U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 1 to

Form 10-K

Commission File No. 001-14949

Implant Sciences Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (978) 752-1700

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.          Yes o  No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes o  No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes x  No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company in Rule 12b-2 of the Act (Check one):

o  Large Accelerated Filer

o  Accelerated Filer

o  Non-accelerated Filer (do not check if a smaller reporting company)

x  Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o  No x

As of October 21, 2016, 79,875,620 shares of the registrant’s Common Stock were outstanding.  As of December 31, 2015 the last business day of the registrant’s most recent completed second quarter, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) was $39,582,000 based on the last sale price the Over-The-Counter-Bulletin-Board on such date.

EXPLANATORY PARAGRAPH

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends our Annual Report on Form 10-K for the fiscal year ended June 30, 2016, originally filed on October 14, 2016 (the “Original Filing”).  We are filing this Amendment to include the information required by Part III not included in the Original Filing as we will not file our definitive proxy statement within 120 days of our fiscal year ended June 30, 2016.  In addition, in connection with the filing of this Amendment and pursuant to Rules 12b-15 and 13a-14 under the Securities Exchange Act of 1934, as amended, we are including with this Amendment currently dated certifications of our Chief Executive Officer and Chief Financial Officer (Exhibits 31.1, 31.2, 32.1 and 32.2).

Except as described above, Amendment No. 1 restates only Part III of the Original Filing and includes the exhibits as set forth in Item 15 herein; no other changes have been made to the Original Filing.  This Amendment No.1 continues to speak as of the date of the Original Filing, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the Original Filing.

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PART III

Item 10.

Directors, Executive Officers and Corporate Governance

There are no family relationships between any director, named executive officer, or person nominated or chosen to become a director or executive officer.

The directors and named executive officers, their ages and positions as well as certain biographical information of these individuals are set forth below. The ages of the individuals are provided as of September 30, 2015.

Background of Executive Officers and Directors

Dr. William J. McGann was appointed to serve as the Chief Executive Officer and President of the Company on January 16, 2015 and currently serves as our Chief Executive Officer, following the September 1, 2015 decision by the Board of Directors to separate the roles of Chief Executive Officer and President. Dr. McGann joined us in April 2012 as Chief Operating Officer. Dr. McGann was also appointed as a director of the Company in 2012. Dr. McGann served as Vice President, Engineering, Global Fire Products, UTC Fire and Security, a business unit of United Technologies Corporation, from March 2010 until his appointment as Chief Operating Officer of the Company. From January 2005 through March 2010, Dr. McGann served as Chief Technology Officer of GE Security. From January 1991 through January 2005, Dr. McGann served as Vice President, Research and Development and was one of the founders of Ion Track Instruments, where he played a key role in creating an industry around explosives trace detection science and technology. Ion Track was sold to General Electric in 2005. Dr. McGann holds a Ph.D. in Physical Chemistry from the University of Connecticut, where his doctoral work was in the area of Magnetic Resonance and Laser Spectroscopy. 

Our Board of Directors has concluded that Dr. McGann is qualified to serve as a director based on his experience and leadership as an executive of a public company and his knowledge of the security industry and specific expertise in explosives trace detection.

Robert P. Liscouski, joined us on February 2, 2015 as Executive Vice President, Business Development and was promoted to President on September 1, 2015. He has served on our Board of Directors since May 2009. From July 2009 until November 2013, Mr. Liscouski served as a partner at Secure Strategy Group, a homeland security-focused banking and strategic advisory firm that had previously retained by us. Mr. Liscouski also serves as a senior partner at Edge360, a leading security technology and situational awareness solutions provider to the homeland security marketplace that was been retained by us in fiscal 2013. Mr. Liscouski was the first Assistant Secretary for Infrastructure Protection for the Department of Homeland Security, serving from March 2003 to February 2005. Mr. Liscouski’s private sector experience includes serving as the CEO of Content Analyst, a software company that automates the analysis and categorization of large volumes unstructured text and data, as Director of Information Assurance for The Coca-Cola Company and Vice President, Law Enforcement Division, for ORION Scientific Systems. Mr. Liscouski’s government experience includes 11 years as a Special Agent with the Diplomatic Security Service of the U.S. Department of State with assignments including being the State Department representative to INTERPOL, Mobile Training Team Leader, Beirut and Rome, and five years with the Bergen County, NJ, Prosecutor’s Office as an undercover and homicide investigator. Mr. Liscouski is a Senior Fellow at the Center of Strategic and International Studies in Washington, D.C. and served for 12 years as an advisor to the U.S. government on technology matters. Mr. Liscouski holds a B.S. degree in Criminal Justice from John Jay College of Criminal Justice and a Master of Public Administration degree from the Kennedy School of Government, Harvard University.

Our Board of Directors has concluded that Mr. Liscouski is qualified to serve as a director based on his experience and leadership roles in public safety and security as a senior official with the Department of Homeland Security and based on his experience and leadership roles in the private sector.

Brenda L. Baron has served as our Vice President, Supply Chain since September 21, 2015, having previously served as Vice President, Manufacturing since February 2009. Ms. Baron joined us in April 2004. Ms. Baron developed the Security Division’s manufacturing operations, as well as manufacturing, test, and documentation control and is now responsible for managing our supply chain. Prior to joining the Company, Ms. Baron served as Documentation Engineer with the instrumentation division of Milipore Corporation, from 2002 to 2004, and was employed at Ion Track Instruments, an explosive trace detector manufacturer, as Configuration Manager, from 1998 to 2001, where she played a key role in bringing handheld, bench top, and portal trace detectors into production.

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Roger P. Deschenes joined us in June 2008 as Controller, was promoted to Vice President, Finance in January 2009 and to Chief Financial Officer in July 2010. Mr. Deschenes has more than 25 years of accounting and financial leadership experience with publicly traded and private companies. Prior to joining Implant Sciences, Mr. Deschenes served as Vice President, Finance with Beacon Roofing Supply, Inc. from 2006 to 2007. From 1990 to 2006, Mr. Deschenes served in several senior accounting and financial capacities at Saucony, Inc. including: Vice President, Controller, Chief Accounting Officer and Assistant Treasurer. Saucony, Inc. was sold to Stride Rite, Inc. in 2005. Mr. Deschenes received a B.S. in Business Administration from Salem State University and is a Certified Management Accountant.

Dr. Darryl K. Jones joined us in May 2012 as Vice President, Sales and Marketing and assumed responsibility for our Technical Services in March 2014. From 2009 until he joined the Company, Dr. Jones served as Vice President, Global Product Management at Morpho Detection, Inc., a business unit of the Safran Group. From 2006 through 2009, Dr. Jones served as General Manager, Global Security Sales at GE Security and served as Global Business Manager at GE Healthcare from 2003 through 2006. Dr. Jones holds a Ph.D. in Optical Science and Engineering from the University of Alabama in Huntsville, a Master of Arts degree in Physics and a B.A. from Fisk University.

Todd A. Silvestri was appointed Chief Operating Officer on September 28, 2015, having joined us in September 2008 as Vice President, Advanced Technology and Product Development and is directly responsible for the design and commercialization of the our advanced explosive trace detection solutions and our manufacturing operations. Previously, Mr. Silvestri was Senior Vice President of Century Capital Partners, assisting his clients in defining optimal exiting strategies, securing capital, and expanding into foreign markets. Prior to that, he led new product development for Environmental Systems Products, where he was responsible for expanding the company’s traditional business-to-government services into new frontiers by commercializing products and services for private business clients and consumers. In 2003, Mr. Silvestri founded APAC Global LLC providing consulting in the areas of company establishment, localization/relocation of operations, supply chain management, and organizational design primarily focused with small to medium sized companies expanding to, or within, the Asia Pacific Region. Mr. Silvestri holds an M.B.A. from the Kellogg School of Management at Northwestern University, as well as a B.S. in Chemical Engineering from Clarkson University.

James M. Simon, Jr, was elected to the Board of Directors on July 1, 2015.  Mr. Simon has served as the Chief Executive Officer of Intelligence Enterprises LLC, a privately held management-consulting firm specializing in advising companies and governments around the world on a variety of matters including business development, contract capture, M&A, as well as strategic program initiatives, since January 2003.  Since November 2012, he has also taught cyber security in the Department of Criminal Justice at The University of Alabama.  From January 2010 to September 2012, Mr. Simon served as Microsoft’s Chief Strategist for its worldwide public sector and its executive sponsor for the State of Alabama.  In 2004, he founded Microsoft’s Institute for Advanced Technology in Governments, and for five years, led its efforts to connect Microsoft's world-leading advanced research and development activities with the global public sector.  Mr. Simon served in the US Army from 1969 to 1973 and the US Army Reserve from 1973 to 1997, was a principle negotiator for the Conventional Forces in Europe Treaty from 1990 to 1993, and, following his appointment by President Clinton and confirmation by the Senate, served as Assistant Director of Central Intelligence for Administration from 1998 to 2003.  Mr. Simon has served on a number of corporate boards, the most recent being GeoEye, Inc., a provider of satellite imagery, that was acquired by DigitalGlobe, Inc.  Mr. Simon holds a B.A. degree in Political Science from The University of Alabama and an M.A. in International Relations from the University of Southern California.

Our Board of Directors has concluded that Mr. Simon is qualified to serve as a director based on his past and current leadership and executive roles in national and international security, his extensive service as a director of corporate boards and his extensive experience working with senior government and industry leaders worldwide.

Michael C. Turmelle was appointed Chairman of the Board of Directors on July 1, 2015, having served on our Board of Directors since December 2005.  Since February 2015, Mr. Turmelle has served as President of Hayward Tyler Inc., a provider of horizontal and vertical pumps. From November 2007 through January 2015, Mr. Turmelle served as the Principle of SFTT Consulting, assisting companies in the renewable energy, medical devices and

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security markets with financial, strategic, and operational issues.  From 1987 until October 2007, Mr. Turmelle worked for SatCon Technology Corporation, holding several positions including Chief Financial Officer from 1991 until 2000 and Chief Operating Officer from 2000 to 2005.  Mr. Turmelle holds a B.A. degree in Economics from Amherst College and a Financial Management Program certificate from General Electric.

Our Board of Directors has concluded that Mr. Turmelle is qualified to serve as a director based on his past and current leadership and executive roles, financial and operational skills, business judgment and knowledge of corporate governance matters.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires our named executive officers, directors and persons who beneficially own more than 10% of a registered class of our securities to file reports of ownership and changes in ownership with the SEC.  Based solely on a review of copies of such forms submitted to the Company, we believe that all persons subject to the requirements of Section 16(a) filed such reports on a timely basis in fiscal 2016, with the exception of Dr. Jones, who filed one such report on February 19, 2016 with respect to the grant of a stock option on August 14, 2015 to purchase 1,258,418 shares of our Common Stock and Dr. McGann who filed one such report on February 19, 2016 with respect to the grant of a stock option on August 14, 2015 to purchase 1,498,972 shares of our Common Stock.

Board Leadership Structure

The Board determined to separate the roles of Chairman of the Board, President and Chief Executive Officer, which roles were previously held by a former named executive officer. On July 1, 2015, the Board appointed Michael Turmelle, an independent director, to serve as Chairman of the Board and on September 1, 2015, the Board of Directors separated the roles of Chief Executive Officer and President, and promoted Mr. Robert Liscouski to President. Dr. McGann continues to serve as the Chief Executive Officer. The Board determined that the current Board leadership structure is appropriate for the Company at this time. In reaching its determination, the Board considered a number of factors, including the effectiveness of the Board’s leadership structure during 2016 and the Company’s operating and financial performance.

Code of Conduct and Ethics

We have adopted a code of ethics that applies to our chief executive officer, chief operating officer and chief financial officer.  The code of ethics is posted on our website at www.implantsciences.com. We intend to include on our website any amendments to, or waivers from, any provision of our code of ethics that applies to our chief executive officer, chief operating officer and chief financial officer that relates to any element of the code of ethics definition enumerated in Item 406 of Regulation S-K.

Stockholder Communications with the Board of Directors

Pursuant to procedures set forth in our by-laws, our Nominating/Corporate Governance Committee will consider stockholder nominations for directors if we receive timely written notice, in proper form, of the intent to make a nomination at a meeting of stockholders.  To be timely, the notice must be received within the time frame identified in our by-laws, discussed below.  To be in proper form, the notice must, among other matters, include each nominee’s written consent to serve as a director if elected, a description of all arrangements or understandings between the nominating stockholder and each nominee and information about the nominating stockholder and each nominee.  These requirements are detailed in our amended and restated by-laws, which were attached as an exhibit to our Current Report on Form 8-K filed with the Securities and Exchange Commission on December 18, 2007.  A copy of our by-laws will be provided upon written request.

We have not yet selected the date for our next Annual Meeting of Stockholders. We will notify stockholders of the date of our next Annual Meeting of Stockholders, and the deadline for submitting stockholder proposals for inclusion in our proxy materials for that Meeting pursuant to Rule 14a-8 under the Exchange Act, in a subsequent Quarterly Report on Form 10-Q or a Current Report on Form 8-K.   

Our by-laws require advance notice of any proposal by a stockholder intended to be presented at an annual meeting that is not included in our notice of annual meeting and proxy statement because it was not timely submitted under the preceding paragraph, or made by or at the direction of any member of the Board of Directors, including any proposal for the nomination for election as a director.

The Board will give appropriate attention to written communications that are submitted by stockholders, and will respond if and as appropriate.  Stockholders who wish to send communications on any topic to the Board should address such communications to Board of Directors c/o Chief Executive Officer, Implant Sciences Corporation, 500 Research Drive, Unit 3, Wilmington, MA 01887.

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Board Attendance

The Board of Directors met five times and held twenty-five meetings by telephone conference call during the fiscal year ended June 30, 2016. In addition, on two occasions the Directors adopted certain resolutions by unanimous written consent in lieu of a meeting. Each director attended at least 75% of the total number of meetings of the Board of Directors and of the committees on which he served during fiscal 2016.

The membership of each committee, as of September 30, 2016, is indicated in the table below:

The Board of Directors has determined that Mr. Simon and Mr. Turmelle, who serves as the Chairman of the Audit Committee, are “audit committee financial experts” as defined in Item 407(d)(5)(ii) of Regulation S-K.

The primary functions of the Audit Committee are to represent and assist the Board of Directors with the oversight of:

·

appointing, approving the compensation of, and assessing the independence of our independent auditors;

·

overseeing the work of our independent auditors, including through the receipt and consideration of certain reports from the independent auditors;

·

reviewing and discussing with management and the independent auditors our annual and quarterly financial statements and related disclosures;

·

coordinating the Board of Director’s oversight of our internal control over financial reporting, disclosure controls and procedures and code of conduct and ethics;

·

establishing procedures for the receipt and retention of accounting related complaints and concerns;

·

meeting independently with our independent auditors and management; and

·

preparing the audit committee report required by SEC rules.

In this context, the Audit Committee has met and held discussions with management and the Company's independent registered public accounting firm. During the fiscal year ended June 30, 2016, the Audit Committee held four meetings by telephone conference call.

The responsibilities of the Audit Committee are set forth in its written charter, which is posted on our website at www.implantsciences.com.

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Audit-Related Matters

Report of the Audit Committee

The Audit Committee has reviewed and discussed the audited financial statements with management and the independent registered public accounting firm. The Audit Committee discussed with the independent registered public accounting firm matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended (AICPA, Professional Standards, Vol. 1 AU 380), and as adopted by the Public Company Accounting Oversight Board in Rule 3200T. The Audit Committee has discussed with the independent registered public accounting firm the auditor's independence from the Company and management. In addition, the Audit Committee received the written disclosures and the letter from the independent registered public accounting firm required by the applicable requirements of the Public Company Accounting Oversight Board Ethics and Independence Rule 3526, regarding the independent public accounting firm’s communications with the Audit Committee concerning independence.

In reliance on the reviews and discussions referred to above, the Audit Committee approved that the audited financial statements be included in the Company's Annual Report on Form 10-K for the year ended June 30, 2016.

Members of the Audit Committee

Michael C. Turmelle (Chairman)

James M. Simon, Jr.

Compensation Committee

The Compensation Committee consists of Messrs. Simon and Turmelle, both of whom are independent. Mr. Simon serves as Chairman of the Compensation Committee.  The Compensation Committee is responsible for implementing our compensation philosophies and objectives, establishing remuneration levels for our executive officers and implementing our incentive programs, including our equity compensation plans. During the fiscal year ended June 30, 2016, the Compensation Committee met twice. The responsibilities of the Compensation Committee are set forth in its written charter, which is posted on our website at www.implantsciences.com.

Strategy Committee

The Board of Directors is responsible for overall Company’s strategic initiatives. On July 1, 2015, the Board of Directors established the Strategy Committee, which Committee is responsible for identifying and establishing strategic goals and objectives, focusing their efforts on long term initiatives versus day-to-day operations.  Messrs. Liscouski, McGann, Simon and Turmelle serve on the Committee. Mr. Simon serves as Chairman of the Strategy Committee.  The Company’s management is responsible for devising, developing and reporting on the Company’s strategic plan to the Committee.  The Committee is responsible to review management’s plans and make recommendations to the Board of Directors for the following:

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the development, adoption and modification of Company strategy;

·

the review and assessment of external developments and factors, such as economic changes, competition, technology and threats or conditions that could affect the Company’s strategy and execution;

·

execution of the Company’s strategy through development and growth initiatives, including but not limited to acquisitions, joint ventures and strategic alliances;

·

review potential candidates for development and growth initiatives, including but not limited to acquisitions, joint ventures and strategic alliances;

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the development of plan to implement the Company’s strategy; and,

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the periodic review of the Company’s progress with respect to the implementation of its strategic initiatives.

Nominating/Corporate Governance Committee

The Nominating/Corporate Governance Committee consists of Messrs. Simon and Turmelle. Mr. Turmelle serves as chairman of the Nominating/Corporate Governance Committee.  The Nominating/Corporate Governance Committee leads the Board’s effort at ensuring we have qualified directors by: (i) identifying individuals qualified to become Board members consistent with criteria approved by the Board and recommending to the Board a group of

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director nominees for each annual meeting of stockholders; (ii) recommending nominees to fill any vacancies which may occur during the year; (iii) considering candidates for nominees as directors of the Company who are recommended by stockholders entitled to do so under our By-laws; and (iv) ensuring that the Audit, Compensation and Nominating/Corporate Governance Committees of the Board have qualified and experienced “independent” directors.  The Board has adopted a written charter for the Nominating/Corporate Governance Committee which is posted on our website at www.implantsciences.com.

In the event that the Nominating/Corporate Governance Committee or the Board identifies the need to fill a vacancy or to add a new member to fill a newly created position on the Board with specific criteria, the Nominating/Corporate Governance Committee initiates a search process and keeps the Board apprised of its progress. The Nominating/Corporate Governance Committee may seek input from members of the Board, the Chief Executive Officer and other management and, if necessary, hire a search firm. In addition, as a matter of policy, the Nominating/Corporate Governance Committee will consider candidates for Board membership properly recommended by stockholders. The initial candidate or candidates, including anyone recommended by a stockholder, who satisfy the specific criteria for Board membership and otherwise qualify for membership on the Board are reviewed and evaluated by the Nominating/Corporate Governance Committee. The evaluation process for candidates recommended by stockholders is the same as the process used to evaluate candidates recommended by any other source.

Item 11.

Executive Compensation

Information on Executive Compensation

Compensation Discussion and Analysis

Overview

Pursuant to its charter, the responsibilities of the Compensation Committee are (i) to assist the Board of Directors in discharging its responsibilities in respect of compensation of our senior executive officers; (ii) review and analyze the appropriateness and adequacy of our annual, periodic or long-term incentive compensation programs and other benefit plans and administer those compensation programs and benefit plans.

The Compensation Committee is responsible for the review of our compensation and benefit plans to ensure that they meet our objectives, as well as review the Chief Executive Officer’s performance, recommend the annual compensation of the Chief Executive Officer, review the Chief Executive Officer’s recommendations on compensation for our other named executive officers and make recommendations for adopting and changing compensation policies and practices and review and recommend compensation for directors, consultants and advisors. The Compensation Committee reports its recommendations for executive compensation to the full Board of Directors for approval and authorization.

Except for the delegation of authority to the Chief Executive Officer to grant certain de minimus equity compensation awards to our non-executive employees, the Compensation Committee has not delegated any of its responsibilities to any other person.

Objectives of Compensation Program

Our compensation practices are intended to attract, motivate and retain highly competent executives in a competitive marketplace.  The program provides the named executive officers listed in our summary compensation table with a compensation package that is competitive, internally equitable and commensurate with their skills, knowledge, experience and responsibilities.

The executive compensation program primary objective is to align total executive compensation with the achievement of our annual and long-term performance goals.  The annual goals are primarily based on revenues and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) and the long-term goals are based on our stock price.

Compensation is paid to our named executive officers in both fixed and discretionary amounts which are established by the Board of Directors based on existing contractual agreements and the determinations of the Compensation Committee after recommendations by our Chief Executive Officer (other than with respect to himself).  Executive officer compensation consists of base salary, cash bonuses and long-term incentive compensation in the form of stock options to purchase shares of our common stock. From time to time, we may also

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pay other expenses on behalf of a named executive officer to include a vehicle allowances, key man life insurance and legal fees.

Use of Consultants and Peer Group Data

We do not engage in specific numerical benchmarking in determining executive compensation.  The Compensation Committee periodically considers available compensation data from available resources, but uses the information as a guideline in exercising its discretion in determining executive officer compensation.

In September 2015, the Compensation Committee, acting on behalf of the Board of Directors, retained Northbrook Compensation Associates, to analyze the Company’s current base salary levels for its executive officers, establish typical market annual cash incentive award values, and provide recommendations regarding base salary ranges, annual bonus values and long-term incentive compensation.

In establishing executive compensation for fiscal 2016, the Compensation Committee largely followed the methodology recommended in the Northbrook Compensation Associates report. The Compensation Committee determined that Northbrook Compensation Associates was independent and that its engagement did not present any conflicts of interest.  Northbrook Compensation Associates provided no other service to us.

Base Salaries

As noted previously, the Compensation Committee evaluates the performance of our Chief Executive Officer and recommends his salary to the full Board of Directors in light of that evaluation.  Base salaries, being the first element of the compensation program, are reviewed on an annual basis.  The Compensation Committee reviews the Chief Executive Officers base salary annually, giving consideration to his performance during the previous year. Dr. McGann, who was appointed Chief Executive Officer on January 16, 2015, was paid based a base annual salary of $270,000. On July 1, 2015, Dr. McGann’s base annual compensation was increased to $300,000 per annum. In performing their evaluation of Dr. McGann’s performance, the Compensation Committee considered the following quantitative and qualitative factors in establishing fiscal 2016 compensation for our Dr. McGann:

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the value of Dr. McGann’s leadership;

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our financial performance and relative shareholder return;

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the achievement of several regulatory approvals necessary in our industry to compete; and

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leadership of our strategic alternative review process, which culminated with executing an asset purchase agreement with L-3 Communications Corporation on October 10, 2016 to sell the assets used in our explosives trace detection business.

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the compensation plans of chief executive officers in comparable companies.

The base salaries of our other named executive officers, other than the Chief Executive Officer, are reviewed and recommended annually by the Compensation Committee to the full Board of Directors, after consultation with and upon the recommendation of the Chief Executive Officer.  The base salary of each named executive officer is recommended by the Chief Executive Officer to the Compensation Committee after evaluating each named executive officer’s performance over the year, giving consideration to our financial performance, the individual’s performance during the year and their contributions to the Company and other relevant factors.

The Compensation Committee considers several factors in evaluating the base salary recommendations for the other named executive officers that are recommended by the Chief Executive Officer. Periodically, the Compensation Committee will review industry specific compensation data that provides detailed information regarding compensation practices of industry peers, competitors and companies of similar size.

Annual Cash Incentives

Annual cash incentives are a significant component of executive compensation, reflecting our belief that management’s contribution to long-term shareholder returns is derived from increasing current earnings and preparing the Company for future earnings growth.  We believe bonuses are key and enable us to attract, retain and motivate our executives.

For fiscal 2015 and 2016, the Board of Directors established bonus targets as a percentage of base salary for each named executive. These levels were designed to result in total cash compensation, the sum of base salary and target bonus, at the market median, while also taking into account internal pay equity considerations.  Fiscal year-end bonuses are discretionarily determined, guided by a framework designed to consider both quantitative and qualitative performance against goals established by the Board of Directors.  Bonus targets are based on

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performance milestones which are established by mutual agreement between the Company and executive within 60 days after commencement of each such fiscal year. For fiscal 2015, each of the named executive officers were eligible to receive a bonus equal to 50% of their base annual salary.

The bonus targets established for the executive officers named in the Summary Compensation Table were based on the achievement of Company-wide revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets established by the Board for the fiscal year and qualitative evaluations of performance against strategic goals determined by the Board of Directors.  Our revenues for fiscal 2015 were $12,991,000 and our adjusted earnings before interest, taxes, depreciation and amortization was a loss of $9,053,000.  Based on our actual results each of the named executive officers did not earn any quantitative bonus for fiscal 2015.

For fiscal 2015, the Board of Directors determined that the addition of our QS-B220 product to the Transportation Security Administration’s (“TSA”) Qualified Product List for passenger checkpoint screening; the execution of an indefinite delivery / indefinite quantity contact with the TSA; and, the receipt of a deliver order under that contract were significant qualitative achievements, and recommended qualitative bonuses of $67,500 for Dr. McGann, $61,250 for Dr. Jones, $100,000 for Mr. Silvestri and $57,500 for Mr. Deschenes.  Mr. Liscouski was not eligible to participant in our bonus program during fiscal 2015.  With the exception of Mr. Silvestri who was awarded a bonus amount that represented 50% of his base salary, the bonuses represent 25% of the named executive’s base compensation (base salary as of the commencement of the fiscal year). The Compensation Committee recommended and the Board of Directors approved a bonus of 50% of Mr. Silvestri’s base salary in recognition of his efforts towards our achievement of the regulatory approvals that were attained in fiscal 2015. Per the terms of his separation agreement, the Board of Directors approved a $50,000 bonus payable to Mr. Bolduc, our former President and Chief Executive Officer for fiscal 2015.

The bonus targets established for the executive officers named in the Summary Compensation Table were based on the achievement of Company-wide revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets established by the Board for the fiscal year and qualitative evaluations of performance against strategic goals determined by the Board of Directors.  

For fiscal 2016, the Compensation Committee and the Board of Directors determined that executive officers would be eligible for incentive compensation equal to a maximum of 100% of the executive officer’s base salary on the achievement of Company-wide revenue, based on a sliding scale. Revenues for the year ended June 30, 2016 were $53,061,000 as compared with $12,991,000 for the comparable prior year period, an increase of $40,070,000, or 308.4% and our adjusted earnings before interest, taxes, depreciation and amortization was $1,960,000. Maximum potential incentive compensation table, based on our revenue achievement, is as follows:

Based on our Company-wide revenues for the fiscal year ended June 30, 2016, the Board of Directors recommended bonuses of $300,000 for Dr. McGann and Mr. Liscouski, $262,500 for Dr. Jones, $250,000 for Mr. Silvestri and $246,100 for Mr. Deschenes.  Each of the Named Executive Officers bonuses is equal to 100% of the executive officers’s base salary as of the commencement of the fiscal year, with the exception of Mr. Silvestri. Further, on July 1, 2015, the Board of Directors approved a sign-on bonus of $200,000 payable to Mr. Liscouski.

The Compensation Committee retains full discretion to award discretionary bonuses to the Chief Executive Officer and other named executive officers.  In determining discretionary bonuses, the Compensation Committee considers the Chairman of the Board’s recommendation for the Chief Executive Officer and considers the Chief Executive Officer’s recommendation for the other named executive officers in determining discretionary bonuses.

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The Chairman’s and Chief Executive Officer’s recommendations are guided by their evaluations of our actual financial performance against our financial performance goals and their assessment of the effectiveness of the individual and collective efforts of our named executive officers in achieving our business objectives.  The Compensation Committee will also consider extraordinary efforts by executive officers in various project or key business initiatives during the year.

Equity Compensation

We view equity compensation to be a key element of our executive compensation program and is intended to more closely align total compensation with the long-term financial interests of our stockholders.  The equity compensation component of our compensation program consists of awards of stock options to purchase shares of our common stock.

We have granted stock options to our named executive officers at an exercise price equal to the closing price of our common stock as reported on the OTC Bulletin Board. Beginning in fiscal 2014, to more closely align our named executive compensation with the long-term financial interests of our stockholders, we began to issue stock options with performance target that affects the vesting of the options. On August 13, 2013 options were granted to our named executive officers that were exercisable in three equal annual installments commencing on August 13, 2014, subject to the our achievement of certain performance milestones on or before February 1, 2014. We did not achieve the milestones and, therefore, the options expired on February 1, 2014. Subsequent options grants to our named executive officers on March 6, 2014 and July 2, 2014, included performance target vesting provisions. Please refer to “Outstanding Equity Awards at 2016 Fiscal Year-End” for further discussion of the performance target vesting provisions of these option grants.

Annual equity awards to our named executive officers are typically made in the first quarter of the fiscal year, following the close of our prior fiscal year and the approval of our annual operating budget for the current fiscal year.

Our Compensation Committee administers our stock option plan, the purpose of which is to advance our interest by:

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providing directors, officers, employees and other eligible person with additional incentives;

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encouraging ownership of our common stock by eligible persons;

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increasing the proprietary interest of eligible persons in our success;

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encouraging eligible persons to remain with us; and

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attracting new directors, officers and directors.

In determining whether to grant stock options and how many of such options to grant to persons eligible under our stock option plan, consideration is given to each individual’s past performance and contribution to the Company, as well as that individual’s expected ability to contribute to our future success.  As part of our annual performance evaluation process, both the Chairman and Chief Executive Officer, after consultation with each named executive officer, establish the executive’s performance objectives for the coming fiscal year.  These performance objectives serve as a framework to evaluate an executive’s overall performance and can be subject to change during the fiscal year as circumstances warrant.  Individual performance objectives may include operational or financial metrics that support corporate or departmental goals and may include specific operational objectives within the executive’s area of responsibility. The performance objectives may include demonstration of leadership and decision making, effective communication, efforts towards our strategic initiatives, commitment to our key initiatives and core values and may also include specific objectives such as the completion of identified major projects.  Evaluation of an executive’s performance relative to their objectives is subjective, involving a high degree of judgment based on either the Chairman’s or Chief Executive Officer’s observations or interactions with the executive officer during the year. The Chairman and Chief Executive Officer may also consider an executive’s prospects for future development and advancement within the Company in determining equity compensation recommendations. Additionally, the Chairman and Chief Executive Officer may consider our overall performance in light of the market we compete in as part of an individual executive’s performance.

The above evaluation forms the basis for recommendations of stock options awards to the Compensation Committee for each named executive officer. The Compensation Committee meets with the Chairman and Chief Executive Officer to discuss their recommendations with them before meeting separately in executive session to discuss their recommendations and make a final determination of the stock option awards to the named executive

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officers.  The Compensation Committee’s evaluation of stock option awards to the Chairman and Chief Executive Officer are also inherently subjective, involving a high degree of judgment.

Employment Agreements

We have entered into employment agreements with Drs. McGann and Jones, Messrs. Liscouski, Silvestri and Deschenes and Ms. Baron. On January 6, 2016, we amended each of the employment agreements with Drs. McGann and Jones, Messrs. Liscouski, Silvestri and Deschenes and Ms. Baron. On February 26, 2015, our Board of Directors amended and restated the Change in Control Plan which was originally adopted by the Board of Directors on September 7, 2012 (the “Original Plan,” and as amended and restated, the “Amended Plan”). Further, on August 26, 2016, by Written Consent of the Board of Directors, Mr. Simon, a member of our Board of Directors and certain of our employees, Messrs. Hacene Boudries, Andrew Anderson and Michael Moody were added as participants in the Change in Control Plan.

Each of the named executive officers has executed a Change in Control Payment Agreement with us. Detailed discussion of the named executive officer employment agreements and change in control agreements, can be found in “Employment Agreements; Change in Control and Severance Provisions.”

Stock Ownership Guidelines

We do not have a formal policy regarding minimum stock ownership requirements for our named executive officers. However, we do encourage ownership of our common stock through stock options grants.

Retirement Plans

We have a defined contribution plan, the Implant Sciences Corporation 401(k) Profit Sharing Plan, established under Section 401(k) of the Internal Revenue Code. All full-time employees who are 21 years of age are eligible to participate on the beginning of the first month after 30 days of employment. The company’s contributions are discretionary. We made no matching contributions during fiscal 2016 or 2015.

Our named executive officers do not participate in any special or separate executive retirement plan.  

Perquisites

We do not have a formal perquisites program.  From time to time, personal benefits may be provided to named executive officers when it is determined that such personal benefits are an integral part of an executive’s compensation package.  

Compensation for Fiscal Year 2017

In determining executive compensation for fiscal 2017, the Compensation Committee largely followed the same methodology recommended in the Northbrook Compensation Associate’s report and based in part on its consideration of the results of the shareholder advisory vote on our executive compensation, at the Annual Meeting of Stockholders held on July 1, 2015, in which over 81% of shares present at the meeting and entitled to vote supported the compensation of our named executive officers.

The Compensation Committee recommended and the Board of Directors approved fiscal year 2017 base salaries for our named executive officers as follows:  Dr. McGann, $300,000; Mr. Liscouski, $300,000; Dr. Jones, $262,150; Mr. Silvestri, $250,000; and, Mr. Deschenes, $246,100.  The base salaries reflect no increase from the fiscal year 2016 base salaries.

Each of the named executive officers is eligible to receive a maximum bonus equal to 50% of their base annual salary for fiscal 2017, which will be based on Company-wide revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets established by the Board for the fiscal year and qualitative evaluations of performance against strategic goals determined by the Board of Directors. Named executive compensation for fiscal 2017 may be subject to change.

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Summary Compensation Table

The following table provides information concerning compensation earned in our last three fiscal years, ended June 30, 2016 and 2015, by our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, our other most highly compensated named executive officers, whose total compensation exceeded $100,000 for the fiscal years ended June 30, 2016 and 2015 (together, the “Named Executive Officers”):

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Grants of Plan-Based Awards to Named Executive Officers

The following table sets forth the individual grants of plan-based awards to the Named Executive Officers in the fiscal year ended June 30, 2016. Please see the “Outstanding Equity Awards at 2016 Fiscal Year-End” for the outstanding stock option awards and unvested stock awards held by each of the Named Executive Officers as of June 30, 2016:

(1)

Options vest in three equal installments commencing on August 15, 2016.

Employment Agreements; Change in Control and Severance Provisions

Terms of Employment Agreement with Named Executive Officers and Former Executive Officer

Named Executive Officers

Dr. William J. McGann

In March 2012, we entered into a three-year employment agreement with Dr. William J. McGann, our Chief Operating Officer, pursuant to which Dr. McGann receives a base salary of $250,000 per year, commencing on April 2, 2012. After the third year, the agreement will automatically continue unless notice of termination is given by either party.  

On January 16, 2015, the Board of Directors appointed Dr. McGann as our President and Chief Executive Officer and amended and restated the employment agreement with Dr. McGann. The new agreement will remain in effect until the first to occur of the following events: 1) the voluntary termination of Dr. McGann; 2) Dr. McGann resigns for Good Reason, as defined in the restated and amended agreement; 3) we terminate Dr. McGann’s employment for Cause, as defined in the restated and amended agreement; 4) the death or disability of Dr. McGann; or 5) the Board of Directors elects a new President of CEO, in which case Dr. McGann would continue his employment as our Chief Operating Officer. On January 6, 2016, we amended Dr. McGann’s amended and restated employment agreement.

The amended and restated employment agreement establishes Dr. McGann’s base salary at the rate of $270,000 per year, which amount is equal to Dr. McGann’s annualized base salary immediately prior to the agreement. Dr. McGann’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Dr. McGann employment is terminated by us without “cause” or Dr. McGann resigns for “good reason” (as those terms are defined in the agreement).  Dr. McGann’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee. In the event Dr. McGann resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twenty-four (24) months of his base salary then in effect.

The agreement provides for Dr. McGann to be eligible to receive incentive compensation in an amount up to $135,000, for each of the fiscal years ended June 30, 2016 and June 30, 2015 upon the achievement of certain performance milestones established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $67,500 was payable to Dr. McGann for the fiscal year ended June 30, 2015. For the fiscal year ended June 30, 2016, Dr. McGann was eligible to receive incentive compensation in an amount up to $300,000 upon the

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achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $300,000 was payable to Dr. McGann as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Dr. McGann within 60 days after commencement of each such fiscal year.

The agreement also provides that within 30 days after the completion of an equity financing, the gross proceeds of which to the Company are not less than $15,000,000, the Company will grant Dr. McGann an incentive stock option to purchase that number of shares of common stock of the Company which, together with all other option and equity awards previously issued by the Company, will equal approximately 1% of the Company’s fully diluted equity.

Mr. Robert P. Liscouski

On December 15, 2015, we entered into an employment agreement with Mr. Robert Liscouski, our President, pursuant to which Mr. Liscouski will receive a base annual salary of $300,000 per year, commencing on December 15, 2015.  The employment agreement does not contain a specified term of employment. We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Mr. Liscouski employment is terminated by us without “cause” or Mr. Liscouski resigns for “good reason” (as those terms are defined in the agreement).  In the event Mr. Liscouski resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of his base salary then in effect. Mr. Liscouski’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides for Mr. Liscouski to be eligible to receive incentive compensation in an amount equal to 50% of his annual base salary and provided for a sign on bonus in the amount of $200,000. For the fiscal year ended June 30, 2016, Mr. Liscouski was eligible to receive incentive compensation in an amount up to $300,000 upon the achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $300,000 was payable to Mr. Liscouski as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Mr. Liscouski within 60 days after commencement of each such fiscal year.

Dr. Darryl K. Jones

In May, 2012, we entered into a three-year employment agreement with Dr. Darryl Jones, our Vice President of Sales and Marketing, pursuant to which Dr. Jones will receive a base annual salary of $235,000 per year, commencing on May 7, 2012.  After the third year, the agreement will automatically continue unless notice of termination is given by either party.   On January 6, 2016, we amended Dr. Jones’ employment agreement. We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Dr. Jones employment is terminated by us without “cause” or Dr. Jones resigns for “good reason” (as those terms are defined in the agreement).  In the event Dr. Jones resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of his base salary then in effect.

Dr. Jones’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides for Dr. Jones to be eligible to receive incentive compensation in an amount of up to $122,500 for each of the fiscal year ended June 30, 2015 and June 30, 2014 upon the achievement of certain performance milestones to be established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $61,250 was payable to Dr. Jones for the fiscal year ended June 30, 2015. For the fiscal year ended June 30, 2016, Dr. Jones was eligible to receive incentive compensation in an amount up to $262,500 upon the achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $262,500 was payable to Dr. Jones as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Dr. Jones within 60 days after commencement of each such fiscal year.

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The agreement also provides that within 30 days after the completion of an equity financing, the gross proceeds of which to the Company are not less than $15,000,000, the Company will grant Dr. Jones an incentive stock option to purchase that number of shares of common stock of the Company which, together with all other option and equity awards previously issued by the Company, will equal approximately 1% of the Company’s fully diluted equity.

Ms. Brenda L. Baron

On March 13, 2015, we entered into an employment agreement with Ms. Brenda Baron, our Vice President of Manufacturing, pursuant to which Ms. Baron will receive a base annual salary of $180,000 per year, commencing on March 13, 2015. On January 6, 2016, we amended Ms. Baron’s employment agreement. As amended, the employment agreement does not contain a specified term of employment. We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Ms. Baron employment is terminated by us without “cause” or Ms. Baron resigns for “good reason” (as those terms are defined in the agreement).  In the event Ms. Baron resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of her base salary then in effect.

Ms. Baron’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides for Ms. Baron to be eligible to receive incentive compensation in an amount equal to 50% of her annual base salary.  Ms. Baron was eligible to receive incentive compensation of $90,000 for the fiscal year ended June 30, 2015 upon the achievement of certain performance milestones to be established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $45,000 was payable to Ms. Baron for the fiscal year ended June 30, 2015. For the fiscal year ended June 30, 2016, Ms. Baron was eligible to receive incentive compensation in an amount up to $187,200 upon the achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $187,200 was payable to Ms. Baron as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Ms. Baron within 60 days after commencement of each such fiscal year.

Mr. Todd A. Silvestri

On March 13, 2015, we entered into an employment agreement with Mr. Todd Silvestri, our Vice President of Advanced Technology and Product Development, pursuant to which Mr. Silvestri will receive a base annual salary of $200,000 per year, commencing on March 13, 2015. On January 6, 2016, we amended Mr. Silvestri’s employment agreement. As amended, the employment agreement does not contain a specified term of employment. We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Mr. Silvestri employment is terminated by us without “cause” or Mr. Silvestri resigns for “good reason” (as those terms are defined in the agreement).  In the event Mr. Silvestri resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of his base salary then in effect.

Mr. Silvestri’s base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides for Mr. Silvestri to be eligible to receive incentive compensation in an amount equal to 50% of his annual base salary.  Mr. Silvestri was eligible to receive incentive compensation of $100,000 for the fiscal year ended June 30, 2015 upon the achievement of certain performance milestones to be established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $100,000 was payable to Mr. Silvestri for the fiscal year ended June 30, 2015. For the fiscal year ended June 30, 2016, Mr. Silvestri was eligible to receive incentive compensation in an amount up to $250,000 upon the achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $250,000 was payable to Mr. Silvestri as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Mr. Silvestri within 60 days after commencement of each such fiscal year.

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Mr. Roger P. Deschenes

On September 16, 2015, we entered into an employment agreement with Mr. Roger Deschenes, our Chief Financial Officer, pursuant to which Mr. Deschenes will receive a base annual salary of $246,000 per year, commencing on September 16, 2015. On January 6, 2016, we amended Mr. Deschenes’ employment agreement. As amended, the employment agreement does not contain a specified term of employment. We may terminate the agreement at any time without cause, on 30 days’ written notice.  The agreement, however, provides for payment of twelve months’ salary and a pro rata portion of any bonus compensation earned during the year of termination, as well as the continuation of certain benefits, as separation payments in the event that Mr. Deschenes employment is terminated by us without “cause” or Mr. Deschenes resigns for “good reason” (as those terms are defined in the agreement).  In the event Mr. Deschenes resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined in (d) or (e) above, Executive shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of his base salary then in effect.

Mr. Deschenes’ base salary is subject to annual review, and any increases will be made in the discretion of the Board of Directors upon the recommendation of the Compensation Committee.

The agreement provides for Mr. Deschenes to be eligible to receive incentive compensation in an amount equal to 50% of his annual base salary.  Mr. Deschenes was eligible to receive incentive compensation of $117,000 for the fiscal year ended June 30, 2015 upon the achievement of certain performance milestones to be established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $57,500 was payable to Mr. Deschenes for the fiscal year ended June 30, 2015. For the fiscal year ended June 30, 2016, Mr. Deschenes was eligible to receive incentive compensation in an amount up to $246,100 upon the achievement of performance milestones established by the Board of Directors.  We did achieve these milestones and a bonus in the amount of $246,100 was payable to Mr. Deschenes as of June 30, 2016. Incentive compensation, if any, for subsequent fiscal years will be based on performance milestones to be established by mutual agreement between the Company and Mr. Deschenes within 60 days after commencement of each such fiscal year.

Separation Agreement

On January 16, 2015, Glenn D. Bolduc, resigned from his positions as Chief Executive Officer and President of the Company), as well as his seat on the Company’s Board of Directors and his position as Chairman of the Board effective on that date.

In connection with and prior to Mr. Bolduc’s resignations, Mr. Bolduc entered into a Separation Agreement and Release (the “Separation Agreement”) with the Company.  The Separation Agreement provides that Mr. Bolduc’s resignation will be deemed an involuntary termination without cause pursuant to his Amended and Restated Employment Agreement dated as of June 25, 2013.  In this regard, and subject to the terms contained in the Employment Agreement, Mr. Bolduc is entitled to receive: (i) annual base salary for 18 months on a regular payroll basis; (ii) a pro rata portion of any bonus earned in 2015; (iii) continuation of coverage under and contributions to health care, dental and life insurance benefits for a 12 month period; and (iv) transfer of any key man life insurance.

In connection with Mr. Bolduc’s resignation, we recorded a non-recurring charge of $725,000 in our consolidated statements of operations and comprehensive loss for the year ended June 30, 2015.

The agreement provides for Mr. Bolduc to be eligible to receive pro-rate incentive compensation in an amount equal to 25% of his annual base salary.  Mr. Bolduc was eligible to receive incentive compensation of $50,000 for the fiscal year ended June 30, 2015 upon the achievement of certain performance milestones to be established by the Board of Directors. We did achieve these milestones and a bonus in the amount of $50,000 was payable to Mr. Bolduc for the fiscal year ended June 30, 2015.

Additionally, pursuant to the terms of the Separation Agreement: (i) Mr. Bolduc agreed to consent to a modification of the Company’s Change of Control Payment Plan (“CIC Plan”), currently being considered by the Board of Directors, under which, in the event the Company is sold, Mr. Bolduc’s share in the CIC Plan will be reduced to 4% of the net sales price of the Company, as defined in an amended CIC Plan, and under which the aggregate share of all other participants in the CIC Plan will be 8.5% of the net sales price; (ii) the Company agreed that Mr. Bolduc shall continue to have the use of an apartment in New York City through the end of the current lease, all lease obligations of said apartment, including but not limited to rent payments and utilities, to be paid by the Company; (iii) the Company agreed to pay Mr. Bolduc’s attorney the sum of $40,000 towards legal fees related to the negotiation of the Separation Agreement and related matters; (iv) the Company amended Mr. Bolduc’s existing stock options permitting Mr. Bolduc to exercise those options which are vested as of his separation date through the maturity date of said options and to provide for the ability to exercise the vested options on a cashless

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basis, all other terms of Mr. Bolduc’s options remained unchanged ; and (v) Mr. Bolduc agreed to release all claims against the Company.

We recorded a non-cash charge of $440,000 in our consolidated statements of operations and comprehensive loss in the year ended June 30, 2015 to record additional stock-based compensation expense resulting from the amendments to Mr. Bolduc’s existing vested stock options.

Potential Payments Upon Termination or Change in Control

The following table describes the estimated compensation upon (i) termination by the Company of the Named Executive Officer without “cause,” or (ii) termination by the Named Executive Officer for “good reason,” excluding certain changes in control involving the Company.  The estimated incremental compensation assumes the triggering event had occurred on June 30, 2016.  Benefits generally available to all employees are not included in the table.  The actual amount of compensation can only be determined at the time of termination.

Each of the Named Executive Officers’ employment agreement, as amended on January 6, 2016, provides that in the event the Named Executive Officer resigns for Good Reason within twelve (12) months after a Change of Control or acquisition, as defined, the Named Executive Officer shall receive, in addition to any severance to which he is entitled under the agreement as amended, an additional sum equal to twelve (12) months of his base salary then in effect. The additional severance payable to each of the Named Executive Officers who resigns for Good Reason within twelve (12) months after a Change of Control is as follows:

Adoption of the Change of Control Payment Plan

On September 7, 2012, the Board of Directors adopted the Implant Sciences Corporation Change of Control Payment Plan (the “COC Plan”), the purpose of which is to reward management for the increases in shareholder value generated between January 2009 and September 7, 2012.

On January 2, 2009, the closing price of our common stock on the NYSE Amex LLC was $0.18 per share. On the date the plan was adopted, the closing price of the common stock on the OTC Markets Group’s OTCPK tier was $1.40. Our Board of Directors believes that this increase in shareholder value is directly attributable to the dedication and hard work of our management team, employees and directors. Accordingly, our management and

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directors have not significantly benefitted from the increase in shareholder value between January 2009 and September 7, 2012, and the COC Plan is intended to provide value to our management and directors equivalent to the value they would have earned had they owned a more significant portion of our equity.

Pursuant to the COC Plan, the Board established a target level of stock ownership for each officer as a percentage of our fully diluted capitalization, and a corresponding ownership percentage for directors. To reflect the increase in shareholder value between January 2009 and the adoption of the plan, the Board determined that each officer and director should be allocated a “Change of Control Payment” equal to the product of (x) the closing price of our common stock on September 7, 2012 (i.e., $1.40) less a “floor price,” multiplied by (y) the number of additional stock options granted to each participant on the same date. The floor price applicable to directors and officers who served us at the beginning of the turn-around is $0.20, i.e., slightly above the closing price of the common stock on January 2, 2009. The floor prices for Dr. McGann and Dr. Jones are $0.51 and $0.67, respectively, reflecting the closing prices of the common stock on the dates those officers joined us. The benefits under the plan are payable upon, and only upon, a “Change of Control,” as defined in the plan, involving the company. Accordingly, the payment of the benefits allocated under the plan will be further deferred until such time that all shareholders receive payments for or in respect of their common stock in a transaction constituting a Change of Control.

Pursuant to the terms of the Separation Agreement (see Note 16): (i) Mr. Bolduc agreed to consent to a modification of the Company’s Change in Control Payment Plan (“CIC Plan”), currently being considered by the Board of Directors, under which, in the event the Company is sold, Mr. Bolduc’s share in the CIC Plan will be reduced to 4% of the net sales price of the Company, as defined in an amended CIC Plan, and under which the aggregate share of all other participants in the CIC Plan will be 8.5% of the net sales price. The Company amended Mr. Bolduc’s existing stock options permitting Mr. Bolduc to exercise those options.

On February 26, 2015, our Board of Directors amended and restated the Change in Control Plan which was originally adopted by the Board of Directors on September 7, 2012 (the “Original Plan,” and as amended and restated, the “Amended Plan”).  The Amended Plan modifies certain provisions of the Original Plan relating to the calculation and  amounts of payment to which certain  key employees and directors of the Company are entitled following a Change in Control (as defined in the Amended Plan) as well as certain terms and conditions of payment,  as described below.  

The Original Plan provided that Participants would receive certain fixed amounts upon a Change of Control.  The Amended Plan does not provide such fixed amounts.  Instead, the Amended Plan provides for Change of Control Payments based on a percentage of Net Proceeds of a Change of Control after subtracting amounts that the Participant would receive in the Change of Control transaction as a result of the Participant’s ownership of certain stock options of the Company.  Change of Control Payments are calculated as (a) the product of (i) Net Proceeds of a Change of Control, multiplied by (ii) the applicable percentage granted to the Participant, reduced, but not below zero, by (b) any portion of the Net Proceeds or any other consideration which are payable to such Participant with respect to the At-Risk Options or with respect to shares of capital stock of the Company acquired upon the exercise of the At-Risk Options.  The options deemed to be “At- Risk” are identified in Appendix A of the Amended Plan.

In the Amended Plan, Net Proceeds is defined as the aggregate consideration paid in connection with a Change of Control, after payment of (i) all secured indebtedness of the Company and any controlled subsidiary, together with all accrued but unpaid interest thereon and all other obligations related thereto, including without limitation all indebtedness owed to DMRJ Group, LLC, and to the holders of promissory notes issued pursuant to that certain Note Purchase Agreement dated as of March 19, 2014, between the Company and certain other parties thereto, and (ii) all other obligations and liabilities of the Company and any Controlled Subsidiary, including all expenses related to such Change of Control.  Net Proceeds shall be deemed to include (i) any consideration to be paid to the Company, any Controlled Subsidiary, or the Company’s stockholders (as the case may be) that is to be held in escrow and (ii) any consideration to be paid to the Company, any Controlled Subsidiary, or the Company’s stockholders (as the case may be) that is based on the future outcome or performance of the Company or any Controlled Subsidiary in the form of an earn-out according to the terms of the Change of Control. Upon any release from escrow and/or any payment of an earn-out, the Company shall make the Change of Control Payments attributable to such amounts upon the same payment schedule and under the same terms and conditions as apply to the corresponding payments to the Company, any Controlled Subsidiary, or the Company’s stockholders (as the case may be) and in compliance with Section 409A of the Code.

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In the Amended Plan, the definition of “Change of Control” was revised to mean the occurrence of any one of the following events:

(a)

a merger or consolidation in which:

(i)

the Company is a constituent party, or

(ii)

more than fifty percent (50%) owned subsidiary of the Company, measured by the total fair market value and the total voting power of the outstanding shares of the capital stock of such subsidiary (a “Controlled Subsidiary”) is a constituent party, where any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), acquires ownership of the stock of the Company or Controlled Subsidiary that, together with the stock then held by such Person or Group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company or Controlled Subsidiary (determined on a fully diluted basis assuming the exercise, conversion or exchange of all exercisable, convertible or exchangeable securities, respectively).  However, if any one Person or more than one Person Acting as a Group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same Person or Persons is not considered to cause a Change of Control.

(b)

the sale, lease, transfer, exclusive license or other disposition by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole to any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), in a single transaction or in a series of related transactions during the twelve (12) month period ending on the date of the most recent disposition to such Person or Persons, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company; or

(c)

the sale, exchange or transfer to any one Person, or more than one Person Acting as a Group, other than Excluded Person(s), in a single transaction or in a series of related transactions during the twelve (12) month period ending on the date of the most recent transfer to such Person or Persons, of at least a majority, by voting power (determined on a fully diluted basis, assuming the exercise, conversion or exchange of all exercisable, convertible or exchangeable securities, respectively), of the outstanding shares of capital stock of the Company.

Under the Original Plan a termination of employment of a Participant did not affect such Participant’s ability to receive a Change of Control Payment.  Under the Amended Plan, in the event that a Participant is terminated by the Company for Cause or resigns without Good Reason, such Participant’s eligibility immediately terminates.

Additionally, a Participant’s termination without Cause or Resignation for Good Reason prior to or after a Change of Control will not affect the eligibility of such Participant or his or her Beneficiary to receive a Change of Control Payment; provided, however, that, (x) in the event of a Participant’s termination without Cause or Resignation for Good Reason after the Effective Date but on or before June 30, 2015, then, for purposes of the definition of Change of Control Payment, the percentage applicable to such Participant shall be as set forth in Column B of Appendix B of the Amended Plan; and (y) in the event of a Participant’s termination without Cause or Resignation for Good Reason after June 30, 2015 but on or before December 31, 2015, the percentage applicable to such Participant shall be as set forth in Column C of Appendix B of the Amended Plan.

Termination for Cause is defined as the termination by the Company or any affiliate of any Participant’s employment with the Company or any affiliate for any of the following reasons: (a) the Participant’s conviction or entry of a plea of nolo contendere to any felony or a crime involving moral turpitude, fraud or embezzlement of the property of the Company or any affiliate; or (b) the Participant’s dishonesty, gross negligence or gross misconduct that is materially injurious to the Company or any affiliate or material breach of his duties to the Company or any affiliate, which has not been cured by the Participant within 10 days (or longer period as is reasonably required to cure such breach, negligence or misconduct) after he shall have received written notice from the Company or such affiliate stating with reasonable specificity the nature of such breach; or (c) the Participant’s illegal use or abuse of drugs, alcohol, or other related substances that is materially injurious to the Company or any affiliate.

Resignation for Good Reason is defined as the voluntary resignation of a Participant’s employment with the Company or any affiliate for any of the following reasons: (a) a “material diminution” (as such term is used in Section 409A of the Code) of the duties assigned to Participant; or (b) a material reduction in the Participant’s base salary or other benefits (other than a reduction or change in benefits generally applicable to all executive employees of the Company and its affiliates); or (c) relocation by the Company or any affiliate of any Participant who is an employee of the Company to an office more than 50 miles outside the Participant’s current workplace. However,

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resignation by a Participant shall be not deemed to be a Resignation for Good Reason unless (i) the Participant reports the event or condition to the Board, in writing, within 45 days of such event or condition occurring and (ii) within 30 days after the Participant provides such written notice, the Company or the appropriate affiliate.

The Change in Control Payments will be payable to Participants, or their respective beneficiaries, in cash, no later than 30 days after the Net Proceeds are received by the Company.

The Original Plan stated that any termination or amendment of the Original Plan that imposed additional obligations on, or impaired the rights of, a Participant would not be effective without the written consent of the Participant.  The Amended Plan states that any termination or amendment to the Plan that imposes additional obligations on, or impairs the rights of, a Participant shall not be effective without the Participant’s written consent unless such termination or amendment shall apply with the same force and effect to all of the Participants, in which case no consent of the Participants, or of any individual Participant, shall be required.

The applicable percentage of Net Proceeds to be received by each Participant is set forth below and in Appendix B of the Amended Plan.  As described above, the Change in Control Payment to which a Participant will be entitled based upon the applicable percentage below will be reduced by any consideration that the Participant receives as a result of the At-Risk Options.

On August 26, 2016, by Written Consent of the Board of Directors, Messrs. Hacene Boudries, Andrew Anderson and Michael Moody were added as Participants in the Change in Control Plan.

PARTICIPANTS AND CHANGE IN CONTROL PERCENTAGES

______________________________________

*Applicable percentage received by a Participant in the event of Participant’s termination without Cause or Resignation for Good Reason after the Effective Date but on or before June 30, 2015.

**Applicable percentage received by a Participant in the event of Participant’s termination without Cause or Resignation for Good Reason after June 30, 2015 but on or before December 31, 2015.

The applicable percentage of Net Proceeds to be received by each Participant set forth in Column A above were fully vested as of June 30, 2016.

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Outstanding Equity Awards at 2016 Fiscal Year-End

The following table provides information regarding outstanding stock options held by each Named Executive Officer as of June 30, 2016.

(1)

Exercisable in two equal annual installments commencing on September 7, 2012.

(2)

Exercisable in full upon the later of (i) the addition of the Company’s QS-B220 Product to the Transportation Security Administration (“TSA”) Qualified Product List for passenger checkpoint screening and (ii) the receipt of an initial order for such products under an indefinite delivery/indefinite quantity contract with the TSA.

(3)

Exercisable on April 1, 2012.

(4)

Options vest one-third upon the last to occur of (i) addition of the Company’s QS-B220 Product to the Transportation Security Administration (“TSA”) Qualified Product List for passenger checkpoint screening, (ii) the execution of an indefinite delivery/indefinite quantity contract with the TSA, and (iii) receipt of orders under that contract. The remaining options will vest in two equal installments on the first and second anniversary of the initial vesting date. We achieved the three criteria established for the July 2, 2014 option grant and, as such, the initial one-third vested on November 10, 2014.

(5)

Options vest in three equal annual installments commencing on the August 15, 2016.

(6)

Exercisable on June 26, 2009.

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2016 Option Exercises and Stock Vested

During the year ended June 30, 2016, there were no exercises of option awards by any of the Named Executive Officers.  

Directors’ Compensation

The following table sets forth the annual compensation of our non-employee directors for the fiscal year ended June 30, 2016, which consists of annual cash retainers, board and committee meeting fees and equity awards in the form of options pursuant to the 2014 Stock Option Plan.  

(1)

The amount reported in this column for the non-employee director represents the dollar amount recognized for financial statement reporting purposes in fiscal 2016, with respect to options granted to non-employee directors, determined in accordance with Statement of Accounting Standards Codification 718-10-25 Compensation – Stock Compensation. See Note 2 of Notes to Consolidated Financial Statements set forth in this Annual Report on Form 10-K for the assumptions used in determining the value of such awards.

Grants of Plan-Based Awards to Non-Employee Directors

The following table sets forth the individual grants of plan-based awards to our non-employee directors in fiscal year ended June 30, 2016.

(1)

Options vested on July 1, 2015.

Additional Information to Understand the Director Compensation Table

Fees paid to our non-employee directors in connection with their service as directors, during the fiscal year ended June 30, 2016, were as follows: $30,000 annual retainer to each director; $1,000 for each Board of Directors meeting attended; $750 for each committee meeting attended; and $500 for each Board of Directors meeting or committee meeting in which the director participates by telephone conference call.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information related to securities authorized for issuance under equity compensation plans as of the end of fiscal 2016 is included in Item 5 of Part II of our Annual Report on Form 10-K for the year ended June 30, 2016.

The following table sets forth the beneficial ownership of shares of our common stock, as of September 30, 2016, of (i) each person known by us to beneficially own 5% or more of such shares; (ii) each of our directors and executive officers named in the Summary Compensation Table; and (iii) all of our current executive officers, directors, and significant employees as a group.  Except as otherwise indicated, all shares are beneficially owned, and the persons named as owners hold investment and voting power.

Beneficial ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934.  Under this rule, certain shares may be deemed to be beneficially owned by more than one person, if, for

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example, persons share the power to vote or the power to dispose of the shares.  In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire shares, for example, upon exercise of an option or warrant, or conversion of a security, within 60 days of September 30, 2016.  In computing the percentage ownership of any person, the amount of shares is deemed to include the amount of shares beneficially owned by such person, and only such person, by reason of such acquisition rights.

As a result, the percentage of outstanding shares of any person as shown in the following table does not necessarily reflect the person’s actual voting power at any particular date.

*

Less than 1%.

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Item 13.

  Certain Relationships and Related Transactions, and Director Independence

Transactions with related parties, including, but not limited to, members of the Board of Directors, are reviewed and approved by all members of the Board of Directors.  In the event a transaction with a member of the Board is contemplated, the Director having a beneficial interest in the transaction is not permitted to participate in the decision-making and approval process.  The policies and procedures surrounding the review, approval or ratification of related party transactions are not in writing, nevertheless, such reviews, approvals and ratifications of related party transactions are documented in the minutes of the meetings of the Board of Directors and any such transactions are committed to writing between the related party and the Company in an executed engagement agreement.

In April 2011, we entered into an advisory and consulting agreement with Robert Liscouski, a member of our Board of Directors and President, to assist our U.S. government sales and marketing team with our efforts to advance our interests with the U.S. government.  During the years ended June 30, 2016 and 2015, Mr. Liscouski was paid $0 and $105,000, respectively. As of June 30, 2016, we had no obligation to Mr. Liscouski.

On August 15, 2014, August 29, 2014, September 18, 2014 and October 2, 2014, Roger Deschenes, our Chief Financial Officer, advanced $100,000, $125,000, $125,000 and $100,000, respectively, for general working capital purposes, of which $450,000 of principal and $12,000 of interest has been repaid to Mr. Deschenes during the year ended June 30, 2015. The advances were payable on demand and bore interest at 15%. As of June 30, 2016 our obligation to Mr. Deschenes was $0.

Review, Approval or Ratification of Transactions with Related Persons

Our Audit Committee, among other duties, is charged to review, and if appropriate, ratify all agreements and transactions which had been entered into with related parties, as well as review and ratify all future related party transactions.

Independence of the Board of Directors

The Board of Directors has adopted director independence guidelines that are consistent with the definitions of “independence” as set forth in Section 301 of the Sarbanes-Oxley Act of 2002 and Rule 10A-3 under the Securities Exchange Act.  In accordance with these guidelines, the Board of Directors has reviewed and considered facts and circumstances relevant to the independence of each of our directors and director nominees and has determined that, each of the Company’s non-management directors qualifies as “independent.”

Item 14.

Principal Accounting Fees and Services

Pre-Approval Policies and Procedures

The Audit Committee has the authority to approve all audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm.  Generally, the Company may not engage its independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee (or a properly delegated subcommittee thereof).  All Audit-related fees, Tax fees and All other fees were approved by the Audit Committee.

The Audit Committee of our Board of Directors appointed Marcum LLP (“Marcum”) as our independent registered public accounting firm effective April 2010. Marcum acts as our principal independent registered public accounting firm.

The following is a summary of the fees billed to us by Marcum for professional services rendered for the fiscal years ended June 30, 2016 and 2015 and fees billed to us by Romito, Tomasetti & Associates, P.C. for tax compliance services.  The Audit Committee considered and discussed with Marcum the provision of non-audit services to us and the compatibility of providing such services with maintaining their independence as our auditors.

Audit Fees.  Consist of fees billed for professional services rendered for the audit of our annual financial statements, review and audit of internal controls to ascertain compliance with the Sarbanes-Oxley Act, review of

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financial statements included in our quarterly reports and other professional services provided in connection with statutory and regulatory filings.

Audit-Related Fees. Consist of fees billed for assurance and related services that related to the performance of the audit or review of our financial statements and are not otherwise reported under “Audit Fees”.

Tax Fees. Consist of fees billed for professional services for tax compliance, tax advice, and tax planning.  These services include assistance regarding federal and state tax compliance and acquisitions.

Pre-Approval Policies and Procedures.  The Audit Committee has the authority to approve all audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm.  Generally, the Company may not engage its independent registered public accounting firm to render audit or non-audit services unless the service is specifically approved in advance by the Audit Committee (or a properly delegated subcommittee thereof).  All Audit-related fees, Tax fees and All other fees were approved by the Audit Committee.

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PART IV

Item 15.

Exhibits, Financial Statement Schedules

The following are filed as part of this Form 10-K/A:

(1)

Not applicable

(2)

Exhibits

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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