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 MARCH 31, 2016

 

¨  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 May 6, 2016 there were 16,796,599 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 MARCH 31, 2016 AND SEPTEMBER 30, 2015		3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2016 AND 2015		5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2016		6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2016 AND 2015		7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8
Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations		19
Item 4.  Controls and Procedures		27
PART II.  OTHER INFORMATION		27
Item 1A. Risk Factors		27
Item 6.   Exhibits		27
Signatures		28

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		March 31,				September 30,
		2016				2015
Current Assets
Cash and cash equivalents		$	814,000			$	1,295,000
Accounts receivable, net of allowances of $178,000 and $168,000 at March 31, 2016 and September 30, 2015, respectively			4,850,000				3,382,000
Costs in excess of billings and unbilled receivables			1,437,000				1,518,000
Inventories, net of reserves			4,037,000				3,066,000
Prepaid expenses and other current assets			1,251,000				1,125,000
Total current assets			12,389,000				10,386,000
Property, Plant and Equipment, net			7,073,000				6,662,000
Other Assets
Intangibles, net			1,156,000				1,225,000
Goodwill			6,048,000				6,131,000
Security deposits			60,000				58,000
Total other assets			7,264,000				7,414,000
Total Assets		$	26,726,000			$	24,462,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long-term debt		$	2,544,000			$	1,567,000
Capital lease obligations, current			82,000				76,000
Convertible notes			2,570,000				2,123,000
Accounts payable			2,628,000				1,886,000
Deferred revenue			237,000				109,000
Accrued expenses and other liabilities			2,847,000				2,650,000
Total current liabilities			10,908,000				8,411,000
Long-term Liabilities
Long-term debt, net of current portion			978,000				1,288,000
Capital lease obligations, net of current portion			102,000				43,000
Deferred tax liability			249,000				242,000
Other long-term liabilities			49,000				50,000
Total long-term liabilities			1,378,000				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)

 

LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)

 

		March 31,				September 30,
		2016				2015
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,582,839 and 17,368,738 shares issued, 16,772,679 and and 16,558,578 shares outstanding at March 31, 2016 and September 30, 2015, respectively.			9,000				9,000
Additional paid in capital			19,919,000				19,650,000
Accumulated other comprehensive income (loss)			(146,000	)			110,000
Accumulated deficit			(4,092,000	)			(4,167,000	)
Less 810,160 shares of treasury stock - at cost			(986,000	)			(986,000	)
Total Dynasil stockholders' equity			14,704,000				14,616,000
Noncontrolling interest			(264,000	)			(188,000	)
Total stockholders' equity			14,440,000				14,428,000
Total Liabilities and Stockholders' Equity		$	26,726,000			$	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								Six Months Ended
		March 31,								March 31,
		2016				2015				2016				2015
Net revenue		$	11,296,000			$	9,895,000			$	22,493,000			$	19,506,000
Cost of revenue			7,218,000				6,135,000				14,451,000				12,154,000
Gross profit			4,078,000				3,760,000				8,042,000				7,352,000
Operating expenses:
Sales and marketing			343,000				309,000				685,000				674,000
Research and development			512,000				416,000				1,003,000				790,000
General and administrative			3,182,000				3,021,000				6,155,000				6,488,000
Gain on sale of assets			-				-				(4,000	)			(185,000	)
Total operating expenses			4,037,000				3,746,000				7,839,000				7,767,000
Income (loss) from operations			41,000				14,000				203,000				(415,000	)
Interest expense, net			77,000				123,000				136,000				248,000
Income (loss) before taxes			(36,000	)			(109,000	)			67,000				(663,000	)
Income tax (credit)			33,000				18,000				68,000				21,000
Net income (loss)			(69,000	)			(127,000	)			(1,000	)			(684,000	)
Less: Net loss attributable to noncontrolling interest			(38,000	)			(28,000	)			(76,000	)			(52,000	)
Net income (loss) attributable to common stockholders		$	(31,000	)		$	(99,000	)		$	75,000			$	(632,000	)
Net income (loss)		$	(69,000	)		$	(127,000	)		$	(1,000	)		$	(684,000	)
Other comprehensive income (loss):
Increase in pension liability			-				-				-				318,000
Foreign currency translation			(142,000	)			(195,000	)			(256,000	)			(389,000	)
Total comprehensive loss		$	(211,000	)		$	(322,000	)		$	(257,000	)		$	(755,000	)
Basic net income (loss) per common share		$	(0.00	)		$	(0.01	)		$	0.00			$	(0.04	)
Diluted net income (loss) per common share		$	(0.00	)		$	(0.01	)		$	0.00			$	(0.04	)
Weighted average shares outstanding
Basic			16,636,950				16,365,688				16,594,074				16,333,295
Diluted			16,636,950				16,365,688				16,650,606				16,333,295

 

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)

 

For the six months ended March 31, 2016										Additional				Other																				Total
		Common				Common				Paid-in				Comprehensive				Accumulated				Treasury Stock								Noncontrolling				Stockholders'
		Shares				Amount				Capital				Income (Loss)				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			4,743				-				7,000				-				-				-				-				-				7,000
Stock-based compensation costs			209,358				-				262,000				-				-				-				-				-				262,000
Foreign currency translation adjustment			-				-				-				(256,000	)			-				-				-				-				(256,000	)
Net income (loss)			-				-				-				-				75,000				-				-				(76,000	)			(1,000	)
Balance, March 31, 2016			17,582,839			$	9,000			$	19,919,000			$	(146,000	)		$	(4,092,000	)			810,160			$	(986,000	)		$	(264,000	)		$	14,440,000

 

 

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)

 

		Six Months Ended
		March 31,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	(1,000	)		$	(684,000	)
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense			262,000				157,000
Foreign exchange loss (gain)			61,000				(95,000	)
Gain on sale of assets			(4,000	)			(185,000	)
Depreciation and amortization			652,000				586,000
Pension expense			-				318,000
Other			115,000				20,000
Other changes in assets and libilities:
Accounts receivable, net			(1,551,000	)			(40,000	)
Inventories			(1,063,000	)			(14,000	)
Costs in excess of billings and unbilled receivables			81,000				(2,000	)
Prepaid expenses and other assets			(150,000	)			(150,000	)
Accounts payable			796,000				108,000
Accrued expenses and other liabilities			204,000				(529,000	)
Deferred revenue			127,000				(72,000	)
Net cash from operating activities			(471,000	)			(582,000	)
Cash flows from investing activities:
Proceeds from sale of assets			4,000				244,000
Purchases of property, plant and equipment			(982,000	)			(456,000	)
Net cash from investing activities			(978,000	)			(212,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock			7,000				6,000
Net proceeds from issuance of convertible notes			390,000				-
Principal payments on capital leases			(69,000	)			(73,000	)
Proceeds from short and long-term debt			735,000				300,000
Payments on long-term debt			(76,000	)			(38,000	)
Net cash from financing activities			987,000				195,000
Effect of exchange rates on cash and cash equivalents			(19,000	)			(42,000	)
Net change in cash and cash equivalents			(481,000	)			(641,000	)
Cash and cash equivalents, beginning		$	1,295,000			$	3,842,000
Cash and cash equivalents, ending		$	814,000			$	3,201,000
Supplemental disclosures of cash flow information:
Non cash activities:
Assets purchased under capital leases		$	134,000			$	73,000
Tax payments (refunds)		$	-			$	(13,000	)

 

 

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 March 31, 2016, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended March 31, 2016 and 2015, changes in stockholders’ equity for the six months ended March 31, 2016 and cash flows for the six months ended March 31, 2016 and 2015 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. 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.

 

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.

 

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of March 31, 2016, 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 – Recent 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 September 30, 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.

 

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 2014-09, “Revenue from Contracts with Customers,” which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting revenue gross versus net),” which clarifies gross versus net revenue reporting when another party is involved in the transaction. In April 2016, the FASB issued ASU 2016-10, “Identifying Performance Obligations and Licensing,” which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. There are two transition methods available under the new standard, either cumulative effect or retrospective. The new guidance is effective for the Company beginning in fiscal 2018. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

  

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 adoption 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 fiscal 2017. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

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 depreciation, 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.

 

Leases (Topic 842). In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and other purposes, such as debt covenant compliance. This new guidance is effective for the Company beginning in fiscal 2020, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

 

Note 3 – Acquisitions and Divestitures

 

In the six months ended March 31, 2015, 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:

 

		March 31,				September 30,
		2016				2015
Raw Materials		$	2,517,000			$	1,828,000
Work-in-Process			963,000				862,000
Finished Goods			557,000				376,000
		$	4,037,000			$	3,066,000

 

 

Note 6 – Intangible Assets

 

Intangible assets at March 31, 2016 and September 30, 2015 consist of the following:

 

		Useful		Gross				Accumulated
March 31, 2016		Life (years)		Amount				Amortization				Net
Acquired Customer Base		5 to 15		$	786,000			$	479,000			$	307,000
Know How		15			512,000				265,000				247,000
Trade Names		Indefinite			301,000				-				301,000
Patents		20			274,000				3,000				271,000
Biomedical Technologies		5			260,000				230,000				30,000
				$	2,133,000			$	977,000			$	1,156,000

 

		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 March 31, 2016 and 2015 was $43,000 and $42,000, respectively. Amortization expense for the six months ended March 31, 2016 and 2015 was $86,000 and $85,000, respectively.

 

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

 

		2016 (6 months)				2017				2018				2019				2020				Thereafter				Total
Acquired Customer Base		$	40,000			$	80,000			$	80,000			$	80,000			$	27,000			$	-			$	307,000
Know How			17,000				34,000				34,000				34,000				34,000				94,000				247,000
Patents			3,000				6,000				6,000				6,000				6,000				61,000				88,000
Biomedical Technologies			30,000				-				-				-				-				-				30,000
		$	90,000			$	120,000			$	120,000			$	120,000			$	67,000			$	155,000			$	672,000

 

 

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 and six months ended March 31, 2016.

 

 

Note 8 –Debt

 

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 $2,000,000 to $3,819,000. As a result of a clause in the Middlesex Term Note, all outstanding debt is classified as short-term. As of March 31, 2016, the total availability under the Company’s line of credit was $3,810,000 and the balance on the term note was $1,970,000.

 

 

Note 9 – 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 six months ended March 31, 2016, no common stock options were included in the calculation of dilutive shares as all of the 123,147 common stock options outstanding had exercise prices above the applicable quarterly average market price per share and their inclusion would be anti-dilutive. Additionally, for the three months ended March 31, 2016 and 2015 and for the six months ended March 31, 2015, no common share equivalents related to stock options were included in the calculation of dilutive shares, since there was a loss attributable to common shareholders and the inclusion of common share equivalents would be anti-dilutive.

 

For the six months ended March 31, 2016, 56,532 shares of common stock related to restricted stock were included in the denominator used to calculate diluted earnings per share. Additionally, for the three months ended March 31, 2016 and 2015 and the six months ended March 31, 2015, no common share equivalents related to unvested restricted stock were included in the calculation of dilutive shares, since there was a loss attributable to common shareholders and the inclusion of common share equivalents would be anti-dilutive.

 

The computation of the weighted shares outstanding for the three months ended March 31, 2016 and 2015 is as follows:

 

		March 31, 2016				March 31, 2015
Weighted average shares outstanding
Basic			16,636,950				16,365,688
Effect of dilutive securities
Stock Options			-				-
Restricted Stock			-				-
Dilutive Average Shares Outstanding			16,636,950				16,365,688

 

  

The computation of the weighted shares outstanding for the six months ended March 31, 2016 and 2015 is as follows:

 

		March 31, 2016				March 31, 2015
Weighted average shares outstanding
Basic			16,594,074				16,333,295
Effect of dilutive securities
Stock Options			-				-
Restricted Stock			56,532				-
Dilutive Average Shares Outstanding			16,650,606				16,333,295

 

 

Note 10 - 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 the Company’s 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 and six months ended March 31, 2016 and 2015 is as follows:

 

		Three Months Ended				Three Months Ended
Stock Compensation Expense		March 31, 2016				March 31, 2015
Stock Grants		$	102,000			$	80,000
Restricted Stock Grants			11,000				7,000
Option Grants			10,000				4,000
Employee Stock Purchase Plan			1,000				1,000
Subsidiary Option Grants			19,000				-
Total		$	143,000			$	92,000

 

 

		Six Months Ended				Six Months Ended
Stock Compensation Expense		March 31, 2016				March 31, 2015
Stock Grants			185,000			$	137,000
Restricted Stock Grants			19,000				14,000
Option Grants			17,000				4,000
Employee Stock Purchase Plan			1,000				2,000
Subsidiary Option Grants			40,000				-
Total		$	262,000			$	157,000

 

 

At March 31, 2016 there was approximately $216,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of fifteen months.

 

  

Restricted Stock Grants

 

A summary of restricted stock activity for the six months ended March 31, 2016 is presented below:

 

Restricted Stock Activity for the Six Months ended March 31, 2016		Shares				Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2015			27,000			$	1.04
Granted			100,000				1.73
Vested			(27,000	)			1.04
Cancelled			-				-
Nonvested at March 31, 2016			100,000			$	1.73

 

 

Stock Option Grants

 

The weighted average assumptions used in the Black-Scholes option pricing model for the stock option grant during the six months ended March 31, 2016 were as follows:

 

		Six Months Ended March 31, 2016
Expected term in years			3 years
Risk-free interest rate			1.05	%
Expected volatility			78.53	%
Expected dividend yield			0.00	%

 

A summary of stock option activity for the six months ended March 31, 2016 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			64,935				2.33				2.84
Exercised			-				-
Cancelled			-				-
Balance at March 31, 2016			123,147			$	2.30				2.19
Outstanding and exercisable at March 31, 2016			123,147			$	2.30				2.19

 

 

Subsidiary Stock Option Grants

 

During the six months ended March 31, 2016, 102,587 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 six months ended March 31, 2016 used in the Black-Scholes option pricing model were as follows:

 

Expected term in years			10 years
Risk-free interest rate			2.02	%
Expected volatility			82.96	%
Expected dividend yield			0.00	%

 

  

A summary of Xcede stock option activity for the six months ended March 31, 2016 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			102,587			$	1.00
Exercised			-				-
Cancelled			(315,024	)		$	1.00
Balance at March 31, 2016			567,821			$	1.00				8.74
Outstanding and exercisable at March 31, 2016			227,773			$	1.00				8.07

 

 

At March 31, 2016, the Company’s Xcede joint venture had $150,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of fifteen months and $13,500 of unrecognized stock compensation expense that begin to vest upon the attainment of specific capital raising targets.

 

 

Note 11 – 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 March 31, 2016. Consequently, it is no longer reported as a separate segment. At March 31, 2015, the Company had approximately $0.2 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 March 31, 2016 and 2015 is summarized below:

 

Results of Operations for the Three Months Ended March 31,
2016
		Optics				Contract Research				Biomedical				Total
Revenue		$	6,428,000			$	4,868,000			$	-			$	11,296,000
Gross Profit			2,208,000				1,870,000				-				4,078,000
GM %			34.3	%			38.4	%			-				36.1	%
SG&A			1,882,000				1,800,000				355,000				4,037,000
Gain on sale of assets			-				-				-				-
Operating Income (Loss)			326,000				70,000				(355,000	)			41,000
Depreciation and Amortization			225,000				85,000				17,000				327,000
Capital expenditures			329,000				30,000				20,000				379,000
Intangibles, Net			608,000				247,000				301,000				1,156,000
Goodwill			1,109,000				4,939,000				-				6,048,000
Total Assets		$	17,653,000			$	8,502,000			$	571,000			$	26,726,000

 

Results of Operations for the Three Months Ended March 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	5,220,000			$	4,675,000			$	-			$	9,895,000
Gross Profit			1,808,000				1,952,000				-				3,760,000
GM %			34.6	%			41.8	%			-				38.0	%
SG&A			1,580,000				1,896,000				270,000				3,746,000
Gain on sale of assets			-				-				-				-
Operating Income (Loss)			228,000				56,000				(270,000	)			14,000
Depreciation and Amortization			204,000				74,000				15,000				293,000
Capital expenditures			152,000				4,000				56,000				212,000
Intangibles, Net			699,000				282,000				254,000				1,235,000
Goodwill			1,157,000				4,939,000				-				6,096,000
Total Assets		$	16,038,000			$	8,887,000			$	694,000			$	25,619,000

 

 

 

 

The Company’s segment information for the six months ended March 31, 2016 and 2015 is summarized below:

 

Results of Operations for the Six Months Ended March 31,
2016
		Optics				Contract Research				Biomedical				Total
Revenue		$	12,635,000			$	9,858,000			$	-			$	22,493,000
Gross Profit			4,318,000				3,724,000				-				8,042,000
GM %			34.2	%			37.8	%			-				35.8	%
SG&A			3,634,000				3,506,000				703,000				7,843,000
Gain on sale of assets			(4,000	)			-				-				(4,000	)
Operating Income (Loss)			688,000				218,000				(703,000	)			203,000
Depreciation and Amortization			454,000				164,000				34,000				652,000
Capital expenditures			894,000				37,000				51,000				982,000
Intangibles, Net			608,000				247,000				301,000				1,156,000
Goodwill			1,109,000				4,939,000				-				6,048,000
Total Assets		$	17,653,000			$	8,502,000			$	571,000			$	26,726,000

 

Results of Operations for the Six Months Ended March 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	10,168,000			$	9,338,000			$	-			$	19,506,000
Gross Profit			3,302,000				4,050,000				-				7,352,000
GM %			32.5	%			43.4	%			-				37.7	%
SG&A			3,670,000				3,778,000				504,000				7,952,000
Gain on sale of assets			(185,000	)			-				-				(185,000	)
Operating Income (Loss)			(183,000	)			272,000				(504,000	)			(415,000	)
Depreciation and Amortization			408,000				148,000				30,000				586,000
Capital expenditures			396,000				4,000				56,000				456,000
Intangibles, Net			699,000				282,000				254,000				1,235,000
Goodwill			1,157,000				4,939,000				-				6,096,000
Total Assets		$	16,038,000			$	8,887,000			$	694,000			$	25,619,000

 

 

Customer Financial Information

 

For the three and six months ended March 31, 2016, one customer in the Optics segment represented more than 10% of the total segment revenue. For the three and six months ended March 31, 2015, there was no customer in the Optics segment whose revenue represented more than 10% of the total segment revenue.

 

For the three and six months ended March 31, 2016, three and five customers, respectively, 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 and six months ended March 31, 2015, four 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 March 31, 2016 and 2015, these customers made up 57% and 69%, respectively, of Contract Research revenue. For the six months ended March 31, 2016 and 2015, these customers made up 77% and 70%, 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 March 31, 2016 and 2015 are as follows:

 

		Three Months Ended								Three Months Ended
		March 31, 2016								March 31, 2015
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States		$	8,226,000				73	%		$	7,982,000				81	%
Europe			2,452,000				22	%			1,124,000				11	%
Other			618,000				5	%			789,000				8	%
		$	11,296,000				100	%		$	9,895,000				100	%

 

 

Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2016 and 2015 are as follows:

 

		Six Months Ended								Six Months Ended
		March 31, 2016								March 31, 2015
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States		$	16,455,000				73	%		$	15,664,000				80	%
Europe			4,493,000				20	%			2,008,000				10	%
Other			1,545,000				7	%			1,834,000				10	%
		$	22,493,000				100	%		$	19,506,000				100	%

 

 

Note 12 - 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. Due to the Company’s adoption of ASU 2015-17, the deferred taxes are all classified as long term.

 

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 March 31, 2016 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 March 31, 2016 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 (92%) and (102%) for the three and six months ended March 31, 2016, respectively, and (17%) and (3%) for the three and six months ended March 31, 2015, 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 13 – 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.

 

 

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

 

Consolidated revenue for the second quarter of fiscal year 2016, which ended March 31, 2016, was $11.3 million, an increase of 14%, compared with revenue of $9.9 million for the quarter ended March 31, 2015. The increase is attributable to a $1.2 million increase in revenue from the Optics segment and a $0.2 million increase in revenue from the Contract Research segment.

 

Cost of revenue for the second quarter of 2016 was $7.2 million, an increase of 18% compared with $6.1 million for the quarter ended March 31, 2015 as a result of a $0.8 million increase in the cost of revenue associated with the Optics segment and a $0.3 million increase in the cost of revenue associated with the Contract Research segment.

 

Total operating expenses were $4.0 million for the three month period ended March 31, 2016 as compared to $3.7 million for the same period in fiscal 2015.

 

Income from operations for both the quarters ended March 31, 2016 and 2015 was essentially breakeven.

 

Net income (loss) was approximately breakeven or ($0.00) per share for the quarter ended March 31, 2016 and ($0.1) million, or ($0.01) per share for last year’s quarter that ended on March 31, 2015.

 

Our Biomedical segment primarily consists of our majority-owned joint venture, Xcede. The Biomedical segment incurred approximately $0.4 million in research expenses in the current quarter as Xcede continues to develop a tissue sealant technology. We expect Xcede to incur similar or increasing amounts of expenses each quarter in fiscal 2016. Xcede is 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. The notes accrue interest at 5% and are due on demand after June 30, 2016. Xcede raised approximately $0.4 million 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 March 31, 2016. Consequently, it is no longer reported as a separate segment.

 

 

Results of Operations

 

Results of Operations for the Three Months Ended March 31,
2016
		Optics				Contract Research				Biomedical				Total
Revenue		$	6,428,000			$	4,868,000			$	-			$	11,296,000
Gross Profit			2,208,000				1,870,000				-				4,078,000
GM %			34.3	%			38.4	%			-				36.1	%
SG&A			1,882,000				1,800,000				355,000				4,037,000
Gain on sale of assets			-				-				-				-
Operating Income (Loss)			326,000				70,000				(355,000	)			41,000
Depreciation and Amortization			225,000				85,000				17,000				327,000
Capital expenditures			329,000				30,000				20,000				379,000
Intangibles, Net			608,000				247,000				301,000				1,156,000
Goodwill			1,109,000				4,939,000				-				6,048,000
Total Assets		$	17,653,000			$	8,502,000			$	571,000			$	26,726,000

 

Results of Operations for the Three Months Ended March 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	5,220,000			$	4,675,000			$	-			$	9,895,000
Gross Profit			1,808,000				1,952,000				-				3,760,000
GM %			34.6	%			41.8	%			-				38.0	%
SG&A			1,580,000				1,896,000				270,000				3,746,000
Gain on sale of assets			-				-				-				-
Operating Income (Loss)			228,000				56,000				(270,000	)			14,000
Depreciation and Amortization			204,000				74,000				15,000				293,000
Capital expenditures			152,000				4,000				56,000				212,000
Intangibles, Net			699,000				282,000				254,000				1,235,000
Goodwill			1,157,000				4,939,000				-				6,096,000
Total Assets		$	16,038,000			$	8,887,000			$	694,000			$	25,619,000

 

Revenue for the second quarter of fiscal year 2016, which ended March 31, 2016, was $11.3 million, an increase of 14% compared with revenue of $9.9 million for the quarter ended March 31, 2015.

 

Optics segment revenue increased approximately $1.2 million or 23% for the three months ended March 31, 2016, compared with the same period in the prior year, primarily as a result of the increased sales at our U.K. subsidiary related to the previously announced three-year crystal component supply agreement.

 

Contract Research segment revenues increased approximately $0.2 million or 4%, compared with the same period in the prior year, as the result of the utilization of some of the available backlog. Backlog decreased $2.0 million from September 30, 2015 to $31.0 million as of March 31, 2016, of which approximately $10.0 million is currently funded and in process. Management expects continuing government budget pressures on spending and delays in funding subsequent to the granting of awards to add increased variability to the timing of revenues.

 

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

 

 

Cost of revenue for the second quarter of 2016 was $7.2 million, an increase of 18% compared with $6.1 million for the quarter ended March 31, 2015. The Optics segment cost increase of $0.8 million was expected, as it correlates to the increased revenue. The $0.3 million of increased costs in our Contract Research group was due to the specific contract work done in the second quarter of 2016. These contracts require higher material and consulting expenses than is typical in the Contract Research segment.

 

Gross profit for the three months ended March 31, 2016 was $4.1 million, or 36% of revenues, compared to $3.8 million or 38% of revenues for the three months ended March 31, 2015. Gross profit for the Optics segment increased $0.4 million to $2.2 million, remaining at approximately the same 34% of revenues for the two quarters ending March 31, 2016 and 2015. Gross profit decreased $0.1 million in the Contract Research segment as a result of the higher mix of lower margin materials and consulting expenses required during the quarter ended March 31, 2016. 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 increased to $4.0 million for the three months ended March 31, 2016 from $3.7 million for the same quarter in fiscal 2015. Operating expenses for the Optics segment increased $0.3 million, while expenses in the Contract Research segment decreased by $0.1 million as adjustments were made to offset the higher than planned materials and consulting costs mentioned previously. 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 March 31, 2016 was at breakeven, slightly better than the similar breakeven position for the same period in fiscal 2015.

 

Net interest expense was approximately $0.1 million for both the three months ended March 31, 2016 and 2015.

 

Income tax expense for the three months ended March 31, 2016 consisted primarily of tax expense on U.K. operations.

 

Net income (loss) for the three months ended March 31, 2016 was approximately breakeven, or ($0.00) in basic earnings per share, essentially the same as a loss of ($0.1) million, or ($0.01) in basic earnings per share for the quarter ended March 31, 2015.

 

 

Results of Operations – Year to Date

 

Results of Operations for the Six Months Ended March 31,
2016
		Optics				Contract Research				Biomedical				Total
Revenue		$	12,635,000			$	9,858,000			$	-			$	22,493,000
Gross Profit			4,318,000				3,724,000				-				8,042,000
GM %			34.2	%			37.8	%			-				35.8	%
SG&A			3,634,000				3,506,000				703,000				7,843,000
Gain on sale of assets			(4,000	)			-				-				(4,000	)
Operating Income (Loss)			688,000				218,000				(703,000	)			203,000
Depreciation and Amortization			454,000				164,000				34,000				652,000
Capital expenditures			894,000				37,000				51,000				982,000
Intangibles, Net			608,000				247,000				301,000				1,156,000
Goodwill			1,109,000				4,939,000				-				6,048,000
Total Assets		$	17,653,000			$	8,502,000			$	571,000			$	26,726,000

 

Results of Operations for the Six Months Ended March 31,
2015
		Optics				Contract Research				Biomedical				Total
Revenue		$	10,168,000			$	9,338,000			$	-			$	19,506,000
Gross Profit			3,302,000				4,050,000				-				7,352,000
GM %			32.5	%			43.4	%			-				37.7	%
SG&A			3,670,000				3,778,000				504,000				7,952,000
Gain on sale of assets			(185,000	)			-				-				(185,000	)
Operating Income (Loss)			(183,000	)			272,000				(504,000	)			(415,000	)
Depreciation and Amortization			408,000				148,000				30,000				586,000
Capital expenditures			396,000				4,000				56,000				456,000
Intangibles, Net			699,000				282,000				254,000				1,235,000
Goodwill			1,157,000				4,939,000				-				6,096,000
Total Assets		$	16,038,000			$	8,887,000			$	694,000			$	25,619,000

 

Revenue for the six months ended March 31, 2016 increased $3.0 million or 15% to $22.5 million compared to $19.5 million for the six months ended March 31, 2015.

 

Optics segment revenue increased $2.5 million or 24% for the six months ended March 31, 2016, compared with the same period in the prior year. The majority of this increase is the result of sales related to the three-year crystal component supply agreement at our U.K. subsidiary.

 

Revenue from our Contract Research segment increased $0.5 million or 6% for the six months ended March 31, 2016 compared to the same period in 2015, primarily due to one contract for the delivery of high speed cameras. Backlog decreased $2.0 million from September 30, 2015 to $31.0 million as of March 31, 2016, of which approximately $10.0 million is currently funded and in process. Management expects continuing government budget pressures on spending and delays in funding subsequent to the granting of awards to add increased variability to the timing of revenues.

 

The Biomedical segment had no revenue in either the six months ended March 31, 2016 or 2015.

 

 

Gross profit for the six months ended March 31, 2016 was $8.0 million, or 36% of sales, compared to $7.4 million, or 38% of sales for the six months ended March 31, 2015.

 

Gross profit for the Optics segment increased approximately $1 million to $4.3 million for the six months ended March 31, 2016 compared to the six months ended March 31, 2015, primarily as a result of the increase in revenues in the first six months of fiscal 2016 versus the same period in 2015.

 

Gross profit for the Contract Research segment declined $0.3 million to $3.7 million for the six months ended March 31, 2016 compared to the six months ended March 31, 2015 primarily as a result of the higher material and consulting mix in the current funded government research awards. The Contract Research segment gross profit as a percent of sales was 38% for the six months ended March 31, 2016 as compared to 43% for the same period in the prior year.

 

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 remained level at $7.8 million for the six months ended both March 31, 2016 and March 31, 2015. The 2016 operating expenditures actually decreased for the six months ended March 31, 2016, because the 2015 period had a $0.2 million favorable gain on the sale of one of the Optics segments product lines.

 

Income from operations for the six months ended March 31, 2016 was $0.2 million compared to a loss from operations of ($0.4) million for the prior year comparable period. The increase in income of $0.6 million is primarily a result of the new large contract in the Optics segment having a year over year increase of $0.9 million in income from operations. The Contract Research segment had a decrease in income from operations for the six months ended March 31, 2016, compared to the same period in the prior year of $0.2 million.

 

Net interest expense for the six months ended March 31, 2016 decreased $0.1 million from the same period in 2015, as a result of the steps the Company took in reducing its debt at the end of 2015.

 

Income tax expense for the six months ended March 31, 2016 increased as a result of the revenue and profit improvements in the Optics segment.

 

Net income for the six months ended March 31, 2016 was $0.1 million or $0.00 basic earnings per share, compared with a loss of ($0.6) million or ($0.04) per share for the six months ended March 31, 2015.

 

Liquidity and Capital Resources

 

Liquidity Overview and Outlook

 

Net cash as of March 31, 2016 was $0.8 million or approximately $0.5 million less than the net cash of $1.3 million at September 30, 2015, largely as a result of increased business activity.

 

As of March 31, 2016, the Company was in compliance with the terms of all its outstanding indebtedness, which consisted of $2.0 million of senior debt borrowed from Middlesex Savings Bank through a five-year term note, $0.2 million borrowed under the Company’s revolving line of credit with Middlesex Saving Bank and $1.0 million of subordinated debt owed to Massachusetts Capital Resources Company. The Company had $3.8 million of additional availability under its Middlesex Savings Bank line of credit based on collateral calculations as of March 31, 2016. Management believes that the cash and availability under the line of credit discussed above are adequate to meet the operating Company’s 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 $3.8 million.

 

As of March 31, 2016, the Company’s Xcede subsidiary had $0.2 million of cash remaining from its convertible notes financings, which management believes will fund Xcede’s operations into June of 2016. Xcede’s management is actively pursuing a number of financing alternatives.

 

 

Cash From Operating Activities

 

In total, including the changes in accounts receivable, prepaid expenses, accounts payable, accrued expenses and operating activities used cash of $0.5 million for the six months ended March 31, 2016. Approximately $1.6 million of the cash was used for accounts receivable increases, as a result of the higher level of revenues during 2016 and, in our Contract Research segment, a delay in payments from a major U.S. government customer who is having internal system issues. This is expected to be rectified in the coming months. In addition, as a result of the higher revenues in 2016, the Company has increased its inventory levels by $1.0 million to meet the new demand. These increases were, in fact, partially offset by operations and management of current liabilities.

 

Cash From Investing and Financing Activities

 

The Company used cash of approximately $1.0 million for the purchase of property, plant and equipment for the six months ended March 31, 2016.

 

Total outstanding bank debt as of March 31, 2016 increased approximately $0.6 million to $3.5 million from $2.9 million at September 30, 2015, and Xcede convertible notes and accrued interest increased approximately $0.5 million to $2.6 million at March 31, 2016 from $2.1 million as of September 30, 2015. Net cash generated from financing activities during the six months ended March 31, 2016 was approximately $1.0 million, as a result of the $0.6 million drawdown on the Middlesex Bank line of credit and the issuance of approximately $0.4 million of Xcede convertible notes.

 

Obligations Relating to Xcede Convertible Notes

 

As of March 31, 2016, Xcede had convertible notes outstanding in the aggregate principal amount of approximately $2.6 million. 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 the notes. Certain officers and directors of the Company hold approximately 55% of the notes, and the remaining 45% are held by outside investors. The notes are unsecured and are not guaranteed by the Company.

 

Upon the closing of a capital stock financing by Xcede 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.

 

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 March 31, 2016 or 2015.

 

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

 

See Note 2, "Recent Accounting Pronouncements" in the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements, including the respective dates of adoption or expected adoption and effects on our consolidated financial position, results of operations and cash flows.

 

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 March 31, 2016. Based on this evaluation, our management concluded that as of March 31, 2016, 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.

 

 

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 as Exhibit 10.1 to Form 10-Q filed on February 11, 2016 and incorporated herein by reference.

 

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 May 12, 2016 issued by Dynasil Corporation of America announcing its financial results for the quarter ended March 31, 2016.

 

 

101 The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and September 30, 2015, (ii) Consolidated Statements of Operations for the three and six months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2016; (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2016 and 2015, 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: May 12, 2016
	Peter Sulick,
	Chief Executive Officer and President
	/s/ Robert J. Bowdring		DATED: May 12, 2016
	Robert J. Bowdring,
	Chief Financial Officer