U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2015

 

¨

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______.

 

 

Commission file number: 000-27503

 

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

 

 

Delaware	22-1734088
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
313 Washington Street, Suite 403, Newton, MA	02458
(Address of principal executive offices)	(Zip Code)

 

 

Registrant’s telephone number, including area code: (617) 668-6855

 

 

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 past 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 ¨

 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 ¨

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

	Large accelerated filer¨	Accelerated filer ¨
	Non-accelerated filer ¨	Smaller reporting company x

 

 

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

 

As of February 5, 2016 there were 16,730,231 shares of common stock, par value $.0005 per share, outstanding.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

 

INDEX

 

	Page
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2015 AND SEPTEMBER 30, 2015	3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014	5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2015	6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014	7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 4.  Controls and Procedures	23
Item 5.  Other Information	23
PART II.  OTHER INFORMATION	24
Item 1A.  Risk Factors	24
Item 6. Exhibits	24
Signatures	24

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		December 31,				September 30,
		2015				2015
ASSETS
Current Assets
Cash and cash equivalents		$	1,101,000			$	1,295,000
Accounts receivable, net of allowances of $168,000 at December 31, 2015 and September 30, 2015, respectively			4,444,000				3,382,000
Costs in excess of billings and unbilled receivables			1,288,000				1,518,000
Inventories, net of reserves			3,252,000				3,066,000
Prepaid expenses and other current assets			1,152,000				1,125,000
Total current assets			11,237,000				10,386,000
Property, Plant and Equipment, net			7,048,000				6,662,000
Other Assets
Intangibles, net			1,197,000				1,225,000
Goodwill			6,094,000				6,131,000
Security deposits			60,000				58,000
Total other assets			7,351,000				7,414,000
Total Assets		$	25,636,000			$	24,462,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt		$	2,503,000			$	1,567,000
Capital lease obligations, current			89,000				76,000
Convertible notes			2,540,000				2,123,000
Accounts payable			1,901,000				1,886,000
Deferred revenue			245,000				109,000
Accrued expenses and other liabilities			2,342,000				2,650,000
Total current liabilities			9,620,000				8,411,000
Long-term Liabilities
Long-term debt, net of current portion			1,129,000				1,288,000
Capital lease obligations, net of current portion			118,000				43,000
Deferred tax liability			214,000				242,000
Other long-term liabilities			49,000				50,000
Total long-term liabilities			1,510,000				1,623,000

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

 

		December 31,				September 30,
		2015				2015
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,458,249 and 17,368,738 shares issued, 16,648,089 and and 16,558,578 shares outstanding at December 31, 2015 and September 30, 2015, respectively.			9,000				9,000
Additional paid in capital			19,773,000				19,650,000
Accumulated other comprehensive income (loss)			(4,000	)			110,000
Accumulated deficit			(4,061,000	)			(4,167,000	)
Less 810,160 shares of treasury stock - at cost			(986,000	)			(986,000	)
Total Dynasil stockholders' equity			14,731,000				14,616,000
Noncontrolling interest			(225,000	)			(188,000	)
Total stockholders' equity			14,506,000				14,428,000
Total Liabilities and Stockholders' Equity		$	25,636,000			$	24,462,000

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

		Three Months Ended
		December 31,
		2015				2014
Net revenue		$	11,204,000			$	9,611,000
Cost of revenue			7,239,000				6,018,000
Gross profit			3,965,000				3,593,000
Operating expenses:
Sales and marketing			341,000				365,000
Research and development			491,000				375,000
General and administrative			2,973,000				3,467,000
Gain on sale of assets			(4,000	)			(185,000	)
Total operating expenses			3,801,000				4,022,000
Income (loss) from operations			164,000				(429,000	)
Interest expense, net			59,000				125,000
Income (loss) before taxes			105,000				(554,000	)
Income tax (credit)			36,000				3,000
Net income (loss)			69,000				(557,000	)
Less: Net loss attributable to noncontrolling interest			(37,000	)			(24,000	)
Net income (loss) attributable to common stockholders		$	106,000			$	(533,000	)
Net income (loss)		$	69,000			$	(557,000	)
Other comprehensive income (loss):
Increase (decrease) in pension liability			-				318,000
Foreign currency translation			(114,000	)			(194,000	)
Total comprehensive loss		$	(45,000	)		$	(433,000	)
Basic net income (loss) per common share		$	0.01			$	(0.03	)
Diluted net income (loss) per common share		$	0.01			$	(0.03	)
Weighted average shares outstanding
Basic			16,551,197				16,300,902
Diluted			16,578,634				16,300,902

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

										Additional				Other																				Total
		Common				Common				Paid-in				Comprehensive				Accumulated				Treasury Stock								Noncontrolling				Stockholders'
		Shares				Amount				Capital				Income				Deficit				Shares				Amount				Interest				Equity
Balance, September 30, 2015			17,368,738			$	9,000			$	19,650,000			$	110,000			$	(4,167,000	)			810,160			$	(986,000	)		$	(188,000	)		$	14,428,000
Issuance of shares of common stock  under employee stock purchase plan			2,295				-				4,000				-				-				-				-				-				4,000
Stock-based compensation costs			87,216				-				119,000				-				-				-				-				-				119,000
Foreign currency translation adjustment			-				-				-				(114,000	)			-				-				-				-				(114,000	)
Net income (loss)			-				-				-				-				106,000				-				-				(37,000	)			69,000
Balance, December 31, 2015			17,458,249			$	9,000			$	19,773,000			$	(4,000	)		$	(4,061,000	)			810,160			$	(986,000	)		$	(225,000	)		$	14,506,000

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		Three Months Ended
		December 31,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	69,000			$	(557,000	)
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense			119,000				65,000
Foreign exchange loss (gain)			26,000				(23,000	)
Gain on sale of assets			(4,000	)			(185,000	)
Depreciation and amortization			325,000				293,000
Pension expense			-				318,000
Other			16,000				(35,000	)
Other changes in assets and libilities:
Accounts receivable, net			(1,101,000	)			(79,000	)
Inventories			(218,000	)			12,000
Costs in excess of billings and unbilled receivables			231,000				(56,000	)
Prepaid expenses and other assets			(32,000	)			(469,000	)
Accounts payable			34,000				(360,000	)
Accrued expenses and other liabilities			(303,000	)			(438,000	)
Deferred revenue			136,000				(76,000	)
Net cash from operating activities			(702,000	)			(1,590,000	)
Cash flows from investing activities:
Proceeds from sale of assets			4,000				244,000
Purchases of property, plant and equipment			(603,000	)			(244,000	)
Net cash from investing activities			(599,000	)			-
Cash flows from financing activities:
Proceeds from issuance of common stock			4,000				3,000
Net proceeds from issuance of convertible notes			390,000				18,000
Principal payments on capital leases			(46,000	)			(33,000	)
Proceeds from short and long-term debt			5,037,000				300,000
Payments on long-term debt			(4,264,000	)			(19,000	)
Net cash from financing activities			1,121,000				269,000
Effect of exchange rates on cash and cash equivalents			(14,000	)			(17,000	)
Net change in cash and cash equivalents			(194,000	)			(1,338,000	)
Cash and cash equivalents, beginning		$	1,295,000			$	3,842,000
Cash and cash equivalents, ending		$	1,101,000			$	2,504,000
Supplemental disclosures of cash flow information:
Non cash activities:
Assets purchased under capital leases		$	134,000			$	73,000

 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2015, the consolidated statements of operations and comprehensive income (loss) for the three months ended December 31, 2015 and 2014, changes in stockholders’ equity for the three months ended December 31, 2015 and cash flows for the three months ended December 31, 2015 and 2014 of Dynasil Corporation of America and subsidiaries (the “Company”), and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net loss or stockholders’ deficit. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.

 

The preparation of our unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2015 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

 

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of December 31, 2015, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.

 

 

Note 2 – Adoption of Accounting Pronouncements

 

Effective October 1, 2015, the Company early adopted the guidance issued in Accounting Standards Update 2015-03, Interest – Imputation of Interest (Topic 835) (“ASU 2015-03”) to simplify the presentation of debt issuance costs. This standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company adopted this guidance on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. As a result of the adoption of ASU 2015-03, $12,000 of debt issuance costs at October 1, 2015 were reclassified from deferred financing costs, net to long-term debt in the consolidated balance sheets.

 

Effective for the reporting period beginning October 1, 2015, the Company early adopted the guidance issued in Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”) which simplifies the presentation of deferred income taxes. ASU 2015-17 concludes that deferred tax liabilities and assets should be classified as noncurrent in a classified statement of financial position. The Company adopted this guidance on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. The adoption of this ASU did not have a material impact on the Company’s financial statements.

 

 

Note 3 – Acquisitions and Divestitures

 

In the three months ended December 31, 2014, the Company recorded a gain of $0.2 million in connection with the sale of a product line in its Optics segment.

 

 

Note 4 – Xcede Technologies, Inc. Joint Venture

 

In October, 2013, the Company formed Xcede Technologies, Inc. (“Xcede”), a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its tissue sealant technology, which formerly comprised the majority of its biomedical segment. Xcede has raised approximately $2.4 million in external funding in the form of Convertible Notes (the “Notes”) to outside investors and to certain officers and directors of the Company. The Notes accrue interest at 5% and, as amended, are due after June 30, 2016, upon the demand of the holders of a majority of the aggregate outstanding principal amount of the Notes.

 

Upon the closing of a capital stock financing raising at least $3.0 million, inclusive of the Notes and interest, the outstanding principal amount of the Notes plus all accrued interest will be converted into shares of the same capital stock sold in the financing at a 20% discount to the price per share of that capital stock. Alternatively, at any time prior to a capital stock financing the Note holders can convert, at their option, the principal amount of the Notes plus accrued interest into common stock based on a $5 million valuation.

 

Xcede’s common stock is 90% owned by Dynasil Biomedical and, as a result, is included in the Company’s consolidated balance sheets, results of operations and cash flows. The Company expects Xcede to require significant additional funding prior to commencing human trials.

 

On January 6, 2016, Xcede announced that it has signed three agreements with Cook Biotech Inc. of West Lafayette, IN including a Development Agreement, a License Agreement and a Supply Agreement in connection with the development, regulatory approval and production of Xcede’s resorbable hemostatic patch.

 

 

Note 5 - Inventories

 

Inventories, net of reserves, consists of the following:

 

		December 31,				September 30,
		2015				2015
Raw Materials		$	1,883,000			$	1,828,000
Work-in-Process			847,000				862,000
Finished Goods			522,000				376,000
		$	3,252,000			$	3,066,000

 

 

Note 6 – Intangible Assets

 

Intangible assets at December 31, 2015 and September 30, 2015 consist of the following:

 

		Useful		Gross				Accumulated
December 31, 2015		Life (years)		Amount				Amortization				Net
Acquired Customer Base		5 to 15		$	807,000			$	473,000			$	334,000
Know How		15			512,000				256,000				256,000
Trade Names		Indefinite			310,000				-				310,000
Patents		20			254,000				2,000				252,000
Biomedical Technologies		5			260,000				215,000				45,000
				$	2,143,000			$	946,000			$	1,197,000

 

		Useful		Gross				Accumulated
September 30, 2015		Life (years)		Amount				Amortization				Net
Acquired Customer Base		5 to 15		$	824,000			$	464,000			$	360,000
Know How		15			512,000				248,000				264,000
Trade Names		Indefinite			318,000				-				318,000
Patents		20			223,000				-				223,000
Biomedical Technologies		5			260,000				200,000				60,000
				$	2,137,000			$	912,000			$	1,225,000

 

Amortization expense for the three months ended December 31, 2015 and 2014 was $44,000 and $43,000, respectively.

 

Estimated amortization expense for each of the next five fiscal years and thereafter is as follows:

 

		2016 (9 months)				2017				2018				2019				2020				Thereafter				Total
Acquired Customer Base		$	60,000			$	80,000			$	80,000			$	80,000			$	34,000			$	-			$	334,000
Know How			26,000				34,000				34,000				34,000				34,000				94,000				256,000
Patents			5,000				6,000				6,000				6,000				6,000				61,000				90,000
Biomedical Technologies			45,000				-				-				-				-				-				45,000
		$	136,000			$	120,000			$	120,000			$	120,000			$	74,000			$	155,000			$	725,000

 

 

Note 7 – Goodwill

 

Goodwill is subject to an annual impairment test. The Company considers many factors which may indicate the requirement to perform additional, interim impairment tests. These include:

 

·

A significant adverse long term outlook for any of its industries;

·

An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

·

Failure of an anticipated commercialization of a product or product line;

·

Unanticipated competition or the introduction of a disruptive technology;

·

The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

·

A loss of key personnel; and

·

An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

 

There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of goodwill during the three months ended December 31, 2015.

 

 

Note 8 – Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share is computed by dividing the net income or loss attributable to common shares by the weighted average number of common shares. Diluted earnings per common share adjusts basic earnings per share for the effects of common stock options, common stock warrants, convertible preferred stock and other potential dilutive common shares outstanding during the periods.

 

 

For purposes of computing diluted earnings per share for the three months ended December 31, 2015, no common stock options were included in the calculation of dilutive shares as all of the 58,212 common stock options outstanding had exercise prices above the applicable quarterly average market price per share and their inclusion would be anti-dilutive. For the three months ended December 31, 2014, no common share equivalents related to stock options were included in the calculation of dilutive shares, since there was a loss from continuing operations and the inclusion of common share equivalents would be anti-dilutive.

 

For the three months ended December 31, 2015, 27,437 shares of common stock related to restricted stock were included in the denominator used to calculate diluted earnings per share. For the three months ended December 31, 2014, no common share equivalents related to restricted stock were included in the calculation of dilutive shares, since there was a loss from continuing operations and the inclusion of common share equivalents would be anti-dilutive.

 

The computation of the weighted shares outstanding for the three months ended December 31 is as follows:

 

		December 31, 2015				December 31, 2014
Weighted average shares outstanding
Basic			16,551,197				16,300,902
Effect of dilutive securities
Stock Options			-				-
Restricted Stock			27,437				-
Dilutive Average Shares Outstanding			16,578,634				16,300,902

 

 

Note 9 - Stock Based Compensation

 

The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model.

 

The expected volatility was determined with reference to the historical volatility of the Company's stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that the options granted are expected to be outstanding. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate in effect at the time of grant. The dividend yield is expected to be zero because historically the Company has not paid dividends on common stock.

 

The Company’s Xcede joint venture adopted an Equity Incentive Plan in 2013 which provides for, among other incentives, the granting to officers, directors, employees and consultants options to purchase shares in Xcede’s common stock. The options granted generally vest over a 3 year period. The fair value of the stock options granted is estimated at the date of grant using the Black-Scholes option pricing model using assumptions generally consistent with those used for Company stock options. Because Xcede is not publicly traded, the expected volatility is estimated with reference to the average historical volatility of a group of publicly traded companies that are believed to have similar characteristics to Xcede.

 

 

Stock Compensation Expense for the three months ended December 31, 2015 and 2014 is as follows:

 

		Three Months Ended				Three Months Ended
Stock Compensation Expense		December 31, 2015				December 31, 2014
Stock Grants		$	83,000			$	57,000
Restricted Stock Grants			8,000				7,000
Option Grants			6,000				-
Employee Stock Purchase Plan			1,000				1,000
Subsidiary Option Grants			21,000				-
Total		$	119,000			$	65,000

 

At December 31, 2015 there was approximately $86,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of eighteen months.

 

Restricted Stock Grants

 

A summary of restricted stock activity for the three months ended December 31, 2015 is presented below:

 

Restricted Stock Activity for the Three Months ended December 31, 2015		Shares				Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2015			27,000			$	1.04
Granted			40,000				1.70
Vested			-				-
Cancelled			-				-
Nonvested at December 31, 2015			67,000			$	1.43

 

Stock Option Grants

 

During the three months ended December 31, 2015, no Dynasil stock options were granted. A summary of stock option activity for the three months ended December 31, 2015 is presented below:

 

		Options Outstanding				Weighted Average Exercise Price per Share				Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2015			58,212			$	2.28				1.96
Outstanding and exercisable at September 30, 2015			58,212			$	2.28				1.96
Granted			-				-
Exercised			-				-
Cancelled			-				-
Balance at December 31, 2015			58,212			$	2.28				1.71
Outstanding and exercisable at December 31, 2015			58,212			$	2.28				1.71

 

 

Subsidiary Stock Option Grants

 

During the three months ended December 31, 2015, 75,000 Xcede stock options were granted at an exercise price of $1.00 per share. These options vest over the next three years and expire ten years from the grant date. The weighted average assumptions for grants during the three months ended December 31, 2015 used in the Black-Scholes option pricing model were as follows:

 

Expected term in years			10 years
Risk-free interest rate			2.05	%
Expected volatility			82.42	%
Expected dividend yield			0.00	%

 

A summary of Xcede stock option activity for the three months ended December 31, 2015 is presented below:

 

		Options Outstanding				Weighted Average Exercise Price per Share				Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2015			780,258			$	1.00				8.85
Outstanding and exercisable at September 30, 2015			180,293			$	1.00				8.50
Granted			75,000			$	1.00
Exercised			-				-
Cancelled			(35,000	)		$	1.00
Balance at December 31, 2015			820,258			$	1.00				8.70
Outstanding and exercisable at December 31, 2015			201,512			$	1.00				8.21

 

At December 31, 2015, the Company’s Xcede joint venture had $195,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of nineteen months and $82,000 of unrecognized stock compensation expense that begin to vest upon the attainment of specific capital raising targets.

 

 

Note 10 – Segment, Customer and Geographical Reporting

 

Segment Financial Information

 

Dynasil’s business is comprised of three segments: optics (“Optics”), contract research (“Contract Research”) and biomedical (“Biomedical”). The Company’s Instruments segment was substantially disposed of in the first quarter of fiscal 2014, has had no subsequent operations and had no remaining assets as of December 31, 2015. Consequently, it is no longer reported as a separate segment. At December 31, 2014, the Company had approximately $0.3 million of assets related to the businesses formerly comprising the Instruments segment.

 

Within these segments, there is a segregation of reportable units based upon the organizational structure used to evaluate performance and make decisions on resource allocation, as well as availability and materiality of separate financial results consistent with that structure. The Optics segment manufactures optical materials, components and coatings. The Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment, through Xcede Technologies, Inc., a majority owned, joint venture, is focused on developing a tissue sealant technology though no assurance can be given that this technology will become successfully commercialized.

 

 

The Company’s segment information for the three months ended December 31, 2015 and 2014 is summarized below:

 

Results of Operations for the Three Months Ended December 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	6,214,000			$	4,990,000			$	-			$	11,204,000
Gross Profit			2,110,000				1,855,000				-				3,965,000
GM %			34.0	%			37.2	%			-				35.4	%
SG&A			1,751,000				1,706,000				348,000				3,805,000
Gain on sale of assets			4,000				-				-				4,000
Operating Income (Loss)			363,000				149,000				(348,000	)			164,000
Depreciation and Amortization			228,000				80,000				17,000				325,000
Capital expenditures			565,000				7,000				31,000				603,000
Intangibles, Net			644,000				256,000				297,000				1,197,000
Goodwill			1,155,000				4,939,000				-				6,094,000
Total Assets		$	16,506,000			$	8,273,000			$	857,000			$	25,636,000

 

Results of Operations for the Three Months Ended December 31,
2014
		Optics				Contract Research				Biomedical				Total
Revenue		$	4,948,000			$	4,663,000			$	-			$	9,611,000
Gross Profit			1,495,000				2,098,000				-				3,593,000
GM %			30.2	%			45.0	%			-				37.4	%
SG&A			2,091,000				1,881,000				235,000				4,207,000
Gain on sale of assets			185,000				-				-				185,000
Operating Income (Loss)			(410,000	)			216,000				(235,000	)			(429,000	)
Depreciation and Amortization			204,000				74,000				15,000				293,000
Capital expenditures			244,000				-				-				244,000
Intangibles, Net			752,000				290,000				229,000				1,271,000
Goodwill			1,232,000				4,939,000				-				6,171,000
Total Assets		$	15,419,000			$	9,036,000			$	922,000			$	25,377,000

 

Customer Financial Information

 

For the three months ended December 31, 2015, one customer in the Optics segment represented more than 10% of the total segment revenue. For the three months ended December 31, 2014, the single largest customer in the Optics segment made up 21% and 9%, respectively of the total segment revenue.

 

For the three months ended December 31, 2015, five customers of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three months ended December 31, 2015 and 2014, these customers made up 76% and 74%, respectively, of Contract Research revenue.

 

Geographic Financial Information

 

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended December 31, 2015 and 2014 are as follows:

 

 

		Three Months Ended								Three Months Ended
		December 31, 2015								December 31, 2014
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States		$	8,235,000				74	%		$	7,682,000				80	%
Europe			2,041,000				18	%			884,000				9	%
Other			928,000				8	%			1,045,000				11	%
		$	11,204,000				100	%		$	9,611,000				100	%

 

 

Note 11 - Income Taxes

 

Dynasil Corporation of America and its wholly-owned U.S. subsidiaries file a consolidated federal income tax return and various state returns. The Company’s U.K. subsidiary files tax returns in the U.K.

 

The Company uses the asset and liability approach to account for income taxes. Under this approach, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and net operating loss and tax credit carry forwards. The amount of deferred taxes on these temporary differences is determined using the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, as applicable, based on tax rates, and tax laws, in the respective tax jurisdiction then in effect.

 

In assessing the ability to realize the net deferred tax assets, management considers various factors including taxable income in carryback years, future reversals of existing taxable temporary differences, tax planning strategies and projections of future taxable income, to determine whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of these assets is sufficient to warrant the need for a full valuation allowance against its U.S. net deferred tax assets.

 

The Company applies the authoritative provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being reached upon ultimate settlement with the relevant tax authority. As of December 31, 2015 and September 30, 2015, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of December 31, 2015 and September 30, 2015, the Company had no accrued interest or penalties related to uncertain tax positions. The Company currently has no federal or state tax examinations in progress.

 

The effective tax rates were 25% and (0.57%) for the three months ended December 31, 2015 and 2014, respectively. The rates differ from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation allowance against the Company’s U.S. deferred tax asset.

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions for the tax years beginning with 2012 are still subject to examination.

 

 

Note 12 – Settlement of Pension Liability

 

On December 1, 2014, the Company terminated and settled its pension liability with each of the remaining participants in the EMF Defined Benefit Plan (the “Plan”). The Plan had been frozen since 2006. The total benefit payments made upon termination were $675,000 and the actual plan assets at the date of termination were $320,000. The Company funded and expensed the $355,000 difference upon settlement of the Plan.

 

 

Note 13 – Subsequent Events

 

On February 1, 2016, the Company entered into a $2,000,000 Term Note with Middlesex Savings Bank, as per the terms of the Loan Document Modification Agreement, dated September 29, 2015, as detailed in the Company’s Annual Report on Form 10-K, filed on December 17, 2015. The Company converted $2,000,000 of outstanding advances under the Company’s Middlesex Bank Line of Credit Note to a new five-year term note bearing interest at the fixed annual rate of 4.5%. Immediately following this conversion, the total availability under the Company’s line of credit increased by $2 million to $3,819,000.

 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto contained herein and in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2015.

 

General Business Overview

 

Operations

 

Revenue for the first quarter of fiscal year 2016, which ended December 31, 2015, was $11.2 million, an increase of 17%, compared with revenue of $9.6 million for the quarter ended December 31, 2014. The increase is largely attributable to a $1.3 million increase in revenue from the Optics segment and a $0.3 million increase in revenue from the Contract Research segment.

 

Cost of revenue for the first quarter of 2016 was $7.2 million, an increase of 20% compared with $6.0 million for the quarter ended December 31, 2014 as a result of a $0.6 million increase in the cost of revenue associated with the Optics segment and a $0.6 million increase in the cost of revenue associated with the Contract Research segment.

 

Total operating expenses were $3.8 million for the three month periods ended December 31, 2015 as compared to $4.0 million for the same period in fiscal 2014. Total operating expenses for the first quarter of fiscal year 2014 included a $0.4 million pension charge.

 

Income from operations for the quarter ended December 31, 2015 was $0.2 million compared with a loss of ($0.4) million for the quarter ended December 31, 2014.

 

Net income was $0.1 million, or $0.01 per share, for the quarter ended December 31, 2015, compared with a loss of approximately ($0.5) million for the same quarter last year. The loss in the first quarter of last year included a $0.4 million pension charge partially offset by a $0.2 million gain on the sale of a product line in the Optics segment.

 

Our Biomedical segment primarily consists of the results of our majority owned joint venture, Xcede. Xcede incurred over $1 million in research expenses last year and over $0.3 million in the current quarter as Xcede continues to develop a tissue sealant technology. We expect to incur similar or increasing amounts each quarter in fiscal 2016. We are currently funding these research expenses through cash raised from the issuance of Xcede convertible notes to outside investors and to certain officers and directors of the Company. Xcede raised approximately $400,000 in the first quarter of 2016 and management is continuing to pursue various financing alternatives to fund these research expenses.

 

The Company’s Instruments segment was substantially disposed of in the first quarter of fiscal 2014, has had no subsequent operations and had no remaining assets as of December 31, 2015. Consequently, it is no longer reported as a separate segment.

 

 

Results of Operations

 

Results of Operations for the Three Months Ended December 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	6,214,000			$	4,990,000			$	-			$	11,204,000
Gross Profit			2,110,000				1,855,000				-				3,965,000
GM %			34.0	%			37.2	%			-				35.4	%
SG&A			1,751,000				1,706,000				348,000				3,805,000
Gain on sale of assets			4,000				-				-				4,000
Operating Income (Loss)			363,000				149,000				(348,000	)			164,000
Depreciation and Amortization			228,000				80,000				17,000				325,000
Capital expenditures			565,000				7,000				31,000				603,000
Intangibles, Net			644,000				256,000				297,000				1,197,000
Goodwill			1,155,000				4,939,000				-				6,094,000
Total Assets		$	16,506,000			$	8,273,000			$	857,000			$	25,636,000

 

Results of Operations for the Three Months Ended December 31,
2014
		Optics				Contract Research				Biomedical				Total
Revenue		$	4,948,000			$	4,663,000			$	-			$	9,611,000
Gross Profit			1,495,000				2,098,000				-				3,593,000
GM %			30.2	%			45.0	%			-				37.4	%
SG&A			2,091,000				1,881,000				235,000				4,207,000
Gain on sale of assets			185,000				-				-				185,000
Operating Income (Loss)			(410,000	)			216,000				(235,000	)			(429,000	)
Depreciation and Amortization			204,000				74,000				15,000				293,000
Capital expenditures			244,000				-				-				244,000
Intangibles, Net			752,000				290,000				229,000				1,271,000
Goodwill			1,232,000				4,939,000				-				6,171,000
Total Assets		$	15,419,000			$	9,036,000			$	922,000			$	25,377,000

 

Consolidated revenue for the first quarter of fiscal year 2016, which ended December 31, 2015, was $11.2 million, an increase of 17% compared with revenue of $9.6 million for the quarter ended December 31, 2014.

 

The Optics segment revenue increased approximately $1.3 million or 26% for the three months ended December 31, 2015, compared with the same period in the prior year, primarily as a result of increased sales to a large UK customer.

 

Contract Research segment revenues increased approximately $0.3 million or 7%, compared with the same period in the prior year, primarily as a result of a higher level of material purchases in connection with a research contract. The purchased materials were billed in accordance with the terms of the contract. The research backlog for the Contracts Research segment has decreased slightly to approximately $32.5 million at December 31, 2015 (of which approximately $12 million is currently funded and in process) compared to $33 million at September 30, 2015.

 

The Biomedical segment has no revenues as it is currently researching and developing a tissue sealant technology.

 

Cost of revenue for the first quarter of 2016 was $7.2 million, an increase of 20% compared with $6.0 million for the quarter ended December 31, 2014 primarily as a result of a $0.6 million increase in the cost of revenue associated with the higher revenues in the Optics segment and $0.6 million associated with the higher material costs in the Contract Research segment discussed above.

 

 

Gross profit for the three months ended December 31, 2015 was $4.0 million, or 35% of revenues, compared to $3.6 million or 37% of revenues for the three months ended December 31, 2014. Gross profit for the Optics segment increased $0.6 million to $2.1 million or 34% of revenues at December 31, 2015 compared to 30% of revenues for the quarter ended December 31, 2014 as a result of higher revenues without a corresponding increase in overhead expenses and the addition of new equipment which has improved yields on certain products. Gross profit decreased $0.2 million in the Contract Research segment as the number of direct labor hours billed decreased slightly even though direct material billed increased. Direct labor hours billed have a higher gross profit margin than direct material billings so the gross profit on the increase in direct material billed did not fully offset the gross profit associated with the lower direct labor hours billed.

 

The Biomedical segment, through Xcede, is developing a tissue sealant technology which has not been approved for commercial use and consequently has no gross profit.

 

Total operating expenses decreased to $3.8 million for the three months ended December 31, 2015 from $4.0 million for the same quarter in fiscal 2014. Operating expenses for the Contract Research segment decreased approximately $0.1 million due to cost saving measures, while operating expenses in the Optics segment decreased $0.4 million primarily due to the $0.4 million pension settlement charge recorded in the first quarter of 2014. Biomedical segment expenses increased approximately $0.1 million due to Xcede spending increases.

 

As a result of the items discussed above, income from operations for the three months ended December 31, 2015 was $0.2 million compared to a loss from operations of ($0.4) million for the same period in fiscal 2014.

 

Net interest expense was approximately $0.1 million for the three months ended December 31, 2015 and 2014.

 

Income tax expense for the three months ended December 31, 2015 consists primarily of tax expense on U.K. operations, offset by certain U.K. tax research credits.

 

Net income for the three months ended December 31, 2015 was $0.1 million, or $0.01 in basic earnings per share, compared with a loss of approximately ($0.5) million for the quarter ended December 31, 2014. The loss in the first quarter of last year included a $0.4 million pension charge partially offset by a $0.2 million gain on the sale of a product line in the Optics segment.

 

Liquidity and Capital Resources

 

Liquidity Overview and Outlook

 

Net cash as of December 31, 2015 was $1.1 million or approximately $0.2 million less than the net cash of $1.3 million at September 30, 2015.

 

As of December 31, 2015, the Company was in compliance with the terms of all its outstanding indebtedness which consisted of $2.3 million of senior debt borrowed under a revolving line of credit with Middlesex Savings Bank and $1.0 million of subordinated debt owed to Massachusetts Capital Resources Company. The Company has $1.7 million of additional availability under its Middlesex Savings Bank line of credit based on its collateral calculations as of December 31, 2015. Management believes that the cash and availability under the line of credit discussed above are adequate to meet the Company’s current liquidity requirements for the next twelve months.

 

On February 1, 2016, the Company converted $2,000,000 of outstanding advances under the Company’s Middlesex Bank Line of Credit Note to a fixed rate, five-year term note bearing interest at the annual rate of 4.5%. Immediately following this conversion, the total availability under the Company’s line of credit increased by $2 million to $3,819,000.

 

The Company’s Xcede subsidiary currently has $0.5 million of cash remaining from its convertible notes financings. Approximately $0.4 million of convertible notes were issued in the first quarter of 2016 and the Company does not currently expect to issue any more convertible notes under the current convertible notes offering memorandum. Xcede management is continuing to pursue various financing alternatives.

 

 

Management believes that Xcede has sufficient cash on hand to fund Xcede’s operations for at least the next three months.

 

Cash From Operating Activities

 

In total, including the changes in accounts receivable, prepaid expenses, accounts payable and accrued expenses, operating activities used cash of $0.7 million for the three months ended December 31, 2015. Approximately $1.3 million of the cash was used for accounts receivable and inventory increases as a result of the higher level of revenues in the Optics segment as well as normal cyclical billing and payment activity.

 

Cash From Investing and Financing Activities

 

The Company used cash of approximately $0.6 million for the purchase of property, plant and equipment for the three months ended December 31, 2015.

 

Total outstanding bank debt as of December 31, 2015 increased approximately $0.7 million to $3.6 million from $2.9 million at September 30, 2015 and Xcede convertible notes increased approximately $0.4 million to $2.5 million at December 31, 2015 from $2.1 million as of September 30, 2015. Net cash generated from financing activities during the three months ended December 31, 2015 was approximately $1.1 million for the three months ended December 31, 2015 as a result of the $0.7 million drawdown on the Middlesex Bank line of credit and include the issuance of approximately $0.4 million of Xcede convertible notes.

 

Critical Accounting Policies and Estimates

 

Effective October 1, 2015, the Company early adopted the guidance issued in Accounting Standards Update 2015-03, Interest – Imputation of Interest (Topic 835) and Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, as detailed in Note 2 to the financial statements in this Form 10-Q. There have been no other material changes in our critical accounting policies or critical accounting estimates since September 30, 2015. For further discussion of our accounting policies see the “Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2015 as well as the notes to the financial statements contained in this Form 10-Q.

 

The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

 

Revenue Recognition

 

Revenue from sales of products is recognized at the time title and the risks and rewards of ownership pass. Revenue from research and development activities is derived generally from the following types of contracts: reimbursement of costs plus fees, fixed price or time and material type contracts. Revenue is recognized when the products are shipped per customers’ instructions, the contract has been executed, the contract or sales price is fixed or determinable, delivery of services or products has occurred and the Company’s ability to collect the contract price is considered reasonably assured.

 

Government funded services revenues from cost plus contracts are recognized as costs are incurred on the basis of direct costs plus allowable indirect costs and an allocable portion of the contracts’ fixed fees. Revenue from fixed-type contracts is recognized under the percentage of completion method with estimated costs and profits included in contract revenue as work is performed. Revenues from time and materials contracts are recognized as costs are incurred at amounts generally commensurate with billing amounts. Recognition of losses on projects is taken as soon as the loss is reasonably determinable.

 

The majority of the Company’s contract research revenue is derived from the United States government and government related contracts. Such contracts have certain risks which include dependence on future appropriations and administrative allotment of funds and changes in government policies. Costs incurred under United States government contracts are subject to audit. The Company believes that the results of such audits will not have a material adverse effect on its financial position or its results of operations.

 

 

Goodwill

 

Goodwill is subject to an annual impairment test. We consider many factors which may indicate the requirement to perform additional, interim impairment tests. These include:

 

·

A significant adverse long term outlook for any of our industries;

·

An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;

·

Failure of an anticipated commercialization product line;

·

Unanticipated competition or a disruptive technology introduction;

·

The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;

·

A loss of key personnel; and

·

An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

 

Goodwill is tested by reviewing the carrying value compared to the fair value at the reporting unit level. Fair value for the reporting unit is derived using the income approach. Under the income approach, fair value is calculated based on the present value of estimated future cash flows. Assumptions by management are necessary to evaluate the impact of operating and economic changes and to estimate future cash flows. Management’s evaluation includes assumptions on future growth rates and cost of capital that are consistent with internal projections and operating plans.

 

The Company generally performs its annual impairment testing of goodwill during the fourth quarter of its fiscal year, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The Company tests impairment at the reporting unit level using the two-step process. The Company’s primary reporting units tested for impairment are Radiation Monitoring Devices, which comprises our Contract Research segment, and Hilger Crystals, a component of our Optics segment.

 

Intangible Assets

 

The Company’s intangible assets consist of acquired customer relationships and trade names of Hilger Crystals, Ltd., acquired know-how of Radiation Monitoring Devices, Inc. and purchased and patented biomedical technologies within the Biomedical segment. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 5 to 20 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the three month period ended December 31, 2015 or 2014.

 

Impairment of Long-Lived Assets

 

The Company’s long-lived assets include property, plant and equipment and intangible assets subject to amortization. The Company evaluates long-lived assets for recoverability whenever events or changes in circumstances indicate that an asset may have been impaired. In evaluating an asset for recoverability, the Company estimates the future cash flow expected to result from the use of the asset and eventual disposition. If the expected future undiscounted cash flow is less than the carrying amount of the asset, an impairment loss, equal to the excess of the carrying amount over the fair value of the asset, is recognized.

 

Allowance for Doubtful Accounts Receivable

 

The Company performs ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been minimal, within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of any of our significant customers could have a material adverse effect on the collectability of our accounts receivable and our future operating results.

 

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation using fair value. Compensation costs are recognized for stock-based compensation granted to employees and directors. Options and restricted stock awards are recorded as an expense over the requisite service period based on the grant date estimated fair value of the grant, which in the case of options is determined using the Black-Scholes option pricing model.

 

Income Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income tax provision (benefit) in each of the jurisdictions in which we operate. This process involves estimating our current income tax provision (benefit) together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We regularly evaluate our ability to recover the reported amount of our deferred income taxes considering several factors, including our estimate of the likelihood of the Company generating sufficient taxable income in future years during the period over which temporary differences reverse.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

Revenue from Contracts with Customers (Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2019. Early adoption is permitted for periods beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB Accounting Standards Codification (ASC) 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective for the Company beginning in fiscal 2017. Early adoption is permitted. The adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. In August 2014, the FASB issued ASU No. 2014-15, which states that under GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent. If and when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting. Even when an entity’s liquidation is not imminent, there may be conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events. The new guidance is effective for the Company beginning in fiscal 2017, and for annual periods and interim periods thereafter. Early application is permitted. The Company will evaluate the going concern considerations in this ASU; however, management does not currently believe that the Company will meet the conditions that would subject its financial statements to additional disclosure.

 

 

Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates the concept of extraordinary items in an entity’s income statement. Extraordinary classification outside of income from continuing operations was previously considered only when evidence clearly supported its classification as an extraordinary item. Extraordinary items were events and transactions that were distinguished by their unusual nature and by the infrequency of their occurrence. The ASU eliminates the need to separately classify, present and disclose extraordinary events. The disclosure of events or transactions that are unusual or infrequent in nature will be included in other guidance. This new guidance is effective for the Company beginning in the first quarter of 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. In April 2015, the FASB issued ASU No. 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The Company chose to early adopt this ASU effective October 1, 2015 and as a result of the adoption, $12,000 of debt issuance costs at October 1, 2015 were reclassified from deferred financing costs, net to long-term debt in the consolidated balance sheets.

 

Inventory (Topic 330), Simplifying the Measurement of Inventory. In July 2015, the FASB issued ASU No. 2015-11, which requires that an entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Substantial and unusual losses that result from subsequent measurement of inventory should be disclosed in the financial statements. This new guidance is effective for the Company beginning in fiscal 2018. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments. In September 2015, the FASB issued ASU No. 2015-16, which requires that an acquirer recognize adjustment to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer needs to record, in the same period’s financial statements, the effect on earnings of changes in depreciations, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, an entity is required to present, separately on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This new guidance is effective for the Company beginning in fiscal 2017. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Balance Sheet Classification of Deferred Taxes. In November 2015, the FASB issued ASU 2015-17, which eliminates the current requirement for companies to present deferred tax liabilities and assets as current and non-current in a classified balance sheet. To simplify the presentation of deferred income taxes, ASU 2015-17 requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, the Company’s fiscal year 2018.  As early adoption of this guidance was permitted, the Company chose to adopt ASU 2015-17 for the reporting period beginning on October 1, 2015. The Company adopted this guidance on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. The adoption of this ASU did not have a material impact on the Company’s financial statements.

 

 

Forward-Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our compliance with the financial covenants under our loan agreements with Middlesex Savings Bank and Massachusetts Capital Resource Company, Xcede obtaining financing from outside investors, the commercialization of our products including our dual mode detectors, our development of new technologies including at Xcede and Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans,” “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to comply with the financial covenants under our outstanding indebtedness, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in the Company’s Annual Report on Form 10-K, filed on December 17, 2015, including the risk factors contained in Item 1A, and from time to time in the Company's other filings with the Securities and Exchange Commission. The Company disclaims any intention or obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

 

ITEM 4 Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

Our management, with the participation and supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified under the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2015. Based on this evaluation, our management concluded that as of December 31, 2015, these disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

ITEM 5 Other Information

 

During the quarter ended December 31, 2015, Xcede Technologies, Inc., the Company’s 90%-owned subsidiary, issued convertible promissory notes in the aggregate principal amount of $400,000 to certain investors and certain officers and directors of the Company. The notes accrue interest at 5% and are due after June 30, 2016, upon the demand of the holders of a majority of the aggregate outstanding principal amount of all convertible notes issued by Xcede and currently outstanding.

 

 

PART II – OTHER INFORMATION

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2015, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

ITEM 6 Exhibits

 

10.1 Term Note Agreement between the Company and Middlesex Savings Bank, dated February 1, 2016, filed herewith.

 

31.1(a) Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.1(b) Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1 Section 1350 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished but not filed for purposes of the Securities Exchange Act of 1934).

 

99.1 Press release, dated February 11, 2016 issued by Dynasil Corporation of America announcing its financial results for the quarter ended December 31, 2015.

 

101 The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2015 and September 30, 2015, (ii) Consolidated Statements of Operations for the three months ended December 31, 2015 and 2014, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2015; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

DYNASIL CORPORATION OF AMERICA

 

 

BY:	/s/ Peter Sulick		DATED: February 11, 2016
	Peter Sulick,
	Chief Executive Officer and President
	/s/ Robert J. Bowdring		DATED: February 11, 2016
	Robert J. Bowdring,
	Chief Financial Officer