UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
XX QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
--- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010
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
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(Exact name of registrant as specified in its charter)
Delaware 22-1734088
(State or other jurisdiction (IRS Employer Identification No.)
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of incorporation)
385 Cooper Road, West Berlin, New Jersey, 08091
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(Address of principal executive offices)
(856) 767-4600
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(Registrant's telephone number, including area code)
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 XX 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 No
---- ----
1
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
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Non-accelerated filer Smaller reporting company XX
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Indicate by check mark whether the registrant is a
shell company Yes No XX
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The Company had 12,603,063 shares of common stock, par value $.0005 per share,
outstanding as of May 17, 2010.
2
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION PAGE 3
------
Item 1. Financial Statements
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2010
AND SEPTEMBER 30, 2009 4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND SIX MONTHS ENDED MARCH 31, 2010 AND 2009 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED MARCH 31, 2010 AND 2009 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 20
Market Risk
Item 4T. Controls and Procedures 20
PART II. OTHER INFORMATION 21
Item 1. Legal Proceedings 21
Item 6. Exhibits 21
Signatures 22
3
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31 September 30
2010 2009
(Unaudited)
---------- ----------
Current assets
Cash and cash equivalents $ 2,760,718 $3,104,778
Accounts receivable, net of allowance for doubtful
accounts of $107,381 and $123,853 and sales
returns of $24,132 and $18,916 for
March 31, 2010 and
September 30, 2009, respectively 5,103,968 4,053,742
Inventories 2,135,745 2,371,516
Deferred tax asset 290,100 290,100
Prepaid expenses and other current assets 425,799 306,848
---------- ----------
Total current assets 10,716,330 10,126,984
Property, Plant and Equipment, net 2,656,939 2,744,724
Other Assets
Intangibles, net 6,964,425 7,232,035
Goodwill 11,054,396 11,054,396
Deferred financing costs, net 53,252 64,637
---------- ----------
Total other assets 18,072,073 18,351,068
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Total Assets $31,445,342 $31,222,776
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $ 1,820,685 $ 1,749,524
Note to a related party 2,000,000 -0-
Accounts payable 797,094 773,837
Accrued expenses and other current liabilities 1,441,939 1,111,342
Income taxes payable 332,590 507,122
Billings in excess of costs 12,895 60,448
Dividends payable 131,400 149,150
---------- ----------
Total current liabilities 6,536,603 4,351,423
Long-term Liabilities
Long-term debt, net 5,153,621 6,386,796
Note payable to related party -0- 2,000,000
---------- ----------
Total long-term liabilities 5,153,621 8,386,796
Stockholders' Equity
Common Stock, $.0005 par value, 40,000,000 shares
authorized, 13,382,178 and 12,250,257 shares issued,
12,572,018 and 11,440,097 shares outstanding 6,691 6,125
4
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Continued)
Preferred Stock, $.001 par value, 10,000,000
Shares authorized, 5,256,000 and 5,966,000 5,256 5,966
shares issued and outstanding for March 31,
2010 and September 30, 2009, 10% cumulative,
convertible
Additional paid in capital 16,900,110 16,364,388
Retained earnings 4,066,861 3,094,420
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20,978,918 19,470,899
Deferred Compensation - Common Stock (237,458) -0-
Less 810,160 shares in treasury - at cost (986,342) (986,342)
---------- ----------
Total stockholders' equity 19,755,118 18,484,557
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Total Liabilities and Stockholders' Equity $31,445,342 $31,222,776
========== ==========
5
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended
March 31 March 31
2010 2009 2010 2009
---------- --------- ---------- ----------
Net revenues $10,263,326 $8,602,885 $20,200,092 $17,370,161
Cost of revenues 6,054,847 5,105,158 12,106,800 10,782,696
---------- --------- ---------- ----------
Gross profit 4,208,479 3,497,727 8,093,292 6,587,465
Selling, general and
administrative expenses 3,099,355 2,742,466 5,912,334 5,174,834
---------- --------- ---------- ----------
Income from operations 1,109,124 755,261 2,180,958 1,412,631
Interest expense, net 151,988 219,861 314,429 406,658
---------- --------- ---------- ----------
Income before income taxes 957,136 535,400 1,866,529 1,005,973
Income taxes 323,836 131,266 619,462 246,198
---------- --------- ---------- ----------
Net income 633,300 404,134 1,247,067 759,775
========== ========= ========== ==========
Three Months Ended Six Months Ended
March 31 March 31
2010 2009 2010 2009
---------- --------- ---------- ----------
Net income 633,300 404,134 1,247,067 759,775
Dividends on preferred stock 131,400 149,150 274,633 298,300
---------- --------- ---------- ----------
Net income applicable to common
shareholders 501,900 254,984 972,434 461,475
Dividend add back due to assumed
Preferred Stock conversion 131,400 -0- 274,633 -0-
---------- --------- ---------- ----------
Net income for diluted income per
common share $633,300 $254,984 $1,247,067 $461,475
========== ========== ========== ==========
Basic net income per common share $0.04 $0.02 $0.08 $0.04
Diluted net income per common share $0.04 $0.02 $0.09 $0.04
Weighted average shares outstanding
Basic 12,502,365 11,367,008 12,146,499 11,358,143
Diluted 14,839,745 12,345,107 14,483,879 12,336,162
6
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
March 31
2010 2009
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Cash flows from operating activities:
Net income $ 1,247,067 $ 759,775
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Stock compensation expense 120,364 53,875
Provision for doubtful accounts and sales returns (11,257) (11,632)
Depreciation and amortization 504,644 489,443
(Increase) decrease in:
Accounts receivable (1,038,967) (1,864,300)
Inventories 235,771 437,185
Prepaid expenses and other current assets (161,686) (113,610)
Increase (decrease) in:
Accounts payable and accrued expenses 336,107 (742,886)
Income taxes payable (174,532) 117,400
Billings in excess of cost (47,553) 180,011
----------- ----------
Net cash provided by (used in) operating activities 1,009,958 (694,739)
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (140,955) (218,678)
----------- ----------
Net cash used in investing activities (140,955) (218,678)
----------- ----------
Cash flows from financing activities:
Issuance of common stock 223,584 86,792
Repayment of long-term debt (1,162,014) (894,148)
Repayment of short-term debt -0- (431,044)
Deferred financing costs incurred -0- 6,139
Preferred stock dividends paid (274,633) (298,300)
----------- ----------
Net cash used in financing activities (1,213,063) (1,530,381)
----------- ----------
Net decrease in cash and cash equivalents (344,060) (2,443,798)
Cash and cash equivalents, beginning 3,104,778 3,882,955
----------- ----------
Cash and cash equivalents, ending $2,760,718 $1,439,157
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7
DYNASIL CORPORATION OF AMERICA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
The consolidated balance sheet as of September 30, 2009 was audited and
appears in the Form 10-K previously filed by the Company. The consolidated
balance sheet as of March 31, 2010 and the consolidated statements of
operations and cash flows for the three and six months ended March 31, 2010
and 2009, and the related information contained in these notes have been
prepared by management without audit. In the opinion of management, all
adjustments (which include only normal recurring items) necessary to present
fairly the financial position, results of operations and cash flows in
conformity with generally accepted accounting principles as of March 31, 2010
and for all periods presented have been made. Interim operating results are
not necessarily indicative of operating results for a full year.
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. It is suggested that
these condensed consolidated financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's September
30, 2009 Annual Report on Form 10-K previously filed by the Company with the
Securities and Exchange Commission.
Reclassifications
Certain amounts as previously reported have been reclassified to conform to
the current year financial statement presentation.
Note 2 - Inventories
Inventories are stated at the lower of average cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Inventories consist
of raw materials, work-in-process and finished goods. The Company evaluates
inventory levels and expected usage on a periodic basis and records
adjustments for impairments as required.
Inventories consisted of the following:
March 31, 2010 September 30, 2009
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Raw Materials $1,479,595 $1,374,134
Work-in-Process 365,884 550,151
Finished Goods 290,266 447,231
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$2,135,745 $2,371,516
================= ==================
Note 3 - Billings in Excess of Costs
Billings in excess of costs relates to research and development contracts and
consists of billings at provisional contract rates less actual costs plus
fees.
Note 4 - Net Income Per Share
Basic net income per common share is computed by dividing the net income
applicable to common
shares after preferred stock dividend requirements, if applicable, by the
weighted average number
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of common shares outstanding during each period. Diluted net income per
common share adjusts basic earnings per share for the effects of common stock
options, convertible preferred stock and other potential dilutive common
shares outstanding during the periods.
For purposes of computing diluted earnings per share, 2,337,380 and 978,019
common share equivalents were assumed to be outstanding for the quarters ended
March 31, 2010 and 2009, respectively. The effect of the assumed conversion
of certain stock options was anti-dilutive and therefore excluded from the
computations. The computation of basic and diluted net income per common
share is as follows:
Calculation of Net Income for Basic Earnings per Share
March 31, 2010 March 31, 2009
Net income $ 1,247,067 $ 759,775
Less: Preferred stock dividends (274,633) (298,300)
---------- -----------
Income allocable to common shareholders $ 972,434 $ 461,475
Calculation of Net Income for Diluted Earnings per Share
March 31, 2010 March 31, 2009
Net income 1,247,067 $ 759,775
Less: Preferred stock dividends $ -0- (298,300)
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Net Income for Dilutive Earnings
per Share $ 1,247,067 $ 461,475
Weighted average shares outstanding March 31, 2010 March 31, 2009
Basic 12,146,499 11,358,143
Effect of dilutive securities
Stock Options 234,980 33,719
Convertible Preferred Stock 2,102,400 944,300
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Diluted average shares outstanding 14,483,879 12,336,162
Note 5 - Stock Based Compensation
The fair value of the stock options granted was estimated at the date of grant
using the Black-Scholes options pricing model. The list of assumptions used
for the Black-Scholes option pricing model is presented below with numbers
shown for the most recent grant:
March 31, 2010
Expected term in years 3 years
Risk-free interest rate 4.61%
Expected volatility 73.35%
Expected dividend yield 0.00%
The expected volatility was determined with reference to the historical
volatility of the
Company's stock. The expected term of options granted represents the period
of time for which the options have been granted. 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.
9
During the three months ended March 31, 2010, 94,647 stock options were
granted at $3.58 per share and 6,226 stock options were exercised. The stock
options granted are for Director Compensation, are currently vested and have a
stock-based compensation expense totaling $111,000. This expense will be
recognized over the twelve months ending February 2011. Of the options
exercised, 2,182 had an exercise price of $0.51 per share with $1,112.82 paid
in cash, 1,910 had an exercise price of $0.60 per share with $1,146.00 paid in
cash and 2,134 had an exercise price of $0.53 per share with $1,131.02 paid in
cash. For three months ended March 31, 2010, total stock-based compensation
charged to operations was $65,688 consisting of $15,439 from previously
granted options that vested during this period, $27,581 from Director stock
options, and $22,668 for stock grants. At March 31, 2010, there was
approximately $310,191 of total unrecognized compensation expense related to
non-exercisable option-based compensation arrangements under the Plan. The
Company cancelled $6,031 worth of options during the three months ended March
31, 2010. Compensation expense relating to stock grants during the three
months ended March 31, 2010 totaled $22,668, comprised of 2,768 shares granted
at $2.71 and 47,584 shares granted at $2.69 per share, which includes 43,619
shares for deferred directors' compensation.
During the six months ended March 31, 2010, 664,647 stock options were granted
at prices ranging from $3.19 to $4.06 per share and 88,192 stock options were
exercised. Of the granted stock options, 550,000 vest quarterly beginning in
January 2010, 20,000 of the remaining options vest in 2011, and the remaining
94,647 are currently vested. Of the options exercised, 80,000 had an exercise
price of $2.00 per share with $160,000 paid in cash, 3,876 had an exercise
price of $0.60 per share with $2,325.60 paid in cash, 2,182 had an exercise
price of $0.51 per share with $1,112.82 paid in cash, and 2,134 had an
exercise price of $0.53 per share with $1,131.02 paid in cash. For the six
months ending March 31, 2010, total stock based compensation was charged to
operations was $120,364, consisting of $16,857 from previously granted options
that vested during this period, $55,082 from Director stock options, and
$48,425 from stock grants. The Company cancelled $12,954 worth of stock
options during the six months ended March 31, 2010. Compensation expense
relating to stock grants during the six months ended March 31, 2010 totaled
$48,425, comprised of 6,200 shares granted at $2.80, 300 shares granted at
$2.99, 3,769 shares granted at $1.99, 2,768 shares granted at $2.71 and 47,584
shares granted at $2.69 per share, which includes 43,619 shares for deferred
directors' compensation.
Note 6 - Equity
As part of the July 1, 2008 acquisition of specific assets of RMD Instruments,
LLC, the Company issued one million Dynasil common stock shares as part of the
purchase price. The Seller's members may tender the shares of the acquisition
stock to Dynasil for repurchase by it at a repurchase price of $2.00 per share
during a two year period starting July 1, 2010, upon no less than ninety (90)
days prior notice to the Company. The Company has included 1,000,000 shares
in common stock outstanding since the current market price exceeds the put
price of $2.00 and management believes the likelihood of redemption is remote.
On November 30, 2009, Dynasil issued an aggregate of 946,431 shares of its
Common Stock, $.0005 par value per share, as a result of the exercise of the
conversion rights by holders of 710,000 shares of its Series B 10% Cumulative
Convertible Preferred Stock (the "Series B
Preferred Shares"). Dynasil had previously called all of the Series B
Preferred Shares for redemption on November 30, 2009. 100% of the Series B
preferred stock was converted to common stock which eliminates dividend
payments of $71,000 on an annual basis. As of March 31, 2010,
5,256,000 shares of Dynasil's Series C 10% Cumulative Convertible Preferred
Stock were outstanding. The Company's convertible preferred stock, when
issued, were convertible to common stock at or above the current market price
of the Company's common stock and therefore, contain no beneficial conversion
feature.
10
Note 7 - Segment Reporting
Dynasil's business breaks down into two segments: optics/photonics products
and instruments and contract research. Within these segments, there is a
segregation of reportable units based upon the organizational structure used
to evaluate performance and make decisions on resource allocation, as well as
availability and materiality of separate financial results consistent with
that structure. The optics/photonics products and instruments segment
manufactures optical materials, components, coatings and specialized
instruments used in various applications in the medical, industrial, and
homeland security/defense sectors. Our contract research segment is one of
the largest small business participants in U.S. government-funded research.
Segment Financial Information
Six Months Ended
Segment March 31, 2010 March 31, 2009
-------- -------------- --------------
Contract Research
Revenues $ 11,621,992 $ 9,805,325
Income from Operations 846,527 710,077
Income as a percent of sales 7.3% 7.2%
Photonics Products and Instruments
Revenues $ 8,578,100 $ 7,564,836
Income from Operations 1,334,431 702,554
Income as a percent of sales 15.6% 9.3%
Total
Revenues $ 20,200,092 $ 17,370,161
Income from Operations 2,180,958 1,412,631
Income as a percent of sales 10.8% 8.1%
Note 8 - Income Taxes
The FASB's guidance on income taxes requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on differing
treatment of items for financial reporting and income tax reporting purposes.
The deferred tax balances are adjusted to reflect tax rates by tax
jurisdiction, based on currently enacted tax laws, which will be in effect in
the years in which the temporary differences are expected to reverse. We have
provided deferred income tax benefits on net operating loss carry-forwards to
the extent we believe we will be able to utilize them in future tax filings.
The FASB's guidance also prescribes a comprehensive model for how a company
should measure, recognize, present, and disclose in its financial statements
uncertain tax positions that the company has taken or expects to take on a tax
return. The Company recognizes the tax benefits from uncertain tax positions
only if it is more likely than not that the tax position will be sustained on
examination by the taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such
positions are
measured based on the largest benefit that has a greater than 50% likelihood
of being realized upon ultimate settlement. Interest and penalties, if
incurred, are included in interest and financing expense. The Company's
income tax filings are subject to audit by various taxing authorities. The
Company's open audit periods are 2005 - 2008. There are no material uncertain
positions.
11
Note 9 - Subsequent Events
The Company has performed an evaluation of subsequent events through May 17,
2010, which is the date the financial statements were issued.
Dynasil's Line of Credit of $1,000,000 with Susquehanna Bank has been extended
to July 31, 2010, as an "on demand" Line of Credit. The interest rate on the
Line of Credit was changed on January 31, 2010, from the bank's prime
commercial rate of interest with no minimum rate to the bank's prime rate of
interest with a minimum interest rate of 4%. This minimum rate has been
continued. As of the date of this report and March 31, 2010, the entire
$1,000,000 Line of Credit was available for Company use.
Following a competitive bidding process, the Company has signed a Commitment
Letter with Sovereign Bank which will totally refinance the Company's debt
structure. The prospective credit arrangement will be composed of 3 sections:
- $3,000,000 Working Capital Line of Credit
This Line of Credit will be at the bank's Prime rate or one-month Libor
plus 2.75% and will have a two year maturity.
- $9,000,000 Term Debt
This will be used to refinance all existing Company debt.
$5,995,162 Susquehanna Bank Term Debt
2,000,000 RMD Instruments, LLC Note (due October 1, 2010)
965,005 Mortgage Note with Tompkins Trust
----------
$8,960,167 As of March 31, 2010
This Term Debt will have a 5 year maturity, but will be amortized using
7 years for the calculation of periodic principal payments. The interest rate
will be fixed at closing and if closing had occurred on May 10, 2010, the
fixed rate would have been 5.65%.
- $5,000,000 Acquisition Line of Credit
This Line of Credit will be used to fund, or partially fund, the
Company's plans for acquisitions. There will be specific guidelines
which will define a "Permitted Acquisition" under the Acquisition Line
of Credit. The Acquisition Line of Credit will be available for 2 years.
Upon an advance against the Acquisition Line of Credit, the borrowing
will be termed out on a basis coterminous with the Term Debt - again
using a 7 year amortization period. The interest rate will be fixed at
closing and if closing had occurred on May 10, 2010, the fixed rate
would have been 5.65%.
The new credit facilities will be secured by all Company assets and the
Company will be required to meet specific financial covenant requirements each
quarter.
The finalization of the new credit facilities with Sovereign Bank is subject
to the execution of documents and instruments containing representations,
warranties, conditions, covenants, events of default, and rights and remedies
upon default.
The Company is responsible for all expenses incurred by the bank. The Company
expects to have the new credit facilities in effect by July 1, 2010.
On or about May 6, 2008, the Company's EMF subsidiary ("EMF") received a
Summons with Notice (the "Summons") filed on January 18, 2008 in the Supreme
Court of the State of New York, County of Albany, by the New York State
Attorney General on behalf of the State of New York Workers' Compensation
Board (the "Board"), as plaintiff. The Summons required EMF, which is
12
one of a large number of defendants, to appear in the action commenced by the
Board alleging its entitlement to recover previously billed and unpaid
assessments in a Manufacturing Self Insurance Trust that terminated on or
about August 31, 2007. On April 6, 2010, EMF accepted a settlement offer from
the Board that calls for EMF to pay $21,509.37 no later than June 3, 2010.
The settlement offer has been accepted by the Board as of May 4, 2010 without
any contingency requirements. Although the settlement is not yet paid, EMF
has fully recorded the liability in its books and records. No further
activity is required.
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 ending September 30, 2009.
General Business Overview
Revenues for the second quarter of fiscal year 2010 which ended March 31, 2010
were $10.3 million, an increase of 19.3% over revenues of $8.6 million for the
quarter ended March 31, 2009. Income from Operations for the quarter was
$1.11 million, an increase of 46.9% over Income from Operations of $0.8
million for the quarter ended March 31, 2009. Net Income for the quarter was
$633,300 or $0.04 per share, compared with a net income of $404,134, or $0.02
per share, for the quarter ended March 31, 2009.
For the six months ended March 31, 2010, our Contract Research segment
("Contract Research") revenues increased 18.5% over the prior year period.
Interest in our unique research capabilities has increased. For example, our
Contract Research segment was awarded an additional $2.5 million by the
Domestic Nuclear Detection Office of the Department of Homeland Security.
Operating Income has increased in tandem with revenues since the majority of
these research contracts are primarily on a 'cost plus' basis.
For the same six month period, the revenues for our Optics Photonics and
Instruments Segment ("Products and Instruments") increased 13.4%, but Income
from Operations increased 90.0%. Gross Profit margin improved from 35.6% of
sales to 40.4%. This is partially a return of economies of scale with higher
revenues coupled with continued cost controls efforts even in the face of
higher revenues.
We continue to devote resources to our extensive technology portfolio to
further increase our organic growth and we have increased our acquisition-
related activities.
Results of Operations
3 Months Ended 3/31/10 3 Months Ended 3/31/09
Contract Products & Contract Products &
Research Instruments Total Research Instruments Total
-------- ----------- ---------- -------- ----------- --------
Revenue $5,834,409 $4,428,917 $10,263,326 $4,950,232 $3,652,653 $8,602,885
Gross Profit 2,431,218 1,777,261 4,208,479 2,086,198 1,411,529 3,497,727
SG&A 1,983,404 1,115,951 3,099,355 1,735,235 1,007,231 2,742,466
Operating Income 447,814 661,310 1,109,124 350,963 404,298 755,261
13
Revenue for the three months ended March 31, 2010 was $10,263,326, a 19.3%
increase from $8,602,885 for the three months ended March 31, 2009. Revenues
for the six months ended March 31, 2010 were $20,200,092, an increase of 16%
over revenues of $17,370,161 for the six months
ended March 31, 2009. The six month revenue increase was driven by a 18.5%
Contract Research increase and an 13.4% Products and Instruments increase. We
continue to be successful at winning Contract Research projects and management
is seeing a modest rebound in shipments and orders for Products and
Instruments.
Gross profit for the three months ended March 31, 2010 was $4,208,479, or
41.0% of sales, a 20.3% increase from $3,497,727, or 40.7% of sales for the
three months ended March 31, 2009. Gross profit for the six months ended
March 31, 2010 was $8,093,292, or 40.1% of sales, an increase of 22.6% over
the six months ended March 31, 2009 of $6,587,465 or 37.9% of sales. The six
month gross profit dollars for our Contract Research segment grew with
revenues and the gross profit as a percent of sales improved marginally from
39.7% in 2009 to 39.8% at March 31, 2010.
The gross profit margin for our Products and Instruments segment improved from
35.6% to 40.4% with the return of higher revenues comparing the six months
periods ended March 31, 2010 and 2009. The quarter showed a more moderate
improvement from 38.6% to 40.1%.
Selling, general and administrative ("SG&A") expenses for the three months
ended March
31, 2010, were $3,099,355 or 30.2% of sales, a decrease of 1.7 percentage
points from the three months ended March 31, 2009 of $2,742,466 or 31.9% of
sales. SG&A expenses for the six months ended March 31, 2010 were $5,912,334
or 29.3% of sales, a decrease of 0.5 percentage points from the six months
ended March 31, 2009 of $5,174,834 or 29.8% of sales.
SG&A expenses for the Contract Research segment were flat at 32.5% of sales
for the six month year to date period. SG&A expenses for the Products and
Instruments segment as a percent of sales fell from 27.6% of sales for the
three months ended March 31, 2009 to 25.2% of sales for the same period in
2010 with the higher revenues. The six month SG&A expenses ended March 31,
2010 were 24.9%, improved from 26.3% in the same period in 2009.
Income from Operations for the three months ended March 31, 2010 was
$1,109,124, an increase of 46.9% over Income from Operations of $755,261 for
the quarter ended March 31, 2009. Income from Operations for the six months
ended March 31, 2010 was $2,180,958, an increase of 54.4% over Income from
Operations for the six months ended March 31, 2009 of $1,412,631. For the
three months ended March 31, 2010, Contract Research had increased Income from
Operations totaling $96,851 while Products and Instruments' Income from
Operations rose $257,012 from the same period for 2009.
Net interest expense for the three months ended March 31, 2010, was $151,988,
compared to $219,861 for the three months ended March 31, 2009. Net interest
expense for the six months ended March 31, 2010 was $314,429, compared to
$406,658 for the six months ended March 31, 2009. The decrease in combined
interest expense was solely the result of the repayment of $2.0 million of
debt since March 31, 2009 which includes $0.4 million which was repaid during
the quarter ending March 31, 2010. The only change in interest rates was the
increase in rate on the RMD Instruments, LLC note of $2,000,000 from 8% to 9%,
effective as of October 1, 2009.
Net income for the three months ended March 31, 2010, was $633,300 or $0.04 in
basic earnings per share, which is up 56.7% from net income for the three
months ended March 31 2009, of $404,134, or $0.02 in basic earnings per share.
Net income for the six months ended March 31, 2010 was $1,247,067, or $.08 in
basic earnings per share, which is up 64.1% from the net
income for the six months ended March 31, 2009, of $759,775 or $.04 in basic
earnings per
share. When compared to the quarter ended March 31, 2009, the increase in net
income was
14
primarily driven by improved operating results combined with lower interest
expense, net of taxes.
The Company had a $323,836 provision for income taxes for the quarter ended
March 31, 2010 and a $131,266 provision for the quarter ended March 31, 2009.
The company had a $619,462 provision for income taxes for the six months ended
March 31, 2010, and a $246,198 provision for the six months ended March 31,
2009. The tax provision is higher due to increased net income results. Dynasil
had no further federal net operating loss carry-forwards and most New Jersey
state tax net operating loss carry-forwards were utilized for the quarter and
six months ended March 31, 2009. The company had approximately $445,532 of net
operating loss carry-forwards as of September 30, 2009 available to offset
certain future New Jersey and New York state taxable income that expire in
various years through 2013.
Liquidity and Capital Resources
Cash decreased by $344,060 for the six months ended March 31, 2010 to
$2,760,718. The primary sources of cash were net income of $1,247,069 with
depreciation and amortization expenses that aggregated to $504,644 and
issuance of common stock of $223,584. Working Capital accounts were impacted
with an increase of $1,038,967 in accounts receivable. This was nearly in
lock step with the increase in revenue. Days sales outstanding ("DSO")
changed only nominally from to 46.4 days at March 31, 2010 from 46.0 days at
September 30, 2009. Inventory fell and provided cash of $235,771 despite the
rise in sales. Inventory turns, which apply only to the Products and
Instruments segment, improved to 4.7 turns from a twelve month average of 4.1
turns. Repayment on long term debt was the largest use of cash with an amount
of $1,162,014. Payments on long term debt included the monthly payments on
term and mortgage debt of $862,014. In addition, a mandatory principal
repayment of $300,000 was made to Susquehanna Bank based on the earning
recapture in terms and conditions contained in the Term Loan and Line of
Credit Loan Agreement dated July 1, 2008 (the "Term Loan Agreement"). Also,
income taxes payable were reduced by $174,532 due to the timing of payments of
estimated taxes and billings in excess of costs decreased by $47,553.
Management believes that its current cash and cash equivalent balances, along
with the net cash generated by operations and credit lines, are sufficient to
meet its anticipated cash needs for working capital for at least the next 12
months. As of March 31, 2010, the Company had cash of $2.76 million and
available bank line of credit borrowings of $1.2 million. Under current debt
arrangements, the Company has scheduled debt repayments of $3.8 million over
the next 12 months including $2.0 million due October 1, 2010 to RMD
Instruments, LLC. In addition, beginning on July 1, 2010, the sellers of RMD
Instruments, LLC may tender up to 1,000,000 shares of Dynasil stock at a
repurchase price of $2.00 per share requiring the Company to make a cash
payment of up to $2.0 million (see Note 6 to the financial statements
contained in this report). Cash on hand combined with cash generated in
operating activities and the available line of credit borrowings are, in
Management's opinion, sufficient for the next 12 months.
In addition, following a competitive bidding process, the Company has signed a
Commitment Letter with Sovereign Bank which will totally refinance the
Company's debt structure. The prospective credit arrangement will be composed
of 3 sections.
- $3,000,000 Working Capital Line of Credit
This Line of Credit will be at the bank's Prime rate or one-month Libor
plus 2.75% and will have a two year maturity.
15
- $9,000,000 Term Debt
This will be used to refinance all existing Company debt.
$5,995,162 Susquehanna Bank Term Debt
2,000,000 RMD Instruments, LLC Note (due October 1, 2010)
965,005 Mortgage Note with Tompkins Trust
----------
$8,960,167 As of March 31, 2010
This Term Debt will have a 5 year maturity, but will be amortized using
7 years for the calculation of periodic principal payments. The interest
rate will be fixed at closing and if closing had occurred on May 10, 2010,
the fixed rate would have been 5.65%.
- $5,000,000 Acquisition Line of Credit
This Line of Credit will be used to fund, or partially fund, the
Company's plans for acquisitions. There will be specific guidelines
which will define a "Permitted Acquisition" under the Acquisition Line
of Credit. The Acquisition Line of Credit will be available for 2 years.
Upon an advance against the Acquisition Line of Credit, the borrowing
will be termed out on a basis coterminous with the Term Debt - again using
a 7 year amortization period. The interest rate will be fixed at closing
and if closing had occurred on May 10, 2010, the fixed rate would
have been 5.65%.
The new credit facilities will be secured by all Company assets and the
Company will be required to meet specific financial covenant requirements each
quarter.
The finalization of the new credit facilities with Sovereign Bank is subject
to the execution of documents and instruments containing representations,
warranties, conditions, covenants, events of default, and rights and remedies
upon default.
The Company is responsible for all expenses incurred by the bank. The Company
expects to have the new credit facilities in effect by July 1, 2010.
In the unanticipated event that the financing with Sovereign Bank cannot be
completed, or cannot be completed in a timely manner, the Company believes it
would be able to make alternative refinancing arrangements with other
interested parties from the competitive process.
The inability to extend the bank line of credit, or to refinance, could cause
a cash shortage, although the line is not currently utilized. In addition, a
reoccurring worldwide economic slow-down could significantly impact the
Company's revenues and profits so that a returning recession could cause a
cash shortage. Also, depending on its fiscal 2010 net income, the Company
may be required to repay Susquehanna Bank during fiscal year 2010 up to
$500,000 under the Term Loan Agreement. There are currently plans for
customary capital expenditures in the range of $500,000 to $800,000 which
would most likely be funded out of operating cash flow. Any major business
expansions or acquisitions likely will require the Company to seek additional
debt and/or equity financing.
Acquisitions
We continue to execute our strategy of significant growth through acquisitions
as well as
organic growth and effective execution in our businesses. The acquisition of
Radiation Monitoring Devices, Inc. ("RMD Research") and specific assets of RMD
Instruments, LLC ("RMD Instruments" on July 1, 2008 (collectively, "RMD") had
a transformational impact on Dynasil with a tripling of revenues as well as
significantly increasing our technical capabilities and intellectual property.
Management has now essentially completed the planned integration of
RMD and is focused on commercialization of RMD technology either internally or
through acquisitions. Therefore, the Company has recently refocused on
seeking possible acquisitions.
16
Critical Accounting Policies and Estimates
There have been no material changes in our critical accounting policies or
critical accounting estimates since September 30, 2009. We have not adopted
any accounting policies since September 30, 2009 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, 2009 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. This is when the products are shipped per
customers' instructions, the sales price is fixed and determinable, and
collections are reasonably assured. Revenues from research and development
activities consist of up-front fees, research and development funding and
milestone payments. Periodic payments for research and development activities
and government grants are recognized over the period that the Company performs
the related activities under the terms of the agreements.
Government funded services revenue 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. Revenues from fixed-
type contracts are 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 represented by agreed billing amounts. Recognition of
losses on projects is taken as soon as the loss is reasonably determinable.
The Company has no current accrual provision for potential losses on existing
research projects based on Management expectations as well as historical
experience.
The majority of the Companies' 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
Companies believe that the results of such audits will not have a material
adverse effect on its financial position or its results of operations.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill
Goodwill
Goodwill and intangible assets which have indefinite lives are subject to
annual impairment tests. We test goodwill 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.
Our evaluation includes assumptions on future growth rates and cost of capital
that are consistent with internal projections and operating plans.
17
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 RMD Research, which comprises our
Contract Research segment and RMD Instruments, which is a component of our
Optics/Photonic Products and Instruments segment.
Step one of our impairment testing compares the carrying value of a reporting
unit to its fair value. The carrying value represents the net book value of
the net assets of the reporting unit or simply the equity of the reporting
unit if the reporting unit is the entire entity. If the fair value of the
reporting unit is greater than its carrying value, no impairment has been
incurred and no further testing or analysis is necessary. The Company
estimates fair value using a discounted cash flow methodology which calculates
fair value based on the present value of estimated future cash flows.
Estimating future cash flows requires significant judgment and includes making
assumptions about projected growth rates, industry-specific factors, working
capital requirements, weighted average cost of capital, and current and
anticipated operating conditions. Assumptions by management are necessary to
evaluate the impact of operating and economic changes. The Company's
evaluation includes assumptions on future growth rates and cost of capital
that are consistent with internal projections and operating plans. The use of
different assumptions or estimates for future cash flows could produce
different results. The Company regularly assesses the estimates based on the
actual performance of our reporting units.
If the carrying value of a reporting unit is greater than its fair value, step
two of the impairment testing process is performed to determine the amount of
impairment to be recognized. Step two requires the Company to estimate an
implied fair value of the reporting unit's goodwill by allocating the fair
value of the reporting unit to all of the assets and liabilities other than
goodwill. Impairment then exists if the carrying value of the goodwill is
greater than the goodwill's implied fair value. No goodwill impairment charge
was recorded during the periods ended March 31, 2010 and 2009.
Intangible Assets
The Company's intangible assets consist of an acquired customer base of
Optometrics, LLC, acquired customer relationships and trade names of RMD
Instruments, LLC, and acquired backlog and know how of RMD, Inc. The Company
amortizes its intangible assets with definitive lives over their useful lives,
which range from 5 to 15 years, based on the time period the Company expects
to receive the economic benefit from these assets. No impairment charge was
recorded during the periods ended March 31, 2010 and 2009.
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. With the significant economic downturn
during fiscal 2009, the Company concluded that impairment indicators existed.
As a result, the Company reviewed its long-lived assets and determined there
was no impairment charge during the year ended September 30, 2009.
18
Estimating Allowances for Doubtful Accounts Receivable
We perform 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
We account 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
at the date of grant based on the then estimated fair value of the security in
question, 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. The Company believes that
these carryforwards will be realized, and has adjusted the valuation allowance
accordingly.
New Accounting Standards
Recently Adopted Standards
In June 2008, the Financial Accounting Standards Board ("FASB") issued certain
provisions of Accounting Standards Codification ("ASC") 260, "Earnings per
Share", which state that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and are to
be included in the computation of earnings per share under the two-class
method as described in ASC 260. These provisions were effective for fiscal
years beginning after December 15, 2008 (October 1, 2009 for the Company) with
early adoption prohibited. These provisions require all presented prior-period
earnings per share data to be adjusted. The Company adopted ASC 260, as of
October 1, 2009. The adoption of these provisions did not have a material
effect on the consolidated financial statements.
Recently Issued Accounting Standards
In August 2009, the FASB issued changes to measuring liabilities at fair
value. The standard changes provide clarification that in circumstances in
which a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure
19
fair value of such liability using one or more of the techniques prescribed by
the update. These changes were effective for the Company on October 1, 2009.
The adoption of this standard did not have an impact on the Company's
consolidated financial statements.
In September 2009, the FASB issued authoritative guidance on revenue
arrangements with multiple deliverables. This guidance provides another
alternative for establishing fair value for a deliverable. When vendor
specific objective evidence or third-party evidence for deliverables in an
arrangement cannot be determined, companies will be required to develop a best
estimate of the selling price for separate deliverables and allocate
arrangement consideration using the relative selling price method. This
guidance is effective October 1, 2010, and early adoption is permitted. The
Company is currently evaluating the potential impact of this guidance on its
financial position and results of operations.
In January 2010, the FASB issued guidance to amend the disclosure requirements
related to recurring and nonrecurring fair value measurements. The guidance
requires new disclosures on the transfers of assets and liabilities between
Level 1 (quoted prices in active market for identical assets or liabilities)
and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). The
guidance will be effective for interim and annual reporting periods beginning
after December 15, 2009. The Company does not expect the adoption of this
guidance will have a material effect on its consolidated financial statements.
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q which are not
historical facts, including, but not limited to, statements about our
expectations, beliefs, plans, objectives, prospects, financial condition,
assumptions or future events or performance, are forward-looking statements
that involve a number of risks and uncertainties. The actual results of the
future events described in such forward-looking statements could differ
materially from those stated in such forward-looking statements. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report on Form 10-Q, including,
without limitation, those set forth under Management's Discussion and Analysis
of Financial Condition and Results of Operations, and the risks and
uncertainties set forth from time to time in the Company's filings with the
Securities and Exchange Commission, and other public statements. Such risks
and uncertainties include, without limitation, seasonality, interest in the
Company's products, consumer acceptance of new products, general economic
conditions, consumer trends, costs and availability of raw materials and
management information systems, competition, litigation and
the effect of governmental regulation. 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 4T Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) under the Securities Exchange Act of 1934, as amended ("the Exchange
Act")) as of the end of the period covered by this report and have determined
that, as of such date, such disclosure controls and procedures are effective.
20
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in
connection with this evaluation that occurred during our last fiscal quarter
that materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II
OTHER INFORMATION
------------------
ITEM 1 Legal Proceedings
On or about May 6, 2008, the Company's EMF subsidiary ("EMF") received a
Summons with Notice (the "Summons") filed on January 18, 2008 in the Supreme
Court of the State of New York, County of Albany, by the New York State
Attorney General on behalf of the State of New York Workers' Compensation
Board (the "Board"), as plaintiff. The Summons required EMF, which is one of a
large number of defendants, to appear in the action commenced by the Board
alleging its entitlement to recover previously billed and unpaid assessments
in a Manufacturing Self Insurance Trust that terminated on or about August 31,
2007. On April 6, 2010, EMF accepted a settlement offer from the Board that
calls for EMF to pay $21,509.37 no later than June 3, 2010. The settlement
offer has been accepted by the Board as of May 4, 2010 without any contingency
requirements. Although the settlement is not yet paid, EMF has fully recorded
the liability in its books and records. No further activity is required.
ITEM 6 Exhibits
(a) Exhibits and index of 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 17, 2010 issued by Dynasil Corporation
of America
announcing its financial results for the quarter ended March 31, 2010.
99.2 Press release, dated May 12, 2010 issued by Dynasil Corporation
of America
announcing its signing of a Commitment Letter with Sovereign/Santander
Bank.
21
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/ Craig T. Dunham DATED: May 17, 2010
--------------------------------- --------------------
Craig T. Dunham,
President and CEO
/s/ Richard A. Johnson DATED: May 17, 2010
--------------------------------- --------------------
Richard A. Johnson,
Chief Financial Officer
22