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, 2018

 

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

 

 

Commission file number: 001-35011

 

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨  No ¨

 

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 8, 2018 there were 17,238,134 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, 2018 AND SEPTEMBER 30, 2017	3
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2018 AND 2017	5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2018	6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED MARCH 31, 2018 AND 2017	7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	8
Item 2.   Management’s Discussion and Analysis of Financial Condition and  Results of Operations	20
Item 4.  Controls and Procedures	28
PART II.  OTHER INFORMATION	29
Item 1A. Risk Factors	29
Item 6.   Exhibits	29
Signatures	30

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		March 31,				September 30,
		2018				2017
ASSETS
Current Assets
Cash and cash equivalents		$	1,130,000			$	2,415,000
Accounts receivable, net of allowances of $186,000 and $200,000 at March 31, 2018 and September 30, 2017, respectively			4,276,000				3,407,000
Costs in excess of billings and unbilled receivables			846,000				1,317,000
Inventories, net of reserves			4,638,000				4,326,000
Prepaid expenses and other current assets			686,000				973,000
Total current assets			11,576,000				12,438,000
Property, Plant and Equipment, net			7,551,000				7,032,000
Other Assets
Intangibles, net			997,000				987,000
Deferred tax asset			3,351,000				2,642,000
Goodwill			6,009,000				5,940,000
Security deposits			33,000				58,000
Total other assets			10,390,000				9,627,000
Total Assets		$	29,517,000			$	29,097,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Equipment line of credit		$	281,000			$	-
Current portion of long-term debt			1,615,000				2,007,000
Capital lease obligations, current			62,000				91,000
Accounts payable			1,744,000				2,380,000
Deferred revenue			126,000				129,000
Accrued expenses and other liabilities			2,745,000				2,667,000
Total current liabilities			6,573,000				7,274,000
Long-term Liabilities
Long-term debt, net of current portion			1,172,000				1,045,000
Capital lease obligations, net of current portion			61,000				81,000
Deferred tax liability, net			244,000				234,000
Other long-term liabilities			164,000				38,000
Total long-term liabilities			1,641,000				1,398,000

 

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,
		2018				2017
Stockholders' Equity
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 18,008,871 and 17,893,763 shares issued, 17,198,711 and  and 17,083,603 shares outstanding at March 31, 2018 and September 30, 2017, respectively.			9,000				9,000
Additional paid in capital			21,635,000				21,406,000
Accumulated other comprehensive income (loss)			(282,000	)			(539,000	)
Accumulated deficit			(428,000	)			(919,000	)
Less 810,160 shares of treasury stock - at cost			(986,000	)			(986,000	)
Total Dynasil stockholders' equity			19,948,000				18,971,000
Noncontrolling interest			1,355,000				1,454,000
Total stockholders' equity			21,303,000				20,425,000
Total Liabilities and Stockholders' Equity		$	29,517,000			$	29,097,000

 

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,
		2018				2017				2018				2017
Net revenue		$	10,255,000			$	10,085,000			$	19,443,000			$	19,228,000
Cost of revenue			6,310,000				6,297,000				11,958,000				11,915,000
Gross profit			3,945,000				3,788,000				7,485,000				7,313,000
Operating expenses:
Sales and marketing			388,000				328,000				667,000				593,000
Research and development			215,000				335,000				524,000				531,000
General and administrative			3,262,000				3,128,000				6,418,000				6,115,000
Total operating expenses			3,865,000				3,791,000				7,609,000				7,239,000
Income (loss) from operations			80,000				(3,000	)			(124,000	)			74,000
Interest expense, net			45,000				45,000				88,000				112,000
Income (loss) before taxes			35,000				(48,000	)			(212,000	)			(38,000	)
Income tax (benefit)			(1,255,000	)			71,000				(595,000	)			(2,658,000	)
Net income (loss)			1,290,000				(119,000	)			383,000				2,620,000
Less: Net loss attributable to noncontrolling interest			(33,000	)			(64,000	)			(108,000	)			(133,000	)
Net income (loss) attributable to common stockholders		$	1,323,000			$	(55,000	)		$	491,000			$	2,753,000
Net income (loss)		$	1,290,000			$	(119,000	)		$	383,000			$	2,620,000
Other comprehensive income (loss):
Foreign currency translation			222,000				65,000				257,000				(230,000	)
Total comprehensive income (loss)			1,512,000				(54,000	)			640,000				2,390,000
Less: comprehensive income (loss) attributable to noncontrolling interest			(33,000	)			(64,000	)			(108,000	)			(133,000	)
Total comprehensive income (loss) attributable to common stockholders		$	1,545,000			$	10,000			$	748,000			$	2,523,000
Basic net income (loss) per common share		$	0.08			$	(0.00	)		$	0.03			$	0.16
Diluted net income (loss) per common share		$	0.08			$	(0.00	)		$	0.03			$	0.16
Weighted average shares outstanding
Basic			17,133,468				16,886,628				17,090,530				16,847,679
Diluted			17,133,468				16,886,628				17,090,530				16,847,679

 

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

 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

For the six months ended March 31, 2018

 

										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, 2017			17,893,763			$	9,000			$	21,406,000			$	(539,000	)		$	(919,000	)			810,160			$	(986,000	)		$	1,454,000			$	20,425,000
Issuance of shares of common stock under employee stock purchase plan			7,956				-				8,000				-				-				-				-				-				8,000
Stock-based compensation costs			107,152				-				221,000				-				-				-				-				9,000				230,000
Foreign currency translation adjustment			-				-				-				257,000				-				-				-				-				257,000
Net income (loss)			-				-				-				-				491,000				-				-				(108,000	)			383,000
Balance, March 31, 2018			18,008,871			$	9,000			$	21,635,000			$	(282,000	)		$	(428,000	)			810,160			$	(986,000	)		$	1,355,000			$	21,303,000

 

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,
		2018				2017
Cash flows from operating activities:
Net income (loss)		$	383,000			$	2,620,000
Adjustments to reconcile net income (loss) to net cash:
Stock compensation expense			230,000				227,000
Foreign exchange loss (gain)			(33,000	)			47,000
Depreciation and amortization			610,000				624,000
Deferred income taxes			(710,000	)			(2,655,000	)
Non-cash R&D services			200,000				205,000
Other			50,000				49,000
Other changes in assets and liabilities:
Accounts receivable, net			(811,000	)			152,000
Inventories			(279,000	)			(332,000	)
Costs in excess of billings and unbilled receivables			472,000				328,000
Prepaid expenses and other assets			189,000				263,000
Accounts payable			(646,000	)			(410,000	)
Accrued expenses and other liabilities			123,000				(542,000	)
Deferred revenue			(3,000	)			(140,000	)
Net cash from operating activities			(225,000	)			436,000
Cash flows from investing activities:
Purchases of property, plant and equipment			(1,005,000	)			(228,000	)
Purchase of intangibles			(45,000	)			(64,000	)
Net cash from investing activities			(1,050,000	)			(292,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock			8,000				8,000
Principal payments on capital leases			(50,000	)			(55,000	)
Proceeds from (payments of) equipment line of credit, net			281,000				-
Proceeds from (payments of) bank and subordinated debt, net			(277,000	)			(354,000	)
Net cash from financing activities			(38,000	)			(401,000	)
Effect of exchange rates on cash and cash equivalents			28,000				(51,000	)
Net change in cash and cash equivalents			(1,285,000	)			(308,000	)
Cash and cash equivalents, beginning		$	2,415,000			$	2,607,000
Cash and cash equivalents, ending		$	1,130,000			$	2,299,000
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest		$	77,000			$	92,000
Tax payments (refunds)			5,000				3,000
Non cash activities:
Recapitalization of Xcede - conversion of non controlling notes payable to preferred stock			-				(3,103,000	)
Subsidiary stock options issued to settle liabilities			-				75,000
Subsidiary debt issued to fund research activities			-				500,000

 

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, 2018, the consolidated statements of operations and comprehensive income (loss) for the three and six months ended March 31, 2018 and 2017, changes in stockholders’ equity for the six months ended March 31, 2018 and cash flows for the six months ended March 31, 2018 and 2017 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. Xcede Technologies, Inc. (“Xcede”) is a joint venture between Dynasil Biomedical and Mayo Clinic to spin out and separately fund the development of a tissue sealant technology. As of March 31, 2018, Dynasil Biomedical owned 63% of Xcede’s stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. The remaining 37% of Xcede’s stock is owned by others and is accounted for under the rules applicable to non-controlling interest. Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not affect previously reported net income or stockholders’ equity. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the Company’s 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, 2017 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 March 31, 2018, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Quarterly Report on 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, 2017, the Company adopted the guidance issued in Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which intends to simplify various aspects of how share-based payments are accounted for and presented in financial statements. The standard is effective prospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The new standard contains several amendments that will simplify the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The changes in the new standard eliminate the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. In addition, the new standard eliminates the limitation on recognition of excess stock compensation benefits until such benefits are actually realized, and instead applies the general recognition standard to these deferred tax assets. This standard was applied using a modified retrospective approach and the Company will recognize forfeitures of awards as they occur. The adoption of the ASU had no impact on the retained earnings, other components of equity or net assets as of the beginning of the period of adoption. For the six month period ended March 31, 2018, the Company recognized all excess tax benefits and tax deficiencies as income tax expense or benefit as a discrete event. The Company has elected to present the cash flow statement on a prospective transition method and no prior periods have been adjusted.

 

 

Effective October 1, 2017, the Company adopted the guidance issued in Accounting Standard Update 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control, which amends the consolidation guidance on how a reporting entity that is the single decision maker of a VIE should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The adoption of this ASU did not have an 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 Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (“ASC”) Topic 606.  The new revenue recognition standard relates to revenue from contracts with customers, which, along with amendments issued in 2015 and 2016, will supersede nearly all current U.S. GAAP guidance on this topic and eliminate industry-specific guidance. The underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. At this time, the Company plans to adopt this standard through the modified retrospective approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year.

 

The Company has engaged a third party to assist in evaluating the impact of this new standard on its consolidated financial statements and related disclosures and is currently evaluating how the adoption of ASU 2014-09 will impact its consolidated financial statements and results of operations by applying the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potential changes to our business processes, systems, and controls to support the recognition and disclosure under the new standard. The Company will complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.

 

Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. In May 2017, the FASB issued ASU No. 2017-09 which was issued to clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, “Compensation – Stock Compensation” to changes in the terms and conditions of a share-based payment award. This update is required beginning with the Company’s 2019 fiscal year and should be applied prospectively to award modifications after the effective date. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

Business Combinations (Topic 805): Clarifying the Definition of a Business: In January 2017, the FASB issued ASU 2017-01 which clarifies the definition of a business for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for the Company beginning October 1, 2018. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued ASU 2016-16 which eliminates the exception, other than for inventory transfers, under current U.S. GAAP under which the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use.  Upon adoption of ASU 2016-16, the Company will recognize the tax expense from the sale of that asset in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation.  Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer.  This new guidance is effective for the Company beginning in fiscal 2019, with early adoption permitted. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  The cumulative-effect adjustment, if any, would consist of the net impact from (1) the write-off of any unamortized tax expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any necessary valuation allowances.  The adoption of this standard is not expected to have a material impact on the Company’s financial statements.

 

 

Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services. In May 2017, the FASB issued ASU 2017-10 which provides guidance for operating entities when they enter into a service concession arrangement with a public-sector grantor. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year, at the time the Company adopts Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

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 with the intention to adopt this ASU in fiscal year 2020.

 

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment: In January 2017, the FASB issued ASU 2017-04 which simplifies the test for goodwill impairment. This new guidance is effective for the Company beginning in fiscal year 2021. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial statements.

 

On December 22, 2017, the date the Tax Cuts and Jobs Act (“2017 Tax Act”) was signed into law, the Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance regarding accounting for the income tax effects of the Tax Cuts Act, including the impact of the Tax Cuts Act on deferred tax assets and liabilities for financial statements issued in the reporting period that includes the enactment date of December 22, 2017. The Company estimated and accounted for the tax implications of the Tax Cuts Act in the quarter ended December 31, 2017 and the resultant changes are reflected in the current financial statements.

 

 

Note 3 – Xcede Technologies, Inc. Joint Venture

 

In October 2013, the Company, through its subsidiary Dynasil Biomedical (“DBM”), formed Xcede, a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its hemostatic tissue sealant technology, which formerly comprised the majority of its expense within the biomedical segment.

 

Beginning at its inception and through November 2016, Xcede funded its pre-clinical research activities through the issuance of convertible notes bearing interest at 5% (“the Notes”) pursuant to a note purchase agreement dated October 2013 and most recently amended in November 2016 that provided for the issuance of up to $5.2 million in the aggregate principal amount of the Notes from external investors and certain directors and officers of the Company. The Notes were convertible into equity of Xcede.

 

In November 2016, Dynasil committed to invest $1.2 million of cash into Xcede over the following 18 months, all of which has been invested as of March 31, 2018, in exchange for Series B convertible preferred stock of Xcede (“Series B Preferred”). The value of the Series B Preferred, as it is wholly owned by DBM, was eliminated in consolidation. In conjunction with Dynasil’s committed investment, all $5.5 million in existing Notes and accrued interest were converted into 5,394,120 shares of Series A convertible preferred stock of Xcede (“Series A Preferred”) at a 20% discount to the price per share of the Series B Preferred, in accordance with the amended provisions of the Notes. The original conversion terms of the Notes were amended to require conversion into Series A Preferred rather than the class of stock issued in conjunction with the financing (Series B Preferred). Because the original conversion terms of the Notes were amended and as a result of assessing the impact of the rights and features of the Note amendment and their effect on the value to the issuer and holders, the transaction is recorded at fair value with a resulting gain on extinguishment of debt in the quarter ended December 31, 2016. Fair value was determined by management based on an independent valuation using a market and income approach and an option pricing model to allocate value to the respective shares. The fair value of the Series A Preferred was approximately $3.6 million on the date of issuance, as compared to the carrying value of the convertible principal and accrued interest of $5.5 million, resulting in a gain of approximately $1.9 million. Due to the related party nature of the transaction, this gain was recorded within the equity of Xcede. Of that $1.9 million, approximately $1.6 million was attributed to DBM and eliminated in consolidation, and approximately $0.3 million was attributed to noncontrolling interest.

 

 

Series A Preferred participants include both outside investors (accounted for as noncontrolling interest) and DBM. The outside investors converted $3.1 million of Notes and accrued interest into 3,055,551 shares of Series A Preferred. DBM converted the remaining $2.4 million of Notes and accrued interest into 2,338,569 shares of Series A Preferred, the value of which is eliminated in consolidation.

 

Each share of Series A Preferred and Series B Preferred (together “the Preferred Stock”) shall be convertible, at the option of the holder, into such number of fully paid and non-assessable shares of Xcede common stock (“Common Stock”) as determined by dividing the original issue price, as defined, by the conversion price in effect on the date of conversion, which is 1:1. Each holder of the Preferred Stock shall have one vote for each share of Common Stock that the holder of the Preferred Stock would be entitled to receive upon the conversion of the holder’s Preferred Stock into Common Stock. Upon any liquidation event, which includes certain change of control events, following payment of pre-equity distributions, the remaining proceeds or net assets of Xcede shall be paid and distributed in the following amounts and order of priority: (1) to satisfy the liquidation preference payment due to each holder of Series B Preferred, (2) to satisfy the liquidation preference payment due to each holder of Series A Preferred, (3) payment in full of any acquisition transaction payment, and (4) the remaining assets available to be distributed ratably among the holders of the Common Stock. If a liquidation event were to occur, the Series A Preferred’s liquidation value would be $1.016 per share and Series B Preferred’s liquidation value would be $1.27 per share. As of March 31, 2018, the liquidation value of the Series B Preferred would be approximately $1.4 million and the Series A Preferred would be approximately $5.5 million, of which $2.4 million is DBM’s portion and $3.1 million would be attributed to noncontrolling shareholders.

 

As of March 31, 2018, DBM owned approximately 63% of Xcede’s outstanding Common Stock and Preferred Stock and, as a result, Xcede is included in the Company’s consolidated balance sheets, results of operations and cash flows. Due to the Series A Preferred having a liquidation preference and therefore not representing a residual interest, cumulative net losses of Xcede are attributed only to common stockholders in accordance with common stock ownership. Noncontrolling interest represents the value of the Series A Preferred and common stock not owned by DBM plus 17% of cumulative losses of Xcede based on the 17% common stock ownership held by noncontrolling interests.

 

Due to the issuance of Preferred Stock, DBM’s ownership percentage in Xcede decreased to less than 80%. Based on this ownership percentage, beginning in fiscal year 2017, Xcede is no longer included in the Dynasil consolidated federal tax return and the Company is no longer able to offset taxable income or benefit from net operating losses and other tax attributes related to Xcede. (See Note 11 – Income Taxes.)

 

As previously disclosed, in January 2016, Xcede announced that it had signed three agreements with Cook Biotech Inc. of West Lafayette, Indiana (“Cook”), including a Development Agreement, a License Agreement and a Supply Agreement, in connection with the development, regulatory approval and production of Xcede’s hemostatic patch (“Xcede’s Patch”). In November 2016, Xcede entered into another Services Agreement, a Secured Promissory Note, a Loan Agreement, a Security Agreement and an Intellectual Property Security Agreement (collectively the “Note Agreement”) with Cook, in which Cook committed to fund the pre-clinical testing of, and subject to the receipt of applicable regulatory approvals to initiate first in human clinical trial for, the Xcede Patch. Under the terms of the Note Agreement, in exchange for the services performed by Cook, Xcede has committed to a multiple draw credit facility in the aggregate amount not to exceed $1.5 million. Three draws of principal will be available, each in the amount of $500,000, upon satisfaction of conditions identified in the Note Agreement. The principal amounts outstanding bear interest at a fixed rate of 2% and are secured by all the rights of Xcede under the Development Agreement, Supply Agreement, and License Agreement, all the rights to the data and work product arising from the clinical trial being performed under the Services Agreement, all regulatory approvals for the Xcede Patch, all patent and patent applications owned or controlled by Xcede, and all trademark and service mark registrations and applications. The note is recorded at fair value net of unamortized discount based on an imputed interest rate of 5.4%. The outstanding principal and unpaid interest are due and payable in full at the earlier of closing of an acquisition transaction or December 31, 2025. Xcede will recognize research and development expense as the related services are performed by Cook. There was approximately $37,000 and $167,000 of research and development expense recognized during the three months ended March 31, 2018 and 2017, respectively. There was approximately $200,000 and $205,000 recognized during the six months ended March 31, 2018 and 2017, respectively.

 

 

Note 4 - Inventories

 

Inventories, net of reserves, consists of the following:

 

		March 31,				September 30,
		2018				2017
Raw Materials		$	2,607,000			$	2,540,000
Work-in-Process			1,080,000				798,000
Finished Goods			951,000				988,000
		$	4,638,000			$	4,326,000

 

 

Note 5 – Intangible Assets

 

Intangible assets at March 31, 2018 and September 30, 2017 consist of the following:

 

		Useful		Gross				Accumulated
March 31, 2018		Life (years)		Amount				Amortization				Net
Acquired Customer Base		5 to 15		$	768,000			$	607,000			$	161,000
Know How		15			512,000				333,000				179,000
Trade Names		Indefinite			293,000				-				293,000
Patents		20			378,000				14,000				364,000
Biomedical Technologies		5			260,000				260,000				-
				$	2,211,000			$	1,214,000			$	997,000

 

		Useful		Gross				Accumulated
September 30, 2017		Life (years)		Amount				Amortization				Net
Acquired Customer Base		5 to 15		$	737,000			$	551,000			$	186,000
Know How		15			512,000				316,000				196,000
Trade Names		Indefinite			281,000				-				281,000
Patents		20			333,000				9,000				324,000
Biomedical Technologies		5			260,000				260,000				-
				$	2,123,000			$	1,136,000			$	987,000

 

 

Amortization expense for the three months ended March 31, 2018 and 2017 was $28,000 and $26,000, respectively. Amortization expense for the six months ended March 31, 2018 and 2017 was $56,000 and $52,000, respectively.

 

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

 

		2018 (6 months)				2019				2020				2021				2022				Thereafter				Total
Acquired Customer Base		$	40,000			$	80,000			$	41,000			$	-			$	-			$	-			$	161,000
Know How			17,000				34,000				34,000				34,000				34,000				26,000				179,000
Patents			6,000				11,000				11,000				11,000				11,000				162,000				212,000
		$	63,000			$	125,000			$	86,000			$	45,000			$	45,000			$	188,000			$	552,000

 

 

As of March 31, 2018, Xcede had $152,000 in patents that have not been granted, therefore, the amortization related to these patents is not included in the five-year amortization table above.

 

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the six months ended March 31, 2018.

 

Note 6 – 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 six months ended March 31, 2018.

 

 

Note 7 – Debt

 

Subordinated Debt

 

On January 3, 2018, the Company amended the Note Purchase Agreement with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan and defer principal repayment requirements to November 30, 2018. Such amendment also increased the interest rate of the note from six percent (6%) to seven percent (7%) per annum.

 

 

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 outstanding. 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 and six months ended March 31, 2018 and 2017, no common stock options were included in the calculation of dilutive shares as all of the 160,537 and 196,769 common stock options outstanding, respectively, had exercise prices above the applicable period’s average market price per share and their inclusion would be anti-dilutive. For the three and six months ended March 31, 2018 and 2017, 40,000 and 70,000 shares of restricted common stock, respectively, were excluded from the calculation of dilutive shares, as the effect of their inclusion would be anti-dilutive. Additionally, for the three months ended March 31, 2017, no common share equivalents related to stock options or 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, 2018 and 2017 is as follows:

 

		March 31, 2018				March 31, 2017
Weighted average shares outstanding
Basic			17,133,468				16,886,628
Effect of dilutive securities
Stock Options			-				-
Restricted Stock			-				-
Dilutive Average Shares Outstanding			17,133,468				16,886,628

 

 

The computation of the weighted shares outstanding for the six months ended March 31, 2018 and 2017 is as follows:

 

		March 31, 2018				March 31, 2017
Weighted average shares outstanding
Basic			17,090,530				16,847,679
Effect of dilutive securities
Stock Options			-				-
Restricted Stock			-				-
Dilutive Average Shares Outstanding			17,090,530				16,847,679

 

 

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 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 of options to purchase shares in Xcede’s common stock to officers, directors, employees and consultants. The options granted generally vest over a three 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 and six months ended March 31, 2018 and 2017 is as follows:

 

		Three Months Ended				Three Months Ended
		March 31, 2018				March 31, 2017
Stock Grants		$	92,000			$	84,000
Restricted Stock Grants			13,000				13,000
Option Grants			4,000				13,000
Employee Stock Purchase Plan			1,000				1,000
Subsidiary Option Grants			28,000				28,000
Total		$	138,000			$	139,000

 

		Six Months Ended				Six Months Ended
		March 31, 2018				March 31, 2017
Stock Grants		$	130,000			$	123,000
Restricted Stock Grants			26,000				26,000
Option Grants			17,000				25,000
Employee Stock Purchase Plan			1,000				1,000
Subsidiary Option Grants			56,000				52,000
Total		$	230,000			$	227,000

 

 

 

At March 31, 2018, there was approximately $58,000 in unrecognized stock compensation cost for Dynasil, which is expected to be recognized over a weighted average period of approximately seven months.

 

Restricted Stock Grants

 

A summary of restricted stock activity for the six months ended March 31, 2018 is presented below:

 

Restricted Stock Activity for the Six Months ended March 31, 2018		Shares				Weighted-Average Grant-Date Fair Value
Nonvested at September 30, 2017			70,000			$	1.73
Granted			-				-
Vested			(30,000	)			1.73
Cancelled			-				-
Nonvested and expected to vest at March 31, 2018			40,000			$	1.73

 

Stock Option Grants

 

During the six months ended March 31, 2018, no Dynasil stock options were granted. A summary of stock option activity for the six months ended March 31, 2018 is presented below:

 

		Options Outstanding				Weighted Average Exercise Price per Share				Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2017			196,769			$	1.98				1.64
Outstanding and exercisable at September 30, 2017			196,769			$	1.98				1.64
Granted			-				-
Exercised			-				-
Cancelled			(36,232	)			1.82
Balance at March 31, 2018			160,537			$	2.01				1.43
Outstanding and exercisable at March 31, 2018			160,537			$	2.01				1.43

 

Subsidiary Stock Option Grants

 

During the three months ended March 31, 2018, no Xcede stock options were granted. A summary of Xcede stock option activity for the six months ended March 31, 2018 is presented below:

 

		Options Outstanding				Weighted Average Exercise Price per Share				Weighted Average Remain Contractual Term (in Years)
Balance at September 30, 2017			1,375,956			$	1.00				8.70
Outstanding and exercisable at September 30, 2017			923,617				1.00				8.30
Granted			-				-
Exercised			-				-
Cancelled			-				-
Balance at March 31, 2018			1,375,956				1.00				8.18
Outstanding and exercisable at March 31, 2018			1,116,036			$	1.00				7.91

 

At March 31, 2018, the Company’s Xcede joint venture had approximately $97,000 of unrecognized stock compensation expense associated with stock options expected to be recognized over a weighted average period of eight months.

 

 

Note 10 – Segment, Customer and Geographical Reporting

 

Segment Financial Information

 

Dynasil reports three reportable segments: contract research (“Contract Research”), optics (“Optics”) and biomedical (“Biomedical”). Within these segments, there is a segregation of operating segments 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 aggregates four operating segments – Dynasil Fused Silica, Optometrics, Hilger Crystals (“Hilger”), and Evaporated Metal Films – that manufacture commercial products, including optical crystals for sensing in the security and medical imaging markets, as well as optical components, optical coatings and optical materials for scientific instrumentation and other applications. The Contract Research segment is one of the largest small business participants in U.S. government-funded research. The Biomedical segment consists of a single operating segment, Dynasil Biomedical Corporation (“Dynasil Biomedical”), a medical technology incubator which owns rights to certain early stage medical technologies. Dynasil Biomedical holds common and preferred stock in the Xcede joint venture which is developing a tissue sealant technology and currently has no other operations.

 

The Company’s segment information for the three months ended March 31, 2018 and 2017 is summarized below:

 

Results of Operations for the Three Months Ended March 31,

2018

		Optics				Contract Research				Biomedical				Total
Revenue		$	5,910,000			$	4,345,000			$	-			$	10,255,000
Gross profit			2,050,000				1,895,000				-				3,945,000
GM %			35	%			44	%			-				38	%
Operating expenses			1,858,000				1,813,000				194,000				3,865,000
Operating income (loss)			192,000				82,000				(194,000	)			80,000
Depreciation and amortization			247,000				61,000				3,000				311,000
Capital expenditures			339,000				58,000				29,000				426,000
Intangibles, net			455,000				179,000				363,000				997,000
Goodwill			1,070,000				4,939,000				-				6,009,000
Total assets		$	20,903,000			$	8,028,000			$	586,000			$	29,517,000

 

Results of Operations for the Three Months Ended March 31,

2017

		Optics				Contract Research				Biomedical				Total
Revenue		$	5,281,000			$	4,804,000			$	-			$	10,085,000
Gross profit			1,913,000				1,875,000				-				3,788,000
GM %			36	%			39	%			-				38	%
Operating expenses			1,597,000				1,802,000				392,000				3,791,000
Operating income (loss)			316,000				73,000				(392,000	)			(3,000	)
Depreciation and amortization			237,000				73,000				3,000				313,000
Capital expenditures			103,000				34,000				44,000				181,000
Intangibles, net			465,000				213,000				379,000				1,057,000
Goodwill			899,000				4,939,000				-				5,838,000
Total assets		$	19,705,000			$	7,477,000			$	794,000			$	27,976,000

 

 

The Company’s segment information for the six months ended March 31, 2018 and 2017 is summarized below:

 

Results of Operations for the Six Months Ended March 31,
2018
		Optics				Contract Research				Biomedical				Total
Revenue		$	10,853,000			$	8,590,000			$	-			$	19,443,000
Gross profit			3,740,000				3,745,000				-				7,485,000
GM %			34	%			44	%			-				38	%
Operating expenses			3,433,000				3,537,000				639,000				7,609,000
Operating income (loss)			307,000				208,000				(639,000	)			(124,000	)
Depreciation and amortization			477,000				126,000				7,000				610,000
Capital expenditures			928,000				77,000				45,000				1,050,000
Intangibles, net			455,000				179,000				363,000				997,000
Goodwill			1,070,000				4,939,000				-				6,009,000
Total assets		$	20,903,000			$	8,028,000			$	586,000			$	29,517,000

 

Results of Operations for the Six Months Ended March 31,
2017
		Optics				Contract Research				Biomedical				Total
Revenue		$	9,686,000			$	9,542,000			$	-			$	19,228,000
Gross profit			3,487,000				3,826,000				-				7,313,000
GM %			36	%			40	%			-				38	%
Operating expenses			2,924,000				3,542,000				773,000				7,239,000
Operating income (loss)			563,000				284,000				(773,000	)			74,000
Depreciation and amortization			471,000				147,000				6,000				624,000
Capital expenditures			194,000				34,000				64,000				292,000
Intangibles, net			465,000				213,000				379,000				1,057,000
Goodwill			899,000				4,939,000				-				5,838,000
Total assets		$	19,705,000			$	7,477,000			$	794,000			$	27,976,000

 

Customer Financial Information

 

For both the three and six months ended March 31, 2018 and 2017, no customer in the Optics segment represented more than 10% of the total segment revenue.

 

For the three and six months ended March 31, 2018, 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 and six months ended March 31, 2017, three 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, 2018 and 2017, these customers made up 72% and 59%, respectively, of Contract Research revenue. For the six months ended March 31, 2018 and 2017, these customers made up 70% and 60%, 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, 2018 and 2017 are as follows:

 

		Three Months Ended								Three Months Ended
		March 31, 2018								March 31, 2017
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States		$	8,129,000				79	%		$	7,931,000				79	%
Europe			1,365,000				13	%			1,212,000				12	%
Other			761,000				8	%			942,000				9	%
		$	10,255,000				100	%		$	10,085,000				100	%

 

Revenue by geographic location in total and as a percentage of total revenue, for the six months ended March 31, 2018 and 2017 are as follows:

 

		Six Months Ended								Six Months Ended
		March 31, 2018								March 31, 2017
Geographic Location		Revenue				% of Total				Revenue				% of Total
United States		$	15,481,000				80	%		$	15,120,000				79	%
Europe			2,633,000				13	%			2,299,000				12	%
Other			1,329,000				7	%			1,809,000				9	%
		$	19,443,000				100	%		$	19,228,000				100	%

 

 

Note 11 - Income Taxes

 

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. 

 

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. Prior to November 18, 2016, the Company’s subsidiary, Xcede was included in the federal and state tax returns filed by Dynasil. As of November 18, 2016, Dynasil’s ownership in Xcede was reduced to approximately 59%. As a result, Xcede will no longer be included in Dynasil’s federal consolidated tax return and will file a separate federal return. Xcede will continue to be included in the Dynasil consolidated state tax filings pursuant to the respective state tax requirements.

 

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.

 

As a result of Xcede’s de-consolidation from the Company’s federal tax returns, the Company will no longer be able to offset taxable income with Xcede’s current or cumulative net operating losses. Upon review of relevant criteria for the new Dynasil federal consolidated group, it was determined that it is more likely than not that the federal deferred tax assets of the new Dynasil federal consolidated group will be realized based upon positive earnings history and expected future profits of the group. As a result, the federal deferred tax asset valuation allowance associated with the Dynasil federal consolidated group was reversed resulting in an income tax benefit in the amount of $2.7 million during the quarter ending December 31, 2016. Going forward, as the Company records income, it will be able to utilize the NOLs (net operating losses) within its deferred tax assets. Based upon the Company’s recent losses and uncertainty of future profits, the Company has determined that the uncertainty regarding the realization of the Company’s state and separate Xcede deferred tax assets is sufficient to warrant the continued need for a valuation allowance against these 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, 2018 and September 30, 2017, the Company has no 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, 2018 and September 30, 2017, 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. 

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law. The Tax Act, which is effective on December 22, 2017, significantly revises the U.S. tax code by, among other changes, lowering the corporate income tax rate from 35% to 21%, requiring a one-time transition tax on accumulated foreign earnings of certain foreign subsidiaries that were previously tax deferred and creating new taxes on certain foreign sourced earnings.  At March 31, 2018, the Company has not completed its accounting for the tax effects of the Tax Act; however, the Company has made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax.  The Company is reviewing and will continue to review its accounting of the tax effects of the Tax Act through the end of the fiscal year.

 

The Company re-measured certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%, and provisionally recorded an income tax expense of $0.5 million related to such re-measurement in the first quarter of fiscal 2018. It is still analyzing certain aspects of the Tax Act and refining its calculations during the measurement period.

 

The one-time transition tax is based on the total unremitted earnings of the Company’s foreign subsidiary, Hilger, which has previously been deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition liability of its foreign subsidiary resulting in additional income tax expense of $0.2 million in the first quarter of fiscal 2018. The Company has not yet completed its calculation of the total unremitted earnings of Hilger. The transition tax is based in part on the amount of those earnings held in cash and other specified assets. The amount may change when the Company finalizes the calculation of Hilger’s total unremitted earnings previously deferred from U.S. federal taxation and finalize the amounts held in cash or other specified assets.

 

There are Research and Experimentation tax credits available at both the federal and state levels resulting from the PATH Act of 2015 (“PATH 2015 R&E Tax Credit”). These credits are designed to encourage and reward companies for efforts in areas of research and experimentation. In March 2018, the Company has reasonably completed a study encompassing all business activities and contracts in these areas for the years 2012 through 2016. As a result, the Company is estimating it will have net tax credits of approximately $1.3 million on its federal income tax returns for the years ended September 30, 2012, 2013, 2014, 2015 and 2016. The Company is in the process of reviewing its state tax credits and will have those results completed and additional credits determined by year end for the same time periods. 

 

The effective tax rates were (3,586%) and (148%) for the three months ended March 31, 2018 and 2017, respectively.  The effective tax rates were 281% and 6,995% for the six months ended March 31, 2018 and 2017, respectively. The results for both six month periods ended March 31, 2018 and 2017 had significant events which resulted in an extreme variation in tax rates. The effective tax rate for the six months ended, March 31, 2018 was primarily driven by the recently signed 2017 Tax Act, as well as the R&E tax credit study completed in the second quarter of fiscal year 2018. The effective tax rate for the six months ended March 31, 2017 was primarily the result of the tax benefit of $2.7 million recorded for the release of the valuation allowance as a result of the tax deconsolidation of its Xcede subsidiary. The effective tax rate excluding the impact of the 2017 Tax Act was (16%) for the six months ended March 31, 2018. The effective tax rates excluding the impact of the 2017 Tax Act, the R&E tax credit and the valuation allowance were (43%) and (437%) for the six months ended March 31, 2018 and 2017, respectively.

 

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 2014 are still subject to examination.

 

 

Note 12 – Subsequent Events

 

The Company has evaluated subsequent events through the date the financial statements were released.

 

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, 2017.

 

General Business Overview

 

Operations

 

Consolidated revenue for the quarter ended March 31, 2018 was $10.3 million, compared to revenue of $10.1 million for the second quarter of fiscal year 2017. This 2% increase in revenue was largely attributable to an 11% increase in revenue in our Optics segment, partially offset by a reduction in the Research segment’s commercial revenue this period.

 

Cost of revenue for the second quarter of 2018 was $6.3 million or 62% of revenue, essentially the same as the cost of revenue for the quarter ended March 31, 2017. The costs were essentially flat from fiscal year 2018 to fiscal year 2017, reflective of the slight increase in overall revenue during the quarter.

 

Total operating expenses were $3.9 million for the three-month period ended March 31, 2018 as compared to $3.8 million for the same period in fiscal year 2017. Expenses within the second quarter of 2018 were slightly higher, again reflective of the increase in revenue during the quarter.

 

Our Biomedical segment primarily consists of the results of our majority owned joint venture, Xcede Technologies, Inc. (“Xcede”). Xcede incurred $0.2 million in research expenses in the second quarter of fiscal year 2018 compared to $0.4 million for the same three month period in 2017. Xcede’s expenses were reduced this period as we complete the final steps leading up to the start of the planned in-human trial. We expect Xcede will incur increasing amounts of expense in subsequent quarters in fiscal year 2018 and beyond as it continues its development activities through the planned in-human trial. We expect Xcede will continue to need additional external investor funding in order to pursue future clinical trials and regulatory approvals of its tissue sealant technology.

 

Income (loss) from operations for the quarter ended March 31, 2018 was $0.1 million and approximately breakeven for the same period in 2017.

 

Net income (loss) attributable to common stockholders was approximately $1.3 million or $0.08 per share for the quarter ended March 31, 2018 and approximately ($0.1) or ($0.00) per share for the quarter ended March 31, 2017.

 

 

Results of Operations

 

Results of Operations for the Three Months Ended March 31,

2018

		Optics				Contract Research				Biomedical				Total
Revenue		$	5,910,000			$	4,345,000			$	-			$	10,255,000
Gross profit			2,050,000				1,895,000				-				3,945,000
GM %			35	%			44	%			-				38	%
Operating expenses			1,858,000				1,813,000				194,000				3,865,000
Operating income (loss)			192,000				82,000				(194,000	)			80,000
Depreciation and amortization			247,000				61,000				3,000				311,000
Capital expenditures			339,000				58,000				29,000				426,000
Intangibles, net			455,000				179,000				363,000				997,000
Goodwill			1,070,000				4,939,000				-				6,009,000
Total assets		$	20,903,000			$	8,028,000			$	586,000			$	29,517,000

 

Results of Operations for the Three Months Ended March 31,

2017

		Optics				Contract Research				Biomedical				Total
Revenue		$	5,281,000			$	4,804,000			$	-			$	10,085,000
Gross profit			1,913,000				1,875,000				-				3,788,000
GM %			36	%			39	%			-				38	%
Operating expenses			1,597,000				1,802,000				392,000				3,791,000
Operating income (loss)			316,000				73,000				(392,000	)			(3,000	)
Depreciation and amortization			237,000				73,000				3,000				313,000
Capital expenditures			103,000				34,000				44,000				181,000
Intangibles, net			465,000				213,000				379,000				1,057,000
Goodwill			899,000				4,939,000				-				5,838,000
Total assets		$	19,705,000			$	7,477,000			$	794,000			$	27,976,000

 

Consolidated revenue for the quarter ended March 31, 2018 was $10.3 million, compared to revenue of $10.1 million for the second quarter of fiscal year 2017.

 

The Optics segment revenue increased $0.6 million, or 11%, for the three months ended March 31, 2018 compared with the same period in the prior year, primarily as a result of an increase in revenue in our Optics businesses, largely resulting from increased demand from our customers in the semiconductor/microlithography market.

 

Contract Research segment revenue decreased $0.5 million, or 10%, for the three months ended March 31, 2018, as compared to the same three month period in 2017. In the current quarter, the lower research revenue was largely due to a delay in commercial revenue. The research backlog for the Contracts Research segment remains strong at approximately $30.7 million at March 31, 2018.

 

The Biomedical segment has no revenues as it is currently developing a hemostatic and sealant product to control bleeding in surgical applications based on Xcede’s innovative adhesive technology.

 

Gross profit for the three months ended March 31, 2018 was $3.9 million, or 38% of revenues, compared to $3.8 million, also 38% of revenues, for the three months ended March 31, 2017. Gross profit for the Optics segment increased to $2.0 million at March 31, 2018, compared to $1.9 million for the quarter ended March 31, 2017, as a direct result of the increase in revenue. Gross profit increased to 44% in the Contract Research segment for the quarter ended March 31, 2018, compared to 39% in the second quarter of 2017, as a result of the mix of active contracts during the second quarter of 2018, which carry stronger margins because more internal resources were utilized rather than subcontractors.

 

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

 

Total operating expenses increased to $3.9 million for the three months ended March 31, 2018 from $3.8 million for the same quarter in fiscal year 2017. Operating expenses for the Optics segment increased $0.3 million due to increases in headcount and related costs, depreciation for new equipment and a one-time rent benefit that occurred in 2017. Contract Research segment expenses remained at the same $1.8 million level of spending in the second quarter of fiscal year 2018, as compared to the same period last year. Biomedical segment expenses decreased $0.2 million in the quarter ended March 31, 2018 from $0.4 million in the quarter ended March 31, 2017 due to a reduction in spending while Xcede awaits the start of its planned clinical trial.

 

As a result of the factors discussed above, income (loss) from operations for the quarter ended March 31, 2018 was $0.1 million, compared to approximately breakeven results for the same period in 2017.

 

Net interest expense was essentially the same in both the three months ended March 31, 2018 and 2017.

 

The provision for income taxes for the second quarter of 2018 was a benefit of $1.3 million as compared to a tax provision of $0.1 million for the same period in fiscal year 2017. The 2018 provision in the second quarter of fiscal year 2018 was the result of a PATH 2015 R&E Tax Credit for the years 2012 thru 2016 that we are estimating based on the review we are in the process of conducting. We anticipate completing this review by the fiscal year end and expecting additional state credits will be determined as well. The 2017 benefit resulted from the deconsolidation of Xcede, which means the Company no longer is able to offset taxable income with Xcede’s net operating loss results or carryforwards.

 

Net income (loss) attributable to common stockholders was approximately $1.3 million or $0.08 per share for the quarter ended March 31, 2018 and ($0.1) million or ($0.00) per share for the quarter ended March 31, 2017.

 

Results of Operations – Year to Date

 

Results of Operations for the Six Months Ended March 31,

2018

		Optics				Contract Research				Biomedical				Total
Revenue		$	10,853,000			$	8,590,000			$	-			$	19,443,000
Gross profit			3,740,000				3,745,000				-				7,485,000
GM %			34	%			44	%			-				38	%
Operating expenses			3,433,000				3,537,000				639,000				7,609,000
Operating income (loss)			307,000				208,000				(639,000	)			(124,000	)
Depreciation and amortization			477,000				126,000				7,000				610,000
Capital expenditures			928,000				77,000				45,000				1,050,000
Intangibles, net			455,000				179,000				363,000				997,000
Goodwill			1,070,000				4,939,000				-				6,009,000
Total assets		$	20,903,000			$	8,028,000			$	586,000			$	29,517,000

 

Results of Operations for the Six Months Ended March 31,

2017

		Optics				Contract Research				Biomedical				Total
Revenue		$	9,686,000			$	9,542,000			$	-			$	19,228,000
Gross profit			3,487,000				3,826,000				-				7,313,000
GM %			36	%			40	%			-				38	%
Operating expenses			2,924,000				3,542,000				773,000				7,239,000
Operating income (loss)			563,000				284,000				(773,000	)			74,000
Depreciation and amortization			471,000				147,000				6,000				624,000
Capital expenditures			194,000				34,000				64,000				292,000
Intangibles, net			465,000				213,000				379,000				1,057,000
Goodwill			899,000				4,939,000				-				5,838,000
Total assets		$	19,705,000			$	7,477,000			$	794,000			$	27,976,000

 

Revenue for the six months ended March 31, 2018 was $19.4 million, a $0.2 million increase over the six months ended March 31, 2017.

 

Optics segment revenue increased $1.2 million, or 12%, for the six months ended March 31, 2018, compared with the same period in the prior year. This increase was largely the result of a general increase in sales in all of our Optics businesses with a significant amount coming from our customers in the semiconductor/microlithography industries over the same period last year.

 

Revenue from our Contract Research segment decreased $0.9 million, or 9%, for the six months ended March 31, 2018 as compared to the same period in 2017, primarily due to a delay in our commercial revenue orders. We are anticipating this business will start to pick up in the second half of fiscal year 2018.

 

The Biomedical segment had no revenue in either the six months ended March 31, 2018 or 2017.

 

Gross profit for the six months ended March 31, 2018 was $7.5 million, or 38% of sales, compared to $7.3 million, also 38% of sales for the six months ended March 31, 2017.

 

 

Gross profit for the Optics segment increased approximately $0.3 million to $3.8 million for the six months ended March 31, 2018, compared to the gross profit for the same period in fiscal year 2017, primarily as a result of the increase in revenues in the first six months of fiscal 2018 as compared to the same period in 2017. The Optics segment’s gross margin as a percent of revenue decreased to 34% from 36% year over year due to a conscious effort to strengthen our quality efforts and invest in new product offerings.

 

Gross profit for the Contract Research segment decreased $0.1 million to $3.7 million for the six months ended March 31, 2018, compared to the six months ended March 31, 2017, primarily as a result of the reduction in commercial sales in 2018 as compared to 2017. The Contract Research segment gross profit as a percent of revenue was 44% for the six months ended March 31, 2018 as compared to 40% for the same period in the prior year due to research contracts utilizing internal resources versus sub-contractors.

 

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 $0.4 million to $7.6 million for the six months ended March 31, 2018, as compared to the total operating expenses of $7.2 million for the six months ended March 31, 2017. This increase was spread fairly consistently across the organization as we have added and upgraded resources in 2018, compared to 2017, as we prepare for new initiatives in 2019.

 

Income (loss) from operations was ($0.1) for the six months ended March 31, 2018 and $0.1 for the same six month period in 2017.

 

Net interest expense for both the six month periods ended March 31, 2018 and 2017 was $0.1 million.

 

The provision for income taxes for the first six months of 2018 was a benefit of $0.6 million as compared to a benefit of $2.7 million for the same period in fiscal year 2017. The 2018 provision was the result of the $1.3 million PATH 2015 R&E Tax Credit estimate for the years 2012 thru 2016 that was recognized in the second quarter of 2018, offset by the result of the 2017 Tax Act, in which we estimated the rate reduction impact to be $0.5 million, the earnings and profit transition tax of our Hilger Crystals subsidiary to be $0.1 million and the first quarter earnings provision of $0.1 million. The 2017 benefit resulted from the deconsolidation of Xcede, which resulted in the Company no longer being able to offset taxable income with Xcede’s net operating loss results or carryforwards.

 

Net income attributable to common stockholders for the six months ended March 31, 2018 was $0.5 million or $0.03 basic earnings per share, compared to net income of $2.8 million or $0.16 basic earnings per share for the six months ended March 31, 2017.

 

Liquidity and Capital Resources

 

Liquidity Overview and Outlook

 

Net cash as of March 31, 2018 was $1.1 million, or approximately $1.3 million less than the net cash of $2.4 million at September 30, 2017.

 

Cash From Operating Activities

 

The Company generated approximately $0.7 million in cash from operating results including the impact of the noncash items, which was mainly offset by the increase in accounts receivable of approximately $0.9 million, resulting in a use of $0.2 million. The accounts receivable increase was due to increased revenue in the Optics segment for the quarter ended March 31, 2018 compared to the quarter ended September 30, 2017. Other increases and reductions in assets and liabilities, including prepaids, costs in excess of billings, accounts payable and accrued expenses offset each other. 

 

Cash From Investing and Financing Activities

 

The Company used cash of approximately $1.1 million for the purchase of property, plant, equipment and patents for the six months ended March 31, 2018 as we invest in new equipment for future product lines.

 

 

Total outstanding bank debt as of March 31, 2018 was $3.1 million, essentially the same as at September 30, 2017. The net cash from financing activities during the six months ended March 31, 2018 consisted of $0.3 million in principal payments, offset by $0.3 million in financing from the new Middlesex Savings Bank equipment line of credit.

 

As of March 31, 2018, the Company was in compliance with the terms of all its outstanding indebtedness which consisted of $1.3 million of senior debt borrowed under the $2.0 million fixed rate, five-year term note that was established in February 2016 with Middlesex Savings Bank, $0.3 million owed to Middlesex Savings Bank under the newly established equipment line of credit, and $0.8 million of subordinated debt owed to the Massachusetts Capital Resources Company. The Company has $4.0 million of additional availability under its Middlesex Savings Bank line of credit based on its collateral calculations as of March 31, 2018. Management believes that the cash and availability under the lines of credit discussed above are adequate to meet the Company’s current liquidity requirements for the next twelve months.

 

On January 3, 2018, the Company amended the Note Purchase Agreement (the “Note”) with Massachusetts Capital Resource Company to reinstate the interest only payment requirements of the loan, defer principal repayment requirements to November 30, 2018, and institute a 1% rate increase, raising the Note’s interest rate to 7% per annum.

 

During the quarter ended December 31, 2016, the Company’s Xcede subsidiary converted all of its approximately $5.5 million of convertible notes and accrued interest into 5,394,120 shares of Xcede Series A preferred stock (as more fully described in Note 3, “Xcede Technologies, Inc. Joint Venture”).

 

As of March 31, 2018, Xcede had $0.5 million of outstanding indebtedness, which consisted of a promissory note issued to Cook Biotech Inc. (“Cook”) in November 2016 and due on December 31, 2025. Xcede has agreed to use the proceeds from the note to fund its planned first in human trial for its hemostatic tissue sealant product. Also in November 2016, Dynasil agreed to invest $1.2 million in Xcede over the next two fiscal years to fund Xcede’s non-clinical operations. With the committed resources from the Company and Cook, Xcede’s management believes it has sufficient funding to complete its planned first in human trial, but it is continuing to seek various financing alternatives to fund further development activities and its pursuit of regulatory approval.

 

Critical Accounting Policies and Estimates

 

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2017. 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, 2017 as well as the notes to the financial statements contained in this Quarterly Report on 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

 

Revenues from the sale of the Company’s products and services are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. The Company generally ships products F.O.B. shipping point. 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.

 

In May 2014, the FASB issued ASU 2014-09 which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Using these guidelines, a comprehensive framework was established for determining how much revenue to recognize and when it should be recognized. The standard is based on the principle that an entity should recognize revenue to depict the transfer of 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. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard. At this time, the Company plans to adopt this standard through the modified retrospective approach. The ASU becomes effective for the Company at the beginning of its 2019 fiscal year. In 2016 and 2017, the FASB issued several ASU’s related to ASU 2014-09, which simplify and provide additional guidance to companies for implementation of the standard. To be consistent with this core principle, an entity is required to apply the following five-step approach:

•

Identify the contract(s) with a customer;

•

Identify each performance obligation in the contract;

•

Determine the transaction price;

•

Allocate the transaction price to each performance obligation; and

•

Recognize revenue when or as each performance obligation is satisfied.

 

We are currently evaluating how the adoption of ASU 2014-09 will impact our consolidated financial statements and result of operations by applying the five-step approach to each revenue stream. This evaluation includes completing an inventory of revenue streams by like contracts to allow for ease of implementation, monitoring developments for the manufacturing industry and government contractors, and evaluating potential changes to our business processes, systems, and controls to support the recognition and disclosure under the new standard. The Company has engaged a third party to assist in evaluating the impact of this new standard on our consolidated financial statements and related disclosures. We plan to complete the conversion and implementation phases by the end of fiscal year 2018 in conjunction with future interpretative guidance.

 

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 six month periods ended March 31, 2018 or 2017.

 

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its intangible and indefinite-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. The only changes in in the carrying value of intangible and indefinite-lived assets during the six months ended March 31, 2018 were the addition of patents and fluctuations in foreign exchange rate.

 

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.

 

The Company continually assesses whether events or changes in circumstances have occurred that may warrant revision of the estimated useful lives of its long-lived assets or whether the remaining balances of those assets should be evaluated for possible impairment. There were no changes, aside from foreign exchange rate fluctuations, in the carrying value of long-lived assets, during the six months ended March 31, 2018.

 

Allowance for Doubtful Accounts Receivable

 

The Company performs ongoing credit evaluations of our customers and adjusts 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 tax assets 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, the commercialization of our technology, including the Xcede patch and our dual mode detectors, the success of efforts to fund Xcede, results of our pre-clinical and planned clinical trials, regulatory approvals, the expected timing of the clinical trials of the Xcede patch, our development of new technologies including at Dynasil Biomedical, the adequacy of our current financing sources to fund our current operations, our growth initiatives, governmental budgetary and funding matters, 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 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, clinical results of Xcede’s programs which may not support further development, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, changing priorities or reductions in government spending, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to comply with our debt obligations, our ability to deleverage our balance sheet, 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 20, 2017, 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, 2018. Based on this evaluation, our management concluded that as of March 31, 2018, 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 Quarterly Report on Form 10-Q, 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, 2017, and from time to time in the Company’s other filings with the Securities and Exchange Commission, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q 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

 

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 14, 2018 issued by Dynasil Corporation of America announcing its financial results for the quarter ended March 31, 2018.
101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2018 and September 30, 2017, (ii) Consolidated Statements of Operations for the three and six months ended March 31, 2018 and 2017, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2018; (iv) Consolidated Statements of Cash Flows for the six months ended March 31, 2018 and 2017, 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 14, 2018
	Peter Sulick,
	Chief Executive Officer and President
	/s/ Robert J. Bowdring	DATED: May 14, 2018
	Robert J. Bowdring,
	Chief Financial Officer