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 JUNE 30, 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
of incorporation) Identification No.)
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 12,671,645 shares of common stock, par value
$.0005 per share, outstanding as of August 16, 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 JUNE 30, 2010
AND SEPTEMBER 30, 2009 4
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED JUNE 30, 2010 AND 2009 6
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
NINE MONTHS ENDED JUNE 30, 2010 AND 2009 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8
Item 2. Management's Discussion and Analysis of Financial 14
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 22
Market Risk
Item 4T. Controls and Procedures 23
PART II. OTHER INFORMATION 23
Item 1. Legal Proceedings 23
Item 6. Exhibits 23
Signatures 24
3
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30 September 30
2010 2009
(Unaudited)
---------- ----------
Current assets
Cash and cash equivalents $4,002,366 $ 3,104,778
Accounts receivable, net of allowance for doubtful
accounts of $113,553 and $123,853 and sales
returns of $41,714 and $18,916 for June 30, 2010
and September 30, 2009, respectively 4,690,587 4,053,742
Inventories 2,183,367 2,371,516
Deferred tax asset 346,500 290,100
Prepaid expenses and other current assets 425,595 306,848
---------- ----------
Total current assets 11,648,415 10,126,984
Property, Plant and Equipment, net 2,641,397 2,744,724
Other Assets
Intangibles, net 6,820,353 7,232,035
Goodwill 11,054,396 11,054,396
Deferred financing costs, net 53,499 64,637
---------- ----------
Total other assets 17,928,248 18,351,068
---------- ----------
Total Assets $32,218,060 $31,222,776
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current portion of long term debt $1,847,785 $ 1,749,524
Note payable to related party 2,000,000 -0-
Accounts payable 869,826 773,837
Accrued expenses and other current liabilities 1,809,680 1,111,342
Income taxes payable 345,828 507,122
Billings in excess of costs -0- 60,448
Dividends payable 131,400 149,150
---------- ----------
Total current liabilities 7,004,519 4,351,423
Long-term Liabilities
Long-term debt, net 4,685,547 6,386,796
Note payable to related party -0- 2,000,000
---------- ----------
Total long-term liabilities 4,685,547 8,386,796
4
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED) (Continued)
June 30 September 30
2010 2009
(Unaudited)
---------- ----------
Temporary Equity
Redeemable common stock at redemption value $2,000,000 2,000,000 2,000,000
Put option on 1,000,000 shares, 1,000,000 shares
issued and outstanding in 2010 and 2009.
Stockholders' Equity
Common Stock, $.0005 par value, 40,000,000 shares
authorized, 12,428,941 and 11,250,257 shares issued,
11,618,781 and 10,440,097 shares outstanding 6,214 5,625
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 June 30,
2010 and September 30, 2009, 10% cumulative,
convertible
Additional paid in capital 15,003,262 14,364,888
Retained earnings 4,663,100 3,094,420
---------- ----------
19,677,832 17,470,899
Deferred Compensation - Common Stock (163,496) -0-
Less 810,160 shares in treasury - at cost (986,342) (986,342)
---------- ----------
Total stockholders' equity 18,527,994 16,484,557
---------- ----------
Total Liabilities and Stockholders' Equity $32,218,060 $31,222,776
========== ==========
5
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
June 30 June 30
2010 2009 2010 2009
---------- --------- ---------- ----------
Net revenues $11,294,868 $8,512,892 $31,494,960 $25,883,053
Cost of revenues 6,562,323 4,860,590 18,669,123 15,643,287
---------- --------- ---------- ----------
Gross profit 4,732,545 3,652,302 12,825,837 10,239,766
Selling, general and administrative
expenses 3,399,584 2,957,111 9,311,918 8,131,946
---------- --------- ---------- ----------
Income from operations 1,332,961 695,191 3,513,919 2,107,820
Interest expense, net 142,578 160,367 457,007 567,025
---------- --------- ---------- ----------
Income before income taxes 1,190,383 534,824 3,056,912 1,540,795
Income taxes 462,737 141,456 1,082,199 387,654
---------- --------- ---------- ----------
Net income $727,646 $393,368 $1,974,713 $1,153,141
========== ========= ========== ==========
Three Months Ended Nine Months Ended
June 30 June 30
2010 2009 2010 2009
---------- --------- ---------- ----------
Net income $727,646 $393,368 $1,974,713 $1,153,141
Dividends on preferred stock 131,400 149,150 406,033 447,450
---------- --------- ---------- ----------
Net income applicable to common
shareholders 596,246 244,218 1,568,680 705,691
Dividend add back due to assumed
Preferred Stock conversion 131,400 17,750 406,033 53,250
---------- --------- ---------- ----------
Net income for diluted income per
common share $727,646 $261,968 $1,974,713 $758,941
========== ========= ========== ==========
Basic net income per common share $0.05 $0.02 $0.13 $0.06
Diluted net income per common share $0.05 $0.02 $0.13 $0.06
Weighted average shares outstanding
Basic 12,610,116 11,371,933 12,315,532 11,362,745
Diluted 14,982,382 12,346,636 14,687,798 12,337,448
6
DYNASIL CORPORATION OF AMERICA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
June 30
2010 2009
---------- -----------
Cash flows from operating activities:
Net income $ 1,974,713 $1,153,141
Adjustments to reconcile net income to net cash provided
by operating activities:
Stock compensation expense 202,325 96,345
Provision for doubtful accounts and sales returns 12,498 (48,318)
Depreciation and amortization 767,686 732,725
Deferred income taxes (56,400) -0-
(Increase) decrease in:
Accounts receivable (649,343) (374,360)
Inventories 188,149 406,595
Prepaid expenses and other current assets (164,573) (34,324)
Increase (decrease) in:
Accounts payable and accrued expenses 776,576 (487,778)
Income taxes payable (161,294) 117,400
Billings in excess of cost (60,448) 180,011
----------- ----------
Net cash provided by operating activities 2,829,889 1,741,437
----------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment (241,468) (292,567)
Decrease in other assets (71) 5,269
----------- ----------
Net cash used in investing activities (241,539) (287,298)
----------- ----------
Cash flows from financing activities:
Issuance of common stock 264,509 66,347
Repayment of long-term debt (1,602,988) (1,275,940)
Repayment of short-term debt -0- (490,117)
Deferred financing costs incurred -0- 6,130
Preferred stock dividends paid (352,283) (447,450)
----------- ----------
Net cash used in financing activities (1,690,762) (2,141,030)
----------- ----------
Net increase (decrease) in cash and cash equivalents 897,588 (686,891)
Cash and cash equivalents, beginning 3,104,778 3,882,955
----------- ----------
Cash and cash equivalents, ending $4,002,366 $3,196,064
=========== ===========
Supplemental Information on Cash Flows
Non cash portion of preferred stock dividends paid $53,750 $-0-
Preferred dividends totaled $406,033 during the period ended
June 30, 2010, of which $352,283 was paid in cash and
$53,750 was paid in common stock issuance.
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 June 30, 2010
and the consolidated statements of operations and cash flows
for the three and nine months ended June 30, 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 June 30,
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. In addition, see Note 7 describing
a reclassification relating to temporary equity.
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:
June 30, 2010 September 30, 2009
----------------- ------------------
Raw Materials $1,499,316 $1,374,134
Work-in-Process 346,117 550,151
Finished Goods 337,934 447,231
----------------- ------------------
$2,183,367 $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.
8
Note 4 - Intangible Assets
Intangible assets at June 30, 2010 and September 30, 2010
consist of the following:
Useful Gross Accumulated June 30, 2010
Life (Years) Amount Amortization
------------- ------------ ------ ------------
Acquired Customer Base 5-15 $7,025,413 $ 986,060
Know How 15 512,000 68,267
Trade Names 15 219,000 29,200
Backlog 4 182,000 34,533
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$7,938,413 $1,118,060
========== ===========
Useful Gross Accumulated
September 30, 2009 Life (Years) Amount Amortization
------------------ ------------ ------ ------------
Acquired Customer Base 5-15 $7,025,413 $ 630,294
Know How 15 512,000 42,667
Trade Names 15 219,000 18,250
Backlog 4 182,000 15,167
---------- -----------
$7,938,413 $ 706,378
========== ===========
During the period ended June 30, 2010, the Company adjusted
the useful life of the Company's Backlog from 15 years to 4
years from the date of acquisition (July 1, 2008). A useful
life of 4 years coincides with the corresponding revenues
generated from the backlog. The Company determined that
amortizing the backlog over 15 years versus 4 years from the
date of acquisition did not have a material impact on the
current or prior period financial statements. Commencing
April 1, 2010, the net book value of the backlog of $160,767
is being amortized over its remaining useful life of 27
months.
Note 5 - 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 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,
2,372,266 and 974,703 common share equivalents were assumed
to be outstanding for the quarters ended June 30, 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
June 30,2010 June 30, 2009
---------- -----------
Net income $1,974,713 $1,153,141
Less: Preferred stock dividends (406,033) (447,450)
---------- -----------
Income allocable to common
shareholders $1,568,680 $ 705,691
9
Calculation of Net Income for Diluted Earnings per Share
June 30,2010 June 30, 2009
---------- -----------
Net income $1,974,713 $1,153,141
Less: Preferred stock dividends $ -0- (394,200)
---------- -----------
Net Income for Dilutive Earnings
per Share $1,974,713 $ 758,941
Weighted average shares outstanding June 30,2010 June 30, 2009
Basic 12,315,532 11,362,745
Effect of dilutive securities
Stock Options 269,866 30,403
Convertible Preferred Stock 2,102,400 944,300
---------- -----------
Diluted average shares outstanding 14,687,798 12,337,448
Note 6 - 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:
May 10, 2010 (Date of most recent grant)
Expected term in years 3 years
Risk-free interest rate 4.23%
Expected volatility 68.33%
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.
During the three months ended June 30, 2010, 6,471 stock
options were granted at $3.58 per share and 15,000 stock
options were exercised. The stock options granted vest in
2012 and are for employee compensation with a Black Scholes
value of $7,000. The options exercised had an exercise
price of $2.00 per share with $30,000 paid in cash. For the
three months ended June 30, 2010, total stock-based
compensation charged to operations was $81,962 consisting of
$43,189 from previously granted options that vested during
this period and $38,773 for stock grants. At June 30, 2010,
there was approximately $301,752 of total unrecognized
compensation expense related to non-exercisable option-based
compensation arrangements under the Plan. The Company
cancelled $0 worth of options during the three months ended
June 30, 2010. Compensation expense relating to stock
grants during the three months ended June 30, 2010 totaled
$38,773, comprised of 2,302 shares granted at $2.61 and 718
shares granted at $2.99 per share and 43,619 shares for
deferred directors' compensation issued March 2010 at $2.69
per share.
During the nine months ended June 30, 2010, 671,118 stock
options were granted at prices ranging from $3.19 to $4.06
per share and 121,459 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,
6,471 vest in 2012 and the remaining 94,647 are currently
vested. Of the options exercised, 110,000 had an exercise
price of $2.00 per share with $220,000 paid in cash, 3,876
had an exercise price of $0.60 per share with $2,325.60 paid
in
10
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 nine
months ending June 30, 2010, total stock based compensation
was charged to operations was $202,325, consisting of
$32,296 from previously granted options that vested during
this period, $82,831 from Director stock options, and
$87,198 from stock grants. The Company cancelled $12,954
worth of stock options during the nine months ended June 30,
2010. Compensation expense relating to stock grants during
the nine months ended June 30, 2010 totaled $87,198,
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, 2,302 shares granted at $2.61, 718
shares granted at $2.79 and 47,584 shares granted at $2.69
per share, which includes 43,619 shares for deferred
directors' compensation.
Note 7 - Equity
On July 1, 2008, the Company acquired certain business
assets from RMD Instruments, LLC (the "Seller") through a
new Dynasil wholly-owned subsidiary named RMD Instruments
Corporation. This was done in order to maintain the name in
the marketplace with customers. As part of the transaction,
the Company issued one million Dynasil common stock shares
to the members of the Seller. Commencing July 1, 2010, the
Seller's members may tender these shares of Dynasil common
stock to the Company for repurchase by it at a repurchase
price of $2.00 per share during a two year period ending
July 1, 2012, upon no less than ninety (90) days prior
notice to the Company.
During the period ended June 30, 2010, the Company
reclassified the 1,000,000 shares of redeemable common stock
valued at its redemption value of $2.00 per share, or
$2,000,000, from permanent equity to temporary equity to
properly reflect the repurchase requirement that is not
within the Company's control. Management believes the
likelihood of redemption is remote and has determined that
the reclassification adjustment has no material impact on
the financial statements for the periods presented. There
is no material impact on the Company's financial position,
results of operations or earnings per share. In addition,
there is no material impact on liquidity ratios: debt to
equity, debt leverage, return on equity or working capital.
The reclassification adjustment resulted in a decrease in
common stock of $500 and additional paid-in-capital of
$1,999,500 and an increase in temporary equity of
$2,000,000. Prior periods presented have been reclassified
to conform with the current period financial statement
presentation.
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 June 30, 2010, 5,256,000 shares of Dynasil's Series C
10% Cumulative Convertible Preferred Stock (the "Series C
Preferred Shares") were outstanding. The Company's
convertible preferred stock, when issued, was convertible to
common stock at or above the current market price of the
Company's common stock and therefore, contains no beneficial
conversion feature. Dividends on the Series C Preferred
Shares are payable quarterly in cash or common stock at the
election of the stockholder. A Series C preferred
stockholder's ability to elect for dividends in common stock
is terminated once Dynasil has issued 480,000 shares of
common stock in respect of such elections. As of June 30,
2010, a total of 447,500 shares of common stock remain
available. If payment in shares is elected (and available),
the shares are to be issued at $2.50 per share.
11
Note 8 - Segment, Customer and Geographical Reporting
Segment Financial Information
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.
Nine Months Ended
Segment June 30, 2010 June 30, 2009
-------- -------------- --------------
Contract Research
Revenues $ 17,369,196 $14,817,723
Income from Operations 1,144,596 1,019,356
Income as a percent of revenues 6.6% 6.9%
Photonics Products and Instruments
Revenues $14,125,764 $11,065,330
Income from Operations 2,369,323 1,088,464
Income as a percent of revenues 16.8% 9.8%
Total
Revenues $ 31,494,960 $ 25,883,053
Income from Operations 3,513,919 2,107,820
Income as a percent of revenues 11.2% 8.1%
Goodwill
Contract Research $ 4,754,825 $ 4,754,825
Photonics Products and Instruments 6,299,571 6,299,571
Customer Financial Information
For the quarter and the nine months ended June 30, 2010, the
top three customers for the
Contract Research segment were each various agencies of the
U.S. Government. For the quarter ended June 30, 2010, these
customers made up 83% of Contract Research revenues. For
the nine months ended June 30, 2010, these customers made up
80% of Contract Research revenues.
For the Products and Instruments segment, there was no
customer whose revenue represented more than 10% of the
total segment revenues for either the quarter ended or for
the nine months ended June 30, 2010.
12
Geographic Financial Information
Revenues by geographic location in total and as a percentage
of total revenues, for the three months and nine months
ended June 30, 2010 and 2009 are as follows:
Three Months Ended Nine Months Ended
June 30, 2010 June 30, 2010
----------- ----------
Geographic Location Revenues % of Total Revenues % of Total
------------------- -------- ---------- -------- ----------
United States $ 9,738,147 86.3% $27,288,686 86.6%
Europe 603,072 5.3% 2,348,835 7.5%
Other 953,649 8.4% 1,857,439 5.9%
---------- ------ ---------- ------
Total Revenues $11,294,868 100.0% $31,494,960 100.0%
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 2006 - 2009. There are no
material uncertain positions.
Note 9 - Subsequent Events
On July 9, 2010, the Company completed bank financing with
Sovereign Bank (the "Bank") (which refinanced all
outstanding debt and increased Dynasil's line of credit from
$1.2 million to $8
million by entering into a Loan and Security Agreement with
the Bank dated as of July 7, 2010. Under the Bank Loan
Agreement, the Bank provided Dynasil with three borrowing
facilities: a five-year $9 million term loan (the "Term
Loan") at an interest rate of 5.58%; a $3 million working
capital line of credit (the "Working Capital Line of
Credit") at an interest rate of Prime or one month LIBOR
plus 2.75% and a monthly fee calculated at the rate of 0.25%
per annum of the unused Working Capital Line of Credit; and
a $5 million acquisition line of credit (the "Acquisition
Line of Credit") at an interest rate of one month LIBOR plus
3.5% and a monthly fee calculated at the rate of 0.25% per
annum of the unused Acquisition Line of Credit. See the
Company's report on form 8-K filed on July 14, 2010 for
additional details.
13
On July 19, 2010, the Company completed the acquisition of
100% of the issued and outstanding stock of Hilger Crystals
Limited ("Hilger") from Newport Corporation ("Newport").
Hilger, located in Margate, Kent, England, is engaged in the
manufacture of synthetic crystals for infrared spectroscopy
and x-ray and gamma ray detection. Pursuant to the Share
Purchase Agreement dated July 19, 2010 by and among the
Company, Newport, Hilger and Newport Spectra-Physics
Limited, Dynasil acquired 100% of the issued and outstanding
stock of Hilger for an initial cash payment of $4 million
and a possible additional payment of up to $0.75 million
after eighteen months based on Hilger's current business
revenues for the eighteen months following the acquisition.
See the Company's report on form 8-K filed on July 23, 2010
for additional details.
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 third quarter of fiscal year 2010 which
ended June 30, 2010 were at a record level of $11.3 million,
an increase of 32.7% over revenues of $8.5 million for the
quarter ended June 30, 2009. Income from Operations for the
quarter was $1.33 million, an increase of 91.7% over Income
from Operations of $0.7 million for the quarter ended June
30, 2009. Income before Taxes for the quarter was $1.2
million, an increase of 122% over Income before Taxes of
$0.5 million for the quarter ended June 30, 2009. Net
Income for the quarter was $727,646 or $0.05 per share,
compared with a Net Income of $393,368, or $0.02 per share,
for the quarter ended June 30, 2009. Year to date revenues
of $31,494,960 are up 22% versus last year's $25,883,053,
year to date Income from Operations of $3,513,919 is 67%
above last year's $2,107,820, year to date Income before
Taxes of $3,056,912 is up 98.4% versus $1,540,795 for the
nine months ended June 30, 2009, and year to date Net Income
of $1,974,713 is up 71.2% versus $1,153,141 for the nine
months ended June 30, 2009.
For the nine months ended June 30, 2010, our Contract
Research segment ("Contract Research") revenues increased
17.2% over the prior year period. Revenue has increased
from the ramp-up of research resources which was required to
meet contract timing given increased contract wins.
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 nine month period, the revenues for our Optics
Photonics and Instruments Segment ("Products and
Instruments") increased 27.7%, but Income from Operations
increased 117.7%. Gross Profit margin improved from 36.6%
of sales to 41.5%. The increased revenues came from a
combination of growth initiatives and improved economic
conditions. The large increase in profitability was driven
by the higher revenues coupled with continued cost
reductions and controls.
14
Results of Operations - Quarter Ending June 30
3 Months Ended 6/30/10 3 Months Ended 6/30/09
---------------------- ----------------------
Contract Products & Contract Products &
Research Instruments Total Research Instruments Total
-------- ----------- ---------- -------- ----------- --------
Revenue $5,747,204 $5,547,664 $11,294,868 $5,012,397 $3,500,495 $8,512,892
Gross Profit 2,249,290 2,483,255 4,732,545 2,300,418 1,351,884 3,652,302
SG&A 2,077,688 1,321,896 3,399,584 1,991,140 965,971 2,957,111
Operating Income 171,602 1,161,359 1,332,961 309,278 385,913 695,191
Revenue for the three months ended June 30, 2010 was
$11,294,868, a 32.7% increase from
$8,512,892 for the three months ended June 30, 2009.
Contract Research revenue was increased by 14.6%. Products
and Instruments revenue achieved an increase of 58.4% due to
a combination of customer and new product initiatives as
well as improved economic conditions.
Gross Profit for the three months ended June 30, 2010 was
$4,732,545 or 41.9% of sales, a 29.6% increase from
$3,652,302, or 42.9% of sales for the three months ended
June 30, 2009 due primarily to increased revenue.
Selling, general and administrative ("SG&A") expenses for
the three months ended June 30, 2010 were $3,399,584 or
30.0% of sales. This was a decrease of 4.7% of sales from
SG&A expenses of $2,957,111 or 34.7% of sales for the three
months ended June 30, 2009. This was driven by higher
revenues combined with cost controls.
Income from Operations for the three months ended June 30,
2010 was $1,332,961, an increase of 91.7% over Income from
Operations of $695,191 for the quarter ended June 30, 2009.
Contract Research Income from Operations was lower in 2010
for the quarter due to an adjustment for unallowable costs
associated with government contracts.
Net interest expense for the three months ended June 30,
2010 was $142,578, compared to $160,367 for the three months
ended June 30, 2009, which was a result of paying down debt.
Net income for the three months ended June 30, 2010 was
$727,646 or $0.05 in basic earnings per share, which is up
85.0% from net income for the three months ended June 30,
2009, of $393,368, or $0.02 in basic earnings per share.
The Company had a $462,737 provision for income taxes for
the quarter ended June 30, 2010 and a $141,456 provision for
the quarter ended June 30, 2009.
Results of Operations - Year to Date
9 Months Ended 6/30/10 9 Months Ended 6/30/09
---------------------- ----------------------
Contract Products & Contract Products &
Research Instruments Total Research Instruments Total
-------- ----------- ---------- -------- ----------- --------
Revenue $17,369,196 $14,125,764 $31,494,960 $14,817,723 $11,065,330 $25,883,053
Gross Profit 6,966,152 5,859,685 12,825,837 6,194,395 4,045,371 10,239,766
SG&A 5,821,556 3,490,362 9,311,918 5,175,039 2,956,907 8,131,946
Operating Income 1,144,596 2,369,323 3,513,919 1,019,356 1,088,464 2,107,820
15
Revenues for the nine months ended June 30, 2010 were
$31,494,460, an increase of 21.7% over revenues of
$25,883,053 for the nine months ended June 30, 2009. The
nine month revenue increase was driven by a 17.2% Contract
Research increase and a 27.7% Products and Instruments
increase. We continue to be successful at winning Contract
Research programs and our backlog of contracts awarded
continues to be in excess of one year. Our Products and
Instruments segment continues to win additional business
with both existing and new products.
Gross Profit for the nine months ended June 30, 2010 was
$12,825,837, or 40.7% of sales, an increase of 25.3% over
the nine months ended June 30, 2009 of $10,239,766 or 39.6%
of sales. The nine month gross profit dollars for our
Contract Research segment grew with revenues and the gross
profit as a percent of sales moderated from 41.8% in 2009 to
40.1% at June 30, 2010, as a nearly equal amount of costs
shifted between Cost of Sales and SG&A expenses. The gross
profit margin for our Products and Instruments segment
improved from 36.6% to 41.5% due to higher revenue,
operational improvements and cost controls as compared to
the nine months periods ended June 30, 2009.
Selling, general and administrative ("SG&A") expenses for
the nine months ended June 30, 2010 were $9,311,918 or 29.6%
of sales, a 1.8 percentage improvement from the nine months
ended June 30, 2009 of $8,131,946 or 31.4% of sales. SG&A
expenses for the Contract Research segment improved by 1.4
percent from 33.5% of sales for the nine months ended June
30, 2010 to 34.9% of sales in the previous year, as a nearly
equal amount of costs shifted between Cost of Sales and SG&A
expenses. The nine month SG&A expenses for the Products and
Instruments segment ended June 30, 2010 were 24.7% improved
from 26.7% in the same period in 2009 due primarily to
higher revenues along with cost controls.
Income from Operations for the nine months ended June 30,
2010 was $3,513,919, an increase of 66.7% over Income from
Operations for the nine months ended June 30, 2009 of
$2,107,820. Contract Research had increased Income from
Operations of $125,240 while Products and Instruments'
Income from Operations rose $1,280,859 from the same period
for 2009.
Net interest expense for the nine months ended June 30, 2010
was $457,007, compared to $567,025 for the nine months ended
June 30, 2009. The decrease in combined interest expense
was solely the result of the repayment of $1.6 million of
debt since September 30, 2009. 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 nine months ended June 30, 2010 was
$1,974,713, or $0.13 in basic earnings per share, which is
up 71.2% from the net income for the nine months ended June
30, 2009, of $1,153,141 or $0.06 in basic earnings per
share. When compared to the nine months ended June 30,
2009, the increase in net income was primarily driven by
improved operating results combined with lower interest
expense, net of taxes.
The Company has a $1,082,199 provision for income taxes for
the nine months ended June 30, 2010, and a $387,654
provision for the nine months ended June 30, 2009. The tax
provision is higher due to increased net income results.
The Company 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 the nine
months ended June 30, 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. The effective tax rate for the
nine months ended June 30, 2010 was 35.3% which is up from
25.2% in the previous year as a result of higher
profitability and amortization for tax purposes of
intangibles from past acquisitions which only offsets a
fixed amount of income.
16
Liquidity and Capital Resources
Cash was increased by $897,588 for the nine months ended
June 30, 2010 to $4,002,366. The primary sources of cash
were net income of $1,974,713 with depreciation and
amortization expenses that aggregated to $767,686 and
issuance of common stock of $264,509. Working Capital
accounts were impacted with an increase of $649,343 in
accounts receivable. This was an increase of 16% in
accounts receivable as compared to a revenue increase of
22%. As a result, days sales outstanding ("DSO") improved
9.8 days from 48.8 days at September 30, 2009 to 39.0 days
at June 30, 2010. Inventory was reduced and provided cash
of $188,149, despite the rise in sales. Inventory turns,
which apply only to the Products and Instruments segment,
improved to 5.4 turns from a twelve month average of 4.4
turns. Repayment on long term debt was the largest use of
cash with an amount of $1,602,988. Payments on long term
debt included the monthly payments on term and mortgage debt
of $1,302,988. In addition, a mandatory principal repayment
of $300,000 was made to Susquehanna Bank in February, 2010,
based on the earnings recapture provision 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 $161,294 due to the timing of tax
provisions and payments of estimated taxes. Cash of
$241,468 was used for the investment in capital equipment
and $352,283 was used to pay cash dividends on preferred
stock.
Management believes that its current cash and cash
equivalent balances of $4,002,366, combined with the net
cash generated by operations and credit lines, are
sufficient to meet its anticipated cash needs for working
capital and capital expenditures for new business
initiatives for at least the next twelve months.
On July 9, 2010, the Company completed bank financing with
Sovereign Bank (the "Bank") which refinanced all outstanding
debt and increased the Company's bank lines of credit from
$1.2 million to $8.0 million. The agreement with the Bank
provided the Company with three borrowing facilities.
First, a five year $9 million term loan was used to
refinance all existing indebtedness in the aggregate amount
of $8,373,315. The balance of the $9 million term debt was
used to pay transaction expenses with a remaining amount of
$448,055 added to cash available for use for general
corporate purposes. The five year Bank term loan carries a
fixed interest rate of 5.58% which reduces average interest
rates by 18% as compared to a 6.82% weighted average cost of
debt prior to refinancing. In addition to lower interest
costs, the Bank term loan is repayable monthly based on a 7-
year straight line amortization with a balloon payment due
on July 7, 2015. The second borrowing facility with the
Bank is a $3 million working capital line of credit at an
interest rate of Prime or one month LIBOR plus 2.75%. There
has been no draw on the working capital line of credit to
date. The third borrowing facility is a $5 million
acquisition line of credit at an interest rate of one month
LIBOR plus 3.5%. Principal debt repayments will be
$1,285,714 over the next 12 months. Prior to the
refinancing, the current portion of long term debt including
a $2,000,000 Note payable to a related party was $3,847,785,
resulting in a reduction of required principal payments of
$2,562,070 over the next twelve months and an improvement in
the current ratio (current assets divided by current
liabilities) from 1.66 to 2.62.
Beginning on July 1, 2010, the seller's members of RMD
Instruments, LLC may tender up to 1,000,000 shares of
Dynasil common stock at a repurchase price of $2.00 per
share which could require the Company to make a cash payment
of up to $2.0 million (see Note 6 to the financial
statements contained in this report).
The Bank financing requires Dynasil to maintain at all times
and measured at the end of each fiscal quarter a
Consolidated Maximum Leverage Ratio (Total Funded Debt to
EBITDA, as defined in the Bank Loan Agreement) not to exceed
3 to 1 and a Fixed Charge Coverage Ratio of at least 1.2 to
1. Please see the Company's report on form 8-K filed on
July 7, 2010 for additional details.
17
The Company was in compliance with the Bank covenants at the
time of the Bank financing. We believe that the Company
will remain in compliance and maintain access to the Bank
lines of credit. However, this belief is based upon many
assumptions including the general business climate. 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.
Acquisitions and Commercialization of Research
We continue to execute our strategy of significant growth
through acquisitions and commercialization of technology
from our government funded research 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 is
focused on commercialization of RMD technology either
internally or through acquisitions.
Specifically, on July 19, 2010, the Company completed the
acquisition of 100% of the issued and outstanding stock of
Hilger Crystals Limited ("Hilger") from Newport Corporation
("Newport"). Hilger, located in Margate, Kent, U.K., is
engaged in the manufacture of synthetic crystals for
infrared spectroscopy and x-ray and gamma ray detection.
The acquisition combines our technical depth in synthetic
crystals at Radiation Monitoring Devices, Inc. ("RMD
Research") with Hilger's highly specialized expertise in the
growth and manufacturing of crystals. The acquisition of
Hilger puts the Company in a strong position as a high
quality manufacturer and supplier. The transaction
exemplifies our growth strategy to acquire companies with
strengths in complementary areas, which enables us to more
quickly commercialize our new technology while expanding the
scale and scope of our product line and distribution
channels. Please see the Company's report on Form 8-K flied
on July 23, 2010 for additional details.
During the third quarter, Dynasil's Board took a key step
with commercialization of RMD Research technology by
approving investment into dual mode nuclear detectors for
Homeland Security applications which would be used to locate
nuclear bombs or nuclear materials at ports and borders.
They are designed to be a single detector which replaces two
current detector subsystems - the gamma radiation detector
and also the helium 3 detectors for neutrons which are in
critically short supply. Handheld devices would be the
initial target market.
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
18
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 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.
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.
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
19
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. An
impairment then exists if the carrying value of the goodwill
is greater than the goodwill's implied fair value. With
respect to the Company's annual goodwill impairment testing
performed during the fourth quarter of fiscal year 2009,
step one of the testing determined the estimated fair values
of the reporting units substantially exceeded their carrying
values by 21%. Accordingly, the Company concluded that no
impairment had occurred and no further testing was
necessary.
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 4 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 June 30, 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.
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.
Convertible Preferred Stock
The Company considers the guidance of EITF 98-5, "Accounting
for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios" and
EITF 00-27, "Application of Issue No. 98-5 to Certain
Convertible Instruments", codified in FASB ASC Topic
20
470-20 when accounting for the issuance of convertible
preferred stock. The Company's convertible preferred stock,
when issued, are generally convertible to common stock at or
above the then current market price of the Company's common
stock and therefore, will contain no beneficial conversion
feature.
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 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
21
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.
In April 2010, the FASB issued ASC Topic 605 "Revenue
Recognition - Milestone Method." This issue provides
guidance on defining a milestone and determining when it may
be appropriate to apply the milestone method of revenue
recognition for research or development transactions. The
new guidance recognizes the milestone method as an
acceptable revenue recognition method for substantive
milestones in research or development transactions. It is
effective on a prospective basis to milestones achieved in
fiscal years, and interim periods within those years,
beginning on or after June 15, 2010. We believe the
adoption of this new guidance will not have a material
impact on our 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, including, but
not limited to, the future markets and demand for our
products, new research and development initiatives, our debt
covenant compliance, and the Company's potential repurchase
obligation with respect to equity issued in connection with
the RMD acquisition 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.
22
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.
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. The settlement
has been paid and no further action 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 August 16, 2010 issued by
Dynasil Corporation of America
announcing its financial results for the quarter
ended June 30, 2010.
(b) Reports on Form 8-K
On July 14, 2010 an 8-K report for Items 1.02, 2.03,
8.01 and 9.01 reporting that Dynasil completed bank
financing with Sovereign Bank (the "Bank") (which refinanced
all outstanding debt and increased Dynasil's line of credit
from $1.2 million to $8 million by entering into a Loan and
Security Agreement with the Bank dated as of July 7, 2010.
On July 23, 2010, an 8-K report for Items 2.01, 2.03,
8.01, and 9.01 reporting that Dynasil completed the
acquisition of 100% of the issued and outstanding stock of
Hilger Crystals Limited ("Hilger") from Newport Corporation
("Newport"). Pursuant to the Share Purchase Agreement dated
July 19, 2010 by and among the Company, Newport, Hilger and
Newport Spectra-Physics Limited, Dynasil acquired 100% of
the issued and outstanding stock of Hilger for an initial
cash payment of $4 million and a possible additional
payment of up to $0.75 million after eighteen months based
on Hilger's current business revenues for the eighteen
months following the acquisition.
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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: August 16, 2010
--------------------------------- --------------------
Craig T. Dunham,
President and CEO
/s/ Richard A. Johnson DATED: August 16, 2010
--------------------------------- --------------------
Richard A. Johnson,
Chief Financial Officer
24