the Company) may convert their shares of Series C Preferred Stock into shares of Common Stock at a conversion price of $2.50 per share; provided, however, that until shareholder approval has been obtained, such conversions cannot exceed, in the aggregate, 19.9% of the total issued and outstanding shares of Common Stock of the Company on the Issuance Date; and provided, further, that a shareholder that has elected to be subject to the Beneficial Ownership Limitation shall not convert above that Limitation.
All shares of Series C Preferred Stock will convert automatically into shares of Common Stock, at the conversion price of $2.50 per share, immediately upon receipt of shareholder approval; provided, however, that a holder may make an election applicable to its beneficial ownership of common stock and restrict conversion of its shares of Series C Preferred Stock such that the Company shall not effect any conversion of such holder's shares of Series C Preferred Stock, and such holder shall not have the right to convert any portion of the Series C Preferred Stock, to the extent that, after giving effect to the conversion such holder or any of such holder's affiliates would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%, such amount, as elected, the "Beneficial Ownership Limitation") of the number of shares of Common Stock outstanding immediately after giving effect to the conversion of the holder's shares of Series C Preferred Stock. Shares of Series C Preferred Stock that are not automatically converted after shareholder approval are stripped of their dividend, liquidation preference and redemption rights, and remain subject to the Beneficial Ownership Limitation elected by the holder. The Series C Preferred Stock will accrue an annual dividend at a rate of 6.0% to be paid in cash, which dividends cease at the time of shareholder approval.
At any time following the mandatory conversioneffective upon shareholder approval in the event of a fundamental transaction defined in the Series C Designation of Rights (such as a merger, consolidation, sale of all or substantially all of the Company's assets, etc.), the Company may force the conversion of the remaining Series C Preferred Stock by delivering a written noticeand after that date will apply to all holders of outstanding shares of Series C Preferred Stock at least 10 trading daysawards made under the 2018 Plan on or after that date. No awards have been made under the 2018 Plan prior to the date of consummation of the fundamental transaction; provided, however, that, if such forced conversion would result in the issuance of shares of Common Stock (or common stock of the successor or acquiring corporation in such fundamental transaction) to such holder in violation of the Beneficial Ownership Limitation, such forced conversion shall apply to the extent that,this Proxy Statement and only to the extent that, such issuance of shares of Common Stock (or common stock of the successor or acquiring corporation in such fundamental transaction) to the holder would not violate such Beneficial Ownership Limitation.
Description of the Warrants
Each Warrant entitles the holder thereof to purchase one share of Common Stock for cash at an exercise price of $2.75 per share, subject to customary anti-dilution adjustments. The Warrants become exercisable upon receipt of shareholder approval of this Proposal No. 3, for a period of 72 months.
At the election of a particular Preferred Investor, the Warrants held by that Preferred Investorno awards are subject to a provision prohibiting the exercise of such Warrants to the extent that, after giving effect to such exercise, the holder of such Warrant (together with the holder's affiliates, and any other persons acting as a group together with the holder or any of the holder's affiliates), would beneficially own in excess of 4.99% (or, at the election of the holder, 9.99%) of the outstanding Common Stock. Again, such restriction does not apply to a Preferred Investor unless that Preferred Investor electscontemplated to be boundmade at this time prior to approval by the limitation.
Description ofshareholders. We intend to register the Series D Preferred Stock
In connection withshares authorized under the acquisition of Bird & Cronin, we issued 1,581,935 shares of Series D Preferred Stock. The rights and preferences of2018 Plan under the Series D Preferred Stock are definedSecurities Act following approval by the "Certificate of Designations, Preferences, and Rights of the Series D Non-Voting Convertible Preferred Stock" (the "Series D Designation of Rights") filed by us on September 29, 2017 with the Utah Division. We encourage you to read the Series D Designation of Rights thoroughly; the following summary is qualified by the terms contained in the Series D Designation of Rights.
Each share of Series D Preferred Stock has no par value per share and a stated value equal to $2.52855, with the aggregate stated value of all shares of Series D Preferred Stock being $4.0 million. The Series D Preferred Stock is non-voting. The Series D Preferred Stock accrues an annual dividend at a rate of 6.0% to be paid in cash. Upon receipt of shareholder approval of this Proposal No. 3, all shares of Series D Preferred Stock will be converted automatically into shares of our Common Stock, on a one-for-one basis.
Reasons for Shareholder Approval
shareholders. If our shareholders do not approve Proposal No. 3 at the Annual Meeting,2018 Plan, we will not issue awards under the 2018 Plan. It is our intention to use the shares authorized under the 2015 Plan before making awards under the 2018 Plan, to the extent that is feasible or advisable, although that is not necessary.
Significant Historical Award Information
Common measures of Series C Preferred Stocka stock plan’s cost include “dilution” and Series D Preferred Stock may not be converted in excess of 19.99% of Common Stock outstanding and no Warrants“overhang.” Dilution measures the degree to which the shareholders’ ownership has been diluted by stock-based compensation awarded under equity plans; dilution that includes shares that may be exercised. Dividends onawarded under equity plans in the Series C Preferred Stock and the Series D Preferred Stock would continuefuture is commonly referred to accrue andas overhang. These metrics as applied to our plans can be payable quarterly in cash. In addition, we have agreed to hold special meetings of shareholders and to seek approval of a similar proposal until the required approvals have been obtained to allow us to fulfill our obligations to the Preferred Investors under the Securities Purchase Agreement and to the seller under the Asset Purchase Agreement. Your approval of Proposal No. 3 will permit us to continue with the transition and integration of the Acquisition and assist us in meeting the obligations of the Company under our agreements with these parties and continue to pursue our growth strategy. Approval of Proposal No. 3 will constitute approval pursuant to the NASDAQ Listing Rule set forth above.
Interests of Related Parties
Certain of our officers, directors and affiliates hold shares of Series C Preferred Stock and will receive shares of Common Stock upon conversion of their shares of Series C Preferred Stock, one share of Common Stock for each share of Series C Preferred Stock held by such shareholder, immediately upon approval of Proposal No. 3 at the Annual Meeting,measured approximately as indicated in the following table:
| Name of Shareholder | | No. of Shares of Series C Preferred Stock | | | No. of Common Stock Warrants | |
| Provco Ventures I, LP | | | 300,000 | | | | 150,000 | |
| Brian M. Larkin | | | 40,000 | | | | 20,000 | |
| Stuart M. Essig | | | 398,010 | | | | 199,005 | |
| David H. Hausmann | | | 80,000 | | | | 40,000 | |
Potential Adverse Effects of Proposal No. 3
The failure to approve Proposal No. 3 will mean that we will be obligated to continue to pay cash dividends to the holderstable below for each of the Series C Preferred Stock andpast three fiscal years:
| Key Equity Metrics | | | |
Overhang(1) | 5.0% | 11.7% | 21.6% |
Dilution(2) | 3.0% | 5.3% | 7.2% |
———————
(1)
Overhang is calculated by dividing (a) the Series D Preferred Stock. The Series C Preferred Stock andsum of (x) the Series D Preferred Stock would remain unconverted and outstanding, subject to their preferred liquidation and redemption provisions set forth in the Series C Designation of Rights and Series D Designation of Rights, respectively. In addition, the Warrants issued pursuant to the Securities Purchase Agreement will not be exercisable until approval has been obtained or the Company adopts alternative means to amend such Warrants.
If Proposal No. 3 is approved, existing shareholders will suffer immediate substantial dilution in voting rights and in ownership interests upon the issuance of Common Stock upon conversion of the Series C Preferred Stock and Series D Preferred Stock and possible future dilution upon the exercise of the Warrants. The sale into the public market of these shares of Common Stock also could materially and adversely affect the market price of our Common Stock. The table below summarizes the dilution to our existing shareholders immediately following the approval of Proposal No. 3. Upon approval of Proposal No. 3 by the shareholders, the Series C Preferred Stock (subject to any applicable Beneficial Ownership Limitations elected by holders of the Series C Preferred Stock) will automatically convert into Common Stock, the Series D Preferred Stock will automatically convert into Common Stock, and the Warrants will become immediately exercisable. The table does not include or assume the exercise of the Warrants or other outstanding warrants or options and grants under the Company's incentive award plans as described below. Percentages in the table are approximate due to rounding.
| Description of Securities Owned | | No. Common Stock Equivalents | | | Fully Diluted Percentage Ownership | |
| Common Stock/Existing Shareholders | | | 4,823,694 | | | | 38.0 | % |
| Series A Preferred Stock (June 2015 Issuance) | | | 1,610,000 | | | | 12.7 | % |
| Series A Preferred Stock (December 2016 Issuance) | | | 390,000 | | | | 3.1 | % |
| Series B Preferred Stock | | | 1,484,000 | | | | 11.7 | % |
| Series C Preferred Stock (after approval of Proposal No. 3) (1) | | | 2,800,000 | | | | 22.1 | % |
| Series D Preferred Stock (after approval of Proposal No. 3) (2) | | | 1,581,935 | | | | 12.5 | % |
| Totals | | | 12,689,629 | | | | 100.0 | % |
(1) | Shares of Series C Preferred Stock will be converted automatically to the number of shares of Common Stock indicated upon approval of Proposal No. 3 at the Annual Meeting, subject, however, to the conversion limitations of the Beneficial Ownership Limitation applicable to those shareholders electing to be subject to such limitation as described on page 24 of this Proxy Statement. |
| |
(2) | All shares of Series D Preferred Stock will be converted automatically to the number of shares of Common Stock indicated upon approval of Proposal No. 3 at the Annual Meeting. |
In addition to the above securities, there are issued and outstanding or commitments to issue options and grants under the Company's incentive awards plans for the purchase of a total of 238,990 shares of Common Stock. The table does not give effect to the exercise of any of these options and grants or the potential exercise thereof. The number of shares
of Common Stock described above also does not give effectsubject to
(i)equity awards outstanding at the
issuance of additional shares of Common Stock due to potential future anti-dilution adjustments on the Series A Preferred Stock or the Series B Preferred Stock, (ii) the issuance of additional shares of Common Stock in payment of Series A Dividends or Series B Dividends, (iii) the issuance of shares of Common Stock pursuant to other outstanding options and warrants or (iv) any other future issuances of our Common Stock, including issuances in connection with the possible redemptionend of the
Series A Preferred Stock or the Series B Preferred Stock.Required Vote
Proposal No. 3 will be approved if the total votes cast on the proposal in person or by proxy voted "FOR" such approval exceedyear and (y) the number of votes cast againstshares available for future grants, by (b) the proposal.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
A VOTE "FOR" APPROVAL OF PROPOSAL NO. 3.
INFORMATION ABOUT THE ACQUISITION
The following is a summarynumber of shares outstanding at the end of the material provisionsyear.
(2)
Dilution is calculated by dividing (a) the number of shares subject to equity awards outstanding at the end of the Asset Purchase Agreement, dated September 26, 2017,fiscal year by and between(b) the Company and Bird & Cronin (the "Asset Purchase Agreement"), but does not purport to describe allnumber of shares outstanding at the end of the termsfiscal year.
Recommendation of the Asset Purchase Agreement. Board
The Board of Directors recommends a vote FOR approval of the 2018 Plan.
Summary of the 2018 Plan
The following summary is qualified in its entirety by referencesubject to the complete text of the Asset Purchase Agreement, a copy of which is attached as an exhibit to our Current Report on Form 8-K filed with the Commission on September 27, 2017. This summary may not contain all of the information about the Asset Purchase Agreement that is important to you. You should refer tospecific provisions contained in the full text of the Asset Purchase Agreement2018 Plan, which is attached as Appendix A to this Proxy Statement.
Administration
The Compensation Committee has full power to select, from among the individuals eligible for detailsawards, the individuals to whom awards will be granted, to make any combination of awards to participants, and to determine the transaction and thespecific terms and conditions of each award, subject to the Asset Purchase Agreement.provisions of the 2018 Plan. The Compensation Committee may delegate to our Chief Executive Officer or any other executive officers the authority to grant awards at fair market value to employees who are not subject to the reporting and other provisions of Section 16 of the Exchange Act.
Additionally, representations, warranties
Limitation on Awards and covenants described inShares Available
The maximum number of shares of stock reserved and available for issuance under the 2018 Plan is 600,000 shares, plus the number of shares of stock reserved and available for issuance under the 2015 Plan as of the date of shareholder approval of the 2018 Plan. For purposes of this sectionlimitation, the shares of stock underlying any awards that are forfeited, are canceled, expire or are terminated (other than by exercise) under (i) the 2018 Plan or (ii) from and containedafter shareholder approval of the 2018 Plan, the 2015 Plan shall be added to the shares of stock available for issuance under the 2018 Plan. Shares tendered or held back upon exercise of an option or settlement of an award to cover the exercise price or tax withholding shall not be available for future issuance under the 2018 Plan.
Eligibility
Persons eligible to participate in the Asset Purchase Agreement have been made only for the purpose of the Asset Purchase Agreement2018 Plan will be those full or part-time officers, employees, non-employee directors, and as such, are intended solely for the benefitother key persons (including consultants and prospective employees) of the Company and Bird & Cronin. In many cases, these representations, warrantiesits subsidiaries as selected from time to time by the Compensation Committee. As of October 4, 2018, approximately 335 individuals were eligible to participate in the 2018 Plan, including seven directors, and covenantsfive executive officers.
Awards
The 2018 Plan provides for the grant of various types of awards, including, for example: (i) incentive stock options; (ii) nonqualified stock options; (iii) stock appreciation rights; (iv) restricted stock awards; (v) deferred stock awards; and (vi) other stock-based and cash-based awards to eligible individuals. The terms of the awards will be set forth in an award agreement, consistent with the terms of the 2018 Plan.
Stock Options. The 2018 Plan permits the granting of (1) options to purchase common stock intended to qualify as incentive stock options under Section 422 of the Code and (2) options that do not so qualify. Options granted under the 2018 Plan will be non-qualified options if they fail to qualify as incentive options or exceed the annual limit on incentive stock options. Non-qualified options may be granted to any persons eligible to receive incentive options and to non-employee directors and key persons. The option exercise price of each option will be determined by the Compensation Committee but may not be less than 100% of the fair market value of the common stock on the date of grant. The 2018 Plan provides for 600,000 shares that can be granted in the form of incentive stock options. No dividends or dividend equivalents shall be paid on stock options.
The term of each option will be fixed by the Compensation Committee and may not exceed 10 years (or for 10% or greater shareholders receiving an incentive stock option, five years) from the date of grant. The Compensation Committee will determine at what time or times each option may be exercised. Options may be made exercisable in installments and the exercisability of options may be accelerated by the Compensation Committee. Options may be exercised in whole or in part with written notice to us.
Upon exercise of options, the option exercise price must be paid in full (1) in cash, by certified or bank check, or other instrument acceptable to the Compensation Committee, (2) by delivery (or attestation to the ownership) of shares of common stock that are beneficially owned by the optionee, (3) subject to limitations agreedapplicable law, by a broker pursuant to irrevocable instructions to the broker from the optionee, or (4) by net exercise.
To qualify as incentive options, options must meet additional federal tax requirements, including a $100,000 limit on the value of shares subject to incentive options that first become exercisable by a participant in any one calendar year.
Stock Appreciation Rights. The Compensation Committee may award a stock appreciation right either as a freestanding award or in tandem with a stock option. The Compensation Committee may award stock appreciation rights subject to such conditions and restrictions as the Compensation Committee may determine, provided that (1) upon exercise of a stock appreciation right granted in tandem with an option, the applicable portion of any related option shall be surrendered, and (2) stock appreciation rights granted in tandem with options are exercisable at such time or times and to the extent that the related stock options are exercisable. The grant price of a stock appreciation right will be determined by the partiesCompensation Committee and specified in the award agreement; however, the grant price must be at least equal to 100% of the fair market value of a share on the date of grant. Stock appreciation rights may be exercised upon such terms and conditions as are qualified by certain disclosures exchangedimposed by the partiesCompensation Committee and as set forth in the stock appreciation right award agreement.
Restricted Stock Awards. The Compensation Committee may award shares of common stock to participants subject to such conditions and restrictions as the Compensation Committee may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with the Company through a specified restricted period. Cash dividends and stock dividends, if any, with respect to restricted stock may be withheld by the Company for the grantee’s account, and be subject to forfeiture to the same degree as the shares of restricted stock to which such dividends relate. Except as otherwise determined by the Committee, no interest will accrue or be paid on the amount of any cash dividends withheld.
Deferred Stock Awards. The Compensation Committee may award phantom stock units as deferred stock awards to participants. Deferred stock awards are ultimately payable in the form of shares of common stock and may be subject to such conditions and restrictions as the Compensation Committee may determine. These conditions and restrictions may include the achievement of certain performance goals and/or continued employment with the Company through a specified vesting period. In the Compensation Committee’s sole discretion and subject to the participant’s compliance with the procedures established by the Compensation Committee and requirements of Section 409A of the Code, it may permit a participant to make an advance election to receive a portion of his or her future cash compensation otherwise due in the form of a deferred stock award. During the deferral period, a grantee shall have no rights as a shareholder; provided, however, that the grantee may be credited with dividend equivalent rights with respect to the phantom stock units underlying his deferred stock award, subject to such terms and conditions as the Committee may determine, but shall not be entitled to dividends, if any, or dividend equivalents prior to settlement.
Other Awards. The Compensation Committee may recommend grants of other types of equity-based or equity-related awards not otherwise described by the terms of the 2018 Plan, in such amounts and subject to such terms and conditions, as the Compensation Committee shall recommend. Such awards may be based upon attainment of performance goals established by the Compensation Committee and may involve the transfer of actual shares to participants, or payment in cash or otherwise of amounts based on the value of shares.
Detrimental Activity
The Compensation Committee may cancel, rescind, suspend, or otherwise limit any award to a participant if the participant engages in detrimental activities, including rendering services to a competitor, disclosing confidential information without permission, refusing to assign inventions to us, soliciting our employees or customers, engaging in an activity that results in a termination for cause, materially violating any of our internal policies, or being convicted of, or pleading guilty to, a crime.
Amendment and Termination
The Board of Directors may amend the 2018 Plan at any time, subject to shareholder approval to the extent required by applicable law or regulation or the listing standards of NASDAQ or any other market or stock exchange on which the common stock is at the time primarily traded. Additionally, shareholder approval will be specifically required to (i) increase the number of shares available for issuance under the 2018 Plan, or (ii) decrease the exercise price of any outstanding option or stock appreciation right granted under the 2018 Plan.
Our Board of Directors may terminate the 2018 Plan at any time. Unless sooner terminated by the Board, the Plan will terminate on the close of business on September 10, 2028.
Adjustment for Change in Capitalization
In the event that the Compensation Committee shall determine that any dividend or other distribution (whether in the form of cash, common stock, or other property), recapitalization, common stock split, reverse common stock split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event has occurred, then the Compensation Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (1) the number and kind of shares of common stock that may thereafter be issued in connection with awards, (2) the executionnumber and kind of shares of common stock, securities or other property (including cash) issued or issuable in respect of outstanding awards, (3) the exercise price, grant price or purchase price relating to any award, and (4) the maximum number of shares subject to awards which may be awarded to any employee during any tax year; provided that, with respect to incentive stock options, any such adjustment shall be made in accordance with Section 424 of the Asset Purchase Agreement. Furthermore,Code; and provided further that, no such adjustment shall cause any award hereunder that is or could be subject to Section 409A of the representations and warrantiesCode to fail to comply with the requirements of such section.
Tax Withholding
Participants in the Asset Purchase Agreement2018 Plan are responsible for the resultpayment of any federal, state, or local taxes that we are required by law to withhold upon any option exercise or vesting of other awards. Subject to approval by the Compensation Committee, depending on the withholding method, a grantee may elect to have such grantee’s tax withholding obligation satisfied at the minimum or other applicable withholding rate in the grantee’s applicable jurisdiction, including maximum applicable rates that may be utilized without creating adverse accounting treatment under Financial Accounting Standards Board Accounting Standards Codification Topic 718 (or any successor pronouncement thereto) and permitted under applicable withholding rules promulgated by the Internal Revenue Service or another applicable governmental entity, in whole or in part, by (i) authorizing the Company to withhold from shares of stock to be issued pursuant to any award a number of shares with an aggregate fair market value (as of the date the withholding is effected) that would satisfy such withholding amount, or (ii) transferring to the Company shares of stock owned by the grantee with an aggregate fair market value (as of the date the withholding is effected) that would satisfy such withholding amount.
Effect of Change in Control
Unless otherwise provided in an award agreement, notwithstanding any provision of the 2018 Plan to the contrary:
(a) In the event of a negotiated allocationparticipant’s termination of contractual risk amongwithout cause or for good reason (as defined in the parties and, taken2018 Plan) during the 12-month period following a change in isolation, do not necessarily reflect facts aboutcontrol, notwithstanding any provision of the Company or Bird & Cronin, their respective subsidiaries and affiliates2018 Plan or any other party. Likewise, any referencesapplicable award agreement to materiality contained in the representations and warranties may not correspondcontrary, the award shall become immediately exercisable with respect to concepts of materiality applicable to investors or shareholders. Finally, information concerning the subject matter100% of the representations and warranties may have changed sinceshares subject to such award, and/or the applicable restricted period shall expire immediately with respect to 100% of the outstanding shares of restricted stock or restricted stock units as of the date of the Asset Purchase Agreement or maytermination.
(b) With respect to performance-based awards, in the event of a change in control, all incomplete performance periods in respect of such awards in effect on the futuredate the change in control occurs shall end on the date of such change and these changes maythe Committee shall (i) determine the extent to which performance goals with respect to each such performance period have been met based upon such audited or unaudited financial information then available as it deems relevant and (ii) cause to be paid to the applicable participant partial or full awards with respect to performance goals for each such performance period based upon the Committee’s determination of the degree of attainment of performance goals or, if not be fully reflected indeterminable, assuming that the public disclosures madeapplicable “target” levels of performance have been attained, or on such other basis determined by the Company and/or Bird & Cronin.Committee.
BackgroundUnder the Plan, “Change in Control” is deemed to have occurred if the event set forth in any one of the Acquisitionfollowing paragraphs shall have occurred:
Discussions between Dynatronics and Bird & Cronin commenced in April
(a) One person (or more than one person acting as a group) acquires ownership of 2016. On May 1, 2017,stock of the Company that, together with the stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; provided, that, a Change in Control shall not occur if any person (or more than one person acting as a group) owns more than 50% of the total fair market value or total voting power of the Company’s stock and Bird & Cronin executedacquires additional stock;
(b) One person (or more than one person acting as a non-binding lettergroup) acquires (or has acquired during the twelve-month period ending on the date of intent for the purchasemost recent acquisition) ownership of the Company’s stock possessing 30% or more of the total voting power of the stock of such corporation;
(c) A majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; or
(d) One person (or more than one person acting as a group), acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) assets from the Company that have a total gross fair market value equal to or more than 40% of substantiallythe total gross fair market value of all of the assets of Bird & Cronin. the Company immediately before such acquisition.
Miscellaneous
The non-binding offer was conditioned2018 Plan also contains provisions with respect to payment of exercise prices, vesting and expiration of awards, treatment of awards upon amongthe sale of Dynatronics Corporation, transferability of awards, and tax withholding requirements. Various other terms, conditions, and limitations apply, as further described in the completion2018 Plan.
New Plan Benefits
It is not possible to state the persons who will receive options or awards under the 2018 Plan in the future or the amount of options or awards that will be granted under the 2018 Plan.
EQUITY COMPENSATION PLANS AT JUNE 30, 2018
Equity Compensation Plans
As of June 30, 2018, we had equity awards outstanding under two plans: the 2005 Dynatronics Equity Incentive Award Plan (the “2005 Plan”) and the 2015 Plan. Outstanding awards under these plans expire (if not exercised) on the expiration date indicated in the respective awards, or, if no expiration date is indicated in such award, on the tenth anniversary of the grant date of the award. Nonqualified and incentive stock options and other awards have been granted under these two plans to our employees, officers, directors and consultants. The Compensation Committee administers these plans.
The following table sets forth information as of June 30, 2018, about these plans and any equity compensation plans that have not been approved by our shareholders under which our equity securities may be issued.
Equity Compensation Plan Information
| Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted- average exercise price of outstanding options, warrants and rights (b) | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | | | |
| 2005 Equity Incentive Plan (1) | 17,296 | $3.81 | - |
| 2015 Equity Incentive Plan (2) | 174,500 | $2.97 | 162,361 |
| Equity compensation plans not approved by security holders | - | - | 600,000 |
| Total | 191,796 | | 762,361 |
(1)
No further awards will be granted under the 2005 Plan.
(2)
Upon the adoption of the 2018 Plan, shares remaining available under the 2015 Plan will become eligible for use under the 2018 Plan or may be used for additional awards under the 2015 Plan prior to the granting of awards under the 2018 Plan, at the discretion of the Compensation Committee.
RELATED-PARTY TRANSACTIONS POLICY AND PROCEDURES
We have adopted a policy that any transactions with directors, executive officers or entities of which they are also officers or directors or in which they have a financial legalinterest, will only be on terms consistent with industry standards and technical due diligence. On June 9, 2017,approved by a majority of the disinterested members of our Board of Directors. In addition, interested directors may be counted in determining the presence of a quorum at a meeting of our Board of Directors met and discussed fully the potential Acquisition. At that meeting, Dynatronics' executive officers were authorized and instructed to pursue activities related to the Acquisition.
On October 2, 2017, we closed on the Acquisition. Cash for the Acquisition was provided by proceeds from the offer and sale of our Series C Preferred Stock and the Warrants, and amounts borrowed pursuant to an asset-based credit facility with Bank of the West, as amended pursuant to a Modification Agreement dated September 25, 2017 (the "Modification Agreement"). The closing of the Acquisition, the closing of the Modification Agreement and the financing under the Securities Purchase Agreement occurred simultaneously on October 2, 2017 (the "Closing").
At the Closing, we paid Bird & Cronin cash of $9,066,666 and delivered 1,397,375 shares of Series D Preferred Stock valued at approximately $3,533,333. A holdback of cash totaling $933,334 and 184,560 shares of Series D Preferred Stock valued at approximately $466,666 will be retained for purposes of satisfying adjustments to the purchase price as may be required by the Asset Purchase Agreement and indemnification claims, if any. Subject to adjustments or claims as provided by the Asset Purchase Agreement, 50% of the holdback amount will be released to Bird & Cronin one year from the Closing, and the balance of the holdback amount will be released to Bird & Cronin 18 months after Closing. As part of the Acquisition, we will pay and discharge certain liabilities and obligations of Bird & Cronin related to its ongoing business (primarily trade accounts and similar obligations in the ordinary course).
Bird & Cronin is a closely-held corporation founded in 1968 that prior to the Acquisition designed, manufactured, and distributed orthopedic soft goods and specialty patient care products to customers in the United States and internationally. Over 95% of Bird & Cronin's products were manufactured in an 85,000 square-foot manufacturing facility located at 1200 Trapp Road, Eagan, Minnesota (the "Facility") owned by an affiliate of Bird & Cronin. The Acquisition does not include a purchase of the Facility. At the Closing, we entered into a lease ("Lease") with Trapp Road Limited Liability Company, a Minnesota limited liability company, to occupy the Facility for a term of three years at annual rental payments of $600,000, payable in monthly installments of $50,000. The Lease provides that the lease term will automatically be extended for two additional periods of two years each, without any increase in the lease payment, subject to our right to terminate the Lease or to provide notice not to extend the term of the Lease prior to the end of the term.
Employees of Bird & Cronin were offered employment with Dynatronics at Closing. In addition, the Co-Presidents of Bird & Cronin, Mike Cronin and Jason Anderson, entered into employment agreements with the Company (the "Employment Agreements") and serve as Co-Presidents of Bird & Cronin, LLC, our subsidiary and assignee ("Acquisition Subsidiary") that operates the business previously operated by Bird & Cronin, reporting to our CEO, Kelvyn Cullimore. Their annual salary is $175,000 and we will pay them each an annual bonus of up to $10,000, as determined by Mr. Cullimore. The Employment Agreements also provide them with other employee benefits as provided to our employees generally at their level of management at the Acquisition Subsidiary (including, e.g., paid time off and paid holidays, medical/dental/vision insurance, Section 125 Flexible Spending Account and 401(k)). In addition to the restrictive covenants applicable to them under the Asset Purchase Agreement, the Employment Agreements include restrictive covenants which limit the ability of Messrs. Anderson and Cronin to be employed by a competitor of, or otherwise to compete with, Dynatronics for, in Mr. Anderson's case, a two-year period, and, in Mr. Cronin's case, a one-year period following the later of (i) termination of employment and (ii) the latest date upon which Dynatronics makes any severance payment to such person.
The Asset Purchase Agreement contains customary representations, warranties and covenants by Bird & Cronin and the Company, as well as customary indemnification provisions among the parties. Post-closing covenants include a covenant that for a period of five years, Bird & Cronin and its shareholders (including Mr. Cronin) will refrain from, among other things, solicitation of employees, customers and business of Bird & Cronin or the Company and from other competitive activity as defined in the Asset Purchase Agreement, and requires them and their representatives (as defined in the Asset Purchase Agreement) to maintain (other than in connection with performing obligations pursuant to the Lease or the Employment Agreements, as applicable), the confidentiality of, and not use, confidential information relating to the acquired business or purchased assets, except as permitted by the Asset Purchase Agreement.
The Asset Purchase Agreement contains limited representations and warranties of each of the Company and Bird & Cronin relating to, among other things, the authorization of the parties to enter into and carry out the obligations in the Asset Purchase Agreement and the enforceability of the Asset Purchase Agreement.
The Asset Purchase Agreement contains additional representations and warranties of Bird & Cronin which relate to, among other things, the following subject matters:
· | Bird & Cronin's organization and qualifications to do business; |
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· | Power and authorization to enter into the Asset Purchase Agreement and to consummate the transaction; |
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· | The absence of conflicts or violations of Bird & Cronin's governing documents, contracts, applicable law or regulations; |
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· | The accuracy of financial statements and their preparation in accordance with Bird & Cronin's historical accounting methodologies; |
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· | Compliance with laws and statutes; |
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· | Good and transferable title to the assets, free of encumbrances; |
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· | The absence of legal proceedings and claims; |
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· | The condition of the assets to be acquired; |
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· | Customers and suppliers; |
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· | Material contracts; |
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· | Intellectual property; |
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· | Insurance; |
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· | Regulatory matters; |
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· | The absence of certain changes or events; and |
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· | Solvency. |
All of the representations and warranties survive the closing and remain in full force and effect following the closing until September 30, 2018 (other than with respect to certain fundamental representations, which shall survive the closing and remain in full force and effect until 60 days after the expiration of the applicable statute of limitations).
The Asset Purchase Agreement is governed by the laws of the state of Delaware, without giving effect to any conflict of law principles which would result in the application of the laws of any other jurisdiction.
The business formerly operated by Bird & Cronin is now operated by Acquisition Subsidiary as a division of the Company. For convenience, reference to the "Company" in the following discussion of the post-closing operations of Bird & Cronin includes Acquisition Subsidiary unless otherwise indicated. This section of the Proxy Statement summarizes the material terms of the Acquisition.
We have filed with the Commission Current Reports on Form 8-K disclosing terms and conditions of the Acquisition and related transactions. Those reports included or incorporated by reference as exhibits, transaction documents, including the Asset Purchase Agreement, the Modification Agreement and the Securities Purchase Agreement. The summary of the Asset Purchase Agreement in this Proxy Statement does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Asset Purchase Agreement, a copy of which was filed as Exhibit 10.1 to the Company's Current Report on Form 8-K on September 27, 2017 and is incorporated herein by reference.Bird & Cronin Description and Overview
The following description of Bird & Cronin is as of the time of the Acquisition, except as indicated.
Bird & Cronin is a family-owned Minnesota corporation founded in 1968. Bird & Cronin designs, manufactures, and distributes orthopedic soft goods and specialty patient care products to customers in the United States and internationally. Over 90% of Bird & Cronin's products are made in Bird & Cronin's 85,000 square-foot manufacturing facility located at 1200 Trapp Road, Eagan, Minnesota.
Business Overview and ObjectivesBird & Cronin has been family owned and operated for over 45 years and is proud of its tradition of manufacturing the industry's highest quality medical products with a special emphasis on customer care. Bird & Cronin's mission is to provide quality medical products and services to its customers, recognizing its obligation to be aware, informed and responsive to the changing needs of the health-care environment.
Bird & Cronin has benefitted from strong, long-standing relationships with hospitals, orthopedic specialists, universities, research facilities, and other customers across the medical universe. Bird & Cronin sells products through direct sales as well as through distribution relationships. Additionally, Bird & Cronin holds a number of National Group Purchasing and Government Contracts, some of which include Intalere (formerly Amerinet), Department of Defense, and Department of Veterans Affairs.
Gross sales for Bird & Cronin for the years ended September 30, 2015 and September 30, 2016 were $23.2 million and $24.0 million, respectively. Net income for the years ended September 30, 2015 and September 30, 2016 were approximately $1.1 million and $2.1 million, respectively.
Bird & Cronin currently has 109 employees. Bird & Cronin believes that the skills and dedication of its employees separate its products from those of its competitors.
The Co-Presidents of Bird & Cronin, Michael Cronin and Jason Anderson continue to manage the business following the Acquisition. Mr. Cronin has over 25 years of experience leading sales, marketing, and customer service efforts. Prior to joining Bird & Cronin, Mr. Cronin owned and operated his own medical distribution business. Mr. Anderson has over 20 years of experience leading businesses, operations and technology. Prior to joining Bird & Cronin, Mr. Anderson was a partner and Chief Information Officer for Evercore Wealth Management (a leading national wealth management firm), the Director of Information Services at Varde Partners (an alternative asset manager), and both a partner and the Chief Technology Officer for Lowry Hill Private Asset Management (since restructured as Abbot Downing), a Minneapolis based high net worth advisory and proprietary asset management firm (and subsidiary of Wells Fargo).
Approximately 90% of Bird & Cronin's revenues are generated from self‑manufactured products, with the remaining 10% generated from third party distributed products.
Bird & Cronin's products include ankle walkers, wrist supports, ankle braces, abdominal binders, knee & leg supports, catheters, cervical collars, shoulder immobilizers, splints, extrication collars, and many other related products. All of Bird & Cronin's products fall under the FDA Class I distinction based on the risks associated with the manufactured products. Class I devices are deemed to be low risk and are therefore subject to the least regulatory controls. Bird & Cronin also has the capability to private label products for customers, which is a key differentiator in the market.
A full listing of Bird & Cronin's products can be found in its online catalog located at: http://www.birdcronin.com. Reference to Bird & Cronin's website is not intended to incorporate by reference any of the material or information contained on such website in this Proxy Statement.
An investment in Dynatronics involves a high degree of risk and should not be made by persons who cannot afford the loss of their entire investment. Dynatronics' subsequent filings with the Commission may contain amended and updated discussions of significant risks. Dynatronics cannot predict future risks or estimate the extent to which they may affect financial performance. Please also read carefully the section entitled "Special Note Regarding Forward-Looking Information" in this Proxy Statement at page 35.
Certain risk factors relating to the business and industry of the Company and its securities can be found in Part I, Item 1A —"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended June 30, 2017. In addition, you should carefully consider additional risks that relate to the Acquisition and the business of Bird & Cronin, including but not limited to, the risks set forth below.
Risks Relating to the AcquisitionUncertainty about the proposed Acquisition may adversely affect relationships with our customers, suppliers and employees, whether or not the transaction is completed.
In response to the announcement of the proposed Acquisition, Dynatronics' and/or Bird & Cronin's existing or prospective customers or suppliers may:
· | delay, defer or cease purchasing products or services from us or the combined company, or providing products or services to us or the combined company; |
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· | delay or defer other decisions concerning us or the combined company; or |
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· | otherwise seek to change the terms on which they do business with us or the combined company. |
Any such delays or changes to terms could materially harm our business or the combined business. In addition, as a result of the proposed Acquisition, the employees acquired from Bird & Cronin could experience uncertainty about their future with us following the Closing. As a result, key employees may depart because of issues relating to such uncertainties, or a desire not to remain with us following the Acquisition. Losses of customers, employees or other important strategic relationships could have a material adverse effect on our business, operating results, and financial condition. Such adverse effects could also be exacerbated by a delay in the completion of the Acquisition for any reason.
We expect to incur substantial expenses related to the integration of Bird & Cronin.
We expect to incur substantial expenses in connection with the integration of the business, policies, procedures, operations, technologies and systems of Bird & Cronin. There are a large number of systems and functionscommittee thereof that we may be required to integrate, including, for example, management information, accounting and finance, payroll and benefits and regulatory compliance. Acquisitions of privately held entities,approves such as Bird & Cronin, are particularly challenging because their prior practices may not meet the requirements of the Sarbanes-Oxley Act and/or generally accepted public accounting standards. While we have assumed that a certain level of expenses would be incurred, there are a number of factors beyond our control that could affect the total amount or the timing of all of the expected integration expenses. Moreover, many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from the elimination of duplicative expenses, the realization of economies of scale and cost savings, and other synergies related to the integration of the businesses following completion of the Acquisition.
We may be unable to successfully integrate our business with the business of Bird & Cronin and realize the anticipated benefits of the Acquisition.
The Acquisition involves the combination of the businesses of two companies that currently operate as independent companies. Although we recently acquired Hausmann Industries, Inc. ("Hausmann") in April 2017, our management has limited integration experience and will be required to devote significant attention and resources to integrating our business practices and operations with those of Bird & Cronin. Potential difficulties we may encounter as part of the integration process include, but are not limited to, the following:
· | inability to successfully combine our business with the business of Bird & Cronin in a manner that permits us to achieve the full synergies anticipated from the Acquisition; |
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· | complexities associated with managing our business and the business of Bird & Cronin following the Acquisition, including the challenge of integrating the business and assets of each of the companies in a seamless manner that minimizes any adverse impact on customers, suppliers, employees and other constituencies; |
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· | integrating the workforces of the two companies while maintaining focus on providing consistent, high quality customer service; and |
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· | potential unknown liabilities and unforeseen increased expenses or delays associated with the Acquisition, including costs to integrate the two companies that may exceed anticipated costs. |
Any of the potential difficulties listed above could adversely affect our ability to maintain relationships with customers, suppliers, employees, lenders and other constituencies or our ability to achieve the anticipated benefits of the Acquisition or otherwise adversely affect our business and financial results following completion of the Acquisition.
Our actual financial and operating results after the Acquisition could differ materially from any expectations or guidance provided by us concerning future results, including (without limitation) expectations or guidance with respect to the financial impact of any cost savings and other potential synergies.
We currently expect to realize an increase in sales and other synergies as a result of the proposed Acquisition. These expectations are subject to numerous assumptions, however, including assumptions derived from our diligence efforts concerning the status of and prospects for Bird & Cronin's business, which we do not currently control, and assumptions relating to the near-term prospects for our industry generally and the markets for Bird & Cronin's products in particular. Additional assumptions that we have made include, without limitation, the following:
· | projections of Bird & Cronin's future revenues; |
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· | anticipated financial performance of Bird & Cronin's products and products currently in development; |
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· | anticipated cost savings and other synergies associated with the Acquisition, including potential revenue synergies; |
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· | our expected capital structure after the Acquisition; |
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· | amount of goodwill and intangibles that will result from the Acquisition; |
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· | certain other purchase accounting adjustments that we expect to record in our financial statements in connection with the Acquisition; |
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· | acquisition costs, including restructuring charges and transaction costs payable to our financial, legal and accounting advisors; |
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· | our ability to maintain, develop and deepen relationships with Bird & Cronin's customers; and |
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· | other financial and strategic risks of the Acquisition. |
We cannot provide any assurances with respect to the accuracy of our assumptions, including our assumptions with respect to future revenues or revenue growth rates, if any, of Bird & Cronin, and we cannot provide assurances with respect to our ability to realize any cost savings that we currently anticipate. Risks and uncertainties that could cause our actual results to differ materially from currently anticipated results include, but are not limited to, risks relating to our ability to integrate Bird & Cronin successfully; currently unanticipated incremental costs that we may incur in connection with integrating the two companies; risks relating to our ability to realize incremental revenues from the Acquisition in the amounts that we currently anticipate; risks relating to the willingness of Bird & Cronin's customers and other partners to continue to conduct business with us following the Acquisition; and numerous risks and uncertainties that affect our industry generally and the markets for our products and those of Bird & Cronin, specifically. Any failure to integrate Bird & Cronin successfully and to realize the financial benefits we currently anticipate from the Acquisition would have a material adverse impact on our future operating results and financial condition and could materially and adversely affect the trading price or trading volume of our Common Stock.
The combined businesses may not perform as we expect, or as the market expects, which could have an adverse effect on the price of our Common Stock.
Risks associated with the combined company following the Acquisition include:
· | integrating businesses is a difficult, expensive, and time-consuming process, and the failure to integrate successfully our business with the businesses of Bird & Cronin in the expected time frame would adversely affect our financial condition and results of operations; |
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· | the Acquisition will significantly increase the size of our operations, and if we are not able to effectively manage our expanded operations, our stock price may be adversely affected; |
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· | the current sales rates of Bird & Cronin as combined with the Company may dilute the observed growth rates of the Company; |
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· | the success of the Company following the Closing will also depend upon relationships with third parties and pre-existing customers of us and Bird & Cronin, which relationships may be affected by customer preferences or public attitudes about the Acquisition. Any adverse changes in these relationships could adversely affect our business, financial condition and results of operations; and |
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· | the price of our Common Stock after the Acquisition may be affected by factors different from those currently affecting the price of our Common Stock. |
transactions. If any of these events were to occur, the price of our Common Stock could be adversely affected.
Risks Related to the Operation of the Bird & Cronin Business Following the AcquisitionUncertain or weakened global economic conditions may adversely affect Bird & Cronin's industry, business and results of operations.
The overall performance of the Bird & Cronin division will depend on domestic and worldwide economic conditions, which may remain challenging for the foreseeable future. Financial developments seemingly unrelated to Bird & Cronin or its industry may adversely affect it. The U.S. economy and other key international economies have been impacted by threatened sovereign defaults and ratings downgrades, falling demand for a variety of goods and services, restricted credit, threats to major multinational companies, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies, acts of terrorism and overall uncertainty. Healthcare reform in the United States has created a great deal of confusion for medical products such as those manufactured and distributed by Bird & Cronin. These conditions affect the rate of medical or therapeutic equipment spending and could adversely affect our ability to sell Bird & Cronin's products, or delay prospective purchasing decisions, any of which could adversely affect our operating results. We cannot predict the timing, strength or duration of the economic recovery or any subsequent economic slowdown worldwide, in the United States, or in Bird & Cronin's industry.
Bird & Cronin's failure or inability to enforce its trademarks or other proprietary rights could adversely affect its competitive position or the value of its brand.Bird & Cronin owns certain federal trademark registrations but also relies on unregistered proprietary rights, including common law trademark protection. Third parties may oppose Bird & Cronin's trademark applications, or otherwise challenge its use of the trademarks, and may be able to use its trademarks in jurisdictions where they are not registered or otherwise protected by law. If Bird & Cronin's trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before Bird & Cronin, Bird & Cronin could be forced to rebrand its products, which could result in loss of brand recognition, and could require additional resources for marketing new brands. If others are able to use Bird & Cronin's trademarks, its ability to distinguish its products may be impaired, which could adversely affect its business. Further, we cannot assure you that competitors will not infringe upon Bird & Cronin's trademarks, or that we will have adequate resources to enforce its trademarks.
Bird & Cronin may be unable to effectively develop and market products against the products of its competitors in a highly competitive industry.
The present or future products of Bird & Cronin could be rendered obsolete or uneconomical by technological advances by its competitors. Competitive factors include price, customer service, technology, innovation, quality, reputation and reliability. Bird & Cronin's competition may respond more quickly to new or emerging technologies, undertake more extensive marketing campaigns, have greater financial, marketing and other resources than Bird & Cronin, or be more successful in attracting potential customers, employees and strategic partners. Given these factors, we cannot guarantee that we will be able to continue the current level of success of Bird & Cronin in the industry.
The cost of complying with complex governmental regulations applicable to the Bird & Cronin business, sanctions resulting from non-compliance, or reduced demand resulting from increased regulations, could affect our operating results.
Bird & Cronin's operations and facilities are subject to the requirements of the Occupational Safety and Health Act and comparable state statutes that regulate the protection of the health and safety of workers, and the proper design, operation and maintenance of equipment. Additionally, certain products of Bird & Cronin are subject to the requirements of the Food, Drug, and Cosmetic Act and the oversight of the Food and Drug Administration ("FDA").
Failure to comply with these requirements, including general industry standards, record keeping requirements and monitoring and control requirements, may result in significant fines or compliance costs, which could have a material adverse effect on our results of operations, financial condition and cash flows.
ADDITIONAL INFORMATION ABOUT BIRD & CRONINHistorical Financial InformationThis Summary Information should be read in conjunction with the historical financial information prepared by the management of Bird & Cronin, including Bird & Cronin's audited Balance Sheets and Income Statements as of September 30, 2016 and September 30, 2015, and historical nine-month financial information (unaudited), consisting of Bird & Cronin's Balance Sheet and Income Statement as of June 30, 2017, attached to this Proxy Statement as Attachment C (referred to herein as the "Bird & Cronin Financial Statements"). Financial information about Dynatronics for the year ended June 30, 2017, including our audited financial statements for the two years then ended, and the notes thereto, is available on our Annual Report on Form 10-K, filed September 26, 2017, incorporated herein by reference.
As discussed above, in connection with our Annual Meeting, we are not seeking shareholder approval of the Acquisition and there are no regulatory requirements thatdisinterested directors, we shall obtain shareholder approvala majority vote of the Acquisition. We are seeking shareholder approval, in accordance withshareholders approving the NASDAQ Listing Rules, of the issuance of securities in excess of 19.99% of the outstanding Common Stock of the Company in connection with the Acquisition. The risks and uncertainties described above are not the only ones related to the Acquisition. Additional risks and uncertainties regarding Bird & Cronin not presently known to us or that our management currently deems immaterial also may impair our business operations. Following the closing of the Acquisition, the business of Bird & Cronin is now the business of the Company, operated by Acquisition Subsidiary as a division of Dynatronics. If any of the risks described above were to occur, our business, financial condition, operating results and cash flows could be materially adversely affected. In such an event, the trading price of our Common Stock could decline and you could be materially and adversely impacted. The risks discussed above also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements.transaction.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS OF BIRD & CRONIN
Set forth below is our management discussion and analysis of financial condition and results of operations for Bird & Cronin for the year ended September 30, 2016 compared to the year ended September 30, 2015, and the nine months ended June 30, 2017 compared to the nine months ended June 30, 2016.
The following discussion and analysis of Bird & Cronin's financial condition and results of operations should be read in conjunction with the audited financial statements of Bird & Cronin, as of and for the years ended September 30, 2016 and 2015 and the notes thereto, and the unaudited financial information for the nine months ended June 30, 2017, provided to Dynatronics in connection with the Acquisition by Bird & Cronin.
Critical Accounting Policies and Estimates
Bird & Cronin makes judgments, estimates and assumptions concerning the future when preparing its financial statements. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected. The accounting policies and estimates below involve a high degree of judgment and complexity. See Note 1 of the Bird & Cronin Financial Statements for a complete discussion of Bird & Cronin's significant accounting policies and estimates.
Revenue Recognition
Bird & Cronin recognizes revenue from the sale of a product when products are shipped to the customer. Amounts billed for shipping and handling are recorded as costs of sales.
Accounts Receivable
Accounts receivable are due from dealers and distributors. Customer accounts receivable are recorded at the amounts Bird & Cronin expects to collect on balances outstanding, which are net of allowances for doubtful accounts. Management provides for probable uncollectible amounts and estimated rebates and returns through charges to earnings and credits to valuation allowances based on its assessment of the current status of individual accounts and estimates of sales levels. In addition, Bird & Cronin closely monitors outstanding balances and charges off all balances when Bird & Cronin management determines the probability of collection is remote. Generally, accounts receivable are due within 30 to 60 days. Accounts receivable balances outstanding longer than the contractual payment terms are considered past due.
Inventories
Inventories consist of raw materials (including work in process) and finished goods, and are stated at the lower of cost or market. Cost is recorded using the weighted-average method.
Income Taxes
Bird & Cronin, with the consent of its stockholders, has elected under the Internal Revenue Code to be an S Corporation. In lieu of corporate income taxes, the individual stockholders of an S Corporation are taxed on their proportionate share of the corporation's taxable income. The guidance followed by Bird & Cronin on accounting for uncertainty in income taxes recognized in financial statements prescribes a more likely than not recognition threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return and also provides guidance on various related matters such as interest and penalties and disclosure. Under Section 7519 of the Internal Revenue Code, Bird & Cronin is required to make income tax deposits to maintain its fiscal year end for the amount of deferred income from October 1 through December 31 of each year.
Nine Months Ended June 30, 2017 Compared to Nine Months Ended June 30, 2016
Net sales for the nine months ended June 30, 2017 were $17,923,262, compared to $17,659,221 for the nine months ended June 30, 2016. Cost of sales for the nine-month period in 2017 were $11,342,431 and gross profit was $6,580,831 for the period, compared to cost of sales of $11,337,934 and gross profit of $6,321,287 in 2016. The improvement in gross profit was due primarily to greater operational efficiencies, increased sales of higher margin products and price increases in 2017.
Selling, general and administrative ("SG&A") expense for the nine months ended June 30, 2017 were $5,177,464 or 28.8% of net sales, compared to $4,966,780, or 28.1% of net sales for the same period in 2016. The increase in SG&A expense in 2017 was due to employee bonuses and increased executive compensation expense. Net income for the nine months ended June 30, 2017, was $1,403,470, compared to net income of $1,340,071 for the nine months ended June 30, 2016.
Net cash provided by operating activities during the nine months ended June 30, 2017 was $387,122, compared to $1,223,483 during the same period in 2016. Capital expenditures used net cash during the nine months ended June 30, 2017 of $76,190 and $6,840 during the same period in 2016. Distributions to stockholders during the nine months ended June 30, 2017 totaled $1,235,250, compared to $1,180,000 during the nine months ended June 30, 2016.
Year Ended September 30, 2016 Compared to Year Ended September 30, 2015
The increase in net sales during the year ended September 30, 2016 from 2015 is due to increased focus on sales management and improved market conditions. Bird & Cronin management anticipate sales to stay within historical ranges.
Cost of sales consists of certain labor costs, payments to raw materials suppliers, vendors and others that are directly related to a revenue-generating event. Cost of sales also includes shipping and handling charges. During the year ended September 30, 2016, cost of sales as a percent of total revenue decreased to 63.8% as compared to 65% for the year ended September 30, 2015. This decrease was primarily the result of improved operating efficiencies. Bird & Cronin management anticipates cost of sales as a percentage of total revenue to stay within its historical range.
SG&A expense decreased in 2016 compared to the year ended September 30, 2015, from $7,067,142 (30.2% of net sales) to $6,581,001 (27.2% of net sales). The primary reason for the decrease in SG&A is due to the implementation of a new sales commission structure, key performance indicators across the organization, and retirement of a senior executive. Bird & Cronin management anticipates that operating costs will continue at similar levels.
Research and development ("R&D") expense is related primarily to the development of new products and improvement of existing products. Bird & Cronin management has not historically reported R&D costs separately. Its management anticipates that certain R&D costs will be incurred and that they will continue at similar historical levels.
Interest Expense
Interest expense for the years September 30, 2016 and 2015 was immaterial and represents interest paid on a revolving line of credit with a financial institution. The borrowing capacity under the line of credit was $4,000,000. No borrowings were outstanding at September 30, 2016 and 2015. Subsequent to the year end, prior to the closing of the Acquisition, Bird & Cronin closed the line of credit and the agreement with the bank was terminated.
Liquidity and Capital ResourcesBird & Cronin has historically met its working capital and capital expenditure requirements by using net cash flow from operations and by drawing on its line of credit. The principal source of liquidity is Bird & Cronin's operating cash flow.Cash Flows from Operating Activities
Net cash provided by operating activities totaled $2,041,409 in 2016, compared with $969,143 in 2015. Cash flow improvement from 2015 to 2016 was directly related to the improvement in net income.
Cash Flows from Investing Activities
For the year ended September 30, 2016, Bird & Cronin used $6,840 for the purchase of property and equipment, compared to cash provided from the sale of assets in 2015 (offset by capital expenditures of $10,463) net, of $20,350 for the year ended September 30, 2015.Cash Flows from Financing Activities
Distributions to stockholders in 2016 totaled $1,790,000, compared to distributions to stockholders in 2015 of $338,938.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Combined Statements of Operations for the year ended June 30, 2017 (the "Pro Forma Statements"), which combine the historical consolidated statements of operations of Dynatronics and Bird & Cronin for those periods, giving effect to the Acquisition as if it had been consummated on July 1, 2016, the beginning of the full year period presented are included with this Proxy Statement as Attachment D. The Pro Forma Statements were derived from, and should be read in conjunction with:
• | The audited consolidated financial statements of Dynatronics as of and for the year ended June 30, 2017, as contained on Form 10-K filed on September 27, 2017; |
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• | The audited financial statements of Bird & Cronin as of and for the years ended September 30, 2016 and 2015, and the unaudited financial statements of Cronin as of and for the nine-months ended June 30, 2017. |
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Proxy Statement includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These statements are often identified by the use of words such as "may," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue," and similar expressions or variations and other matters that do not relate strictly to historical facts. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under the heading "Risk Factors" in our filings with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act. The forward-looking statements in this Proxy Statement represent our views as of the date such statements are made. While we may elect to update such forward-looking statements at some point in the future, we disclaim any obligation to do so, even if subsequent events cause our views to change. These forward-looking statements should not be relied upon as representing our views as of any date subsequent to the date such statements are made. The forward-looking statements contained herein speak only as of the date on which they were made, and, except as required by law, we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Proxy Statement.
SHAREHOLDER PROPOSALS FOR 20182019 ANNUAL MEETING OF SHAREHOLDERS
Requirements for Shareholder Proposals to Be Considered for Inclusion in Dynatronics' Proxy Materials
Shareholders of Dynatronics may submit proposals on matters appropriate for shareholder action at meetings of Dynatronics'our shareholders in accordance with Rule 14a-8 promulgated under the Exchange Act. For such proposals to be included in Dynatronics'our proxy materials relating to its 2018our 2019 Annual Meeting of Shareholders, all applicable requirements of Rule 14a-8 must be satisfied and such proposals must be received by Dynatronicsus no later than June 2, 2018.2019. Such proposals should be delivered to Dynatronics Corporation, 7030 Park Centre Drive, Cottonwood Heights, Utah 84121, Attention: Jim Ogilvie, Vice President of BusinessCorporate Development, telephone (801) 727-1755.
Requirements for Shareholder Proposals to be Brought Before the Annual Meeting
Dynatronics'
Our bylaws provide that, except in the case of proposals made in accordance with Rule 14a-8, for shareholder nominations to the Board of Directors or other proposals to be considered at an annual meeting of shareholders, the shareholder must have given timely notice thereof in writing to theour Corporate Secretary of Dynatronics not less than 60 nor more than 90 calendar days prior to the anniversary of the date on which Dynatronicswe first mailed itsour proxy materials for itsour immediately preceding annual meeting of shareholders (as specified in Dynatronics'the proxy materials for itsthe immediately preceding annual meeting of shareholders). To be timely for the 20182019 Annual Meeting of Shareholders, a shareholder'sshareholder’s notice must be delivered or mailed to and received by Dynatronics'our Corporate Secretary at theour principal executive offices of Dynatronics between July 2, 2018,2019 and August 1, 2018.2019. However, in the event that the annual meeting2019 Annual Meeting is called for a date that is not within 30 calendar days of the anniversary of date that the date on which the immediately preceding annual meeting of shareholders2018 Annual Meeting was called, to be timely, notice by the shareholder must be so received by us not later than the close of business on the tenth calendar day following the date on which public announcement of the date of the annual meeting2019 Annual Meeting is first made. In no event will the public announcement of an adjournment of an annual meeting of shareholders commence a new time period for the giving of a shareholder'sshareholder’s notice as provided above. A shareholder'sshareholder’s notice to Dynatronics'our Corporate Secretary must set forth the information required by Dynatronics'the bylaws with respect to each matter the shareholder proposes to bring before the annual meeting.
In addition, the proxy solicited by the Board of Directors for the 20182019 Annual Meeting of Shareholders will confer discretionary authority to vote on (i) any proposal presented by a shareholder at that meeting for which Dynatronics haswe have not been provided with notice on or prior to August 1, 2018,2019, and (ii) any proposal made in accordance with the bylaw provisions, if the 20182019 proxy statement briefly describes the matter and how management'smanagement’s proxy holders intend to vote on it, if the shareholder does not comply with the requirements of Rule 14a-4(c)(2) under the Exchange Act.
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HOUSEHOLDING OF PROXY MATERIALS SHAREHOLDERS SHARING THE SAME ADDRESSThe CommissionSEC has adopted rules that permit companies and intermediaries (such as(e.g., brokers) to implement asatisfy the delivery procedure called "householding." Under this procedure, multiplerequirements for Notices of Internet Availability of Proxy Materials or other Annual Meeting materials with respect to two or more shareholders who reside atsharing the same address may receiveby delivering a single copy of our annual report and proxy materials, including any Notice of Internet Availability of Proxy Materials unless the affected shareholder has provided contrary instructions.or other Annual Meeting materials addressed to those shareholders. This procedure reduces printing costsprocess, which is commonly referred to as “householding,” potentially means extra convenience for shareholders and postage fees.cost savings for companies.
Once again this
This year, a number of brokers with account holders who beneficially own our Common Stockare Dynatronics shareholders will be "householding"“householding” our annual report and proxy materials. A single setNotice of annual report and other proxy materialsInternet Availability of Proxy Materials will be delivered to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. Once you have received notice from your broker that itthey will be "householding"“householding” communications to your address, "householding"“householding” will continue until you are notified otherwise or until you revoke your consent. Shareholders with shares held in street name may revoke their consentIf, at any time, by contacting Broadridge Financial Solutions, either by calling toll-free (800) 542-1061, or by writingyou no longer wish to Broadridge Financial Solutions, Householding Department, 51 Mercedes Way, Edgewood, New York, 11717.
Upon written or oral request, Dynatronics will promptly deliver a separate copy of the annual reportparticipate in “householding” and other proxy materialswould prefer to any beneficial owner at a shared address to which a single copy of any of those documents was delivered. To receive a separate copyNotice of Internet Availability of Proxy Materials, please notify your broker. Shareholders who currently receive multiple copies of the annual reportNotices of Internet Availability of Proxy Materials at their addresses and other proxy materials, you may write or call Dynatronics' Investor Relations Department at Dynatronics Corporation, 7030 Park Centre Drive, Cottonwood Heights, Utah 84121, Attention: Jim Ogilvie, Vice Presidentwould like to request “householding” of Business Development, telephone (801) 727-1755.their communications should contact their brokers.
ANNUAL REPORT ON FORM 10-KWe are furnishing a copy of our Annual Report on Form 10-K for the year ended June 30, 2017, including the Financial Statements for the year then ended, as filed with the Commission, to each shareholder to whom this Proxy Statement is delivered.
OTHER BUSINESSMATTERS
We know
The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If however, any further business shouldother matters are properly comebrought before the Annual Meeting,meeting, it is the intention of the persons named as proxies in the accompanying form willproxy to vote on such businessmatters in accordance with their best judgment.
| DYNATRONICS CORPORATION |
| By order of the Board of Directors |
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| /s/ Kelvyn H. Cullimore, Jr.
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| Kelvyn H. Cullimore, Jr. |
| Chairman, President and CEO |
ATTACHMENT A
Dynatronics Corp.
Compensation Committee Charter
Purpose
The purpose of the Compensation Committee (the "Committee")By Order of the Board of Directors (the "Board")
/s/ David Wirthlin
David Wirthlin
Chief Financial Officer and Corporate Secretary
October 10, 2018
A copy of Dynatronics Corp. (the "Company")Corporation’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018, is available without charge upon written request to: Secretary, Dynatronics Corporation, 7030 Park Centre Dr., Cottonwood Heights, Utah 84121.
· | oversee the Company's employee benefit plans, including its incentive compensation and equity compensation plans; |
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· | oversee the Company's compensation policies, plans and programs for its executive officers, including, without limitation, the compensation of the Company's Chief Executive Officer (the "CEO") and other executive officers (including officers reporting under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"));
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· | approve and evaluate director compensation; and |
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· | oversee the management of risks associated with the Company's compensation policies and programs |
DYNATRONICS CORPORATION
2018 EQUITY INCENTIVE PLAN
DYNATRONICS CORPORATION
2018 EQUITY INCENTIVE PLAN
1Purpose; Eligibility.
1.1General Purpose. The compensation programs forname of this plan is the Company's executive officers shall be (i) designedDynatronics Corporation 2018 Equity Incentive Plan (the “Plan”). The purposes of the Plan are to (a) enable Dynatronics Corporation, a Utah corporation (the “Company”), and any Affiliate to attract motivate and retain talented executives responsible forthe types of Employees, Consultants and Directors who will contribute to the Company’s long range success; (b) provide incentives that align the interests of Employees, Consultants and Directors with those of the shareholders of the Company; and (c) promote the success of the Company, (ii) determined within a competitive frameworkCompany’s business.
1.2Eligible Award Recipients. The persons eligible to receive Awards are the Employees, Consultants and (iii) based on the achievementDirectors of the Company's overall financial results, individual contributionsCompany and a compensation philosophy of "pay for performance." In furtherance of these purposes, the Compensation Committee will undertake those specific duties and responsibilities listed belowits Affiliates and such other duties asindividuals designated by the BoardCommittee who are reasonably expected to become Employees, Consultants and Directors after the receipt of Awards.
1.3Available Awards. Awards that may from timebe granted under the Plan include: (a) Incentive Stock Options, (b) Non-qualified Stock Options, (c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, (f) Cash Awards, and (g) Other Equity-Based Awards.
2Definitions.
“Affiliate” means a corporation or other entity that, directly or through one or more intermediaries, controls, is controlled by or is under common control with, the Company.
“Applicable Laws” means the requirements related to time prescribe.or implicated by the administration of the Plan under applicable state corporate law, United States federal and state securities laws, the Code, any stock exchange or quotation system on which the shares of Common Stock are listed or quoted, and the applicable laws of any foreign country or jurisdiction where Awards are granted under the Plan.
Membership“Award” means any right granted under the Plan, including an Incentive Stock Option, a Non-qualified Stock Option, a Stock Appreciation Right, a Restricted Award, a Performance Share Award, a Cash Award, or an Other Equity-Based Award.
The Committee shall be composed“Award Agreement” means a written agreement, contract, certificate or other instrument or document evidencing the terms and conditions of no more than four (4) members.
Committee members shall be appointed by, and shall serve atan individual Award granted under the Plan which may, in the discretion of the Board.Company, be transmitted electronically to any Participant. Each memberAward Agreement shall be subject to the terms and conditions of the Plan.
“Board” means the Board of Directors of the Company, as constituted at any time.
“Cash Award” means an Award denominated in cash that is granted underSection 7.4of the Plan.
“Cause” means
(a) With respect to any Employee or Consultant, unless the applicable Award Agreement states otherwise:
(i) If the Employee or Consultant is a party to an employment or service agreement with the Company or its Affiliates and such agreement provides for a definition of Cause, the definition contained therein; or
(ii) If no such agreement exists, or if such agreement does not define Cause: (1) the commission of, or plea of guilty or no contest to, a felony or a crime involving moral turpitude or the commission of any other act involving willful malfeasance or material fiduciary breach with respect to the Company or an Affiliate; (2) conduct that results in or is reasonably likely to result in harm to the reputation or business of the Company or any of its Affiliates; (3) gross negligence or willful misconduct with respect to the Company or an Affiliate; or (4) material violation of state or federal securities laws.
(b) With respect to any Director, unless the applicable Award Agreement states otherwise, a determination by a majority of the disinterested Board members that the Director has engaged in any of the following:
(i) malfeasance in office;
(ii) gross misconduct or neglect;
(iii) false or fraudulent misrepresentation inducing the director’s appointment;
(iv) willful conversion of corporate funds; or
(v) repeated failure to participate in Board meetings on a regular basis despite having received proper notice of the meetings in advance.
The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to whether a Participant has been discharged for Cause.
“Change in Control”
(a) One Person (or more than one Person acting as a group) acquires ownership of stock of the Company that, together with the stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company; provided, that, a Change in Control shall not occur if any Person (or more than one Person acting as a group) owns more than 50% of the total fair market value or total voting power of the Company’s stock and acquires additional stock;
(b) One Person (or more than one Person acting as a group) acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) ownership of the Company’s stock possessing 30% or more of the total voting power of the stock of such corporation;
(c) A majority of the members of the Board are replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the Board before the date of appointment or election; or
(d) One Person (or more than one Person acting as a group), acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition) assets from the Company that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the Company immediately before such acquisition.
“Code” means the Internal Revenue Code of 1986, as it may be amended from time to time. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder.
“Committee” means a committee of one or more members of the Board appointed by the Board to serve untiladminister the Plan in accordance withSection 3.3andSection 3.4.
“Common Stock” means the common stock, no par value per share, of the Company, or such member'sother securities of the Company as may be designated by the Committee from time to time in substitution thereof.
“Company” means Dynatronics Corporation a Utah corporation, and any successor thereto.
“Consultant” means any individual or entity which performs bona fide services to the Company or an Affiliate, other than as an Employee or Director, and who may be offered securities registerable pursuant to a registration statement on Form S-8 under the Securities Act.
“Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Consultant or Director, is duly appointednot interrupted or untilterminated. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such member's earlier retirement, resignationservice,provided thatthere is no interruption or removal.termination of the Participant’s Continuous Service;provided further thatif any Award is subject to Section 409A of the Code, this sentence shall only be given effect to the extent consistent with Section 409A of the Code. For example, a change in status from an Employee of the Company to a Director of an Affiliate will not constitute an interruption of Continuous Service. The BoardCommittee or its delegate, in its sole discretion, may removedetermine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal or family leave of absence. The Committee or its delegate, in its sole discretion, may determine whether a Company transaction, such as a sale or spin-off of a division or subsidiary that employs a Participant, shall be deemed to result in a termination of Continuous Service for purposes of affected Awards, and such decision shall be final, conclusive and binding.
“Deferred Stock Units(DSUs)” has the meaning set forth inSection 7.2hereof.
“Director” means a member of the Committee atBoard.
“Disability” means, unless the applicable Award Agreement says otherwise, that the Participant is unable to engage in any time withsubstantial gainful activity by reason of any medically determinable physical or without cause. The Committeemental impairment;provided, however,for purposes of determining the term of an Incentive Stock Option pursuant toSection 6.10hereof, the term Disability shall consist of no fewer than three membershave the meaning ascribed to it under Section 22(e)(3) of the Board.Code. The Board may designate one memberdetermination of whether an individual has a Disability shall be determined under procedures established by the Committee. Except in situations where the Committee is determining Disability for purposes of the Committee as its chair. Theterm of an Incentive Stock Option pursuant toSection 6.10hereof within the meaning of Section 22(e)(3) of the Code, the Committee may form and delegate authority to subcommittees when appropriate. All membersrely on any determination that a Participant is disabled for purposes of benefits under any long-term disability plan maintained by the Company or any Affiliate in which a Participant participates.
“Disqualifying Disposition” has the meaning set forth inSection 14.12.
“Effective Date” shall mean the date that the Company’s shareholders approve this Plan if such shareholder approval occurs before the first anniversary of the Committee will meetdate the independence requirements set forth in Rule 10C-1(b)(1) underPlan is adopted by the Board.
“Employee” means any person, including an Officer or Director, employed by the Company or an Affiliate;provided, that,for purposes of determining eligibility to receive Incentive Stock Options, an Employee shall mean an employee of the Company or a parent or subsidiary corporation within the meaning of Section 424 of the Code. Mere service as a Director or payment of a director’s fee by the Company or an Affiliate shall not be sufficient to constitute “employment” by the Company or an Affiliate.
“Exchange Act and the rules of Nasdaq Stock Market, Inc. (the "Nasdaq Rules"); the non-employee director definition of Rule 16b-3 promulgated under Section 16 of” means the Securities Exchange Act of 1934, as amended; andamended.
“Fair Market Value” means, as of any date, the outside director definition of Section 162(m)value of the Internal Revenue Code of 1986,Common Stock as amended.
Responsibilities and Duties
Executive and Other Compensation
The responsibilities and duties ofdetermined below. If the Compensation CommitteeCommon Stock is listed on any established stock exchange or a national market system, including without limitation, the New York Stock Exchange or the NASDAQ Stock Market, the Fair Market Value shall include:
· | Annually reviewing and approving for the CEO and the executive officers of the Company, including: (i) annual base salary, (ii) annual incentive bonus, including the specific goals and amount, (iii) equity compensation, (iv) any employment agreement, severance arrangement and change in control agreement/provision, (v) any signing bonus or payment of relocation costs and (vi) any other significant benefits, compensation or arrangements not available to employees generally. One of the Committee's objectives shall be to use compensation to align the interests of the executive officers with the long-term interests of the Company's shareholders, thereby incentivizing management to increase shareholder value. In evaluating and determining CEO and other executive officer compensation, the Committee shall consider the results of the most recent shareholder advisory vote on executive compensation ("Say on Pay Vote"), as required by Section 14A of the Exchange Act; |
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· | Reviewing and approving corporate goals and objectives relevant to the compensation of the CEO and the executive officers of the Company, evaluating performance in the light thereof, and considering factors related to the performance of the Company, including accomplishment of the Company's long-term business and financial goals; |
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· | Acting as Administrator of the Company's equity compensation plans for its employees, directors and other service providers; |
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· | Providing oversight of the Company's overall compensation plans and benefits programs and making recommendations to the Board with respect to improvements or changes to such plans or the adoption of new plans when appropriate; |
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· | Evaluating, on a periodic basis, the competitiveness of (i) the compensation of the CEO and the executive officers of the Company and (ii) the Company's overall compensation plans; |
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· | Reviewing and discussing with management the risks arising from the Company's compensation policies and practices related to all employees that are reasonably likely to have a material adverse effect on the Company and making recommendations to the Board with respect to such policies and practices to mitigate such risks; |
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· | Evaluating director compensation, consulting with outside consultants and/or with the Human Resources department when appropriate, and making recommendations to the Board regarding director compensation; |
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· | Reviewing and making recommendations to the Board with respect to directors' stock option grants or other equity awards under the Company's equity incentive plans; |
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· | Reviewing and recommending to the Board for approval any equity award granting policy; and |
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· | Reviewing and recommending to the Board for approval the frequency with which the Company will conduct Say-on-Pay votes, taking into account the results of the most recent shareholder advisory vote on the frequency of Say-on-Pay votes required by Section 14A of the Exchange Act, and reviewing and approving the proposals regarding the Say-on-Pay Vote and the frequency of the Say-on-Pay vote to be included in the Company's annual proxy statement. |
Authority to Engage Advisors
In addition to the responsibilities and duties described above, the Committee has the authority, in its sole discretion, to retain or obtain the adviceclosing price of a compensation consultant, legal counselshare of Common Stock (or if no sales were reported the closing price on the date immediately preceding such date) as quoted on such exchange or other advisor. The Committeesystem on the day of determination, as reported in theWall Street Journal. In the absence of an established market for the Common Stock, the Fair Market Value shall be directly responsible for the appointment, compensation and oversight of the work of any such compensation consultant, legal counsel or other advisor retained by the Committee. The Committee shall receive appropriate funding from the Company, as determined in good faith by the Committee and such determination shall be conclusive and binding on all persons.
“Fiscal Year” means the Company’s fiscal year, ending June 30.
“Free Standing Rights” has the meaning set forth inSection 7.1(a).
“Good Reason” means, unless the applicable Award Agreement states otherwise:
(a)If an Employee or Consultant is a party to an employment or service agreement with the Company or its capacity asAffiliates and such agreement provides for a committeedefinition of Good Reason, the definition contained therein; or
(b)If no such agreement exists or if such agreement does not define Good Reason, the occurrence of one or more of the Board, forfollowing without the paymentParticipant’s express written consent, which circumstances are not remedied by the Company within thirty (30) days of reasonable compensation to its compensation consultants, legal counselreceipt of a written notice from the Participant describing the applicable circumstances (which notice must be provided by the Participant within ninety (90) days of the Participant’s knowledge of the applicable circumstances): (i) any material, adverse change in the Participant’s duties, responsibilities, authority, title, status or other advisors and to otherwise perform its duties and responsibilities under this Charter.reporting structure; (ii) a material reduction in the Participant’s base salary or bonus opportunity; or (iii) a geographical relocation of the Participant’s principal office location by more than fifty (50) miles.
The Committee may select, or receive advice from, a compensation consultant, legal counsel or other advisor to
“Grant Date” means the date on which the Committee (other than in-house legal counsel) only after taking into considerationadopts a resolution, or takes other appropriate action, expressly granting an Award to a Participant that specifies the factors specifiedkey terms and conditions of the Award or, if a later date is set forth in Nasdaq Rule 5605(d)(3)(D). The Committee may retain, or receive advice from, any compensation consultant, legal counsel or other advisorsuch resolution, then such date as is set forth in such resolution.
“Incentive Stock Option” means an Option that it prefers, including advisors that are not deemed independent, after considering the factors specified in Nasdaq Rule 5605(d)(3)(D).
Notwithstanding the foregoing,is designated by the Committee as an incentive stock option within the meaning of Section 422 of the Code and that meets the requirements set out in the Plan.
“Non-Employee Director” means a Director who is a “non-employee director” within the meaning of Rule 16b-3.
“Non-qualified Stock Option” means an Option that by its terms does not qualify or is not requiredintended to conductqualify as an independence assessment forIncentive Stock Option.
“Officer” means a compensation consultant, legal counsel or other advisor that acts in a role limited to the following activities for which no disclosureperson who is required under Item 407(e)(3)(iii) of Regulation S-K: (i) consulting on any broad-based plan that does not discriminate in scope, terms, or operation in favor of executive officers or directorsan officer of the Company and that is available generally to all salaried employees and/or (ii) providing information that either is not customized forwithin the Company or that is customized based on parameters that are not developed by the advisor and about which the advisor does not provide advice.
The Committee shall not be required to implement or act consistently with the advice or recommendationsmeaning of any compensation consultant, legal counsel or other advisor to the Committee, and the authority granted to the Committee pursuant to this Charter shall not affect the ability or obligationSection 16 of the Committee to exercise its own judgment in fulfillment of its duties under this Charter. Any advisors retained by the Committee will report directly to the Committee and may be terminated in the discretion of the Committee.
Compliance and Governance
The Committee shall annually review this Charter and recommend any proposed changes to the Board. To the extent required by the Exchange Act and the rules and regulations promulgated thereunder.
“Option” means an Incentive Stock Option or a Non-qualified Stock Option granted pursuant to the Plan.
“Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.
“Option Exercise Price” means the price at which a share of Common Stock may be purchased upon the exercise of an Option.
“Other Equity-Based Award” means an Award that is not an Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, or Performance Share Award that is granted underSection 7.4and is payable by delivery of Common Stock and/or which is measured by reference to the value of Common Stock.
“Participant” means an eligible person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Award.
“Performance Goals” means, for a Performance Period, the one or more goals established by the Committee for the Performance Period based upon business criteria or other performance measures determined by the Committee in its discretion.
“Performance Period” means the one or more periods of time, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Performance Share Award or a Cash Award.
“Performance Share Award” means any Award granted pursuant toSection 7.3hereof.
“Performance Share” means the grant of a right to receive a number of actual shares of Common Stock or share units based upon the performance of the SEC,Company during a Performance Period, as determined by the Committee.
“Permitted Transferee” means: (a) a member of the Optionholder’s immediate family (child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships), any person sharing the Optionholder’s household (other than a tenant or employee), a trust in which these persons have more than 50% of the beneficial interest, a foundation in which these persons (or the Optionholder) control the management of assets, and any other entity in which these persons (or the Optionholder) own more than 50% of the voting interests; (b) third parties designated by the Committee will review the Company's Compensation Discussionin connection with a program established and Analysis ("CD&A") and related executive compensation information, recommend that the CD&A and related executive compensation information be included in the Company's annual report on Form 10-K or proxy statement, as applicable, and produceapproved by the Committee report on executive officer compensation requiredpursuant to which Participants may receive a cash payment or other consideration in consideration for the transfer of a Non-qualified Stock Option; and (c) such other transferees as may be includedpermitted by the Committee in the Company's annual report on Form 10-K or proxy statement, as applicable.
Meetings“Person” means a person as defined in Section 13(d)(3) of the Exchange Act.
“Plan” means this Dynatronics Corporation 2019 Equity Incentive Plan, as amended and/or amended and restated from time to time.
“Related Rights” has the meaning set forth inSection 7.1(a).
“Restricted Award” means any Award granted pursuant toSection 7.2(a).
“Restricted Period” has the meaning set forth inSection 7.2(a).
“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.
“Securities Act” means the Securities Act of 1933, as amended.
“Stock Appreciation Right” means the right pursuant to an Award granted underSection 7.1to receive, upon exercise, an amount payable in cash or shares equal to the number of shares subject to the Stock Appreciation Right that is being exercised multiplied by the excess of (a) the Fair Market Value of a share of Common Stock on the date the Award is exercised, over (b) the exercise price specified in the Stock Appreciation Right Award Agreement.
“Stock for Stock Exchange” has the meaning set forth inSection 6.4.
“Substitute Award” has the meaning set forth inSection 4.6.
“Ten Percent Shareholder” means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Affiliates.
“Total Share Reserve” has the meaning set forth inSection 4.1.
3Administration.
3.1Authority of Committee. The Plan shall be administered by the Committee or, in the Board’s sole discretion, by the Board. Subject to the terms of the Plan, the Committee’s charter and Applicable Laws, and in addition to other express powers and authorization conferred by the Plan, the Committee shall have the authority:
(a)to construe and interpret the Plan and apply its provisions;
(b)to promulgate, amend, and rescind rules and regulations relating to the administration of the Plan;
(c)to authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan;
(d)to delegate its authority to one or more Officers of the Company with respect to Awards that do not involve “insiders” within the meaning of Section 16 of the Exchange Act;
(e)to determine when Awards are to be granted under the Plan and the applicable Grant Date;
(f)from time to time to select, subject to the limitations set forth in this Plan, those eligible Award recipients to whom Awards shall be granted;
(g)to determine the number of shares of Common Stock to be made subject to each Award;
(h)to determine whether each Option is to be an Incentive Stock Option or a Non-qualified Stock Option;
(i)to prescribe the terms and conditions of each Award, including, without limitation, the exercise price and medium of payment and vesting provisions, and to specify the provisions of the Award Agreement relating to such grant;
(j)to determine the target number of Performance Shares to be granted pursuant to a Performance Share Award, the performance measures that will be used to establish the Performance Goals, the Performance Period(s) and the number of Performance Shares earned by a Participant;
(k)to amend any outstanding Awards, including for the purpose of modifying the time or manner of vesting, or the term of any outstanding Award;provided, however, that if any such amendment impairs a Participant’s rights or increases a Participant’s obligations under his or her Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant’s consent;
(l)to determine the duration and purpose of leaves of absences which may be granted to a Participant without constituting termination of their employment for purposes of the Plan, which periods shall be no shorter than the periods generally applicable to Employees under the Company’s employment policies;
(m)to make decisions with respect to outstanding Awards that may become necessary upon a change in corporate control or an event that triggers anti-dilution adjustments;
(n)to interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to, or Award granted under, the Plan; and
(o)to exercise discretion to make any and all other determinations which it determines to be necessary or advisable for the administration of the Plan.
The Committee also may modify the purchase price or the exercise price of any outstanding Award,provided thatif the modification effects a repricing, shareholder approval shall be required before the repricing is effective.
3.2Committee Decisions Final. All decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on the Company and the Participants, unless such decisions are determined by a court having jurisdiction to be arbitrary and capricious.
3.3Delegation. The Committee or, if no Committee has been appointed, the Board may delegate administration of the Plan to a committee or committees of one or more members of the Board, and the term “Committee” shall apply to any person or persons to whom such authority has been delegated. The Committee shall meet as oftenhave the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board or the Committee shall thereafter be to the committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be deemed necessary or appropriate, in its judgment, in orderadopted from time to fulfill its responsibilities, but at least once annually. The affirmative vote of a majority of the members present at a meeting at which a quorum is present shall constitute action of the Committee.
Subject to the foregoing, the Committee may meet either in person or telephonically, and at such times and places as the Committee determines. The Committee may establish its own meeting schedule, which it will provide totime by the Board. The Board may abolish the Committee may seekat any information it requires from employeestime and revest in the Board the administration of the Company, all of whom shall be directed to cooperate with the Committee's requests, and from external parties.Plan. The Company may invite to its meetings other Board members members of the Company's management team and such other persons as the Committee deems appropriate in order to carry out its responsibilities. Neither the CEO nor any other officer of the Company may be present during deliberations of the Committee regarding the compensation of the CEO or such other officer, as applicable. The Committee is governed by the same rules regarding meetings (including meetings in person, by telephone, or by electronic communications), action without meetings, notice, waiver of notice, and quorum and voting requirements as are applicable to the Board.
Reports
The Committee shall make regular reports to the full Board on the actions and recommendations of the Committee.
Compensation
Members of the Committee shall receivebe appointed by and serve at the pleasure of the Board. From time to time, the Board may increase or decrease the size of the Committee, add additional members to, remove members (with or without cause) from, appoint new members in substitution therefor, and fill vacancies, however caused, in the Committee. The Committee shall act pursuant to a vote of the majority of its members or, in the case of a Committee comprised of only two members, the unanimous consent of its members, whether present or not, or by the written consent of the majority of its members and minutes shall be kept of all of its meetings and copies thereof shall be provided to the Board. Subject to the limitations prescribed by the Plan and the Board, the Committee may establish and follow such rules and regulations for the conduct of its business as it may determine to be advisable.
3.4Committee Composition. Except as otherwise determined by the Board, the Committee shall consist solely of two or more Non-Employee Directors. The Board shall have discretion to determine whether or not it intends to comply with the exemption requirements of Rule 16b-3. However, if the Board intends to satisfy such exemption requirements, with respect to any insider subject to Section 16 of the Exchange Act, the Committee shall be a compensation committee of the Board that at all times consists solely of two or more Non-Employee Directors. Within the scope of such authority, the Board or the Committee may delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. Nothing herein shall create an inference that an Award is not validly granted under the Plan in the event Awards are granted under the Plan by a compensation committee of the Board that does not at all times consist solely of two or more Non-Employee Directors.
3.5Indemnification. In addition to such other rights of indemnification as they may have as Directors or members of the Committee, and to the extent allowed by Applicable Laws, the Committee shall be indemnified by the Company against the reasonable expenses, including attorney’s fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which the Committee may be party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted under the Plan, and against all amounts paid by the Committee in settlement thereof (provided, however, that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by the Committee in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, or in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful;provided, however, that within 60 days after the institution of any such action, suit or proceeding, such Committee shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding.
4Shares Subject to the Plan.
4.1Total Share Reserve. Subject to adjustment in accordance withSection 11, no more than Six Hundred Thousand (600,000) shares of Common Stock plus the number of shares of Common Stock underlying any award granted under the Dynatronics Corporation 2015 Equity Incentive Award Plan (the “Prior Plan”) that expires, terminates or is canceled or forfeited under the terms of the Prior Plan shall be available for the grant of Awards under the Plan (the “Total Share Reserve”). Any shares of Common Stock granted in connection with Options and Stock Appreciation Rights shall be counted against this limit as one (1) share for every one (1) Option or Stock Appreciation Right awarded. Any shares of Common Stock granted in connection with Awards other than Options and Stock Appreciation Rights shall be counted against this limit as one (1) share of Common Stock for every one (1) share of Common Stock granted in connection with such Award. During the terms of the Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Awards.
4.2Shares Available for Distribution. Shares of Common Stock available for distribution under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner.
4.3Incentive Stock Option Share Limit. Subject to adjustment in accordance withSection 11, no more than Six Hundred Thousand (600,000) shares of Common Stock may be issued in the aggregate pursuant to the exercise of Incentive Stock Options (the “ISO Limit”).
4.4Single Fiscal Year Share Limit. The maximum number of shares of Common Stock subject to Awards granted during a single Fiscal Year to any Director, together with any cash fees paid to such Director during the Fiscal Year shall not exceed a total value of $300,000 (calculating the value of any Awards based on the grant date fair value for financial reporting purposes).
4.5Treatment of Canceled, Forfeited, or Terminated Award Shares. Any shares of Common Stock subject to an Award that expires or is canceled, forfeited, or terminated without issuance of the full number of shares of Common Stock to which the Award related will again be available for issuance under the Plan. Any shares of Common Stock that again become available for future grants pursuant to thisSection 4.5shall be added back as one (1) share if such shares were subject to Options or Stock Appreciation Rights and as one (1) share if such shares were subject to other Awards. Notwithstanding anything to the contrary contained herein: shares subject to an Award under the Plan shall not again be made available for issuance or delivery under the Plan if such shares are (a) shares tendered in payment of an Option, (b) shares delivered or withheld by the Company to satisfy any tax withholding obligation, or (c) shares covered by a stock-settled Stock Appreciation Right or other Awards that were not issued upon the settlement of the Award.
4.6Substitute Awards. Awards may, in the sole discretion of the Committee, be granted under the Plan in assumption of, or in substitution for, their serviceoutstanding awards previously granted by an entity acquired by the Company or with which the Company combines (“Substitute Awards”). Substitute Awards shall not be counted against the Total Share Reserve;provided, that, Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify as Incentive Stock Options shall be counted against the ISO Limit. Subject to applicable stock exchange requirements, available shares under a shareholder-approved plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted to reflect such acquisition or transaction) may be used for Awards under the Plan and shall not count toward the Total Share Limit.
5Eligibility.
5.1Eligibility for Specific Awards. Incentive Stock Options may be granted only to Employees. Awards other than Incentive Stock Options may be granted to Employees, Consultants and Directors and those individuals whom the Committee membersdetermines are reasonably expected to become Employees, Consultants and Directors following the Grant Date.
5.2Ten Percent Shareholders. A Ten Percent Shareholder shall not be granted an Incentive Stock Option unless the Option Exercise Price is at least 110% of the Fair Market Value of the Common Stock on the Grant Date and the Option is not exercisable after the expiration of five years from the Grant Date.
2Option Provisions. Each Option granted under the Plan shall be evidenced by an Award Agreement. Each Option so granted shall be subject to the conditions set forth in thisSection 6, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. All Options shall be separately designated Incentive Stock Options or Non-qualified Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. Notwithstanding the foregoing, the Company shall have no liability to any Participant or any other person if an Option designated as an Incentive Stock Option fails to qualify as such at any time or if an Option is determined to constitute “nonqualified deferred compensation” within the meaning of Section 409A of the Code and the terms of such Option do not satisfy the requirements of Section 409A of the Code. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions:
6.1Term. Subject to the provisions ofSection 5.2regarding Ten Percent Shareholders, no Incentive Stock Option shall be exercisable after the expiration of 10 years from the Grant Date. The term of a Non-qualified Stock Option granted under the Plan shall be determined by the BoardCommittee;provided, however, no Non-qualified Stock Option shall be exercisable after the expiration of 10 years from the Grant Date.
6.2Exercise Price of an Incentive Stock Option. Subject to the provisions ofSection 5.2regarding Ten Percent Shareholders, the Option Exercise Price of each Incentive Stock Option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the Grant Date. Notwithstanding the foregoing, an Incentive Stock Option may be granted with an Option Exercise Price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code.
6.3Exercise Price of a Non-qualified Stock Option. The Option Exercise Price of each Non-qualified Stock Option shall be not less than 100% of the Fair Market Value of the Common Stock subject to the Option on the Grant Date. Notwithstanding the foregoing, a Non-qualified Stock Option may be granted with an Option Exercise Price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 409A of the Code.
6.4Consideration. The Option Exercise Price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (a) in cash or by certified or bank check at the time the Option is exercised or (b) in the discretion of the Committee, upon such terms as the Committee shall approve, the Option Exercise Price may be paid: (i) by delivery to the Company of other Common Stock, duly endorsed for transfer to the Company, with a Fair Market Value on the date of delivery equal to the Option Exercise Price (or portion thereof) due for the number of shares being acquired, or by means of attestation whereby the Participant identifies for delivery specific shares of Common Stock that have an aggregate Fair Market Value on the date of attestation equal to the Option Exercise Price (or portion thereof) and receives a number of shares of Common Stock equal to the difference between the number of shares thereby purchased and the number of identified attestation shares of Common Stock (a “Stock for Stock Exchange”); (ii) a “cashless” exercise program established with a broker; (iii) by reduction in the number of shares of Common Stock otherwise deliverable upon exercise of such Option with a Fair Market Value equal to the aggregate Option Exercise Price at the time of exercise; (iv) by any combination of the foregoing methods; or (v) in any other form of legal consideration that may be acceptable to the Committee. Unless otherwise specifically provided in the Option, the exercise price of Common Stock acquired pursuant to an Option that is paid by delivery (or attestation) to the Company of other Common Stock acquired, directly or indirectly from the Company, shall be paid only by shares of the Common Stock of the Company that have been held for more than six months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting purposes). Notwithstanding the foregoing, during any period for which the Common Stock is publicly traded (i.e., the Common Stock is listed on any established stock exchange or a national market system) an exercise by a Director or Officer that involves or may involve a direct or indirect extension of credit or arrangement of an extension of credit by the Company, directly or indirectly, in violation of Section 402(a) of the Sarbanes-Oxley Act of 2002 shall be prohibited with respect to any Award under this Plan.
6.5Transferability of an Incentive Stock Option. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
6.6Transferability of a Non-qualified Stock Option. A Non-qualified Stock Option may, in the sole discretion of the Committee, be transferable to a Permitted Transferee, upon written approval by the Committee to the extent provided in the Award Agreement. If the Non-qualified Stock Option does not provide for transferability, then the Non-qualified Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option.
6.7Vesting of Options. Each Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Committee may deem appropriate. The vesting provisions of individual Options may vary. No Option may be exercised for a fraction of a share of Common Stock. The Committee may, but shall not be required to, provide for an acceleration of vesting and exercisability in the terms of any Award Agreement upon the occurrence of a specified event.
6.8Termination of Continuous Service. Unless otherwise provided in an Award Agreement or in an employment agreement the terms of which have been approved by the Committee, in the event an Optionholder’s Continuous Service terminates (other than upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (a) the date three months following the termination of the Optionholder’s Continuous Service or (b) the expiration of the term of the Option as set forth in the Award Agreement;provided that, if the termination of Continuous Service is by the Company for Cause, all outstanding Options (whether or not vested) shall immediately terminate and cease to be exercisable. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Award Agreement, the Option shall terminate.
6.9Extension of Termination Date. An Optionholder’s Award Agreement may also provide that if the exercise of the Option following the termination of the Optionholder’s Continuous Service for any reason would be prohibited at any time because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act or any other state or federal securities law or the rules of any securities exchange or interdealer quotation system, then the Option shall terminate on the earlier of (a) the expiration of the term of the Option in accordance withSection 6.1or (b) the expiration of a period after termination of the Participant’s Continuous Service that is three months after the end of the period during which the exercise of the Option would be in violation of such registration or other securities law requirements.
6.10Disability of Optionholder. Unless otherwise provided in an Award Agreement, in the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (a) the date 12 months following such termination or (b) the expiration of the term of the Option as set forth in the Award Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein or in the Award Agreement, the Option shall terminate.
6.11Death of Optionholder. Unless otherwise provided in an Award Agreement, in the event an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the Option upon the Optionholder’s death, but only within the period ending on the earlier of (a) the date 12 months following the date of death or (b) the expiration of the term of such Option as set forth in the Award Agreement. If, after the Optionholder’s death, the Option is not exercised within the time specified herein or in the Award Agreement, the Option shall terminate.
6.12Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and its Affiliates) exceeds $100,000, the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Non-qualified Stock Options.
3Provisions of Awards Other Than Options.
7.1Stock Appreciation Rights.
(a)General. Each Stock Appreciation Right granted under the Plan shall be evidenced by an Award Agreement. Each Stock Appreciation Right so granted shall be subject to the conditions set forth in thisSection 7.1, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. Stock Appreciation Rights may be granted alone (“Free Standing Rights”) or in tandem with an Option granted under the Plan (“Related Rights”).
(b)Grant Requirements. Any Related Right that relates to a Non-qualified Stock Option may be granted at the same time the Option is granted or at any time thereafter but before the exercise or expiration of the Option. Any Related Right that relates to an Incentive Stock Option must be granted at the same time the Incentive Stock Option is granted.
(c)Term of Stock Appreciation Rights. The term of a Stock Appreciation Right granted under the Plan shall be determined by the Committee;provided, however, no Stock Appreciation Right shall be exercisable later than the tenth anniversary of the Grant Date.
(d)Vesting of Stock Appreciation Rights. Each Stock Appreciation Right may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Stock Appreciation Right may be subject to such other terms and conditions on the time or times when it may be exercised as the Committee may deem appropriate. The vesting provisions of individual Stock Appreciation Rights may vary. No Stock Appreciation Right may be exercised for a fraction of a share of Common Stock. The Committee may, but shall not be required to, provide for an acceleration of vesting and exercisability in the terms of any Stock Appreciation Right upon the occurrence of a specified event.
(e)Exercise and Payment. Upon exercise of a Stock Appreciation Right, the holder shall be entitled to receive from the Company an amount equal to the number of shares of Common Stock subject to the Stock Appreciation Right that is being exercised multiplied by the excess of (i) the Fair Market Value of a share of Common Stock on the date the Award is exercised, over (ii) the exercise price specified in the Stock Appreciation Right or related Option. Payment with respect to the exercise of a Stock Appreciation Right shall be made on the date of exercise. Payment shall be made in the form of shares of Common Stock (with or without restrictions as to substantial risk of forfeiture and transferability, as determined by the Committee in its sole discretion.
4discretion), cash or a combination thereof, as determined by the Committee.
ATTACHMENT B
AUDIT COMMITTEE CHARTER
OF DYNATRONICS CORPORATION(f)Exercise Price. The exercise price of a Free Standing Right shall be determined by the Committee, but shall not be less than 100% of the Fair Market Value of one share of Common Stock on the Grant Date of such Stock Appreciation Right. A Related Right granted simultaneously with or subsequent to the grant of an Option and in conjunction therewith or in the alternative thereto shall have the same exercise price as the related Option, shall be transferable only upon the same terms and conditions as the related Option, and shall be exercisable only to the same extent as the related Option;provided, however, that a Stock Appreciation Right, by its terms, shall be exercisable only when the Fair Market Value per share of Common Stock subject to the Stock Appreciation Right and related Option exceeds the exercise price per share thereof and no Stock Appreciation Rights may be granted in tandem with an Option unless the Committee determines that the requirements ofSection 7.1(b)are satisfied.
Organization
There(g)Reduction in the Underlying Option Shares. Upon any exercise of a Related Right, the number of shares of Common Stock for which any related Option shall be a committee of the board of directors to be known as the Audit Committee. The Audit Committeeexercisable shall be composedreduced by the number of directors who are independentshares for which the Stock Appreciation Right has been exercised. The number of the managementshares of the corporation and are freeCommon Stock for which a Related Right shall be exercisable shall be reduced upon any exercise of any relationship that, inrelated Option by the opinionnumber of the boardshares of directors, would interfere with their exercise of independent judgment as a committee member.
Statement of Policy
The Audit Committee shall provide assistance to the directors of the corporation in fulfilling their responsibility to the shareholders, potential shareholders and investment community relating to corporate accounting, reporting practices of the corporation and the quality and integrity of the financial reports of the corporation. In so doing, it is the responsibility of the Audit Committee to maintain free and open means of communication between the directors, the independent auditors, and the financial management of the corporation.
Responsibilities
In carrying out its responsibilities, the Audit Committee believes its policies and procedures should remain flexible, in order to best react to changing conditions and to ensure to the directors and shareholders that the corporate accounting and reporting practices of the corporation are in accordance with all requirements and are of the highest quality.
In carrying out these responsibilities, the Audit Committee will:
Review and recommend to the directors the independent auditors to be selected to audit the financial statements of the corporation and its divisions and subsidiaries.
Meet with the independent auditors and management of the corporation at the conclusion of the fiscal year to review the audit, including any comments or recommendations of the independent auditors.
Review with the independent auditors and the corporation's financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the corporation, and elicit any recommendationsCommon Stock for the improvement ofwhich such internal control procedures or particular areas where new or more detailed controls or procedures are desirable. Particular emphasis should be given to the adequacy of such internal controls to expose any payments, transactions or procedures that might be deemed illegal or otherwise improper. Further, the committee periodically should review the corporation's policy statements to determine their adherence to the code of conduct.
Review the financial statements contained in the annual report to shareholders with management and the independent auditors to determine that the independent auditors are satisfied with the disclosure and content of the financial statements to be presented to the shareholders. Any changes in accounting principles should be reviewed.
Provide sufficient opportunity for the independent auditors to meet with the members of the Audit Committee without members of management present. Among the items to be discussed in these meetings are the independent auditors' evaluation of the corporations' financial and accounting personnel, and the cooperation that the independent auditors received during the course of the audit.
Review accounting and financial human resources and succession planning within the corporation.
Submit the minutes of all meetings of the Audit Committee to, or discuss the matters discussed at each committee meeting with, the board of directors.
Investigate any matter brought to its attention within the scope of its duties, with the power to retain outside counsel for this purpose if, in its judgment, it is appropriate.
1Option has been exercised.
ATTACHMENT C
FINANCIAL STATEMENTS OF BIRD & CRONIN
BIRD & CRONIN, INC.
FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
BIRD & CRONIN, INC.
CONTENTS |
|
SEPTEMBER 30, 2016 AND 2015 |
| Page |
| |
INDEPENDENT AUDITOR'S REPORT | 1 |
| |
FINANCIAL STATEMENTS | |
Balance Sheets | 2-3 |
Statements of Income | 4 |
Statements of Retained Earnings | 5 |
Statements of Cash Flows | 6 |
Notes to Financial Statements | 7-10 |
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Management
Bird & Cronin, Inc.
Eagan, Minnesota
We have audited the accompanying financial statements of Bird & Cronin, Inc. (an S Corporation), which comprise the balance sheets as of September 30, 2016 and 2015 and the related statements of income, retained earnings, and cash flows for the years then ended, and the related notes to the financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bird & Cronin, Inc. as of September 30, 2016 and 2015 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ CUMMINGS, KEEGAN & CO., P.L.L.P.
December 7, 2016
St. Louis Park, Minnesota
| BIRD & CRONIN, INC. | |
| | | | | | | | | | | | | |
| BALANCE SHEETS | |
| SEPTEMBER 30, 2016 AND 2015 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
ASSETS | |
| | | | | | | | | | | | | |
| | | 2016 | | | 2015 | |
Current assets | | | | | | | | | | | | |
| Cash and cash equivalents | | | | | $ | 2,289,493 | | | | | | $ | 2,044,924 | |
| Accounts receivable, trade | | | 2,261,380 | | | | | | | | 2,230,978 | | | | | |
| Less allowance for rebates | | | (157,000 | ) | | | | | | | (164,000 | ) | | | | |
| Less allowance for doubtful accounts | | | (8,000 | ) | | | 2,096,380 | | | | (8,000 | ) | | | 2,058,978 | |
| Inventories: | | | | | | | | | | | | | | | | |
| Finished goods | | | 1,886,387 | | | | | | | | 1,492,176 | | | | | |
| Raw materials | | | 2,485,044 | | | | 4,371,431 | | | | 2,274,214 | | | | 3,766,390 | |
| Prepaid expenses | | | | | | | 121,055 | | | | | | | | 162,653 | |
| | | | | | | | | | | | | | | | | |
| Total current assets | | | | | | | 8,878,359 | | | | | | | | 8,032,945 | |
| | | | | | | | | | | | | | | | | |
Property and equipment | | | | | | | | | | | | | | | | |
| Furniture and equipment | | | | | | | 2,983,202 | | | | | | | | 2,980,949 | |
| Leasehold improvements | | | | | | | 741,458 | | | | | | | | 741,458 | |
| | | | | | | | 3,724,660 | | | | | | | | 3,722,407 | |
| Less accumulated depreciation | | | | | | | (2,813,963 | ) | | | | | | | (2,664,268 | ) |
| | | | | | | | | | | | | | | | | |
| Property and equipment - net | | | | | | | 910,697 | | | | | | | | 1,058,139 | |
| | | | | | | | | | | | | | | | | |
Other assets | | | | | | | | | | | | | | | | |
| Federal tax deposit to retain fiscal year | | | | 109,693 | | | | | | | | 64,979 | |
| | | | | | | | | | | | | | | | | |
| Total other assets | | | | | | | 109,693 | | | | | | | | 64,979 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | | | | | $ | 9,898,749 | | | | | | | $ | 9,156,063 | |
See Notes to Financial Statements.
| | | 2016 | | | 2015 | |
Current liabilities | | | | | | |
| Accounts payable - trade | | $ | 823,869 | | | $ | 566,630 | |
| Accrued salaries and vacation | | | 391,399 | | | | 182,998 | |
| | | | | | | | | |
| Total current liabilities | | | 1,215,268 | | | | 749,628 | |
| | | | | | | | | |
Stockholders' equity | | | | | | | | |
| Common stock, stated value $50 per share, 2,500 shares authorized, 217.5 shares issued and outstanding - stated value | | | 10,875 | | | | 10,875 | |
| Capital paid in excess of stated value | | | 46,278 | | | | 46,278 | |
| Retained earnings | | | 8,626,328 | | | | 8,349,282 | |
| | | | | | | | | |
| Total stockholders' equity | | | 8,683,481 | | | | 8,406,435 | |
| | | | | | | | | |
| Total liabilities and stockholders' equity | | $ | 9,898,749 | | | $ | 9,156,063 | |
See Notes to Financial Statements.
| BIRD & CRONIN, INC. | |
| | | | | | | | | | | | | |
| STATEMENTS OF INCOME | |
| FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 | |
| | | | | | | | | | | | | |
| | | 2016 | | | 2015 | |
| | | | | | % of | | | | | | % of | |
| | | Amount | | | Sales | | | Amount | | | Sales | |
| | | | | | | | | | | | | |
Sales - net | | $ | 24,005,306 | | | | 100.0 | % | | $ | 23,201,757 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | | |
Cost of sales | | | 15,357,454 | | | | 63.8 | | | | 15,084,837 | | | | 65.0 | |
| | | | | | | | | | | | | | | | | |
| Gross profit | | | 8,647,852 | | | | 36.2 | | | | 8,116,920 | | | | 35.0 | |
| | | | | | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | |
| Selling | | | 2,223,511 | | | | 9.3 | | | | 2,588,136 | | | | 11.0 | |
| General and administrative | | | 4,357,490 | | | | 17.9 | | | | 4,479,006 | | | | 19.2 | |
| | | | | | | | | | | | | | | | | |
| Total operating expenses | | | 6,581,001 | | | | 27.2 | | | | 7,067,142 | | | | 30.2 | |
| | | | | | | | | | | | | | | | | |
| | | | 2,066,851 | | | | 9.0 | | | | 1,049,778 | | | | 4.8 | |
| | | | | | | | | | | | | | | | | |
Other income | | | | | | | | | | | | | | | | |
| Miscellaneous income | | | 248 | | | | - | | | | 44,485 | | | | 0.2 | |
| Interest income | | | - | | | | - | | | | 28 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total other income | | | 248 | | | | - | | | | 44,513 | | | | 0.2 | |
| | | | | | | | | | | | | | | | | |
Other expenses | | | | | | | | | | | | | | | | |
| Interest | | | 53 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total other expenses | | | 53 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | |
| Net income | | $ | 2,067,046 | | | | 8.9 | % | | $ | 1,094,291 | | | | 5.0 | % |
See Notes to Financial Statements.
| BIRD & CRONIN, INC. | |
| | | | | | | |
| STATEMENTS OF RETAINED EARNINGS | |
| FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 | |
| | | | | | | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Balance - beginning of year | | $ | 8,349,282 | | | $ | 7,593,929 | |
| | | | | | | | | |
| Add net income for the year | | | 2,067,046 | | | | 1,094,291 | |
| | | | | | | | | |
| Less distributions to stockholders | | | (1,790,000 | ) | | | (338,938 | ) |
| | | | | | | | | |
| Balance - end of year | | $ | 8,626,328 | | | $ | 8,349,282 | |
See Notes to Financial Statements.
| BIRD & CRONIN, INC. | |
| | | | | | | |
| STATEMENTS OF CASH FLOWS | |
| FOR THE YEARS ENDED SEPTEMBER 30, 2016 AND 2015 | |
| | | | | | | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Cash flows from operating activities: | | | | | | |
| Net income | | $ | 2,067,046 | | | $ | 1,094,291 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | | | 154,482 | | | | 193,760 | |
| Net gain on disposal of assets | | | (200 | ) | | | (12,911 | ) |
| Provision for rebates and doubtful accounts | | | (7,000 | ) | | | 32,000 | |
| Changes in: | | | | | | | | |
| Accounts receivable | | | (30,402 | ) | | | (150,855 | ) |
| Inventories | | | (605,041 | ) | | | (379,447 | ) |
| Federal tax deposit to retain fiscal year | | | (44,714 | ) | | | (23,944 | ) |
| Prepaid expenses | | | 41,598 | | | | (1,414 | ) |
| Accounts payable | | | 257,239 | | | | 194,564 | |
| Accrued liabilities | | | 208,401 | | | | 23,099 | |
| Total adjustments | | | (25,637 | ) | | | (125,148 | ) |
| | | | | | | | | |
| Net cash provided by operating activities | | | 2,041,409 | | | | 969,143 | |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| Proceeds from sale of assets | | | 200 | | | | 20,350 | |
| Capital expenditures | | | (7,040 | ) | | | (10,463 | ) |
| | | | | | | | | |
| Net cash provided by (used in) investing activities | | | (6,840 | ) | | | 9,887 | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Distributions to stockholders | | | (1,790,000 | ) | | | (338,938 | ) |
| | | | | | | | | |
| Net cash used in financing activities | | | (1,790,000 | ) | | | (338,938 | ) |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 244,569 | | | | 640,092 | |
| | | | | | | | | |
| Cash and cash equivalents at beginning of year | | | 2,044,924 | | | | 1,404,832 | |
| | | | | | | | | |
| Cash and cash equivalents at end of year | | $ | 2,289,493 | | | $ | 2,044,924 | |
See Notes to Financial Statements.
1. Summary of Significant Accounting Policies
Nature(a)General. A Restricted Award is an Award of Businessactual shares of Common Stock (“Restricted Stock”) or hypothetical Common Stock units (“Restricted Stock Units”) having a value equal to the Fair Market Value of an identical number of shares of Common Stock, which may, but need not, provide that such Restricted Award may not be sold, assigned, transferred or otherwise disposed of, pledged or hypothecated as collateral for a loan or as security for the performance of any obligation or for any other purpose for such period (the “Restricted Period”) as the Committee shall determine. Each Restricted Award granted under the Plan shall be evidenced by an Award Agreement. Each Restricted Award so granted shall be subject to the conditions set forth in this - Bird & Cronin, Inc. (the "Company") manufacturesSection 7.2, and sells medical supplies and equipment on credit terms to medical and health care facilities throughoutsuch other conditions not inconsistent with the United States and Canada.Plan as may be reflected in the applicable Award Agreement.
Cash(b)Restricted Stock and Cash EquivalentsRestricted Stock Units.
(i) - For purposesEach Participant granted Restricted Stock shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock setting forth the restrictions and other terms and conditions applicable to such Restricted Stock. If the Committee determines that the Restricted Stock shall be held by the Company or in escrow rather than delivered to the Participant pending the release of the statements of cash flows,applicable restrictions, the Committee may require the Participant to additionally execute and deliver to the Company considers all highly liquid debt instruments purchased(A) an escrow agreement satisfactory to the Committee, if applicable and (B) the appropriate blank stock power with respect to the Restricted Stock covered by such agreement. If a maturityParticipant fails to execute an agreement evidencing an Award of three months or lessRestricted Stock and, if applicable, an escrow agreement and stock power, the Award shall be null and void. Subject to be cash equivalents.
Customer Accounts Receivable - Customer accounts receivable is stated at the amount management expectsrestrictions set forth in the Award, the Participant generally shall have the rights and privileges of a shareholder as to collect from outstanding balances. Management provides for probable uncollectible amounts and estimated rebates and returns through chargessuch Restricted Stock, including the right to earnings and credits to valuation allowances based on its assessment of the current status of individual accounts and estimates of sales levels. Balances that are still outstanding after management has used reasonable collection efforts are written off. There were no accounts receivable balances over 90 days old for either of the years ended September 30, 2016 and 2015.
Inventories - Inventories are valued at the lower of cost (weighted average) or market, and consist of raw materials and finished goods. Work in process is insignificant and is included in raw materials.
Property and Equipment - Property and equipment, including significant renewals and betterments, are capitalized at cost. The costs of property, equipment and leasehold improvements are depreciated over the estimated useful lives of the related assets. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets.
When property and equipment is sold or retired, its cost and related accumulated depreciation allowance are removed from the accounts and any gain or loss from disposition is reflected in income. Maintenance and repairs are charged to operations when incurred.
The estimated useful lives of the various classifications of property and equipment are as follows:
Classification of Assets
| Estimated Useful Lives
|
Furniture and equipment | 3-10 years |
Leasehold improvements | 7-40 years |
Depreciation expense for the years ended September 30, 2016 and 2015 was $154,482 and $193,760, respectively.
BIRD & CRONIN, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
(Continued)
1.Summary of Significant Accounting Policies (continued)
Accumulated depreciation for the years ended September 30, 2016 and 2015, by category, is as follows:
| | | 2016 | | | 2015 | |
Classification of Assets | | | | | | |
| Furniture and equipment | | $ | 2,467,805 | | | $ | 2,341,393 | |
| Leasehold improvements | | | 346,158 | | | | 322,875 | |
| | | | | | | | | |
| Total | | $ | 2,813,963 | | | $ | 2,664,268 | |
Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,vote such Restricted Stock and the reported amounts of revenuesright to receive dividends;provided that, any cash dividends and expenses duringstock dividends with respect to the reporting period. Actual results could differ from their estimates.
Shipping and Handling - The Company includes shipping and handling costs in cost of sales.
Advertising Costs - Advertising costs consist of general advertising costs which are expensed as incurred and printing of catalogs and product information which are expensed as the supply is used. Prepaid advertising costs included in prepaid expenses were $5,545 and $8,190 as of September 30, 2016 and 2015, respectively, and advertising expense was $29,328 and $30,805 for the years ended September 30, 2016 and 2015, respectively.
Revenue Recognition - Sales are recognized when products are shipped to customers and includes amounts billed to customers for shipping.
Sales Tax - The Company excludes from its revenues all sales taxes assessed to its customers. Sales taxes assessed on sales are recorded as accrued liabilities until remitted to state agencies.
Income Taxes - The Company has elected toRestricted Stock shall be taxed under the provisions of the S-Corporation Act of the Internal Revenue Code and similar provisions of Minnesota law. Under those provisions the Company does not pay federal or state corporate taxes on its income. Instead, the stockholders are liable for individual federal and state income taxes on their respective shares of the Company's taxable income.
Under Section 7519 of the Internal Revenue Code, the Company is required to make income tax deposits to maintain its fiscal year end for the amount of deferred income from October 1 through December 31. For the years ended September 30, 2016 and 2015, the amount on deposit was $109,693 and $64,979, respectively.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
(Continued)
1.Summary of Significant Accounting Policies (continued)
Subsequent Events - The Company has evaluated subsequent events through December 7, 2016, which is the date the financial statements were available to be issued.
Accounting Standards Not Yet Adopted - Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, as revisedwithheld by ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, will be effective for the Company for the year ending September 30, 2020. This standard update requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects toParticipant’s account, and interest may be entitled in exchange for those goods or services. The Company has not yet determined the effect this ASU will havecredited on the Company's financial statements.
2.Lineamount of Credit
The Company hasthe cash dividends withheld at a loan agreement with its bank for advances under a revolving line of credit of uprate and subject to $4,000,000. The line is securedsuch terms as determined by the Company's assets and expires February 28, 2017. Interest is charged at the prime rate as publishedCommittee. The cash dividends or stock dividends so withheld by the Wall Street Journal (3.5% at September 30, 2016). There were no amounts outstanding at September 30, 2016 or 2015. The lineCommittee and attributable to any particular share of credit agreement contains working capital, tangible net worth and other customary covenants.
3.Operating Lease and Related Party Transaction
The Company leases its warehouse and sales facilities from a limited liability company related through common control under an agreement expiring March 2019. The lease requires monthly lease payments of $50,000. The lease agreement allows for an additional five year term. In additionRestricted Stock (and earnings thereon, if applicable) shall be distributed to the minimum rental payments, the agreement provides the Company pay real estate taxes, utilities, insurance, and maintenance. Total rent expense (including real estate taxes) under the building operating lease for the years ended September 30, 2016 and 2015 was $719,858 and $718,579, respectively.
Future minimum obligations, not including real estate taxes, utilities, insuranceParticipant in cash or, maintenance for the years ending September 30 are as follows:
Year | | | |
| 2017 | | $ | 600,000 | |
| 2018 | | | 600,000 | |
| 2019 | | | 300,000 | |
| | | | | |
| | | $ | 1,500,000 | |
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2016 AND 2015
(Continued)
4.Profit Sharing and 401(k) Plans
The Company has a profit sharing plan covering all employees who meet the Plan's eligibility requirements. Contributions are made at the discretion of the management.Committee, in shares of Common Stock having a Fair Market Value equal to the amount of such dividends, if applicable, upon the release of restrictions on such share and, if such share is forfeited, the Participant shall have no right to such dividends.
(ii)The terms and conditions of a grant of Restricted Stock Units shall be reflected in an Award Agreement. No contributions were madeshares of Common Stock shall be issued at the time a Restricted Stock Unit is granted, and the Company will not be required to set aside funds for the years ended September 30, 2016payment of any such Award. A Participant shall have no voting rights with respect to any Restricted Stock Units granted hereunder. The Committee may also grant Restricted Stock Units with a deferral feature, whereby settlement is deferred beyond the vesting date until the occurrence of a future payment date or 2015.
The Company also has a 401(k) plan for all eligible employees. The Company will match employee contributions up to 5%event set forth in an Award Agreement (“Deferred Stock Units”). At the discretion of eligible compensation. Employees are allowed to contribute up to 75%the Committee, each Restricted Stock Unit or Deferred Stock Unit (representing one share of compensationCommon Stock) may be credited with an amount equal to the plan. For the years ended September 30, 2016cash and 2015, employer contributions were $217,031 and $243,630, respectively.
5.Concentrations
The Company maintains checking balances at two banks in the Minneapolis area. Accounts at the institutions are insuredstock dividends paid by the Federal Deposit Insurance Corporation upCompany in respect of one share of Common Stock (“Dividend Equivalents”). Dividend Equivalents shall be withheld by the Company and credited to $250,000. At September 30, 2016, the Company's uninsuredParticipant’s account, and interest may be credited on the amount of cash and deposit balances totaled approximately $1,880,000.
The Company has concentrations of credit risk asDividend Equivalents credited to the Participant’s account at a result of sales to two significant customers. During the year ended September 30, 2016, these customers represented approximately 30% of total sales and 21% of total receivables at year end. During the year ended September 30, 2015, these customers represented approximately 29% of total sales and 20% of total receivables at year end.
The Company has concentrations as a result of purchases from one major vendor for the year ended September 30, 2016 and two major vendors for the year ended September 30, 2015. Purchases from these vendors as a percentage of total purchases for the years ended September 30, 2016 and 2015 represented approximately 10% and 26%, respectively. These customers represented approximately 1% or less of accounts payable for each of the years ended September 30, 2016 and 2015.
6.Income Tax
Management has evaluated the Company's tax positions for all open tax years. Currently, the 2013, 2014 and 2015 tax years are openrate and subject to examinationsuch terms as determined by the Internal Revenue Service, Iowa Department of Revenue, North Dakota Department of RevenueCommittee. Dividend Equivalents credited to a Participant’s account and Minnesota Department of Revenue. However, the Company is not currently under audit nor has the Company been contacted byattributable to any of these jurisdictions.
Based on the evaluation of the Company's tax positions, management believes all positions taken wouldparticular Restricted Stock Unit or Deferred Stock Unit (and earnings thereon, if applicable) shall be upheld under an examination. Therefore, no provision for the effects of uncertain tax positions has been recorded for the year ended September 30, 2016.
ATTACHMENT D
PROFORMA FINANCIAL STATEMENTS