U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

(Mark One)

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2014

 

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

 

Commission file number: 000-27503

 

DYNASIL CORPORATION OF AMERICA

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

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

 

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

 

As of February 6, 2015 there were 16,401,983 shares of common stock, par value $.0005 per share, outstanding.

 

 
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

 

INDEX

 

  Page
PART 1. FINANCIAL INFORMATION  
Item 1. Financial Statements  
   
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES  
   
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2014 AND SEPTEMBER 30, 2014 3
   
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013 5
   
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 6
   
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013 7
   
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
   
Item 4.  Controls and Procedures 21
   
PART II.  OTHER INFORMATION 22
   
Item 1A. Risk Factors 22
   
Item 6. Exhibits 22
   
Signatures 22

 

2
 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

   December 31,   September 30, 
   2014   2014 
         
ASSETS          
           
Current Assets          
Cash and cash equivalents  $2,504,000   $3,842,000 
Accounts receivable, net of allowances of $304,000 and $299,000 at December 31, 2014 and September 30, 2014, respectively   3,338,000    3,240,000 
Costs in excess of billings and unbilled receivables   1,291,000    1,235,000 
Inventories, net of reserves   2,941,000    2,954,000 
Prepaid expenses and other current assets   1,348,000    861,000 
Total current assets   11,422,000    12,132,000 
           
Property, Plant and Equipment, net   6,515,000    6,518,000 
           
Other Assets          
Intangibles, net   1,271,000    1,383,000 
Goodwill   6,171,000    6,247,000 
Deferred financing costs, net   36,000    39,000 
Security deposits   58,000    58,000 
Total other assets   7,536,000    7,727,000 
           
Total Assets  $25,473,000   $26,377,000 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current Liabilities          
Current portion of long-term debt  $3,021,000   $2,329,000 
Capital lease obligations, current   152,000    134,000 
Convertible notes   1,451,000    1,433,000 
Accounts payable   1,251,000    1,602,000 
Deferred revenue   29,000    103,000 
Accrued expenses and other liabilities   2,398,000    2,503,000 
Total current liabilities   8,302,000    8,104,000 
           
Long-term Liabilities          
Long-term debt, net of current portion   2,871,000    3,282,000 
Capital lease obligations, net of current portion   80,000    95,000 
Pension liability   -    318,000 
Deferred tax liability   251,000    264,000 
Other long-term liabilities   37,000    - 
Total long-term liabilities   3,239,000    3,959,000 

 

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

 

3
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED) (Continued)

 

   December 31,   September 30, 
   2014   2014 
         
LIABILITIES AND STOCKHOLDERS' EQUITY (Continued)          
           
Stockholders' Equity          
Common Stock, $0.0005 par value, 40,000,000 shares authorized, 17,175,191 and 17,140,182 shares issued, 16,365,031 and and 16,330,022 shares outstanding at December 31, 2014 and September 30, 2014, respectively.   9,000    9,000 
Additional paid in capital   19,246,000    19,195,000 
Accumulated other comprehensive income   222,000    98,000 
Accumulated deficit   (4,466,000)   (3,933,000)
Less 810,160 shares of treasury stock - at cost   (986,000)   (986,000)
Total Dynasil stockholders' equity   14,025,000    14,383,000 
Noncontrolling interest   (93,000)   (69,000)
Total stockholders' equity   13,932,000    14,314,000 
           
Total Liabilities and Stockholders' Equity  $25,473,000   $26,377,000 

 

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

 

4
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

   Three Months Ended 
   December 31, 
   2014   2013 
Net revenue  $9,611,000   $10,712,000 
Cost of revenue   6,018,000    6,261,000 
Gross profit   3,593,000    4,451,000 
Operating expenses:          
Sales and marketing   365,000    397,000 
Research and development   375,000    347,000 
General and administrative   3,467,000    3,280,000 
Gain on sale of assets   (185,000)   (1,187,000)
           
Total operating expenses   4,022,000    2,837,000 
Income (loss) from operations   (429,000)   1,614,000 
Interest expense, net   125,000    213,000 
Income (loss) before taxes   (554,000)   1,401,000 
Income tax (credit)   3,000    (44,000)
Net income (loss)   (557,000)   1,445,000 
Less: Net loss attributable to noncontrolling interest   (24,000)   (13,000)
Net income (loss) attributable to common stockholders  $(533,000)  $1,458,000 
           
Net income (loss)  $(557,000)  $1,445,000 
Other comprehensive income (loss):          
(Increase) decrease in pension liability   318,000    - 
Foreign currency translation   (194,000)   37,000 
Total comprehensive income (loss)  $(433,000)  $1,482,000 
           
Basic net income (loss) per common share  $(0.03)  $0.10 
Diluted net income (loss) per common share  $(0.03)  $0.10 
           
Weighted average shares outstanding          
Basic   16,300,902    15,021,757 
Diluted   16,300,902    15,281,841 

 

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

 

5
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

           Additional   Other                   Total 
   Common   Common   Paid-in   Comprehensive   Retained   Treasury Stock   Noncontrolling   Stockholders' 
   Shares   Amount   Capital   Income   Earnings   Shares   Amount   Interest   Equity 
Balance, September 30, 2014   17,140,182   $9,000   $19,195,000   $98,000   $(3,933,000)   810,160   $(986,000)  $(69,000)  $14,314,000 
Issuance of shares of common stock
under employee stock purchase plan		   2,831    -    3,000    -    -    -    -    -    3,000 
                                              
Stock-based compensation costs   41,820    -    65,000    -    -    -    -    -    65,000 
                                              
Adjustment for escrow settlement   (9,642)   -    (17,000)   -    -    -    -    -    (17,000)
                                              
Settlement of pension obligation, net of tax   -    -    -    318,000    -    -    -    -    318,000 
                                              
Foreign currency translation adjustment   -    -    -    (194,000)   -    -    -    -    (194,000)
                                              
Net income (loss)   -    -    -    -    (533,000)   -    -    (24,000)   (557,000)
Balance, December 31, 2014   17,175,191   $9,000   $19,246,000   $222,000   $(4,466,000)   810,160   $(986,000)  $(93,000)  $13,932,000 

 

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

 

6
 

 

DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Three Months Ended 
   December 31, 
   2014   2013 
Cash flows from operating activities:          
Net income (loss)  $(557,000)  $1,445,000 
Adjustments to reconcile net income (loss) to net cash:          
Stock compensation expense   65,000    120,000 
Foreign exchange loss (gain)   (23,000)   7,000 
Gain on sale of assets   (185,000)   (1,187,000)
Depreciation and amortization   293,000    266,000 
Pension expense   318,000    - 
Other   (35,000)   12,000 
Other changes in assets and libilities:          
Accounts receivable, net   (79,000)   600,000 
Inventories   12,000    (224,000)
Costs in excess of billings and unbilled receivables   (56,000)   (755,000)
Prepaid expenses and other assets   (469,000)   (219,000)
Accounts payable   (360,000)   (9,000)
Accrued expenses and other liabilities   (438,000)   274,000 
Deferred revenue   (76,000)   (167,000)
Net cash from operating activities   (1,590,000)   163,000 
           
Cash flows from investing activities:          
Proceeds from sale of assets   244,000    4,357,000 
Purchases of property, plant and equipment   (244,000)   (131,000)
Net cash from investing activities   0    4,226,000 
           
Cash flows from financing activities:          
Proceeds from issuance of common stock   3,000    4,000 
Payment of debt issuance costs   -    (1,000)
Net proceeds from issuance of convertible notes   18,000    378,000 
Principal payments on capital leases   (33,000)   (30,000)
Proceeds from short and long-term debt   300,000    - 
Payments on long-term debt   (19,000)   (4,389,000)
Net cash from financing activities   269,000    (4,038,000)
           
Effect of exchange rates on cash and cash equivalents   (17,000)   (32,000)
           
Net change in cash and cash equivalents   (1,338,000)   319,000 
           
Cash and cash equivalents, beginning  $3,842,000   $2,437,000 
Cash and cash equivalents, ending  $2,504,000   $2,755,000 
           
Supplemental disclosures of cash flow information:          
Non cash activities:          
Assets purchased under capital leases  $73,000   $67,000 

 

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

 

7
 

 

DYNASIL CORPORATION OF AMERICA

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 - Basis of Presentation

 

The accompanying consolidated balance sheet as of December 31, 2014, the consolidated statements of operations and comprehensive income (loss) for the three months ended December 31, 2014 and 2013, changes in stockholders’ equity for the three months ended December 31, 2014 and cash flows for the three months ended December 31, 2014 and 2013 of Dynasil Corporation of America and subsidiaries (the “Company”), and the related information contained in these notes have been prepared by management and are unaudited. In the opinion of management, all adjustments (which include normal recurring and nonrecurring items) necessary to present fairly the financial position, results of operations and cash flows in conformity with generally accepted accounting principles for the periods presented have been made. Interim operating results are not necessarily indicative of operating results for a full year.

 

The preparation of our unaudited consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's September 30, 2014 Annual Report on Form 10-K previously filed by the Company with the Securities and Exchange Commission.

 

The Company considers events or transactions that have occurred after the unaudited consolidated balance sheet date of December 31, 2014, but prior to the filing of the unaudited consolidated financial statements with the SEC on this Form 10-Q, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure, as applicable. Subsequent events have been evaluated through the date of the filing of this Quarterly Report on Form 10-Q with the SEC.

 

Note 2 – Acquisitions and Divestitures

 

On June 26, 2014, the Company and its wholly owned subsidiary, Evaporated Metal Films Corp. (“EMF”) acquired substantially all the assets of DichroTec Thin Films, LLC (“DichroTec”), a manufacturer of optical thin film coatings. The total purchase price paid of $1.7 million, consisting of approximately $0.5 million in cash and 690,000 shares of Dynasil common stock, was allocated primarily to machinery and equipment. DichroTec reported unaudited revenues of approximately $1.9 million for the twelve months ended December 31, 2013.

 

On November 7, 2013, the Company sold its Lead Paint detector business to Protec Instrument Corporation (“Protec”), a wholly owned subsidiary of Laboratoires Protec S.A., a French corporation and former European distributor of the Company’s lead paint detector products. The sales price totaled approximately $1.2 million, including the assumption of certain liabilities of the Company by Protec. On December 23, 2013, the Company sold its Gamma Medical Probe business to Dilon Technologies, Inc., a Delaware corporation (“Dilon”), for $3.5 million, the assumption of certain liabilities of the Company, and a possible contingent payment. The Agreement also provided for $250,000 of the proceeds to be deposited in escrow for a year, which amount is included in accounts receivable in the Consolidated Balance Sheet. The Lead Paint Detector and Gamma Medical Probe businesses together comprised substantially all of the operating assets of the Company’s Instrument segment. The Company used $3.9 million of the proceeds from the two sale transactions to reduce its indebtedness to Santander Bank, N.A., its former lender.

 

In connection with the sales of the two businesses, the Company recorded a gain of $1.2 million which is included in Income from Operations in the three months ended December 31, 2013. The businesses sold constituted substantially all of the Instruments segment but did not constitute a component of the business, and therefore did not qualify to be reported as discontinued operations.

 

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

 

8
 

  

Note 3 – Xcede Technologies, Inc. Joint Venture

 

In October, 2013, the Company formed Xcede Technologies, Inc. (“Xcede”), a joint venture with Mayo Clinic, in order to spin out and separately fund the development of its tissue sealant technology, which formerly comprised the majority of its biomedical segment. Xcede has raised approximately $1.4 million in external funding in the form of Convertible Notes from outside investors including certain officers and directors of the Company. The notes accrue interest at 5% and are due on demand after June 30, 2015. Upon the closing of a capital stock financing raising at least $3.0 million, inclusive of the convertible notes and interest, the outstanding principal amount of the notes plus all accrued interest will be converted into shares of the same capital stock sold in the financing at a 20% discount to the price per share of that capital stock. Alternatively, at any time prior to a capital stock financing the note holders can convert at their option the principal amount of the notes plus all accrued interest thereon into common stock based on a $5 million valuation.

 

Xcede is 90% owned by Dynasil Biomedical and, as a result, is included in the Company’s consolidated balance sheet, results of operations and cash flows. The Company expects Xcede to require additional funding in connection with human trials expected to commence in the fourth quarter of 2015.

 

Note 4 - Inventories

 

Inventories, net of reserves, consists of the following:

   December 31,   September 30, 
   2014   2014 
Raw Materials  $1,789,000   $1,805,000 
Work-in-Process   839,000    858,000 
Finished Goods   313,000    291,000 
   $2,941,000   $2,954,000 

 

Note 5 – Intangible Assets

 

Intangible assets at December 31, 2014 and September 30, 2014 consist of the following:

 

   Useful   Gross   Accumulated     
December 31, 2014  Life (years)   Amount   Amortization   Net 
Acquired Customer Base   5 to 15   $842,000   $416,000   $426,000 
Know How   15    512,000    222,000    290,000 
Trade Names   Indefinite    326,000    -    326,000 
Patents   20    124,000    -    124,000 
Biomedical Technologies   5    260,000    155,000    105,000 
        $2,064,000   $793,000   $1,271,000 

 

   Useful   Gross   Accumulated     
September 30, 2014  Life (years)   Amount   Amortization   Net 
Acquired Customer Base   5 to 15   $877,000   $409,000   $468,000 
Know How   15    512,000    213,000    299,000 
Trade Names   Indefinite    339,000    -    339,000 
Patents   20    159,000    -    159,000 
Biomedical Technologies   5    260,000    142,000    118,000 
        $2,147,000   $764,000   $1,383,000 

  

9
 

 

Amortization expense for the three months ended December 31, 2014 and 2013 was $43,000 and $45,000, respectively. Estimated amortization expense for each of the next five fiscal years is as follows:

 

   2015 (9 months)   2016   2017   2018   2019   Thereafter   Total 
Acquired Customer Base  $60,000   $80,000   $80,000   $80,000   $80,000   $46,000   $426,000 
Know How   26,000    34,000    34,000    34,000    34,000    128,000    290,000 
Patents   6,000    6,000    6,000    6,000    6,000    94,000    124,000 
Biomedical Technologies   45,000    60,000    -    -    -    -    105,000 
   $137,000   $180,000   $120,000   $120,000   $120,000   $268,000   $945,000 

 

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 three months ended December 31, 2014.

 

Note 7 – Earnings (Loss) Per Common Share

 

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

 

For purposes of computing diluted earnings per share for the three months ended December 31, 2014 and 2013, no common stock options were included in the calculation of dilutive shares as all of the 21,980 and 630,532 common stock options outstanding, respectively, had exercise prices above the current quarterly average market price per share and their inclusion would be anti-dilutive. Additionally, for the three months ended December 31, 2014, 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 from continuing operations and the inclusion of common share equivalents would be anti-dilutive.

 

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

 

   December 31, 2014   December 31, 2013 
Weighted average shares outstanding          
Basic   16,300,902    15,021,757 
Effect of dilutive securities          
Stock Options   -    - 
Restricted Stock   -    260,084 
Dilutive Average Shares Outstanding   16,300,902    15,281,841 

 

10
 

  

Note 8 - 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.

 

A summary of stock option activity for the three months ended December 31, 2014 and 2013 is presented below:

   Options
Outstanding		   Weighted Average
Exercise Price per
Share		   Weighted Average
Remain Contractual
Term (in Years)		 
Balance at September 30, 2014   430,532   $3.33    0.31 
Outstanding and exercisable at September 30, 2014   430,532   $3.33    0.31 
Granted   -    -      
Exercised   -    -      
Cancelled   (408,552)  $3.99      
Balance at December 31, 2014   21,980   $3.03    2.09 
Outstanding and exercisable at December 31, 2014   21,980   $3.03    2.09 

 

   Options
Outstanding		   Weighted Average
Exercise Price per
Share		   Weighted Average
Remain Contractual
Term (in Years)		 
Balance at September 30, 2013   630,532   $3.33    1.06 
Outstanding and exercisable at September 30, 2013   630,532   $3.33    1.06 
Granted   -    -      
Exercised   -    -      
Cancelled   -    -      
Balance at December 31, 2013   630,532   $3.33    0.81 
Outstanding and exercisable at December 31, 2013   630,532   $3.33    0.81 

  

11
 

 

A summary of restricted stock activity for the three months ended December 31, 2014 and 2013 is presented below:

 

Restricted Stock Activity for the Three Months ended
December 31, 2014		  Shares   Weighted-Average 
Grant-Date Fair Value		 
Nonvested at September 30, 2014   54,000   $1.04 
           
Granted   -    - 
Vested   -    - 
Cancelled   -    - 
Nonvested at December 31, 2014   54,000   $1.04 

 

Restricted Stock Activity for the Three Months ended
December 31, 2013		  Shares   Weighted-Average 
Grant-Date Fair Value		 
Nonvested at September 30, 2013   423,168   $0.74 
           
Granted   -    - 
Vested   (12,500)   1.08 
Cancelled   -    - 
Nonvested at December 31, 2013   410,668   $0.73 

 

Stock Compensation Expense for the three months ended December 31, 2014 and 2013 is as follows:

 

   Three Months Ended   Three Months Ended 
Stock Compensation Expense  December 31, 2014   December 31, 2013 
Stock Grants  $57,000   $51,000 
Restricted Stock Grants   7,000    68,000 
Employee Stock Purchase Plan   1,000    1,000 
Total  $65,000   $120,000 

 

At December 31, 2014 there was approximately $48,000 in unrecognized stock compensation cost, which is expected to be recognized over a weighted average period of three months.

 

Note 9 – Segment, Customer and Geographical Reporting

 

Segment Financial Information

 

Dynasil’s business is comprised of four segments: contract research (“Contract Research”), optics (“Optics”), instruments (“Instruments”) and biomedical (“Biomedical”). Substantially all the operating assets of the Instruments segment were sold in the three months ended December 31, 2013.

 

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

 

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The Company’s segment information for the three months ended December 31, 2014 and 2013 is summarized below:

 

Results of Operations for the Three Months Ended December 31,
2014

   Contract
Research		   Optics   Instruments   Biomedical   Total 
Revenue  $4,663,000   $4,948,000   $-   $-   $9,611,000 
Gross Profit   2,098,000    1,495,000    -    -    3,593,000 
GM %   45.0%   30.2%   -    -    37.4%
SG&A   1,881,000    2,091,000    -    235,000    4,207,000 
Gain on sale of assets   -    185,000    -    -    185,000 
Operating Income (Loss)   216,000    (410,000)   -    (235,000)   (429,000)
                          
Depreciation and Amortization   74,000    204,000    -    15,000    293,000 
Capital expenditures   -    244,000    -    -    244,000 
                          
Intangibles, Net   290,000    752,000    -    229,000    1,271,000 
Goodwill   4,939,000    1,232,000    -    -    6,171,000 
Total Assets  $9,036,000   $15,226,000   $289,000   $922,000   $25,473,000 

 

Results of Operations for the Three Months Ended December 31,
2013

   Contract
Research		   Optics   Instruments   Biomedical   Total 
Revenue  $5,840,000   $4,099,000   $773,000   $-   $10,712,000 
Gross Profit   2,530,000    1,597,000    324,000    -    4,451,000 
GM %   43.3%   39.0%   41.9%   -    41.6%
SG&A   2,182,000    1,199,000    469,000    174,000    4,024,000 
Gain on sale of assets   -    -    1,187,000    -    1,187,000 
Operating Income (Loss)   348,000    398,000    1,042,000    (174,000)   1,614,000 
                          
Depreciation and Amortization   70,000    178,000    2,000    16,000    266,000 
Capital expenditures   -    131,000    -    -    131,000 
                          
Intangibles, Net   324,000    870,000    -    163,000    1,357,000 
Goodwill   4,939,000    1,317,000    -    -    6,256,000 
Total Assets  $10,360,000   $12,538,000   $752,000   $505,000   $24,155,000 

 

Customer Financial Information

 

For the three months ended December 31, 2014, four customers of the Contract Research segment, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three months ended December 31, 2013, three customers, all various agencies of the U.S. Government, each represented more than 10% of the total segment revenue. For the three months ended December 31, 2014 and 2013, these customers made up 72% and 64%, respectively, of Contract Research revenue.

 

For the three months ended December 31, 2014 and 2013, there was no customer in the Optics segment whose revenue represented more than 10% of the total segment revenue.

 

For the three months ended December 31, 2014 and 2013, the Biomedical segment had no revenue.

 

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Geographic Financial Information

 

Revenue by geographic location in total and as a percentage of total revenue, for the three months ended December 31, 2014 and 2013 are as follows:

 

   Three Months Ended   Three Months Ended 
   December 31, 2014   December 31, 2013 
Geographic Location  Revenue   % of Total   Revenue   % of Total 
United States  $7,682,000    80%  $8,908,000    83%
Europe   884,000    9%   830,000    8%
Other   1,045,000    11%   974,000    9%
   $9,611,000    100%  $10,712,000    100%

 

Note 10 - Income Taxes

 

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

 

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

 

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

 

The Company applies the authoritative provisions related to accounting for uncertainty in income taxes. As required by these provisions, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being reached upon ultimate settlement with the relevant tax authority. As of December 31, 2014 and September 30, 2014, the Company has no unrecorded liabilities for uncertain tax positions. Interest and penalty charges, if any, related to uncertain tax positions would be classified as income tax expense in the accompanying consolidated statement of operations. As of December 31, 2014 and September 30, 2014, the Company had no accrued interest or penalties related to uncertain tax positions. The Company currently has no federal or state tax examinations in progress.

 

The effective rate of (0.57%) for the three months ended December 31, 2014 and (3.12%) for the three months ended December 31, 2013 differs from the U.S. federal statutory income tax rate of 34% primarily due to a full valuation allowance against the Company’s U.S. deferred tax asset.

 

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company’s tax filings for federal and state jurisdictions for the tax years beginning with 2010 are still subject to examination.

 

Note 11 – Settlement of Pension Liability

 

On December 1, 2014, the Company terminated and settled its pension liability with each of the remaining participants in the EMF Defined Benefit Plan (the “Plan”). The Plan had been frozen since 2006. The total benefit payments made upon termination were $688,000 and the actual plan assets at the date of termination were $332,000. The Company funded and expensed the difference upon settlement of the Plan.

 

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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 in the Dynasil Corporation of America ("Dynasil", the "Company" or "we") Form 10-K for the fiscal year ended September 30, 2014.

 

General Business Overview

 

Operations

 

Revenue for the first quarter of fiscal year 2015, which ended December 31, 2014, was $9.6 million, a decrease of 10.3% compared with revenue of $10.7 million for the quarter ended December 31, 2013. The decrease is attributable to an $0.8 million decline in revenue from the Instruments segment, substantially all the assets of which were sold in the first quarter of 2014, and to a $1.2 million drop in revenue from the Contracts Research segment due to continuing reductions and slowdowns in government research grant funding which began to impact the segment’s revenue during the third quarter of 2014. These decreases were partially offset by a $0.8 million increase in revenue in the Optics segment as a result of both internal revenue growth and the acquisition of the assets of DichroTec Thin Films LLC (“DichroTec”) in June, 2014.

 

Cost of Revenue for the first quarter of 2015 was $6.0 million, a decrease of 3.9% compared with $6.3 million for the quarter ended December 31, 2013 primarily as a result of decreases in the cost of revenue associated with the Contract Research segment revenue decrease discussed above and the sale of the Instruments segment businesses offset by increases in the Optics segment associated with the revenue growth discussed above.

 

Total operating expenses increased $0.2 million or 4.6% to $4.2 million for the three month period ended December 31, 2014. The reasons for the increase include the $0.4 million pension settlement expense in 2015, $0.5 million of increased expense in the Optics segment as a result of SG&A associated with the DichroTec acquisition and increased corporate allocations. These increases were partially offset by a $0.5 million reduction in operating expenses from the sale of substantially all of the Instruments segment and $0.3 million in lower Contract Research SG&A expenses as a result of cost saving measures implemented during 2014 in response to the decline in government spending and contract awards. Total operating expenses for the Biomedical segment also increased approximately $0.1 million in the first quarter of fiscal year 2015 compared to the first quarter of fiscal year 2014 as a result of higher tissue sealant research expenses at Xcede, the Company’s 90% owned joint venture.

 

Income (Loss) from Operations for the quarter ended December 31, 2014 was a loss of approximately $0.4 million compared with income of $1.6 million for the quarter ended December 31, 2013. Included in Income (Loss) from Operations in the first quarter of 2014 was a $0.4 million pension settlement expense and a $0.2 million gain on the sale of a product line while the first quarter of 2014 included a gain of approximately $1.2 million gain related to the sale of two businesses in the Instruments segment. Excluding the onetime pension expense and the gain on the sale of the product line in 2015 and the gain on the sales of the businesses in 2014, Income (Loss) from Operations was a loss of $0.2 million in 2015 compared to income of $0.4 million in 2014. The decrease in income from operations was due to lower gross margins on certain large customer shipments and higher expenses within the businesses comprising the optics segment and, to a lesser extent, lower gross profit partially offset by lower SG&A expense in the Contract Research segment as a result of the lower revenues as discussed above.

 

Net Income (Loss) was a loss of $0.6 million, or $0.03 per share, for the quarter ended December 31, 2014, compared with income of $1.4 million, or $0.10 per share, for the quarter ended December 31, 2013.

 

We expect to continue to incur research expenses in Xcede, our majority-owned joint venture that is focused on developing a tissue sealant technology for a wide spectrum of applications. We expect these expenses to increase as Xcede prepares for human trials that are expected to commence in the fourth quarter of 2015.

 

Commercialization of technology from our extensive research and development portfolio and strategic acquisitions are expected to be the key drivers of our future growth and we plan to continue to invest in these growth opportunities, depending upon the availability of capital to fund these endeavors. 

 

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Results of Operations

 

Results of Operations for the Three Months Ended December 31,
2014

   Contract
Research		   Optics   Instruments   Biomedical   Total 
Revenue  $4,663,000   $4,948,000   $-   $-   $9,611,000 
Gross Profit   2,098,000    1,495,000    -    -    3,593,000 
GM %   45.0%   30.2%   -    -    37.4%
SG&A   1,881,000    2,091,000    -    235,000    4,207,000 
Gain on sale of assets   -    185,000    -    -    185,000 
Operating Income (Loss)   216,000    (410,000)   -    (235,000)   (429,000)
                          
Depreciation and Amortization   74,000    204,000    -    15,000    293,000 
Capital expenditures   -    244,000    -    -    244,000 
                          
Intangibles, Net   290,000    752,000    -    229,000    1,271,000 
Goodwill   4,939,000    1,232,000    -    -    6,171,000 
Total Assets  $9,036,000   $15,226,000   $289,000   $922,000   $25,473,000 

 

Results of Operations for the Three Months Ended December 31,
2013

   Contract
Research		   Optics   Instruments   Biomedical   Total 
Revenue  $5,840,000   $4,099,000   $773,000   $-   $10,712,000 
Gross Profit   2,530,000    1,597,000    324,000    -    4,451,000 
GM %   43.3%   39.0%   41.9%   -    41.6%
SG&A   2,182,000    1,199,000    469,000    174,000    4,024,000 
Gain on sale of assets   -    -    1,187,000    -    1,187,000 
Operating Income (Loss)   348,000    398,000    1,042,000    (174,000)   1,614,000 
                          
Depreciation and Amortization   70,000    178,000    2,000    16,000    266,000 
Capital expenditures   -    131,000    -    -    131,000 
                          
Intangibles, Net   324,000    870,000    -    163,000    1,357,000 
Goodwill   4,939,000    1,317,000    -    -    6,256,000 
Total Assets  $10,360,000   $12,538,000   $752,000   $505,000   $24,155,000 

 

Revenue for the first quarter of fiscal year 2015, which ended December 31, 2014, declined $1.1 million or 10.3% to $9.6 million. Revenue from our Contract Research segment decreased approximately $1.2 million or 20.2%, compared with the same period in the prior year, primarily as a result of a drop in government research awards granted to the Contract Research segment. Management believes this lower level reflects continuing government budget pressure to reduce spending across the majority of the agencies that we contract with. The research backlog for the Contracts Research segment has declined approximately $2.0 million from September 30, 2014 to $28.0 million at December 31, 2014. The Optics segment revenue increased approximately $0.8 million or 20.7% for the three months ended December 31, 2014, compared with the same period in the prior year, as a result of the acquisition of the DichroTec business in June 2014 as well as internal growth across the businesses of the segment. The Instruments segment revenue decline is a result of the sale of the lead paint and medical product businesses during the quarter ending December 31, 2013. The Biomedical segment had no revenue in the three months ended December 31, 2014.

 

Gross Profit for the three months ended December 31, 2014 was $3.6 million, or 37.4% of revenues, compared to $4.5 million or 41.6% of revenues for the three months ended December 31, 2013. Gross profit decreased $0.4 million for the Contract Research primarily as a result of lower billable hours reflecting the lower level of government research awards. Gross profit for the Optics segment decreased $0.1 million to 30.2% of revenues at December 31, 2014 compared to 39.0% of sales for the quarter ended December 31, 2013 primarily as a result of an increase in the mix of sales of lower margin products as well as lower than planned yields on a new product line. There was no gross profit associated with the Instruments segment due to the sales of the businesses in the Instrument segment in fiscal year 2014. 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.

 

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Total operating expenses for the three months ended December 31, 2014 increased to $4.2 million, or 43.8% of revenues compared to $4.0 million or 41.6% of revenues for the three months ended December 31, 2013. The operating expenses for the first quarter of 2015 include $0.4 million of expense associated with the pension settlement and a $0.5 million reduction of operating expenses that resulted from the sale of the lead paint and medical products businesses in the Instruments segment. Operating expenses in the Optics segment also increased approximately $0.5 million for the quarter, compared with the same period in the prior year, as a result of operating expenses associated with the DichroTec acquisition and increased corporate allocations.

 

As a result of the items discussed above, Income (Loss) from Operations for the three months ended December 31, 2014 was a loss of $0.4 million compared to income of $1.6 million for the same period in fiscal 2014.

 

Net interest expense decreased approximately $0.1 million for the three months ended December 31, 2014 compared with the three months ended December 31, 2013 due to the lower average level of borrowings in the first quarter of 2015 as well as the accrual of default interest in the first quarter of 2014 which was not required in the first quarter of fiscal 2015.

 

Income tax expense for the three months ended December 31, 2014 consists primarily of state tax expense offset by certain U.K. tax research credits.

 

Net Income (Loss) for the three months ended December 31, 2014 was a loss of $0.6 million, or $0.03 in basic earnings per share, compared with income of $1.4 million, or $0.10 in basic earnings per share, for the quarter ended December 31, 2014. Included in Net Income in the first quarter of 2014 was a gain of approximately $1.2 million related to the sale of the businesses in the Instrument’s segment. 

 

Liquidity and Capital Resources

 

Liquidity Overview and Outlook

 

Net cash as of December 31, 2014 was $2.5 million or approximately $1.3 million less than the net cash of $3.8 million at September 30, 2014.

 

As of December 31, 2014, the Company was in compliance with the terms of all its outstanding indebtedness which consisted of $2.4 million of senior debt borrowed under a revolving line of credit with Middlesex Savings Bank and $3.0 million of subordinated debt owed to Massachusetts Capital Resources Company. The Company has $1.3 million of additional availability under its Middlesex Savings Bank line of credit based on its collateral calculations as of December 31, 2014.

 

The Company’s Xcede subsidiary currently has $0.7 million of cash remaining from its Convertible Note financing that was completed in September of 2014. Management does not believe that the convertible notes, which are payable upon demand after June 30, 2015, will be called by the noteholders and, as a result, believes that this cash is sufficient to fund Xcede’s operations for at least the next six months. Management is continuing to pursue various financing alternatives.

 

Management believes that the cash and availability under the line of credit discussed above are adequate to meet the Company’s current liquidity requirements.

 

Cash From Operating Activities

 

In total, including the changes in accounts receivable, prepaid expenses, accounts payable and accrued expenses, operating activities used cash of $1.6 million for the three months ended December 31, 2014. Approximately $1.5 million of the cash used is a result of balance sheet changes including a $0.4 million decrease in accounts payable as a result of normal cyclical billing and payment activity and a $0.5 million increase in prepaid expenses and other current assets primarily as a result of deposits in connection with capital equipment orders.

 

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Cash From Investing and Financing Activities

 

The Company generated $0.2 million from the sale of a product line and used cash of approximately $0.2 million for the purchase of property, plant and equipment for the three months ended December 31, 2014. The Company expects capital expenditures to decline from the current spending levels in the second half of the year.

 

Total outstanding bank debt for the three months ended December 31, 2014 increased approximately $0.3 million to $5.9 million from $5.6 million at September 30, 2014. Net cash generated from financing activities was approximately $0.3 million for the three months ended December 31, 2014.

 

Critical Accounting Policies and Estimates

 

There have been no material changes in our critical accounting policies or critical accounting estimates since September 30, 2014. We have not adopted any accounting policies since September 30, 2014 that have or will have a material impact on our consolidated financial statements. 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, 2014 as well as the notes in this Form 10-Q.

 

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

 

Revenue Recognition

 

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

 

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

 

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

 

Goodwill

 

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

 

·A significant adverse long term outlook for any of our industries;
·An adverse finding or rejection from a regulatory body involved in new product regulatory approvals;
·Failure of an anticipated commercialization product line;
·Unanticipated competition or a disruptive technology introduction;
·The testing for recoverability under the Impairment or Disposal of Long-Lived Assets Subsections of Subtopic 360-10 of a significant asset group within a reporting unit;
·A loss of key personnel; and
·An expectation that a reporting unit carrying goodwill, or a significant portion of a reporting unit, will be sold or otherwise disposed of.

 

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

 

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

 

Intangible Assets

 

The Company’s intangible assets consist of acquired customer relationships and trade names of Hilger Crystals, Ltd., acquired know-how of Radiation Monitoring Devices, Inc. and purchased and patented biomedical technologies within the Biomedical Segment. The Company amortizes its intangible assets with definitive lives over their useful lives, which range from 5 to 20 years, based on the time period the Company expects to receive the economic benefit from these assets. No impairment charge was recorded during the three month periods ended December 31, 2014 or 2013.

 

Impairment of Long-Lived Assets

 

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

 

Allowance for Doubtful Accounts Receivable

 

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

 

Stock-Based Compensation

 

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

 

Income Taxes

 

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

 

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RECENT ACCOUNTING PRONOUNCEMENTS

 

Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, which provides new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals representing a strategic shift in operations will be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations reporting. This guidance is effective for the Company beginning in fiscal 2015. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

Revenue from Contracts with Customers (Topic 606) Section A—Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). In May 2014, the FASB issued ASU No. 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new guidance is effective for the Company beginning in fiscal 2017. Early adoption is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

Compensation—Stock Compensation (Topic 718) Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. In June 2014, the FASB issued ASU No. 2014-12, which clarifies the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Under the new guidance, a performance target that affects vesting and could be achieved after completion of the service period should be treated as a performance condition under FASB Accounting Standards Codification (ASC) 718 and, as a result, should not be included in the estimation of the grant-date fair value of the award. An entity should recognize compensation cost for the award when it becomes probable that the performance target will be achieved. In the event that an entity determines that it is probable that a performance target will be achieved before the end of the service period, the compensation cost of the award should be recognized prospectively over the remaining service period. The new guidance is effective for the Company beginning in fiscal 2016. Early adoption is permitted. Adoption of this ASU is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows.

 

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

 

Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. In January 2015, the FASB issued ASU No. 2015-01, which eliminates from GAAP the concept of extraordinary items. The ASU retains and expands the existing presentation and disclosure guidance for items that are unusual in nature or occur infrequently to also include items that are both unusual in nature and infrequently occurring. The provisions of this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted, provided that presentation applied to the beginning of the fiscal year of adoption. This amendment is applicable to us beginning in the first quarter of 2017. The adoption of this standard is not expected to have a material impact on our financial statements.

 

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Forward-Looking Statements

 

The statements contained in this Quarterly Report on Form 10-Q which are not historical facts, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs and assumptions of our management, including, without limitation, our expectations regarding results of operations, our compliance with the financial covenants under our loan agreements with Middlesex Savings Bank and Massachusetts Capital Resource Company, Xcede obtaining financing from outside investors, the commercialization of our products including our dual mode detectors, our development of new technologies including at Xcede and Dynasil Biomedical, uncertainty of the impact of the DichroTec acquisition, the adequacy of our current financing sources to fund our current operations, our growth initiatives, our capital expenditures and the strength of our intellectual property portfolio. These forward-looking statements may be identified by the use of words such as “plans,” “intends,” “may,” “could,” “expect,” “estimate,” “anticipate,” “continue” or similar terms, though not all forward-looking statements contain such words. The actual results of the future events described in such forward-looking statements could differ materially from those stated in such forward-looking statements due to a number of important factors. These factors that could cause actual results to differ from those anticipated or predicted include, without limitation, our ability to comply with the financial covenants under our outstanding indebtedness, our ability to develop and commercialize our products, including obtaining regulatory approvals, the size and growth of the potential markets for our products and our ability to serve those markets, the rate and degree of market acceptance of any of our products, general economic conditions, costs and availability of raw materials and management information systems, our ability to obtain and maintain intellectual property protection for our products, competition, the loss of key management and technical personnel, our ability to obtain timely payment of our invoices to governmental customers, litigation, the effect of governmental regulatory developments, the availability of financing sources, our ability to identify and execute on acquisition opportunities and integrate such acquisitions into our business, and seasonality, as well as the uncertainties set forth in the Company’s Annual Report on Form 10-K, filed on December 17, 2014, 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 3 Quantitative and Qualitative Disclosures About Market Risk.

 

Dynasil, as a smaller reporting company, is not required to complete this item.

 

ITEM 4 Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures.

 

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

 

Our management, including the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2014. Based on this evaluation, our management concluded that as of December 31, 2014, these disclosure controls and procedures were effective at the reasonable assurance level.

 

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Changes in Internal Control Over Financial Reporting

 

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

 

PART II – OTHER INFORMATION

 

ITEM 1A.  RISK FACTORS

 

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2014, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

ITEM 6 Exhibits

 

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

 

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

 

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

 

99.1 Press release, dated February 17, 2015 issued by Dynasil Corporation of America announcing its financial results for the quarter ended December 31, 2014.

 

101 The following materials from Dynasil Corporation of America’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of December 31, 2014 and September 30, 2014, (ii) Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended December 31, 2014; (iv) Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and 2013, and (v) Notes to Consolidated Financial Statements.

 

SIGNATURES

 

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

 

DYNASIL CORPORATION OF AMERICA    
       
BY: /s/ Peter Sulick DATED: February 17, 2015  
  Peter Sulick,    
  Chief Executive Officer and President    
       
  /s/ Thomas C. Leonard DATED: February 17, 2015  
  Thomas C. Leonard,    
  Chief Financial Officer    

 

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